House Financial Services Committee Considers Amendments to the FDCPA

On November 14, 2019, the House Committee on Financial Services passed the following bills which would amend the federal Fair Debt Collection Practices Act and tighten consumer protections. The bills will now make their way to full House for further consideration.

• The Ending Debt Collection Harassment Act of 2019 (H.R. 5021) is a response to the proposed Debt Collection Rules and proposes to prohibit a debt collector from contacting a consumer by email or text message without a consumer’s consent to be contacted electronically. The bill also prohibits the CFPB from issuing any rules implementing the FDCPA that allow a debt collector to send unlimited email and text messages to a consumer.
  
• The Small Business Fair Debt Collection Protection Act (H.R. 5013) proposes to expand the FDCPA’s protections to certain small business debt.
• The Fair Debt Collection Practices for Servicemembers Act (H.R. 5003) seeks to add additional prohibitions to the FDCPA concerning servicemembers and their families.
• The Stop Debt Collection Abuse Act (H.R. 4403) proposes to extend the FDCPA’s protections as it relates to debt owed to a federal agency, limits the fees debt collectors can charge, and clarifies that debt buyers are subject to FDCPA.
• The Debt Collection Practices Harmonization Act (H.R. 3948) proposes to expand the scope of the FDCPA to include municipal utility bills, tolls, traffic tickets, and court debts.
• The Small Business Lending Fairness Act (H.R. 3490) proposes to restrict the use of confessions of judgment embedded in certain contracts.

Has Mulvaney Gone Too Far? A Look at the CFPB’s Semi Annual Report to Congress

The CFPB has issued its semi-annual report to Congress, leaving little doubt as to the agenda of Acting Director, Mick Mulvaney.  While the information contained in the actual report is largely inconsequential, it is Mulvaney’s opening message which should raise eyebrows of both consumer advocates and the consumer financial service industry.  Mulvaney quotes the Federalist Papers and draws on James Madison’s definition of tyranny when describing the CFPB’s Director (an accumulation of all powers, legislative, executive and judiciary in the same hands).  While scathingly describing the position he currently holds, Mulvaney blames Congress for creating an agency “primed to ignore due process and abandon the rules of law in favor of bureaucratic fiat and administrative absolutism.”    Citing the Bureau’s lack of accountability to any branch of government, Mulvaney includes a request that Congress amend Dodd Frank to:

• Fund the Bureau through Congressional appropriations
• Require legislative approval of major Bureau rules;
• Ensure the Director is answerable to the President in the exercise of executive authority; and
• Create an independent Inspector General for the Bureau.

By footnote, Mulvaney notes that the legislative proposals are his own and that no other officer or agency approved the legislative recommendations prior to submission.  Mulvaney is scheduled to appear before the House Financial Services Committee this week.

The proposal and the positions being advocated by Mulvaney should be of concern for both consumer advocates and the consumer financial services industry – particularly the second proposal.  Requiring legislative approval of all major Bureau rules essentially defeats the purpose of an agency delegated with rule making abilities if all such rules are to be subject to Congressional approval.  The debt collection industry, particularly, is clamoring for clarity as to how a statute adopted in the 1970s should be applied with today’s technology.  Agency rulemaking without the requirement of Congressional approval is a much more efficient means to provide that clarity if the positions of all stakeholders are fairly considered

Moving to the actual report itself, there is very little to report except that it acknowledges that the CFPB is still working towards a release of a proposed rules concerning debt collection.  Interestingly, it appears that the CFPB is now narrowing its debt collection focus to communication procedures and consumer disclosures and moving away from some of the other proposals contained in the original proposal. 

For those wondering, Mulvaney’s term as acting director is for 210 days but can be renewed and/or extended should Trump make a nomination for a permanent director prior to the expiration of that term.

Guest Post: Supreme Court Clarifies Scope Of Whistleblower Protections Under Dodd-Frank

By: Connie E. Carrigan
February 27, 2018

On February 21, 2018, in the case of Digital Realty Trust, Inc. v. Somers, the United States Supreme Court unanimously decided that employees who raise internal complaints about possible violation of securities laws are not protected as whistleblowers under the Dodd-Frank Act.  In order to obtain protection from retaliatory measures undertaken by their employers, such complaints must be reported to the Securities and Exchange Commission (SEC). 

The Dodd-Frank Act was enacted in 2010 in an effort to protect consumers from abusive practices by financial service providers.  While the Act itself specifically limits the definition of whistleblower to only those employees who make a report of suspected securities violations to the SEC, the regulations interpreting the Act’s anti-retaliation provisions extend its protections well beyond the statute.  In reliance upon these regulations, several federal circuit courts throughout the nation adopted the expansive interpretation on the basis that it reflected Congressional intent.  This created a split in the circuits as other courts strictly applied the Act’s narrow definition of what actions constitute protected whistleblower activity.

