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President Biden extends moratorium on student loan payments
On April 6, President Biden extended the moratorium on collecting student loans until August 31, explaining that the extension “will assist borrowers in achieving greater financial security and support the Department of Education’s efforts to continue improving student loan programs.” The Department of Education released a statement noting that it will continue to assess the financial impacts of the Covid-19 pandemic on student loan borrowers and assist them, which includes “allowing all borrowers with paused loans to receive a ‘fresh start’ on repayment by eliminating the impact of delinquency and default and allowing them to reenter repayment in good standing.” In response to the extension, Secretary of Education Miguel Cardona stated that the Department of Education will continue "to ensure that all borrowers have access to repayment plans that meet their financial situations and needs.”
CFPB reports on extended payment plans for payday loans
On April 6, the CFPB released a report on consumer use of state payday loan extended payment plans, which is believed to be the first study to compare state extended payment plans and usage rates. The report examines state payday loan extended payment plans, an intervention which permits payday borrowers to repay their loan in no-cost installments. The report analyzed laws in states that authorize payday loans and determined that 16 of the 26 payday-authorizing jurisdictions address extended payment plans. According to the Bureau, the savings of a no-cost extended payment plan can be substantial when compared to the total charges associated with repeated rollover fees. A Bureau press release regarding the report highlighted findings from prior research that most payday loans were made to borrowers who use the rollover option so many times that the accrued fees were greater than the original principal.
Key findings of the report include, among other things:
- State payday loan extended payment plan laws typically address certain key provisions. Key provisions include, among other things, number of installments, plan length, allowable fees, frequency of use, consumer eligibility, and disclosures. While specific requirements vary by state, typical features include: disclosure of the right to elect an extended payment plan at the time consumers enter into a payday loan agreement, the requirement that an extended payment plan be repaid in several installments, and that there be no additional fees charged for an extended payment plan.
- Eligibility requirements for extended payment plans vary by state and likely impact usage rates. For example, in Washington, which has possibly the most borrower-friendly extended payment plan, the usage rate is 13.4 percent, whereas states with more restrictive requirements, such as Florida, which requires credit counseling to be eligible, may have usage rates under 1 percent.
- Despite the prevalence of state laws providing for no-cost extended payment plans, rollover and default rates consistently exceed extended payment plan usage rates. According to the report, monetary incentives encourage lenders to promote higher-cost rollovers, and collect the fees associated with such rollovers, at the expense of extended payment plans.
CFPB’s TSR claims against software company to proceed
On April 5, the U.S. District Court for the Central District of California denied a motion to dismiss claims brought by the CFPB alleging violations of the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the California-based software company and its owner (collectively, “defendants”) market and sell credit-repair business software and other tools to credit-repair businesses charging unlawful advance fees to consumers. According to the Bureau, the defendants provide substantial assistance to these businesses and purportedly encourage them to “charge unlawful advance fees” even though, under the TSR, companies that telemarket their services are prohibited from requesting or receiving fees from consumers until consumers are provided with a credit report showing that the promised results have been achieved.
The court was unpersuaded by the defendants’ argument that the Bureau exceeded its authority to pursue enforcement actions against them, claiming the credit-repair businesses that use defendants’ products and services are not “covered persons” under the CFPA, as the businesses “provide only retrospective credit-repair services and thus do not provide prospective consumer financial services under the CFPA.” The court held that the CFPA’s broad purpose and expansive language covers the services provided by the credit-repair businesses to improve or repair consumers’ credit and that such activity is considered “credit counseling” under the CFPA and is therefore a “consumer financial product or service.” The court further held that the credit-repair businesses were “covered persons” based on allegations that they provide consumers’ credit history to help with the approval of a mortgage or auto loan, recognizing that performing analysis relating to the credit history of consumers in connection with a decision regarding a consumer financial product or service is covered by the CFPA. The court also disagreed with the defendants’ argument that they are not “service providers” under the statute, in part, because the defendants “have the capacity to vet and monitor” the credit-repair businesses. The court also was not persuaded that the Credit Repair Organizations Act’s (CROA) provision allowing credit-repair businesses to charge monthly fees supersedes the TSR requirement that such a company cannot collect payment until the promised results have been achieved, holding that the requirements of each are not in conflict and noting that “if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR—only the CROA is applicable,” and that nothing in the language of the CROA indicates that the defendants’ activities “may not simultaneously be regulated by the [TSR].”
