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Special Alert: CFPB Enters into First Consent Order with Online Payment Platform for Misrepresenting Data Security Practices
On March 2, the CFPB took action against an Iowa-based online payment platform and entered into a Consent Order for deceptive acts and practices relating to false representations regarding the company’s data security practices in violation of 1031(a) and 1036 (a)(1) of the Consumer Financial Protection Act of 2010. The CFPB ordered the company to pay a $100,000 fine and to take certain remedial steps to improve their cybersecurity practices. Notably, this action is the result of the company’s failure to have adequate controls in place; it is not the result of a breach incident. Similar to other regulators, the CFPB will likely pay increasing attention to cybersecurity and data privacy issues as the understanding of its significance grows.
The Consent Order states that, despite representations to the contrary, the company (i) misrepresented the quality and efficacy of its cybersecurity and data privacy practices by stating that all personal data on its site was “safe” and “secure” and that its practices “exceeded” industry standards; (ii) did not properly encrypt consumer data; and (iii) failed to provide employees with sufficient cyber training.
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 the persons listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Elizabeth E. McGinn, (202) 349-7968
CFPB Releases Fact Sheet: Policy Priorities over the Next Two Years
On February 25, the CFPB released a fact sheet outlining its policy priorities over the next two years. The document lists the following nine near-term priority goals: (i) arbitration; (ii) consumer reporting; (iii) debt collection; (iv) demand side consumer behavior; (v) household balance sheets; (vi) mortgages; (vii) open-use credit; (viii) small business lending; and (ix) student lending. Regarding arbitration, the CFPB noted that it “will continue the rulemaking process and propose a rule consistent with its study that will further enable consumers to effectuate their rights and hold institutions accountable for unlawful conduct.” With respect to consumer reporting, the CFPB will focus on issues surrounding the accuracy of consumer reporting and institutions’ dispute resolution processes. In the debt collection space, the CFPB plans to initiate rulemakings on debt collector conduct (including issues relating to the substantiation of consumer debt and the disclosure of information to consumers) while simultaneously pursuing rigorous supervision and enforcement activity to ensure industry compliance. Regarding demand side consumer behavior, the CFPB will focus on financial education for consumers. With respect to household balance sheets, the CFPB will conduct research and data analysis on household financial health and decision making. For mortgages, the CFPB will focus on the implementation of existing rules as well as the supervision and enforcement of issues relating to equal and fair access to credit. In the open-use credit space, the CFPB plans to conduct small-dollar, installment lending, and overdraft market rulemakings while conducting complementary supervision and enforcement work to support its new rules. Regarding small business lending, the CFPB will (i) build a small lending team that will begin conducting research and outreach for a small business lending rulemaking; (ii) employ its consumer response team to build infrastructure to analyze small business complaints; and (iii) examine small business lenders for fair lending compliance. Finally, with respect to student lending, the CFPB will work on servicer alignment as well as supervision and enforcement of servicers’ legal obligations. In addition to these nine priority areas, the CFPB also indicated that it plans to continue to focus on well-established and ongoing work streams, such as fair lending oversight of indirect auto lenders and its rulemaking on prepaid cards.
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.
CFPB Issues Policy on No-Action Letters
On February 18, the CFPB finalized its policy on No-Action Letters, which was originally proposed in October 2014. The No-Action Policy is intended to create a process for companies to apply for a No-Action Letter (NAL) from the CFPB in “instances involving innovative financial products or services that promise substantial consumer benefit” where provisions of the statutes implemented or regulations issued by the CFPB are vague. According to CFPB Director Cordray, the new policy is “designed to improve access to consumer financial products and services that promise substantial consumer benefits.” Denial of applications will be made at the discretion of the CFPB staff, who will not be required to “provide specific reasons for declining to provide NALs.” According to the policy statement, the CFPB has “limited resources to devote to NALs” and anticipates receiving approximately “one to three actionable applications per year.”
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.
CFPB Announces Consumer Advisory Board Meeting
On Thursday, February 25, the CFPB will hold its next Consumer Advisory Board meeting in Washington, DC. According to the meeting’s agenda, after opening remarks from Director Cordray, Chris D’Angelo, Director Cordray’s Chief of Staff, will discuss the Bureau’s strategic outlook. Later in the afternoon, CFPB Assistant Director for Financial Education Janneke Ratcliffe and Senior Financial Education Research Analyst Genevieve Melford will speak on the topic of Measuring Financial Well-Being. The event is open to the public.
