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CFPB Announces First Enforcement Action Against Payday Lender
On November 20, the CFPB announced the resolution of an enforcement action against one of the largest payday lenders in the country. The consent order alleges that the lender and an online lending subsidiary made hundreds of payday loans to active duty military members or dependents in violation of the Military Lending Act, and that call center training deficiencies have allowed additional loans to be originated to spouses of active-duty members. The order also alleges unfair and deceptive debt collection practices, including so-called “robosigning” that allegedly yielded inaccurate affidavits and pleadings likely to cause substantial injury. In July, the CFPB issued a notice that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.
Notably, this is the first public action in which the CFPB alleges that the supervised entities engaged in unlawful examination conduct. The Bureau asserts that the lender and subsidiary failed to comply with examination requirements, including by not preserving and producing certain materials and information required by the CFPB. Both the lender and its subsidiary are nonbanks and have not previously been subject to regular federal consumer compliance examinations; the CFPB does not allege that the exam failures were intentional violations potentially subject to criminal charges.
Pursuant to the consent order, the lender must pay $8 million in consumer redress, in addition to the more than $6 million the lender has already distributed to consumers for alleged debt collection and MLA violations. The lender also must pay a $5 million civil money penalty. The CFPB did not reveal how it determined the penalty amount or what portion of the fine is attributable to the alleged consumer-facing violations versus the alleged unlawful exam conduct. Finally, the order requires comprehensive compliance enhancement and imposes ongoing reporting and recordkeeping obligations for a period of three years.
In written remarks released by the CFPB, Director Cordray stated: “This action should send several clear messages to everyone under the jurisdiction of the Consumer Bureau. First, robo-signing practices are illegal wherever they occur, and they need to stop – period. Second, violations of the Military Lending Act harm our servicemembers and will be vigorously policed. Third, the Bureau will detect and punish entities that withhold, destroy, or hide information relevant to our exams.”
CFPB Settles With Mortgage Insurer Over Alleged RESPA Violations
On November 15, the CFPB announced a settlement with a mortgage insurer accused of paying illegal kickbacks to mortgage lenders in exchange for insurance referrals in violation of Section 8 of RESPA. The settlement resolves allegations that the company entered into captive reinsurance arrangements with lenders across the country pursuant to which the insurer at first ceded approximately 12% of its premiums per referral to lenders’ captive reinsurers, but over time ceded increasingly large percentages of its premiums—up to 40% for each referral—in exchange for lenders’ continued referral of customers.
The proposed consent order requires the company to pay $100,000 in penalties and subjects the company to regular and mandatory compliance reporting and monitoring for a period of four years. In addition, the company is enjoined from entering into or otherwise obtaining any new captive mortgage reinsurance arrangements for a period of ten years and, with respect to pre-existing arrangements, must forfeit any right to the funds not directly related to collecting on reinsurance claims.
The action follows several other RESPA enforcement actions announced earlier this year, including actions against four mortgage insurers.
OCC Establishes Standards For Independent Consultants Required Under Enforcement Actions
On November 12, the OCC issued Bulletin 2013-33, which establishes the standards the OCC uses when it requires banks to employ independent consultants as part of an enforcement action. The Bulletin explains that when conducting its initial assessment of the need for an independent consultant, the OCC considers, among other factors: (i) the severity of the violations; (ii) the criticality of the function requiring remediation; (iii) confidence in bank management’s ability to identify violations and take corrective action in a timely manner; (iv) the expertise, staffing, and resources of the bank to perform the necessary actions; (v) actions already taken by the bank to address the violations or issues; and (vi) the services to be provided by an independent consultant. The bulletin outlines the OCC’s process for reviewing a consultant selected by a bank, including its expectations for a bank’s due diligence process when retaining an independent consultant. The bulletin also describes the OCC’s oversight of the performance of the consultant, the nature of which can be impacted by, among other things: (i) the nature of deficiencies or violations the independent consultant is engaged to identify, including with respect to recommendations regarding remediation; (ii) the scope and duration of work; and (iii) the potential for and materiality of harm to consumers and the bank.