District Court rejects borrower’s RESPA, TILA mortgage servicing claims
On March 15, the U.S. District Court for the Southern District of Ohio granted a defendant mortgage loan servicer’s motion for summary judgment in an action claiming violations of federal law based on alleged defects in the servicing of the plaintiff’s loan. According to the court, after settling similar claims against his two prior loan servicers, the plaintiff sued the companies that own and service his mortgage loan (collectively, defendants) disputing the precise amount of his delinquency and claiming the defendants failed to properly apply his mortgage payments or to respond to his notice of error (NOE). The plaintiff contended, among other things, that the defendants’ response to the NOE, misapplication of payments, and inaccurate periodic mortgage statements breached the terms of the mortgage agreement and violated RESPA, FDCPA, and TILA. In granting summary judgment, the court agreed with the defendants, finding that plaintiff’s breach of contract claim was foreclosed by a prior settlement agreement with his former servicer. The court also found that the servicer’s response to plaintiff’s NOE did not violate RESPA because it “fully addressed both ‘errors’ that the plaintiff presented,” and the perceived errors “amounted to confusion about basic arithmetic.” The court emphasized that “[n]othing in RESPA or Regulation X gives borrowers authority to dictate the parameters of a lender’s investigation,” and concluded that the servicer’s investigation and response was sufficient since the servicer provided the documents used to conclude that there was no misapplication of funds and “[e]ven a cursory investigation would have revealed that the specific errors alleged in the NOE did not occur.”
In granting the defendants’ request for summary judgment regarding claims that the plaintiff received five inaccurate mortgage statements in violation of the FDCPA and TILA, the court concluded that the periodic statements contained all the fields required under Regulation Z, and explained that allegations contesting the accuracy of the information contained in the statements did not violate TILA because “12 C.F.R. § 1026.42(d) does nothing to regulate the accuracy of information presented in a periodic statement.” As to the plaintiff’s FDCPA claim, which was premised on allegations that plaintiff’s prior servicer misapplied funds which caused defendants to collect amount that plaintiff did not owe, the court found that that the disputed periodic statement was truthful and accurate and that the plaintiff released the defendants of any liability under the FDCPA in his settlement agreement with the prior servicer.
FDIC highlights NSF/overdraft fees, fair lending in 2022 Consumer Compliance Supervisory Highlights
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
HUD proposes 40-year term for loan modifications
On April 1, HUD published a proposed rule in the Federal Register to increase the maximum term limit allowable on loan modifications for FHA-insured mortgages from 360 to 480 months. According to the proposed rule, the update would allow mortgagees to provide a 40-year loan modification option to borrowers who may not qualify for loss mitigation options and is intended to help borrowers experiencing a financial hardship, including those impacted by the Covid-19 pandemic, obtain affordable monthly payments. The proposed rule noted that “[i]ncreasing the maximum term limit to 480 months would allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Additionally, the proposal would align FHA with Fannie Mae and Freddie Mac, “which both currently provide a 40-year loan modification option.” Comments are due by May 31.
CFPB handled nearly 1 million consumer complaints in 2021
On March 31, the CFPB published its Consumer Response Annual Report for 2021, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2021. According to the report, the Bureau handled approximately 994,000 consumer complaints last year. Among other trends, the agency found that complaints about credit or consumer reporting continue to increase, accounting for more than 70 percent of all complaints received last year. Debt collection complaints are also increasing, accounting for more than 10 percent of all complaints. Consumers also reported difficulties with financial institutions failing to adequately address consumer complaints, giving consumers the runaround, and described issues with reaching companies to raise concerns about digital assets, mobile wallets, and buy-now-pay-later credit. The Bureau noted that during the second year of the Covid-19 pandemic, complaint data showed that the volume of complaints from consumers struggling to pay their mortgages is increasing as borrower protections have expired. While complaints related to vehicle loans have also increased, the Bureau reported that student loan complaints remain lower than pre-Covid levels due to the implementation of temporary relief programs. The top products and services—representing approximately 94 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to money transfers and virtual currency; vehicle finance; prepaid cards; student, personal, and payday loans; credit repair; and title loans.
