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FTC shares 2021 enforcement report with CFPB
On June 3, the FTC announced that it submitted its 2021 Annual Financial Acts Enforcement Report to the CFPB. The report covers FTC enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include, among other things:
- Automobile Credit and Leasing. The report discussed the FTC’s July 2021 settlement with the owners of car dealerships in Arizona and New Mexico (collectively, “defendants”) resolving claims that the defendants misrepresented consumer information on finance applications and misrepresented financial terms in advertisements in violation of TILA and CLA (covered by InfoBytes here).
- Payday Lending. The report highlighted the FTC’s settlement against a payday lending enterprise for allegedly overcharging consumers millions of dollars, deceiving them about the terms of their loans, and failing to make required loan disclosures. According to the report, the owners and operators of the settling entities are banned from making loans or extending credit, nearly all debt held by the company will be deemed paid in full, and the companies involved are being liquidated, with the proceeds to be used to provide redress to consumers harmed by the company.
- Credit Repair and Debt Relief. The report discussed the FTC’s settlement with the operators of a student loan debt relief scheme, who were charged with falsely promising consumers the company could lower or eliminate student loan balances, illegally imposing upfront fees for credit repair services, and signing consumers up for high-interest loans to pay the fees without making required loan disclosures in violation of TILA. The order bans the defendants from providing debt relief services and collecting any further payments from consumers who purchased the services, and requires the defendants to return money to be used to refund consumers.
Additionally, the report addressed the FTC’s research and policy efforts and highlighted the FTC’s Military Task Force’s work on military consumer protection issues.
HUD announces $65,000 payment for FHA violations
On June 2, HUD announced a conciliation agreement with a mortgage lender to resolve allegations that it engaged in discriminatory lending practices based on race and national origin, in violation of the Fair Housing Act (FHA). The agreement arises from a complaint filed with HUD by the National Community Reinvestment Coalition (NCRC), which alleged that testing in the Seattle-Tacoma area revealed that Black and Hispanic testers were treated differently than White testers who sought housing loans. While the respondent denied that it provided less favorable treatment to testers based on race or national origin, it has agreed to pay $65,000 to NCRC and will “contribute an additional $10,000 to a Seattle-area non-profit organization specializing in providing financial literacy and housing education and counseling for persons in majority-minority census tracts in the Seattle-Tacoma-Bellevue metropolitan area.” The respondent will also conduct an event in the Seattle metro area to improve homeownership rates of Black homebuyers and will provide additional fair lending training to employees. The conciliation agreement does not constitute an admission by respondent or evidence of a finding by HUD of a violation of the FHA.
Special Alert: Fed finalizes rule for FedNow platform
The Federal Reserve Board recently issued a final rule for its FedNow instant-payments platform that offers more clarity on how the new service will work while essentially adopting the proposed rule. FedNow will stand alongside private sector initiatives and, like more modern payments systems, will feature credit payments to push funds rather than debit payments to pull funds, offering faster processing.
Highlights of the new rule and FedNow
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
- Not a consumer or business app or service. Depository institutions that are eligible to hold Reserve Bank accounts will be able to use FedNow, which will be administered by the 12 Reserve Banks. Consumers and businesses may not participate in FedNow directly, and therefore, could not send payment orders to a Reserve Bank through it. They would instead send instant payments through their depository institution accounts.
- Bank v. nonbank direct participation in FedNow. Eligible institutions include banks, savings associations, credit unions, U.S. branches and agencies of non-U.S. banks, Edge or agreement corporations, some systemically important financial market utilities, and government-sponsored entities (including Fannie Mae and Freddie Mac). We use the term “banks” throughout to simplify the discussion.
- Not yet open for business. The Fed continues to target release of FedNow for sometime in 2023. It will implement the 24x7x365 real-time payments service in stages, each with additional features and enhancements.
Fed publishes financial sector liabilities
On June 6, the Federal Reserve Board published a notice in the Federal Register regarding Regulation XX (Concentration Limit) to announce that the Fed will publish the aggregate financial sector liabilities by July 1 of each year. Regulation XX generally “prohibits a merger or acquisition that would result in a financial company that controls more than 10 percent of the aggregate consolidated liabilities of all financial companies (‘aggregate financial sector liabilities’).” The Fed explained in the notice that aggregate financial sector liabilities are “equal to the average of the year-end financial sector liabilities figure (as of December 31) of each of the preceding two calendar years.”
FTC says consumers lost more than $1 billion to crypto fraud
On June 3, the FTC reported that consumers lost over $1 billion to fraud involving cryptocurrencies from January 2021 through March 2022. The FTC’s recent Consumer Protection Data Spotlight found that cryptocurrency is becoming the payment of choice for many scammers and that most reported cryptocurrency losses involved fake investment opportunities (totaling $575 million in reported losses since January 2021). The spotlight stated that nearly four out of every ten dollars reported lost to a fraud originating on social media was lost in crypto, far more than any other payment method. Following losses related to cryptocurrency schemes, the next largest losses involved romance scams ($185 million) and business and government impersonation scams ($133 million collectively).
CFPB highlights abuses in military allotment system
On June 2, the CFPB posted a blog post highlighting abuses within the military allotment system with respect to servicemembers’ automatic recurring payments. According to the Bureau, the allotment system was established to help servicemembers make payments directly from their paychecks, especially when deployed away from home. However, according to the CFPB some lenders have been abusing the allotment system, with certain lenders using the system “as a means of prioritizing repayment of that lender’s loan over the servicemember’s payments of other expenses.” The Bureau noted that servicemembers have other options for automatic payments that are usually free of charge and provide more legal protections than the allotment system, and reiterated that the Department of Defense (DoD) made significant changes in 2014 that prohibited new allotments to purchase, lease, or rent personal property like cars, furniture, and electronics, and “expanded the allotment prohibition in the Military Lending Act (MLA) to include a wider range of credit products, like installment loans, that cannot be repaid by allotment” (revised MLA regulations covered by InfoBytes here).