SEC Announces Its First Ever Deferred Prosecution Agreement With An Individual
On November 12, the SEC announced a deferred prosecution agreement (DPA) with a former hedge fund administrator, the agency’s first ever DPA with an individual. The DPA follows a November 2012 SEC enforcement action against a hedge fund and its manager, who allegedly misappropriated more than $1.5 million from the hedge fund and overstated its performance to investors. The SEC action derived from and was aided by information provided by the hedge fund administrator. In return for the assistance provided, the SEC agreed to enter the DPA instead of pursuing allegations that the settling administrator aided and abetted the fund’s securities law violations. The DPA requires the administrator to disgorge $50,000, and prohibits the administrator from, (i) serving as a fund administrator or otherwise providing any services to any hedge fund for a period of five years, and (ii) associating with any broker, dealer, investment adviser, or registered investment company. The SEC states the agreement demonstrates its commitment to rewarding proactive cooperation. According to the SEC, the agreement strikes a balance between holding the administrator accountable for his part in the alleged misconduct, while giving him credit for reporting the fraud and providing full cooperation without any assurances of leniency.
Federal Magistrate Recommends Court Order Diligence Firm To Respond To RMBS Working Group Subpoena
On November 11, a U.S. Magistrate Judge for the U.S. District Court for the District of Connecticut recommended that the District Court grant the U.S. Attorney’s motion, filed on behalf of the federal-state RMBS Working Group, to enforce a subpoena seeking information and documents from a firm that performed due-diligence work on mortgage loans and loan pools for numerous financial institutions. U.S. v. Clayton Holdings, No. 3:13mc116 (D. Conn. Nov. 11, 2013). In its opposition, the diligence firm objected to the subpoena as a “fishing expedition” that would require it to produce information for all 193 of its clients, even after it has cooperated as a third-party witness in connection with 16 companies the Working Group has identified as subjects of its RMBS investigations. Generally, the magistrate determined that the government’s request was not overly broad and burdensome, and recommended that the court order the firm to produce, for the period 2005 through 2007, (i) its entire database and all data used, maintained, or accessed in connection with due diligence services on mortgage loans and mortgage loan pools, and (ii) all communications, including e-mails, instant messages, or Bloomberg messages, concerning the provision of due diligence services on mortgage loans and mortgage loan pools. The recommended ruling does restrict the response to information and documents related to work performed for specific financial institution clients. The parties have until November 25 to object to the recommendation.
Report On CFPB's Auto Finance Forum
This morning, the CFPB hosted an auto finance forum, which featured remarks from CFPB staff and other federal regulators, consumer advocates, and industry representatives.
Some of the highlights include:
- Patrice Ficklin (CFPB) confirmed that the CFPB, both before issuing the March bulletin and since, has conducted analysis of numerous finance companies’ activities and found statistically significant disparities disfavoring protected classes. She stated that there were “numerous” companies whose data showed statistically significant pricing disparities of 10 basis points or more and “several” finance companies with disparities of over 20 or 30 basis points.
- Much of the discussion focused on potential alternatives to the current dealer markup system. The DOJ discussed allowing discretion within limitations and with documentation of the reasons for exercising that discretion (e.g., competition). The CFPB focus was exclusively on non-discretionary “alternative compensation mechanisms”, specifically flat fees per loan, compensation based on a percentage of the amount financed, or some variation of those. The CFPB said it invited finance companies to suggest other non-discretionary alternatives. Regardless of specific compensation model, Ms. Ficklin stated that in general, nondiscretionary alternatives can (i) be revenue neutral for dealers, (ii) reduce fair lending risk, (iii) be less costly than compliance management systems enhancements, and (iv) limit friction between dealers on the one hand and the CFPB on the other.