In determining that the whistleblower protections are limited to those who report violations to the SEC and in rejecting the employee’s assertion that his report of inappropriate activity to senior management was sufficient to trigger Dodd-Frank protections when his employment was terminated, the Supreme Court distinguished such protections from those contained in the Sarbanes-Oxley Act enacted in 2002 for the purpose of regulating the financial services industry and curbing securities violations.  Both Acts forbid retaliation for reporting unlawful conduct.  However, the Sarbanes-Oxley Act contains a more expansive whistleblower protection by protecting employees who provide information to federal agencies, to Congress, or to “a person with supervisory authority over the employee.” 

Justice Ruth Bader Ginsberg, writing for the Court, reasoned that the “core objective” of Dodd-Frank was to aid the SEC’s enforcement efforts by rewarding those who report suspected violations of securities law to the SEC.  The Dodd-Frank Act unambiguously provides that a whistleblower is a person who provides “information relating to a violation of the securities laws to the [Securities and Exchange] Commission.”  Justice Ginsberg further reasoned that the Court’s narrow interpretation of the Act nevertheless accomplishes the Act’s objective of protecting whistleblowers so long as they report misconduct to the SEC and that the Act’s anti-retaliation provisions appropriately serve to protect employees, attorneys, and auditors who may be required to make disclosures that are protected under any law subject to the SEC’s jurisdiction.

The Somers decision is welcome news to employers as it limits the scope of reports which are protected by the Dodd-Frank Act to those which have been asserted directly to the SEC, thereby protecting employers from defending against retaliation claims raised by employees who have only made such complaints internally.  However, the fact that the Dodd-Frank Act incentivizes employees to report inappropriate activity to the SEC by tempting them with lucrative whistleblower awards should not be taken lightly.  The fact remains that pursuant to various federal and state whistleblower protections, employers are obligated not to retaliate against employees who disclose suspected violations of law.  A zero-tolerance policy with regard to such retaliation is recommended.  Employers should ensure that all reports of wrongdoing are taken seriously and are effectively, fairly, and consistently investigated.

 

Connie Carrigan is a partner with Smith Debnam Narron Drake Saintsing & Myers, LLP's Employment Law Group.  If you have questions about the impact of this decision or any other matter relating to employment practices, please contact Connie at ccarrigan@smithdebnamlaw.com.

CFPB Consent Orders with Consumer Reporting Agencies Focus on Marketing Practices not Credit Reporting

Marketing practices remain at the forefront of CFPB activity as evidenced by two recent consent orders entered into with TransUnion and Equifax.  The consent orders combine to require the CRAs to pay more than $17.6 million in restitution to affected consumers and an additional $5.5 million in civil monetary penalties. Both consent orders will remain in place for five years and were entered without any admission of liability by the consumer reporting agencies (the “CRAs”).



Surprisingly, the violations identified by the CFPB have very little if anything to do with credit reporting.  Instead, the orders are focused on the CRAs’ marketing of credit related reporting services.  According to the Consent Orders, the CRAs marketed and sold consumers credit scores and credit related products.  The CFPB took issue with: (a) the scores being marketed and represented as being the same scores lenders typically used to determine a consumer’s creditworthiness; and (b) the CRAs not adequately disclosing the monthly charges for the services if not cancelled during the free trial period.  Additionally, with respect to Equifax, the CFPB asserted a violation of Regulation V’s prohibition against CRAs advertising its credit products through the centralized credit reporting source for annual free credit reports prior to delivery of the consumer’s free annual credit report.



Specifically, the CFPB asserted TransUnion and Equifax “represented, directly or indirectly, expressly or impliedly, that the credit scores it marketed and sold to consumers were the same scores typically used by lenders or other commercial users for credit decisions.”  Equifax Order, ¶ 23; see also TransUnion Order, ¶ 29.  Additionally, the CFPB asserted that TransUnion and Equifax failed to adequately disclose that consumers, unless they opted out in the free trial period, would automatically be enrolled in a subscription based service with monthly fees.



In addition to the restitution and monetary penalty elements, the Consent Orders require remediation by the two CRAs and provide further insight into the CFPB’s continuing focus on marketing practices of financial institutions.  Beyond the obvious (a prohibition against misrepresenting products and payment terms), the Orders set forth the CFPB’s expectations regarding:

·        Informed Consent.  The Orders require the CRAs obtain express informed consent from consumers before enrolling them in what the CFPB terms as “Negative Option billing structures” (the requirement that a consumer affirmatively opt out in the trial period or incur monthly charges).  Specifically, the orders require the CRAs to include:

o   In their internet offers, a check box on the page where payment information is collected requiring consumers to affirmatively consent to the billing structure.  The Orders further require the check box be conspicuous and clearly state “that the consumer agrees to be billed for the product unless the consumer cancels before the trial period expires.”  The Orders additionally require that adjacent to the check box, the CRAs must disclose the amount of the recurring charge and the billing interval; the date the trial period expires; and the amount the consumer will be charged.  Similarly, the CRAs must provide a simple mechanism for immediate cancellation which must, “at a minimum, be substantially similar to the mechanism(s) the consumer used to initiate the purchase” of any credit-related product.

o   For oral offers, the Orders require the CRAs obtain “affirmative and unambiguous” oral confirm that the consumer affirmatively consents to authorizing payment for the credit-related products and understands the necessary steps to cancel the services and future charges.

