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  • Report Criticizes Auto Dealer Compensation, Add-On Product Practices

    Consumer Finance

    On January 23, the Center for Responsible Lending (CRL) released a report titled “Non-Negotiable: Negotiation Doesn’t Help African-Americans and Latinos on Dealer-Financed Car Loans.” The report provides the results of CRL’s investigation of whether racial disparities occur in auto financing, “considering the consumer’s attempt to negotiate their interest rates and comparison-shop at other institutions.” The CRL also examined “other aspects of car buying by race and ethnicity, including the purchase of ancillary ‘add-on’ products and the accuracy of information provided by the dealer to the customer during the buying experience.” CRL states that its research “supports the likelihood that dealer practices, such as interest rate markups, have a discriminatory impact on borrowers of color.” Specifically, the CRL states its investigation revealed (i) African-American and Latino consumers attempt to negotiate pricing on car dealer loans just as much as white consumers, if not more, and their levels of comparison shopping are similar to those of white buyers; (ii) more borrowers of color reported receiving misleading information about their loans from car dealers, which served to negate the impact of negotiations or comparison shopping; and (iii) African Americans and Latinos are nearly twice as likely to be sold multiple add-on products as white consumers. The CRL recommends that policymakers (i) prohibit dealer compensation that varies based on the interest rate or other material, other than the loan’s principal balance; (ii) require dealers to disclose the actual costs of every add-on product sold during the financing process and to reveal the cost of the car with and without add-on products; and (iii) prohibit dealers from representing that the buyer is required to purchase ancillary products in order to obtain financing.

    CFPB Auto Finance Disparate Impact Ancillary Products

  • CFPB Continues Add-On Products Crackdown

    Consumer Finance

    On December 23, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and certain subsidiaries alleged to have violated multiple consumer protection laws with respect to credit card add-on products. The action, which is the fourth action taken by the CFPB relating to credit card add-on products, and the fifth add-on product action overall, extends the CFPB’s intense supervisory and enforcement focus on ancillary products and oversight of third-party service providers.

    In coordination with the FDIC and the OCC, the CFPB ordered the companies to refund an estimated $59.5 million to more than 335,000 customers for certain credit card practices, including allegedly unfair billing tactics and deceptive marketing. The company must also pay an additional $9.6 million in civil penalties, submit to an independent review of other credit card add-on products, and continue to implement enhanced third-party oversight.

    The consent orders allege that the company misled consumers about the benefits, fees, length of coverage, and terms and conditions of certain payment protection products, and that the company billed consumers for services they did not receive, unfairly charged consumers for interest and fees, and failed to comply with federal requirements to inform consumers about their right to a free credit report.

    The coordinated action follows another taken by federal regulators last year, in which the same companies were ordered to refund approximately $85 million in connection with alleged UDAAP violations related to the offering of a rewards card and certain debt collection practices.

    Credit Cards CFPB Enforcement Ancillary Products

  • Fifth Circuit Holds State AG Credit Card Add-On Suit Not Subject To Federal Jurisdiction

    Fintech

    On December 2, the U.S. Court of Appeals for the Fifth Circuit held that a set of parens patriae suits filed by the Mississippi Attorney General (AG) against credit card issuers is not subject to federal jurisdiction under the Class Action Fairness Act (CAFA) or National Bank Act (NBA) preemption. Hood v. JP Morgan Chase & Co., No. 13-60686, 2013 WL 6230960 (5th Cir. Dec. 2, 2013). The consolidated appeal involves cases originally filed by the AG in state court against six credit card issuers for allegedly violating the Mississippi Consumer Protection Act in connection with the marketing, sale, and administering of certain ancillary products, including payment protection plans. After the card issuers removed the cases, a federal district court denied the state’s motion to remand, holding that it had subject matter jurisdiction because: (i) the cases were CAFA mass actions; (ii) the NBA (and the Depository Institutions Deregulation and Monetary Control Act for one state-chartered bank defendant) preempted some of the state law claims; and (iii) it had supplemental jurisdiction over the remaining state law claims. The Sixth Circuit disagreed and held that the card issuers failed to prove that any card holder met CAFA’s individual amount in controversy requirement, rejecting the issuers’ argument that the state is the real party in interest and its claims for restitution and civil penalties exceed the threshold. The court also rejected the issuers’ argument—and the district court’s holding—that the payment protection plans were part of the loan agreement and the fees associated with the plans constitute “interest,” such that the state’s challenge to the plans was an implicit usury claim preempted by the NBA. Instead, the court held that while the plans could conceivably fit within the definition of “interest,” there is no clear rule on this subject that demands removal. Moreover, the court held that even if the payment protection plan fees are “interest,” the claims still would not be preempted because the state does not allege that the issuers charged too much interest, but rather challenges the alleged practice of improperly enrolling customers in the plans. The court reversed the district court and remanded for further proceedings consistent with its opinion.

