CFPB Monthly Report Turns its Attention to Credit Card Products

The CFPB issued its Monthly Report this week. The report is a high level snapshot of trends in consumer complaints and provides a summary of the volume of complaints by product category, by company and by state.  Additionally, each month it highlights a product type and a geographic area.  This month’s report highlights credit card products and provides some forecasting of areas regulators are likely to focus on in upcoming examinations.



Each month, the Report breaks down complaint volume by product looking at a three month average and comparing the same to the prior year.  As has been the case in prior months, the Report continues to indicate that the three products yielding the highest volume of complaints are debt collection, mortgage and credit reporting.  If there is good news to be had, the Report indicates that debt collection and credit reporting both showed a significant decrease in complaints in September 2015.  Debt collection showed a 10% decrease and credit reporting showed at 15% decrease.  Interestingly, the products showing the largest increase in claims in a 2014 vs. 2015 comparison were debt settlement, credit repair and check cashing.  Taking this into account, we are likely to see a continued increase in enforcement actions in the debt settlement and credit repair industries.

 

This month’s report focuses on credit card products.  According to the CFPB Reports, credit card products are one of the most complained about financial service products, fourth only to debt collection, credit reporting and mortgage.  Credit card providers and servicers should pay close attention to this month’s report as it highlights what are likely to be points of emphasis with regulators in upcoming examinations – particularly with regard to the application of payments and billing disputes.

 

• The most common complaint involves billing disputes.  According to the report, consumers are confused as to how and when late fees can be assessed.  Other consumers indicated confusion as to how to properly and timely make a billing error dispute.  16% of all credit card complaints are categorized by the CFPB as involving billing disputes.

 

• Another issue highlighted by the CFPB is the concern with credit card accounts being closed without notice due to concerns by the credit card companies as to fraud and identity theft. 

 

• Consumers also complained about their inability to allocate payments as they desire and expressed confusion where portions of accounts were subject to differing interest rates, promotions, and expiration dates.

 

Overall, the Report did not contain any surprises.  So what might the credit card industry expect to see from regulators?  Based upon the current complaint trends, the credit card industry is likely to continue to see a continued focus on to their application of credit card payments, as well as scrutiny as to the accuracy of their disclosures for 0% balance transfers and other promotions. 

 

FTC Settles Fair Credit Claims with Sprint Over Risk Based Pricing

The Federal Trade Commission and Sprint Corporation have entered into a consent order which resolves the FTC allegations that Sprint violated the Fair Credit Reporting Act (“FCRA”) and it’s Risk Based Pricing Rule.  Without admitting liability, Sprint has agreed to pay the FTC $2.95 million in civil penalties.

The Complaint alleges that Sprint placed consumers with lower credit scores into an Account Spending Limit ("ASL") program through which they were required to pay an additional $7.99 per month.  According to the complaint, Sprint used consumers’ credit scores to ascertain whether they should be subject to the ASL program.  According to the complaint, Sprint failed to provide adequate and/or timely notification to consumers that were placed in the ASL Program that they were receiving risk based pricing.  As a result, the complaint contends that consumers were not provided notice until it was too late to switch to another service provider.

Risk Based Pricing occurs when lenders offer different interest rates or loan terms to borrowers based on their individual creditworthiness.  The Rule requires that notice be provided to consumers who receive materially less favorable credit terms than a substantial proportion of consumers based upon their credit score. “Materially less favorable” can mean a higher APR, but where there is not APR, it can mean other things, like a deposit required by a telephone company or an annual membership fee for a credit card.  16 CFR 640.2(o).  The Risk Based Pricing Rules require that notice be provided to consumers affected by Risk Based Pricing.

The Order requires Sprint to send consumers impacted by Risk Based Pricing notice by the earlier of either five (5) days after the consumer activates service or a date that give the consumer a reasonable opportunity to avoid incurring future financial obligations to Sprint.  Sprint additionally must provide revised notifications to all consumers who previously received the incomplete notices.  The Order further sets forth specifically the contents required for all Risk Based Pricing Notices moving forward.  Beyond the specific remediation and civil penalty, and as is typical with FTC Orders, Sprint is required to provide compliance reporting to the FTC at the FTC’s request for ten (10) years.

