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On February 6, CFPB Director Kathy Kraninger testified at a House Financial Services Committee hearing on the CFPB’s Semi-Annual Report to Congress. (Covered by InfoBytes here.) The hearing covered the semi-annual report to Congress on the Bureau’s work from April 1, 2019, through September 30, 2019. In her opening remarks, Committee Chairwoman Maxine Waters argued, among other things, that the Bureau’s recent policy statement on the “abusiveness” standard in supervision and enforcement matters “undercuts” Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Waters also challenged Kraninger on her support for the joint notice of proposed rulemaking issued by the OCC and FDIC to strengthen and modernize Community Reinvestment Act regulations (covered by a Buckley Special Alert), arguing that the proposal would lead to disinvestment in communities, while emphasizing that Kraninger’s actions have not demonstrated the Bureau’s responsibility to meaningfully protect consumers. However, in her opening statement and written testimony, Kraninger highlighted several actions recently taken by the Bureau to protect consumers, and emphasized the Bureau’s commitment to preventing harm by “building a culture of compliance throughout the financial system while supporting free and competitive markets that provide for informed consumer choice.”
Additional highlights of Kraninger’s testimony include:
- Memoranda of Understanding (MOU) with the Department of Education (Department). Kraninger discussed the recently announced information sharing agreement (covered by InfoBytes here) between the Bureau and the Department, intended to protect student borrowers by clarifying the roles and responsibilities for each agency and permitting the sharing of student loan complaint data analysis, recommendations, and data analytic tools. Kraninger stated that the MOU will give the Department the same near real-time access to the Bureau’s complaint database enjoyed by other government partners, and also told the Committee that the Bureau and Department are currently discussing a second supervisory MOU.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans. Kraninger told the Committee that a rewrite of the payday lending rule—which will eliminate requirements for lenders to assess a borrower’s ability to repay loans—is expected in April. (Covered by InfoBytes here.) Kraninger noted that the Bureau is currently reviewing an “extensive number of comments” and plans to address a petition on the rule’s payments provision. “[F]inancial institutions have argued that there were some products pulled into that that were, you know, unintended,” she stated. “[W]orking through all of that and. . .moving forward in a way that is transparent in. . .April is what I am planning to do.”
- Ability-to-Repay and Qualified Mortgages (QM). Kraninger discussed the Bureau’s advanced notice of proposed rulemaking that would modify the QM Rule by moving away from the 43 percent debt to income ratio requirement and adopt an alternative such as a pricing threshold to ensure responsible, affordable mortgage credit is available to consumers. (Covered by InfoBytes here.) She stated that the Bureau would welcome legislation from Congress in this area.
- Supervision and Enforcement. Kraninger repeatedly emphasized that supervision is an important tool for the Bureau, and stated in her written testimony that during the reporting period discussed, “the Bureau’s Fair Lending Supervision program initiated 16 supervisory events at financial services institutions under the Bureau’s jurisdiction to determine compliance with federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities, including the Equal Credit Opportunity Act  and HMDA.” In addition to discussing recent enforcement actions, Kraninger also highlighted three innovation policies: the Trial Disclosure Program Policy, No-Action Letter Policy, and the Compliance Assistance Sandbox Policy. (Covered by InfoBytes here.)
- Military Lending Act (MLA). Kraninger reiterated her position that she does not believe Dodd-Frank gives the Bureau the authority to supervise financial institutions for military lending compliance, and repeated her request for Congress to grant the Bureau clear authority to do so. (Covered by InfoBytes here.) Congressman Barr (R-KY) noted that while he introduced H.R. 442 last month in response to Kraninger’s request, the majority has denied the mark up.
