Regulatory Bulletin November 2016


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Re-enlistment Bonus clawback is something we should all care about…

HeaderOn October 30, 2016 the Military Times reported that the Pentagon announced it will suspend previous collection efforts aimed a recouping re-enlistment bonuses from some 10,000 current and prior servicemembers. While the payment of these bonuses may have been questionable from the Pentagon’s retroactive standpoint, the servicemembers involved held up their end of the bargain. And any of us who has served is well aware that it is never the soldier’s place to question the rules, no matter how convoluted, bizarre or even witless. Just think back to the 1960s classic novel and later cult film, CATCH-22. Earlier news reporting has brought this to public attention finally a statement has been issued that supposedly will suspend collection efforts. Of course Congress will weigh in, once they are back in session and many speeches will be made. In the meantime, men and women who responded to what they believed was a legitimate offer have been put in a terrible bind. Some have already been coerced into repaying or are working on financial plans to resolve a problem not of their own making. As responsible bankers we should be offering guidance to any of our customers who may have been caught up in this travesty, first because it is the right thing to do and second because the CFPB has finally taken an interest in how financial services companies treat our service personnel. We continue to note adverse regulatory responses aimed at institutions that preyed on our military service-members. “Service members and families who received bonuses in good faith deserve to know they will be made whole, that the problem will be solved, and that those responsible will be held accountable,” said committee chairman Rep. Mac Thornberry, R-Texas, and ranking member Rep. Adam Smith, D-Wash. in a joint statement. “Congress must act to give them the peace of mind they have earned.” A promise to “work together with the Department of Defense and my colleagues in the Senate to explore all options available to hold those responsible for this unacceptable situation accountable and to ensure this never happens again” came from Senate Armed Services Committee Chairman John McCain, R-Ariz. However, while we wait for the lag between promises and action, it should be our task, as professionals, to see to it that any of our customers caught up in this military/bureaucratic nightmare are given the best advice and counseling we have at our disposal. good counsel.


Another HMDA Reminder

HeaderTIMING The Consumer Financial Protection Bureau (CFPB) published 797 pages of final rules on October 12, 2015. The clock keeps on ticking. These changes intended to “modify and simplify reporting requirements are effective January 1, 2018. But don’t be caught off guard. The changes will begin with reporting 2017 HMDA data. Will you be prepared to accurately collect the right data? CHANGES Which institutions are covered by HMDA and Regulation C. Know where your institution fits into reporting threshold. Changes to which loans are and are not reportable. The final rule adopts a dwelling-secured standard for all loans or lines of credit that are for personal, family, or household purposes. Most consumer-purpose transactions, including closed-end home-equity loans, home-equity lines of credit, and reverse mortgages, are now reportable. Commercial-purpose transactions are subject to the regulation only if they are for home purchase, home improvement, or refinancing. The data fields to be reported have increased from 26 to 52 including: Information about applicants, borrowers, and the underwriting process, such as age, credit score, debt-to-income ratio, and automated underwriting system results. Information about the property securing the loan, such as construction method, property value, and additional information about manufactured and multifamily housing. Information about the features of the loan, such as additional pricing information, loan term, interest rate, introductory rate period, non-amortizing features, and the type of loan. New requirements on reporting the collection of ethnicity, race, or sex information add clarifying options and permits applicants and borrowers to self-identify using 15 new subcategories. While the final rule retains the current requirement for data submission by March 1 of the following year, it also imposes a new requirement that large volume reporters of HMDA data submit quarterly. Finally the requirement of public disclosure statement and loan/application register is replaced with a mandatory notice to the public that the data is available on the CFPB’s website. All of your loan officers, compliance officers, loan processors, clerks, auditors and everyone who has input to or supervision of your institution’s HMDA program should be made aware of these changes. Failure to do so will cause confusion and could affect the accuracy of your HMDA LAR and reporting program.


