CFPB Annual Report on the FDCPA Offers Glimpse of Future Rulemaking

The CFPB issued its annual report on the FDCPA to Congress this week.  Much of what the Report contains has been previously reported.  See FTC Report to CFPB ; Supervisory Highlights.   What is new, however, is that the Report offers further insight as to what the CFPB rulemaking on debt collection may address. 

As was reported a few week ago, the CFPB and FTC are working together to formulate proposed rules addressing the FDCPA and it is widely expected that the proposed rules will be issued before the end of the year.  In the fall of 2013, the Bureau took the first steps toward rulemaking by issuing an Advanced Notice of Proposed Rulemaking (the “ANPR”).  The ANPR set forth a series of questions on which the CFPB sought comments.  According to the Annual Report, the ANPR resulted in more than 23,000 comments.  The Annual Report indicates the Bureau will take into account the comments received, its further discussions with stakeholders, as well as further research before it issues a notice of proposed rulemaking.

The Annual Report indicates that, a year after the comment period closed, the Bureau is still reviewing the comments received in response to the ANPR.  In addition, the Bureau has initiated a series of research projects to help it better understand the collection market and its impact on consumers.  Specifically, the Bureau disclosed that it has mailed a survey to more than 10,000 consumers asking questions about their experience with debt collection.  The Bureau indicated that it is also conducting “qualitative testing”, including focus groups and cognitive interviews to assist the Bureau in assessing the disclosures of debt collectors, specifically: (a) information about the debt and its owner; (b) disclosures that the communication is from a debt collector; and (c) the debtor’s right to dispute a debt.  The Bureau also disclosed that it is engaging stake holders in roundtable discussions about specific debt collection issues that it has flagged as troublesome- e.g., debt collection in Latino communities and the collection and credit reporting of medical debt.

While the Annual Report does not provide a time table for release of the notice of proposed rulemaking, it does offer insight to particular themes which are likely to be addressed in any proposed rules:

·       New Technology:  The FDCPA was adopted in the early 1970s and does not take into account new technologies.  The Annual Report suggests that it is likely that the proposed rules will address newer technologies, including email communications.

·       Documentation of Debt:  While noting a contraction in the debt buying market, the Annual Report notes that the sufficiency of documentation substantiating a debt was a common theme in the comments received in response to the ANPR.  It appears from the Annual Report, however, that the Bureau is aware that there may need to be a balancing of interests in this regard and that the level of documentation necessary to support a debt may vary as to product type.

·       Communication Issues:  The Bureau is likely to address communication issues. In its Annual Report, the Bureau identifies communication tactics as the second most common complaint in 2014.  The Bureau also noted that in the comments received in response to the ANPR, “[m]any consumer groups and industry members supported rules  addressing or clarifying a wide variety of issues related to the proper time, place, and manner of debt collection communications.”  Based upon the Bureau’s comments throughout the Annual Report, it would not be surprising to see rules proposed that provide clarification of validation rights, what documentation is necessary in response to a dispute, and clarification as to the frequency of calls.

·       First vs. Third Party Debt Collection Issues: The Bureau acknowledged that it received comments advocating for first party debt collection regulation.  While the Bureau did not indicate its views on the same, it has previously indicated that it believes that first parties are subject to similar standards as those set forth in the FDCPA and therefore it is likely that any proposed rulemaking will attempt to include first party collections.  See CFPB Bulletin 2013-07.

The Annual Report can be found here: Annual Report to Congress.

North Carolina Senate Introduces Bill to Provide Private Rights of Action for Inaccurate Credit Reporting

The North Carolina Senate has introduced a bill which will create a private right of action for inaccurate credit reporting. Senate Bill 357 proposes to include new provisions to both Chapters 58 and 75.  The proposed bill will provide a private right of action to consumers when a creditor, collection agency, or debt buyer fails to correct inaccurate information in a credit report after receiving notice of a dispute directly from a consumer.  The bill provides two provisions, one directed to those collecting debt on their own behalf and one directed to collection agencies and debt buyers. 

The Bill proposes amendments to Article 2 of Chapter 75 (the “North Carolina Debt Collection Act”) and Article 70 of Chapter 58.  It provides as follows:

§75-57. Duty to correct incorrect information reported to credit reporting agencies.

