Nonbanks to Feel Brunt of CFPB Rules in 2016

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WASHINGTON — After several years of tussling with mortgage rules and their implementation, the Consumer Financial Protection Bureau is focusing on several areas that will primarily affect the nonbank market, including debt collection, payday-type loans and prepaid cards.

Though the agency did some work on those rules in 2015, it was still distracted by changes to its 2014 qualified mortgage rule and regulations governing mortgage disclosures. With those out of the way, there is little holding the CFPB back from ventures into new areas.

"More of their focus is going to be on the nonbanks from a rulemaking point of view," said Anthony Gibbs, a former regional director of supervision at the CFPB who is now a senior director at Alvarez & Marsal. "Prior to the CFPB's existence, the nonbanks haven't had their compliance management systems tested to the degree of depository institutions, so this is a turning point for them."

Before Gibbs left late last year, the agency was nearing a 50/50 split in its supervisory attention to banks and nonbanks, after starting out focusing mostly on banks, he said. The agency also recently announced that it would be developing a proposal to supervise the largest nonbank lenders for consumer installment and vehicle title loans.

As the CFPB expands its oversight of nonbanks, "the challenge for nonbanks is going to be to ensure their compliance management systems are adequate … [for]consumer protection requirements and supervision by the CFPB," Gibbs said. "It can be difficult to tell from within an organization when enough has been invested and enough validation is occurring."

Following are the key areas the CFPB plans to focus in 2016.

Payday Loans and Debt Collection

Chief among the priorities this year for the CFPB are rules on debt collection and payday, auto title and deposit-advance loans. Both plans would cover banks and nonbanks, but the payday rules are likely to have a greater impact on outfits such as storefront and online payday lenders, which have not previously faced federal supervision.

"Small-dollar lending is probably a greater priority for the CFPB, because there are no comprehensive substantive federal rules governing how providers in this marketplace offer payday, installment or auto title loans and state law is quite disparate in its regulation of these products," said Gerald S. Sachs, former senior counsel at the CFPB's enforcement office who is now with Paul Hastings. "Whereas debt collection already has a comprehensive federal regulatory regime."

The CFPB provided an outline of its payday lending plan in March of last year for review by a small-business panel, but has struggled to release a formal proposal. According to its latest semiannual rulemaking agenda, released on Nov. 20, it plans to release the proposal in the first quarter of this year.

"The Bureau is in the process of developing a notice of proposed rulemaking to address concerns in markets for payday, auto title, and similar lending products," Kelly Cochran, the agency's assistant director of regulations, wrote in the latest agenda posted on the CFPB blog. "The bureau is particularly concerned that lenders are offering these products without assessing the consumer's ability to repay, thereby forcing consumers to choose between reborrowing, defaulting, or falling behind on other obligations. We are also concerned about certain payment collection practices that can subject consumers to substantial fees and increase risk of account closure."

The debt collection rule is also highly anticipated. Like the rulemaking process for payday loans, debt collection pre-rule activities have been delayed until the first quarter of this year. The agency put out an advanced notice of proposed rulemaking in 2013 and closed the comment period in February 2014.

Debt collection activities "are the single largest source of complaints to the federal government of any industry. Building on a previous advance notice of proposed rulemaking, the bureau is now analyzing the results of a groundbreaking nationwide survey related to consumers' experiences with debt collection," Cochran said in the blog post. "We're also engaged in consumer testing initiatives to determine what information would be useful for consumers to have about debt collection and their debts and how that information should be provided to them."

Some predict the CFPB will ultimately strengthen the consumer data requirements and protections throughout the entire debt collection process.

This "should increase costs but also open the pipeline for charged-off receivables to flow from banks to third-party collectors over time," Isaac Boltansky, an analyst with Compass Point Research & Trading, wrote in a November note after the CFPB released its rulemaking agenda.

The industry is also paying particular attention to this rule because it will be the first time the agency will seek to use its rulemaking authority under the Dodd-Frank Act to regulate unfair, deceptive, or abusive practices.

