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On October 30, New York Attorney General Eric T. Schneiderman announced an agreement with a credit card servicer and marketer to resolve allegations that the servicer failed to disclose upfront fees in its direct mail marketing materials. According to Attorney General’s office, the servicer failed to disclose a $125 “off-the-top first year fee” for a low-limit card product, which effectively reduced the card’s credit limit from $500 to $375. Under the terms of the agreement, the servicer is required to improve the disclosures in its direct mail marketing and issue refunds of the $125 fee to affected New York consumers.
CFPB’s Summer Edition of Supervisory Highlights Discloses Findings Across Many Financial Services Areas
On September 12, the CFPB released its summer 2017 Supervisory Highlights, which outlines its supervisory and oversight actions in areas such as auto loan servicing, credit card account management, debt collection, deposit account supervision, mortgage origination and servicing, remittances, service provider programs, short-term small-dollar lending, and fair lending. According to the Supervisory Highlights, recent supervisory resolutions have “resulted in total restitution payments of approximately $14 million to more than 104,000 consumers during the review period” between January 2017 and June 2017.
As examples, in the area of auto loan servicing, examiners discovered vehicles were being repossessed even though the repossession should have been cancelled. Coding errors, document mishandling, and failure to timely cancel the repossession order were cited causes. Regarding fair lending examination findings, the CFPB discovered, in general, “deficiencies in oversight by board and senior management, monitoring and corrective action processes, compliance audits, and oversight of third-party service providers.” Examiners also conducted ECOA Baseline Reviews on mortgage servicers and discovered weaknesses in servicers’ fair lending compliance management systems. Findings in other areas include the following:
- consumers were provided inaccurate information about when bank checking account service fees would be waived, and banks misrepresented overdraft protection;
- debt collectors engaged in improper debt collection practices related to short-term, small-dollar loans, including attempts to collect debts owed by a different person or contacting third parties about consumers’ debts;
- companies overcharged mortgage closing fees or wrongly charged application fees that are prohibited by the Bureau’s Know Before You Owe mortgage disclosure rules; and
- borrowers were denied the opportunity to take full advantage of the mortgage loss mitigation options, and mortgage servicers failed to “exercise reasonable diligence in collecting information needed to complete the borrower’s application.”
The Bureau also set forth new examination procedures for HMDA data collection and reporting requirements as well as student loan servicers, in addition to providing guidance for covered persons and service providers regarding pay-by-phone fee assessments.
On September 13, the U.S. District Court for the Eastern District of North Carolina granted preliminary approval to settle a class-action suit resolving allegations that a national bank overcharged military families on interest and fees related primarily to mortgage and credit card accounts in violation of the Servicemembers Civil Relief Act (SCRA). The order also, in the context of the proposed settlement only, preliminarily certifies the class, which is comprised of members who—after September 11, 2001—were entitled to “additional compensation related to military reduced interest rate benefits from [the bank].” The plaintiffs filed the complaint against the bank in 2015 claiming alleged violations of the SCRA, TILA, and the North Carolina Unfair and Deceptive Trade Practices Act. In May 2016, the court denied the defendants’ motion to dismiss the first amended complaint, and at the end of 2016, the parties agreed to mediation. A second amended complaint—now the operative complaint—was filed just prior to the motion for preliminary approval. While the bank has not admitted any wrongdoing, it has agreed to refrain from using an “interest subsidy method for interest benefits calculations for a five-year period,” which, plaintiffs pleaded, can lead to higher costs.
According to the terms of the memorandum in support of the motion for preliminary approval, class members will receive payments based on the strength of their individual claims, considering such factors as: (i) loan type; (ii) whether they previously received remediation from the bank, and how much; and (iii) the eligible period for interest rate refunds. The memorandum further stipulates that approximately $15.4 million of the nearly $42 million overall settlement will be provide to class members who have not received or deposited any payments from the bank. Unclaimed amounts from the first round will be pooled with the remainder of the settlement to be allocated as outlined in the distribution plan. A final approval hearing is scheduled for February of next year.