A debt collector shall have a duty to verify the accuracy of, and to correct any incorrect information in, any report made by the debt collector to a credit reporting agency upon notification by a consumer that the information is incorrect. Failure to comply with this section within 60 days of receipt of written notification from a consumer that the debt collector has included inaccurate information in a report to a credit reporting agency shall be an unfair and deceptive trade practice under G.S. §75-1.1.

§58-70-170. Duty to correct incorrect information reported to credit reporting agencies.

A collection agency shall have a duty to verify the accuracy of, and to correct any incorrect information in, any report made by the collection agency to a credit reporting agency upon notification by a debtor that the information is incorrect. Failure to comply with this section within 60 days of receipt of written notification from a debtor that the collection agency has included inaccurate information in a report to a credit reporting agency shall be an unfair and deceptive trade practice under G.S. 75-1.1.

The federal Fair Credit Reporting Act likewise requires that data furnishers provide correct information to credit reporting agencies and correct inaccurate information. It, however, does not provide a private right of action when the consumer directly disputes inaccurate or incomplete information with the data furnisher.  See 15 U.S.C. §1681s-2(a)(2) and (c)(1).  Directly in conflict with the FCRA, the proposed North Carolina legislation appears to provide a private right of action under those circumstances.

Analysis of proposed N.C.G.S. §75-57 and its Impact on Original Credit Furnishers:

In its simplest terms, Article 2 of Chapter 75 applies to creditors collecting consumer debts on their own behalf.   See N.C.G.S. §75-50.  Article 2 of Chapter 75 provides consumers with a private right of action and provides for the recovery of actual damages and statutory civil penalties of $500-$4,000 per violation.  If passed, Section 57 will provide a private right of action in instances where a consumer directly disputes an item on its credit report with the creditor/furnisher.  The provision is problematic because: (a) it provides no guidance as to what would constitute a reasonable investigation; (b) it provides no definition or fleshing out of what constitutes “notice” by the consumer; and (c) it ignores the reality that, while credit furnishers may request information on a credit report be updated, the credit reporting agencies themselves are the only entities that can correct the credit report.  Proposed Section 57 would apply to banks, credit card companies, finance companies and other creditors who furnish information to credit reporting agencies regarding consumers.

Analysis of proposed N.C.G.S. §58-70-170 and its Impact on Collection Agencies and Debt Buyers:

The implications for collection agencies and debt buyers are largely the same as set forth above. Adding to those issues, however, the bill is unclear as to whether there is a private right of action and if so, the measure of damages.  In its current form, Article 70 only addresses liability and private rights of action for violations of Part 3 of Article 70.  As drafted, proposed N.C.G.S. §58-70-170 is added as Part 6 of Article 70.  As there is no provision in existing Article 70 which will address the measure of damages, the proposed provision leaves open the measure of damages, as well as whether or not a private right of action is even available.

Adding to these concerns is the question of whether this legislation is preempted by the FCRA.  We strongly suggest this is the case.  The FCRA expressly provides that “[n]o requirement or prohibition may be imposed under the laws of any State with respect to any subject matter regulated under section 1681s-2…of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies” except for states which previously received a carve out (specifically, Massachusetts and California).  15 U.S.C. §1681t (b)(1)(F);  see also Ross v. Fed. Deposit Ins. Corp., 625 F.3d 808, 812 (4th Cir. 2010).   The proposed bill is directly in conflict with this provision.

The Bill’s primary sponsor is Stan Bingham, representing District 33.  The Bill has bi-partisan support from Senators Brent Jackson, Michael V. Lee, Gladys A. Robinson and Joyce Waddell.  The Bill passed its first reading on March 24, 2015 and has been referred to committee.  If passed, the legislation will take effect October 1, 2015.  

CFPB Issues Notice of Final Policy Statement Regarding its Disclosure of Consumer Complaint Narratives

The CFPB has issued its notice of final policy to disclose publicly consumer complaint narratives in its Consumer Complaint Database.  The CFPB intends to provide consumers who submit their complaints directly to the CFPB the opportunity to include consumer complaint narratives in the Consumer Complaint Database. These narratives will be publicly available. 

Consumer Narratives:

1.        Requires consumers to opt in.  The CFPB will not publish the narrative unless the consumer affirmatively checks a consent box within the complaint portal.

