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AFSA Leadership Meets with CFPB Director

Several AFSA board members and staff met with Consumer Financial Protection Bureau (CFPB) Director Richard Cordray and other senior officials on Feb. 16 to familiarize them with the association’s membership. The discussion covered a broad array of topics.
Director Cordray asked about the customer profile for personal installment loans, and he wondered what happens when lenders must turn borrowers away. He observed that finance companies broaden the availability of consumer credit. The director inquired about state laws and licensing for vehicle finance and personal loans. He asked why traditional, personal, installment, and auto loans have performed well in recent years while some mortgage loans have not.
Meeting participants discussed “ability to repay” and underwriting trends. Director Cordray listed the CFPB’s top priorities, including credit cards, private student loans and developing a supervisory regime that will not seek to disrupt what is working in the marketplace. He said that AFSA members’ model of installment lending has not been high on the Bureau’s priorities to date. The agency has been focused on the numerous statutory requirements mandated by the Dodd-Frank Act. Both the director and his staff expressed eagerness to learn more about the industry.

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AFSA Submits Comment Letter on Republished Regulations Z and V

On Feb. 21, AFSA submitted a comment letter to the CFPB on its recently republished final interim rules for Regulation Z and Regulation V. The Dodd-Frank Act transferred rulemaking authority for a number of consumer financial protection laws, including Regulations Z and V, from seven federal agencies to the CFPB. The CFPB stated that it is “in the process of republishing the regulations implementing those laws with technical and conforming changes to reflect the transfer of authority and certain other changes made by the Dodd-Frank Act” and that the interim rule “does not impose any new substantive obligations” on those subject to the existing regulations.
AFSA’s letter stated that contrary to the CFPB’s statement, “AFSA believes that these interim final rules do impose new substantive obligations on covered persons. The new interim final rules require covered persons to revise both credit card application disclosures and account opening disclosures. Specifically, the new Regulation Z requires covered persons to change the credit card website disclosure from the Federal Reserve Board’s (FRB) site to the CFPB’s site and the new Regulation V requires covered persons to change the risk-based pricing website disclosure from the FRB’s site to the CFPB’s site.” AFSA believes that these changes are substantive because they require coordination with forms vendors (or equivalent in-house personnel), re-programming and re-loading the forms into the loan origination system, and testing the system to ensure that the forms continue to be generated accurately, which are no small tasks. AFSA argued that, “A revision to a rule that causes every card issuer in America to revise their disclosures by a mandatory compliance date is, on-face, substantive, and should be clearly labeled as such.” AFSA asked that the CFPB correctly characterize future rules as “substantive” that require any changes to disclosures.

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AFSA Comments on CFPBs Credit Card Agreement Prototype

On Feb. 16, AFSA submitted a letter to the Consumer Financial Protection Bureau (CFPB) on the Bureau’s credit card agreement prototype. The purpose of the two-page prototype, according to the CFPB, is to simplify credit card agreements so that the “prices, risks, and terms are easier for consumers to understand.” The CFPB is testing the prototype with the Pentagon Federal Credit Union to get on-the-ground consumer feedback.
Although the letter expresses support for the CFPB’s efforts in this area, it states several concerns that AFSA members have with the prototype. AFSA’s primary concern with the prototype is that it is inconsistent with Regulation Z.

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Inside the Beltway
CFPB Convenes Panel to Review Mortgage Disclosure Forms
The M Report (02/21/12) Schuette, Ryan

On Feb. 21, the Consumer Financial Protection Bureau (CFPB) announced the formation of a small business panel to review the Bureau’s integration of statutory requirements from the Real Estate Settlement Procedures Act and Truth-in-Lending Act into a single uniform document, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The panel will build on the form-testing activities the Bureau has conducted and comments it has previously received from the public and industry. According to the Bureau, the panel is a way to increase transparency and garner feedback from mortgage lenders about the single form and build a fairer and more comprehensive document for borrowers. “This is another step in the CFPB’s wide-ranging efforts to gather the input of the people who will be affected by our rules,” CFPB director Richard Cordray said in a statement. “The CFPB is dedicated to issuing thoughtful, research-based rules that take into account not only the benefits to consumers but also how businesses of all sizes will be affected.” Among the topics the panel will review are loan estimates, disclosure terms, and requirements related to the two laws. The panel’s report on the input they have received on the form is due within 60 days of convening. The Bureau must propose a rule for the disclosure form by July.