FCC Announces Weekly Release of Consumer Complaints

The FCC announced this week that it will begin releasing weekly robocall and telemarketing complaint data weekly.  The FCC's declared intention is to assist developers in building and improving "do-not-disturb" technologies but in reality, the compilation of data will provide plaintiff's attorneys with a new tool for targeting TCPA defendants. 


The FCC allows consumers to file complaints with the FCC online, by telephone and by mail. The released information is unverified by the FCC and includes the date and time of the call, the category of complaint and the caller id number.  The spreadsheet does not provide any indication as to the number called and whether it is a cell phone or landline. Financial service companies, including banks and third party collection entities, should review the list regularly to look for developing trends with numbers associated with their entity.

Cordray Remarks Hint at Further Changes for the Mortgage Industry and Send Warning to Vendors

In his prepared remarks to the Mortgage Bankers Association this week, Richard Cordray suggested there are more changes to come for the mortgage industry and that regulators need to pay more attention to vendors involved in the mortgage industry.


In addressing the implementation of TRID, Cordray reiterated prior assurances that initial examinations regarding TRID will be focused on the good faith efforts lenders have made to come into compliance with the rule.  Cordray acknowledged that the implementation process "was not as smooth as we would have hoped" despite the agency having allowed almost two years for implementation.  Rather than acknowledging the unwieldy nature of wholesale changes to how lenders provide disclosures to borrowers, Cordray suggested that the issues were largely the fault of vendors who "performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date."  Cordray suggested that financial regulators, including the CFPB, may need to devote greater attention to performance of vendors and how they are affecting the marketplace.  Under Dodd Frank, the CFPB has supervisory authority over service providers to supervised banks and nonbanks, as well as service providers to a substantial number of small insured depository institutions or small insured credit unions.  12 U.S.C. §§5514-5516.


Cordray also noted that more changes are likely in the mortgage The CFPB has been  examining the entire closing experience and evaluating electronic closings and how improvements in technology can be used to the advantage of both the consumer and the lender.  Based on the results of a CFPB pilot program for electronic closings, the CFPB is strongly encouraging the mortgage industry to embrace innovation and "e-closings."

CFPB Adopts Final HMDA Rules: What You Need to Know

Last week, the CFPB issued its final rule modifying and significantly expanding the data collection reporting requirements under the Home Mortgage Disclosure Act (“HMDA”).  Adopted in 1975, HMDA requires certain lenders to report information about home loans for which they receive applications or which they originate or purchase.  The Dodd Frank Act directed the CFPB to expand the data reported under HMDA and provided the CFPB with rulemaking authority.  HMDA data is an integral focus for the Department of Justice and the CFPB in identifying red lining and other fair lending violations.  The new rule is lengthy (approximately 800 pages).  Here is a very cursory review:

•  Data fields are significantly expanded.

The finalized rule significantly expands the data fields required by HMDA and exceed the data fields  required by the Dodd Frank Act.  The final rule includes twenty five new data fields, including: age, credit score, total loan costs or total points and fees, interest rates, loan term, mortgage loan originator identity and property value.  The rule additionally modifies several existing data fields. The new data collection rules take effect in 2018.

• The scope of institutions covered decreases.

The final rules narrows the number of depository institutions subject to the reporting requirements. Beginning in 2018, institutions will only be required to report HMDA data if they originated at least 25 covered closed-end mortgage loans or at least 100 covered open end lines of credit in each of the two preceding calendar years and satisfy the location requirements (providing loans in identified metropolitan statistical areas (“MSA”)).  The CFPB estimates that the new threshold will reduce the number of banks and credit unions reporting by 22%.

• Frequency of Reporting and Manner of Reporting.

Additionally, the final rule will require quarterly reporting beginning in 2020 for lenders reporting a combined total of 60,000 applications and covered loans in the preceding year.  The CFPB also announced that they are developing a new web-based submission tool for reporting HMDA data.

As these changes have been in the works for over a year, they should not catch anyone by surprise.  The good news is that the rule’s implementation will be gradual over the next few years.  However, banks and credit unions should immediately:

• Identify their current data collection abilities;
• Identify where they need to increase their data capture; and
• Identify their affected lines of business.

