The House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit has scheduled a hearing for tomorrow, May 21, on “Qualified Mortgages: Examining the Impact of the Ability to Repay Rule.” 

There will be one panel consisting of two witnesses from the CFPB.  The CFPB officials scheduled to appear are Peter Carroll, Assistant Director for Mortgage Markets, and Kelly Cochran, Assistant Director for Regulations.

As we reported last week, the National Treasury Employees Union (NTU) won an election to represent over 800 of the CFPB’s 1,200 employees.  The vote was 378 in favor and 86 against. 

I asked Shannon Farmer, a colleague who is a labor lawyer, whether this move would make it harder for the CFPB to fire incompetent employees and increase the agency’s human resource expenses.  She said that it would if the CFPB’s employees are not protected by civil service rules.  She also noted that it would make it more difficult for the CFPB to manage its employees.  Union arrangements often deter managers from being forthright with employees about their performance for fear of getting flak from the union.  Shannon thinks that this effect imposes the most significant costs on a company or agency whose employees unionize.  

As someone with no labor law background, I am struck by how 378 employees can obligate over 422 other employees to be part of a union shop. 

It is hard to say how this move might affect how the CFPB operates.  But many of those it supervises already have experience with NTU members, as the NTU represents employees of the IRS, SEC, FDIC and OCC.

According to a report from Politico, CFPB employees voted last week to join the National Treasury Employees Union, a federal union that also represents employees at other financial regulators, including the FDIC, OCC and SEC. 

The report states that “according to several people familiar with the situation,” the move to unionize “was driven in large part by news that many employees in Washington would be forced to give up their private offices while the bureau renovates its headquarters.” It indicates that “sources” have described CFPB Washington staffers as angry about their current office space, which often involves groups of four or five people sharing single offices.  According to these sources, the CFPB’s plans to move employees from offices to open spaces when the CFPB temporarily relocates during the renovations sparked a backlash and raised concerns about keeping a similar layout in the permanent building once it is renovated.  The report quotes “one person familiar with the situation” as having said that CFPB “lawyers and economists and senior folks” who are “used to having their own offices” are concerned about the noise level in an open space layout. 

The union’s president is reported as having said that, in addition to workspace concerns, CFPB employees are concerned about travel policies and benefits, work schedules, reviews, promotions and alternative work schedules.  The report describes CFPB staffers as having “grown frustrated in recent months after putting in grueling hours as they raced to meet statutory deadlines” under Dodd-Frank. 

As the report notes, the CFPB’s leaders will now have to navigate union politics while trying to fill the vacancies that have resulted from a slew of recent departures.

The CFPB has announced the launch of its Spanish language website.  According to the CFPB, in response to research showing that two-thirds of Latinos who are online tend to access the Internet from a mobile device, the website is designed so that “it works beautifully on mobile devices as well as on desktops.” 

The website allows users to access Spanish language versions of the CFPB’s online consumer complaint system and answers to consumers’ frequently asked questions. (In its announcement, the CFPB noted that it also takes complaints over the telephone in Spanish, as well as in more than 180 other languages.) 

The CFPB plans to continue to build its Spanish language website in the coming months.

The Truth in Lending Act ban on mandatory arbitration provisions in certain mortgage loans becomes effective on June 1, 2013.  Lenders now using mortgage loan documentation containing such provisions should take steps to ensure that they (and references to them) are removed from documentation to be used for loans that will be subject to the ban. 

The prohibition was one of the Regulation Z amendments made by the CFPB’s final rule on loan originator compensation issued in January 2013.  It bans “terms that require arbitration or any other non-judicial procedure to resolve any controversy or settle any claims arising out of the transaction” in any agreement for a closed-end loan secured by a dwelling or an open-end loan secured by the consumer’s principal dwelling. “Dwellings” include mobile homes and trailers used as residences. 

The prohibition applies to loans for which an application is received on or after June 1, 2013.  It does not apply to loans for which the application was received before then, even if the loan is consummated on or after June 1.  Arbitration provisions in existing documents for closed loans are unaffected by the prohibition. (The prohibition, which was part of the Dodd-Frank Act, was not of great importance since very few mortgage lenders were using arbitration provisions. This is because Fannie Mae and Freddie Mac would not allow the inclusion of such provisions in loans they purchased.) 

While arbitration provisions in documents used for non-mortgage consumer financial  products and services are also unaffected by the prohibition, Dodd-Frank left open the possibility of  broader regulation of mandatory arbitration agreements.  Under Dodd-Frank Section 1028, the CFPB is required to conduct a study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services generally.

