As we begin 2015, it is worth noting the various federal regulations that will or might take effect. This article summarizes the key regulations that took effect late in 2014, that will take effect in 2015, and that have at least some potential of taking effect in 2015. We focus here on those regulations directly impacting consumer financial services.
Rules Taking Effect in 2015 (and Late 2014)
Integrated Disclosures under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z)
Perhaps the most significant new consumer regulations to take effect in 2015 are the integrated disclosure regulations under the Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) (the Final Integrated Disclosure Rule). Released on November 20, 2013, by the CFPB, the Final Integrated Disclosure Rule will be effective on August 1, 2015. 78 Fed.Reg. 79730, December 31, 2013. For loan applications received prior to August 1, 2015, the existing Regulation X and Regulation Z rules would apply and, for loan applications received on or after August 1, 2015, the new disclosure requirements would apply.
The Final Integrated Disclosure Rule consolidated the RESPA and TILA initial disclosures, and the RESPA and TILA loan closing disclosures for most closed-end consumer mortgage transactions, resulting in a single Loan Estimate disclosure and a single Closing Disclosure. The new rules do not apply to home equity lines of credit, reverse mortgages, or loans secured by a mobile home or other dwelling that is not attached to real property.
Countless articles and seminars have provided details of the Final Integrated Disclosure Rule, and vendors have stepped into the breach to provide the forms and systems needed to create new disclosures. This article therefore does not address the new Integrated Disclosure Rules in detail. However, a proposal issued on October 10, 2014, (the “October Proposal”) should be noted.
Under the Final Integrated Disclosure Rule, if there are changes in interest rate dependent charges due to a rate lock, extension, or a re-lock, the lender is required to provide a revised Loan Estimate disclosure on the date that the rate is locked. The October Proposal would allow the new disclosure to be provided on the date after the rate is locked. 79 Fed.Reg. 64336, October 29, 2014.
In addition, for new construction loans under the Final Integrated Rule, if the creditor reasonably expects settlement to occur more than 60 days after providing the initial Loan Estimate, the creditor may issue a revised Loan Estimate so long as the original Loan Estimate disclosed that the creditor could issue revised disclosures. However, a separate provision of the Final Integrated Rule does not permit the creditor to state that it may issue revised disclosures, thus creating a conflict. The October Proposal would add a new provision allowing the creditor to make the statement on the Loan Estimate form, thus allowing the creditor to issue a revised Loan Estimate if done at least 60 days prior to consummation. All Comments on the October Proposal were due by November 10, 2014.
Amendments to the 2013 Mortgage Rules Under the Truth in Lending Act (Regulation Z) Affecting the Qualified Mortgage Points and Fees Cure
In addition to changes to the Final Integrated Disclosure Rule noted above, the CFPB also passed a final rule amending the 2013 mortgage rules under Regulation Z that also impact Regulation X. With the exception of commentary addressing certain provisions in the TILA-RESPA integrated disclosure rule that are effective August 1, 2015, the amendments generally apply to transactions consummated on or after November 3, 2014. 79 Fed.Reg. 65300, November 3, 2014.
The relevant amendment is the provision of a cure mechanism permitting a lender to refund an overage of points and fees to a borrower of a Qualified Mortgage (QM). Under the Ability-to-Repay (ATR) Rule, points and fees charged to a consumer on a QM generally cannot exceed 3 percent of the loan principal at the time the loan is made. The recent amendment to the rule provides that, for transactions consummated between November 3, 2014 and January 10, 2021, the creditor or assignee can cure an excess over the QM points and fees limits if the consumer is refunded the overage within 210 days of consummation and any of the following do not occur: (1) the consumer institutes an action in connection with the loan, (2) the creditor, assignee, or servicer receives written notice from the consumer that the transaction’s total points and fees exceed the applicable limit, or (3) the consumer is 60 days past due. The creditor also must refund the customer the points and fees overages at the contract rate that applied during the period from consummation until payment is made to the consumer. Additionally, the creditor or assignee must maintain and follow policies and procedures for post-consummation review of points and fees.
