The CFPB’s Proposed Rule Outline and Preparing for a CFPB Examination

2015 CFSP Western States Conference & Trade Show

Welcome to the 2015 CFSP Western States Conference & Trade Show


Dodd Frank - 2015 Update

The CFPB’s Proposed Rule Outline

& Preparing for a

CFPB ExaminationJustin B. Hosie,

PartnerHudson Cook, LLP6005 Century Oaks Drive,

Suite 500Chattanooga, TN 37416 (423) 490-7564 (423) 584-1583 [email protected]

mailto:[email protected]


What are we talking about today?

• Two big 2015 considerations:– CFPB Rule Outline– Preparing for CFPB Examination


Quick Caveats on the

Rule Outline• CFPB has only issued an

outline, not a proposed rule – subject to change

• The outline isn’t particularly clear – subject to interpretations

• Interplay with state law is subject to interpretations


Part I – The Proposed Rule

Outline• What will the rule cover?

– Covered– Excluded– Not mentioned

• 7 Credit Options: – 3 short term– 4 long term

• Collection Practices• Timing


What will the rule cover?

• Payday loans• Deposit advance products• Vehicle title loans• Installment loans with an

MAPR above 36% and either an account access device (check(s), ACH, etc.) or vehicle/title as security

• Open-end lines of credit


What is specifically excluded?

• True pawn (take possession, not just title)

• Credit card accounts• Real estate secured loans• Student loans• Deposit account overdraft


What isn’t mentioned?

• RTO• Retail installment sales• Business loans• Letters of credit• Other ideas


What are the models the CFPB

anticipates?• Short term “ability to repay”• Short term “safe harbor”• Short term open end lines of

credit• Long term “ability to repay”• Long term “safe harbor 1” -

NCUA• Long term “safe harbor 2” –

Pew• Long term open end line of

credit


What divides “short” and “long”

term?• Short-Term = 45 days or less• Long-Term =

– 46 Days or More– MAPR over 36%– Secured by

• Account Access*or • Vehicle


Why so many models?

• Purporting to allow lenders “flexibility”

• Rather than outlawing anything allowed under state law

• Choose your own adventure• Serve as a federal floor /

ceiling “in tandem” with (i.e. curtailing) state laws


Model 1 of 7: Short Term Ability to

Repay• Verify income and determine

ability to cover payment(s) after paying verified major financial obligations and living expenses for loan plus 60 days

• Consumer report to verify obligations/history and to report payments



Repay• Consider borrowing history

within the previous 18 months• Re-borrowing before a loan

payment is due or shortly after prior pay-off indicates prior loan was unaffordable



Repay• Presumed inability to repay a

2nd or 3rd sequential balloon payment loan, unless verified financial improvement

• 60 day cool-off after third loan in a sequence

• New collection limitations


How does this work “with” California

law?Verify

Income and

major financial obligati

ons

Database or

Consumer

Report

Borrower’s

history

Reborrowing

Limits

Cool Off

CFPB #1 Ability to Repay

Yes Yes Yes Yes 60 day cool off after 3 loan

sequenceCalifornia“Payday” Law

None None None No rollovers,

no explicit limit on

sequential

transactions

None


Model 2 of 7: Short Term Safe Harbor

• Verify income• Consumer report to verify

history and report payments • No outstanding covered loans

with any lender • 3 loans total in a 60-day

sequence



• 60-day cool off. After completing a 3-loan sequence within the past 60 days, no additional credit

• In a rolling 12-month period, limited to 6 short term loans and indebtedness not more than 90 days

• $500 maximum amount financed



• Term of 45 days or less• Only one finance charge per

period • No vehicles as collateral• Off-Ramp: Amortize principal

by thirds over 3 loans or provide extended payment plan (4 payments)




law?Verify

Income

Database or Consumer

Report

Other loans prohibited

Sequential Loans

Cool Off

Max loans per year

Max amou

nt financed

Term Off Ramp

:

CFPB #2Short Term Protect

Yes Yes Other 3 loans in 60 day sequence

60 day cool off after 3 loan sequence

6 loans per rolling 12 months

$500 45 day

Amortize or Payment Plan

California“Payday” Law

None None Yes, with same lender.