- There was significant debate over whether flat fee arrangements, or other potential compensation mechanisms, actually eliminate or reduce the potential for disparate impact in auto lending. There was also criticism of the CFPB’s failure to empirically test whether these “fixes” would result in other unintended consequences. Industry stakeholders asserted that such arrangements fail to mitigate fair lending risk market-wide while at the same time potentially increase the cost of credit and constrain credit availability. Industry stakeholders also questioned the validity of the large dollar figures of alleged consumer harm caused by dealer markups. When assessing any particular model, the CFPB’s Eric Reusch explained, finance companies should determine whether (i) it mitigates fair lending risk, (ii) creates any new risk or potential for additional harm, and (iii) it is economically sustainable, with sustainability viewed through the lens of consumers, finance companies, and dealers.
- Numerous stakeholders urged the CFPB to release more information about its proxy methodology and statistical analysis, citing the Bureau’s stated dedication to transparency and even referencing its Data Quality Act guidelines. The DOJ described its commitment to “kicking the tires” on its statistical analyses and allowing institutions to do the same. The CFPB referenced its recent public disclosure of its proxy methodology, noting that this was the methodology the CFPB intended to apply to all lending outside of mortgage.
- Steven Rosenbaum (DOJ) and Donna Murphy (OCC) pointedly went beyond the stated scope of the forum to highlight potential SCRA compliance risks associated with indirect auto lending.
Additional detail from each panel follows. Please note that these details are based on notes taken during the event and could differ from actual statements made during the event. The entire report is subject to alteration or clarification, particularly if a transcript or archived video are made available.
Opening Remarks
Director Cordray opened the forum. He stressed the importance of vehicles to individual consumers and to the broader economy. He stated that some consumers may be subject to discrimination that may result in millions of dollars in consumer harm each year.
As he did in a Senate hearing earlier this week, Mr. Cordray emphasized that neither the 2012 fair lending bulletin nor the March 2013 auto finance bulletin were new; they simply served as a reminder to finance companies of liability under ECOA, particularly with regard to indirect auto finance.
He stated that the CFPB uses proven statistical methods and publicly available data to assess the probability that a particular customer belongs to a particular racial group or is of a particular national origin.
The March bulletin provided guidance about steps auto finance companies might consider taking to ensure they are ECOA-compliant. One approach described by the Director is to develop robust fair lending compliance management systems to monitor for disparate impact and promptly remedy consumer harm on an ongoing basis when it is identified. The bulletin also stated that finance companies could take steps to comply with the law by adopting some other pricing mechanism that fairly compensates dealers for their work but avoids the fair lending risks that are inherent in pricing by discretionary markup. Director Cordray stated that such mechanisms include: a flat fee per transaction, or a fixed percentage of the amount financed, or other nondiscretionary approaches that market participants may devise that would work to address these concerns.
He acknowledged that dealers are entitled to fair compensation, but stressed that the CFPB wants to make sure the process is transparent. He stated it is worth considering further how the disclosure of markup practices actually works.
Panel 1
Patrice Ficklin (CFPB): Ms. Ficklin described and defended the March bulletin, asserting that the CFPB did not provide any new legal interpretations, but rather reminded finance companies about existing law. She noted and defended the CFPB’s proxy methodology, as described recently in letters to Congress, but did not provide additional detail. She stated that the CFPB’s supervisory and enforcement work in this area is more substantial than it was in March, and continues to indicate fair lending risk—the CFPB has found “substantial and statistically significant” disparities between African Americans, Hispanics, and Asians and similarly situated white borrowers. The CFPB has identified numerous institutions with disparities over 10 basis points, and several over 20 or 30 basis points.
Going forward, the CFPB is committed to continuing a constructive dialogue with industry, a dialogue in which alternative compensation structures has been the key theme to date.
Melissa Yap (FRB): Ms. Yap described the Fed’s ECOA authority post-Dodd-Frank. She stated that pricing remains the greatest area of risk. The Fed employs the 2009 interagency fair lending procedures and looks at (i) financial incentives, (ii) the amount of discretion, and (iii) disparities in note rate and markup over buy rate. She described the Fed’s proxy methodology, which differs slightly from the CFPB’s, but which the Fed believes is appropriate for the size and complexity of the institutions it supervises. For race, the Fed geocodes and defines majority-minority census tracts as those over 50%. She defended name proxies for gender and ethnicity, stating they are as likely to over count as under count. She also referenced two webinars the Fed and other hosted this year, which included discussion of these issues, see e.g., August webinar.