Section 1028 also authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” such agreements based on the study results.  In April 2012, the CFPB took what it described as “a preliminary step in undertaking the study” by publishing a request for information about the scope, methodology and data sources for the study.  The CFPB’s study is now proceeding and Director Cordray has said at least some of the results will be publicly released this year.

For more on the arbitration ban, see our legal alert.

The dark cloud that has been hanging over CFPB Director Richard Cordray’s recess appointment just got darker.  In a 2-1 decision in NLRB v. New Vista Nursing and Rehabilitation, the U.S. Court of Appeals for the Third Circuit ruled today that, under the U.S. Constitution’s Recess Appointments Clause (RAC), the President may only make recess appointments during an intersession recess.  In addition, the Third Circuit rejected the NLRB’s argument that pro forma sessions should be deemed a “recess” (on the theory that “recess” for purposes of the RAC should be read to mean any time the Senate is not open for business and unavailable to provide its advice and consent).  While the recess appointment invalidated in New Vista was a 2010 appointment and not the 2012 appointments at issue in Noel Canning, the Third Circuit’s views fully accord with the D.C. Circuit’s determination in Noel Canning v. NLRB.  

In its January 2013 Noel Canning decision, the D.C. Circuit ruled that, because the most recent session began on January 3, 2012 and President Obama’s three NLRB appointments were made on January 4 (while the Senate was conducting pro forma sessions), the appointments were not made during a “recess” within the meaning of the RAC.  Since the President’s recess appointment of Richard Cordray as CFPB Director was also made on January 4, the D.C. Circuit’s opinion cast serious doubt on the validity of Mr. Cordray’s appointment.  By agreeing that recess appointments must be made during an intersession recess to be valid, the Third Circuit has added to that doubt. 

On April 25, the NLRB filed a petition for certiorari, asking the Supreme Court to review Noel Canning.  The respondent has advised the Court it does not intend to oppose the petition. 

We thought the petition for certiorari in Noel Canning had a high probability of success before today’s decision.  The panel split in New Vista further increases the likelihood that certiorari will be granted.

Bloomberg has reported that, according to a spokesman for Senate Majority Leader Harry Reid, the Senate will vote next week on whether to advance President Obama’s renomination of Richard Cordray to serve as CFPB Director.  

As reported by Politico, Senator Reid is expected to file a motion to cut off debate on
Mr. Cordray’s renomination before the Memorial Day recess but the vote on his motion may not occur until after the Senate returns from its break in the first week of June. Politico also reported that Senator Reid might attempt to change the Senate’s  filibuster rules to prevent Republicans from using a filibuster to block the renomination.

In its annual letter to the CFPB on its 2012 administrative and enforcement activities related to Regulations B (ECOA), E (Electronic Fund Transfers),  Z (TILA) and M (Consumer Leasing), the FTC stressed that it is “committed to continuing its vigorous enforcement of [such regulations] and intends to do the same with other rules the CFPB issues.” The FTC shares enforcement authority with the CFPB under these regulations as to non-banks. 

The FTC activities described in the letter include: 

• TILA/Reg Z enforcement actions dealing with non-mortgage credit, including actions against five auto dealers for allegedly deceptive advertisements and an action against a payday lender and related entities for allegedly inaccurate disclosures. 
• Enforcement actions against several companies for allegedly making false claims in connection with offering forensic mortgage loan audits to borrowers seeking loan modifications.
• Submission of a comment letter to the CFPB on its proposal for integrating the application and closing disclosures required by TILA and RESPA for mortgage loans. 
• EFTA/Reg E enforcement actions, including actions against five sellers of goods and services for allegedly not obtaining consumer authorization for preauthorized electronic fund transfers established in connection with so-called negative option plans (plans where the consumer agrees to continued shipments of goods or receipt of services if the consumer does not cancel at the end of a trial period), an action against a payday lender for allegedly requiring electronic payments as a condition of obtaining loans, and an action against a retailer for allegedly conditioning credit on preauthorized transfers. 
• Submission of a comment letter to the CFPB in response to the CFPB’s Advance Notice of Proposed Rulemaking seeking information on extending Reg E requirements to general purpose reloadable prepaid cards.

A letter sent today to the CFPB by an attorney for the Community Financial Services Association of America (CFSA), a national trade organization for payday lenders, asserts that the CFPB violated the Federal Advisory Committee Act (FACA) by excluding the public from portions of today’s meeting of the CFPB’s Consumer Advisory Board (CAB).

