What to do now about the new CFPB rule on arbitration?  (1) begin planning now and (2) begin actual preparation after the 60 days runs.

Congress has 60 days after publication of the new CFPB rule to take action to stop the application of this rule.  Publication occurred on Wednesday (July 19th).  It is impossible to predict what Congress will do.  However, we can be virtually certain that absent such Congressional action, this new rule will apply 180 days after those 60 days expire.  While there are other possible hurdles for this rule (for instance, an expected lawsuit challenging the rule; a possible new CFPB Director in the future; a challenge to the CFPB’s structure, etc.), these other impacts are unlikely to prevent the rule from beginning to have application.

We suggest you use the next 60 days to plan but wait to make any substantial expenditures until it is certain what Congress will do.  Here are some key questions which financial institutions should consider during those 60 days:

Continue Reading What to do now about the new CFPB rule on arbitration?

The Dodd Frank Act expressly provided that any CFPB rule on arbitration would not apply to existing contracts.  12 U.S.C. § 5518(d).  Therefore, the CFPB rule released last week will only bar class action waivers for contracts “entered into after” the applicable date for the regulation (60 days after publication of the rule in the Federal Register and then 180 days after that date).

However, the CFPB has taken an aggressive position on what is an existing contract.  Therefore, for existing customers, lenders and other “covered persons” will need to examine every change in any product or services they offer that is subject to the arbitration rule. If any “new product or service” is given to an existing customer, the new regulation applies to that product or service even if it is covered by the terms of an existing contract (assuming that the new product or service is within the scope of the rule).  In such a case, the lender would need to amend the previous agreement or provide a new agreement for the new product and could not rely on the arbitration clause to avoid a class action.

Continue Reading Are existing agreements governed by the new CFPB Arbitration Rule?

The Consumer Financial Protection Bureau (CFPB) recently finalized various updates to its mortgage disclosure rule, often referred to as “Know Before You Owe” or the TILA-RESPA Integrated Disclosures (TRID).  The updates were proposed approximately one year ago.  They include technical corrections, formal guidance, and a few substantive changes.  Some of the changes include:

  • Adding tolerance provisions for total payments that track existing TILA requirements regarding finance charges
  • Expanding the scope of certain exemptions for housing assistance loans
  • Applying TRID to all cooperative units, regardless of whether the cooperative units are classified as real property under state law
  • Providing guidance on sharing information with third parties

The new rule takes effect 60 days after publication in the Federal Register, but compliance is not mandatory until October 1, 2018.  A copy of the final rule is available here.

Notably absent from the final rule is guidance on the “black hole”—the period of time between issuing the Closing Disclosure and the actual closing date when, in certain instances, lenders may be prevented from resetting tolerances (and passing on closing cost increases to the borrower).  The amendments as originally proposed included a potential fix for this problem.  However, the CFPB decided not to adopt the fix based on conflicting comments that it received.  Instead, the CFPB issued a new proposed rule (with a new comment period) to address the “black hole” issue.  A copy of the proposed rule is available here.

The Consumer Financial Protection Bureau (CFPB) issued a rule on Monday prohibiting class action waivers in arbitration provisions of certain consumer contracts. The rule—to be codified at 12 C.F.R. § 1040—also requires covered businesses to submit records to the CFPB regarding any arbitration filed by or against their customers regarding covered products and services. The provided records will be made public and hosted by the CFPB on a searchable database. The likely impact of this rule (should it be allowed to go into effect) will be significant for financial institutions and dramatically alter their relationships with their customers.

Continue Reading CFPB Kills Class Action Waivers for Consumers Contracts and Makes Arbitration Public

With the Consumer Financial Protection Bureau (“CFPB”) now employing mystery shoppers, financial institutions must ensure that their branches are actually putting non-decimation policies into practice.  As we reported here on July 1, BancorpSouth, a Mississippi-based bank, recently entered into a $10.6M settlement with the CFPB regarding alleged redlining in the Memphis market.  That investigation was the CFPB’s first use of testing, also called “mystery shopping,” as an investigative tool.  This practice, which has long been in use by the Department of Justice and the Department of Housing and Urban Development, involves sending both white and African American individuals into branch offices to determine whether white customers are treated more favorably than African American customers.

More information about the CFPB’s use of mystery shopper’s as well as the redlining settlement can be located here.

 

In a case that demonstrates the scope of the Consumer Financial Protection Bureau’s (“CFPB’s”) reach, the CFPB and Department of Justice (“DOJ”) have entered into a settlement with BancorpSouth totaling almost $10,600,000 over alleged redlining.  Redlining is the practice of denying services or raising prices to residents of certain geographic areas based upon their racial or ethnic makeup.  The term was coined from the practice by lenders of marking in red areas on maps of cities that were not desirable for mortgage loans.

