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10.31.2017 | Legal Update

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1. Senate Votes to Repeal CFPB Arbitration Rule
2. Federal Banking Agencies Issue HMDA Compliance Examination Guidance
3. CFPB Imposes Ability-to-Repay Requirements Aimed at Payday Debt Traps
4. OCC Issues Guidance on Impact of Discriminatory Practices on CRA Ratings
5. Other Developments: Board Responsibilities and Uniform Residential Loan Applications

1. Senate Votes to Repeal CFPB Arbitration Rule

With Vice President Mike Pence casting the tie-breaking vote, the U.S. Senate has voted to repeal the CFPB’s arbitration rule, which would have prohibited banks and other covered consumer financial service providers from using arbitration clauses in agreements with consumers to prevent consumers from filing or participating in class action lawsuits concerning covered consumer financial products or services. The vote on October 24 invokes Congress’s authority under the Congressional Review Act to prevent certain regulations issued by federal agencies from becoming effective by enacting a joint resolution of disapproval within 60 legislative days after Congress receives a regulation. The House of Representatives passed a resolution of disapproval of the CFPB’s arbitration rule in July. Assuming that the President does not veto the resolution of disapproval, the arbitration rule may not take effect and the CFPB may not issue any substantially similar rule without authorization by Congress. The White House has publicly supported nullifying the arbitration rule, and the President is not expected to veto the resolution of disapproval. 

     Nutter Notes: The CFPB stated that the justification for its arbitration rule is that increasing the risk of class action lawsuits by eliminating mandatory arbitration clauses in contracts for certain consumer financial products and services would cause financial institutions to discontinue or avoid practices harmful to consumers. The CFPB’s conclusion was based on a study of the use of mandatory arbitration clauses in consumer financial markets that was required to be conducted under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As part of its arbitration study, the CFPB also concluded that banning mandatory arbitration in consumer financial products and services would be unlikely to significantly increase costs to consumers. The OCC, however, recently concluded that there is “a strong probability of a significant increase” in costs to consumers resulting from the elimination of mandatory arbitration clauses. The OCC analyzed the same data reviewed by the CFPB and determined that introducing an increased risk of financial liability to financial institutions from class actions is likely to be passed on to consumers in the form of increased costs to consumers, either in the form of increased prices or decreased availability of financial products and services. Click here for a copy of the CFPB’s original arbitration study and here for a copy of the OCC’s review of the arbitration study.

2. Federal Banking Agencies Issue HMDA Compliance Examination Guidance

The federal banking agencies have issued guidance on Home Mortgage Disclosure Act (HMDA) data fields that have been designated as key fields that the agencies will use to evaluate compliance with HMDA’s requirements by banks and other financial institutions that report HMDA data. The new guidance released on October 17 explains that, for the purposes of evaluating a financial institution’s compliance with HMDA requirements, examiners will focus primary attention on 37 designated key HMDA data fields during transaction testing for HMDA data collected on or after January 1, 2018. The key fields include loan type, loan purpose, census tract, ethnicity of applicant, and co-applicant and income, among others. The key fields are those considered by the agencies to be most important to ensuring the integrity of analyses of overall HMDA data. However, in certain circumstances examiners may determine that it is necessary to review additional HMDA data fields consistent with the FFIEC’s HMDA examination guidelines. Click here for a copy of the new guidance, including a complete list of the designated key HMDA data fields.

     Nutter Notes:  Amendments to the CFPB’s Regulation C, which implements HMDA, that become effective on January 1, 2018 establish the data that financial institutions must collect and report pursuant to HMDA requirements. The FFIEC issued HMDA Examiner Transaction Testing Guidelines on August 22, 2017 that establish procedures for examiners to use when validating HMDA data that will be reported under the amended rule beginning on January 1, 2018. The new transaction testing guidelines include a data sampling process that involves prioritizing designated data fields for review, or reviewing all data fields within a sample, but the guidelines themselves did not establish the designated key data fields. The new transaction testing guidelines were also revised to reflect the amended reporting requirements. The transaction testing guidelines are based on a statistical sampling methodology. The guidelines provide direction to examiners in determining error rates for expanded data fields, such as applicant race and ethnicity, and establish error rate thresholds for determining when an institution is expected to correct and resubmit reported data. The guidelines also provide examples that demonstrate how examination procedures will be applied in specific cases.

