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FFIEC Issues Cybersecurity Statement, Comments on Recent Attacks on Interbank Messaging and Payment Networks
On June 7, the FFIEC issued a statement on behalf of its members (the OCC, Federal Reserve, FDIC, NCUA, CFPB, and State Liaison Committee) advising financial institutions to “actively manage the risks associated with interbank messaging and wholesale payment networks.” According to the statement, recent cyber attacks against interbank networks and wholesale payment systems have demonstrated the ability to: (i) bypass information security controls and compromise a financial institution’s wholesale payment origination environment; (ii) “obtain and use valid operator credentials with the authority to create, approve, and submit messages”; (iii) make use of sophisticated understanding of funds transfer operations and operational controls; (iv) disable security logging and reporting by using highly customized malware, as well as conceal and delay detection of fraudulent transactions with the use of other operational controls; and (v) quickly transfer stolen funds across multiple jurisdictions. Due to the potential financial loss and compliance risk associated with the unauthorized transactions, the statement reminds financial institutions to consider the following steps to ensure compliance with regulatory requirements and FFIEC guidance: (i) establish and maintain an information security risk assessment program that “considers new and evolving threat intelligence related to online accounts and adjust customer authentication, layered security, and other controls in response to identified risks”; (ii) implement and maintain protection and detection systems, including antivirus protection and intrusion detection systems, and properly monitor system alerts; (iii) protect against unauthorized access to critical systems by, among other things, “limiting the number or credentials with elevated privileges across institutions” and establishing authentication rules; (iv) implement and regularly test controls around critical systems, and report test results to senior management, as well as the board of directors, if appropriate; (v) validate business continuity planning and ensure that the institution is able to “quickly recover and maintain payment processing operations”; (vi) strengthen information security awareness by conducting regular and mandatory training; and (vii) participate in industry information-sharing forums, such as the Financial Services Information Sharing and Analysis Center.
In light of the FFIEC’s statement, the OCC simultaneously released Bulletin 2016-08, cautioning financial institutions that use interbank messaging and wholesale payment networks to take the aforementioned risk mitigation steps.
Special Alert: CFPB's Proposed Rule Regarding Payday, Title, and Certain Other Installment Loans
On June 2, 2016, the CFPB published its proposed rule (the “Proposed Rule”) addressing payday loans, vehicle title loans, and certain other installment loans (collectively “covered loans”). This alert summarizes the Proposed Rule and compares the Proposed Rule to the CFPB’s March 26, 2015 outline released pursuant to the Small Business Regulatory Enforcement Fairness Act (SBREFA). Those wishing to comment on the Proposed Rule must do so by September 14, 2016.
Summary of the Proposed Rule
The Proposed Rule is issued pursuant to the CFPB’s authority under section 1031 of the Dodd-Frank Act to identify and prevent unfair, deceptive, or abusive acts or practices. It defines two types of covered loans: (1) “short-term” loans that have terms of 45 days or less; and (2) “longer-term” loans with terms of more than 45 days that have a “total cost of credit” exceeding 36% and either a “leveraged payment mechanism” or a security interest in the consumer’s vehicle. A “leveraged payment mechanism” includes a right for the lender to initiate transfers from the consumer’s account and certain other payment mechanisms. The Proposed Rule would exclude (i) credit extended for the sole and express purpose of financing a consumer’s initial purchase of a good when the credit is secured by the property being purchased; (ii) credit secured by any real property or by personal property used or expected to be used as a dwelling; (iii) credit cards; (iv) student loans; (v) non-recourse pawn loans; and (vi) overdraft services and lines of credit.
The Proposed Rule would make it an abusive and unfair practice for a lender to make a covered short-term or longer-term loan without determining upfront that the consumer will have the ability to repay the loan (the “full-payment test”). For both types of covered loans, the Proposed Rule would require a lender to determine whether the consumer can afford the full amount of each payment of a covered loan when due and still meet basic living expenses and major financial obligations. As a practical matter, the full-payment test imposes restrictions on rollovers, loan sequences, and refinancing by preventing the offering of short-term loans fewer than 30 days after payoff without a showing that the borrower’s financial situation is materially improved (and capping successive short-term loans at 3 before requiring a 30-day cooling off period), and preventing the refinancing of longer-term loans without a showing that payments would be smaller or would lower the total cost of credit. The Proposed Rule also would provide conditional exemptions for certain covered loans meeting specified criteria, as discussed further below. These conditional exemptions essentially provide alternative compliance options to the Proposed Rule’s full-payment test. Additionally, the Proposed Rule would require lenders to use and furnish information to registered information systems established to track covered loans.