 

2.       Removes all identifying information.  Only narratives that have been scrubbed for personal information will be made available. According to the CFPB, all narratives will be scrubbed to protect privacy and identifying information will be removed, including: (a) personal information, including name, age, legal representation, physical characteristics or personal descriptors, detailed military/veteran information and medical conditions; (b) location and contact information; (c) date and time information; and (d) personal identifying numbers (social security numbers, account numbers).

 

3.       Meets Certain Publication Criteria.  The CFPB has stated that it will not publish a narrative unless the complaint has been submitted through the CFPB portal, is not a duplicate submission, and the consumer’s relationship with the financial institution complained of has been confirmed.  It is important to note that the CFPB has not made any provision for verifying the veracity of the complaint prior to publication.

According to the final policy statement, the CFPB will not publish any narratives for at least 90 days.  

Company Public Facing Responses:

The CFPB intends to allow companies the opportunity to respond to the substance of the complaints; however taking into account the feedback received as to the increased cost and legal risk inherent with preparing a response, the CFPB intends to add a finite list of structured company responses.  The responding company will then be given an opportunity to recommend to the CFPB which option, if any, it would like included as a public response to address the substance of the consumer’s complaint.  There is no obligation to respond. 

Timing of Publication:

The CFPB intends to disclose consumer narratives when the company provides its public facing response, but no later than 60 days after the complaint is routed to the company.  The intention of the disclosure timing is to insure the complaint and response can be disclosed at the same time.

District Court Holds Collection Agency Did Not Establish Permissible Purpose in FCRA Suit

In an FCRA action, where the consumer disputed that a collection agency had a permissible purpose to access his credit report, the District Court of New Hampshire has held that to establish permissible purpose, the collection agency must establish that it was seeking to collect an “account” as the term is narrowly defined in 15 U.S.C. §1693a(2).  In Bersaw v. Northland Group, Inc., C.A No. 14-cv-128-JL, a debt buyer assigned to Northland Group for collection two accounts owed by Bersaw.  In its collection efforts, Northland Group accessed the consumer credit report of Bersaw.  Bersaw filed suit alleging that Northland Group did not have a permissible purpose to access his credit report because he had not had any business dealings or accounts with Northland and had not applied for credit or employment with Bersaw.  Northland Group filed for summary judgment, arguing that the FCRA expressly permits an entity to obtain a credit report when collecting a debt from the consumer. 

In denying Northland’s motion for summary judgment, the court looked at the specific language of 15 U.S.C. §1681b(3)(A) which provides that a consumer reporting agency may furnish a credit report to a person who intends to use the information for a permissible purpose and specifically, in this case, “in connection with a credit transaction involving the consumer on whom the information is to be furnished and involving the extension of credit to, or review or collection of an account of, the consumer.”  (emphasis supplied).  The court determined that it was not enough to be simply attempting to collect a debt from the consumer – the collection agency must be attempting to collect an account from the consumer, as the term is defined in 15 U.S.C. §1693a(2).  Under 15 U.S.C. §1693a(2), the term account is defined as being a “demand deposit, savings deposit, or other asset account (other than an occasional or incidental credit balance in an open end credit plan as defined in section 1602(i) of this title), as described in regulations of the Bureau, established primarily for personal, family, or household purposes.”  The court determined that Northland had not brought forth any evidence whatsoever “that sheds any light on the nature of the debts Northland was attempting to collect from Bersaw.  They may have been “demand deposit, savings deposit or other asset account[s]” and they may well have been incurred “primarily for personal, family, or household purposes. But, based upon the information presently before the court, it is equally possible that the debts in question were not such accounts, and were incurred for business (or some other) purposes.”  The court therefore denied Northland's motion for summary judgment.

 

Nebraska District Court Rules in Favor of Law Firm on Meaningful Involvement Issue

A Nebraska district court has determined that a law firm’s letter did not violate the FDCPA and dismissed the consumer’s complaint.  In Spurgeon v. Frederick J. Hanna & Associates, the consumer alleged that a collection letter was false and deceptive and implied that the communication was from an attorney.  Spurgeon v. Frederick J. Hanna & Associates, C.A. No. 4:14-cv-03098 (D. Neb. Mar. 17, 2015).  The letter in question was sent on law firm letterhead to a consumer in Nebraska and provided in part:

This firm is licensed in Georgia, Florida, Missouri and South Carolina.  Although we are a law firm, no attorney has evaluated your case, nor have we been engaged to file a lawsuit.  Further, no attorney with this firm has personally reviewed the particular circumstances of your account.  This is an attempt to collect a debt.  Any information will be used for the purpose.