According to the CFPB and DOJ, when BancorpSouth expanded into the Memphis market, it did not build any branches in neighborhoods with large minority populations.  Further, nearly all of its loans allegedly originated outside minority neighborhoods.  The fine was announced as part of a settlement between BancorpSouth and the government under which, if approved by the court, Bancorp South will provide $4,000,000 in direct loan subsidies in minority neighborhoods, spend at least $800,000 on community programs and minority outreach, pay $2,780,000 to African American customers who were overcharged or denied  credit, and pay a $3,000,000 penalty.  Although it settled with the government, BancorpSouth did not admit guilt.

The CFPB is showing that its enforcement actions are not limited to larger companies and that it will file actions in federal courts across the country.  On May 11, 2016, it filed an enforcement action against Mississippi payday lender All American Check Cashing in the United States District Court for the Southern District of Mississippi.  In its complaint, the CFPB alleged that all American took steps to hide its fee from customers, going so far as to train its employees to “NEVER TELL THE CUSTOMER THE FEE.”  Further, the CFPB alleges that All American took steps to prevent customers who had changed their minds from cancelling transactions.  According to the CFPB, these actions would constitute “unfair, deceptive, or abusive acts” under 12 U.S.C.A. ss 5531 and 5536, portions of the Consumer Financial Protection Act.

Continue Reading CFPB Files Enforcement Action Against Mississippi Payday Lender

Last week, the Consumer Financial Protection Bureau (“CFPB”) issued a proposed rule which would prohibit mandatory arbitration provisions in millions of banking contracts, including contracts with consumers for credit cards and bank accounts. While financial institutions would still be allowed to offer arbitration as an option to customers individually, they would no longer be able to require it be done individually for claims brought as class actions. The intended, and drastic, result of the rule is that consumers would be free to join together in class action suits against their financial institutions for grievances which they had previously only been able to negotiate individually.

Continue Reading New Proposed Rule from the CFPB Paves Way for Massive Increase in Class Actions Suits Against Financial Institutions

On October 7, 2015, the Consumer Financial Protection Bureau (“CFPB”) proposed a rule that would severely limit the use of arbitration clauses in many consumer financial agreements and likely increase class action litigation in the consumer financial arena. The proposed arbitration ban applies to various consumer accounts, including credit cards, checking accounts, auto title loans, pay day loans, private student loans and installment loans, among others. The proposal requires that any arbitration clauses in these agreements contain a carve-out for class action cases. Stated differently, arbitration clauses in these agreements could not prevent consumers from participating in class action litigation against their lender.

Additionally, as part of the proposal introduced by the CFPB, companies that choose to arbitrate individual claims must submit to the CFPB a list of all arbitration claims filed and awards issued. The CFPB is also considering publishing that information to the public through its website.

The study that led to this proposal was published in March of this year. That study was mandated by the Dodd-Frank Act. Before this proposal can be implemented, it must be examined by a small business review panel. However, if approved, the proposal would take effect 30 days after publication and would govern to all agreements entered into 180 days after the effective date.

When many small and community bankers serving rural and underserved areas prepare for their New Year’s Eve toast this year, they will be able to make a major New Year’s Resolution: make more home loans.  The Consumer Financial Protection Bureau (“CFPB”) has introduced welcome new rules scheduled to take effect next year, which will raise the loan threshold for the “small creditor” exemption from 500 to 2,000 loans.  The new rules will also exclude from the threshold requirement those loans that the creditor retains in portfolio.  According to an estimate from the CFPB, approximately seven hundred additional lenders will now be “small creditors.”

These changes are part of a broader effort by the CFPB to exempt more small lenders from the extensive regulatory compliance burdens of larger lenders.  As the CFPB recognized when it announced the rule, consumers should also benefit from these changes by gaining easier access to financing.  In connection with the expanded definition of small creditors, the rules will provide certain small lenders serving rural and underserved communities with more opportunities to enter into non-standard types of loans to meet the needs of customers in these communities.

In addition to the new definition of “small creditor,” the CFPB has also expanded the definition of “rural” areas.  Now, a rural area includes any county or census block that has not been designated as “urban” by the U.S. Census Bureau.  Additionally, the rule provides safe harbors to lenders that have used Census Bureau or CFPB websites to determine whether a location is a rural or underserved area.

The rule balances the expanded exemption for lenders with several tighter restrictions.  For example, assets of a lender’s affiliates may now count toward the $2 billion asset cap that is used to determine whether a bank is a “small creditor.”  The period by which lenders are measured has also now changed, from any point in the previous three years to the previous calendar year.

Nonetheless, these rules offer exciting new potential for community bankers.  Additionally, the rules are a sign that regulators and lenders can work together, all while protecting the best interests of consumers.

For additional information, please contact Debra Lewis at dlewis@balch.com or Scott Gray at sagray@balch.com