Click here to view the full Special Alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- John P. Kromer, (202) 349-8040
- Walter E. Zalenski, (202) 461-2910
- Marshall T. Bell, (202) 461-2997
CFPB Announces Consumer Advisory Board Meeting
On June 9, the CFPB will hold its next Consumer Advisory Board meeting in Little Rock, AR. According to the meeting’s agenda, the Board will discuss (i) an auto lending education initiative; (ii) trends and themes; and (iii) payday lending. Director Cordray and Assistant Director for Regulations Kelly Cochran are among the CFPB personnel who are scheduled to speak at the meeting. The event is open to the public.
CFPB's Latest Monthly Complaint Snapshot Highlights Issues Related to Credit Reporting
On May 24, the CFPB released its latest consumer complaint report. This month’s report highlights complaints related to credit reporting, noting that such complaints made up approximately 143,700 of the 882,800 total complaints that the CFPB has handled as of May 1. The report found, among other things, that: (i) credit reporting remains among the top three products complained about by consumers, with more than 4,500 complaints submitted in April alone; (ii) the three largest U.S. credit reporting companies are also the top three companies offering credit reporting services, accounting for 95% of the credit reporting complaints submitted between December 2015 and February 2016; and (iii) during that same time period, consumers also submitted more than 2,000 complaints involving specialty consumer reporting companies that provide reports in particular areas, including background and employment screening, checking account screening, rental screening, and insurance screening. According to the report, the most common types of credit reporting complaints have included the following: (i) inaccurate information appearing on credit reports, particularly information related to debt collection items and information resulting from identity theft; (ii) difficulty in correcting inaccuracies, including long delays, negative customer service experiences, and failed attempts to have inaccuracies removed; and (iii) the inability to access credit reports online due to overly burdensome identity authentication questions.
CFPB Takes Action Against Former Loan Officer for "Fee-Shifting" Practices, Alleges RESPA Violations
On May 26, the CFPB announced a consent order against a former mortgage loan originator of a San Francisco-based bank for allegedly violating Section 8(a) of the Real Estate Settlement Procedures Act (RESPA). The CFPB alleges that, from at least November 2013 through February 2015, the loan officer and an escrow company in California “engaged in a scheme in which they manipulated escrow fees, at [the loan officer’s] direction, by shifting them among loans in order to structure no-cost mortgage transactions.” The CFPB further contends that the loan officer referred settlement-services business for federally related mortgages to the escrow company in exchange for allowing him to dictate the escrow fees. According to the CFPB, the arrangement between the loan officer and the escrow company constituted providing a “thing of value” – prohibited under RESPA – because it allowed the officer to consistently deliver “no closing cost” loans to his clients, which “ultimately increased the number of loans he was able to close and, as a result, the commissions he earned.” The CFPB’s consent order imposes an $85,000 civil penalty and prohibits the loan officer from participating in the mortgage industry for one year.
Federal Register Publishes CFPB Arbitration Proposal; Comment Period Closes August 22
On May 24, the CFPB’s proposed rule on arbitration agreements was published in the Federal Register. As previously covered in InfoBytes, the CFPB’s proposal seeks to ban covered providers of most financial consumer products and services from including mandatory pre-dispute arbitration clauses in consumer agreements. Comments on the proposal are due by Monday, August 22, 2016.