- UDAAP. Kraninger fielded a number of questions on the Bureau’s recent abusiveness policy statement. (Covered by InfoBytes here.) Several Democrats told Kraninger the new policy will put unnecessary constraints on the Bureau’s enforcement powers, while some Republicans said the policy fails to define what constitutes an abusive act or practice. Kraninger informed the Committee that the policy statement is intended to “clarify abusiveness and separate it from deceptive and unfairness because Congress explicitly gave us those three authorities.” Kraninger reiterated that the Bureau will seek monetary relief only when the entity has failed to make a good faith effort to comply, and that “[r]estitution for consumers will be the priority in these cases.” She further emphasized that “in no way should that policy be read to say that we would not bring abusiveness claims.” Congresswoman Maloney (D-NY) argued, however, that a 2016 fine issued against a national bank for allegedly unfair and abusive conduct tied to the bank’s incentive compensation sales practices “would have been substantially lower if the [B]ureau hadn’t charged [the bank] with abus[ive] conduct also.” Kraninger replied that the Bureau could have gotten “the same amount of restitution and other penalties associated with unfairness alone.”
- Constitutionality Challenge. Kraninger reiterated that while she agrees with Seila Law on the Bureau’s single-director leadership structure, she differs on how the matter should be resolved. “Congress obviously provided a clear mission for this agency but there are some questions around. . .this and I want the uncertainty to be resolved,” Kraninger testified. “Congress will have the opportunity to make any changes or respond to that and I think that’s appropriate,” she continued. “I would very much like to see a resolution on this question because it has hampered the CFPB’s ability to carry out its mission, virtually since its inception.” (Continuing InfoBytes coverage on Seila Law LLC v. CFPB here.)
On June 6, the FTC announced that it submitted its 2018 Annual Financial Acts Enforcement Report to the CFPB. The report—which the Bureau requested for its use in preparing its 2018 Annual Report to Congress—covers the FTC’s enforcement activities regarding Regulation Z (the Truth in Lending Act or TILA), Regulation M (the Consumer Leasing Act or CLA), and Regulation E (the Electronic Fund Transfer Act or EFTA). Highlights of the enforcement matters covered in the report include:
- Auto Lending and Leasing. The report discusses two enforcement matters related to deceptive automobile dealer practices. The first, filed in August 2018, alleged that a group of four auto dealers, among other things, advertised misleading discounts and incentives in their vehicle advertisements, and falsely inflated consumers’ income and down payment information on financing applications. The charges brought against the defendants allege violations of the FTC Act, TILA, and the CLA. The FTC sought, among other remedies, a permanent injunction to prevent future violations, restitution, and disgorgement. (Detailed InfoBytes coverage of the filing is available here.) In the second, in December 2018, the FTC mailed over 43,000 checks, totaling over $3.5 million, to consumers allegedly harmed by nine dealerships and owners engaged in deceptive and unfair sales and financing practices, deceptive advertising, and deceptive online reviews. (Detailed InfoBytes coverage is available here.)
- Payday Lending. The report covers two enforcement matters, including the U.S. Court of Appeals for the 9th Circuit’s December 2018 decision upholding the $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending program. The decision is the result of a 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. (Detailed InfoBytes coverage is available here.) The report also indicates that, in February 2018, the FTC issued over 72,000 checks totaling more an $2.9 million to consumers stemming from a July 2015 settlement, that alleged that online payday operators used personal financial information purchased from third-party lead generators or data brokers to make unauthorized deposits into and withdrawals from consumers’ bank accounts, regardless of whether the consumer applied for a payday loan. (Detailed InfoBytes coverage is available here.)