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FHFA Releases Plan for Freddie, Fannie Exit
The Washington Post (02/21/12) Goldfarb, Zachary A.

On Jan. 21, the Federal Housing Finance Agency (FHFA) laid out its plan to scale back Fannie Mae and Freddie Mac. The plan includes increasing the fees charged to borrowers who take out taxpayer-backed mortgages, efforts to lay the groundwork for a new mortgage system, such as a new process for pooling and selling loans to investors, as well as steps Fannie and Freddie can take to help lessen the foreclosure crisis without increasing taxpayer losses, such as facilitating short sales and deeds-in-lieu.
However, the plan could conflict with the measures Fannie, Freddie and the Obama administration have been pursuing, which would increase the government’s role in housing. In an effort to raise home values, administration officials have been encouraging companies over the last year to reduce debts owed by homeowners to make it easier for borrowers to refinance at lower interest rates. Doing so would make the housing market more reliant on Fannie and Freddie. The FHFA, which is the conservator of the GSEs, has resisted steps that would place taxpayer losses on Fannie and Freddie. “We’re getting a clear message about wind-down. At the same time, there are continuing to be calls for. . . Fannie and Freddie to do more,” said acting FHFA director Edward DeMarco.
Policymakers have raised similar concerns. Some policymakers, like Rep. Scott Garrett (R-NJ) are pushing for replacing the existing government-backed mortgage finance system with a private market solution, but administration advisors and outside economists say the government must continue to play a significant role. “Part of the conundrum for policymakers is we can have some broad consensus on wanting to wind down Fannie and Freddie, but it becomes pretty unclear about what’s left in the marketplace after they’re gone,” DeMarco stated.

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Consumer Bureau Targets Overdraft Fees
The Hill (02/22/12) Schroeder, Peter

The Consumer Financial Protection Bureau (CFPB) announced on Feb. 22 that it will look into bank overdraft fees and whether consumers are being harmed by them. The CFPB said that according to industry sources, the average overdraft fee in 2011 ranged from $30 to $35 – up 17 percent over the previous five years. “Overdraft practices have the capacity to inflict serious economic harm on the people who can least afford it. We want to learn how consumers are affected, and how well they are able to anticipate and avoid paying penalty fees,” said CFPB Director Richard Cordray.
Specifically, the Bureau is looking into whether banks are providing confusing or misleading information about overdraft fees, the practice of processing larger transactions ahead of smaller ones, and how low-income or young consumers could be disproportionately affected by overdraft fees. The CFPB also is exploring a “penalty fee box” that would detail how much an individual has overdrawn and paid in overdraft fees to be included with checking account statements.

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National and State News
Chevrolet Dealership in Oklahoma City Faces Court in GAP Dispute
Automotive News (02/22/12) Freedman, Eric

The Oklahoma Supreme Court ruled 7-2 that a mandatory arbitration provision in a Chevrolet store’s sales contract does not extend to a dispute over a GAP policy the customer bought from the dealership three days later. The Supreme Court overturned a ruling by the State Court of Appeals that sided with the dealership, saying state policy favors arbitration to resolve disputes.
Marlene Harris had purchased a vehicle from David Stanley Chevrolet. A provision in the purchase agreement required arbitration of “any controversy, claim or dispute between the Purchaser and the Dealer arising out of, or related to, the sale or transaction.” Three days later, Harris bought a Safe-Guard Products International GAP policy from the dealership without an arbitration clause. When Safe-Guard did not pay the total difference between the insurance and the amount owed on the car, Harris sued to compel the GAP coverage, accusing the dealership of breach of contract by misrepresenting the coverage provided by the GAP policy it sold as Safe-Guard’s agent, “that in the event of an accident the loan would be paid off.”
Stanley, however, contended that the purchase agreement and GAP addendum were “interdependent agreements” and “part of the same transaction” because its sale of the policy related to the sale of the vehicle. In the majority opinion, Justice Doug Combs wrote, “It is uncontroverted that the two contracts involve two separate subjects, executed on different dates, and the arbitration clause in the purchase agreement does not mention or reference GAP insurance or any relationship between the two contracts.” According to dealership lawyer James Gibbs II, the decision may have an impact on other dealers in the state. “Part of the problem was the time between the execution of the purchase agreement and the GAP agreement. If completed contemporaneously, I think it may have been a different outcome,” he said.

