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  • Debt Collection and Beyond in 2015

    Consumer Finance

    Aaron-Mahler Walt-Zalenski

     

    In 2015, the CFPB further expanded its reach into debt collection through a number of enforcement actions. The CFPB also continues to conduct research on a potential rulemaking regarding debt collection activities, which may address information accuracy concerns involving debt sales and other collection activity, as well as many other issues regarding how creditors collect their own debts and oversee collectors working on their behalf. In addition to CFPB activity, this year’s Madden v. Midland Funding, LLC decision has important implications beyond the debt collection industry. Finally, developments regarding the Telephone Consumer Protection Act (TCPA) and collections will likely be of interest to regulatory agencies in the new year.

    Debt Sale Consent Orders and Regulatory Guidance

    Among the CFPB enforcement actions relevant to debt collection in 2015 were two consent orders with large debt buyers. These orders resolved allegations that the debt buyers, among other things, engaged in robo-signing, sued (or threatened to sue) on stale debt, made inaccurate statements to consumers, and engaged in other allegedly illegal collection practices. In particular, the CFPB criticized the practice of purchasing debts without obtaining supporting documentation or information, or taking sufficient steps to verify the accuracy of the amounts claimed due before commencing collection activities. Under the consent orders, one company agreed to provide up to $42 million in consumer refunds, pay a $10 million civil money penalty, and cease collecting on a portfolio of consumer debt with a face value of over $125 million. The second company agreed to provide $19 million in restitution, pay an $8 million civil money penalty, and cease collecting on a consumer debt portfolio with a face value of more than $3 million. In addition, both companies agreed to refrain from reselling consumer debt more generally.

    The Office of the Comptroller of the Currency’s (OCC) has also been active in issues affecting debt sales, issuing Bulletin 2014-37.  The Bulletin provides guidance requiring national banks to provide the consumer with notice that a debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer; perform due diligence on the debt buyer; provide the debt buyer with the signed debt contract and a detailed payment history; and take other measures designed to ensure that debt buyers fairly and appropriately collect debts that they purchase.

    Madden v. Midland Funding, LLC

    The Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC carries potentially far-reaching ramifications for the secondary market for credit. In this case, the court held that non- bank assignees of credit obligations originated by national banks are not entitled to rely on National Bank Act preemption from state-law usury claims.  In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle which provides a loan that is not usurious when made does not become usurious when assigned to another party.  Since buyers of defaulted debt, securitization vehicles, hedge funds, and other purchasers of whole loans are often non-bank entities, this decision could create a heightened risk environment for those in the secondary credit market, particularly those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to the peer-to-peer and marketplace lending industries and various types of on-line consumer credit. The Second Circuit decided not to rehear Madden and the defendants have filed a writ of certiorari to the Supreme Court. Bank sellers of loans and related assets and non-bank assignees of bank-originated credit obligations would be prudent to consider the risks that Madden poses to their business, investments, and operations and whether there are risk mitigation measures that may be available.

    Telephone Consumer Protection Act

    Recent declaratory rulings by the Federal Communications Commission regarding the TCPA included clarifying the ability of consumers to revoke their consent to receive autodialed calls and requiring callers making autodialed calls to stop calling a number after one call when it has been reassigned to a new subscriber.  Debt collectors and others should take note of these issues, as TCPA compliance will likely continue to be an area of interest for regulators moving forward.

    TCPA Debt Collection John Redding Aaron Mahler Walter Zalenski Madden

  • Spotlight on Student Lending (Part 2 of 2): Lessons Learned from CFPB Reports

    Consumer Finance

    In 2012 and 2013, the Consumer Financial Protection Bureau released several major reports and held field hearings focused on private student lending and servicing. In addition to recent CFPB activity, on June 25, 2013, the Senate Banking Committee held a hearing regarding private student loans at which, among other witnesses, the CFPB’s Student Loan Ombudsman Rohit Chopra testified.

