InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Issues Spring 2016 Rulemaking Agenda
On May 18, the CFPB released an overview of its Spring 2016 Rulemaking Agenda, which outlines the CFPB’s current initiatives. In addition to summarizing the CFPB’s recently released proposed rule to ban pre-dispute arbitration clauses in future consumer agreements, the agenda states that the CFPB expects to release this Summer (i) a Notice of Proposed Rulemaking regarding small dollar loan products, including payday loans and auto title loan; (ii) a rule to finalize its November 2014 proposed rule on prepaid products; (iii) a Notice of Proposed Rulemaking to provide clarity concerning its TRID Know Before You Owe mortgage rule; and (iv) a final rule to amend its 2014 proposed rule revising certain provisions of mortgage servicing requirements under RESPA and TILA. The agenda further comments on the CFPB’s oversight of (i) overdraft services on checking accounts, noting that the agency “is engaged in pre-rule making activities to consider potential regulation” of such services; (ii) debt collection practices, observing that the agency is in the process of developing proposed rules to further regulate the industry; (iii) nonbank institutions, emphasizing the CFPB’s rulemaking efforts to further define larger participants of certain markets for consumer financial products and services; and (iv) mortgage markets, highlighting CFPB efforts to implement “critical consumer protections under the Dodd-Frank Act.” Finally, the agenda comments that the CFPB is in the “very early stages starting work to implement section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act to require financial institutions to report information concerning credit applications made by women-owned, minority-owned, and small businesses.”
CFPB Takes Action Against Law Firm, its Partners, and Debt Buyer for Alleged FDCPA Violations
On April 25, the CFPB issued separate consent orders to a New Jersey-based law firm and two of the firm’s partners and a New Jersey-based debt buyer for alleged violations of the FDCPA and the Dodd-Frank Act. According to the CFPB, between 2009 and 2014, the law firm, which specializes in retail debt collection litigation, filed lawsuits on behalf of the debt buyer without having “sufficient documentation” to support “the original contracts underlying the alleged debts, documentation of the consumer’s alleged obligation, or the chain of title evidencing that the debt buyer actually owned the debt and thus had standing to sue the consumer.” The CFPB alleges that, among other things, (i) the law firm relied on an automated system and non-attorney staff to complete the initial review of data submitted by the debt buyer regarding consumers’ debt accounts; (ii) the debt buyer failed to require that the law firm complete an account-level review of the documents it submitted prior to filing suit; (iii) neither the debt buyer nor law firm obtained sufficient documentation evidencing the alleged debt and its transactional history; and (iv) the debt buyer and law firm collected debts and filed suits based on unreliable data. The CFPB further contends that the named partners had “managerial responsibility for the Firm and materially participated in the conduct of its debt-collection litigation practices.” In addition to the $1 million civil money penalty imposed on the law firm and the two partners and the $1.5 million civil money penalty imposed on the debt buyer, the consent orders prohibit the firm, the two named partners, and the debt buyer from filing suits or threatening to file suits without substantial evidence that the debt is accurate and enforceable and from using deceptive affidavits, including those that misrepresent the type of documentation reviewed and that the review was conducted by the actual person signing the affidavit.
CFPB Takes Action Against Co-Founders of California Online Lead Aggregator
On April 21, the CFPB filed two complaints against individual operators of an online lead aggregator for their alleged involvement in the company’s practice of reselling consumers’ sensitive personal data to lenders and debt collectors without assessing the sources of this data, a practice the CFPB claims exposed consumers to the possibility that their personal data could be used for illegal purposes. In December 2015, the CFPB filed a complaint against the California-based company for allegedly buying and selling personal information from payday and installment loan applications without “properly vetting buyers and sellers.” The CFPB’s December complaint further alleged that, among other things, the company (i) knew or should have known that the lead generators in its network used false or misleading statements to obtain consumer information; and (ii) connected consumers with lenders that offered less favorable loan terms than were otherwise available, did not comply with state usury limits or claimed they were exempt from state regulation and jurisdiction. The most recently filed complaints charge the two individual operators with, among other things, “knowingly or recklessly provid[ing] substantial assistance to [the company] in its unfair and abusive acts and practices, in violation of [the Dodd-Frank Act].” This assistance allegedly enabled the company’s lead generators “to attract consumers with misleading statements and [take] unreasonable advantage of consumers’ lack of understanding of the material risks, costs, or conditions of the loan products for which they [applied].” The CFPB’s complaints against the individual operators seek monetary and injunctive relief, as well as civil money penalties.
