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  • The CFPB’s ‘UDAAPification’ of Consumer Protection Law
    September 16, 2014
    Jonice Gray Tucker & Aaron C. Mahler

    Questions about the scope of the Consumer Financial Protection Bureau's jurisdiction abound for financial institutions and other entities that work with them. What are the boundaries of the CFPB’s authority? How might these parameters expand in the future? Are there other ways the CFPB may take action against a company even if it does not have supervisory authority, and what would that action look like? These are just a few of many jurisdictional questions that financial institutions and their kin have pondered since the CFPB opened its doors in July 2011.

    The CFPB’s jurisdiction is wide and its reach seems to grow longer as time passes. The bureau regulates many entities through direct supervisory authority and holds the power to indirectly “regulate” many others through its ability to enforce a veritable alphabet soup of consumer protection laws. These laws include Sections 1031 and 1036 of the Consumer Financial Protection Act, a far-reaching statute that broadly prohibits unfair, deceptive or abusive acts or practices in connection with any transaction with a consumer for consumer financial products and services or the offering of such products or services.

    Originally published by Law360; reprinted with permission. 

  • The Brave New World of Consumer Compliance
    September 2, 2014
    Andrew L. Sandler

    Compliance has changed from a checklist-based, technical science to a principles-based, qualitative art. Gone are the days when an institution that is compliant with all substantive consumer protection laws can breathe easy; practices and products long viewed as acceptable now are susceptible to claims that they constitute Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). Unlike other consumer protection laws, a UDAAP violation hinges on the specific facts and circumstances surrounding each act or practice rather than well-defined legal standards and regulations setting forth clear lines between lawful and unlawful conduct. UDAAP standards are so vague and regulators – particularly the CFPB – are so aggressive in interpreting those standards, that it is virtually impossible to predict with any level of certainty the practices and products that may be subject to challenge. UDAAP is also unique in the sense that its provisions touch nearly every part of a consumer financial institution’s policies and practices, including product development, disclosures, sales, advertising, account servicing, and collections. An additional challenge presented by UDAAP is that regulators now take the view that financial services companies are responsible for the conduct of the third party service providers they partner with in offering products and services to their customers.

    Originally published in Mortgage Compliance Magazine; reposted with permission. 

  • The Board of Directors and Cybersecurity: Setting up the Right Structure
    August 26, 2014
    Elizabeth McGinn, Thomas Sporkin, Alexander D. Lutch & James T. Shreve

    Because investments in cybersecurity do not generate revenue, they can be a hard sell. At the same time, such investments generally lead to significant cost savings and can help a company avoid the reputational damage associated with a successful attack. In addition to devoting attention to reports on security efforts and any breaches that occur, there are concrete steps the board can take to promote an effective corporate cybersecurity structure.

    Originally published by BNA's Banking Report; reprinted with permission. 

  • From Landlord to Locked Up: The Long Arm of the SCRA
    August 21, 2014
    Kirk D. Jensen, Sasha Leonhardt & Alex Dempsey

    Over the past few years, the U.S. Department of Justice and federal banking regulators have aggressively increased their efforts to enforce the SCRA. Both federal and state regulators now focus on SCRA compliance when examining institutions, and government enforcement attorneys are keenly aware of the various protections afforded to service members by the SCRA. While most scrutiny has been directed toward the SCRA’s foreclosure, default judgment and interest rate protections, creditors should not overlook the risks associated with the SCRA’s eviction protection. And, while most SCRA enforcement actions do not result in criminal charges, the McLeod case demonstrates that violations of the SCRA’s eviction protections can lead to severe penalties, including incarceration.

    Originally published by Law360; reprinted with permission.

  • Banks Should Steel Themselves for Fair Lending Game-Changer
    August 12, 2014
    Warren W. Traiger

    Warren Traiger authored, "Banks Should Steel Themselves for Fair Lending Game-Changer" in American Banker on August 12, 2014.

    The Consumer Financial Protection Bureau's proposal to increase the categories of mortgage data collected and reported under the Home Mortgage Disclosure Act is, in the words of Yogi Berra, déjà vu all over again.