Further, effective August 1, 2015, the Official Commentary to the rule will include a comment referencing the Final Integrated Disclosure Rule’s tolerance cure provision to explain that, to the extent that the amount paid to cure the QM tolerance violation is applied to points and fees, that amount can be offset by payments to the consumer under the Regulation X tolerance cure.
Other changes provide an alternative small servicer definition for nonprofits meeting certain requirements and amend the existing Regulation Z ability-to-repay requirements to provide that certain non-interest bearing, contingent subordinate liens originated by nonprofit creditors will not be counted toward the credit extension limit applying to the nonprofit exemption from the ATR requirements.
While the CFPB has described the November 3 rule changes as “minor adjustments,” there has been discussion that they are more significant than the CFPB has represented. The impact of these changes will likely be assessed in the context of evaluating the efficacy of other requirements involving QMs.
New Definitions of “Larger Participant” for CFPB Supervisory Purposes
Under the Dodd Frank Act, the CFPB has the authority to supervise nonbank “larger participants” of markets for consumer financial products or services that the CFPB could not otherwise supervise. Under this authority, the CFPB may supervise nonbank covered persons for purposes of: (1) assessing compliance with Federal consumer financial law; (2) obtaining information about such persons’ activities and compliance systems or procedures; and (3) detecting and assessing risks to consumers and consumer financial markets. The CFPB exercises this authority through its definition of larger participants of specified consumer financial markets. The CFPB previously exercised this authority to define larger participants for supervision purposes as including certain providers of consumer reporting (77 Fed.Reg. 42874, effective September 30, 2012), certain consumer debt collectors (77 Fed.Reg. 65775, effective January 2, 2013), and certain student loan servicers (78 Fed.Reg. 73383, effective March 1, 2014).
Effective December 1, 2014, larger participants of the international money transfer market are also subject to the CFPB’s supervisory authority. This would apply to nonbanks that have at least one million aggregate annual international money transfers. “International money transfer” means the electronic transfer of funds requested by a sender to a designated recipient that is sent by an international money transfer provider, and “international money transfer provider” means any nonbank covered person that provides international money transfers for a consumer, regardless of whether the consumer holds an account with such person. 79 Fed.Reg. 56631, September 23, 2014.
The CFPB also has proposed rules that would make certain automobile finance and leasing companies larger participants for supervision purposes. 79 Fed.Reg. 60762, October 8, 2014. These rules would generally apply to companies with at least 10,000 annual automobile lease transactions or purchase or refinancing credit transactions. The rules would not apply to automobile dealers that are excluded from the CFPB’s authority under the Dodd Frank Act or to certain extenders of retail credit or retail leases direct to consumers when those loans or leases are not routinely assigned to unaffiliated third parties or leasing sources. Comments on the proposal were due December 8, 2014. It is not certain this proposal would take effect in 2015, but the CFPB generally has finalized proposals regarding larger participants within a few months after the comment period.
Rules Changing Eligibility Thresholds for 2015
A few rules effective January 1, 2015, involve adjusting the monetary thresholds for determining who is subject to certain consumer credit, leasing, mortgage and escrow rules. Parties meeting the yearly thresholds, which are calculated based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), are exempt from the relevant regulatory requirements in 2015. Under the Truth in Lending Act (Regulation Z), this includes the following:
- The asset-size threshold for certain creditors to be exempt from the requirement to establish an escrow account for higher-prices mortgages, which is increased to assets of $2.060 billion or fewer (from a $2.028 billion threshold), along with similar increases for small-creditor portfolios and balloon-payment qualified mortgages. 79 Fed.Reg. 77855, December 29, 2014.
- The consumer credit transactions exemption is increased to a threshold of $54, 600. 79 Fed.Reg. 56483, September 22, 2014.