None None No maximum

Appx $255

31 days

Allowed, not required


Model 3 of 7: Short Term Open End Line

of Credit• Assume consumer fully uses

the credit upon origination • Assume consumer makes only

the minimum required payments until the end of the contract period, at which point lender assumes consumer makes a single payment for the remaining balance and outstanding charges


Model 3 of 7: Short Term Open End Line

of Credit• Assume full repayment on the

loan by the payment date specified in the contract

• Other short-term protections possible




law?• To be determined• Open-end credit outline is the

most murky• No one is betting on its impact

on state law yet


Model 4 of 7: Long Term Ability to

Repay• Verify income and determine

ability to cover payment(s) after paying verified major financial obligations and living expenses

• Consumer borrowing history



Repay• No refinancing without

verified improved financial circumstances if refinancing delinquent or defaulted loan or if refinancing allows consumer to skip or reduce a scheduled payment (unless “substantial” cash out)



Repay• Balloon Payment Limitations – Must consider ability to repay for

60 days beyond loan term – No 2nd or 3rd balloon payment

loan in 60 day sequence, absent verified financial improvement

– After 3 balloons in sequence, 60-day cool off




law?Ability to Repay

Borrower’s History/

Database

Refinancing Limitations

Balloon Payments

CFPB #4Long Term Ability to Repay

Verify income and determine ability to cover payment(s) after paying verified major financial obligations and living expenses

Consumer borrowing history

No refinancing without verified improved financial circumstances if refinancing delinquent or defaulted loan or if refinancing allows consumer to skip or reduce a scheduled payment (unless “substantial” cash out)

Balloon Payment Limitations -Must consider ability to repay for 60 days beyond loan term -No 2nd or 3rd balloon payment loan in 60 day sequence, absent verified financial improvement-After 3 balloons in sequence, 60-day cool off

California For the size and duration, must consider financial ability of the borrowers to repay in the time and manner provided in the loan contracts. 10 CCR § 1452.

None For the size and duration, must consider financial ability of the borrowers to repay in the time and manner provided in the loan contracts. 10 CCR § 1452.

Balloon payments are prohibited (requires substantially equal periodic installments) Cal. Fin. Code § 22307(b).


Model 5 of 7: Long Term Safe Harbor -

NCUA • Verify income + borrowing

history + report payments• 2 such loans in rolling 6-month

period• Loan Amount: $200-$1,000• Duration: 45 days – 6 months• No balloon (full amortization)



NCUA • Charge 28% interest and $20

application fee• Follow NCUA limitations• Advance notice before

processing payments



law?o Verify Income

Sequential Loans

Loan Amount

Duration

Balloon Payments

Interest Limitations

CFPB #5Long Term Safe Harbor (NCUA)

Yes 2 loans in a rolling 6-month period

$200-$1,000

45 days – 6 months

No balloon (full amortization)

28% interest and $20 application fee

CaliforniaInstallment

Yes.. 10 CCR § 1452.

No limit No limit For loans of less than $5,,from 24 months and 15 days to 60 months and 15 days. Cal. Fin. Code § 22334.

Balloon payments are prohibited Cal. Fin. Code § 22307(b).

As agreed to by the parties for loans of $2,500 or more.



Pew• Verify income• Verify borrowing history• Consumer report to verify

history and report payments • No other covered loan• No default on a covered loan in

the past 12 months



Pew• 2 loan max in rolling 12-month

period• Payments can’t exceed 5% of

expected gross income during the same period

• Term: 45 days- 6 Months



Pew• No balloons• 2 Payment minimum• No prepayment penalties• New collection limitations



law?Verify Income

Consumer Report or Database

No other Loans

Sequential Loans

Payment Limitations

Max Term

Balloon Limitations

Prepayment Penalties

Minimum Payments

CFPB #6Long Term Safe Harbor (Pew)

Yes Yes No other covered loan

2 loan max in rolling 12-month period

Payments can’t exceed 5% of expected gross income

45 days – 6 months

No balloons

No prepayment penalties

2 payment minimum

CaliforniaInstallment

Yes. 10 CCR § 1452.

