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CFPB warns lead generators, digital comparison-shopping tool operators of potential CFPA violations
On February 29, the CFPB issued a circular to law enforcement agencies and regulators explaining how operators of digital comparison-shopping tools or lead generators can potentially violate the CFPA’s prohibition on abusive acts or practices by steering consumers towards options that best serve the operator or the lead generator. The circular further discussed “how law enforcement agencies and regulators can evaluate operators of comparison-shopping tools… to manipulate results” to appease consumer preferences.
The Bureau explained that while consumers often use these tools to research, compare, and select financial products, some intermediaries also functioned as lead generators that sold consumer information to lenders. These intermediaries may have received compensation, the CFPB said, often termed as “bounties,” from financial providers for preferential treatment or lead generation. The circular recognized that operators of these tools may have engaged in commercial arrangements with financial providers and may have received compensation based on user actions or bids.
The CFPB stated that both digital comparison-shopping tool operators and lead generators can qualify as “covered persons” under CFPA section 1031(d)(2)(C) which prohibits them from engaging in unfair, deceptive, or abusive acts or practices, particularly those that “take unreasonable advantage” of consumers so they may act in the “covered person’s” best interests. The circular outlined elements of CFPA Section 1031(d)(2)(C) and applied the elements including reasonable reliance by consumers on covered entities to act in their interests, to an evaluation of the operator or lead generator activities. Notably, the circular warned that reasonable consumer reliance could be created based on the representations of the tool operator or lead generator, as well as implicit or explicit communications. Further, the Bureau added that steering consumers towards certain products or providers for the financial benefit of the operator or lead generator, rather than consumer interest, constituted unreasonable advantage-taking.
Finally, the circular included a non-exhaustive list of examples of preferencing or steering arrangements and advised law enforcement agencies and regulators to scrutinize bounty or bidding schemes and decision-making processes to identify abusive conduct.
White House orders DOJ and CFPB to better protect citizens’ sensitive personal data
On March 1, the White House released Executive Order 14117 (E.O.) titled “Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern” to issue safeguards against Americans’ private information. The E.O. was preceded by the White House’s Fact Sheet which included provisions to protect Americans’ data on their genomic and biometric information, personal health, geolocation, finances, among others. The E.O. shared how this data can be used by nefarious actors such as foreign intelligence services or companies and could enable privacy violations. Under the E.O., President Biden ordered several agencies to act but primarily called on the DOJ. The president directed the DOJ to issue regulations on protecting Americans’ data from being exploited by certain countries. The White House also directed the DOJ to issue regulations to protect government-related data, specifically citing protections for geolocation information and information about military members. Lastly, the DOJ was directed to work with DHS to prevent certain countries’ access to citizens’ data through commercial means and the CFPB was encouraged to “[take] steps, consistent with CFPB’s existing legal authorities, to protect Americans from data brokers that are illegally assembling and selling extremely sensitive data, including that of U.S. military personnel.”
A few days before, the DOJ released its fact sheet detailing its proposals to implement the White House’s E.O., focusing on national security risks and data security. The fact sheet highlighted that our current laws leave open lawful access to vast amounts of Americans’ sensitive personal data that may be purchased and accessed through commercial relationships. In response to the E.O., the DOJ plans to release future regulations “addressing transactions that involve [Americans’] bulk sensitive data” that pose a risk of access by countries of concern. The countries of concern include China (including Hong Kong and Macau), Russia, Iran, North Korea, Cuba, and Venezuela. The DOJ will also release its Advance Notice of Proposed Rulemaking (ANPRM) to provide details of the proposal(s) and to solicit comments.
California Attorney General warns small banks and credit unions on fees
On February 22, California State Attorney General, Rob Bonta, issued a letter to small banks and credit unions cautioning that overdraft and returned deposited item fees may infringe upon California’s Unfair Competition Law (UCL) and the CFPA. The letter, directed at institutions in California with assets under $10 billion, highlighted concerns that such fees disproportionately burden low-income and minority consumers. Bonta emphasized that these fees often catch consumers off guard, leading to significant financial strain, and urged the financial institutions in California to comply with state and federal laws by eliminating such practices.