- For the special requirements for appraisals for Higher-Priced Mortgage Loans, transactions of $25,500 or fewer are exempt. 79 Fed.Reg. 78296, December 30, 2014.
- Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) regulations, the adjusted dollar amount for the penalty fees safe harbor in 2015 is $27 for a first late payment and $38 for each subsequent violation within the following six months. Based on the CPI-W calculation, the minimum interest charge disclosure thresholds under the rule will not change in 2015. 79 Fed.Reg 48015, August 15, 2014.
- For loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA), the adjusted total loan amount threshold for determining whether a transaction is a high cost mortgage under the rule is $20,391, and the adjusted statutory fee trigger for HOEPA loans is $1,020. 79 Fed.Reg 48015.
- Under the Ability to Repay/Qualified Mortgage rules, for the purpose of a creditor determining a consumer’s ability to repay a transaction secured by a dwelling, a covered transaction is not a Qualified Mortgage unless the transaction’s total points and fees do not exceed 3 percent of the total loan amount for a loan greater than or equal to $101,953; $3,059 for a loan amount greater than or equal to $61,172 but less than $101,953; 5 percent of the total loan amount for a loan greater than or equal to $20,391 but less than $61,172; $1,020 for a loan amount greater than or equal to $12,744 but less than $20,391; and 8 percent of the total loan amount for a loan amount less than $12,744. 79 Fed.Reg 48015.
Further, under Regulation C of the Home Mortgage Disclosure Act, the asset-size threshold for banks, savings associations and credit unions to be exempt from data collection requirements is $44 million (from $43 million). 79 Fed.Reg. 77854, December 29, 2014. See also, below, on the proposal for extensive amendments to Regulation C.
Additionally, under Regulation M, covering Consumer Leasing, the exemption for consumer leases is now $54,600. 79 Fed.Reg. 56482, September 22, 2014.
Finally, under the Fair Credit Reporting Act, the maximum a consumer reporting agency may charge for making a disclosure to a consumer is adjusted from $11.50 to $12.00 based on the Consumer Price Index for All Urban Consumers (CPI-U). 79 Fed.Reg. 74068, December 15, 2014.
Rules That Could Take Effect in 2015
There are a number of proposed rules for which the public Comment period is still open, or for which the Comment period has closed but for which no final rule has yet been released. Whether these rules could be effective in 2015 will of course depend on many factors, including the nature of Comments provided and the systems changes needed to implement the changes.
New Home Mortgage Disclosure Act (Regulation C) Rules
On July 24, 2014, the CFPB proposed extensive new rules under Regulation C to the Home Mortgage Disclosure Act (HMDA). 79 Fed.Reg. 51732, August 29, 2014. Certain of the proposed changes are mandated by the Dodd Frank Act, but many also are proposed by the CFPB as consistent with their discretionary rulemaking authority. Comments were due by October 29, 2014.
The proposal would modify the institutional coverage test by adopting a uniform threshold of 25 or more closed-end loans or reverse mortgages in a year. Under the current asset-based test, certain banks that make only one home-purchase loan in a year are covered, while certain nondepository institutions that make many more loans are not covered.
The proposal also would cause Regulation C to apply to more types of loans. Financial institutions would be required to report all closed-end loans, open-end loans, and reverse mortgages secured by a dwelling. While under current rules home equity lines of credit could be reported at the institution’s option, the proposal would require such lines to be reported even if not made for consumer purposes or to a consumer. However, unsecured home improvement loans would no longer be covered.
One of the key differences under the proposed rule would be the data that would need to be reported. The proposal would require reporting 37 new data points, 20 of which are not specifically required by HMDA but which include information that the CFPB believes to be appropriate to “carry out the purposes of HMDA by addressing data gaps.” Examples of data fields that the CFPB is proposing to add or modify include debt-to-income ratio, combined loan-to-value ratio, qualified mortgage status, loan term, interest rate, introductory rate period, and additional information about the property securing the loan.