The court granted the law firm’s motion to dismiss, holding as a matter of law that there was no misrepresentation of attorney involvement under 15 U.S.C. §1692e(3) and (10).   The court recognized the public policy behind a debt collector sending a collection letter that is seemingly from an attorney; however, the court noted that there is no express prohibition against a lawyer fulfilling a role as a debt collector.  See Greco v. Trauner, Cohen & Thomas, L.L.P. , 412 F.3d 360, 364-365 (2d Cir. 2005).  The court noted that letters that have been found acceptable contained, either in the body of the letter or on the same page as the body of the letter, disclaimers that no attorney had reviewed the consumer’s file and that the attorney or firm had not been retained to file suit.  Id.  In this case, the court determined that the law firm took sufficient steps to explain their role as a debt collector and disclaim any misapprehension of attorney involvement.  Specifically, the court determined that the letter: (a) set forth the firm’s role in attempting to collect a debt; (b) expressly stated no attorney had reviewed Spurgeon’s file; (c) expressly stated that no attorney had reviewed the particularly circumstances of Spurgeon’s account; (d) expressly stated that the firm had not been engaged to file a lawsuit; and (e) did not threaten legal action of any kind.  The court noted that while the letter set forth what states the firm was licensed in, Nebraska (the state to where the letter was sent and in which Spurgeon resided) was not one of them and thus, by omission, the law firm had informed Spurgeon that its attorneys cannot practice law in Nebraska. “When an attorney/debt collector and his or her law firm are transparent about what role they are playing in the collection of a debt and do not confuse the message with contradicting or ambiguous statements, their collection letters will not be deemed misleading or fraudulent for the purposes of the FDCPA merely because those letters appear on attorney letterhead and are from an attorney acting as a debt collector and not legal counsel.”   Spurgeon, Slip Op. at 6.

District Court Strikes FDCPA Complaint One Day After it is Filed

An Illinois federal court dismissed an FDCPA complaint one day after it was filed, describing the complaint as a “bad joke.”  Sampson v. MRS BPO, LLC, C.A. No. 15 C 2258 (N.D. Ill. Mar. 17, 2015).  The complaint alleged that a collection letter sent to the plaintiff violated 15 U.S.C. §1692f because the collection agency placed plaintiff’s collection account number on the outside of the envelope.  In striking the complaint, the court stated that the allegations of the complaint were “simply not the stuff of which any legitimate invocation of the Act or its constructive purposes can be fashioned.”  “In order for any hypothetical member of the public “who views the envelope”…to be able to perceive that debt collection is involved and is at issue…that member of the public would have to be blessed (or cursed?) with x-ray vision that enabled him or her to read the letter contained in the sealed and assertedly offending envelope.”  The complaint came to the court’s attention because plaintiff’s counsel had a courtesy copy delivered to chambers.  The court’s order not only dismissed the complaint but also ordered counsel to appear and “explain how his filing of the Complaint even arguably complied with the requirements of subjective and objective good faith mandated by Rule 11(b).”

Enthusiasm for this opinion should be tempered with the reminder that the circuits remain split as to their interpretations of 15 U.S.C. §1692f(8).  15 U.S.C. §1692f(8) prohibits the use of any language or symbol other than a debt collector’s name and address on the envelope.  In August of 2014, the Third Circuit found that where the account number was showing through the window of a collection envelope, the collection agency violated 15 U.S.C. §1692f(8).  See Douglass v. Convergent Outsourcing, 765 F. 3d 299 (3d Cir. 2014).  In that case, the court held that the account number was not benign information.  Both the Fifth and Eighth Circuits have found exceptions to 15 U.S.C. §1692f(8) for “harmless words or symbols”, holding that Congress only meant to proscribe words and symbols that would reveal that the contents of the letter pertain to debt collection.  See Goswami c. American Collections Enterprise, Inc., 377 F.3d 488 (5^th Cir. 2004); Strand v. Diversified Collection Service, Inc., 380 F.3d 316 (8^th Cir. 2004).  Sampson seems to fall in line with the Fifth and Eighth Circuit’s rationale.

