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After Year of Progress, Dodd-Frank Rule Phase Hits Roadblocks
American Banker (07/13/12) Borak, Donna

In the first year after the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was passed, regulators made some progress implementing the law, but many rules that it mandated be complete remain unfinished. According to an analysis by law firm Davis Polk & Wardwell, 121 of these rulemakings have pending proposals and 19 rules have not even been proposed.
Many see the regulators' primary challenge as implementing a broad, general framework that Congress created without providing key details. "The regulators were handed a monumental task" with "deadlines that were impossible and random," said Margaret Tahyar, a partner at Davis Polk. "This was more than just filling in a few details. There were major components of the architecture that weren't there."
Realizing the magnitude and implications of many Dodd-Frank reforms, regulators have become more cautious. Other factors that have contributed to the delay are the holdups in Senate confirmation of senior positions, agencies’ more limited budgetary resources, and competing priorities among agencies that have to collaborate on some of the rules.
Scott Garrett (R-NJ), the chair the House Financial Services Capital Markets and GSE Subcommittee, said the agencies are faced with trying to implement certain provisions that are tied to policies yet to be resolved by Congress. To illustrate, he cited the risk retention rule in Dodd-Frank, which generally requires securitizers to hold five percent of a loan's credit risk. But the impact of that rule depends on future decisions, such as what to do with the government-sponsored enterprises (GSEs). "They all interconnect and they all can have a damaging effect on housing mortgage finance if done incorrectly," said Garrett.
Rep. Shelley Moore Capito (R-WV), who chairs the House Financial Services financial Institutions and Consumer Credit Subcommittee, blamed the vagueness of provisions in the legislation. "It's just a mass of ill-defined and nonspecific regulations with onerous penalties, and so it leads to a lot of uncertainty," Capito said.

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CFPB Finalizes Rule on Supervision of Credit Reporting

On July 16, in conjunction with a field hearing in Detroit, the Consumer Financial Protection Bureau (CFPB) adopted a rule to establish the first federal program to supervise consumer reporting agencies. The rule captures the three major national credit bureaus as well as dozens of other companies, together representing the vast majority of the consumer reporting industry by market share. Notably, the rule does not cover consumer debt collection, in contrast to the Bureau’s proposed rule from February.
The $7 million threshold appears to be based on the Small Business Association’s definition. AFSA observed in its April 17 comment letter, “Instead of capturing only the larger participants, the proposed criterion captures all the market participants who are not small businesses. The threshold for larger participants in a market should be significantly higher than the threshold for smaller participants.”
The rule will take effect September 30, 2012. It is unclear when to expect a rule on consumer debt collection or any other market. Notably, the CFPB has yet to propose how to define larger participants among lenders of any kind.

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AFSA Participates in Meeting on Illinois Collateral Recovery Act

AFSA participated in the Illinois Recovery Association’s annual meeting in Rosemont, Ill. on July 18. The meeting was attended by approximately 150 recovery professionals, lenders and vendors and comprised several sessions on compliance, the Consumer Financial Protection Bureau (CFPB), and the Illinois Commerce Commission Recovery Act. The day concluded with a session on technology efficiencies in the recovery industry. Click here to review the meeting agenda.

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Joint Trade Brief Asks Supreme Court to Review Disparate Impact Case

On July 13, AFSA joined other trade associations in an amicus brief to the U.S. Supreme Court asking that it review the disparate impact case, Township of Mt. Holly v. Mt. Holly Gardens Citizens in Action. The case involves the decision of Mt. Holly, a township in New Jersey, to redevelop a residential area occupied mainly by low- to moderate-income minority households. Residents of the area, the Mt. Holly Gardens Citizens in Action, filed suit alleging that the redevelopment plan violated the Fair Housing Act (FHA) because it had a disparate impact on minorities. The joint trade amicus brief supports the Township of Mt. Holly’s petition asking the Supreme Court to hold that disparate impact claims are not permissible under the FHA.
This case is very similar to the Magner v. Gallagher case that the Supreme Court was set to decide this year. However, reportedly due to pressures from federal government agencies or civil rights groups, the case was settled before the justices issued an opinion – which is very unusual for a case that reaches the Supreme Court level. It was widely believed that the Supreme Court would rule that disparate impact claims were not permissible under the FHA.
The Consumer Financial Protection Bureau, Department of Housing and Urban Development, and the Department of Justice have all held that disparate impact claims are permissible under the FHA and Equal Credit Opportunity Act. In November 2011, HUD issued a proposed disparate impact rule.

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AFSA Attends Automotive Trade Association Executives Summer Meeting

AFSA participated in the Automotive Trade Association Executives (ATAE) summer meeting July 10 – 14 in Park City, Utah, where AFSA met with several state representatives. AFSA's involvement with state auto dealers associations is based on the goal of working together on numerous state issues. To discuss AFSA's involvement with state automotive trade associations or specifics from the ATAE meeting, please contact Danielle Fagre Arlowe at dfagre@afsamail.org or 952-922-6500.