These and other proposed Regulation C changes would have significant impact on HMDA reporters. It also must be remembered that the HMDA reports often provide the key information relied on by examiners when assessing compliance with fair lending requirements.
Changes to Mortgage Servicing Rules
On November 20, 2014, the CFPB proposed amendments to the mortgage servicing rules of Regulation X (RESPA) and Regulation Z (TILA). 79 Fed.Reg. 74176, December 15, 2014. Comments are due by March 16, 2015. The proposal addresses nine major topics, each of which are briefly summarized below:
Increased Protection of Successors in Interest. Under current rules, when a borrower dies, the loan servicers must identify and communicate with the borrower’s heirs, and these successors in interest are then given the same servicing rights and protections as the borrower. The proposal expands the definition of successor in interest to include situations where the property is transferred (a) to another person through divorce or legal separation, (b) from a living spouse or parent, (c) through a living trust, or (d) when a joint tenant dies. The servicer also must have procedures in place to identify such successors in interest.
New Definition of “Delinquency.” The proposal adds a general definition of delinquency as beginning on the date that the borrower fails to make a required payment of principal, interest, and any applicable escrow amount. The borrower would not be considered delinquent for failing to pay a late fee. Perhaps more significantly, if a payment is made on a delinquent loan and applied to the most delinquent payment, the delinquency period must then be adjusted to the date of the first payment that remains unpaid for purposes of the calculating the length of the borrower’s delinquency under the various servicing rules.
Requests for Information. The proposed rule would change how a servicer must respond to requests for information that ask for ownership information for loans in trust for which Fannie Mae or Freddie Mac is the trustee, investor, or guarantor. If the borrower does not specifically request the name of the trust, the loan servicer would not be required to provide this information, but would only be required to provide the name and contact information for Fannie Mae or Freddie Mac.
Force-Placed Insurance. The proposed amendments would require servicers to provide notification to borrowers before assessing a charge for forced-place hazard insurance when the borrower’s current coverage is insufficient, contrary to the current rule requiring such notice only if the borrower’s insurance coverage has expired or is expiring.
Early Intervention. Under current rules, the servicer must establish or make good faith efforts to establish live contact with a borrower within 36 days after delinquency. The proposal would clarify that this obligation to make live contact after each payment due date is for the duration of the borrower’s delinquency. In addition, the proposal also would require servicers to provide written early intervention notices to certain borrowers who are in bankruptcy or who have invoked their cease communication rights under the Fair Debt Collection Practices Act.
Loss Mitigation. The CFPB is proposing a number of changes to the loss mitigation rules. To summarize certain key changes, the proposal would require servicers to meet the loss mitigation requirements more than once in the life of a loan for borrowers who become current after a delinquency, without any need for the borrower to file duplicate requests. Second, servicers must provide a written notice once they receive a complete loss mitigation application; require that the notice indicate that the servicer has received a complete application but clarify that the servicer might later request additional information if needed; require that the notice provide the date of completion and a disclosure indicating whether a foreclosure sale was scheduled as of that date; the date foreclosure protections began; a statement informing the borrower of applicable appeal rights; and a statement that the servicer will complete its evaluation within 30 days from the date of the complete application. In addition, servicers will be permitted to offer a short-term repayment plan based on evaluation of an incomplete application.
Servicers also would be required to provide written notice to the borrower if the servicer lacks third-party information 30 days after receiving the borrower’s complete application. The servicer would be prohibited from denying the application and beginning any foreclosure until after it received the third party information and completed an evaluation.
The proposal also would state that a transfer of servicing should not adversely affect a borrower who is pursuing loss mitigation, and would clarify how loss mitigation procedures and timelines apply to a transferee servicer that receives a mortgage loan for which there is a loss mitigation application pending at the time of a servicing transfer.