    At least, it's déjà vu for those of us who have followed the HMDA since 1991, when the first reported data on mortgage applications and originations by race, ethnicity and sex was made public. That raw data, which did not take into account the credit quality of the applicants or proposed collateral, showed that black and Hispanic home loan applicants were, respectively, 2.4 and 1.5 times more likely to be rejected than white applicants. The findings ignited a firestorm of accusations about mortgage lending discrimination by public officials and advocacy organizations. Those accusations, which seemed to catch the industry by surprise, spawned the fair lending mortgage litigation and regulatory enforcement actions that continue unabated to this day.

    Click here to read the full article at AmericanBanker.com.

Knowledge + Insights

  • Special Alert: FinCEN Publishes Long-Awaited Proposed Customer Due Diligence Requirements
    September 8, 2014

    On August 4, 2014, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) published a Notice of Proposed Rulemaking ("NPRM") that would amend existing Bank Secrecy Act (“BSA”) regulations intended to clarify and strengthen customer due diligence (“CDD”) obligations for banks, securities broker-dealers, mutual funds, and futures commission merchants and introducing brokers in commodities (collectively, “covered financial institutions”).

    In drafting the modifications, FinCEN clearly took into consideration comments responding to its February 2012 Advance Notice of Proposed Rulemaking (“ANPRM”), as the current proposal appears narrower and somewhat less burdensome on financial institutions. Comments on the proposed rulemaking are due October 3, 2014.

    Overview: Under the NPRM, covered financial institutions would be obligated to collect information on the natural persons behind legal entity customers (beneficial owners) and the proposed rule would make CDD an explicit requirement. If adopted the NPRM would amend FinCEN’s AML program rule (the four pillars) by making CDD a fifth pillar.

    Click here to view the special alert.

  • Special Alert: CFPB Bulletin Re-Emphasizes Focus on Mortgage Servicing Transfers
    August 21, 2014

    On August 19, 2014, the CFPB issued Bulletin 2014-01 to address “potential risks to consumers that may arise in connection with transfers of residential mortgage servicing rights.”  The bulletin, which is the latest in a series of CFPB regulations, statements, and guidance on this subject, replaces the Bureau’s February 2013 bulletin on mortgage servicing transfers and states that “the Bureau’s concern in this area remains heightened due to the continuing high volume of servicing transfers.”  It further states that “the CFPB will be carefully reviewing servicers’ compliance with Federal consumer financial laws applicable to servicing transfers” and “may engage in further rulemaking in this area.”

    The bulletin contains the following information, which is summarized in great detail below:

    • Examples of policies and procedures that CFPB examiners may consider in evaluating whether the servicers on both ends of a transfer have complied with the CFPB’s new regulations requiring, among other things, policies and procedures reasonably designed to facilitate the transfer of information during servicing transfers and to properly evaluate loss mitigation applications.
    • Guidance regarding the application of other aspects of the new servicing requirements to transfers.
    • Descriptions of other Federal consumer financial laws that apply to servicing transfers, such as the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the prohibition on unfair, deceptive, and abusive acts or practices (“UDAAPs”).
    • A statement that “[s]ervicers engaged in significant servicing transfers should expect that the CFPB will, in appropriate cases, require them to prepare and submit informational plans describing how they will be managing the related risks to consumers.”  This largely reiterates the Bureau’s statements in its February 2013 bulletin.

    In a press release accompanying the bulletin, CFPB Director Richard Cordray stated that: “At every step of the process to transfer the servicing of mortgage loans, the two companies involved must put in appropriate efforts to ensure no harm to consumers. This means ahead of the transfer, during the transfer, and after the transfer.  We will not tolerate consumers getting the runaround when mortgage servicers transfer loans.

    Click here to view the special alert.