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Inside the Beltway
Agency Created By Dodd-Frank Has Authoritarian Powers
Investor’s Business Daily (07/18/12) Powell, Scott and Richards, Jay

In this opinion article, authors Scott Powell and Jay Richards, senior fellows at Discovery Institute in Seattle, question the Consumer Financial Protection Bureau’s (CFPB) “sweeping authority over so many consumer credit and other financial products and services that played no significant role in the crisis.” Created by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the CFPB is vastly different from other regulators. The CFPB is “extending authoritarian rule by the executive branch and enabling activists and lawyers to game the financial services industry” Powell and Richards contend.
The CFPB possesses a wide range of enforcement tools and sanctions, including the ability to issue cease and desist orders that are effective immediately upon notice. Without a court order, the Bureau can impose penalties of up to $1 million per day on entities that knowingly violate a law or rule. The CFPB has stated its intention to use its authority over existing consumer financial laws and issue more regulations. The Bureau's mandate allows five years to review and rewrite all the rules in Dodd-Frank, although many of them were already successfully enforced by seven other agencies. Heightened confusion and uncertainty are sure to result among banks and financial institutions that already are hesitant to extend credit.
“Clearly, the CFPB lacks the checks and balances required by the separation of powers clause,” the authors state. While other federal agencies are governed by multiple bipartisan commissioners or board members, the CFPB director has unprecedented power. The Bureau is funded by the Federal Reserve, but remains independent and free from review from the Fed or Congress.
The CFPB is the first regulator to use social media to post consumer complaints on its website, and does so without verifying those complaints' legitimacy. Such complaints are a gold mine for plaintiff's bar in search of the next class action lawsuit. Consumer costs will increase, according to the authors, because financial institutions will need to divert personnel and resources from banking and lending services to compliance and legal defense.

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CFPB Puts Industry on Notice with First Enforcement Action
American Banker (07/18/12) Wack, Kevin

Deceptive tactics used in the marketing of credit card add-on products, such as payment protection and debt forgiveness in the event of death or disability, are the subject of the Consumer Financial Protection Bureau’s (CFPB) first enforcement action, the Bureau announced on July 18. The action resulted from a CFPB examination that found Capital One’s third-party vendors used deceptive tactics to sell these products to the bank’s credit card customers, misleading them about the nature of the products, as well as their costs and potential benefits, and in some cases enrolling customers without their consent.

Capital One, which announced in April that it was setting aside $75 million in reserves related to the marketing tactics, neither formally admitted nor denied the government's findings. "We are accountable for the actions that vendors take on our behalf," said Ryan Schneider, President of Capital One's Card business, in a press release. "These marketing calls were inconsistent with the explicit instructions we provided to agents for how these products should be sold. We apologize to those customers who were impacted and we are committed to making it right." The bank will refund these customers, stop all marketing of these products, and delay resuming marketing until it submits an acceptable compliance plan to the CFPB. The CFPB and Office of the Comptroller of the Currency (OCC) ordered the bank to pay $150 million to affected customers, plus a $25 million penalty assessed by the CFPB and a $35 million penalty by the OCC, for a combined $210 million in damages.
In conjunction with the enforcement action, they Bureau also released a compliance bulletin notifying financial institutions that it will not tolerate deceptive marketing of “add-on” products, including debt protection, identity theft protection and credit score tracking, to card users by card issuers under the Bureau’s supervision or their service providers. "We know these deceptive marketing tactics for credit card add-on products are not unique to a single institution," said CFPB Director Richard Cordray. "We expect announcements about other institutions as our ongoing work continues to unfold." The Bureau also issued a consumer advisory warning customers about potential dangers associated with these products.

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National and State News
Card Giants to Pay $6 Billion
The Wall Street Journal (07/14/12) Sidel, Robin and Johnson, Andrew R.

Visa, MasterCard and several large card-issuing banks reached a $6 billion settlement with retailers in a long running dispute over interchange fees. The card companies also reached agreements with other merchants not a part of the class action. Under the agreement, the card issuers agreed to cut for eight months the fees merchants pay to accept credit cards in order to settle merchants’ claims of price-fixing. "Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases," said Noah Hanft, MasterCard's general counsel, in a statement.
The agreement also permits retailers to charge customers who pay with credit cards a surcharge at the register and allows merchants to offer discounts to customers that pay with cash. However, if merchants charge more for credit transactions, they must advise consumers of the surcharges. The settlement also restricts the extra amount merchants can charge and prohibits them from discriminating against card brands if they decide to add surcharges. The National Association of Convenience Stores has rejected the proposed settlement, stating it failed “to introduce competition and transparency in a clearly broken market.” The settlement terms do not apply to debit cards.

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Chesterfield Plan Could Limit Alternative Lenders
Richmond Times-Dispatch (07/19/12) Slayton, Jeremy

Chesterfield County, Va., is considering limiting where “alternative financial institutions” can operate. The proposal, which was discussed at the county’s July 17 Planning Commission meeting, would expand the county’s current zoning ordinance, which regulates check cashing establishments and pawnbrokers, to include motor vehicle title lenders, payday lenders and consumer finance companies. These businesses would be prohibited from being located next to a residential property, in areas designated for revitalization or within 2,000 feet of another alternative financial institution. The businesses would be permitted as conditional uses in general commercial districts and in community commercial areas with special permission by the council. The proposal will be discussed again at the commission’s work session on Aug. 21.

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Homeownership Rate Likely to Continue Falling: Capital Economics
DS News (07/17/12) Cho, Esther

In the first quarter of 2012, the homeownership rate dropped to 65.4 percent, a 16-year low, according to the Census Bureau. Research firm Capital Economics predicts this rate will be driven even lower, to 64 percent, due to “tight credit, subdued confidence, and many more foreclosures,” despite the current climate of low interest rates and housing prices that seem to be recovering. “After all, while credit conditions should loosen a touch over the next few years, and consumer confidence in the housing market is already returning, it is unlikely that the resulting improvement in housing demand will be enough to offset the cyclical rebound in household formation,” the firm’s report stated. They do, however, project that the homeownership rate will stabilize and begin rising following the next couple of years as credit conditions ease, credit scores rise, and the economy improves.

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July 19, 2012

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