- Negative Option. The report covers six enforcement matters related to alleged violations of the EFTA and Regulation E for “negative option” plans, including three new filings against online marketers for allegedly advertising “free trial” offers for products that enrolled consumers in expensive, ongoing plans without their knowledge or consent. The report notes that, in 2018, the FTC reached a settlement with one entity and obtained a court judgment against another, both resulting in injunctive relief and monetary settlements (which were suspended due to the defendants’ inability to pay). The report also notes that the FTC mailed 2,116 refund checks totaling more than $355,000 to people who bought an allegedly deceptive “memory improvement” supplement.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) a study of consumers’ experiences in buying and financing automobiles at dealerships; and (ii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
On May 28, the Nevada governor signed SB 201, which, among other things, updates existing Nevada law referring to the federal Military Lending Act (MLA). Specifically, the bill eliminates the current state law provisions that adopt the MLA by referring generally to the federal law and instead specifically adopts the language of certain MLA provisions for lending to a covered service member or a dependent of a covered service member. The bill thus includes language that (i) prohibits a lender from charging an annual percentage rate greater 36 percent; (ii) requires a lender to make certain disclosures before extending certain consumer credit; and (iii) prohibits certain additional loan terms in a transaction, such as a requirement that the loan be repaid by allotment. The bill also requires the Commissioner of Financial Institutions to adopt regulations to administer, carry out, and enforce the MLA provisions. The new provisions were effective on May 28 for the purpose of adopting any regulations and performing any other preparatory administrative tasks that are necessary to carry out the provisions of this act, and on October 1, 2019, for all other purposes.
On March 12, Director of the CFPB, Kathy Kraninger, testified at a hearing held by the Senate Banking, Housing, and Urban Affairs Committee on the CFPB’s Semi-Annual Report to Congress. While Kraninger’s opening statement and question responses were similar to her comments made last week during a House Financial Services Committee hearing (detailed coverage here), notable highlights include:
- Fair Lending. Kraninger did not provide a status update on the Bureau’s pre-rulemaking activities as they relate to whether disparate impact is cognizable under ECOA, but emphasized that the Bureau is committed to the fair lending mission.
- Data Collection. In response to concerns over the Bureau’s history of expansive data collection, Kraninger noted that data collection is an especially important tool for rulemaking, but stated that going-forward she would ensure the Bureau only collects the information needed to carry out the Bureau’s mission, noting that the less personally identifiable information that is collected, the less that requires protection. She acknowledged the Bureau is reviewing the comments submitted in response to its fall 2018 data governance program report (covered by InfoBytes here) and stated the Bureau remains committed to reviewing the internal processes it has for collecting and using data.
- Military Lending Act (MLA). Kraninger stated that she disagrees with the Democratic Senator’s broad interpretation of Section 1024(b)(1)(C) of the Dodd-Frank Act allowing for the Bureau to examine for compliance with the MLA because that interpretation would permit the Bureau to examine for anything that is a “risk to consumers,” including things like safety and soundness, which is not currently under the Bureau’s purview. While she acknowledged that the Bureau has the direct authority to enforce the MLA, she repeatedly rejected the notion that this would also give the Bureau the authority to supervise for the MLA, as Dodd-Frank separates the Bureau’s enforcement and supervision powers.
- Payday Rule. Kraninger repeatedly emphasized that the reconsideration of the underwriting standards in the Payday Rule was to determine if the legal and factual basis used to justify certain practices as unfair and abusive was “robust” enough. She acknowledged that the Bureau will be reviewing all the comments to the proposal and that the evidence used for the original Rule will be part of the record for the reconsideration.
- GSE Patch. In response to questions regarding the 2021 expiration of the Qualified Mortgage (QM) Rule’s 43 percent debt-to-income ratio exception for mortgages backed by Fannie Mae and Freddie Mac (GSEs), Kraninger acknowledged the “non-QM” market hasn’t materialized over the last few years, as was originally anticipated. However, Kraninger was reluctant to provide any further details, noting that she would not be making any “dramatic changes” to the mortgage market. Additionally, she acknowledged that the GSE patch has the potential to expire at the end of the conservatorship as well.
- CFPB Structure. Kraninger did not specify whether she believes the Bureau should be led by a board, rather than a single director, or whether the Bureau should be under appropriations. Specifically Kraninger stated that she would “welcome any changes Congress made that would increase the accountability and transparency of the Bureau,” and would “dutifully carry out” legislation that would place the Bureau under appropriations if the President signed it.
- Student Lending. Kraninger stated that the Bureau intends to re-engage with the Department of Education on a Memorandum of Understanding (MOU) to assist with complaint and information sharing once a new Student Loan Ombudsmen has been hired. The MOUs were previously terminated by the Department in August 2018 (covered by Infobytes here).