  • Special Alert: Recent Regulatory Actions Impacting Virtual Currency Ecosystem
    August 12, 2014

    New York Virtual Currency Proposal Could Capture Certain Bank Products | CFPB Issues Consumer Advisory | CFPB Announces Acceptance of Consumer Complaints


    New York Virtual Currency Proposal Could Capture Bank Products, Card Rewards Programs

    On July 17, the New York Department of Financial Services (NYDFS) proposed a rule intended to govern the virtual currency marketplace. The proposed rule is extremely broad and as currently drafted would appear to capture products provided by traditional brick and mortar banks and other regulated financial institutions. For example, as proposed, the rule could regulate:

    • Reward programs, “thank you” offers, or digital coupons that offer cash back or statement credits;
    • Generated numbers that access cash;
    • Prepaid access and other cards that will allow customers to receive cash, including those customarily exempt such as government funded transfers;
    • P2P transfers; and
    • Wallet providers where the customer can access cash.

    If left unaddressed, these apparent unintended consequences could create a confusing regulatory environment for certain bank and card products. It is also noteworthy that the rule does not provide any customary exclusions for chartered entities, raising substantial preemption questions.

    Businesses engaging in activities covered by the proposed rule would be required to apply for a license from the NYDFS within 45 days of the effective date of the regulation. The proposed rule also sets out comprehensive compliance obligations involving consumer protection, cybersecurity, anti-money laundering, and anti-fraud, and the rule would subject licensed institutions to examination by the NYDFS. Failure to obtain a license could result in disciplinary action by the NYDFS.

    The comment period on the proposed rule ends on September 6, 2014.


    CFPB Announces Two Actions Related To Virtual Currencies

    On August 11, the Consumer Financial Protection Bureau (the CFPB or Bureau) issued a “consumer advisory” concerning virtual currency and also announced that it would begin accepting consumer complaints about virtual currency or virtual currency companies. These actions are the consumer agency’s first foray into virtual currencies, and they follow a recent GAO report that recommended the CFPB play a larger role in the development of federal virtual currency policy.

    Consumer Advisory
    The advisory describes virtual currencies, briefly notes their potential for innovation, and cautions consumers about the numerous and significant risks the CFPB believes virtual currencies present for consumers. Specifically, the CFPB cautions virtual currency consumers that there are risks related to hackers, fewer consumer protections, costs, and scams. The advisory elaborates on the risks for each stage of a virtual currency transaction: purchasing, storing, or transacting in virtual currencies. For example:

    • Purchasing: Warns consumers purchasing virtual currencies to beware of cost fluctuations and potential scams.
    • Storage: Expresses concerns about data security risks and the lack of federal insurance for virtual currencies.
    • Transactions: Advises consumers transacting in virtual currencies to read their agreement with their wallet provider and be mindful of the risks of linking their digital wallet account to their bank account or payment card.

    Consumer Complaints
    The Bureau announced that it is working on a new form for virtual currency complaints, but in the meantime will accept such complaints using its money transfer complaints form.

    Virtual currency complaints will be subject to the CFPB’s standard complaint process. As described in the CFPB’s most recent consumer complaint report, once a complaint is submitted, the CFPB sends the complaint to the appropriate company and works with the company to get a response within 15 calendar days. Each complaint is published in a public database after the company responds to the complaint or after the company has had the complaint for 15 days, whichever comes first. If a company can demonstrate within the 15-day period that it has been wrongly identified, no data for that complaint will be posted unless and until the correct company is identified. The CFPB states that if it receives a complaint about an issue outside its jurisdiction, the Bureau will forward the complaint to the appropriate federal or state regulator.

    Jurisdictional issues notwithstanding, the Bureau promises to use all virtual currency complaints it receives to better understand the virtual currency market and its effect on consumers. The CFPB also asserts that it will use complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps. The Bureau has demonstrated through its examination and enforcement activity in other areas that consumer complaints play a significant role in the Bureau’s risk-based approach to supervision and enforcement. Moreover, the CFPB recently proposed to publish consumer complaint narratives with other complaint data already made public, noting in its proposal that by increasing consumer complaint volume, publication of narratives would benefit “the many Bureau functions that rely, in part, on complaint data to perform their respective missions including the Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking.”