3. CFPB Imposes Ability-to-Repay Requirements Aimed at Payday Debt Traps

The CFPB has issued a final rule aimed at stopping payday debt traps by requiring lenders, including banks under certain circumstances, to determine whether borrowers have the ability to repay certain types of short-term loans and other loans with balloon payment features. The final rule released on October 5 applies to loans that require consumers to repay all or most of the debt at once, including payday loans, auto title loans, deposit advance products, and longer-term loans with balloon payments. While the final rule applies to all lenders that regularly extend the types of credit that are subject to the final rule, there are exemptions and exclusions for many of the types of short-term credit typically extended by banks. For example, the final rule does not apply to any credit cards that qualify as open-end consumer credit plans under Regulation Z (that are not home-secured), student loans made under subchapter IV of the Higher Education Act of 1965 or a private education loan under Regulation Z, overdraft services as defined under Regulation E, and overdraft lines of credit that are subject to Regulation Z, among others. In addition, the final rule does not apply to loans made by a lender that makes 2,500 or fewer covered short-term or balloon-payment loans per year and derives no more than 10% of its revenue from such loans. The final rule will become effective 21 months after it is published in the Federal Register, which is expected shortly. Click here for the text of the final rule.

     Nutter Notes:  Under the new rule, lenders must conduct a “full-payment test” to determine whether a potential borrower can afford to repay the loans without re-borrowing (paying new fees to extend the loan or taking out another loan soon after repayment). For covered short-term loans, the full-payment test requires lenders to determine that the borrower has sufficient income to pay the loan and to meet major financial obligations and basic living expenses during the term of the loan and for 30 days after paying off the loan. For covered longer-term loans with a balloon payment, the full-payment test requires lenders to determine that a borrower can pay all of the payments when due, including the balloon payment, as well as major financial obligations and basic living expenses during the term of the loan and for 30 days after making payments during the month with the loan’s highest payment. For certain types of short-term credit, a lender can avoid the full-payment test if the lender offers a “principal-payoff option” that allows borrowers to pay off the loan more gradually. The final rule requires lenders to use credit reporting systems registered with the CFPB to report and obtain information on certain loans covered by the rule. The final rule also includes a “debit attempt cutoff” for any short-term loan, balloon-payment loan, or longer-term loan with account access and an annual percentage rate higher than 36% that includes authorization for the lender to access the borrower’s checking or prepaid account.

4. OCC Issues Guidance on Impact of Discriminatory Practices on CRA Ratings

The OCC has published its Policies and Procedures Manual (PPM) 5000-43, which describes the OCC’s policy and framework for determining the effect of evidence of discriminatory or other illegal credit practices on the Community Reinvestment Act (CRA) composite or component ratings of a national bank or federal savings association. According to the new guidance released on October 12, the OCC’s determination of how evidence of illegal credit practices in a bank’s CRA lending activities affects a bank’s assigned CRA composite and component ratings is guided by two principles: (1) there must be a logical nexus between the assigned rating and evidence of discriminatory or other illegal credit practices to ensure alignment between the rating and the bank’s actual CRA performance; and (2) full consideration must be given to the remedial actions taken by the bank. Under the first principle, the OCC will only consider lowering a composite or component performance test rating of a bank if the evidence of discriminatory or illegal credit practices directly relates to the institution’s CRA lending activities. Under the second principle, the new guidance states that a bank’s ratings generally should not be lowered solely based on the existence of a discriminatory or other illegal credit practice prior to commencement of the CRA evaluation if the bank has remediated or taken appropriate corrective actions to address the practice. Click here for a copy of the OCC’s new guidance.