Steven Rosenbaum (DOJ): Mr. Rosenbaum described the DOJ’s broad authority to enforce ECOA and noted that it has a number of investigations ongoing, including joint investigations with the CFPB. He stated that Congress created the issue that requires the use of proxies, given that ECOA protects classes in consumer lending but does not require data collection similar to HMDA. The DOJ is using the CFPB’s method on joint investigations, but it continues to “kick the tires” on its methods and analyses and invites finance companies to do the same.
He stated, twice, that ECOA does not require nor prohibit discretion in pricing; risk from discretion can be managed, for example by setting caps or requiring justifications and documentation.
Mr. Rosenbaum added that the DOJ also enforces SCRA, and stated that if finance companies have not thought about SCRA compliance in their auto finance programs, they ought to do so. He also acknowledged the DOJ’s ongoing investigation of buy-here, pay-here dealers, though the issues differ in that those dealers may be offering predatory products in minority neighborhoods.
Keith Ernst (FDIC): Mr. Ernst similarly described the FDIC’s jurisdiction and addressed in broad terms its approach to indirect auto financing. He stated that all examination and statistical results that are consistent with a violation are subject to independent review and all statistical analyses are reviewed by a team. The FDIC provides institutions with the results, data, and methods and provides an opportunity for questions and other feedback. Mr. Ernst also noted that this dialogue includes providing institutions with the opportunity to provide non-discriminatory explanations for statistical disparities. According to Mr. Ernst, the FDIC has amended analyses as part of these processes. The FDIC believes the vast majority of its banks are effectively managing fair lending risk in auto finance, but that examinations can reveal compliance management systems concerns that fall short of a fair lending violation.
Tonya Sweat (NCUA): Ms. Sweat stated that the practices identified in the CFPB bulletin are not prevalent in the credit union industry, but NCUA still examines for fair lending risk and safety and soundness. The NCUA advises credit unions that sound practices include sampling and testing of loans, particularly to ensure third-party compliance. Credit unions should implement written policies that require written approval of any changes to underwriting criteria.
Donna Murphy (OCC): Ms. Murphy provided only brief comments, and generally referenced and incorporated what others had said on proxies. The OCC is revising and updating its methods for fair lending risk assessments and scoping based on changes in markets, the legal environment, and technology. These changes are intended to result in more consistency in examinations and the ability of the OCC to conduct more analysis across banks. For auto finance, the OCC is looking at how it gathers factors regarding use of third-parties. Ms. Murphy also noted the OCC’s attention to SCRA, stating that last year it revised examination procedures and enhanced examiner training for SCRA, including in auto finance, and that those enhancements are reflected in this year’s examination cycle.
Panel 2
The second panel was moderated by the CFPB’s Rohit Chopra and featured remarks from the National Association of Minority Automobile Dealers (NAMAD), the National Consumer Law Center (NCLC), the Consumer for Auto Reliability and Safety (CARS), and the NAACP.
Stuart Rossman from the NCLC described his part in a series of class actions against auto finance companies in the 2000s. Those actions, as he described, resulted in markup caps, the last of which sunsetted last year. He asserted that the market forces that led to those actions persist, as do fundamental problems in discretionary pricing policies. Citing more restrictive class action requirements and less access to critical data, he called on the CFPB to take the lead in enforcement.
NAMAD acknowledged the possibility that bad actors exist in the market, but argued against eliminating discretion. NAMAD called for approval and documentation requirements for discretionary programs. NAMAD supports uniform data collection, enhanced proxies, training and education for dealers and consumers.
CARS noted California’s markup cap statute and reported that a proposal for a ballot proposition outlawing dealer discretion has been filed with the state attorney general. CARS also encouraged the CFPB to look at the impact of percentage rate markups in the motor home market.