    The largest CFPB report, and the one most sweeping in scope, was the Bureau’s study of the private student loan market and characteristics of private student loans that was mandated by Dodd-Frank and issued in July 2012 (Private Student Loans Report). In addition, in October 2012, the Student Loan Ombudsman issued his Annual Report in which, among other things, he characterized the nature of the student loan complaints received through the CFPB’s student loan complaint portal up to that point (Annual Report of the Student Loan Ombudsman). Further, on May 8, 2013, the CFPB issued another report and held a field hearing focused on what it described as the “potential domino effect” of student loan debt on the broader economy and proposing several options to assist private student loan borrowers. Finally, testimony at the above-referenced Senate Banking Committee hearing focused largely on how to increase the low refinancing and modification activity in the private student loan (PSL) market. 

    Taken together the Bureau’s reports, field hearings, and Congressional testimony put student lenders and servicers on notice that the Bureau will be looking closely at servicing issues, including loan modification and debt collection practices, as well as fair lending and likely fair servicing issues going forward, i.e., consistency in loan modifications and work outs.

    With respect to the Private Student Loans Report, the report made clear that, in the fair lending space, the Bureau intends to scrutinize the use of cohort default rate (a statistic calculated by the Department of Education and used to determine which schools will be eligible to participate in federal student aid programs) as an eligibility metric. Likewise, the report recommends that lenders obtain school certification of the student’s education costs to prevent over borrowing.

    As for the Annual Report of the Student Loan Ombudsman, from the Bureau’s perspective, the report likely validates the agency’s growing concern over student loan servicing insofar as the three main areas of consumer complaints described in the report are all focused in that area:  general servicing concerns, concerns about payment processing, and concerns about inability to obtain loan modifications. The report draws parallels between problems in student loan servicing and those in mortgage loan servicing. For example, the report describes consumer complaints focused on the misapplication of payments, untimely error resolution and consumer difficulty in contacting appropriate personnel (all areas that have been a focus in the mortgage servicing space). So evident were the similarities in the eyes of the CFPB that its student loan ombudsman, Rohit Chopra, urged the Treasury secretary, the CFPB and secretary of education to consider whether mortgage servicing program “fixes” can be applied in the student loan context.

    To this end, the Bureau has been sharpening its focus on repayment options in the private student loan market, with signals pointing perhaps to possible new rules setting student loan servicing standards.  However, in the meantime, the Bureau has taken some notable steps.  First, on February 21, it issued a notice and request for information on policy options to “increase the availability of affordable payment plans for borrowers with existing private student loans.  Over 30,000 comments have been received.  In addition, on May 8, as mentioned earlier, the Bureau proposed several policy “solutions” to assist student loan borrowers, such as providing “refi relief” for borrowers who have made timely payments, providing a “road to recovery” for borrowers by allowing their loans to be restructured, and providing a “credit clean slate” for borrowers who satisfy the terms of a workout plan.  Importantly, though, the Bureau conceded that there are still significant accounting and operational impediments to implementing these “solutions” that require further consideration.

    In light of the Bureau’s reports, field hearings, and other public statements, we advise private student lenders focus now on tightening internal controls with respect to fair and responsible lending issues as well as servicing and debt collection practices as those will areas of primary focus by the Bureau in examinations and otherwise going forward.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

  • Spotlight on Student Lending (Part 1 of 2): Facing Increased Regulatory Scrutiny, Student Loan Lenders Prepare for CFPB Examinations

    Consumer Finance

    Currently, total outstanding student debt (both federal loans and private loans) has risen to roughly $1.1 trillion dollars. That figure represents an over 50% increase since 2008 and makes student loans the largest source of unsecured consumer debt – surpassing credit cards. At the same time, at least with respect to federal student loans, delinquencies have risen sharply during the same time period and, with unemployment rates for recent graduates still high by historic standards, the risk of continued high delinquency rates remains significant. Complicating matters is that student loan servicers, and servicers of private student loans in particular, have limited ability vis-à-vis a mortgage lender to modify those loans for borrowers in default.