On August 30, the CFPB issued a final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank ability-to-repay and qualified mortgage provisions (ATR/QM). The CFPB is required to make adjustments to dollar amounts in the Regulation Z provisions implementing these laws based on the annual percentage change reflected in the Consumer Price Index effective June 1, 2017. For open-end consumer credit plans under TILA, the minimum interest charge disclosure threshold will remain unchanged at $1.00 in 2018. For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will remain unchanged at $27 in 2018, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will remain unchanged at $38 in 2018. For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages in 2018 will increase to $21,032, and the adjusted points and fees dollar trigger for high-cost mortgages in 2018 will be $1,052. To satisfy the underwriting requirements under the ATR/QM rule, the maximum thresholds for total points and fees for qualified mortgages in 2018 will be: (i) 3 percent of the total loan amount for loans greater than or equal to $105,158; (ii) $3,155 for loan amounts greater than or equal to $63,095 but less than $105,158; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,032 but less than $63,095; (iv) $1,052 for loan amounts greater than or equal to $13,145 but less than $21,032; and (v) 8 percent of the total loan amount for loan amounts less than $13,145. The final rule is effective January 1, 2018.
CFPB Consent Order to Banking Subsidiaries Resolves Discriminatory Credit Card Term Practices in Puerto Rico and U.S. Territories
On August 23, the CFPB announced it was taking action against two banking subsidiaries of a multi-bank holding corporation for violating the Equal Credit Opportunity Act (ECOA) by allegedly offering credit card products and services to consumers in Puerto Rico, the U.S. Virgin Islands, and other U.S. territories that were inferior to those offered to consumers in the 50 states and discriminating against certain consumers with Spanish-language preferences. The consent order alleges the pattern of discrimination started in January 2005 and continued through November 2015. In 2013, the subsidiaries began self-reporting to the Bureau differences between credit cards and charge cards offered to consumers in the territories versus those offered to consumers in the 50 states, including disparities in pricing, terms and conditions, underwriting, rebates, promotional offers, customer and account management services, credit score requirements, credit limits, and debt collection practices. During the course of the CFPB’s review, the subsidiaries provided monetary and non-monetary relief to more than 200,000 affected consumers, resulting in approximately $95 million of remediation broken into the following amounts paid or credited to consumers: (i) roughly $55.7 million towards pricing, rebates, and promotional offer differences; (ii) approximately $3.2 million towards disparities in underwriting; and (iii) $35.7 million towards customer service, account management, collections, debt mitigation, and line assignment differences. The order also states that the subsidiaries instituted enhancements to their policies and procedures and compliance management systems. Pursuant to the consent order, the subsidiaries must (i) pay at least a $1 million more in restitution to fully compensate affected consumers; and (ii) develop and implement a compliance plan to ensure credit and charge card provisions are handled in a non-discriminatory manner in compliance with ECOA, make any necessary changes to their compliance management systems based on an annual compliance audit program assessment of current business structure, and correct any identified deficiencies. The Bureau further notes that penalties were not assessed due to efforts undertaken by the subsidiaries to self-report deficiencies, self-initiate remediation, and cooperate with the CFPB’s investigation. Furthermore, the Bureau concluded through its review that the subsidiaries did not intentionally discriminate against the consumers, but that the differences occurred as a result of business units utilizing different card management structures in the territories versus in the states.
FTC Files Complaint Against Independent Sales Organization and Sales Agents for Alleged Credit Card Laundering Charges
On August 7, the FTC issued a press release announcing charges against 12 defendants, comprised of an independent sales organization (ISO), sales agents, payment processors, and identified principals, for allegedly violating the Federal Trade Commission Act and the Telemarketing Sales Rule (TSR) by laundering credit card transactions on behalf of a “telemarketing scam” operation (operation) through fictitious merchant accounts. According to a July 28 complaint filed by the FTC, the defendants engaged in a scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. This type of practice, the FTC claims, is known as “credit card laundering” or “factoring” and violates the TSR. The defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants. The FTC seeks “permanent injunctive relief, recession or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten moneys, and other equitable relief.”
Notably, in 2013, the FTC accused the same “telemarketing scam” operation of allegedly promoting “worthless business opportunities” to consumers and falsely promising that they would earn thousands of dollars. A 2015 summary judgement resulted in over $7 million in consumer injury. (See previous InfoBytes coverage here.)