HeaderThe Project Catalyst report is available at: Many of us have grown up in the industry with a certainty that safety and soundness were the two watchwords above all others. The relatively recent ascendance of the CFPB has pushed some significant changes. Gone are the days of safety in doing things the way we always have. Now, along with significant attention being paid to “consumer issues” we are seeing a push toward changes to the industry that are expected to increase access, reliability, fairness and service to an ever greater number of customers. Of course, with these changes will come risks, for both consumers and institutions. The CFPB is attempting to not only be the policeman, pursuing those they see as inimical to public policy but to also nurture the positive changes that will bring safe and helpful products to all potential consumers. This is certainly a new role for people who have in the past been seen mostly in the negative light of enforcers. Success in this endeavor will certainly lead to more competition and increased service to the public. On the other hand, pressure to innovate could drive bad public policy increased unmeasured risk to the industry. We certainly hope that the Bureau is successful in it’s initiatives. Success for the CFPB’s Project Catalyst initiative will be measured by increase in consumer access to fair, transparent, effective, and innovative markets. So what are we going to see? Expanding access to credit: The Bureau estimates that roughly 45 million Americans have either no credit history, or credit history that is too scarce or too stale to generate a credit score. Project Catalyst has learned of a number of innovators that are seeking to expand responsible access to credit. Some companies are exploring opportunities to expand access by looking to alternative forms of data and newer methods of analyzing this data to assess an applicant’s creditworthiness. • Supporting safe consumer financial records access: Tools to help consumers better manage their finances through cross platform access to their own data as well as the ability to easily, efficiently and securely gather information and share it as necessary to make the best use of modern financial services. • Better cash-flow management: Supporting institutions and FinTech companies to better serve consumers by reducing time lag both of information and cash availability. Seamless movement of consumer funds through a variety of financial products, on both the asset and liability side will reduce fees that some consumers see and punitive and some financial service companies see as their lifeblood. Hopefully these efficiencies will help fairly balance the legitimate needs of all concerned. • Increasing options for student loan refinancing: Drive the continuing effort to offer fair, responsible and economically viable refinancing options, offering borrowers with high-rate student loan debt an opportunity to refinance taking advantage of either the current low interest rate lending environment or cash flow improving options. • Modernizing mortgage servicing platforms: Attempts to build ever greater efficiencies in modern loan servicing platforms which may offer greater flexibility for lenders, investors and borrowers. This could include more user friendly interface at both ends as well as systems that “learn” to detect early warning of customer financial stress paving the way for early intervention. With early intervention can come a better chance to work with borrowers to avoid payment defaults and worse, the foreclosure process that leaves both borrower and lender as losers. • Improving credit reporting engagement: This area, one regularly sited as a source of consumer dissatisfaction has players attempting to improve accuracy, reporting errors and disputes. Reductions in these areas will improve efficiencies in credit provision and could reduce friction among customers, lenders, reporting agencies and collectors. Increased availability of data and reporting methodology may offer consumers a clearer path to correction of what have previously seemed intractable credit problems. • Improving peer-to-peer money transfers: The project supports a movement toward greater transparency in transfer process and cost. This will allow consumers to efficiently access providers who offer the least expensive and most convenient providers for both domestic and international transfer. • Supporting consumer savings: The Project is aware of developers working on services to assist consumers in making realistic savings choices designed to offer recommendations based on actual income and expense experience and can pave the way to designated automated savings transactions as a tool for successful realistic family wealth accumulation. Some of these tools will certainly be part of the future of banking. Being aware of and choosing timely, safe and sound modernization will be part of success in the future. Part of strategic planning is to be aware and plan to implement safe and secure modernizations as they become relevant to your institution.