CFPB, Federal Banking Agencies, and NCUA Issue Interagency Guidance Regarding Deposit Reconciliation Practices
On May 18, the CFPB, the Federal Reserve, the OCC, the FDIC, and the NCUA issued interagency guidance on supervisory expectations regarding customer account deposit reconciliation practices. According to the guidance, banks create a “credit discrepancy” if they credit a customer a different amount than the total of the items the customer tried to deposit into an account. In further explaining what constitutes a credit discrepancy, the guidance states, “the customer may deposit $110 to an account, but may indicate on the deposit slip that only $100 has been tendered. In this case, the financial institution may credit $100 to the customer’s account as indicated on the deposit slip without reconciling the $10 discrepancy.” According to the guidance, some financial institutions fail to correct the inconsistencies between the dollar value of items deposited to the customer’s account and the amount actually credited to that same account. This is a potential violation of (i) the Expedited Funds Availability Act’s, as implemented by Regulation CC, requirement to make deposited funds available for withdrawal within prescribed time limits; (ii) the FTC Act’s ban of unfair or deceptive acts or practices; and (iii) the Dodd-Frank Act’s prohibition of unfair, deceptive, or abusive acts or practices. In addition to reminding financial institutions of their obligations to comply with the aforementioned applicable laws, the guidance stresses that financial institutions are expected to “adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”
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 Releases Auto Title Report; Sets Date for Small Dollar Lending Field Hearing
On May 18, the CFPB issued a report titled “Single-Payment Vehicle Title Lending.” The report provides an overview of the CFPB’s analysis of “de-identified data from vehicle title lenders consisting of nearly 3.5 million loans made to over 400,000 borrowers in ten states during 2010-2013.” The CFPB examined loan patterns (re-borrowing and rates of default) for single-payment auto loan titles. A loan contained in the CFPB’s study has three possible outcomes: (i) repaid without subsequent borrowing; (ii) default; or (iii) re-borrowing on the same day or within a certain specified period (14, 30, or 60 days) of time after repayment. According to the report, auto title loans have high rates of consumers re-borrowing: “[o]ver 80% of vehicle title loans are re-borrowed on the same day a previous loan is repaid, and 87% of loans are re-borrowed within 60 days.” The CFPB further contends that only about one in every eight loan sequences is repaid without a consumer having to re-borrow. Additional findings highlighted in the report include: (i) approximately one-third of loan sequences default, with one in every five borrowers having a vehicle repossessed by the lender for failure to repay; and (ii) approximately two-thirds of the loans are in sequences of seven loans or more and about half are in sequences of ten or more loans, with no more than 15% of the sequences maintaining three loans or fewer.
Also on May 18, the CFPB announced that, on June 2, 2016, it will hold a field hearing about small dollar lending in Kansas City, MO. It is widely anticipated that the CFPB will announce its proposal on small dollar lending products during this hearing. Notably, the CFPB’s auto title loan findings are not dissimilar to the findings outlined in the agency’s recent “Online Payday Loan Payments” report. The data analysis from each report will likely influence the lender requirements included in the CFPB’s expected proposal on the small dollar lending industry.
CFPB Files Complaint Against Payday Lending Company for Alleged Deceptive Practices
On May 11, the CFPB filed a complaint for alleged violations of the Consumer Financial Protection Act of 2010 (CFPA) against a Mississippi-based company offering cash checking services and payday loans. Regarding the company’s check cashing services, the CFPB alleges that the company violated state consumer protection laws by (i) explicitly forbidding employees from disclosing check cashing fees to consumers and providing new employees with a training presentation instructing them to “NEVER TELL THE CUSTOMER THE FEE”; and (ii) telling consumers that check transactions could not be canceled or that the process to reverse transactions would be lengthy, when neither was the case. The CFPB’s complaint further contends that the company’s payday lending practices differ from other companies’ practices in that it provides “multiple two-week loans over the course of the month” as opposed to providing 30-day loans to monthly consumers. The CFPB’s complaint states that, “[b]y borrowing from [the company], these consumers pay more in fees for the same or less net cash received during the month. Nevertheless, [the company] has deceptively represented to consumers that borrowing from [it] is more financially beneficial than, or at least financially equivalent to, taking out a 30-day loan from one of [its] competitors.” Further, the complaint states that consumers using the company’s services would often overpay and, from at least 2011 until 2014, the company failed to take “affirmative steps to notify consumers when they made an overpayment or to refund overpayments to consumers.”
The CPFB’s complaint, which also names one other company that provides payday loans and check cashing services in Mississippi and the president and sole owner of both companies, seeks monetary relief, injunctive relief, and penalties.