·        Clear and Conspicuous Disclosure. Additionally, with regard to the offering of educational credit scores (those offered for consumer purposes but rarely used by lenders), the CRAs are required to clearly and conspicuously disclose the nature of the score and clearly and conspicuously disclose the credit scores sold to consumers are not the same scores used by lenders or other commercial users, that there are various types of credit scores, and that lenders use a different type of credit score in making their lending decisions.  The Consent Orders require that the CRAs include these disclosures in written communications under the label “What You Need to Know” and that the label be in a font size double that of the disclosure.

·        Compliance Management.  Similar to other recent enforcement orders, the consent orders require the development and implementation of policies and procedures designed to improve the effectiveness of their communications with consumers and prevent communications which have a tendency to deceive consumers. 

o   The policies and procedures at a minimum should include:

§  At least an annual collection and review of performance metrics, including a review of both internal consumer complaints, as well as consumer complaints received by federal and state regulators;

§  At least an annual collection and review of data regarding consumers’ perceptions of, among other things, the CRAs’ advertising regarding the nature of their credit products (specifically, credit scores), the pricing structure and other material terms for an assessment of “consumer confusion” regarding the products and services offered to consumers; and

§  At least an annual assessment of advertisements to determine what adjustments should be made to enhance consumer understanding of the consumer products issues.

o   Submission of a comprehensive compliance plan designed to insure the CRAs’ marketing and advertising practices comply with all applicable federal consumer financial laws (including the Consumer Financial Protection Act (and its UDAAP provisions) and the FCRA;

o   A requirement that the compliance plan be updated on a regular basis (the orders mandate at least every two years or as required by changes in laws or regulations);

o   An advertising retention policy which will remain in effect for the life of the Orders (five years) and includes:

§  Copies of all advertisements, as well as sales scripts, training materials, and marketing materials relating to the credit related products, including any such materials used by third parties or affiliates;

§  A record of the date and location or placement that each advertisement is made accessible to the public and to the extent the information is available, the number, type and cost of all credit related products purchased through the advertisement and any and all modifications made to the advertisement including its mandated disclosures;

§  For all internet advertisements, the impressions, number of visits, unique visitors and clicks on the advertisement, as well as the number of purchases;

§  Accounting records showing the gross and net revenues generated by the credit related products;

§  All non-telephonic consumer complaints and refund requests relating to credit related products; and

§   Retain telephone communications with consumers consistent with current retention policies.

Entities subject to regulation should be taking notice of the number of enforcement orders which are now focusing on the marketing and advertising of consumer financial service products and reviewing their products under any product specific regulations, as well as the Consumer Financial Protection Act’s UDAAP umbrella. 

CFPB Issues Fall Agenda

The CFPB published its Fall 2016 Rulemaking Agenda last week. The Agenda, which is a federal requirement, was issued in the “early fall” and therefore does not take into account the effect the election may have on the CFPB or its current configuration. While the Agenda is worth monitoring and provides insight into the CFPB’s hot button issues, there is no certainty as to what the next six months will hold.

Payday Lending: As most know, the CFPB published its proposed rule on July 22, 2016. The Comment period ended on October 7, 2016. The rule has met significant opposition and it is telling that no further estimation or target dates have been set by the CFPB for a final rule.

TRID: The CFPB published its proposed amendments to TRID in the form of a Notice of Public Rulemaking in July 2016.The proposed amendments “memorialize the Bureau’s informal guidance on various issues and include clarifications and technical amendments.” The comment period expired October 18, 2016 and the Bureau has set a target date of March 2017 for publication of the Final Rule.


Overdrafts: Since at least the spring of 2015, the CFPB has indicated that they are conducting research to assess whether rulemaking is warranted. Since then, the CFPB does not appear to have made much public headway. The Fall Agenda, like its recent predecessors, indicates the Bureau is still engaged in pre rule making activities. The Rulemaking Agenda bumps the target date for further activity from August 2016 to January 2017 for further pre-rule making activity.

Debt Collection: One of the biggest stories that remains is when a proposed rule as to debt collection will be issued. The CFPB has not committed to a time line but has made progress. In a surprise to many, the CFPB has bifurcated the process by addressing third party and first party collections separately. A SBREFA Panel was convened as to the CFPB’s third party debt proposal in August 2016 and the CFPB continues to meet with interested parties. A proposal as to first party collections is the next likely step. The CFPB estimates further pre-rule activities in February 2017.