The letter underscores how overdraft and returned deposited item fees can harm consumers, and potentially constitute unfair acts against them. Bonta also pointed out how overdraft fees cannot be reasonably anticipated due to the complexities of transaction processing, making it challenging for consumers to make informed financial decisions. Furthermore, the letter warned that imposition of returned deposited item fees, which are charges by financial institutions when a consumer deposits a check that bounces (due to an issue with the check originator such as insufficient funds or a stop payment order), is likely an unfair business practice in violation of the UCL and CFPA because consumers are usually unable to reasonably avoid the fee.
This action by the California Attorney General is notable for its focus on smaller financial institutions that were expressly excluded from the CFPB’s proposed rule last month on overdraft fees (previously covered by InfoBytes here); however, the action is broadly consistent with the CFPB’s guidance on returned deposited item fees (also covered by InfoBytes here).
CFPB claims special, risk-based oversight over lender
On February 23, the CFPB released a supervisory designation over a nonbank, small-loan consumer finance company (the Company). This is the first time the CFPB has used its authority under Section 1024(a)(1)(C) of the Consumer Financial Protection Act (CFPA) to designate a company for supervision based on a determination that the company’s conduct poses “risk to consumers” after a contested proceeding. This provision of the CFPA only required the CFPB to have “reasonable cause to determine” that a covered person’s conduct posed risks to consumers––which the CFPB stated is a “less demanding” legal standard than the preponderance-of-the-evidence standard generally used in civil proceedings.
The CFPB described the relevant statutory framework of the proceeding with particularity since this proceeding was “one of the first” under Section 1024(a)(1)(C). The CFPB found the company to be a covered person and stated that the CFPB had reasonable cause to determine that the Company’s conduct poses risks to consumers, including its alleged bundling of loans with insurance coverage, harmful collection practices, inaccurate credit reporting, and serial refinancing. The CFPB alleged that consumer complaints are sufficient to establish reasonable cause that the Company’s actions put consumers at risk.
FTC provides its 2023 ECOA activities to CFPB
On February 12, the FTC provided the CFPB with an annual summary of its 2023 enforcement, research and policy development, and educational-related initiatives on ECOA, as Dodd-Frank allows the Commission to enforce ECOA and any CFPB rules applicable to entities within the FTC’s jurisdiction. The letter emphasized the commitment of each agency to enforce laws protecting civil rights, fair competition, consumer protection, and equal opportunity in the development and use of automated systems and artificial intelligence. Additionally, the letter stated the FTC continued its involvement in initiatives such as military outreach and participation in interagency task forces on fair lending. Its initiatives focused on consumer and business education regarding issues related to Regulation B and guiding fair lending practices. The Commission also highlighted (1) an enforcement action against a group of auto dealerships alleging ECOA and its implementing Regulation B violations in connection with the sale of add-on products; (2) refund checks sent as a result of the settlement of two enforcement actions against auto dealerships in which it was alleged that the dealerships violated ECOA and Regulation B by discrimination against Black and Latino consumers by charging them higher financing costs; and (3) an amicus brief submitted to an appeals court in support of the CFPB’s appeal to the U.S. Court of Appeals for the Seventh Circuit of the lower court’s decision regarding the applicability of ECOA to individuals other than “applicants.”
CFPB revises its supervisory appeals process
On February 16, the CFPB issued a procedural rule updating its process for financial institutions that appeal the Bureau’s supervisory findings. The CFPB examined financial institutions to ensure they followed federal consumer financial law. After an examination or targeted review, supervised entities may appeal their compliance rating or any other findings.