Panel 3
Bill Himpler, American Financial Services Association (AFSA): Mr. Himpler stressed that the current indirect auto finance model is efficient and proven. He noted that auto finance complaints are at record lows, and pointed out that even the CFPB’s database shows a small number of complaints compared to other markets. Since the CFPB has refused to assess the impact of a broad market shift towards flat fee compensation structures or other alternatives, AFSA is commissioning an independent study to assess the present model and evaluate costs and benefits of alternative models.
Chris Kukla, Center for Responsible Lending (CRL): Mr. Kukla countered that the current compensation model gives rise to potential discrimination and should be ended. Consumers have no ability to know what part of their rate is based on risk and what is due to compensation. He defended the CRL’s 2011 study on indirect auto finance from attacks, including those that followed Senator Warren’s reference to the study during a Senate hearing earlier this week. That study concluded that consumers pay $26 billion each year in markups. Mr. Kukla explained that CRL never said consumers would not otherwise be charged a portion of those fees, and only sought to define the size of the market. He referenced other research that indicates a market-wide adoption of flat fee arrangements would have little impact on dealers.
Paul Metrey, National Automobile Dealers Association (NADA): Mr. Metrey outlined a preferred approach by federal regulators to unintentional disparate impact discrimination: (i) understand the market, (ii) develop appropriate methods, and (iii) if present, address in a manner that assists consumers. He called for the CFPB to pursue more open processes on this issue, including by identifying its complete statistical methodology and fully accounting for neutral legitimate factors. He presented NADA’s case against flat fee arrangements, in part on the basis that dealers still will have discretion to select among finance sources that may offer different flat fee arrangements.
Rich Riese, American Bankers Association (ABA): Mr. Riese challenged the CFPB’s post hoc approach to obtaining input on its auto finance program, stating that the forum does not substitute for the kind of engagement the issue requires. He argued that the guidance should have been proposed and subject to notice and comment. The ABA believes proxies should be viewed with skepticism; they can be useful to identify risks and can be useful in compliance programs, but they should not be used to prove violations. Citing the 1999 interagency exam procedures, he argued that discretion is not an appropriate area to apply disparate impact, and, before straying too much from prior policy, regulators should recognize that Reg. B applies to creditors determination of creditworthiness and the discretion being applied in auto finance is for compensation and is not part of a creditor’s determination of creditworthiness.
The panelists also discussed the comparison of indirect auto finance to the mortgage market, particularly the use of broker yield spread premiums. Mr. Riese pointed out that in the mortgage context, brokers were alleged to have steered borrowers into “bad” loans without considering suitability; that is not the case in the auto market where there are no option arms, teaser rates, etc. Mr. Himpler and Mr. Metrey agreed. Mr. Metrey added that the comparison is apples to oranges—the markets have performed differently; there is nothing going on in auto ABS like there was in MBS. He added that Congress directed an end to yield spread premiums and there has been no similar action in auto, and the Fed tested to see if a fix was necessary but there has been no similar testing in auto.
Mr. Kukla responded that the mechanics may be different, but the impact and incentives are the same. A broader view of “steering” covers any instance in which a consumer is provided a loan with less advantageous terms than the consumer otherwise would have received.
CFPB Settles With Mortgage Company, Senior Executives Over Alleged Loan Officer Compensation Practices
On November 7, the CFPB announced it reached a settlement with a mortgage company and two of its executives accused of using compensation to incentivize loan officers to steer consumers into costlier mortgages. The proposed consent order, entered jointly and severally against the company and the individual executives, requires the defendants to pay more than $9 million in restitution to over 9,400 consumers and a $4 million civil money penalty. In addition, all defendants are subject to regular and mandatory compliance reporting and monitoring for a period of three years and are permanently enjoined from paying compensation to loan officers in a manner that violates the Loan Originator Compensation Rule. The order also mandates that the company maintain compensation records in compliance with federal law going forward. The defendants do not admit the CFPB’s allegations.