HeaderIn the month of October the Consumer Financial Protection Bureau (CFPB) released a monthly complaint snapshot highlighting consumer complaints about prepaid products. Not surprisingly the report shows that consumers continue to experience issues trying to manage their accounts and access funds. CFPB Director Richard Cordray commented, “For many unbanked and underbanked consumers, prepaid products are a vital source of financial security.” He went on to emphasize that he wants “to make sure consumers using prepaid products can easily access their funds and companies are working to resolve consumers’ issues.” The Monthly Complaint Report can be found at: The findings in this month’s report include complaints from consumers who utilize prepaid accounts in lieu of traditional checking accounts. Last month new rules were put in place limiting consumer losses on stolen or lost cards as well as new Know Before you owe disclosures for prepaid accounts. As of Oct. 1, 2016, the Bureau had handled approximately 6,000 prepaid product complaints. Some of the findings in the report include: • Consumers frequently complained about transactions on their accounts that the did not recognize. In a related vein, there were complaints about card cancellation without notice after the submission of a transaction dispute. • Complaints about registering prepaid cards: Consumers noted difficulty in registration or use of card that they purchased. They specifically noted being told cards were not registered properly. Subsequently they would be advised to submit difficult to obtain documentation such as the original packaging the card came in and sales receipts. • Consumers complain of resolution delays and problems: Consumers experienced prolonged delays attributed to investigations, leaving them with funds frozen in inaccessible accounts. Furthermore, lengthy delays were noted in receiving credit on cards once loss had been established. • Most-complained-about companies: The three companies recently receiving the most complaints were American Express, PayPal Holdings, Inc., and NetSpend Corporation. Complaint Overview The recent findings relative to complaints are as follows Complaint volume: Out of 26000 complaints during the month of September the most common complaint was about debt collection at 28%, followed by credit reporting at 18% and mortgages at 17%. All other services totaled 37%. Product trends: Although not the numerical leader student loans was the area experiencing the greatest increase, showing a 96% gain in the three months ending September 2016 over the same peiod in 2015. State information: The three states showing the greatest increase in complaints are New Mexico (28%), Colorado(24%), and Wyoming(24%). Most-complained-about companies: The top three companies that received the most complaints from July through September 2016 were credit reporting companies Equifax, Experian, and TransUnion. These statistics are the canaries in the coal mine. They are the warnings and for some the harbingers of bad times to come. Clearly the DFPB has targeted these issues. If your institution has a correlation with these figures, you should already be working on solutions, as the CFPB has demonstrated a willingness to go after institutions large and small where they believe there has been bad behavior or lack of compliance. If you have compliance questions contact Kevin Kane at 203-521-2345.

U.S. Bank Regulator Notifies Congress of Major Data Security Breach

HeaderLate last week the Wall Street Journal posted a news article about a data breach involving more than 10,000 records. Upon recognition of the event, removal of encrypted data on thumb drives, the regulator notified Congress as required by law. Included in the commentary was that this breach was discovered during a retrospective review of seemingly authorized downloads. Due to the number of records involved, it was classified as a major incident and that triggered the reporting. Before you sit back with a self-congratulatory smile, consider that if you haven’t been testing your security, you might be in the same situation. Most experts will tell you that there are two kinds of entities today, those whose data has been tested by cyber intruders, and those that think they haven’t. All of us, no matter our political persuasions are aware of the damage that hackers, in the form of Wikileaks, have done to politicians, governments, individuals and corporations. It isn’t going to get better. While there is no likelihood that we can block out all cyberhackers and data thieves, we can certainly get ourselves prepared to deal with an intrusion, if one occurs, either through high tech or someone simply gaining unauthorized physical access to one of your computer terminals with a disk or thumb drive. Nobody has more “rules” than the government, and yet they were breached. What are we mortals to do about it? Here’s a suggestion… be prepared. Do an assessment of your risk for cyberbreach. Talk to your IT department head or guru. Find out what security you have and listen when they make recommendations. Get out your insurance policies and find out what coverage you have for a data breach. Are you prepared for the expense of a notification program in the event you have a major incident. Talk to your carrier and ask them to lead you in a tabletop exercise. There are no penalties for being attacked, the costs are in damages you may have to pay, the costs of defense of a lawsuit and the costs of a mass notification if your breach is that large. Peoples’ attitude used to be that they don’t need to be the most secure, just more secure than the other targets. With cyber crime it’s no longer the three hunters being chased by the bear. Being faster than the others isn’t enough. There are so many bad guys out there looking to grab your data that better isn’t good enough. If you need guidance on where to start, contact Kevin Kane at 203-521-2345.