FTC Offers Comments on Draft Data Security and Breach Notification Act of 2015

On March 18, 2015, the FTC provided feedback to Congress concerning the draft Data Security and Breach Notification Act of 2015 (the “Act”).  Currently, data breaches are not regulated on the federal level and while the majority of states have adopted legislation governing data breaches, the standards are not uniform.  The Discussion Draft of the Act sets forth two purposes: (a) to establish uniform national data security and breach notification standards for electronic data; and (b) expressly preempt any related state laws.

In a nutshell, the Discussion Draft of the Act requires that covered entities implement and maintain reasonable security measures and practices to protect and secure personal information in electronic form against unauthorized access, taking into account the size and complexity of the covered entity.  The term covered entities is more expansive than financial institutions, but generally covers those entities within the FTC's general jurisdiction.  Specifically it covers any entity that “acquires, maintains, stores, sells, or otherwise uses data in electronic form that includes personal information”, including common carriers and nonprofit organizations. The draft Act provides for notification of any breach unless “there is no reasonable risk” that the breach will result in identity theft, economic loss or harm, or financial fraud to the consumer.  The Discussion Draft of the Act also establishes a threshold for notifying the consumer reporting agencies, requiring such notification if more than 10,000 individuals are affected.  The Discussion Draft of the Act further sets forth the timing, contents, and manner of delivery of breach notifications.  The Discussion Draft of the Act also provides for civil penalties and allows enforcement by both the FTC and state attorney generals.  No private right of action is provided. 

The FTC’s position as to the Discussion Draft was presented by FTC Consumer Protection Director Jessica Rich and provided general support for the legislation.  Before specifically addressing the provisions of the draft Act, Rich gave a brief overview of the Commission’s current data security program, highlighting its current legislative authority, enforcement actions and policy initiatives.  Summarizing the FTC’s enforcement philosophy, “the Commission has made it clear that it does not require perfect security; that reasonable and appropriate security is a continuous process of assessing and addressing risks; that there is no one-size-fits-all data security program; and that the mere fact that a breach occurred does not mean that a company has violated the law.”

Speaking directly as to the Discussion Draft, the FTC expressed concerns that the Discussion Draft did not go far enough as to the following:

• The definition of personal information.  The FTC pointed out that it does not cover certain information covered by some state laws, specifically, precise geolocation and health data.  The FTC pointed out that the misuse or access to such information can provide both physical and financial harm to consumers. 
• The bill does not address the entire “data ecosystem,” specifically internet enabled devices.  The FTC used as an example pace makers and automobiles and the fact that interception of that information could be harmful to consumers.
• The bill does not include rulemaking authority under the APA.  The FTC pointed out that technology is advancing at such a rapid rate, that rulemaking authority is necessary to ensure the proposed Act remains relevant and addresses these technological advances.
• When notice is required.  The FTC also raised some concerns with the threshold requirements as to when notice of a breach is required, suggesting “an approach that requires notice unless a company can establish that there is no reasonable likelihood of economic, physical or other substantial harm. (emphasis supplied).

The FTC’s Prepared Statement can be found here:  FTC Prepared Statement

The Discussion Draft of the Data Security and Breach Notification Act of 2015 can be found here: Discussion Draft of H.R. ___, Data Security and Breach Notification Act of 2015

 

CFPB is Seeking Public Comment Regarding the Credit Card Market

The CFPB has submitted a Request for Information regarding the credit card market.  The comment period will remain open for sixty (60) days once it is published in the Federal Register.  Under the CARD Act, the CFPB is required to review the credit card market every two years.  The Request for Information focuses on: (a) the impact the CARD Act has had on credit card products, (b) specific terms, disclosures and products and (c) delinquent debt and the collection of the same.  The focus of the Request for Information and the resulting comments will likely provide insight as to whether further regulations will be forthcoming as to credit card products and if so, what the focus is likely to be.