Through consumer complaints and the work of the agency’s Office of Servicemember Affairs, the Bureau stated it continues to hear about significant concerns in this space, including that some lenders are requiring servicemembers to repay by allotment (a violation of the MLA), and other lenders are entering into partnerships with allotment processing banks to create “allotment-funded savings accounts” for servicemembers in order to evade DoD protections. The blog post emphasized the Bureau’s commitment to protecting servicemembers from abuses and provided information for servicemembers on filing complaints should they believe they have been unfairly treated by a company through the military allotment system.
FTC to modernize guidance on preventing digital deception
On June 3, the FTC announced that it is soliciting public comment on modernizing the agency’s business guidance titled “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” which was published in 2013 and provides guidance to businesses on digital advertising and marketing. In seeking public comment on possible revisions, the FTC is seeking information on the technical and legal issues that consumers, the FTC’s law enforcement partners, and others believe should be addressed. The issues include, among other things: (i) the usage of sponsored and promoted advertising on social media; (ii) advertising embedded in games and virtual reality and microtargeted advertisements; and (iii) the usage of dark patterns, manipulative user interface designs used on websites and mobile apps, and digital advertising that pose unique risks to consumers. According to the Commission, this effort “is one of a number of initiatives the FTC is undertaking to tackle dark patterns and digital deception, including issuing a click-to-cancel policy statement, proposing strengthened advertising guidelines against fake and manipulated reviews, arming staff with new tools to investigate dark patterns, and authorizing a Notice of Penalty Offense against deceptive reviews.” Comments close on August 2.
Coding glitch hits credit scores
Recently, a consumer reporting agency (CRA) informed lenders and industry members that it experienced a coding issue when it changed some of the technology to its legacy online model platform. As a result of the issue, the CRA advised that the miscalculation impacted approximately 12 percent of credit scores, although credit reports were not affected.
In response, on June 1, Fannie Mae issued a notice regarding the coding error. Fannie Mae reminded lenders “of their obligations under the Selling Guide to correct erroneous credit data, ensure the accuracy of the credit data submitted to Desktop Underwriter® (DU® ) at the time of loan sale, and to provide any corrected information to us.” Freddie Mac issued a similar notice advising lenders of their credit reporting and data correction responsibilities. Both Fannie Mae and Freddie Mac are monitoring the situation and may issue additional guidance regarding the coding issue.
Ed. Dept. discharges additional $5 billion
On June 1, the Department of Education announced the “largest single loan discharge the Department has made in history,” which includes discharging all remaining federal student loans borrowed to attend any campus owned or operated by a specific large for-profit post-secondary education company from its founding in 1995 through April 2015. The action will result in 560,000 borrowers receiving $5.8 billion in full loan discharges. According to the Department, the post-secondary education company engaged in “widespread and pervasive misrepresentations,” including guarantees that students would find a job. Additionally, the company “made pervasive misstatements to prospective students about the ability to transfer credits and falsified their public job placement rates.” The Department noted that the California AG’s investigation alleged that the company engaged in deceptive and false advertising and recruitment practices, as well as lied to its students about job placement. The Department noted it has approved $25 billion in loan relief to individuals since President Biden took office.
On June 2, CFPB Director Rohit Chopra released a statement regarding the discharge, referring to the company as a “ notorious repeat offender that defrauded its students and the public over many years.” Chopra also noted that the CFPB and state attorneys general actively pursued the company for its misconduct. Chopra pointed to when the Bureau “filed a lawsuit in 2014, obtained a default judgment and secured $480 million in private student loan cancellation in 2015, and won another $183 million in loan cancellation in 2017.” Chopra further noted that “[i]n 2016, then-California Attorney General Kamala Harris won a $1.1 billion judgment against [the company].”
FHFA publishes final rule on GSE capital plans
On June 1, the FHFA announced a final rule requiring Fannie Mae and Freddie Mac (GSEs) to submit annual capital plans and provide prior notice for certain capital actions “consistent with the regulatory framework for capital planning for large bank holding companies.” As previously covered by InfoBytes, in December 2021, FHFA issued the noticed of proposed rulemaking. These capital plans must include several mandatory elements, including (i) “[a]n assessment of the expected sources and uses of capital over the planning horizon that reflects the [GSE]’s size, complexity, risk profile and scope of operations, assuming both expected and stressful conditions”; (ii) “[e]stimates of projected revenues, expenses, losses, reserves and pro forma capital levels,” along with any additional capital measures the GSEs deem relevant; (iii) “[a] description of all planned capital actions over the planning horizon”; (iv) a discussion of stress test results and how the capital plans will account for these results; and (v) a discussion of any anticipated changes to a GSE’s business plan that may likely have a material impact on the GSE’s capital adequacy or liquidity. The final rule noted that the FHFA intends to review the capital plans for comprehensiveness, reasonableness, and relevant supervisory information, and plans to review the GSE’s regulatory and financial reports, as well as the results of any conducted stress tests and any other information required by FHFA or related to the GSE’s capital adequacy. Should the GSEs determine that there has been or will be a material change to their risk profile, financial condition, or corporate structure since the submission of the last plan (or if directed by FHFA), they must resubmit their capital plans within 30 days. The final rule also incorporates the determination of the stress capital buffer into the capital planning process, which will be provided to the GSEs by August 15 of each year, along with an explanation of the results of the supervisory stress test. The final rule is effective 60 days after publication in the Federal Register. Under the final rule, each GSE will submit its first capital plan by May 20, 2023.