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Florida Weighs a Measure to Ease Way to Foreclosure
The New York Times (02/22/12) Alvarez, Lizette

Florida lawmakers are considering legislation that would make it easier to foreclose on abandoned properties and force lenders to move more quickly to complete foreclosures. The legislation attempts to speed up foreclosures by allowing any lienholder to initiate the foreclosure process, which means homeowners associations legally would be able to ask for a hearing to allow them to take action. It also would make it easier to foreclose on vacant homes once certain abandonment requirements have been met. Rather than filing paperwork and documents throughout the foreclosure process, all paperwork and necessary documents would be required to be filed immediately after a foreclosure proceeding begins. The legislation would also shorten the amount of time in which lenders could seek a deficiency judgment or the money they are owed on an underwater mortgage from five years to one year. The legislation is now heading to the House floor, and a similar bill is moving through committee in the Senate.

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Consumer Auto Demand Provides Loan Growth for Banks, Fitch Says
F&I and Showroom 2/21/2012

Fitch Ratings reported that as consumer demand and sales of new and used vehicles continue to rise, banks could have a chance to foster loan growth by expanding into the auto loan sector. Lending standards have eased to more normalized levels, which has opened the door to borrowers who had been cut off to credit due to rigid standards. Fitch added that the loosening lending standards are being driven by higher demand rather than riskier lending strategies. They noted that maneuvering into auto loan portfolios may be easier for banks than other sectors because of the typically short-dated assets that run off relatively quickly, leaving them with limited risk exposure. However, unlike comparable loan sectors, the auto lending space is a dealer-based business, which could make it difficult for banks that do not already have long-term relationships with dealers to enter or re-inter the business without facing barriers of access to dealer networks. In addition, Fitch pointed out that captives have an advantage over banks because they can attract customers through manufacturer incentives and have an “intricate understanding of the underlying product and close dealer relations.” Fitch also stated that heavy demand could stimulate loan competition and drive down yields, putting more pressure on margins, which could result in lenders loosening underwriting standards and overall credit.

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Default Rates Drop Nationwide in January
National Mortgage Professional (02/21/12)

According to data from Standard & Poor's (S&P) and Experian, most consumer loan types had decreases in default rates during January, following four consecutive months of increasing default rates. First mortgage default rates, which drive the composite because they are the largest consumer loan type, fell by 11 basis points in January, reversing the November and December increase. Second mortgage and bank card default rates moved slightly down from December and auto loans default rates remained unchanged.
“As we begin the New Year, consumer default rates may be resuming the two-year downward trend that was interrupted in the middle of last year,” said David Blitzer, managing director and chairman of the Index Committee for S&P Indices. “While one month of data is not a new trend, January’s report shows broad based declines in default rates, which is a bit of a relief.” According to Blitzer, default rates across all loan types are relatively close to the three-year lows they reached in 2011. Three of the five cities the indices cover had lower default rates, with Los Angeles experiencing the largest decline.

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Advent and Goldman to Buy TransUnion in $3 Billion Deal
The New York Times (02/17/12) Protess, Ben

TransUnion, one of the nation’s three largest consumer credit reporting companies, announced on Feb. 17 that it will be bought by a pair of private equity funds, including an arm of Goldman Sachs. Advent International and GS Capital Partners will buy the company for more than $3 billion. Full terms of the deal, which is expected to close by early in the second quarter, were not available, but TransUnion said that it will not prompt changes to the company’s management team.
 “We look forward to working closely with the Advent and Goldman Sachs teams to continue executing against our strategic blueprint by remaining focused on providing our clients with highly attentive service and the very best information and risk management products,” said Bobby Mehta, TransUnion’s president and chief executive, in a statement.
The deal comes at a time when the credit reporting industry faces broad federal oversight for the first time. On Feb. 16, the Consumer Financial Protection Bureau (CFPB) introduced a plan to oversee credit reporting companies and debt collectors. The proposal would give the Bureau authority over the industry’s 30 largest companies, including TransUnion, Experian and Equifax.

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February 23, 2012

Forward To A Colleague

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AFSA Newsbriefs

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