None None None None For loans of less than $5,000, ranges from 24 months and 15 days to 60 months and 15 days. Cal. Fin. Code § 22334.

Balloon payments are Cal. Fin. Code § 22307(b).

The CFLL does not expressly authorize a prepayment penalty.

For loans of less than $10,000, must be paid in substantially equal periodic installments. Cal. Fin. Code § 22307(b).


Model 7 of 7: Long Term Open End Line

of Credit• Assume consumer fully uses

the credit upon origination • Assume consumer makes only

minimum payments until the end of the contract period, at which point the consumer must make a single payment for the remaining balance


Model 7 of 7: Long Term Open End Line

of Credit• Assume full repayment by the

end of the contract period or, if no termination date, 6 months from origination

• Other long-term protections possible




law?• To be determined• Open-end credit outline is the

most murky• No one is betting on its impact

on state law yet


What are the new collection

limitations?• Advance notice before

processing EFT payments• Two payment attempts

maximum without new authorization


Part II - What are we talking about?

• CFPB Examination Procedures• Preparing• Measures to Reduce Problems


What is next?

• Guesses on likely dates:• June 29: “report” of SER comments and

discussion of number of affected businesses, scope of compliance impact and alternatives with lesser impact on small businesses.

• Q3 2015: Notice of Proposed Rule with 60 day comment period

• Q2 2016: Final Rule• Q1 2017: Mandatory Compliance deadline.


Can this be slowed (or stopped)?

• CFPB considers SBREFA to be a minor “speed bump• “Congressional Review” may apply (5 USC 801)

– Applies to “major rules”• $100MM impact on economy

• major increase in costs or prices for consumers or individual industries

• significant adverse effects on competition, employment, investment, productivity, innovation,

– Allows joint resolution of disapproval; may be vetoed

• Elections (2016) and appointing next CFPB Director (2018)


Part II - What are the CFPB Exam

Procedures?• The larger exam manual: http://www.consumerfinance.gov/guidance/supervision/manual/

• The guide examiners use to oversee financial service providers

• 924 pages• Describes exam process and

procedures, product based procedures, federal alphabet soup, then exam process templates

http://www.consumerfinance.gov/guidance/supervision/manual/

http://www.consumerfinance.gov/guidance/supervision/manual/


What are the CFPB Exam Procedures?

• The small dollar lending exam manual: http://www.consumerfinance.gov/f/201309_cfpb_payday_manual_revisions.pdf

• Addresses “payday lending”• 19 pages – constant references to

924 page manual• Includes overview, then modules

on marketing, application and origination, payment processing and sustained use, collections/default and consumer reporting, and service providers.

http://www.consumerfinance.gov/f/201309_cfpb_payday_manual_revisions.pdf





• The letter – Short timing – appx 60 days– Cease document destruction (like a

litigation hold)– Confidential– You can call your attorney– Quickly compile tons of documents -

Over 65 categories of documents requested.



• Meet and greet• The Visit:

– Several federal examiners (enforcement attorneys should not be present , but may be on speed-dial)

– Several weeks– Interviews and observations– Exit interview



• Exam report– Prohibits disclosure under 12 CFR Part 1070– Conclusions and Comments

• Risk Assessment Score• Consumer Compliance Rating• Matters Requiring Attention: Immediate to

180 Days– Review and Findings

• Assessment of risks• Areas reviewed in detail

– General Information


What are examiners looking for?

• Have you done a risk assessment?• Do you have a comprehensive compliance

management system overseen by senior management and with sufficient resources and authority?

• Do you monitor consumer complaints to detect potential problems?

• Do you have adequate personnel control? Hiring, training, supervision, auditing, compensation, disciplinary system

• Do you manage your vendors? Like your own employees

• Do all parts of the business, including your affiliates, sales offices, and vendors, comply with all consumer financial protection laws (including UDAAP)?


How do we prepare?

• CMS – Its more than a policy sitting on

the shelf– Once your policies and

procedures are right, critical functions include:• Oversight• Training• Auditing, and • Updating

– Complaints: tracking, analyzing, and updating policies


What happens after the exam?