    Credit Cards State Attorney General Ancillary Products

  • CFPB Credit Card Report Identifies Practices For Further Scrutiny

    Fintech

    On October 2, the CFPB released its first review of the consumer credit card market. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (the CARD Act) requires the CFPB to prepare a report every two years to examine developments in the consumer credit card marketplace, including (i) the terms of credit card agreements and the practices of issuers, (ii) the effectiveness of disclosures, and (iii) the adequacy of UDAP protections. The CFPB also must review the impact of the CARD Act on (i) the cost and availability of credit, (ii) the safety and soundness of issuers, (iii) the use of risk-based pricing, and (iv) product innovation. In connection with this initial report, the CFPB hosted a credit card field hearing in Chicago, IL, at which Director Cordray reviewed the report’s findings and industry representatives and consumer advocates discussed the current state of the credit card market.

    In its review of the post-CARD Act market, the CFPB found that the CARD Act largely accomplished its intended goals. The CFPB reports that: (i) the total cost of credit declined by two percentage points between 2008 and 2012; (ii) overlimit fees and repricing actions have been effectively eliminated; (iii) the size of late fees has decreased; (iv) there is sufficient available credit, notwithstanding the impacts of the financial crisis, but less than in 2007; and (iv) the CARD Act’s ability-to-repay provisions have protected young consumers.

    However, the CFPB identifies numerous concerns it has about the credit card market, including “practices that may pose risks to consumers and may warrant further scrutiny by the Bureau.” Those concerns include:

    • Add-on products: The CFPB remains concerned about the ways these products are marketed and will continue to pursue allegedly deceptive practices. All of the CFPB’s major enforcement actions to date have involved add-on products, most of which related to credit cards.
    • “Fee harvester” cards: The CFPB recognizes that some upfront fees that exceed 25% of the initial credit limit have been held not to be covered by the CARD Act because a portion of the fees are paid prior to account opening. Still, the CFPB plans to monitor the use of application fees in connection with account openings to determine if it should take action under its available authorities.
    • Deferred interest products: The CFPB intends to study the risks and benefits of private label cards that finance purchases without interest for a period of time but then assess interest retroactively if the balance is not paid in full by a given date.
    • Online disclosures: The CFPB intends to assess the methods by which card issuers provide consumers with disclosures when they access their accounts online.
    • Rewards products disclosures: The CFPB will review whether disclosures for “highly complex” rewards products are being made in a clear and transparent manner and whether “additional action” is warranted.
    • Grace period disclosures: The CFPB believes it may need to take action to ensure that disclosures sufficiently inform consumers that once they carry a credit card balance into a new billing cycle, they no longer enjoy the grace period on new purchases.

    Credit Cards CFPB Disclosures Ancillary Products CARD Act

  • CFPB, OCC Announce Add-On Product Actions, Other Non-Mortgage Enforcement Action

    Consumer Finance

    On September 19, the CFPB and the OCC announced parallel enforcement actions against a national bank to resolve allegations that the bank engaged in the unfair and deceptive marketing, sale, and billing of “add-on products” across multiple consumer products, and the OCC announced a separate order that resolves claims related to the bank’s non-home loan debt collection litigation practices and compliance with the SCRA.

    Under the CFPB’s consent order, the bank will pay a $20 million penalty to resolve allegations that over a seven year period ending in March 2012, the bank, through its vendor, enrolled customers in credit monitoring and identify theft products, and charged some customers for these products without or before having received written authorization to perform the monitoring services. The CFPB order also requires restitution to affected customers, and numerous requirements to enhance compliance, including with regard to vendor oversight. Under the OCC’s parallel action, the bank entered a consent order similar to the one entered with the CFPB, and consented to pay a $60 million penalty.

    The CFPB order acknowledges the bank’s representations that it no longer offers the scrutinized products and that it already has credited or refunded affected customers. The bank’s press release also reaffirms its commitment to holding its vendors to high standards.

    In a separate action announced by the OCC on the same day, the bank also entered a consent order to resolve allegations of unsafe or unsound practices with regard to its non-mortgage debt collection litigation practices and its non-mortgage SCRA compliance. As the bank pointed out in a press release, the consent order relates to only a slight percentage of credit card, student loan, auto loan, business banking and commercial banking customers who defaulted on their loan or contract and the resulting collections litigation that followed several years ago. The press release explains that the bank uncovered the issue in internal reviews that began in 2010 and took several steps in response, including: (i) halting new credit card collections litigation in 2011, (ii) dismissing the impacted lawsuits, and (iii) improving SCRA controls.