The settlement resolves an action commenced by the CFPB in July 2013 in which the CFPB employed its civil litigating authority to charge that the company’s quarterly bonus program violated the Federal Reserve Board’s Loan Originator Compensation Rule and other consumer financial protection laws by, among other things, incentivizing loan officers to steer consumers into loans with higher interest rates. According to the complaint, after the rule took effect in 2011, the defendants eliminated from their compensation program any written reference to compensation based upon loan terms or conditions, but in practice continued to adjust loan officers’ quarterly bonuses based on the interest rates of loans closed during the quarter. The case was referred to the Bureau by the Utah Department of Commerce, Division of Real Estate.
BuckleySandler recently hosted a webinar about this CFPB action and impending changes to mortgage loan originator compensation rules. Please contact any of the attorneys below for materials from the webinar or with any questions about this action or the new mortgage loan originator regulations.
- Clinton Rockwell, (310) 424-3901
CFPB Begins Taking Payday Loan Complaints
On November 6, the CFPB announced that it now will formally accept borrower complaints regarding payday loans through its online complaint portal and by phone. The CFPB’s complaint taking process launched with the Bureau in July 2011, and the CFPB began publishing complaints through its online complaint database in June 2012. The CFPB started with credit card complaints and has since expanded the complaint program and public database to cover mortgages, debt collection, credit reporting, student and other consumer loans, and other products and services.
For purposes of complaint collection, the CFPB defines a payday loan as a “small loan, generally for $500 or less, that is typically due on [the borrower’s] next payday or the next time [the borrower] receive[s] income.” The CFPB adds that a payday loan also may be known as a “cash advance” or a “check loan.” The complaint categories offered by the CFPB include: (i) unexpected fees or interest, (ii) unauthorized or incorrect charges to a bank account, (iii) failure to credit a payment, (iv) problems contacting a lender, (v) receiving a loan not applied for, and (vi) failure to provide borrowed funds. Separately, the CFPB highlighted servicemember payday loan protections provided by the Military Lending Act and encouraged servicemembers to submit payday loan complaints.
These announcements are the most recent from the CFPB in connection with its sustained and expanding interest in short-term, small dollar products. Indeed, as we’ve reported here in the past, federal and state authorities more generally have increased their scrutiny of companies that offer these products and affiliated parties like payment processors. For its part, earlier this year the CFPB issued a white paper on payday loans and deposit advance products, and the CFPB has repeatedly ranked high on its enforcement agenda short-term products it believes have the potential to trap consumers in a “cycle of debt.” In addition, based on the CFPB’s most recent rulemaking agenda, the CFPB may publicly begin certain rulemaking activities with regard to payday loans and deposit advance products.
Federal Reserve Board Announces BSA/AML Enforcement Action Involving International Remittances
On October 31, the Federal Reserve Board released a BSA/AML enforcement action against a Pakistani bank and its New York branch. The Written Agreement addresses examiners’ findings of alleged compliance and risk management deficiencies in the branch’s international remittance services. The agreement requires the bank and branch to, among other things, (i) retain an independent consultant to conduct a compliance review, and (ii) implement enhanced BSA/AML compliance and SAR programs. The agreement also requires interim transaction monitoring procedures and a third-party review of the branch’s international remittance transaction activity over a six-month period.
SEC Action Targets Investment Adviser Custody Rule Violations
On October 28, the SEC announced enforcement actions against three investment advisory firms and certain executives for allegedly violating the “custody rule,” which was updated in 2010 and applies to SEC-registered investment advisory firms that have legal ownership or access to client assets or an arrangement permitting them to withdraw client assets. According to the SEC, in addition to other alleged securities violations, the firms allegedly failed to maintain client assets with a qualified custodian or engage an independent public accountant to conduct required surprise exams. To avoid further administrative proceedings, the firms and executives agreed to settle but did not admit the allegations. The firms and individuals collectively agreed to pay $535,000 in penalties, and one firm was required to disgorge nearly $350,000, inclusive of prejudgment interest. The firms also must submit to independent compliance reviews and implement certain specified compliance enhancements.