• Make the changes required• Respond on time

– to matters requiring attention– to undated requirements

• Factual confirmation often requested• Sometimes receive a “Notice and

Opportunity to Respond and Advise” (NORA)

• Await possible negotiations on a Memorandum of Understanding, possible Civil Investigative Demand, or enforcement action (lawsuit)

• Some hear very little until the next exam


How can we reduce problems?

• Know which laws apply to you and how to comply:– Advertising Rules– ECOA– EFTA– GLBA– FDCPA (you probably think it doesn’t

apply)– TILA– UDAAP



• Monitor CFPB website for “supervisory highlights” and fix problems in your organization. Examples:

• Winter 2015: http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2015/

• Fall 2014: http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2014/

• Summer 2014: http://www.consumerfinance.gov/reports/supervisory-highlights-summer-2014/

• Spring 2014: http://www.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf

• Summer 2013: http://www.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf

• Winter 2013: http://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf

• Fall 2012: http://www.consumerfinance.gov/f/201210_cfpb_supervisory-highlights-fall-2012.pdf

http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2015/

http://www.consumerfinance.gov/reports/supervisory-highlights-winter-2015/

http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2014/

http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2014/

http://www.consumerfinance.gov/reports/supervisory-highlights-summer-2014/

http://www.consumerfinance.gov/reports/supervisory-highlights-summer-2014/

http://www.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf

http://www.consumerfinance.gov/f/201405_cfpb_supervisory-highlights-spring-2014.pdf

http://www.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf

http://www.consumerfinance.gov/f/201308_cfpb_supervisory-highlights_august.pdf

http://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf

http://files.consumerfinance.gov/f/201401_cfpb_supervisory-highlights-winter-2013.pdf

http://www.consumerfinance.gov/f/201210_cfpb_supervisory-highlights-fall-2012.pdf

http://www.consumerfinance.gov/f/201210_cfpb_supervisory-highlights-fall-2012.pdf



• Some examples noted in some of the supervisory highlights:– Good compliance policies, but no follow-through– inadequate resources for compliance department– lack of communication to personnel– lack of training– lack of Board supervision– Operations policies don’t match compliance policies– No comprehensive service provider management

program– Deficient fair lending compliance program;

employee discretion problem

– Failure to provide NOAA– FDCPA and Third-Party Collections



• Be aware of other typical problems:– CMS insufficiency– Marketing issues

• No credit checks (Teletrack and databases count)– Application and Origination –

• Keeping proper denial notices• Proper record retention periods

– Payment Processing • Misleading debit authorizations • Unfair debiting practices• Inaccurate TILA disclosures



– Collections• Field visits to employers• Misleading statements• Sense of Urgency• Others from ACE

– Third Party Oversight• Due diligence, contract provisions, training, monitoring

• Other issues we’ve seen



• Complaints– Don’t just solve on an ad hoc basis– Track and determine cause– Respond by changing policies, training, and

audits• Monitor CFPB Activity to Date

– Actions against similar companies: • ACE• Cash America

– Emerging UDAAP standards– General concepts that could be applied to your

business



• Other considerations– Mystery shopping to see if your

employees really follow training– Self testing encouraged under some

federal laws, such as the ECOA– Self reporting: CFPB has indicated

penalties are less for issues you self report - - difficult to quantify


How can we reduce problems

• Final Checklist:– Conduct a pre-exam risk assessment – know where

your risks are in advance– Have a compliance management plan in place to

remedy those risks– Be prepared from staffing standpoint (expect

disruption)– Review documents and plan for interviews– Maintain a single point of contact to be present at all

CFPB interviews – Be prepared to produce documents electronically– Review your operations materials, training, and actual

employee behavior as much if not more than legal/compliance policies

– Schedule is generally 6-weeks or longer (will not be cut short)


Questions

?


Contact Information

Justin B. Hosie, Partner

Hudson Cook, LLP6005 Century Oaks Drive,

Suite 500Chattanooga, TN 37416 (423) 490-7564 (423) 584-1583 [email protected]

mailto:[email protected]

Documents

The CFPB’s Proposed Rule Outline and Preparing for a CFPB Examination