GAO Report Examines Effectiveness of the Financial Regulatory System
Recently, the Government Accountability Office (GAO) released a report on the effectiveness of the U.S. financial system’s existing regulatory structure. In examining the financial regulatory system, the GAO conducted a performance audit from April 2014 to February 2016, dividing the regulatory system into the following sectors based on the various agencies’ missions: (i) safety and soundness oversight of depository institutions; (ii) consumer protection oversight; (iii) securities and derivatives markets oversight; (iv) insurance oversight; and (v) systemic risk oversight. The GAO found that “[f]ragmentation and overlap have created inefficiencies in regulatory processes, inconsistencies in how regulators oversee similar types of institutions, and differences in the levels of protection afforded to consumers.” Based on its audit, the GAO concluded that the regulatory structure as it stands does not always guarantee (i) efficient and effective oversight; (ii) consistent financial oversight; and (iii) consistent consumer protections. The report further identified problems with the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR), which are regulatory groups created out of the Dodd-Frank Act to address gaps in systemic risk oversight. Specific problems highlighted in the GAO’s findings include: (i) potential missed opportunities and duplicative analyses as a result of the Federal Reserve’s and the OFR’s similar systemic risk monitoring goals but lack of key collaboration; (ii) a lack of reliance by FSOC on the Federal Reserve’s and the OFR’s systemic risk monitoring efforts; and (iii) limitations on FSOC’s authority to address broader systemic risks that are not specific to a particular entity. The GAO emphasized that, “[w]ithout congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that more effective and efficient oversight of financial institutions can be achieved.”
CFPB Enters Proposed Final Judgment Against Student Debt Relief Company
On March 15, the CFPB filed a proposed Stipulated Final Judgment and Order in a California federal court against a California-based student debt relief company and its owner for alleged violations of the CFPA and the Telemarketing Sales Rule (TSR). In its December 2014 complaint, the CFPB alleged that the company violated the CFPA by (i) falsely misrepresenting itself as an affiliate of the Department of Education; (ii) charging consumers an upfront enrollment fee and a recurring monthly fee for “consultation” services; and (iii) deceiving consumers about the costs of their student loan debt relief services. The CFPB contended that the company violated the TSR by “primarily rel[ying] on a direct mailer and outbound telemarketing to attract consumers.” If approved by the court, the CFPB’s proposed consent order would require the company to (i) cease all operations within 45 days of the order’s effective date; (ii) stop enrolling consumers in its services and notify customers that it is ceasing operations; (iii) stop advertising, marketing, promoting, offering for sale, selling, or providing debt relief and student loan services; and (iv) ensure that borrowers confirm their income-driven repayment plans with the Department of Education and submit any necessary documentation for recertification or renewal. The order also imposes $8.2 million in damages, but the defendants will only be required to pay approximately $326,000 due to their inability to pay. Finally, the company will pay $1 to the CFPB’s Civil Money Penalty Fund, ensuring that consumers affected by the company’s practices are eligible for additional relief, if such relief becomes available in the future.
FDIC Finalizes Rule to Increase DIF to Statutorily Required Level
On March 15, the FDIC approved a final rule to increase the Deposit Insurance Fund (DIF) reserve ratio from 1.15 percent to the statutorily required minimum of 1.35 percent. The final rule, which is substantially similar to the proposed rule adopted in October 2015, imposes on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after certain adjustments are made. The rule becomes effective on July 1, 2016. If the reserve ratio reaches 1.15 percent before the effective date, the surcharges will begin on that date; if the reserve ratio has not reached 1.15 percent by the effective date, surcharges will begin the first quarter after the reserve ratio reaches 1.15 percent. The FDIC noted that it expects the reserve ratio to reach the 1.35 percent statutory minimum approximately two years after the surcharges begin. FDIC Chairman Martin J. Gruenberg commented, “With these surcharges, the [DIF] is expected to reach the statutory minimum level ahead of the statutory deadline of 2020, reducing the risk that the FDIC will have to raise rates unexpectedly in the event of stress in the financial sector.”
CFPB Releases Supervisory Highlights, Winter 2016 Issue
On March 8, the CFPB released its tenth edition of Supervisory Highlights, summarizing supervisory observations in the areas of consumer reporting, debt collection, mortgage origination, remittances, student loan servicing, and fair lending. The report covers the CFPB’s supervision work in the last quarter of 2015, generally between September 2015 and December 2015. Noteworthy findings in the report include: (i) violations of the Dodd-Frank Act’s unfair practice provisions by student loan servicers who would automatically default borrowers and co-signers on a private loan if either declared bankruptcy; (ii) violations of the October 2013 Remittance Rule, including providers failing to give complete and accurate disclosures to consumers, failing to cancel transactions within the required timeframe, failing to promptly credit a consumer’s account when an error occurred, and either not communicating the results of error investigations within the required timeframe or at all, or communicating them to an unauthorized party; (iii) inaccuracies in checking account information reported to NSCRAs by banks and credit unions; and (iv) violations of the FDCPA, with debt collectors failing to honor consumers’ requests to stop making contact with them and threatening garnishment against student loan borrowers who were not eligible for garnishment under the Department of Education guidelines. In addition to summarizing supervisory observations, the report provides an overview of the public enforcement actions taken between September and December 2015. Regarding non-public supervisory actions in the areas of deposits, debt collection, and mortgage origination, the report states that the CFPB collected more than $14 million in restitution to approximately 228,000 consumers in the fourth quarter of 2015.