First, the procedural rule expanded the pool of potential members for the appeals committee within the CFPB. Now, any CFPB manager with relevant expertise who did not participate in the original matter being appealed can be considered, rather than previously only managers from the Supervision department. The CFPB’s General Counsel will assign three CFPB managers and legal counsel to advise them. Second, the revised process introduced a new option for resolving appeals—in addition to upholding or rescinding the original finding, matters can now be remanded back to supervision staff for further consideration, potentially resulting in a modified finding. The Bureau also recommended in its procedural rule that entities engage in “open dialogue” with supervisory staff to discuss their preliminary findings to attempt to resolve disputes before an examination is final.
Third, institutions now can appeal any compliance rating issued to them, not just negative ratings, as was the case previously. Fourth, the updated process included additional clarifications and specifies that it applied to pending appeals at the time of its publication.
CFPB reports larger banks charge higher interest rates on credit cards than smaller banks
On February 16, the CFPB published the results of a report that found, on average, larger banks charged higher credit card interest rates than smaller banks and credit unions. The CFPB’s data suggested larger banks charge interest rates eight to 10 points higher than non-large banks. If a consumer were to pick a large bank credit card over a smaller bank, the consumer would see an estimated difference of “$400 to $500” in additional annual interest.
Other findings from the report suggested that large issuers offered higher rates across credit scores: e.g., the median interest rate for people with scores between 620 and 719 was 28.20 percent for large banks and 18.15 percent for small ones. The CFPB also found that 15 bank-issued credit cards with interest rates above 30 percent: nine of the largest issuers reported at least one product over that rate. Lastly, the report found that large banks were more likely to charge annual fees, with 27 percent of large banks charging an annual fee, compared to 9.5 percent of small banks. The CFPB published a table between large and small banks that showed median purchase APR by credit tier.
CFPB reports “all-time high” interest rate margins on credit cards
On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”
Yellen testifies on FSOC Annual Report, key areas of focus
On February 8, the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a hearing titled “The Financial Stability Oversight Council Annual Report to Congress” with testimony provided by U.S. Treasury Secretary Janet Yellen. Secretary Yellen discussed progress, and continued focus, related to five topics addressed in FSOC’s 2023 Annual Report (covered by InfoBytes here): capital risks posed by nonbank financial institutions; climate-related financial stability risks; cybersecurity risks; monitoring artificial intelligence (AI) use in financial services; and digital asset oversight. In response to questioning from Senator Cortez Masto (D-NV), Yellen discussed how FSOC highlighted that about 70 percent of single-family mortgages were originated by nonbank mortgage originators during the first half of 2023. When Secretary Yellen was asked if the shift from banks to nonbanks in the mortgage space poses a financial stability risk “due to non-banks’ lack of access to deposits,” she responded that FSOC is “very focused” on the issue since non-banks are reliant on short-term financing. In addition, Yellen spoke about AI and learning its impact on vulnerabilities and risk, as well as the Basel III proposal, urging regulators to “finalize these rules as quickly as possible.”
CFPB secures $12 million after decade-old complaint against foreclosure relief scam company
On February 8, the CFPB announced the resolution of an enforcement action, begun in 2014, against a foreclosure relief operation that allegedly violated Regulation O. After a decade of court orders, opinions, and appeals, on February 5, 2024, the defendants and the CFPB jointly agreed to the dismissal of their respective appeals and on February 7, 2024, the Seventh Circuit dismissed the parties’ appeals. The final settlement required the defendants to pay $10.9 million in consumer redress and a $1.1 million penalty. The enforcement action notes that the defendants remain “subject to the bans” under the district court’s 2022 order.
The CFPB had alleged that the defendants violated Reg. O by taking payments from consumers for (i) mortgage modifications before they signed an agreement from their lender; (ii) failing to make required disclosures; (iii) directing consumers not to contact lenders; and (iv) making deceptive statements to consumers. As previously reported by InfoBytes, the CFPB and the Florida Attorney General obtained a judgment against this group in May 2015 for parallel violations.