Extension of Regulations E and Z to Prepaid Card Products
The CFPB could issue a final rule this year that would subject most prepaid card products to Regulation E and any such products offering “credit” features to Regulation Z as well. Although there is speculation that the final rule will not be published until the latter part of this year and the effective date will be sometime in 2016, these dates are currently up in the air. Comments to the November 13 proposal are due March 23, 2015.
The proposal includes a wide range of prepaid-card products, including general purpose reloadable cards, certain non-reloadable general-use cards, mobile and other electronic prepaid accounts, student cards, tax refund cards, and peer-to-peer payment products. Payroll cards (and government benefit cards), which were already subject to Regulation E, would have to meet additional Regulation E requirements under the proposal.
Generally, the Regulation E protections being proposed to extend to prepaid cards include providing consumers access to account information either in the form of periodic statements or online for free, the error resolution provisions, and fraud and lost-card protections. Further, under the proposal consumers must be provided both a short and long-form disclosure. Both disclosures are required before a consumer obtains a prepaid card account, except that only the short form is required beforehand for accounts purchased through retail locations. The forms will include information such as costs and fees associated with the account and details regarding access to account information and error resolution. Additionally, prepaid card issuers of 3,000 or more cards would be required to post account agreements on their websites and submit them to the CFPB for posting on its website.
Existing Regulation Z credit card rules and disclosure requirements for open-end (not home-secured) consumer credit plans also would generally apply to prepaid card accounts that offer overdraft services or other credit features and charge a fee for the service (such as interest, transaction fees, annual fees or other participation fees). They also would apply to separate lines of credit linked to prepaid accounts. Broadly, extending Regulation Z to these prepaid cards includes applying the ability to repay provisions, monthly periodic statement requirements, limits on fees and interest charges and on the means of accepting repayment, a “reasonable” time to repay debts before being charged a late fee, and observing a waiting period after the account opens before formally offering consumers credit. Additionally, as with traditional credit cards, issuers of 10,000 or more prepaid accounts with credit features would be required to post their card agreements on the CFPB’s website.
Regardless of whether a final rule and effective date are issued this year, the CFPB has been very vocal about its intent to regulate prepaid cards much more broadly. The final scope and details of the final rule are unclear, but there’s no doubt that a new, sweeping federal regulatory landscape for prepaid cards is on the horizon.
Identification Requirements for Beneficial Owners of Business Customers
The Financial Crimes Enforcement Network (FinCEN) proposed rules on August 14, 2014, that would require banks, brokers or dealers in securities, mutual funds, and introducing brokers in commodities to identify beneficial owners of legal entity customers as part of Customer Due Diligence under the Bank Secrecy Act. 79 Fed.Reg 45151. Comments to the proposal were due on October 3, 2014, which could leave time for FinCEN to issue final regulations with an effective date in 2015. While this proposal would not apply to consumer customers, it is worth noting here as a reminder that FinCEN continues to look for ways to tighten the Bank Secrecy Act and Anti-Money Laundering rules, with attendant obligations on financial institutions.
“Beneficial owners” under the proposal would include each individual who, directly or indirectly, owns 25% or more of the legal entity customer and one individual with significant responsibility to control, manage, or direct the legal entity customer. On the potentially positive side, the institution would be able to rely on a certification from the customer as to who these beneficial owners are. That is, the institution would not be required to verify the status of each such person as a beneficial owner, but could instead rely on the entity’s certification.
However, to verify the identity of those persons, the institution would be required to use Customer Identification Procedures (CIP) that are identical to the CIP used by the institution for customers. For many institutions, this would mean obtaining a consumer report on the individual, and that could create problems under the Fair Credit Reporting Act (FCRA). Under the FCRA, a person generally may not obtain an individual’s consumer report in connection with a business-purpose transaction without that individual’s written consent. Obtaining this written consent could be difficult and time-consuming for business entities where the beneficial owners are not signing the loan or account applications. Unless FinCEN changes course in the final regulation, the CFPB may need to release regulatory guidance interpretations to clarify that a report obtained solely for identification purposes is not a “consumer report” under the FCRA.