    Not surprisingly, given this backdrop, borrowers have lodged complaints with the Consumer Financial Protection Bureau (CFPB or Bureau) focused on their inability to obtain loan modifications, concerns about improper payment processing, and concerns about servicers’ debt collection practices. All of these factors have prompted the Bureau to draw comparisons to the recent mortgage servicing crisis and to increase focus and attention on the student lending and servicing industry in an effort to stave off a problem of those proportions.

    In addition, the Bureau has focused its attention within student lending and servicing on other, more traditional areas of regulatory concern.  For example, the Bureau in the past year indicated it intends to closely scrutinize student lenders on fair lending issues – especially the use of non-credit bureau attributes such as cohort default rate – as well as unfair, deceptive, or abusive trade practices.

    For non-bank private student lenders, regulation by the CFPB represents a significant increase in the type of regulatory scrutiny to which lenders have traditionally been subject.  Even for large bank student lenders, which have long been subject to examinations by their prudential regulators, CFPB regulatory oversight will present new challenges insofar as the Bureau’s focus is solely on consumer protection and compliance and it has made clear that understanding and regulating private student lending is one of its high priorities.

    Here are several steps that student lenders and servicers can take now to proactively mitigate risk in the current environment, including:

    1. Developing, implementing and, as applicable, updating fair and responsible lending programs (including training of key employees in this area)
    2. Conducting periodic fair lending and UDAAP risk assessments
    3. Conducting gap analyses of collections and servicing practices to ensure compliance and CFPB readiness

    It bears emphasizing that the future likely holds increased regulatory scrutiny, especially from the Bureau and especially in the area of student loan servicing and debt collection. Private student lenders will also see increased scrutiny with respect to fair and responsible lending compliance, including their use of non-credit bureau attributes in underwriting and pricing and their marketing practices, e.g., how borrowers are solicited and whether a lender uses different marketing efforts based on loan products, such as those specific to a particular major, school, or geography.

    In December 2012, the Consumer Financial Protection Bureau released their student loan examination procedures, and since doing so, has commenced several examinations of bank and non-bank private student lenders. Lenders will have to show compliance with a variety of federal laws applicable at various stages (called modules) of the lending process and will be examined for potentially unfair, deceptive or abusive acts and practices.

    The procedures indicate that exams will be composed of several modules:

    1. Advertising, marketing and lead generation
    2. Application, qualification, loan origination, and disbursement
    3. Repayment and account maintenance
    4. Customer complaints
    5. Collections and credit reporting
    6. Information sharing and privacy

    The CFPB’s examination personnel will review the lender’s organizational documents and process flowcharts, board minutes, annual reports, management reports, policies and procedures, rate and fee sheets, loan applications, account documentation, notes and disclosures, file contents, operating checklists and worksheets, computer system details, due diligence and monitoring procedures, lending procedures, underwriting guidelines, compensation policies, audit reports and responses, training materials, service provider contracts, advertisements, and complaints. Examiners may also interview the lender’s personnel and observe customer interactions.

    Examiners will review potential legal and regulatory violations in modules roughly corresponding to the processes by which education loans are developed, marketed, originated and serviced, and the processes for handling consumer complaints, delinquencies and defaults, credit reporting and privacy protection. The examination process is intended to help the CFPB determine whether consumer financial protection laws have been violated and, if so, whether supervisory or enforcement actions are warranted.

    BuckleySandler advises student lenders to prepare for a CFPB exam by carefully reviewing the Bureau’s examination procedures, reports, and other public statements concerning student lending and servicing. We also recommend conducting a gap analyses between those materials and existing policies and procedures, and as appropriate, filling any identified gaps.

    Questions regarding the matters discussed above may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

    CFPB UDAAP Student Lending Andrew Louis Jeffrey Naimon Aaron Mahler Sasha Leonhardt

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