On July 20, the CFPB released its Spring 2017 rulemaking agenda. The agenda was last updated in Fall 2016. The summer release date, and the fact that certain deadlines listed in the updated agenda have already passed, indicates that the agenda’s release may have been delayed after the CFPB drafted it. The following aspects of the updated agenda are particularly noteworthy:
- Regulation Reviews: The Bureau plans to begin “the first in a series of reviews of existing regulations that we inherited from other agencies through the transfer of authorities under the Dodd-Frank Act,” noting that “other federal financial services regulators have engaged in these types of reviews over time, and believe that such an initiative would be a natural complement to our work to facilitate implementation of new regulations.” The Bureau has formed “an internal task force to coordinate and deepen the agency’s focus on concerns about regulatory burdens and projects to identify and reduce unwarranted regulatory burdens….” The agenda lists “pre-rule activities” as continuing through September 2017. Separately, the Bureau notes its ongoing assessments of the effectiveness of the Mortgage Servicing Rules, the Ability-to-Repay/Qualified Mortgage Rule, and the Remittance Transfer Rule pursuant to the Dodd-Frank Act’s five-year lookback provision.
- Small Dollar Lending: The Bureau reports that it received more than one million comments on its June 2016 proposed rule to impose ability-to-repay requirements for payday, vehicle title, and similar installment loans. The Bureau states that it “continue[s] to believe that the concerns articulated in the [proposed rule] are substantial” but does not provide an expected release date for a final rule.
- “Larger Participants” in Installment Lending: The agenda lists September 2017 as the expected release date for “a proposed rule that would define non-bank ‘larger participants’ in the market for personal loans, including consumer installment loans and vehicle title loans.” Designation as a larger participant brings a non-bank entity within the CFPB’s supervisory jurisdiction. The agenda indicates that a companion rule requiring payday, vehicle title lenders, and other non-bank entities to register with the Bureau is also underway, as noted below.
- Debt Collection: In July 2016, the Bureau released an outline of proposals under consideration for debt collection and convened a panel under the Small Business Regulatory Enforcement Fairness Act in conjunction with the Office of Management and Budget and the Small Business Administration’s Chief Counsel for Advocacy to consult with representatives of small businesses that might be affected by the rulemaking. The Bureau notes that, “[b]uilding on feedback received through [that] panel, we have decided to issue a proposed rule later in 2017 concerning debt collectors’ communications practices and consumer disclosures.” The agenda states that a proposed rule is expected in September 2017. The Bureau also states that, in a departure from the July 2016 outline of proposals, the Bureau “intend[s] to follow up separately at a later time about concerns regarding information flows between creditors and FDCPA collectors and about potential rules to govern creditors that collect their own debts.”
- Overdrafts: The Bureau states that the current opt-in regime “produces substantially different opt-in rates across different depository institutions” and that its “supervisory and enforcement work indicates that some institutions are aggressively steering consumers to opt in.” The Bureau reports that it is “engaged in consumer testing of revised opt-in forms and considering whether other regulatory changes may be warranted to enhance consumer decision making.” The agenda lists “pre-rule activities” as continuing through June 2017.
- Small Business Lending: The agenda lists “pre-rule activities” on the implementation of the small business data reporting provisions of the Dodd-Frank Act as continuing through June 2017. Specifically, the agenda states that, at this juncture, the CFPB “is focusing on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.”
- HMDA & ECOA Amendments: The agenda lists October 2017 as the expected release date for the April 2017 proposed ECOA amendments to clarify requirements for collecting information on ethnicity, race, and sex, but does not list an expected release date for finalization of the April 2017 proposed technical corrections to the 2015 HMDA rule, or the July 2017 proposed amendments to the 2015 HMDA rule’s requirements for reporting home equity lines of credit.
- TRID/Know Before You Owe Amendments: The agenda lists March 2018 as the expected release date for finalization of the July 2017 proposed rule addressing the “black hole” issue, which is discussed in our special alert.
- Mortgage Servicing Amendments: The Bureau states that it expects to issue a proposal in September 2017 “to make one or more substantive changes to the rule in response to . . . concerns” raised by the industry.
- Arbitration: Interestingly, the agenda states that the Bureau’s final rule on mandatory arbitration clauses, which was released this month to significant controversy, was not expected until August.
- Non-Bank Registration: The Bureau states that it is “considering whether rules to require registration of [installment lenders] or other non-depository lenders would facilitate supervision, as has been suggested to us by both consumer advocates and industry groups.”
- Prepaid Cards: The agenda does not provide an expected release date for finalization of the June 2017 proposed amendments addressing error resolution and limitations on liability, application of the rule’s credit-related provisions to digital wallets, and other issues.
- Credit Card Agreement Submission: The Bureau is “considering rules to modernize our database of credit card agreements to reduce burden on issuers that submit credit card agreements to us and make the database more useful for consumers and the general public.” The agenda lists “pre-rule activities” as continuing through October 2017.
