January 2013 promises to be a big month for mortgages and the CFPB, as a variety of provisions of Title XIV of the Dodd-Frank Act take effect by operation of law on January 21, 2013 unless the Bureau issues final rules implementing them by then.  The Bureau has proven to be savvy in meeting its own Dodd-Frank deadlines.  We will soon find out if it is as savvy in establishing compliance deadlines for its new mortgage rules. 

Title XIV—Dodd-Frank’s “Mortgage Reform and Anti-Predatory Lending Act”—says that its provisions take effect 18 months following the designated transfer date of July 21, 2011 unless final implementing rules have been issued by the Bureau prior to that time.  It also provides that such rules must take effect not later than 12 months after they are issued.  So the industry has circled January 21, 2014 as a potential best-case scenario on compliance dates for the following important Title XIV content:

• Ability to Repay & “Qualified Mortgages”
• Certain New Mortgage Servicing Requirements
• High-Cost Mortgage Scope and Restrictions
• Loan Originator Compensation and Qualification
• Appraisal Standards and Disclosures

We say “potential best-case” for a few reasons.  First, the Bureau may not publish corresponding final rules in time, so these provisions could take effect by operation of law on January 21, 2013.  No one really believes that will happen, but it is possible.  Proposed rules are pending as to each of these elements.

Despite all that has been made of Dodd-Frank, the new Consumer Financial Protection Bureau, and the increased focus on consumer compliance throughout the banking industry, we think that the fundamental formula for effective board oversight of the compliance function has not materially changed. We encourage directors to take stock to make sure their bank’s program is adequate. In this season of great contests on the gridiron, we would emphasize that blocking and tackling—and defense generally—remain the keys to success in this area. Be a good coach and make sure that these fundamentals are practiced at your bank.

Bank Regulatory Expectations

We start with the black-letter guidance and then read between the lines based on our experience and judgment. Each of the prudential bank regulators has outlined its expectations for board oversight of the compliance function. Although it’s stated in various ways, the basic recipe for the “compliance management system” is this:

1. Compliance program documents and reporting
2. Compliance audit
3. Board and management oversight

Think of board oversight as “coaching” and the rest as blocking and tackling.

Bank regulators have been as busy as usual in 2012, but some of the more interesting regulatory and legal changes have come from non-bank regulators and the courts. And, the JOBS Act changes described below actually lifts the regulatory burden on banks a bit, a rare respite in an otherwise challenging regulatory environment.

The JOBS Act eases bank capital activities and M&A.  The Jumpstart Our Business Startups Act affects community banks in 4 key ways:

• “Going public” is easier. Banks that have less than $1 billion in gross revenue can qualify as an “emerging growth” company and take advantage of relaxed rules that allow them to “test the waters” and obtain a confidential prior review of an IPO filing by the SEC, provide reduced executive compensation disclosures and file without a SOX 404 attestation by the bank’s auditors.
• The “crowdfunding” rule (expected in early 2013) will provide banks significant flexibility in raising $1 million per year from their community without IPO-type expenses and without adding new investors to their shareholder count.
• Private offerings are easier. Rules affecting private offerings are being relaxed so that a bank will be able to use public solicitation and advertising to attract investors as long as the bank takes reasonable steps to ensure that those investors are accredited.
• Going or staying private is easier because the shareholder count triggering “going public” was raised from 500 to 2,000. And, shareholders from a bank’s “crowdfunding” offerings and from employee compensation plans are now excluded from the shareholder count. These helpful changes to shareholder count rules mean that some banks can bring in new investors or even acquire another bank without triggering the obligation to “go public,” a significant cost and compliance barrier. Also, banks with a shareholder count under 1,200 can “go private” following a 90-day waiting period.

Concurrent with its enforcement action against Capital One, the CFPB issued a Bulletin on its expectations for the marketing of credit card add-on products, such as those at issue in the Capital One action. The Bulletin also warns institutions that the CFPB will take “all necessary steps to ensure that consumers are protected from deceptive sales and marketing practices, including those resulting from failures to adequately disclose important product terms and conditions, or other violations of Federal consumer financial law.” These include having a comprehensive compliance management program ensures that telemarketing and customer service scripts do not mislead or pressure consumers.

The Bulletin outlines a number of steps that CFPB-supervised institutions should take to ensure that they market and sell credit card add-on products in a way that limits the potential for statutory or regulatory violations and associated consumer harm. The Bulletin also lists a number of compliance management programs that should be employed by institutions offering credit card add-on products.

Although the Bulletin focuses on credit card add-on products, the CFPB notes that institutions should take this guidance into consideration when offering similar products in connection with other forms of credit or deposit services.

The Bulletin is available here.

In its first public enforcement action, the Consumer Finance Protection Bureau (CFPB) found that Capital One Bank, (USA) N.A. engaged in deceptive marketing practices, which the CFPB says mislead customers into buying credit card “add-on products.” The large size of the total payment required under this action ($210 million) has raised speculation that the CFPB will be seeking larger penalties than bank regulators in the past, because such previous penalties have not stopped banks from using unfair tactics to seek profits.

The CFPB found through its supervision process that Capital One’s call-center vendors engaged in deceptive tactics to sell its credit card add-on products, which included payment protection plans, debt forgiveness and credit monitoring services. To activate newly issued credit cards, Capital One customers with low credit scores or low credit limits were directed to a third-party call center and subjected to “high-pressure [sales] tactics.” In particular, the CFPB found that Capital One customers were misled about the benefits of the add-on products, deceived about the nature of the products, mislead about eligibility, misinformed about the cost of the products and, in some cases, enrolled without their consent.

The CFPB’s enforcement action requires Capital One to cease all marketing of these products until the Bureau approves a compliance plan to help ensure against future violations; refund to 2 million customers approximately $140 million, which covers the cost of these add-on products as well as a refund of the finance charges associated with fees paid, any over-the-limit fees incurred and interest; pay claims denied based on ineligibility at enrollment; make convenient repayment to consumers; assure compliance with the terms of the consent order through the work of an independent auditor and pay a $25 million civil money penalty into the Bureau’s Civil Penalty Fund.