    Credit Cards CFPB OCC Servicemembers Debt Collection SCRA Enforcement Ancillary Products

  • CFPB Deputy Enforcement Director Discusses Enforcement Priorities

    Consumer Finance

    On August 22, C. Hunter Wiggins, the CFPB’s Deputy Enforcement Director for Policy and Strategy, spoke to the D.C. Bar Antitrust and Consumer Law Section at a session titled “The Consumer Financial Protection Bureau’s Enforcement Priorities.” A summary of his remarks and responses to certain questions follows.

    Mr. Wiggins began his presentation by noting that the Bureau did not want to be a “reactive” agency that devotes its limited resources to “cleaning up” after past crises. Instead, his team, which reports to the CFPB’s Director of Enforcement, Kent Markus, is responsible for evaluating and setting strategic priorities that will allow the Bureau to be a proactive organization.

    The Bureau has 150 employees in its Office of Enforcement, seven of whom are on the Policy and Strategy Team. In addition, the Enforcement Office has several “Issue Teams,” which include members of the Policy and Strategy team and other Enforcement staff. Each of the “Issue Teams” is focused on one particular market, such as mortgage servicing or credit cards, and is responsible for identifying problems in those markets that should be prioritized for enforcement action. The criteria used include: (1) the number of consumers potentially impacted by a practice; (2) the period of time that practice has been in place (including whether the practice is ongoing); (3) the amount of harm to consumers; (4) whether the practice targets a vulnerable population; (5) whether consumers have the ability to avoid the practice through shopping; (6) whether the practice results in market distortions (such as a “race to the bottom” or competitive harm to legitimate businesses that do not engage in the practice); and (7) barriers to other solutions (such as the lack of a private right of action).

    The Bureau allocates its enforcement resources as follows:

     

     

     

     

     

     

     

     

     

     

     

    • Core Work (50%): This consists of the priority areas in which the Bureau carries out what were described as its “cop on the beat” responsibilities. Each area generally receives a pro rata amount of resources, but this can vary over time. The areas include: (1) auto finance; (2) consumer loans; (3) credit cards; (4) credit reporting; (5) debt collection; (6) debt relief; (7) deposit accounts; (8) fair lending; (9) money services / prepaid cards; (10) mortgage origination; (11) mortgage servicing; (12) payday loans; and (13) student lending.
    • Emphasized Priorities (25-35%): Two to four specific, systemic market problems are chosen. As an example, Mr. Wiggins pointed to the Bureau’s actions regarding credit card add-on products over the past year, which he said were prioritized due to the scope of their impact.
    • Emerging and Cross-Cutting Priorities (15%): These are new products, services, or markets, or in some cases new aspects of older products and services that may have an impact on a particular population. As an example, Mr. Wiggins referred to the Bureau’s recent action regarding the use of military allotments to collect payments on auto loans made to servicemembers.
    • Tactical Priorities (0-10%): These are activities that are useful to the Bureau’s own long-term institutional development. For example, Mr. Wiggins noted areas where the Bureau has sought out partnerships with other agencies to establish or strengthen enforcement relationships with other regulators or law enforcement agencies. Other possible tactical priorities mentioned included pursuing enforcement matters with a regional focus and increasing the Bureau’s ability to use temporary restraining orders as an enforcement tool.

     

    Question and Answer Session

    Mr. Wiggins noted that his responses to questions, which are discussed below, represented his own views and not those of the Bureau.

     

     

     

     

     

     

     

     

     

     

     

     

     

    • RESPA enforcement: Mr. Wiggins was asked if the Bureau was looking at title agents for RESPA compliance. He responded that, in setting priorities, the Bureau focuses on identifying problems, not industries.
    • Add-on products: Mr. Wiggins was asked why the Bureau identified credit card add-on products as an “Emphasized Priority” when those products were already receiving significant attention from other regulators. Mr. Wiggins acknowledged the actions of other regulators but said that the Bureau’s review led them to view this as an area where they needed to step in.
    • Regulating attorneys: A concern was raised regarding the extent to which the Bureau could regulate the activities of attorneys. Mr. Wiggins responded that, as general matter, the Bureau has no interest in intervening in circumstances where attorneys are merely providing legal advice to clients. However, he noted two Bureau enforcement actions involving potentially problematic attorney conduct: first, a 2012 action against a California law firm allegedly engaged in unfair and deceptive practices related to loan modifications; and second, this week’s suit against a debt-settlement firm that allegedly partnered with attorneys to collect prohibited upfront fees for debt relief services.
    • Criminal activity: In response to a question, Mr. Wiggins stated that the Bureau was legally obligated to turn over information regarding suspected criminal activity uncovered during its examinations and investigations to the Department of Justice (DOJ) and that the Bureau has a memorandum of understanding with DOJ for that purpose. However, he emphasized that the CFPB’s examiners and investigators do not look for criminal conduct, such as tax evasion, in the regular course of their duties.
    • Employee incentive programs: Mr. Wiggins was asked about the use of employee incentive programs in the area of debt collection. He responded that incentive programs can be problematic to the extent they encourage employees to engage in improper conduct and that the Bureau takes this into account.