House subcommittee discusses eliminating overdraft fees
On March 31, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing titled, The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions, to discuss efforts to reduce or eliminate overdraft fees. Subcommittee Chair Ed Perlmutter (D-CO) opened the hearing by noting that “consumers in the United States pay around $10 to $12 billion in overdraft fees and nonsufficient fund fees,” with just 9 percent of consumers representing up to 80 percent of these fees. He also noted that these “types of fees impact people of color at a disproportionate rate,” and that “[s]tudies have found banks with branches in predominantly black neighborhoods charge more for overdraft on average, and black customers are overrepresented in those who report paying more than $100 in fees in the past year.” Some subcommittee Democrats appeared supportive of measures to address the alleged growing reliance by banks and credit unions on revenues from overdraft fees to make up for interest lost in the current low-rate environment. In contrast, certain subcommittee Republicans appeared skeptical of government efforts to limit financial institutions’ ability to provide overdraft services, questioning the impact such efforts would have on smaller financial institutions like community banks and credit unions. The committee memorandum and hearing focused on the evolving trends related to overdraft programs and fees and their impact on consumers, including the following:
- Overdraft and Non-Sufficient Funds (NSF) Fee Data and Trends. The subcommittee quoted a study that found that “federal regulators have required banks and credit unions with more than $1 billion in assets to report revenue collected specifically from overdraft and NSF fees, totaling between $11 billion and $12 billion annually,” since 2015. According to the subcommittee, “the true fee total is likely higher since smaller depository institutions are exempt from the reporting requirement.”
- Impact on Consumers. The subcommittee quoted a report that said “consumers face challenges with unclear or confusing overdraft policies or are charged fees simply because of a delay in when their paycheck deposits are made available or when other transactions are settled in their account.” According to the report, consumers “incur overdraft fees despite carefully attempting to avoid them and often believing they have. One practice, in particular, has garnered increased attention recently: charging overdraft fees on debit card transactions that were authorized when the consumer had sufficient funds in the account but then settled, often a few days later, when the account no longer had sufficient funds.”
- Proposals and Challenges to Improving Consumer Protections when Consumers Overdraft. The subcommittee pointed out that initiatives to improve overdraft fees and NSF fees would “focus on enhancing disclosures and information about overdraft provided to consumers; capping the number of fees a consumer may be charged in a defined period of time; reducing the cost of each fee, or encouraging or incentivizing financial institutions to offer small-dollar loans with streamlined underwriting and affordable interest rates or repayment plans to provide an alternative for consumers who typically rely on overdraft.” The subcommittee also said another possible improvement in the market would result from adopting a faster payments network, such as the FedNow Service. As previously covered by InfoBytes, the Fed announced in August 2020 its intention to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024.
One witness, a senior policy analyst from a Latino civil rights and advocacy organization, expressed his support for reducing or eliminating overdraft fees, stating that “[o]verdraft fees, by their nature, impact consumers when they can least afford an additional [c]ost.” The witness quoted a study that found “[l]ow- to moderate-income households are nearly twice as likely as higher-income households to overdraw an account.” Calling overdrafts “a penalty for being poor or financially insecure,” another witness, a consumer policy counsel at a civil rights nonprofit, expressed that “overdraft fees are a penalty for being poor or financially insecure.” Quoting a study finding that approximately “80 percent of overdraft fee revenue to banks comes from 9 percent of accounts,” the witness stated that the “median account balance of this group is less than $350.” In contrast, another witness, a law professor at George Mason University, stated in the hearing that “exasperation is not a substitute for sound economic analysis," He stressed that “this is an area in which unintended consequences of bans on overdraft protection, substantive limits, price controls and the like could have some serious unintended consequences.” He further warned of possible negative consequences should policymakers eliminate overdraft programs, cautioning that new restrictions on overdrafts may have many negative implications for consumers, including “higher bank fees, higher minimum monthly deposits . . . and a loss of access to free checking.”