On March 5, U.S. Senate Democrats issued a letter urging CFPB Director, Kathy Kraninger, to resume reviews for compliance with the Military Lending Act (MLA) during routine lender examinations. The Senators argue that the existing statutory authorities for the Bureau “are more than sufficient to justify including MLA compliance in routine examinations,” in an apparent response to Kraninger’s January request to Congress to grant the Bureau “clear authority” to conduct the examinations. (Covered by InfoBytes here.) The Senators cite to Section 1024(b)(1)(C) of the Dodd-Frank Act, which states that the Bureau “shall require reports and conduct examinations on a periodic basis . . . for purposes of . . . detecting and assessing risks to consumers and to markets for consumer financial products and services,” and asserts that charging servicemembers and their families more than 36 percent in violation of the MLA is “clearly a risk” to consumers. Concluding that the CFPB has all the authority it needs to include the MLA in routine examinations, the Senators request the Bureau provide a full justification of the leadership’s decision to not review for compliance with the MLA by March 8.
On January 24, the CFPB’s Office of Servicemember Affairs (OSA) released an annual report, which highlights issues facing military consumers based on complaints submitted by servicemembers, veterans, and their families (collectively “servicemembers”). The OSA report covers the period between April 1, 2017 and August 31, 2018, during which the Bureau received approximately 48,800 military complaints. Some key takeaways from the OSA report are as follows:
- The largest category of servicemember complaints focused on credit reporting, with 37 percent of total servicemember complaints in this area. The report notes that the Department of Defense’s new security clearance process increases the likelihood that a servicemember’s poor credit score could result in losing a security clearance, and by extension being separated from the military.
- After credit reporting, debt collection was the next most complained about issue. Most servicemembers’ debt collection complaints alleged that the servicemember did not owe the debt or that the debt collector failed to respond to written requests for information. In particular, the report states that some debt collectors have inappropriately contacted servicemembers’ chains of command in an attempt to obtain payment.
- For mortgage debt, the largest category of complaints arose from challenges in the payment process—in particular issues related to loan modifications, collections, communicating with the servicemember’s “single point of contact,” escrow, and servicing transfers. These process-focused complaints were closely followed by overall difficulties in being able to afford mortgage payments.
- For credit cards, the greatest concentration of complaints were around problems with purchases on statements (i.e. fraudulent/unauthorized charges, billing frustrations, and difficulties in challenging charges directly with the credit card issuer). Notably, while the report acknowledges the October 2017 Military Lending Act compliance date for credit card issuers, it does not specifically break out MLA-related complaints; rather, the report notes that the Bureau has received “some complaints from servicemembers demonstrating confusion with respect to how and when creditors are applying the MLA’s protections to credit card accounts.”
- For auto lending, the leading category of complaints arose from managing the loan or lease, including application of payments and late fees. Unique to servicemembers, the report highlights that products like GAP can become void if a servicemember takes a car overseas (for example, to use while on deployment).
- For student lending, two-thirds of complaints arose from challenges in making payments and enrolling in payment plans, in particular issues with enrolling and recertifying eligibility for income-driven repayment.
- Finally, in the payday loan space, since 2016 servicemember complaints have decreased drastically and are now equal with non-servicemember complaints (as a percentage of total complaint volume); previously, servicemembers were almost twice as likely to complain about payday loan products.
On January 17, the CFPB issued a statement from Bureau Director Kathy Kraninger announcing she has asked Congress to grant the Bureau “clear authority to supervise for compliance with the Military Lending Act (MLA).” The statement expresses Kraninger’s interest in protecting servicemembers and their families and notes the requested authority would complement the Bureau’s MLA enforcement work. The announcement acknowledges the recently introduced House legislation, H.R. 442, which would directly grant the Bureau supervisory authority over the MLA, and also includes suggested draft legislation the Bureau sent to both the U.S. House of Representatives and the U.S. Senate (here and here). The draft legislation would amend the Consumer Financial Protection Act to include a section providing the Bureau “nonexclusive authority to require reports and conduct examinations on a periodic basis” for the purposes of (i) assessing compliance with the MLA; (ii) obtaining information about the compliance systems or procedures associated with the law; and (iii) detecting and assessing associated risks to consumers and to markets.