     

    CFPB RESPA Enforcement Ancillary Products Mortgage Origination

  • Illinois Enacts Auto Ancillary Products Bill

    Consumer Finance

    On August 9, Illinois enacted HB 1460, which expands the definition of “service contract” in the state’s Insurance Code to include ancillary auto service contracts – e.g. contracts related to the repair or replacement of tires, repair of certain damage to motor vehicles, or that provide for protective systems applied to a vehicle. By expanding the definition, the new law requires any provider of such ancillary products operating in Illinois to register with the Illinois Department of Insurance, pay an annual registration fee, and to designate an individual for service of process. Ancillary auto product providers also will be subject to, among other things, financial requirements, disclosure rules, and record keeping requirements, and will be subject to examination and enforcement by the Illinois Department of Insurance. The changes take effect on January 1, 2014.

    Auto Finance Ancillary Products

  • Special Alert: CFPB Enforcement Action Targets Marketing of Auto Loans, Add-On Products to Servicemembers

    Federal Issues

    This morning, the Consumer Financial Protection Bureau (CFPB) announced enforcement actions against a national bank and its service provider related to alleged deceptive marketing of auto loans and add-on products to active-duty servicemembers. The CFPB claims that the companies failed to disclose or mischaracterized certain fees charged and ancillary products offered through a program developed to finance auto loans to servicemembers. These are the first public enforcement actions by the CFPB related to auto finance, and according to CFPB Director Richard Cordray, were precipitated by a complaint received from an individual servicemember’s relative. The actions demonstrate the CFPB’s focus on auto finance and its increasing coordination with the Department of Defense (DOD) and the individual branches of the military on servicemember protection issues.

    Scope of Alleged Violations

    The CFPB charges that the bank violated Regulation Z (TILA) by failing to accurately disclose the finance charge, annual percentage rate, payment schedule and total of payments for the subject loans, and also violated the Consumer Financial Protection Act’s (CFPA) prohibition on deceptive acts or practices by (i) failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for the subject loans; and (ii) deceptively marketing the prices and coverage of add-on service contracts. Specifically, the bank allegedly failed to inform servicemembers that they would be charged a monthly processing fee for automatic payroll allotments; (ii) failed to disclose that the allotments would be deducted from servicemember paychecks twice per month, but only credited once a month; and (iii) failed to regularly review and validate its vendor’s marketing related to the cost and coverage of add-on service contracts. As with the CFPB’s actions last year related to certain add-on products marketed by credit card issuer vendors, the CFPB focused on the marketing of the products and did not directly address their value. This action also applies the CFPB’s guidance on vendor management, which outlines the CFPB’s expectations for oversight and management of third-party vendors involved in the offering of ancillary products.

    The service provider is alleged to have violated the CFPA’s prohibition on unfair, deceptive, or abusive practices by (i) deceptively marketing the prices of an add-on vehicle service contract and an add-on GAP insurance product; and (ii) deceptively marketing the scope of the coverage of a vehicle service contract. The CFPB asserts that the company understated the costs of the vehicle service contract and insurance product and overstated the reach of their coverage.

    Resolution

    The orders require the companies to cease the alleged practices, improve disclosures, and pay combined restitution of approximately $6.5 million - $3.2 million by the bank, $3.3 million by the vendor. Neither order includes a civil money penalty.

    In addition, the bank must (i) develop a comprehensive compliance plan within 60 days; (ii) submit compliance progress reports within 90 days and after one year, as well as within 14 days of receiving a request from the CFPB after the one-year report; and (iii) implement certain recordkeeping requirements. The service provider has 15 days to retain an independent consultant to develop a compliance plan. Within 90 days of when the CFPB approves the consultant, the service provider must submit a compliance management system and written compliance plan. It also is subject to similar reporting and recordkeeping requirements.