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    Our Digital Commerce & Payments Practice group is experienced in regulatory matters arising at the intersection of digital payments, financial institutions, and technology providers, and is uniquely positioned to assist virtual currency and related companies whose business brings them into contact with the CFPB.

    Our Consumer Financial Protection Bureau group has advised clients in dozens of CFPB examinations, investigations, and enforcement actions and frequently represents clients in connection with CFPB supervision preparedness and matters pertaining to compliance with CFPB rulemakings and regulatory expectations, including consumer complaint issues.

    Please contact one of the attorneys listed below if you would like to discuss the CFPB advisory or complaints announcement.

  • Special Alert: CFPB Proposes Significant Expansion of HMDA Reporting Requirements
    July 30, 2014

    On July 24, the Consumer Financial Protection Bureau (the CFPB or Bureau) issued a proposed rule that would expand the scope of the Home Mortgage Disclosure Act (HMDA) data reporting requirements and streamline certain existing reporting requirements. Although some of the new data points the Bureau is proposing to collect were expressly mandated by the Dodd-Frank Act, the Bureau also proposed a significant number of new data points based on discretionary rulemaking authority granted by the Act.

    While we describe the proposal below in greater detail, highlights include:

    • The proposal would substantially expand the number of data points collected from financial institutions, including requiring reporting of rate spreads on all loans, not just high cost loans. At least initially, however, this additional information would not be provided to the public on the Loan Application Register (LAR). Instead, the proposal states that the Bureau is still examining privacy concerns related to this information.
    • The proposal would require financial institutions to report home equity lines of credit (HELOCs), reverse mortgages, and commercial loans secured by a dwelling.
    • The proposal does not provide clarification on the definition of an “application” or the “broker rule.”

    Those wishing to comment on the proposal must do so by October 22, 2014. Click here to view the special alert.

  • Special Alert: CFPB Issues Guidance on Supervision and Enforcement of Mini-Correspondent Lenders
    July 10, 2014

    This afternoon, the CFPB issued policy guidance on supervision and enforcement considerations relevant to mortgage brokers transitioning to mini-correspondent lenders. The CFPB states that it “has become aware of increased mortgage industry interest in the transition of mortgage brokers from their traditional roles to mini-correspondent lender roles,” and is “concerned that some mortgage brokers may be shifting to the mini-correspondent model in the belief that, by identifying themselves as mini-correspondent lenders, they automatically alter the application of important consumer protections that apply to transactions involving mortgage brokers.”

    The guidance describes how the CFPB evaluates mortgage transactions involving mini-correspondent lenders and confirms who must comply with the broker compensation rules, regardless of how they may describe their business structure. In announcing the guidance, CFPB Director Richard Cordray stated that the CFPB is “putting companies on notice that they cannot avoid those rules by calling themselves by a different name.”

    The CFPB is not offering an opportunity for the public to comment on the guidance. The CFPB determined that because the guidance is a non-binding policy document articulating considerations relevant to the CFPB’s exercise of existing supervisory and enforcement authority, it is exempt from the notice and comment requirements of the Administrative Procedure Act.


    The CFPB explains that generally, a correspondent lender performs the activities necessary to originate a mortgage loan—it takes and processes applications, provides required disclosures, sometimes underwrites loans and makes the final credit approval decision, closes loans in its name, funds them (often through a warehouse line of credit), and sells them to an investor. The CFPB’s focus here is on mortgage brokers who are attempting to move to the role of a correspondent lender by obtaining a warehouse line of credit and establishing relationships with a few investors. The CFPB believes that some of these transitioning brokers may appear to be the lender or creditor in each transaction, but in actuality have not transitioned to the mini-correspondent lender role and are continuing to serve effectively as mortgage brokers, i.e. they continue to facilitate brokered loan transactions between borrowers and wholesale lenders.