The Request seeks comments as to the following:

The Impact of the CARD Act:

• How have credit card agreements changed in the past two years, particularly:
  • Their terms and conditions;
  • The length and complexity of the agreement; and
  • Changes in underwriting, marketing and pricing practices
• How effective are current disclosures; and
• The cost and availability of credit.

Specific Terms, Disclosures and Products:

• Are effective disclosures being provided to customers using mediums other than paper statements;
• Are reward programs providing adequate disclosures;
• Are payment grace periods being disclosed in a meaningful manner;
• The impact of fee harvesting practices which are not covered by the CARD Act; and
• How well do consumers understand deferred interest products and the impact of those products on subprime consumers

Delinquent Debt and Collection

• What practices are used to minimize loss prior to charge off;
• How are ability to pay standards being implemented in approving credit applications and increasing credit lines;
• How are relationships with collection agencies managed; and
• To what extent are charged off portfolios sold to debt buyers and the terms of sale

The full text of the Request for Information as submitted to the Federal Register can be found here: http://files.consumerfinance.gov/f/201503_cfpb_card-act-report-rfi.pdf

 

CFPB Issues Supervisory Highlights

Last week, the CFPB issued its Supervisory Highlights for July-December, 2014.  The Bureau’s Supervisory Highlights provide a summary of issues found by the Bureau during recent examinations and provides compliance insight for regulated entities.  The Bureau’s examinations found violations involving credit reporting, debt collection, overdraft protections, mortgage origination, and fair lending.  Here are the highlights:

In General:

• Since the publication of the last Supervisory Highlights, supervisory resolutions have resulted in remediation of approximately $19.4 million to 92,000 consumers;
• A final rule defining larger participants in the nonbank financial market can be expected once the CFPB has finished reviewing the comments received (the comment period as to the proposed rule closed in December 2014);

Credit Reporting:

• The CFPB, while noting progress among the consumer reporting agencies in providing dispute documents to furnishers, still does not believe the CRAs are making consistent efforts in this regard.
• The CFPB noted deficiencies in updating public record information.  As a result, the CFPB has directed certain CRAs to:
  • Develop appropriate training with respect to the notice of dispute and forwarding of relevant information to the information furnishers;
  • Establish policies and procedures to insure that when a provider of public information notifies the CRA of incomplete or incorrect information, the CRA promptly modifies or updates the information in its system.

Debt Collection:

• The CFPB identified issues with the collection of student loans on behalf of the Department of Education which we have previously highlighted in this blog ( Student Lending Remains a Hot Issue for 2015 )
• The CFPB additionally identified a deceptive practice regarding the use of ACH payment options.  “When attempting to collect on delinquent accounts, collectors offered consumers a recurring ACH payment option. When informing consumers about this payment option, collectors promoted the consumers’ ability to adjust or cancel a recurring ACH payment with only 24 hours’ notice. This representation, however, contradicted both an express representation in monthly periodic statements provided to consumers and internal policies and procedures, which stated that a minimum of 72 hours’ notice was required. The contradiction in oral and written disclosures of the timeframe required to cancel or adjust a recurring ACH created a risk of deception.”
• The CFPB further noted that several banking institutions changed balance calculation methods without providing proper notification and disclosures to consumers resulting in overdraft fees.  The CFPB deemed this practice deceptive.
   
  Mortgage Origination:

• The CFPB found that in one or more examinations, examiners found that branch managers, as owners of marketing services entities, received compensation based on the terms of transactions originated by the branch managers themselves in contravention of Reg Z’s prohibition of the same.  The CFPB has directed that the practice cease and desist.
• The CFPB noted violations with Reg X, specifically, that the amount disclosed on the HUD-1 impermissibly exceeded the amount disclosed on the Good Faith Estimate.
• The CFPB noted deficiencies with certain examinee’s policies in procedures concerning the deadline to provide Good Faith Estimates.  The Bureau found that certain examinee’s policies did not adequately define when the application was received.  As a result, the deadline to provide Good Faith Estimates was not properly calculated.
• The CFPB noted issues with advertising which did not comply with the disclosures required by Reg Z.
• The CFPB also noted issues with adverse action notifications.  Specifically, the “CFPB examiners found one or more supervised entities failed to provide the requisite information in denial notices as set forth in Regulation B and failed to notify an applicant of action taken within 30 days after receiving the completed application. These errors were attributed to weaknesses in the compliance audit programs and the monitoring and corrective action component of the compliance programs.”
• The CFPB also noted generally weak compliance management systems. The Bureau reiterated that an “effective compliance management system includes board and management oversight, a compliance program, a consumer complaint management program, and a compliance audit program. The board of directors and senior management should, among other things, adopt clear policy statements concerning consumer compliance, establish a compliance function to set policies and procedures, and assign resources to the compliance function commensurate with the size and complexity of the supervised entity’s practices and operations. A compliance program should include policies and procedures, training, and monitoring and corrective action processes. A compliance audit program should assist the board of directors or board committees in determining whether policies and standards adopted by the board are being implemented, and should also identify any significant gaps in board policies and standards.”
   