Guest Post: Participation Cuts Both Ways

By: Mark Dobosz, Executive Director - NARCA
September 30, 2015

The FTC-CFPB Debt Collection Dialogue this week in Dallas discussed many areas of the debt collection process. One topic that was particularly interesting came out during the afternoon’s second panel dialogue.

The panel brought up the issue of default judgments and improving the engagement of consumers in the process of resolving legitimate debt obligations. Since the FTC’s document “Repairing the Broken System” came out five years ago, industry representatives shared a number of initiatives of increased communications with consumers to address concerns expressed in that report regarding consumer involvement. Both regulators and industry representatives on the panel acknowledged that consumer involvement in court proceedings continues to be an issue despite all of the efforts to improve the process. It was evident from the comments that increased utilization of empirical research would be key to solving a challenge in an environment where a plethora of anecdotal exists.

Chris Koegel of the FTC recommended that a collaborative (industry and consumer advocates), comprehensive and detailed study of the issue of the lack of consumer engagement be undertaken immediately.  He additionally reinforced that rushing into solutions that do not base themselves on any existing or future research, and that do not otherwise shed light on the behavioral or practical reasons for the challenge, is misguided.

This recommendation is one that should be considered when applying labels to describe perceived or real challenges for the creditor or the consumer in the debt collection process.

One example is how participation is defined, or not defined, for all parties. If a term intends to be used in defining participation the debt collection process, it should equally apply to not only the creditor but also to the consumer. In any relationship, contractual or otherwise, the responsibility to be “meaningfully involved” is not a one-sided equation. And if that premise is accepted, which I believe reasonable people would agree, then defining it needs to have a defensible background and basis upon which to use the term in defining acceptable behavior amongst both parties.

To Mr. Koegel’s point, addressing a challenging issue that does not have a clear cut definition, requires both current and developing research to create a workable framework.

As Ben Golub, Assistant Professor of Economics at Harvard University summarizes: “….when evidence is non-rigorously collected and there's not a lot of it -- we call the evidence anecdotal. ("I was walking around and it seemed that ladies out walking seem to be wearing red today.") Such evidence has two features, which make it relatively unappealing for scientific analysis. First, there's not a lot of it, which makes precise inference difficult. Second, it has selection issues: whatever made it available or noticeable to the observer may be biasing the inferences we draw from it. In our example, red is a noticeable color, so unless you carefully documented all the ladies you saw, your generalization might be biased by that.” Quora July 2011

Regulators in their collaboration with industry and consumer advocates can benefit from the insights of the great work being done in sociology, psychology and economics to create policy and regulations that truly improve the debt collection process and create a “level-playing” field for all. We can’t have an effective credit ecosystem unless both side participate.

About the Author:  Mark Dobosz currently serves as the Executive Director for NARCA – The National Creditors Bar Association. Mark is a one of NARCA’s speakers on many of the creditors rights issues impacting NARCA members.

                                                                                      

House Passes Bill to Delay Enforcement of TRID

The House overwhelmingly passed the Homebuyers Assistance Act last night by a vote of 303-121.  The Act provides entities who are now subject to the new integrated disclosure rules with a temporary safe harbor, precluding actions to enforce violations until February 1, 2016.  The safe harbor only applies so long as entities have made a good faith efforts to comply with the new  integrated disclosure requirements.  The White House's attempt to veto the bill by issuing a Statement of Administrative Policy failed.  The White House position is premised upon a belief that the bill would revise the effective date and shield lenders from liability so long as they made a good faith effort to comply.  "The Administration strongly opposes H.R. 3192, as it would unnecessarily delay implementation of important consumer protections designed to eradicate opaque lending practices that contribute to risky mortgages, hurt homeowners by removing private right of action for violations, and undercut the Nation's financial stability."


The bill now moves to the Senate. Stay tuned!

CFPB Likely to Issue Student Loan Servicing Rules: What Will They Look Like?

