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House Financial Services Committee sends letter to trade associations regarding responses to Covid-19
On March 11, the House Financial Services Committee issued a letter to several institutions and trade associations stating its concern for citizens impacted by the pandemic in which it urged them to provide assistance. In doing so, it said that “[i]t would be unfair if innocent borrowers were harmed through negative information on their consumer reports. Once negative information is reported to consumer reporting agencies, these consumers are likely to see a reduction in their credit scores, which may limit their ability to access credit in the future.” The letter asked the entities to provide a written response no later than March 20 to describe what their member companies are doing to respond to Covid-19, including specifics on what accommodations the institutions are offering to affected consumers, including their own employees.
FTC reaches settlements with affiliate marketers
On March 5, the FTC announced settlements with four groups of affiliate marketers that, among other things, allegedly violated the FTC Act by using deceptive marketing tactics and earnings claims to persuade consumers to pay thousands of dollars each for business coaching and investment “mentoring” services. The FTC alleged in the first complaint that certain defendants sold membership packages for an online business coaching scheme, and then, when the business coaching scheme went out of business, created their own branded programs and systems that claimed consumers would be able to start their own online marketing businesses and earn substantial income. The defendants also allegedly encouraged consumers to open multiple credit lines to finance the purchases of these programs. The FTC claimed that the defendants “used straw signers and shell companies and provided banks and payment processors with ‘dummy’ websites to evade scrutiny by bank underwriters and obtain multiple merchant accounts to process credit card payments from consumers.” According to the FTC’s second complaint, the other defendants made deceptive earnings claims in order to recruit consumers into the now-defunct business coaching scheme and earned millions of dollars as a reward. In both complaints, the FTC claimed that most consumers who purchased the products suffered large losses and mounting debts.
Under the terms of the settlements, each of the defendants is permanently banned from selling or marketing any business coaching programs or money-making methods, and must pay judgments of (i) $3.35 million to be paid in full for potential consumer redress (order here); and (ii) monetary judgments totaling $38.1 million, which will be partially suspended due to the defendants’ inability to pay (orders here, here, and here).
Senate Democrats ask Office of Civil Rights to address student lending racial disparities
On February 27, Senators Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Cory Booker (D-NJ) sent a letter to the Department of Education’s Office of Civil Rights (OCR) asking how the office plans to address reports of racial disparities within the federal student loan industry. The letter discusses OCR’s responsibility for enforcing civil rights laws that prohibit discrimination in Department-funded programs and activities, including student aid funding, and notes that OCR also bears the responsibility for examining the role federal student loan contractors may play in racial disparities faced by students of color after they leave their institution of higher learning. The Senators claim that for-profit colleges “disproportionately target students of color and often leave them deep in debt while providing little education value in return.” The Senators also cite new Department data, which shows that “despite using [income-driven repayments] at a much higher rate than other borrowers with the same level of education, Black student borrowers continued to have a higher default rate than their peers, regardless of the type of institution they attended.” Latino and Native student borrowers are also affected by these racial disparities, the letter notes.
Among other things, the Senators request the following from OCR by March 26:
- Provide a summary of all current and ongoing actions, including enforcement actions, that OCR has taken since January 2017 to address racial disparities in student loan borrowing and outcomes;
- Conduct a comprehensive investigation into the ways predatory colleges and the student loan industry contribute to racial disparities, such as through servicing and debt collection practices, access to repayment plans, and debt cancellation options for borrowers of color; and
- Develop a plan to address racial disparities in the student loan industry, including legislative recommendations and new policy guidance to entities involved in the industry.