HeaderIn late October the CFPB Put 44 Mortgage Lenders and Brokers on Notice That They May Be Required to Report Mortgage Data; what about you and your correspondents? Except it’s not quite so friendly. The Consumer Financial Protection Bureau (CFPB) is issuing warning letters to 44 lenders and brokers “Financial institutions that fail to report mortgage information as required make it harder to identify and address discriminatory lending,” said CFPB Director Richard Cordray. “No mortgage lender that is required to report their loan data can avoid this responsibility.” The CFPB identified the 44 companies by reviewing available bank and nonbank mortgage data. The warning letters flag that entities that meet certain requirements are required to collect, record, and report mortgage lending data. The letters say that recipients should review their practices to ensure they comply with all relevant laws. The companies are encouraged to respond to the Bureau to advise if they have taken, or will take, steps to ensure compliance with the law. They can also tell the Bureau if they think the law does not apply to them. The CFPB, in sending these letters, made no determination that a legal violation did, in fact, occur. If you are a lender who previously was not required to report, or a lender who does business with such an entity, it is time to reconsider. Don’t wait to be the next on the list. A sample letter is available at: In October 2015, the CFPB finalized the rule updating the reporting requirements of the Home Mortgage Disclosure Act regulation. If you are not certain about your status, contact Kevin Kane at 203-521-2345.


HeaderDon’t be the next institution to be fined. CFPB Finds Qualified Students Were Blocked from Affordable Loan Repayment Plans; Updates Student Loan Servicing Exam Procedures “Our examiners continue to find sloppy or callous practices among some student loan servicers and other financial institutions that violate the law and put consumers at risk,” said CFPB Director Richard Cordray while speaking of a recent report. “If their practices hurt consumers, they need to rethink and change their practices in light of the actions and observations found” in a report covering May through August 2016. Supervisory actions in the areas of deposits, mortgage servicing, and credit cards returned $11.3 million to consumers. Specific issues uncovered by CFPB examiners being addressed through supervisory or enforcement action include student loan servicing, auto loan origination and servicing, debt collection, and mortgage origination. Among the specific issues that generated the repayments were: Student loan servicers unfairly denying or failing to approve qualified students’ affordable payment plans Auto loan servicers illegally keeping borrowers’ belongings Debt collectors charging illegal fees, misleading consumers Additional Compliance Information In addition new compliance information, exam policies and best practices were released including: Revised exam procedures for student lending and servicing Updates to CFPB guidance on compliance for service providers including risk management programs New exam procedures for reverse mortgage servicing Assessing redlining risk Provision of language services for non-English-proficient consumers in ways that benefit both consumers and institutions While these are not necessarily new ground, they demonstrate that the CFPB is going to continue to press for what they consider to be best practices and adequate levels of service.

Director of the Consumer Financial Protection Bureau On Debt Collection and Student Loan Industries

HeaderAt the Consumer Advisory Board Meeting in Washington, DC on October 27, 2016 Director Cordray spoke extensively about the what he described as the student loan industry and the multi-billion debt collection industry. He prefaced his remarks with an interesting comments, saying “Both are markets where consumers cannot vote with their feet, and where incentives and practices are not always aligned with consumer interests.” He made it clear that he wishes to see significant overhaul of the systems which he believes is dysfunctional as it can drive up costs to lenders, collectors and borrowers alike. He envisions a system which would overhaul the entire process from the moment third-party collectors first receive their debt portfolios to their very last efforts to collect. He clarified that he expects to address issues of first-party debt collectors on a separate track. From the standpoint of the CFPB, debt collection and student lending share many common characteristics and generate more complaints that any other financial services product. While the goals of accuracy and efficiency laid our by Director Cordray are laudable, the path to completion will be long and arduous. If your institution is actively involved in these areas, be prepared for more rule changes and not a very straight line path to the goal. Given the history and intractability of the industry we wish the Director and the CFPB godspeed on their mission. If you need clarification in these areas, contact Kevin Kane at 203-521-2345.