"The bureau has avoided writing a UDAAP rule so far, but it will be forced to do so if it intends to write rules that apply to all debt collection activities. That's because the Fair Debt Collection Practices Act doesn't apply to banks collecting their own debt," said Ginny O'Neill, senior vice president and director of the Center for Regulatory Compliance at the American Bankers Association. "We hope the bureau will exercise care to ensure that any new rules promote, not inhibit, the ability of banks to communicate and work with customers experiencing financial difficulties."

Arbitration Rules and Prepaid Cards

The CFPB has also been seeking further information on prepaid cards and the use of mandatory arbitration clauses typically used in credit card contracts so that consumers must settle disputes outside of court.

The CFPB issued a proposal on prepaid cards in December 2014 that received an unexpectedly high amount of criticism from consumers. The industry also criticized the plan for going too far and treating different cards the same, such as those that employers issue to pay employees under the same regulations as prepaid cards purchased at a retailer.

"Consumers and industry alike voiced various concerns relating to the proposed rule, which has likely caused the CFPB to slow down a bit while it evaluates these concerns and works toward finalizing its rulemaking," Sachs said.

Cochran said she expects the agency to issue a final prepaid card rule this spring.

Restrictions on arbitration clauses have also been met with fierce opposition by the industry. The CFPB predicted it would begin "pre-rule activities" in December 2015, but it has yet to publically release a proposal.

"We're now beginning a rulemaking process to address concerns related to the use of arbitration agreements in connection with credit cards, deposit accounts, payday loans and various other consumer financial products or services," Cochran said. "In particular, we are considering whether to propose rules that would prevent companies from using these agreements to foreclose consumers' ability to bring class action lawsuits, which can provide consumers with substantial relief and create the leverage to bring about changes in business practices. To help monitor the fairness of arbitration proceedings, we are also considering whether to propose requiring that arbitration filings and awards be submitted to the bureau. "

Enforcement Activities

One of the biggest areas the industry will be watching is what enforcement actions the CFPB takes, particularly in areas like mortgage servicing, auto lending and credit reporting as well as new ones in the payments space.

"In 2016, I think we will see more enforcement actions from the CFPB in the emerging payments space such as mobile banking and virtual currency," Sachs said. "More regulatory attention is being paid to innovative financial products because they can scale quickly and affect a lot of consumers in a matter of weeks or months."

Gibbs said the CFPB will likely continue to focus on fair lending in the auto loan servicing sector and how consumer data is reported to the credit reporting agencies.

"The CFPB will likely be looking more into the consumer dispute process through the credit reporting agencies, but in many cases, those disputes are because the agencies are receiving inaccurate or untimely information from data furnishers," Gibbs said. "So it's likely you're going to see the CFPB look directly at the furnishers to see how the consumer data is actually being furnished."

Boltansky also predicted more enforcement activity with regard to credit card issuers that offer deferred-interest rates in addition to continued actions against student loan and mortgage servicers, and auto lenders.

"The CFPB's bank overdraft work is likely to produce another report and an enforcement action, but the rulemaking effort is likely to slip into 2017," Boltansky wrote.

Another area that the industry will be paying keen interest to is any enforcement actions stemming from the Truth-in-Lending-Real Estate Settlement Procedures Act integrated disclosures, called TRID, which took effect in October. Lenders and certain members of Congress have asked the agency to tread gently in enforcing violations against lenders making a "good-faith effort" to follow the new rules.

CFPB Director Richard Cordray has said that the agency would be "sensitive" during initial exams, but he did not formally pledge to hold lenders harmless for any mistakes.

"As with any change of this scale, despite the best of efforts, there inevitably will be inadvertent errors in the early days. That is why the bureau and the other regulators have made clear that our initial examinations for compliance with the rule will be sensitive to the progress the industry has made," Cordray wrote in a Dec. 29 letter to the Mortgage Bankers Association. "In particular, our examiners will be squarely focused on whether companies that have made good faith efforts to come into compliance with the rule. All of the regulators have indicated that their examinations for compliance in the first few months of implementing the new rule will be corrective and diagnostic, rather than punitive."

Still, many observers suspect the CFPB will begin taking some action — whether formal or informal — on entities that are still not in compliance with TRID later this year.

"There is no doubt that the examination of lenders with regard to their compliance with TRID is going to happen," said Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer. "The question is how closely and how severely will the CFPB look at compliance to TRID and what will be the consequences when the agency is not satisfied with the results?"

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