The CFPB has set its target on student loan servicing.  Last week, the CFPB issued a Report on Student Loan Servicing and, in conjunction with the Department of Education and Department of the Treasury, issued a Joint Statement of Principles on StudentLoan Servicing.  The Report is a likely foreshadowing of impending rules governing how student loans are serviced.  According to the Joint Statement, rulemaking is likely to focus on four guiding principles:

• Consistency
• Accuracy
• Accountability
• Transparency

The CFPB Report makes the case for regulation of the student loan servicing industry by observing that there are no consistent market-wide standards for student loan servicing.  According to the CFPB, industry wide regulation is needed because student loan debt is the second largest class of consumer debt and while other sectors of consumer debt are showing improvement, the student loan market continues to show elevated levels of distress.  Moreover, the CFPB notes (as it has in other sectors it exercises dominion over) that “a borrower typically has little or no control over which company services their loan.”  The CFPB Report goes on to summarize the comments the CFPB has received in response to the Request for Information that issued in May of this year.  The Report makes it likely that the CFPB will issue a proposed Rule concerning Student Loan Servicing despite the fact that the sector was not earmarked for regulation in the Agency’s Spring 2015 Rulemaking Agenda.

So what would rulemaking look like?  Based upon the CFPB’s Report, it is likely that any rulemaking for student loan servicing is likely to bear similarity to the mortgage servicing rules issued in 2013.  Specifically, rule making is likely:

• To provide uniform standards as to loan servicing across the industry;
  • To address servicers’ obligations to correct errors asserted by borrowers;
  • To require servicers to notify borrower prior to transfer to a new servicer;
  • To establish standards for payment processing
    • Establish time frame for processing payments;
    • Establish some standards as to how payments are applied, particularly where loans are prepaid and groups of loans have been packaged;
       
• To create standardized protocols or programs for alternative repayment programs (a variation on the mortgage loss mitigation rules);
  • To potentially decrease and simplify the number of repayment options available to borrowers;
  • To potentially mandate as loss mitigation Pay as You Earn and/or Income Based Repayment programs;
  • To require standardized notifications of repayment options;
     
• To require servicers to provide certain information regarding student loans to borrowers on a periodic basis and/or upon the borrower’s request;
   
• Impose additional vendor management obligations on lenders (both private and federal) and on servicers.
   

Crawford Proof of Claim Adversary Proceeding Dismissed…Again

For the past year, many involved in the debt buyer industry have closely followed the 11^th Circuit’s ruling in Crawford v. LVNV Funding, LLC.   Last week, the bankruptcy court again dismissed the adversary proceeding. Crawford v. LVNV Funding, LLC, Case No. 08-30192-DHW, Adv. Pro. No. 12-030333-DHW (Sep. 29, 2015).   In what can only be called an ironic twist, the adversary proceeding’s FDCPA claim was dismissed because the debtor failed to file the adversary proceeding within the applicable statute of limitations.

To recap the Crawford saga, the debtor filed an adversary proceeding against several debt buyers, alleging that the filing of a time barred proof of claim violated the automatic stay and the FDCPA.  The adversary proceeding was commenced almost four years after the suspect proof of claim was filed.  The debt buyer ultimately withdrew the proof of claim; however, the adversary proceeding proceeded forward.  The Bankruptcy Court granted the debt buyers’ motion to dismiss holding that the filing of a proof of claim, even one on time barred debt, did not constitute a violation of the FDCPA.  The district court agreed and affirmed the bankruptcy court. On appeal, the Eleventh Circuit reversed, holding that the filing of a proof of claim was an attempt to collect a debt and that the filing of a proof of claim for time barred debt violated the FDCPA.  In so holding, the court took issue with the fact that an otherwise uncollectible debt would result in some recovery under the Chapter 13 plan. “Such a distribution of funds to debt collectors with time-barred claims then necessarily reduces the payments to other legitimate creditors with enforceable claims.”  Crawford, 758 F.3d at 1261.   Additionally, the court premised its reversal on the notion that “a debt collector’s filing of a time-barred proof of claim creates the misleading impression to the debtor that the debt collector can legally enforce the debt.”  Id. In April of this year, the Supreme Court refused to grant review of the decision.  Since the Eleventh Circuit’s opinion in Crawford, several copycat claims have been filed in other jurisdictions.  The majority of courts that have addressed the issue have declined to follow the Eleventh Circuit ruling.