FTC paper discusses small business financing issues
On February 26, the FTC released a staff perspective paper covering topics discussed during the Commission’s “Strictly Business” forum on small business financing held in 2019, as well as an online tool for small businesses to submit lending- or financing-related complaints. As previously covered by InfoBytes, the forum heard from members of the small business marketplace who discussed the recent uptick in online loans and alternative financing products, and analyzed the potential for unfair and deceptive marketing, sales, and collection practices in the industry. The staff paper provides an overview of key issues discussed during the forum, as well as enforcement information, recent small business financing marketplace trends, potential benefits and risks of newer online financing products, and consumer protection issues associated with merchant cash advances. Among other things, the staff paper emphasized that “small business finance providers should avoid the sorts of practices that the Commission has alleged to be deceptive” in its enforcement actions involving either small business consumers or individual consumers, such as actions charging lenders with making “misleading claims regarding fees, consumer savings, payment amounts, and interest rates” in connection with personal loans. The staff paper also stressed that finance providers should understand that using marketing intermediaries, such as brokers and lead generators, “does not immunize them from liability under the FTC Act,” and that finance providers “should take steps to ensure that their marketers do not engage in deceptive or other unlawful conduct.” Small business consumers, the staff paper noted, would also likely benefit from more uniform and easily understood financing disclosures in order to compare costs and product features in the small business marketplace.
CFPB denies tribal lenders’ joint request to set aside CIDs
On February 18, the CFPB released a Decision and Order denying a joint request to set aside civil investigative demands (CIDs) issued in 2019 to four online installment lenders owned by a federally recognized Indian tribe, as well as a processing services company. The CIDs in dispute were issued to the petitioners last October and sought information “to determine whether lenders or associated individuals or entities have violated the Consumer Financial Protection Act’s (CFPA) prohibition on unfair, deceptive, and abusive acts and practices [(UDAAP)] by collecting amounts that consumers did not owe or by making false or misleading representations to consumers in the course of servicing loans and collecting debts.” As previously covered by InfoBytes, four of the petitioners were also part of a 2017 CFPB enforcement action, which alleged that the lenders’ practices violated UDAAP and the Truth in Lending Act. This action was voluntarily dismissed without prejudice in 2018 (covered by InfoBytes here).
According to the CFPB, the joint petition to set aside or modify the CIDs sets out five primary arguments: (i) the CFPB “lacks authority to investigate entities that are arms of a tribe”; (ii) the lenders cannot comply with the CIDs without violating a protective order issued by the Tribal Consumer Financial Services Regulatory Commission; (iii) “the CIDs lack a proper purpose”; (iv) “the CIDs are overly broad and unduly burdensome”; and (v) the CIDs should be withdrawn or stayed pending the U. S. Supreme Court’s ruling in Seila Law LLC v. CFPB about whether the structure of the CFPB is unconstitutional.
The CFPB’s denial of the petitioners’ request addresses each of the arguments. First, it rejects that it lacks authority to investigate “arms of a tribe” based on, among other things, a Ninth Circuit case holding that the CFPA applies to tribal businesses and numerous cases holding that tribes “do not enjoy sovereign immunity from lawsuits brought by the federal government.” Second, while noting the CFPB’s “utmost respect” for, and desire to coordinate with, state and tribal regulators, the agency is not required to coordinate with such regulators before carrying out its responsibility to investigate potential violations of federal consumer law. Third, with respect to whether the CIDs have a proper purpose, the CFPB asserts, among other things, that the dismissal of the earlier lawsuit does not preclude it from bringing future actions, and moreover, even if some of the requested information relates to potentially time-barred conduct, it does not undermine the overall validity. Fourth, concerning the petitioners’ claims that the CIDs are overbroad or unduly burdensome, the CFPB states that the petitioners did not meaningfully engage during the meet-and-confer-process and have not adequately specified or identified how or why the CIDs would be unduly burdensome. Finally, regarding the constitutional issue, the CFPB notes that it has consistently stated that “the administrative process set out in the [CFPB’s] statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the [CFPB’s] statute.” The CFPB directs the petitioners to comply with the CIDs within 30 days of the order.