  Fair Lending:
• The examiners found ECOA and Reg B violations, including “violations related to the failure to consider public assistance income or other sources of income protected by Reg B. “Applicants were automatically declined if they relied on income from a non-employment source, such as social security income or retirement benefits, in order to repay the loan.”
   

Student Lending Remains a Hot Issue for 2015

Last week, President Obama signed a Presidential Memorandum introducing his Student Aid Bill of Rights.  According to White House press release, the Memorandum directs the Department of Education and other federal agencies, presumably the CFPB, to work together to improve student loan affordability.  The President’s initiative directs, among other things, the Department of Education to establish a complaint portal by July 1, 2016 and requiring enhanced disclosures and “stronger consumer protections throughout the repayment process.” The President’s announcement comes on the heels of the CFPB’s Winter 2015 Supervisory Highlights which identified in its examinations of debt collectors issues with the collection of Department of Education student loans – specifically, that collection agents overstated the benefits of federal student loan rehabilitation.  See CFPB: Supervisory Highlights (February 2015), pp. 6-7.   Along the same front, it was widely reported a few weeks ago that the Department of Education had terminated its contracts with five debt collection agencies after its review and audit discovered similar transgressions to the ones reported by the CFPB.  Three of those collection agencies have filed complaints with the United States Court of Federal Claims which, while filed under seal, appear to dispute the Department of Education’s termination of their contracts.

So what does this all mean?  Student Loan reform is likely to remain a hot issue in 2015.  Specifically, we can anticipate:

• A push for additional legislative reform:
  • In its October 2014 Report of the CFPB Student Loan Ombudsman, the CFPB made the following recommendations:
    • Modify the Bankruptcy Code to eliminate or further limit the nondischargeability provisions that currently apply to student loans;
    • Policymakers should consider adding requirements to servicers in the student loan market, similar to those proposed for the servicing of credit cards and mortgages; and
  • President Obama has similarly called for requiring enhanced disclosures in his Student Aid Bill of Rights
• An increase in enforcement actions concerning student lending:
  • With President Obama’s directive that the Department of Education create its own portal for complaints by July 1, 2016, consumers will now have opportunities to file complaints with both the CFPB and the Department of Education; and
• Additional burdens and requirements placed on debt collection agencies collecting on student loans which are likely to be more restrictive than those required by the FDCPA. This will likely increase the cost of collection and drive some agencies from the market; and
• Continued cooperative efforts between the CFPB and the Department of Education.

 

Department of Justice Announces Settlement with California Bank

The Department of Justice has settled civil and criminal charges against CommerceWest Bank concerning its failure to comply with the Bank Secrecy Act. The matter arises out of the bank’s relationship with one of its customers, a third party payment processor. The case underscores the impact of Project Choke Point and the increasing emphasis regulators and the Department of Justice are placing on the mantra "know your customer."

The complaint alleges that the bank’s customer, a third party payment processor, processed transactions for fraudulent merchants including a pay day lender who in turn made unauthorized withdrawals from consumer accounts. The complaint alleges that the bank ignored a series of "glaring red flags" including the following: thousands of complaints from consumers, complaints from other banks expressing their concern that the transactions were fraudulent, and an abnormally high return rate on transactions involving its customer. The complaint alleges that the bank failed to use due diligence in monitoring its customer and failed to comply with its statutory obligation to notify the government of suspicious illegal activity involving consumer fraud.