Additionally, some House Republicans were critical of recent efforts taken by the CFPB in this space and the elimination of overdrafts by several banks. During the hearing, Rep. Blaine Luetkemeyer (R-MO) criticized the CFPB’s inquiry into junk fees (covered by InfoBytes here), arguing that, “t[h]ere is no legal authority for the CFPB to define the term ‘junk fee’ . . . and even less authority for the CFPB to act as a price setter in the consumer financial market.” Luetkemeyer added that “the CFPB is manufacturing a crisis about hidden fees for financial products and services when they are the very people that made up the disclosure regime,” and called the effort “another attempt by the CFPB to denigrate legally operating businesses by any means possible.”
FTC sues company over “free” tax filing campaign
On March 29, the FTC issued an administrative complaint against a company that produces tax filing software for allegedly engaging in deceptive business practices when advertising, marketing, distributing, and selling their purportedly “free” tax filing services. The FTC also filed a complaint for a temporary restraining order and an emergency motion for a temporary restraining order (TRO) and preliminary injunction against the company in the U.S. District Court for the Northern District of California, stating that unless the court steps in, the company will “be free to continue disseminating the deceptive claim that consumers can file their taxes for free using [the software] when, in truth, in numerous instances, defendant does not permit consumers to file their taxes for free using [the software].” The FTC stated in its announcement that millions of consumers are unable to take advantage of the tax filing software’s allegedly “free” service (including those who get a 1099 form for work in the gig economy or those who earn farm income), noting that roughly two-thirds of tax filers were unable to file their taxes for free in 2020. According to the complaint, these consumers are often informed they need to upgrade to a paid version to complete and file their taxes. The FTC specifically pointed to the company’s “Absolute Zero” ad campaign, in which the company informed consumers that its “offering was truly free.” The agency said company’s campaign included the words “Free Guaranteed” to “bolster and emphasize the claim that the offer was truly free.” While many of the company’s ads do contain a fine print disclaimer clarifying that the offer is limited to consumers with “simple tax returns,” the FTC said this is inadequate to cure the misrepresentation that consumers can file their taxes for free because the disclaimers are “disproportionately small compared to the prominent text emphasizing that the service is free,” appear for just seconds, and are in writing only and not read by a voiceover.
Senate Banking Committee members ask CFPB to address medical debt
On March 29, several Democratic U.S. senators sent a letter to CFPB Director Rohit Chopra asking the Bureau to use its authority to take measures to address the growing medical debt burden facing consumers. The letter, led by Senator Sherrod Brown (D-OH), follows a report issued by the Bureau earlier in the month that outlined the negative consequences of medical debt and announced the agency’s intention to review whether data on unpaid medical bills should be included in consumer credit reports (covered by InfoBytes here). The Bureau also stated it would hold consumer reporting agencies accountable for inaccurate reports. Shortly after the Bureau released the report, the three major credit bureaus announced they were eliminating nearly 70 percent of medical collection debt tradelines from consumer credit reports. As previously covered by InfoBytes, Brown issued a statement supporting the credit bureaus’ announcement, but also stressed his intention to collaborate with the Bureau on “address[ing] the growing burden of medical debt, protect[ing] working families, and hold[ing] bad actors accountable.”
In their letter, the senators highlighted the disproportionate impact of medical debt on low-income individuals, minorities, veterans, younger and older Americans, and other vulnerable populations. The senators also expressed concerns regarding the recent trend of private equity firms investing in the healthcare market, especially as private equity-owned health providers are reportedly charging higher rates but delivering lower quality care. According to the senators, these concerns heighten the need for the Bureau to take further action. The senators asked the Bureau to create an ombudsman position to handle medical debt issues (similar to the ombudsman position that oversees student loan servicers’ compliance with federal and state law), and pressed the need for additional research focusing on, among other things, medical debt collection practices and the debt selling market for medical bills.