Fed governor discusses modernizing payment systems for community banks
On February 27, Federal Reserve (Fed) Governor Michelle W. Bowman spoke before the Banking Outlook Conference held at the Federal Reserve Bank of Atlanta on ways the Fed can increase transparency and modernize payment services for community banks. Bowman stated that the Fed is “uniquely positioned as a provider of payment services and as a supervisor of banks to ensure that our nation’s evolving financial system works for community banks.” Bowman discussed how the Fed can achieve this objective by, among other things, (i) adopting an additional same-day automated clearinghouse (ACH) window, which “will allow banks and their customers, particularly those located outside the eastern time zone, to use same-day ACH services during a greater portion of the business day”; (ii) implementing FedNow, which would, as previously covered by InfoBytes, “facilitate end-to-end faster payment services, increase competition, and ensure equitable and ubiquitous access to banks of all sizes nationwide”; and (iii) encouraging partnerships between community banks and fintech firms to “leverage the latest technology to provide customer-first, community-focused financial services and provide customers with efficiencies, such as easy-to-use online applications or rapid loan decisionmaking.” Bowman highlighted the Fed’s fintech innovation office hours, as well as the Fed’s recently launched fintech innovation webpage (covered by InfoBytes here), and emphasized the Fed’s desire to hear directly from banks and fintech companies on innovation challenges.
With respect to third-party service providers, Bowman proposed several important initiatives for the Fed to help community banks effectively manage their third-party relationships and access innovative new technology. These include providing clear, consistent due diligence guidance on third-party relationships to provide uniform standards that are aligned with guidance issued by the OCC and other banking agencies. Bowman also suggested increasing the transparency of its third-party supervisory program by releasing information that may be useful about key service providers to community banks, and tailoring regulatory burdens for community banks with assets under $1 billion.
FDIC releases January enforcement actions
On February 28, the FDIC released a list of administrative enforcement actions taken against banks and individuals in January. The FDIC issued 18 orders, which “consisted of two consent orders; one civil money penalty; three removal and prohibition orders; eight section 19 orders; three terminations of consent orders and cease and desist orders; and one order terminating prompt corrective action.” Among the actions was a civil money penalty assessed against a Montana-based bank for allegedly violating the Flood Disaster Protection Act by failing to obtain adequate flood insurance coverage on certain loans and failing to provide borrowers with notice of the availability of federal disaster relief assistance. Separately, in a joint action with the California Department of Business Oversight, the agency issued a consent order against a California-based bank related to alleged weaknesses in its Bank Secrecy Act and anti-money laundering (BSA/AML) compliance program. Among other things, the bank was ordered to (i) retain qualified management to ensure compliance with applicable laws and regulations; (ii) “correct all violations of law to the extent possible”; (iii) implement a revised, written BSA compliance program to address BSA/AML deficiencies; (iv) establish a written Customer Due Diligence Program to ensure the reasonable detection of suspicious activity and the identification of higher-risk customers; (v) adopt a process for reviewing transaction monitoring alerts; and (vi) “ensure that suspicious activity monitoring system is independently validated.”
CFPB holds symposium on consumer access to financial records
On February 26, the CFPB held a symposium covering consumer access to financial records and Section 1033 of the Dodd-Frank Act, which deals with consumers’ rights to access information about their financial accounts. In her opening remarks, Director Kathy Kraninger pointed out three major changes in data aggregation since the OCC first warned banks about aggregating consumer data in 2001: (i) “the range of actors involved has expanded greatly”; (ii) “the extent to which they are using aggregated data to provide new products and services to millions of American consumers has grown in scope and scale”; and (iii) “technologies that enable safer and more efficient consumer authorized data sharing continue to evolve and proliferate.” According to the CFPB’s press release, the purpose of this symposium was “to elicit a variety of perspectives on the current and future state of the market for services based on consumer-authorized use of financial data.” The symposium consisted of three panels: (i) the current landscape and benefits and risks of consumer-authorized data access; (ii) market developments; and (iii) considerations for policymakers. Panel highlights include:
- Panel #1. The panelists considered potential benefits and risks for consumers around data access as well as the current landscape and benefits and risks of consumer-authorized data access. Panelists agreed that consumers should be given control over their data and also mentioned the need to educate consumers on data security. One panelist suggested that consumers need to understand not only the breadth of data that is accessible, but also what sensitive consumer data is being accessed, stored, and shared. She stressed that entities storing/accessing the data should be subject to the same supervision for cyber security standards as banks.