Arbitration: The CFPB published its proposed Arbitration Rule in the form of a Notice of Public Rulemaking in May 2016 and has targeted February 2017 for a final rule.

Women owned, Minority owned and Small Business Data Collection: The CFPB is in the early stages of developing rules to require financial institutions to report information about their lending to women-owned, minority owned and small businesses. The CFPB has indicated a desire to model any data collection after their recently released HMDA Rules. Pre-rule activities are expected to continue in the first part of 2017.

Supervision of Larger Participants in Installment Loan and Vehicle Title Loan Markets: The CFPB is considering rules expanding its larger participants supervision to include consumer installment loans and vehicle title loan markets. The Bureau is also considering “whether rules to require registration of these or other non-depository lenders would facilitate supervision”. The CFPB has targeted May 2017 for pre-rule activities.

CFPB Shines Its Light on Auto Finance in its Monthly Complaint Report

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.  This month’s report highlights consumer loans with auto lending playing the starring role.  The report provides some forecasting of areas regulators are likely to focus on in upcoming examinations and auto lenders, in particular, should take note.

 

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, credit reporting and mortgage.  If there is good news to be had, the Report indicates that debt collection complaints remained flat in a year to year comparison with 2015.  Student loans showed the most significant increase in volume over last year’s comparable period with an increase of 61%. Taking this into account, we are likely to see an increased focus on student lending issues in coming months.

 

This month’s report focuses on consumer loan products and in particular, auto finance. According to the Report and within the product category, vehicle loans comprise 52% of all complaints.  The Report indicates that: 

• The most common complaint received regarding auto loans is that consumers have difficulty managing their loans.  The report does not explain what in particular that means, but the complaints received are centered on payment processing issues, disputes as to balances, and repossessions without prior notification.
• The Report also notes that consumers are submitting complaints regarding warranty coverage on used vehicles.  It would not be surprising to see the Bureau at some point turn its attention to extended and third party warranty products.
• Another issue highlighted by the CFPB is concerns with the advertising practices at “Buy Here, Pay Here” dealerships.  Consumers are complaining about false and deceptive advertising centered on “no credit check” policies and promises to rebuild credit.

So What Are the Key Take Aways? The CFPB appears focused on the “unfair and deceptive” aspects of auto lending.  The CFPB is reporting that their analysis of the complaint data "shows consumers sometimes have difficulty understanding loan features during the loan negotiations" and find the terms of their financing "confusing".   Many Consumers Face Challenges in Understanding Auto Financing, Says New CFPB Report (June 27, 2016).  Lenders should keep in mind that the CFPB often relies upon the “unfair and deceptive” provision of Dodd Frank to regulate through enforcement actions. Based upon the Report and the “Know Before You Owe” campaign by the CFPB, it would not be surprising therefore to see the CFPB  focus in upcoming examinations on the manner in which payments are being processed, adequate disclosures as to the application of payments and repossession procedures and policies.  It would also not be surprising at some point focus to see some sort of mandated disclosures by the CFPB, particularly in the used vehicle setting and with respect to add on products.

 

 

CFPB Arbitration Rule: What You Need to Know

Last month, the CFPB issued its much anticipated and much dreaded proposed arbitration rules. In its own words, the CFPB proposes “rules that would prohibit mandatory arbitration clauses that deny groups of consumers their day in court.” The proposed rule includes 355 pages of justification prior to presenting the rule in a concise 10 pages. The content of the supplementary information appears to be a lengthy attempt to justify the rule as being in the “public interest” and “the protection of consumers”. The proposal bans covered entities from including arbitration clauses which ban class actions in contracts entered into 211 days after the publication of the final rule. 

The proposed rule comes as no surprise to anyone who read the CFPB’s 2015 arbitration report which was hugely critical of class action bans in arbitration clauses. The 2015 report attempted to make a case that few consumers ever bring individual actions against financial service institutions and that class actions provide a more effective means to challenge and deter prohibited financial service practices. Before publishing the proposed rule, the CFPB convened a Small Business Regulatory Enforcement Fairness Act (“SBREFA”) panel where it outlined its proposal. The proposed rule is virtually identical to the SBREFA proposal and ignores concerns raised by small entity representatives, including the concern that the proposed rule will encourage lengthy and expensive class actions over faster, less costly individual actions (a finding supported by the CFPB’s own 2015 Arbitration Report).