As previously covered by InfoBytes, in August 2018, then acting Director Mick Mulvaney internally announced the Bureau would cease supervisory examinations of the MLA, contending the law did not explicitly grant the Bureau the authority to examine financial institutions for compliance. A bipartisan coalition of 33 state Attorneys General wrote to Mulvaney expressing concern over the decision and after her confirmation, a group of 23 House Democrats urged Kraninger to resume the examinations. (Covered by InfoBytes here and here.)
The Bureau’s request that Congress grant it authority to examine for compliance with the MLA suggests that it does not intend to do so unless Congress acts.
District Court orders mortgage company to pay $260,000 in civil money penalties for deceiving veterans about refinance benefits
On December 21, the U.S. District Court for the District of Nevada ordered a non-bank mortgage company to pay $268,869 in redress to consumers and a civil penalty of $260,000 in an action brought by the CFPB for engaging in allegedly deceptive lending practices to veterans about the benefits of refinancing their mortgages. As previously covered by InfoBytes, the CFPB had alleged that, during in-home presentations, the company used flawed “apples to apples” comparisons between the consumers’ mortgages and a Department of Veterans Affairs’ Interest Rate Reduction Refinancing Loan. According to the Bureau, the presentations misrepresented the cost savings of the refinance by (i) inflating the future amount of principal owed under the existing mortgage; (ii) overestimating the future loan’s term, which underestimated the future monthly payments; and (iii) overestimating the total monthly benefit of the loan after the first month. In addition to the monetary penalties, the order prohibits the company from misrepresenting the terms or benefits of mortgage refinancing and requires the company to submit a compliance plan to the Bureau.
On December 14, Maxine Waters (D-CA) and 22 other House Democrats issued a letter urging the new CFPB Director, Kathy Kraninger, to resume supervisory examinations of the Military Lending Act (MLA). As previously covered by InfoBytes, according to reports citing “internal agency documents,” the Bureau ceased supervisory examinations of the MLA, contending the law does not authorize the Bureau to examine financial institutions for compliance with the MLA. In response, a bipartisan coalition of 33 state Attorneys General sent a letter to then acting Director, Mick Mulvaney, expressing concern over the decision (covered by InfoBytes here).
The letter from Waters, who is expected to be the next chair of the House Financial Services Committee, and the other 22 Democratic members of the Committee, argues that “there is no question the [CFPB] has the authority and the responsibility to supervise its regulated entities for compliance with the MLA.” As support, the letter cites to the Bureau’s authority to oversee a “wide range of regulated entities,” the establishment of the Bureau’s Office of Servicemember Affairs, and the 2013 amendments to the MLA, which gave the Bureau the authority to enforce the act. The letter also points to the Bureau’s work obtaining $130 million in relief for servicemembers, veterans, and their families through enforcement actions, as well as the 109 complaints the Bureau has received from military consumers since 2011.
On October 23, a bipartisan coalition of 33 state Attorneys General sent a letter to acting Director of the CFPB, Mick Mulvaney, expressing concern over reports that the Bureau is no longer supervising financial institutions for compliance with the Military Lending Act (MLA). The Attorneys General wrote that the Bureau would be “failing to abide by its statutorily mandated duty to enforce the MLA” by interpreting its authority to preclude the examination of lenders for compliance with the act. Specifically, the Attorneys General point to recent amendments to the MLA providing that the statute “shall be enforced” by the Bureau (among other agencies) “under any . . . applicable authorities available to the [Bureau].” This includes the authority to examine lenders “to ‘detect and assess risks to consumers.” According to the Attorneys General, the origination of non-MLA compliant loans to servicemembers constitutes such a risk.
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