On remand from the Eleventh Circuit, the debt buyers filed a second motion to dismiss.  This time, the debt buyers argued that the debtor’s FDCPA claim was itself time barred having been filed outside of the one year statute of limitations provided by the FDCPA.  In opposition to the motion, the debtor argued that the statute of limitations was inapplicable because the adversary proceeding was in effect a compulsory counterclaim to the proof of claim and alternatively, that the adversary proceeding was a claim in recoupment and not subject to the statute of limitations.  The court disagreed noting that there is no relation between claims arising out of debt collection and claims concerning the underlying debt’s validity. Because there is no relation between the claims, “disputing a proof of claim and filing an adversary proceeding regarding a FDCPA claim, do not arise out of the same transaction and occurrence.”  The court treated the concept of recoupment as synonymous with a compulsory counterclaim and likewise rejected the plaintiff’s argument that the statute of limitations was inapplicable.  While neither party’s brief addressed the debtor’s claim that the filing of the time barred proof of claim violated the automatic stay, the court took it up sua sponte.  The court rejected this claim as well stating that “it is clear to the court that the filing of a stale proof of claim does not violate the automatic stay.”  In doing so, the court noted that the automatic stay serves to protect the bankruptcy estate from actions taken by creditors outside the bankruptcy and not legal actions taken within the confines of the bankruptcy.

So is the issue dead?  Since Crawford, a number of courts have harshly criticized the Crawford decision.  See, e.g., Elliott v. Cavalry Invs., 2015 U.S. Dist. LEXIS 2423 (S.D. Ind. Jan. 9, 2015); Donaldson v. LVNV Funding, LLC, 2015 U.S. Dist. LEXIS 45134 (S.D. Ind. Apr. 7, 2015); Torres v. Asset Acceptance, LLC, C.A. 2015 U.S. Dist. LEXIS 45094 (E.D. Pa. Apr. 7, 2015); Torres v. Cavalry SPV I, LLC, 2015 U.S. Dist. LEXIS 45087 (E.D. Pa. Apr. 7, 2015); Owens v. LVNV Funding, LLC, 2015 U.S. Dist. LEXIS 52680 (S.D. Ind. Apr. 21, 2015).   At least one appellate court has also weighed in, taking a more moderate view.  In  Gatewood v. CP Medical, LLC, Case No. 15-6008 (8^th Cir. Jul. 10, 2015), the Eighth Circuit held that the FDCPA “simply prohibits false, misleading, deceptive, unfair or unconscionable debt collection practices.  Filing in a bankruptcy court an accurate proof of claim containing all the required information, including the timing of the debt, standing alone, is not a prohibited debt collection practice.” Slip Op. at 10 (emphasis supplied). Two other appellate courts are slated to address the issue. Both the Owens (Seventh Circuit) and Torres (Third Circuit) decisions are currently on appeal and hopefully, will bring more appellate precedence to support the lower courts’ decisions.  Meanwhile, the holding by the bankruptcy court in Crawford makes it clear that even lower courts within the Eleventh Circuit do not think much of the Eleventh Circuit’s opinion.

Welcome TRID

Tomorrow is D Day for implementation of the TILA-RESPA Integrated Disclosure Rule (“TRID”).  As banks and others in the mortgage industry continue their final preparations to implement wholesale changes to their disclosures and closing practices as required by TRID, trade groups supporting the industry continue to request a formal hold harmless period following the Rule’s implementation.  While the CFPB and OCC politely have declined to adopt a formal hold harmless period, they have continued to offer some assurances to the industry that they will evaluate examinees based upon their “good faith efforts to comply with the Rule’s requirements in a timely manner.”   In a recent letter to the American Bankers Association and other interested trade groups, the CFPB and OCC reiterated that during initial examinations for compliance with TRID, examiners will “evaluate an institution’s compliance management system and overall efforts to come into compliance, recognizing the scope and scale of changes necessary for each supervised institution to achieve effective compliance.”  Specifically, the initial focus of examinations will take into account: “the institution’s implementation plan, including actions taken to update policies, procedures, and processes; its training of appropriate staff and, it handling of early technical problems or other implementation challenges.”  Meanwhile, formal efforts to extend an official hold harmless date continue in Congress and are expected to come to a vote by the House within the next week.

So what does this mean as we head towards tomorrow’s implementation of TRID? Banks and other affected verticals should already have in place their TRID compliance management systems, completed training of their affected staff, and completed discussions about the transition to TRID with their vendors (including brokers and closing attorneys).  The challenge moving forward is to trouble shoot for issues with implementation and continually evaluate the effectiveness of the entity's TRID compliance management system and revise the same as needed.