    Application of “Responsible Conduct” Guidance

    Earlier this week, as detailed in our prior Special Alert, the CFPB issued guidance setting forth its expectations for companies subject to enforcement activity.  Among other things, the CFPB stated that “responsible conduct” may be rewarded by the exercise of its discretion to resolve an investigation with no public enforcement action or to reduce any sanction or penalty imposed.  According to the CFPB, in the actions announced today, the companies proactively addressed aspects of the loan program at issue and worked cooperatively with the Bureau to provide refunds to servicemembers. While the matters nonetheless resulted in public enforcement actions, the Bureau states expressly that this “responsible conduct” was one of several factors it considered in electing not to impose civil money penalties.

    CFPB’s Focus on Auto Finance & Servicemember Protection

    In addition to marketing of loans and add-on products, the CFPB has continued to focus on the fair lending implications of certain practices of indirect auto lenders. Just last week, the CFPB sought to explain to members of Congress its rationale for pursuing auto fair lending claims, largely reiterating the information set forth in the guidance issued in CFPB Bulletin 2013-02, and the CFPB reportedly has several ongoing auto finance investigations. We expect to see additional auto finance actions from the Bureau addressing the marketing and pricing of auto loans and add-on products.

    Today’s CFPB announcement notes that the DOD and the Judge Advocate General Corps of each of the service branches assisted the CFPB in this matter. Concurrent with the announcement, the CFPB published information for servicemembers related to military allotments, announced that the DOD has established a working group that will consult with the CFPB and other federal regulators to look at the use of military discretionary allotments, and reiterated the Bureau’s general commitment to working with the DOD on protecting servicemembers in the consumer financial marketplace.”

    CFPB Servicemembers Auto Finance Ancillary Products

  • U.K. FSA Fines Banks for Slow Response to Payment Protection Insurance Customer Complaints

    Federal Issues

    On February 19, the U.K.’s Financial Services Authority announced a fine against three related banks for failing to promptly redress customers lodging complaints about the banks’ payment protection insurance (PPI) product. The FSA states that over a 10 month period, the bank failed to pay redress within the FSA-required 28-day period for nearly a quarter of the banks’ customers who submitted complaints regarding PPI, with some customers waiting over six months for payment. The FSA states that its investigation revealed (i) the banks failed to establish an adequate process for preparing redress payments to send to PPI complainants; (ii) bank staff engaged on the redress process did not have the collective knowledge and experience to ensure that the process worked properly; (iii) the banks failed to effectively track PPI redress payments; (iv) the banks failed to monitor effectively whether they were making all payments of PPI redress promptly and did not gather sufficient management information to identify, in a timely manner, the full nature and extent of the payments failings; and (v) the banks’ approach to risk management when preparing redress payments to send to PPI complainants was ineffective. The FSA has been active in addressing PPI issues. Last month, the FSA and the Office of Fair Trading jointly published final guidance to help prevent the problems associated with PPI recurring in a new generation of products. The FSA’s guidance for payment protection products within its jurisdiction stresses that firms should ensure that product features reflect the needs of the consumers they are targeting. It describes the importance of (i) identifying the target market for protection products; (ii) ensuring that the cover offered meets the needs of that target market; and (iii) avoiding the creation of barriers to comparing, exiting or switching cover.

    UK FSA Ancillary Products

  • CFPB Continues Credit Card Enforcement Activity

    Fintech

    On October 1, the CFPB announced a coordinated enforcement action taken by federal regulators against a major credit card company and several of its subsidiaries alleged to have violated multiple consumer financial protection laws. According to the CFPB, the investigations conducted by it and other federal regulators and a state regulator revealed that the companies (i) charged illegal late fees, (ii) discriminated on the basis of age in the offering of credit, (iii) engaged in deceptive marketing, and (iv) failed to properly report consumer credit disputes. To resolve the allegations, the companies agreed to enter into several different consent orders. Two orders obtained by the CFPB and a joint CFPB/FDIC order require three of the subsidiaries collectively to refund approximately $85 million to approximately 250,000 customers and pay a cumulative $18 million in civil money penalties. Likewise, the OCC issued a consent order that includes an additional $500,000 penalty, and provides for restitution that overlaps with the broader restitution ordered by the CFPB. Finally, an order obtained by the Federal Reserve Board, requires the company, and certain of its subsidiaries, to pay an additional $9 million penalty. Furthermore, pursuant to the various orders, the companies agreed to undergo an independent audit and implement enhanced compliance systems to address the alleged illegal practices. This is the third public CFPB-led enforcement action aimed at credit card companies, and the first to go beyond allegations regarding ancillary products and resolve alleged violations of the CARD Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act.

    FDIC Credit Cards CFPB FCRA Federal Reserve OCC Fair Lending Consumer Reporting Enforcement Ancillary Products

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