CFPB Adopts Procedural Rule Establishing Application Process for the Designation of Rural Areas
On March 3, the CFPB adopted a procedural rule to establish an application process for identifying an area as rural or underserved that the CFPB, pursuant its authority under the Dodd-Frank Act, had not yet designated as rural. In December 2015, Congress passed the FAST Act, which contained several provisions intended to provide regulatory relief to community banks, including implementing a process under which banks and other stakeholders could petition the CFPB for rural or underserved designations in certain areas for the purposes of Federal consumer financial law. The CFPB’s recently issued procedural rule establishes such an application process. Under the process, banks must submit an application—by mail, email or hand delivery—to the CFPB Rural Application Coordinator containing, among other things, the following: (i) identifying information for the proposed designated rural area; (ii) justification for the proposed designation, providing supporting information from the U.S. Census Bureau, the Office of Management and Budget, the Department of Agriculture, and the State Bank Supervisor; and (iii) the area’s population density, including comparative information regarding “the population density of any nearby area with a greater population density that has been designated by the Bureau as a rural area.” The CFPB will begin accepting applications on March 31, 2016.
CFPB Announces Actions against New York-Based Financial Institution and Debt Collection Law Firms
On February 23, the CFPB announced two separate actions, one against a New York-based financial institution and another against the same financial institution, two of its affiliates, and two debt collection law firms, alleging that the respondents’ debt sales and debt collection practices constituted unfair or deceptive acts or practices under the CFPA. In the first action, the CFPB asserted that, between 2010 and 2012, the financial institution “failed to identify and timely remit to Debt Buyers over 9,500 payments totaling $701,000 made by Consumers to Respondent relating to accounts Respondent sold.” The CFPB further alleged that, between February 2012 and June 2013, the financial institution overstated the APR information in sales files, ultimately providing debt buyers with inaccurate APR data. As a result, the Bureau claimed that consumers “likely made payments based on Debt Buyers’ misstatements about the amount owed on their Accounts, and were likely subjected to inaccurate credit reporting and to collection efforts by Debt Buyers when the Consumers had already paid off their Accounts.” In addition to $4.89 million in redress to impacted consumers and $3 million in civil money penalties to the CFPB, the consent order requires the financial institution to enhance its processes, systems, and controls so that they (i) ensure accurate documentation of the financial institution’s debt sales; (ii) prevent the financial institution from selling debt that is undocumented, unverifiable, or within 150 days of the expiration of any applicable statute of limitations; (iii) include provisions in the financial institution’s debt sales contracts that require debt buyers to send borrowers debt validation notices and prohibit debt buyers from reselling debt or collecting post-sale interest on debt except under certain limited circumstances; (iv) require that the financial institution provide consumers with information about their debt, including the name of the original creditor, the credit agreement, and recent account statements; (v) ensure that the financial institution timely forwards consumer payments on sold accounts; and (vi) ensure that the financial institution provides training to employees and service providers on the enhancements to its processes, systems, and controls.
In a separate action, the CFPB issued consent orders to the same financial institution, two of its affiliates, and two debt collection law firms, because the law firms altered affidavits, sworn statements, certifications of proof, and other such declarations (collectively “declarations”) after their execution and then filed those declarations with New Jersey courts. In May 2011, the financial institution discovered the law firms’ conduct and self-reported it to the New Jersey Courts Administration. In response, the Superior Court of New Jersey ordered the financial institution and its affiliates to refund $11 million to impacted consumers and to cease collection efforts on an additional $34 million in debts. Citing to its 2013 Responsible Business Conduct Compliance Bulletin, the CFPB has opted not to impose civil money penalties against either the financial institution or its affiliates. However, the Bureau is requiring, among other things, that the financial institution and its affiliates fully comply with the New Jersey state court order and enhance their oversight and compliance management systems surrounding the execution of declarations. In contrast, the consent orders that the CFPB entered into with the debt collection law firms impose civil money penalties of $15,000 on one firm and $65,000 on the other.
FTC Reports to CFPB on 2015 Activities to Combat Illegal Debt Collection Practices
On February 17, the FTC sent the CFPB a letter summarizing its 2015 efforts to stop allegedly illegal debt collection practices. According to the letter, in 2015, the FTC’s FDCPA activities included “aggressive law enforcement activities and public outreach to address new and troubling issues in debt collection,” such as (i) coordinating the first federal-state-local enforcement initiative, Operation Collection Protection, that targets deceptive and abusive debt collection practices; (ii) prosecuting various cases involving the use of purportedly unlawful text messages to collect debts; (iii) publishing a list of every company and individual that has been banned from engaging in debt collection activities because of the FTC’s work; and (iv) hosting three Debt Collection Dialogues “to promote a more robust exchange of information between the debt collection industry and the state and federal governmental agencies that regulate their conduct.” The letter highlights various actions against debt collectors taken jointly by the FTC and the CFPB, and the offices of the New York and Illinois Attorneys General. Under the FDCPA, the FTC shares enforcement responsibilities with the CFPB. The FTC’s recent letter is intended to assist the CFPB in preparing its annual report to Congress about its administration of the FDCPA, as required by Dodd-Frank.