     Nutter Notes:  According to the OCC’s new CRA guidance, limited, technical, or immaterial instances of discriminatory or illegal credit practices directly related to CRA lending activities in the context of otherwise good-to-excellent performance under each of the performance tests may be the basis for taking some action to reflect adverse effect on an evaluation such as criticizing the practice in the CRA performance evaluation, according to the new guidance. The new guidance warns, however, that more material instances of discriminatory or other illegal credit practices in the context of average-to-good performance may be the basis for lowering a component performance test rating by one level. According to the new guidance, a downgrade of the composite rating should be supported by strong evidence of quantitatively and qualitatively material instances of discriminatory or illegal credit practices directly related to CRA lending activities that have resulted in material harm to customers. In assessing whether there is evidence of discriminatory or other illegal credit practices that may adversely affect a bank’s CRA evaluation, examiners will consider all of the factors set forth in the OCC’s CRA rules, specifically: the nature, extent, and strength of the evidence of the practices; the policies and procedures that the bank has in place to prevent the practices; any corrective action that the bank has taken or has committed to take, including voluntary corrective action resulting from self-assessment; and any other relevant information. According to the new guidance, controls, testing, or audit procedures that the bank has implemented, and restitution made to customers, may be mitigating considerations.

5. Other Developments: Board Responsibilities and Uniform Residential Loan Applications

• Federal Reserve Extends Public Comment Period for Proposal on Board Responsibilities

The Federal Reserve announced on October 5 that it has extended until November 30, 2017 the comment periods for both its proposal to enhance the effectiveness of boards of directors, and its related proposal to implement a new ratings system for large financial institutions that would be aligned with the agency’s post-crisis supervisory program. The proposal to enhance the effectiveness of boards of directors also includes guidance on the ways supervisory findings – such as Matters Requiring Immediate Attention and Matters Requiring Attention – would be communicated to boards of directors.

     Nutter Notes:  Under the Federal Reserve’s proposal for supervisory expectations for boards of directors, the Federal Reserve stated that it intends to better distinguish a board’s roles and responsibilities from those of senior management for all domestic bank and savings and loan holding companies. Click here for a copy of the notice related to the proposal for board expectations and click here for a copy of the notice related to the proposed new rating system for large financial institutions.

• FHFA Adds Language Preference Question to Uniform Residential Loan Application

The Federal Housing Finance Agency (FHFA) has added a preferred language question to the redesigned Uniform Residential Loan Application (URLA). The new question will enable borrowers who prefer to communicate in a language other than English to identify that language. Fannie Mae and Freddie Mac plan to publish the final redesigned URLA later this year, and lenders may begin using the redesigned URLA in July 2019. Use of the redesigned form will become mandatory in February 2020.

     Nutter Notes:  The redesigned URLA will also include disclosures that the mortgage transaction is likely to be conducted in English and that language resources in the applicant’s preferred language may not be available. Fannie Mae and Freddie Mac also plan to publish a separate disclosure translated into several languages to further inform borrowers, the use of which will be optional. Click here for a copy of the preferred language question and disclosures.

Nutter Bank Report

Nutter Bank Report is a monthly electronic publication of the Banking and Financial Services Group of the law firm of Nutter McClennen & Fish LLP.  Chambers and Partners, the international law firm rating service, after interviewing our clients and our peers in the profession, has ranked Nutter’s Banking and Financial Services practice among the top banking practices in the nation. Visit the U.S. rankings at ChambersandPartners.com. The Nutter Bank Report is edited by Matthew D. Hanaghan. Assistance in the preparation of this issue was provided by Heather F. Merton. The information in this publication is not legal advice. For further information, contact:

Kenneth F. Ehrlich
kehrlich@nutter.com
Tel: (617) 439-2989

Michael K. Krebs
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Tel: (617) 439-2288

This update is for information purposes only and should not be construed as legal advice on any specific facts or circumstances. Under the rules of the Supreme Judicial Court of Massachusetts, this material may be considered as advertising.