According to the letter, the CFPB informed a CFSA representative and her professional colleagues that they could only attend what was designated the “public” session of the CAB’s meeting and denied them access to other portions of the meeting, including the portions that related to payday lending.  The letter asserts that under the FACA, a federal advisory committee such as the CAB can only exclude the public from a meeting when information to be discussed involves trade secrets, classified government materials or national security and there has been agency director approval and prior notice in the Federal Register.  It also asserts that the vast majority of the CAB’s business, such as the business conducted at the CAB’s September 27, 2012 meeting, is traditionally conducted in sessions closed to the public. 

The letter demands that within 21 days, the CFPB provide its written assurance that (1) all future CAB proceedings will be open to the public unless they meet a specific FACA exception, and (2) the CFPB has undertaken to amend the CAB’s charter so that non-public proceedings will only be conducted in accordance with the FACA.  The letter advises that, in the absence of a timely response, legal proceedings will be filed to require FACA compliance and enjoin future FACA breaches by the CFPB.  It also notes that the issues raised in the letter apply equally to other CFPB boards and councils such as the CFPB’s Academic Research Council.

The George Mason University School of Law, Law & Economics Center recently hosted a conference titled “Understanding the Consumer Financial Protection Bureau,” through GMU’s Attorneys General Education Program.  Founded in 2009, the program was created to provide economic and public policy educational programming to state attorneys general and their staff attorneys from across the country.  The conference was well attended by attorneys general and staff from over 25 states, as well as members of the private legal and business communities. 

In the keynote address, Acting Deputy Director of the CFPB, Steve Antonakes, stated that the Bureau will be turning its attention to firms that offer short-term, high-cost loan products, such as payday lenders.  Mr. Antonakes also discussed the CFPB’s criteria for prioritizing its supervision schedule.  Going forward, the Bureau will attempt to prioritize examinations across product types, based on the following factors: (i) market size; (ii) market share; (iii) product risk; and (iv) field intelligence regarding the quality of management, other enforcement actions, and complaints.

During the mortgage lending initiatives session, Ben Olson (CFPB’s Deputy Assistant Director of the Office of Regulations) summarized the Bureau’s January 2013 mortgage regulations, covering ability to repay/qualified mortgages, mortgage servicing rules, loan originator compensation,
high-cost home loans, and escrow accounts.  On the topic of qualified mortgage standards, Mr. Olson affirmed the Bureau’s past guidance that the temporary qualified mortgage inclusion of loans eligible for sale to Fannie Mae or Freddie Mac may depend on unique facts and circumstances.  Other panelists emphasized that the coverage can depend on the requirements of a purchase agreement between a GSE and a particular lender.   As expected, Mr. Olson confirmed that the CFPB will focus next on RESPA/TILA disclosure integration and the HMDA changes mandated by the Dodd-Frank Act. 

Jon Seward (Deputy of the Housing and Civil Enforcement Section at the Department of Justice) spoke regarding the DOJ’s fair lending enforcement activities.  Echoing the CFPB’s March 21, 2013 bulletin on indirect auto finance and fair lending compliance, Mr. Seward indicated that the DOJ is also focusing on the auto finance industry.  During the ensuing panel discussion, in response to concerns regarding the use of proxy data in fair lending enforcement against the indirect auto finance industry, Mr. Seward indicated that there will be further discussion among regulators and law enforcement on the use of such data, with the potential for an expansion of HMDA-like reporting requirements into the auto industry.  While it is very clear that there will be an enforcement focus on fair lending in the auto finance industry, it appears that regulators are still working out the manner in which they will build a fair lending case in this area.  Due to the lack of existing demographic tracking and reporting requirements (necessitating the use of proxy data to infer disparate impact), and the necessity to target purchasers of retail installment contracts for the actions of the auto dealers actually negotiating those contracts, use of the statistical analysis currently favored in disparate impact cases will extend the doctrine onto even more dubious ground.

The panel on enforcement actions featured CFPB Enforcement Attorney Deborah Morris.  Ms. Morris focused on the collaboration between the CFPB, state attorneys general, and other regulatory entities, in recent enforcement actions.  According to Ms. Morris, almost all of the CFPB’s enforcement actions and litigation to date have originated from referrals, investigations or examinations conducted by other regulatory agencies, as opposed to CFPB exams.