    RESPA (Regulation X) and TILA (Regulation Z) include certain rules related to broker compensation, including RESPA’s requirement that lender’s compensation to the mortgage broker be disclosed on the Good-Faith Estimate and HUD-1 Settlement Statement, and TILA’s requirements that broker compensation be included in “points and fees” calculations, and its restrictions on broker compensation and prohibition on steering to increase compensation. Those requirements do not apply to exempt bona fide secondary-market transactions, but do apply to table-funded transactions, the difference between which depends on the “real source of funding” and the “real interest of the funding lender.”

    The CFPB states that the requirements and restrictions that RESPA and TILA and their implementing regulations impose on compensation paid to mortgage brokers do not depend on the labels that parties use in their transactions. Rather, under Regulation X, whether compensation paid by the “investor” to the “lender” must be disclosed depends on determinations such as whether that compensation is part of a secondary market transaction, as opposed to a “table-funded” transaction. And under Regulation Z, whether compensation paid by the “investor” to the “creditor” must be included in the points-and-fees calculation and whether the “creditor” is subject to the compensation restrictions as a mortgage broker depends on determinations such as whether the “creditor” finances the transaction out of its own resources as opposed to relying on table-funding by the “investor.”

    CFPB’s Factors For Assessing Mini-Correspondent Lenders

    The guidance advises lenders that in exercising its supervisory and enforcement authority under RESPA and TILA in transactions involving mini-correspondents, the CFPB considers the following questions, among others, to assess the true nature of the mortgage transaction:

    • Beyond the mortgage transaction at issue, does the mini-correspondent still act as a mortgage broker in some transactions, and, if so, what distinguishes the mini-correspondent’s “mortgage broker” transactions from its “lender” transactions?
    • How many “investors” does the mini-correspondent have available to it to purchase loans?
    • Is the mini-correspondent using a bona fide warehouse line of credit as the source to fund the loans that it originates?
      • Is the warehouse line of credit provided by a third-party warehouse bank?
      • How thorough was the process for the mini-correspondent to get approved for the warehouse line of credit?
      • Does the mini-correspondent have more than one warehouse line of credit?
      • Is the warehouse bank providing the line of credit one of, or affiliated with any of, the mini-correspondent’s investors that purchase loans from the mini-correspondent?
      • If the warehouse line of credit is provided by an investor to whom the mini-correspondent will “sell” loans to, is the warehouse line a “captive” line (i.e., the mini-correspondent is required to sell the loans to the investor providing the warehouse line or to affiliates of the investor)?
      • What percentage of the mini-correspondent’s total monthly originated volume is sold by the mini-correspondent to the entity providing the warehouse line of credit to the mini-correspondent, or to an investor related to the entity providing the warehouse line of credit?
      • Does the mini-correspondent’s total warehouse line of credit capacity bear a reasonable relationship, consistent with correspondent lenders generally, to its size (i.e., its assets or net worth)?
    • What changes has the mini-correspondent made to staff, procedures, and infrastructure to support the transition from mortgage broker to mini-correspondent?
    • What training or guidance has the mini-correspondent received to understand the additional compliance risk associated with being the lender or creditor on a residential mortgage transaction?
    • Which entity (mini-correspondent, warehouse lender, or investor) is performing the majority of the principal mortgage origination activities?
      • Which entity underwrites the mortgage loan before consummation and otherwise makes the final credit decision on the loan?
      • What percentage of the principal mortgage origination activities, such as the taking of loan applications, loan processing, and pre-consummation underwriting, is being performed by the mini-correspondent, or an independent agent of the mini-correspondent?
      • If the majority of the principal mortgage origination activities are being performed by the investor, is there a plan in place to transition these activities to the mini-correspondent, and, if so, what conditions must be met to make this transition (e.g. number of loans, time)?

    The CFPB cautions that (i) the inquiries described in the guidance are not exhaustive, and that the CFPB may consider other factors relevant to the exercise of its supervisory and enforcement authorities; (ii) no single question listed in the guidance is necessarily determinative; and (iii) the facts and circumstances of the particular mortgage transaction being reviewed are relevant.

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    Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.