HeaderThe CFPB Student Loan Ombudsman’s Annual Report is available at: Says that “Gaps in Student Loan Rehab Programs Trap Vulnerable Borrowers in Default, May Cost Consumers $125 Million in Unnecessary Interest Charges Alone” In mid-October the CFPB Student Loan Ombudsman projected that in the near term one-in-three rehabilitated student loan borrowers could fa;; back back into default due to gaps between student loan programs. This breakdown will cost borrowers hundreds of millions of dollars, including over $125 million in unnecessary interest charges over the next two years. The Bureau is calling for an systemic overhaul in order to improve the recovery process for distressed consumers. “The consumer protections promised under federal law should make it nearly impossible for the most vulnerable consumers to be trapped in default,” said CFPB Director Richard Cordray. “Today’s report shows that far too many of these borrowers continue to fall through the cracks of a flawed student loan system.” “Too many student loan borrowers are being left behind due to breakdowns in the federal programs designed to provide them a fresh start, including an affordable monthly payment and a path to long-term success,” said CFPB Student Loan Ombudsman Seth Frotman. “This report offers further evidence that industry practices and needless red tape can turn a student loan into an unbearable burden. Policymakers should work to reform the programs that are failing those borrowers that need help most.”

Major Credit Union Signs Consent Decree


Credit Union, long seen as the bastion of Consumerism is Slapped with $23 million in compensation and $5.5 million civil money penalty Credit Union Used False Threats to Collect Debts and Placed Unfair Restrictions on Account Access

In an action that might have been unthinkable a few years ago, in October the “CFPB took action against Navy Federal Credit Union for making false threats about debt collection to its members, which include active-duty military, retired servicemembers, and their families. The credit union also unfairly restricted account access when members had a delinquent loan.” In addition to the payments Navy Federal Credit Union has agreed to correct its debt collection practices. “Navy Federal Credit Union misled its members about its debt collection practices and froze consumers out from their own accounts,” said CFPB Director Richard Cordray. “Financial institutions have a right to collect money that is due to them, but they must comply with federal laws as they do so.” Navy Federal Credit Union, a federal credit union based in Vienna, Va., is the largest credit union in the country, with more than $73 billion in assets as of December 2015. An investigation found that the Credit Union deceived consumers to get them to pay delinquent accounts and specifically: Falsely threatened legal action and wage garnishment Falsely threatened to contact commanding officers to pressure servicemembers to repay Misrepresented credit consequences of falling behind on a loan Illegally froze members’ access to their accounts The Navy Federal Credit Union consent order can be found at:

On October 11, 2016 a panel of judges on the D.C. Circuit Court of Appeals ruled against the CFPB

HeaderThe court ruled that the CFPB’s leadership structure, a single director who cannot be removed at will by the president, is unconstitutional. The ruling does not block the operation of the CFPB, but it does clarify that a director may be removed not “just for cause” but at the discretion of the President. “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency,” the court said in PHH Mortgage v. CFPB. Beyond the ruling on structure, the Court ruled that the CFPB had misinterpreted the statute and incorrectly applied it retroactively. It is likely that the case will be appealed and may be heard by the full D.C. Circuit, after which it could go on to the Supreme Court, if either side is willing to appeal. This may be seen as a major challenge to the CFPB. The ABA, which has taken the position that the structure of the CFPB should have been a five-member, bipartisan commission, would like to see a less activist, more negotiated role. It is likely that the ABA will continue to lobby for those changes as the case progresses and will face strong opposition from Senator Elizabeth Warren. The text of the ruling may be seen at:$file/15-1177-1640101.pdf

In this issue


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