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CFPB Fines Loan-Servicing Software Company $1.1 Million for Flaws Leading to the Reporting of Inaccurate Consumer Information
On November 17, the CFPB ordered a loan-servicing software company to pay a $1.1 million penalty for errors that resulted in the company furnishing incorrect consumer information related to over one million borrowers to the credit reporting agencies. The consent order alleges that the company violated the Consumer Financial Protection Act when its third-party software application generated and furnished inaccurate and incomplete information to consumer reporting agencies because of known software defects. The company allegedly did not share the existence of the defects with its auto-lender clients. In addition to the civil money penalty, the company was ordered to: (i) explain its errors to its clients; (ii) fix the faulty software; and (iii) provide the Bureau with a compliance plan outlining how it plans to identify and fix the defects, as well as ensure that the software is capable of reporting accurate information.
On November 13, the CFPB’s Office of Financial Education (OFE) published two requests for information (RFI) in the Federal Register concerning free access to credit scores. The first RFI requests information related to (i) consumers’ experience when accessing free credit scores, and (ii) the experience of companies and nonprofits when offering free access to credit scores to their customers and the general public. The Bureau plans to use the information gathered through the RFI to, among other things, “identify educational content that is providing the most value to consumers, and additional educational content that the Bureau or others could develop to increase consumers’ understanding of credit scores and credit reports.” Comments must be received by February 12, 2018.
The second RFI requests information on companies that provide existing customers free access to a credit score. This information will be used to update OFE’s March 2017 list of companies that offer this service. (See previous InfoBytes coverage here.) Following its update to the list, the CFPB intends to publish information “to educate consumers about the availability of credit scores and credit reports and how this information can be used effectively.” Comments must be received by January 12, 2018.
On October 30, Alabama Attorney General Steve Marshall announced that a state court granted a permanent injunction against a credit repair company and its owner/operators for allegedly engaging in deceptive and illegal credit repair practices. According to the Office of the Attorney General, defendants allegedly (i) used deceptive advertising that guaranteed improved credit scores and made various false promises; (ii) charged consumers before services were completed or charged rates different from those that were advertised; (iii) failed to allow consumers to cancel the service within three days as required by federal law governing credit repair businesses; and (iv) indiscriminately disputed negative credit report items--a practice known as “jamming”—to create the illusion of improved credit and a temporary rise in credit score. The order permanently closes the company, bans the defendants from engaging in any credit repair or consumer finance activity, and prohibits defendants from owning or managing any business in Alabama or involving Alabama consumers.
On September 14, the CFPB’s Project Catalyst initiative issued its first “no-action” letter to a consumer lending firm that provides an online lending platform that uses alternative data when making lending decisions. As previously discussed in InfoBytes, Project Catalyst explores innovation in the consumer financial services sector and examines the potential challenges facing consumers, entrepreneurs, and investors. With the issuance of the no-action letter—at the lender’s request—the CFPB indicated that it does not, at the present, intend to take enforcement action against the lender under the Equal Credit Opportunity Act. However, the letter does not waive the Bureau’s right to choose to “conduct supervisory activities or engage in an enforcement investigation” should the lender fail to comply with the outlined terms. Further, the letter stipulates that the Bureau has the right to evaluate other matters concerning the lender. According to a press release issued by the Bureau, the lender has agreed to “share certain information with the CFPB regarding the loan applications it receives, how it decides which loans to approve, and how it will mitigate risk to consumers, as well as information on how its model expands access to credit for traditionally underserved populations.”
Earlier this year the CFPB issued a request for information seeking input about the use of alternative data, and it believes the information it will receive under the terms of the no-action letter will help to “further its understanding of how these types of practices impact access to credit generally and for traditionally underserved populations, as well as the application of compliance management systems for these emerging practices.” (See previous InfoBytes summary here.)
On June 27, the CFPB filed two complaints in the District Court for the Central District of California against several credit repair companies and affiliated individuals. The CFPB alleged that these defendants violated the Consumer Financial Protect Act and the Telemarketing Sales Rule by charging consumers illegal fees and misleading consumers about services (see complaints here and here).
According to a CFPB press release, the defendants allegedly “[c]harged illegal advance fees” such as initial consultation fees, and set-up fees prior to providing certain services. Defendants also allegedly “[f]ailed to disclose limits on ‘money-back guarantees’” and “[m]isled consumers about the benefits of their services” by suggesting they could remove negative information from credit reports and “substantial[ly] increase” credit scores.
The CFPB submitted a proposed final judgment for each suit. In the first suit, the CFPB proposed a civil money penalty of over $1.5 million, and restrained defendants from working in credit repair services or maintaining an ownership interest in any company that provides credit repair services for a period of five years. In the second suit, the CFPB sought similar injunctive relief, and also proposed “equitable monetary relief in the form of disgorgement . . . in the amount of $500,000.”
On June 7, the CFPB published analysis of how consumers transition out of credit invisibility. “Credit invisibility” refers to an individual who lacks a credit record at any of the three nationwide credit reporting agencies. The report, entitled CFPB Data Point: Becoming Credit Visible, highlights the results of its latest study of the credit reporting industry, finding that consumers in low-income areas are more likely to gain credit visibility in negative ways such as through an account in collection or some form of public record. In a previous study, the CFPB estimated approximately 26 million Americans were credit invisible with an additional 19 million consumers having “unscorable” credit files—i.e. files that contain insufficient or too brief credit history. (See previous InfoBytes coverage here.) Without such a record, lenders find it more difficult to assess a consumer’s creditworthiness, resulting in credit invisible individuals having a harder time accessing credit.