What You Need to Know
The Rule in a Nutshell. While the rule does not outlaw arbitration clauses in their entirety, it makes them considerably less desirable by prohibiting class action waivers and by requiring providers to report individual arbitration results to the CFPB. In a nutshell, the proposed rule has two parts. First, it prohibits covered providers of certain consumer financial products and services from using arbitration clauses to bar consumers from initiating or participating in class actions after the compliance date. Secondly, it places onerous reporting requirements on covered providers regarding their participation in arbitration proceedings and requires them to submit to the CFPB certain documentation, including: the initial claim and any counterclaim, a copy of the arbitration clause filed with the arbitrator, the judgment or award, if any, issued by the arbitrator, and certain communications with the arbitrator. The CFPB makes it clear it intends to “use the information it collects to continue monitoring arbitral proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action” and that it intends to publish the information on its website in some form.

What’s Covered? Contracts entered into 211 days after the final rule is published.

Who’s Covered? Almost all service products and services regulated by the CFPB would be subject to the new rules. Proposed 12 CFR 1040.3 includes consumer financial products including broadly the “extension of consumer credit”, as well as automobile leases, deposit accounts, debt management and settlement, check cashing and payment processing services, debt collection, credit reporting, and remittance transfers subject to the Electronic Funds Transfer Act. The rules do carve out certain exceptions for certain products provided by governmental entities, tribal governments providing products to consumers who reside in the tribe’s territorial jurisdiction and merchants and retailers under certain conditions when they are not acting as creditors.

Limitations on the use of Pre-Dispute Arbitration Agreements.  

• General Rule: Providers may not seek to rely in any way on a pre-dispute arbitration agreement entered into after the compliance date (more about that later) with respect to any aspect of a class action, including seeking a stay or dismissal unless and until the court has ruled that the case may not proceed as a class action and the decision of the court is final. Proposed 12 CFR 1040.4(a)(1).
  

• Required Language: To the extent providers continue to use arbitration clauses, they must contain the following provision in new contracts: “We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it.” Proposed 12 CFR 1040.4(a)(2)(i). Where the arbitration agreement covers multiple products, some of which may not be covered by the Rules, the provider may include this provision in place of the previous set forth clause: “We are providing you with more than one product or service, only some of which are covered by the Arbitration Agreements Rule issued by the Consumer Financial Protection Bureau. We agree that neither we nor anyone else will use this agreement to stop you from being part of a class action case in court. You may file a class action in court or you may be a member of a class action even if you do not file it. This provision applies only to class action claims concerning the products or services covered by the Rules.” Proposed 12 CFR 1040.4(a)(2)(ii).

• Pre-existing Arbitration Clauses: The proposed rule only applies to agreements entered into 211 days after the publication of the final rules; however, contracts that are transferred to third parties (for instance, portfolio sales) after the effective date of the rule would be covered. Additionally, there is a limited exception for general purpose reloadable prepaid cards that are on the shelf when the rule takes effect.  

With regard to assignees/transferees of accounts, they will be covered by the rule and required to amend the arbitration clause to include the required language or a standalone notice communicating the same information as set forth specifically in the regulations. See Proposed 12 CFR 1040.4(a)(2)(iii).

With regard to general purposes reloadable prepaid cards that are on store shelves as of the compliance date, the providers are bound by the class action waiver but may not be required to provide the notice if they provider does not have a means to communicate with the consumer. See Proposed 12 CFR 1040.5(b).

Reporting Requirements. For entities that continue to use arbitration agreements for individual actions, the proposed rule subjects them to onerous reporting requirements. Proposed 12 CFR 1040.4(b).

The proposed rules require the provider to submit copies of the following documents to the CFPB: 

• The arbitration demand and any counterclaim;
• The pre-dispute arbitration agreement filed with the arbitrator or arbitration administrator;
• The judgment or award, if any, issued by the arbitrator;
• If the arbitrator or arbitration administrator refuses to administer or dismissed the claim due to the provider’s failure to pay any required filing or administrative fees, a copy of the relevant communications received by the provider from the arbitrator or arbitration administrator;
• Any communications related to a determination that the arbitration agreement does not comply with the administrator’s fairness principles, rules or similar requirements.

Additionally, the provider is required to redact non- public personal information from the records prior to submission.

The CFPB also has indicated that it intends to use the collected information for further analysis and will publish it in some form.

Implications of the Rule.  

It is likely the rule will be challenged under Dodd Frank and early indications are that a fight may come from within Congress as well as private litigation. Section 1028(b) of Dodd Frank authorizes the CFPB to prohibit or impose conditions or limitations on the use of agreements between consumers and covered persons providing arbitration only if the CFPB finds that such a prohibition or limitation is in the public interest and for the protection of consumers. The problem for the CFPB is that its own study does not substantiate either finding. In its Report, the 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. Moreover, the CFPB Report supported a finding that arbitration is quicker and cheaper than class actions.