The consent decree requires the bank to engage in certification requirements for a period of ten years. Additionally, the bank has agreed to pay a $1 million civil penalty and an additional $1 million to the United States Postal Inspection Service’s Consumer Fraud Fund. The Department of Justice further reports that as part of the resolution of the criminal charges, the bank has agreed to give up any claim to the $2.9 million previously seized from the third party payment processor’s bank account.

CFPB Issues Report on Arbitration Agreements

The CFPB today issued its report to Congress on Arbitration Agreements.  The report, including appendices, checks in at just over 700 pages. Despite being touted as an “empirical” rather than an “evaluative” study, the report is likely to be a prelude to CFPB rulemaking concerning arbitration provisions.  The report focuses on six financial product markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless.   I break down the highlights of the report in 750 words or less:

·       Arbitration clauses are present in a significant number of contracts over the six financial product markets.  Specifically, the CFPB reports:

o   53 %: The market share of credit card issuers that include arbitration clauses.

o   44%: While fewer than 8 % of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 % of insured deposits.

o   92 % of prepaid card agreements the CFPB obtained are subject to arbitration clauses.

o   86% of the largest lenders in the private student loan market (specifically 6 of the 7 reviewed for this study) include arbitration clauses in their contracts.  

o   99 % of the Texas and California pay day lenders with storefront locations include arbitration clauses in their agreements.

o   88 % of the largest mobile wireless carriers (7 of 8) include arbitration clauses and they cover 99.9% of all subscribers.

·       In the credit card and checking account markets, arbitration clauses are more widely used by larger banks than smaller banks and credit unions;

·       Most arbitration clauses include provisions that arbitration may not proceed on a class basis;

·       AAA is the predominant arbitration forum;

·       The existence of an arbitration clause is not a consideration for consumers when deciding on a credit card provider (in fact, it was dead last in the factors listed);

·       Most consumers are not aware that their credit card contracts include arbitration clauses;

·       Arbitration clauses are disproportionately lengthy when compared to the remainder of the contract and tend to be written on a more complex level;

·       Arbitration clauses tend to be very broad;

·       Most contracts with arbitration clauses did not include damage limitations;

·       CFPB acknowledged that its analysis of arbitration outcomes was subject to certain limitations which “made it quite challenging to attempt to answer even the simple question of how well do consumers (or companies) fare in arbitration.  See Arbitration Study: Report to Congress, pursuant to Dodd-Frank Wall Street Reform and Consumer Protection Act 1028(a), Section 5, p. 7.

·       The Report, however, goes on to compare claims brought in arbitration with those brought through litigation;

·       Of the cases brought through arbitration (and the Report only identified 1,847 between 2010-2012):

o   69.1% involved some dispute over the debt and 59.8% involved an affirmative consumer claim (there were instances where the demand involved both);

o   Arbitrators resolved less than a third of the disputes on their merits;

o   Decisions on the merits took 5-8 months;

o   The median time to settle cases was 155 days;

o   Summarized by the CFPB, “[t]he total amount of relief and debt forbearance consumers obtained in all of these cases combined was under $400,000. Companies obtained decisions requiring consumers to pay $2.8 million in cases filed during this same time period, predominantly for disputed debts.”

·       The CFPB also studied cases that proceeded through litigation in these product markets.  The CFPB Report finds that:

o   Almost all the litigation cases studied by the CFPB were resolved prior to trial;

o   Juries were sought by consumers in the overwhelming majority of class and individual cases;

o   The consumer obtained a judgment in only 6.8% of the individual federal cases

·       The CFPB Report focuses on the recovery in class actions in contrast to individual actions or arbitrations and conducted a more expansive analysis covering 2008-2012, noting:

o   Total gross relief offered to the classes over 419 settlements was almost $2.7 billion (including $2 billion cash and $644 million of in-kind relief);

o   34 million consumers were guaranteed recovery over that 5 year period;

o   The average time to settle was 690 days.

Looking ahead, it is likely that the CFPB will begin exploring rule making which likely will seek to:

·       Limit the availability and scope of arbitration;

·       Simplify the arbitration provisions;

·       Eliminate the ability of credit providers to provide that consumers cannot proceed as a class in arbitration; and

·       Require additional disclosures as to the inclusion of arbitration provisions and perhaps conspicuous opt out provisions.