- Panel #2. The panel, which was comprised of experts in market developments and trends, including in the areas of cash flow underwriting and the business of securing consumer permission to access checking account data, discussed market developments in consumer-authorized data access. One panelist suggested that the U.S. is behind countries like Australia and Canada (where government intervention in the market clarified consumers’ legal right to access their financial data) because of a lack of connectivity and of data field availability in the U.S. Others discussed alternatives to the current screen scraping model—which does not advance transparency or traceability for consumers—such as a model based on an application program interface (API) (APIs can be used to combine data from various sources into one application). The panelists also discussed tokenized authentication as a possible middle phase when going from screen scraping to APIs. Panelists suggested that the market is making significant technological improvements, but lacks guidance from policymakers.
Panel #3. The third panel, focused on “where we are going and how we get there” or the “future of the market” and “considerations for policymakers on how to” ensure consumer data is safeguarded “while ensuring that consumers have continual access to their data.” Among other things, the panel discussed that regulatory intervention in this space has not been common. Many panelists also mentioned areas of uncertainty, including whether banks or consumers should decide the limitations of rights to consumer data. Regarding Section 1033, one panelist suggested that the bank view is that the CFPB does not need to regulate here and should not provide consumers and their agents with access to their information, however, any entities that have access to the data should be regulated. Others believed that banks and other financial institutions do not view Section 1033 correctly. Another area of uncertainty discussed was whether the consumer data right is an ownership right, and whether a bank can decide to whom it will or will not provide consumer data.
DOJ, SEC settle with national bank for $3 billion over sales-compensation practices
On February 21, the DOJ and SEC announced that one of the nation’s largest banks agreed to a settlement including a $3 billion monetary penalty to resolve investigations regarding their incentive compensation sales program. (See the DOJ’s Statement of Facts here). As previously covered by InfoBytes, the OCC also recently issued charges against five of the bank’s former executives, and announced settlements with the former CEO and operating committee members for allegedly failing to adequately ensure that the bank’s sales incentive compensation plans operated according to policy.
The SEC alleged in its Cease and Desist order that the bank violated the antifraud provisions of the Securities Exchange Act of 1934. The SEC’s press release states that in addition to agreeing to cease and desist from committing any future violations of the antifraud provisions, the bank agreed to a civil penalty of $500 million, which the SEC will return to harmed investors.
The bank also settled the DOJ’s civil claims under the Financial Institutions Reform, Recovery and Enforcement Act. According to the settlement, the bank accepted responsibility, cooperated in the resulting investigations, and has taken “extensive remedial measures.” In addition, the DOJ’s press release states that it entered into a three-year deferred prosecution agreement with the bank regarding the bank’s sales incentive compensation practices.
CFPB denies debt collection law firm’s request to set aside CID
On February 10, the CFPB denied a debt collection law firm’s request to modify or set aside a third-party Civil Investigative Demand (CID) issued to the firm by the Bureau while investigating possible violations of the FDCPA, CFPA, and the FCRA. As previously covered by InfoBytes, the Bureau also denied a request by a debt collection company to modify or set aside a CID, which sought information about the company’s business practices and its relationship with the firm in the same investigation. The firm’s petition asserted arguments largely based on the theory that the CFPB’s structure is unconstitutional, and that the Dodd-Frank Act provides the Bureau’s director with “overly broad executive authority.” Alternatively, the firm argued that if the CID is not set aside, it should be modified, stating, among other things, that the CID’s scope exceeds applicable statutes of limitation.
As it did in the debt collection company’s request to set aside or modify the CID, the Bureau rejected the firm’s constitutionality argument, stating that “[t]he administrative process for petitioning to modify or set aside CIDs is not the proper forum for raising and adjudicating challenges to the constitutionality of provisions of the Bureau’s statute.” Additionally, the Bureau’s Decision and Order discounts the firm’s statute of limitations argument, contending that “the Bureau is not limited to gathering information only from the time period in which conduct may be actionable. Instead, what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.” The Bureau also directed the firm to comply with the CID within ten days of the Order.