What should Covered Entities Do?
Taking in account the administrative procedures required, it is unlikely that a final rule will take effect until the second or third quarter of 2017. In the meantime, covered entities should review their loan products and assess the extent they rely upon arbitration clauses and prepare for a bifurcated system where existing contracts may have arbitration clauses which include class waivers and future contracts will not. Entities relying on arbitration clauses, with or without class waivers, should begin considering a compliance management system to insure all reporting requirements are met. To the extent covered entities are not employing arbitration provisions with class waivers and desire to do so, they should consider amending their contracts prior to the effective date of the final rule since agreements entered into prior to the effective date will be grandfathered under existing law. Finally, covered entities have until August 22, 2016 to submit comments regarding the rule. To the extent entities use arbitration provisions, with or without class waivers, they should consider commenting on the rule.

 

CFPB Issues Annual Fair Lending Report

The CFPB has issued its annual Report summarizing its fair lending activities in 2015. The Report is comprehensive and lays out not only the activities of the Bureau but also its methodology in reviewing fair lending issues. For those not familiar, the Dodd Frank Act established an Office of Fair Lending and Equal Opportunity within the CFPB and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equal, and nondiscriminatory access to credit for both individuals and communities.” In doing so, the Office’s two primary tools are the Equal Credit Opportunity Act (“ECOA”) and the Home Mortgage Disclosure Act (“HMDA”).

 

While much of the Report has been previously discussed in prior blog entries, the key takeaways for lenders are as follows:

 

• The Bureau uses a risk based prioritization process to focus their enforcement and regulatory efforts on markets or products that represent the greatest risk for consumers. The Report confirms the Bureau is currently honed in on four products:
•  Mortgage Lending. Mortgage lending is a priority for the Office and they continue to focus on the HMDA data to identify risks in the areas of redlining, underwriting and pricing. In 2015, the Bureau resolved two public enforcement actions involving mortgage lending. 
• Indirect Auto Lending. The Report confirms that the Office remains focused on indirect auto lending and is conducting auto finance targeted ECOA reviews which generally include examination of three areas: credit approvals and denials, interest rates quoted by the lender to the dealer (“Buy Rates”) and any discretionary markup or adjustments to the Buy Rate. In 2015, the Bureau resolved two public enforcement actions involving discriminatory pricing and compensation.  
• Credit Cards. The Report suggests that this is a product which is receiving increased fair lending scrutiny. The Report indicates that the Bureau is “focused in particular on the quality of fair lending compliance management systems and on fair lending risks in underwriting, line assignment, and servicing,” including the treatment of consumers who indicate a preference to speak Spanish. 
• Small Business Lending. The Report indicates that the Bureau has begun targeted ECOA reviews of small-business lending and is focused on the quality of fair lending compliance management systems and on fair lending risks in underwriting, pricing and redlining.
• The Bureau is conducting three types of fair lending reviews:
• ECOA Baseline Reviews. The CFPB uses ECOA Baseline Reviews to evaluate how well an institution’s compliance management system identifies and manages fair lending risks. To this end, the Bureau updated their Baseline Review Modules in the CFPB Supervision and Enforcement Manual.
• ECOA Targeted Reviews. The CFPB uses Targeted Reviews to evaluate areas of heightened fair lending risks and generally focus on a specific line of business, including those identified above.
• HMDA Data Integrity Reviews. The CFPB makes no bones about it. HMDA data is a primary tool used to identify redlining issues.
•  The Report also summarizes the Bureau’s pending investigations:
• Mortgage Lending. The Report makes it abundantly clear that mortgage lending is among the Bureau’s top priorities and has focused its fair lending enforcement efforts on redlining practices. Currently, the Report indicates that it has a number of authorized enforcement actions in settlement negotiations and pending investigations.
•  Indirect Auto Finance. Similarly, the Bureau has prioritized discrimination resulting from discretionary loan pricing. The Report indicates the Bureau currently has a number of pending enforcement actions and several authorized enforcement actions in settlement negotiations.
• The Report also summarizes the new HMDA rule and indicates that the Bureau is in the pre rulemaking stage with respect to developing rules as to the collection of small business lending data as required by the Dodd Frank Act.

Cordray Confirms Activity in Rulemaking

In his prepared remarks to the Consumer Bankers Association last week, Richard Cordray provided a laundry list of regulatory and rulemaking activities currently being undertaken by the CFPB.  For those keeping track:

• Cordray's remarks suggest that a final proposed rule regarding prepaid accounts in imminent;
• Likewise, a notice of proposed rule concerning pay day loans and other small dollar loans will be published in the coming moths;
• Likewise, the CFPB is preparing to issue a notice of proposed rulemaking on the use of arbitration clauses in consumer finance contracts;
• Cordray's remarks also confirmed activity regarding the incidence and transparency of overdraft fees;
• Cordray acknowledged that the CFPB is focused on debt collection but his remarks were oddly silent as to the status of the CFPB's efforts in that regard;
• Cordray also acknowledged that the CFPB has begun working to establish a rule governing the collection and publication of data on small business lending;
• Cordray's remarks also confirmed the CFPB is actively engaged in working to improve the credit reporting market and more specifically, is focused on the accuracy of screening processes used  by depository institutions; and
• Finally, Cordray confirmed the CFPB's continued partnership with the Department of Justice to "identify and stamp out discrimination in auto lending practices."