On June 30, the Board of Governors of the Federal Reserve issued its sixth payments study entitled The Federal Reserve Payments Study 2016: Recent Developments in Consumer and Business Payment Choices. The study includes data on business and consumer noncash payments made in the United States in 2015. Among other things, the study details the differences between business and consumer payments in 2015 compared to those from 2000, general-purpose payment card use in 2015, and increases in use of alternative payment methods.
According to the report, the most popular noncash payment types among consumers were, in descending order: non-prepaid debit cards, general-purpose credit cards, checks, and finally, ACH debit transfers. For businesses, however, ACH credit transfers were the most popular, then checks, general-purpose credit cards, and non-prepaid debit cards. Consumers wrote fewer than half the number of checks in 2015 than they did in 2000 but almost doubled the number of noncash payments that they made. Businesses also cut check-writing by more than half but differed from consumers by more than doubling the number of ACH transfers that they initiated during the same period.
General-purpose or “network-branded” cards accounted for more than 65 percent of noncash payments in 2015. The data showed that 60 percent of these card accounts carried revolving debt, while 40 percent of accounts were paid in full each month.
Information on fraudulent payments also was collected and should be available in the third quarter of this year.
On June 27, the CFPB released its monthly complaint report, highlighting complaints from around the country. According to the Bureau, it has handled over 1.2 million complaints from 2011 through June 1 of this year. The report shows nationwide complaint statistics and statistics for service members and older consumers. In addition, the report breaks down statistics on the state level covering financial products and services, company responses to complaints, as well as number of complaints. The vast majority of consumers report high company response rates to complaints averaging in the high 90 percent range, although the volume of complaints is trending upward. The top five products receiving complaints across the country in descending order are: (i) debt collection; (ii) mortgages; (iii) credit reporting; (iv) credit cards; and (v) bank accounts or services.
On June 5, 15 state attorneys general issued a joint letter to an e-commerce hosting company refuting the company’s assertion in its FAQ provided to online retailers that they are not obligated to notify customers of a data breach in situations where credit card CVV numbers were not disclosed. According to claims made by the attorneys general, the company erroneously stated that, pursuant to the identified states’ data breach notification laws, “there is no obligation to notify in those states . . . if your customers’ CVV data was not exposed.” The attorneys general argued that this is incorrect and stated, “[t]he CVV number does not have to be disclosed to trigger our states’ notification obligations.” The letter noted as an example, New York General Business Law § 899-aa(1)(b)(3), which stipulates that companies must provide notification of a data breach to affected customers when a credit or debit card number plus “any required security code, access code, or password” that would permit access to the account is obtained by an unauthorized party. The attorneys general stated that a CVV code is not a required access code because the card can be used without it. The company is required to provide clarification regarding its FAQ to affected client retailers.
- Buckley Webcast: The next consumer litigation frontier? Assessing the consumer privacy litigation and enforcement landscape in 2019 and beyond
- Buckley Webcast: The CFPB’s proposed debt collection rule
- Buckley Webcast: Trends in e-discovery technology and case law
- Brandy A. Hood to discuss "What the flood? Don’t get washed away by a flood of changes" at the American Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Mitigating the risks of banking high risk customers" at the American Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano, Kari K. Hall, Brandy A. Hood, and H Joshua Kotin to discuss "Regulations that matter in a deregulatory environment" at the American Bankers Association Regulatory Compliance Conference Power Hour
- Buckley Webcast: Data breach litigation and biometric legislation
- Hank Asbill to discuss "Pay no attention to the man behind the curtain: Addressing prosecutions driven by hidden actors" at the National Association of Criminal Defense Lawyers West Coast White Collar Conference
- Daniel P. Stipano to discuss "Keep off the grass: Mitigating the risks of banking marijuana-related businesses" at the ACAMS AML Risk Management Conference
- Daniel P. Stipano to discuss "Mid-year policy update" at the ACAMS AML Risk Management Conference
- Amanda R. Lawrence to discuss "Navigating the challenges of the latest data protection regulations and proven protocols for breach prevention and response" at the ACI National Forum on Consumer Finance Class Actions and Government Enforcement
- Benjamin W. Hutten to discuss "Requirements for banking inherently high-risk relationships" at the Georgia Bankers Association BSA Experience Program
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Douglas F. Gansler to discuss "Role of state AGs in consumer protection" at a George Mason University Law & Economics Center symposium