The report notes that credit invisibility can present a “Catch-22” scenario, whereby a consumer needs credit history to get access to credit but cannot establish a credit history without first being extended credit. However, the report concludes that because 91 percent of consumers acquire a credit record before turning 30, it is possible to avoid a “Catch-22” situation.
The Bureau highlighted the following key findings:
- Most consumers – almost 80 percent – become credit visible before age 25, but Consumers in low- and moderate-income neighborhoods are likely to be older when they establish a credit history.
- Members of all age groups and income levels most commonly use credit cards to establish credit history, with student loans ranking second.
- Approximately 1-in-4 consumers first establish credit history through an account either held by another responsible party—i.e. becoming an “authorized user”—or with a co-borrower. This trend is more common among higher-income groups.
- Consumers in lower-income neighborhoods, however, are more likely to establish a credit history through “non-loan items,” which usually convey negative information (e.g., third-party collections, delinquent utility bills, child support payments, etc.).
- In recent years, more consumers create a credit history using a credit card, except within the under 25 age group. The report attributed the trend in the under 25 age group to a number of factors including increased student loans and the restrictions of the Credit Card Accountability Responsibility and Disclosure Act, which made credit cards less available to young consumers.
Cordray Speaks at Consumer Advisory Board Meeting; Extends Comment Period for RFI on Small Business Lending Market
On June 8, CFPB Director Richard Cordray delivered prepared remarks at the Consumer Advisory Board Meeting in Washington, DC announcing, among other things, that the Bureau has extended the comment period of the “Request for Information Regarding the Small Business Lending Market” an additional 60-days. As previously covered in InfoBytes, the RFI—which was issued May 10—will provide feedback on various aspects of the small business lending market. Cordray noted the CFPB is “mindful of the potential complexity and cost of small business data collection and reporting” and that it plans to “explore ways to fulfill this duty in a balanced manner, seeking to provide timely data with the highest potential to meet the statutory objectives, while minimizing the burdens for both industry and the Bureau.” Allowing for more time to receive “quality responses from the public,” Cordray extended the comment period.
Additionally, Cordray discussed three other topics: (i) the Bureau’s emphasis on encouraging credit card market transparency to reduce consumer risk; (ii) updates to the Bureau’s continued “credit invisibility” research; and (iii) the need to formulate new rules governing the debt collection market.
On April 11, CFPB Director Richard Cordray delivered prepared remarks at the Operation HOPE Global Forums Annual Meeting in Atlanta addressing, among other things, financial challenges facing the “economically vulnerable”—most notably with respect to credit reporting and the handling of consumer disputes. As previously covered in InfoBytes, credit reporting was one of the top three consumer complaint categories for 2016. In his speech, Cordray cited a FTC study that found that “millions of people had an error on at least one of their credit reports that was serious enough to materially affect their credit score” and outlined the Bureau’s position for addressing these concerns such as (i) requiring credit reporting companies to improve quality control systems; (ii) creating easier access for consumer to dispute errors; and (iii) cleaning up information initially provided to the credit reporting companies by examining the ways in which banks and financial companies furnish the information.
On March 7, the Pennsylvania Department of Banking and Securities announced it has published a new brochure to help consumers better understand what information should be included in their credit report and what steps to take if there is an issue.
On March 6, CFPB Director Richard Cordray spoke at the LendIt USA Conference to outline three “areas of special interest” to the Bureau relating to innovations in consumer financial services. In his prepared remarks, Cordray highlighted the three areas as (i) the Project Catalyst initiative; (ii) issues regarding consumer control over personal financial data; and (iii) research concerning the benefits and risks of using unconventional data sources to underwrite loans as a means to open credit access for more consumers.
Project Catalyst, Cordray explained, is the Bureau’s major initiative which “operates on the principle that markets work best when they are wide open to competition from new ideas.” He further explained that the Bureau is trying to “learn about what does and does not work for consumers [as well as] potential challenges facing entrepreneurs and investors.” Project Catalyst hosts an “Office Hours” program to engage with startups, nonprofits, banks, and other financial companies, and conducts research pilot programs with companies of all sizes. It also works to devise new policies to foster innovations such as the “Trial Disclosure Waiver Policy,” which encourages the development of new technologies and approaches for designing and testing alternative consumer disclosures.
Cordray also spoke about the Bureau’s interest in understanding the ways consumers are exercising control over their personal financial data. Last November, the Bureau issued a Request for Information seeking input on the challenges consumers face when accessing, using, and securely sharing their financial records. Furthermore, Cordray emphasized at the conference that two pressing issues are (i) “how to satisfy the demands of the consumers without exposing the providers that maintain [the] data to undue costs and risks, and (ii) how to prevent consumers from subjecting themselves to undue risk, including [the misuse of their data].”
Finally, Cordray commented on the Bureau’s February Request for Information issued to better understand the potential consumer benefits and risks associated with using, applying, and analyzing “alternative data” to predict people’s creditworthiness. The request asked consumers for feedback about the difficulties they have encountered when accessing, using, and securely sharing their financial records.