While providing no hard timelines, Cordray at least confirmed the current priorities of the CFPB regulatory agenda.  For those keeping track, the CFPB's fall rulemaking agenda had anticipated a Notice of Proposed Rulemaking concerning payday lending in early 2016 with a target date of February. 

CFPB Supervisory Highlights Hone in on Credit Reporting and Student Loan Servicing

The CFPB published its Winter Supervisory Highlights last week, highlighting examinations across various financial products that were conducted between September 2015 and December 2015.  The Report highlights key findings made by the CFPB and provides insight into the current focus of examiners.  The Report makes clear that the CFPB remains concerned with credit reporting issues involving depository accounts and that supervision of the student loan servicing market remains a priority.  The Report also makes clear that where there is no specific regulatory authority, the CFPB will fall back on its UDAAP (unfair and deceptive practices) umbrella to regulate as it deems necessary.  Good news for debt collectors and mortgage servicers, the primary focuses of the Report are credit reporting and student loan servicing. The CFPB noted the following issues worthy of mention:

CREDIT REPORTING DEPOSITORY ACCOUNTS

• Banks and Credit Unions continue to struggle with accurately furnishing information to nationwide specialty consumer reporting agencies and specifically, with regard to depository accounts.  As we indicated in a prior blog post, the CFPB continues to be concerned with the furnishing and reporting of information related to deposit accounts.  The Report again emphasizes the need for banks and credit unions to implement reasonable written policies and procedures regarding the accuracy and integrity of the information they are furnishing as to deposit accounts and promptly update information they determine is incomplete or inaccurate.
• The Report also indicates that examiners are concerned that specialty consumer reporting agencies are not adequately overseeing furnishers.

DEBT COLLECTION

• Debt collectors may want to review their data migration systems and employee training regarding cease and desist requests.  The Report notes that examinations found at least one debt collector who contacted consumers after receiving written cease and desist requests.  The report attributed the failure to data migration errors and from mistakes during manual data entry.
• The Report also noted that specific to student loan collection, their examiners found in at least one examination, debt collectors falsely threatening garnishment. 

STUDENT LOAN SERVICING

• As to student loan servicers, the Report makes clear that student loan servicing is going to be an emphasis for the CFPB in coming months.  According to the CFPB news release, “[t]he CFPB has made it a priority to police this market so that borrowers ae not treated unfairly or illegally dead-ended into default.” Significant to the Report:

o   The CFPB examiners found unfair practices in violation of Dodd Frank where one or more servicers auto defaulted both the borrower and the co-borrower if the other filed bankruptcy.  The CFPB concluded that the “auto-defaults were unfair where the whole loan due clause was ambiguous on this point because reasonable consumers would not likely interpret the promissory notes to allow their own default based on a co-debtor’s bankruptcy.”  Supervisory Highlights, p. 16 (10^th Ed. Winter 2016).

o   The CFPB identified issues with loan conversions, suggesting that interest rates were migrated inaccurately by some loan servicers.

o   The CFPB identified weaknesses with loan servicers’ policies and procedures for credit reporting.  Particularly, the CFPB examinations noted insufficient policies and procedures regarding record retention, internal controls, audits and testing, and technology to furnish information accurately to consumer reporting agencies.

Banks and credit unions should pay close attention to the volume of comments being provided by the CFPB concerning credit reporting and depository accounts.  This is the second consecutive Supervisory Highlight edition to note the issue and the CFPB has additionally issued a Compliance Bulletin this year on the subject.

CFPB Enters Consent Order with Buy Here Pay Here Auto Dealer

In its first enforcement order of the year, the CFPB took aim at the financing practices of a buy here pay here auto dealer.  “Buy here pay here dealers” sell the car and originate the auto loan without selling it to a third party.

The CFPB in its press release noted the dealer engaged in abusive financing schemes, hid auto finance charges and misled consumers.  The consent order requires the dealer pay $700,000.00 in restitution to consumers and levies a civil monetary penalty of $100,000.00 on the dealer.  The civil penalty has been suspended based upon the dealer’s inability to pay.  Additionally, the CFPB once again sets forth specific remediation requirements which should be reviewed carefully and considered by the auto finance industry.

According to the findings, which are set forth in the Consent Order and are neither admitted nor denied by the dealer, the dealer sold used cars and provided onsite financing to consumers.  According to the Consent Order, 98% of all purchases were financed onsite and over a two year period, the dealer offered approximately 1000 people financing/year.  The dealers’ practices were such that consumers filled out credit applications prior to being shown any cars.  Once the dealer determined the monthly payment the consumer could afford, the consumer was shown a car in the dealer’s inventory which met the monthly payment ability of the consumer.  None of the cars on the lot displayed purchase prices and the purchase price was not disclosed to the consumer until after the consumer had test driven the car and was ready to purchase the car.  Additionally, the dealer required that, as a condition to providing financing, the consumers agree to purchase a $1,600.00 service contract and a $100.00 GPS payment reminder device.  It was additionally the dealer’s practice to not negotiate the price of the car with finance customers; however, the dealer did negotiate purchase prices with cash customers.  Put simply, customers who obtained financing were treated differently by being required to pay full price, purchase a service contract and a GPS reminder device. 

Pursuant to the Consent Order, the dealer violated the Truth in Lending Act, as well as the Dodd Frank UDAAP provision as follows:

• The amounts charged for the service contract and GPS payment reminder device were finance charges because they were charges payable directly or indirectly by the consumer and imposed by the creditor as an incident or condition of the extension of credit. By requiring credit consumers to purchase the same but not cash consumers, the dealer imposed a finance charge and therefore needed to disclose the same as a cost of credit.  By failing to do so, the dealer’s inaccurately disclosed the finance charges and APR;
   
• The CFPB additionally considered the fact that credit customers were required to pay the full price of the car but cash customers were often provided with discount purchase prices to mean credit customers essentially paid a markup and the same should have been disclosed as a finance charge and APR;
   
• The dealer’s advertised APR was inaccurate as a result of its failure to take into account the costs of the required service contract, payment reminder device and “markup”; and
• The dealer’s failure to post sticker prices or disclose the asking price until the consumer indicated it would purchase the car, coupled with the TILA disclosure violations set forth above, resulted in an unfair and deceptive practice because it “lured consumers with misleading advertising and then kept them in the dark about the true cost of financing the cars they were purchasing.”

Auto dealers should review the Consent Order and take note of several points:

• The relative scope of the violation was minimal: 2,000 loans over a two year period and yet, the Consent Order requires $700,000.00 in restitution.  The clear indication is that the CFPB is not limiting its focus to large players but also is focused on particular practices;
   
• Required charges are finance charges for purpose of the Truth in Lending Act and should be disclosed as such;
   
• The remediation provisions of the Consent Order should be considered as a likely expectation of the CFPB moving forward and require:
   
  • Purchase prices be clearly and prominently displayed on all vehicles available for for sale; and
     
  • The dealer provide an initial disclosure and receive a written acknowledgement of the disclosures prior or simultaneous with offering a car to the consumer or soliciting a commitment from the consumer to purchase:
    • The make, model and VIN of the vehicle;
    • The duration of the retail installment contract
    • The timing, number and dollar amount of periodic payments;
    • The total number of payments required before the consumer acquires full ownership of the vehicle;
    • The purchase price;
    • The finance charge;
    • An itemization of any additional products to be included in the financing transaction; and
    • The APR

Buy here pay here dealers are encouraged to review their current policies and procedures in light of the Consent Order and adjust their practices accordingly.

CFPB’s Supervisory Highlights Reveals Continued Problems with the Servicing of Student Loans (Part 2)

The CFPB published its Fall Supervisory Highlights this week, highlighting examinations across various financial products that were conducted between May 2015 and August 2015.  The Report highlights key findings made by the CFPB and provides insight into the current focus of the examiners.  The current edition of Highlights indicates that problems continue with the servicing of student loans.

Aside from the credit reporting issues we highlighted in a prior post, the Report highlighted specific concerns:

• Examiners continue to be concerned with the issue of partial payments.  The Report notes that examined entities are “depriving consumers of an effective choice as to how to allocate” partial payments. Specifically examiners found that:
  • Servicers were allocating partial payments over multiple loans, leaving all loans delinquent, and not communicating the ramifications of this to affected consumers; and
  • Servicers failed to inform consumers that they could specifically direct how payments were to be applied.
• Examiners noted issues with the manner in which servicers’ systems were processing payments including malfunctions where automatically debit payments were being triggered prior to the due date
• Examiners also raised concerns with auto debited payments in instances where the due date fell on a date the bank was closed.  In these instances where the payment is not processed until the next business day, additional interest accrues.  The CFPB contends this gives rise to two unfair and deceptive practices by the servicer:
  • first, the CFPB is imputing upon the servicer a duty to notify consumers that this may occur; and
  • secondly, the CFPB is imputing a duty on the servicer if no notification is provided to the consumer, then the servicer must credit the payment back to the due date.
• Examiners also found that servicers in certain instances are making false representations to consumers in bankruptcy concerning whether or not their student loans will be discharged in bankruptcy.  The CFPB continues to note that student loans may be discharged if the debtor can establish an undue hardship.
   

The Report serves as a continued reminder that that CFPB is imposing additional duties toward consumers by servicers under the “guise” of unfair and deceptive practices.  The application of payments continues to be a focus for regulators and servicers should carefully examine their policies and procedures to ensure that a robust compliance management system is in place.

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.