Federal Register Publishes Correction to CFPB's KBYO Rule
On February 10, the CFPB published a correction to amend the preamble of the Know Before You Owe (KBYO) rule. Under the former RESPA rules, prepaid property taxes, HOA dues, condo fees, and co-op fees were not subject to tolerances, and the CFPB did not intend to modify that standard under KBYO. However, KBYO’s preamble was missing a “not” where it explained applicable tolerance limitations, which reinforced existing dialogue that the aforementioned fees were within the zero tolerance category. The CFPB’s recently issued correction amends KBYO’s preamble to include the formerly missing “not”: “The final rule also mirrors current Regulation X in that property insurance premiums, property taxes, homeowner’s association dues, condominium fees, and cooperative fees are not subject to tolerances whether or not they are placed into an escrow, impound, reserve, or similar account.” The publication further explains why the CFPB believes those fees are not subject to tolerances, noting “[p]roperty taxes, homeowner’s association dues, condominium fees, and cooperative fees are all ‘[c]harges paid for third-party servicers not required by the creditor.’” The correction is effective February 10, 2016.
FTC Submits Letter to CFPB Regarding ECOA Enforcement and Education Activities
On February 8, the FTC sent the CFPB a letter summarizing the FTC’s enforcement activities related to compliance with the Equal Credit Opportunity Act (ECOA) and implementing Regulation B during 2015. The annual letter reviews the FTC’s responsibilities with regard to ECOA enforcement and education to most non-bank financial service providers. Highlights of the letter include, but are not limited to, (i) the FTC’s public workshop on the growing use of online lead generation in industries such as lending and education; (ii) the FTC’s Federal Register Notice seeking comments on a proposed survey of consumers regarding their experiences in buying and financing automobiles at dealerships, over which the FTC has broad authority to enforce the FTC Act and ECOA; and (iii) updates to the FTC’s Mortgage Discrimination publication, which includes information about ECOA and warns consumers of illegal practices. Finally, the FTC emphasized that, since 2011, it has brought over 25 cases in the auto purchase and financing industry, “including those in a federal-state effort that yielded more than 200 actions for fraud, deception, and other illegal practices.”
Obama Administration's FY 2017 Budget Proposal Makes Room for Small Dollar Loan Program
This week, the Obama Administration released the Fiscal Year 2017 Budget Proposal. President Obama’s proposed budget for the Department of the Treasury would, through the Community Development Financial Institutions (CDFI) Fund, reserve at least $10 million until September 30, 2018 to provide grants for loan loss reserve funds and to provide technical assistance for small dollar loan programs under section 1206 of the Dodd-Frank Act. The Small Dollar Loan Program, according to the budget proposal, “will support broader access to safe and affordable financial products and provide an alternative to predatory lending by encouraging CDFIs to establish and maintain small dollar loan programs.” Earlier this year, Senator Sherrod Brown (D-OH), in a letter to the President, requested that the FY 2017 budget proposal prioritize funding for small dollar loan programs, as outlined in Title XII – Improving Access to Mainstream Financial Institutions – of the Dodd-Frank Act.
On a similar note, the House Financial Services Committee held a hearing titled, “Short-term, Small Dollar Lending: The CFPB’s Assault on Access to Credit and Trampling of State and Tribal Sovereignty,” on February 11, which examined the short-term, small dollar credit marketplace. During the hearing, House members expressed concern that the CFPB and other government agencies are “overextending their efforts” in regulating the industry, thus limiting consumers’ access to credit. Per the CFPB’s 2015 Regulatory Agenda, the agency is “in the process of developing a Notice of Proposed Rulemaking to address concerns in markets for payday, auto title, and similar lending products.” This stimulated conversations on how the potential rule would affect consumers and existing state and tribal law. CFPB Acting Deputy Director David Silberman was present at the hearing; Silberman maintained that the CFPB’s regulatory efforts are to ensure that small dollar loans are affordable and that consumers are not “spiraling into continual debt.”
CFPB and DOJ Announce Joint Settlement with Indirect Auto Lender over Alleged ECOA Violations
On February 2, the CFPB and the DOJ announced a joint enforcement action against an indirect auto lender for alleged violations of the Equal Credit Opportunity Act (ECOA) and implementing Regulation B. In April 2013, the CFPB and the DOJ began an investigation into the indirect auto lender’s compliance with the ECOA and found that its policies allowed for dealers to mark up a consumer’s interest rate on the retail installment contract above the established risk-based buy rate, known as “dealer markup.” The dealers received greater compensation from the indirect auto lender on loans with a higher interest rate. The DOJ and the CFPB determined that the respondent’s practice of allowing pricing discretion resulted in qualified African-American/Pacific Islander borrowers paying more than qualified white borrowers. To resolve the DOJ and the CFPB’s allegations, the respondent agreed to (i) reduce the amount by which loans can be marked up to only 1.25% above the established buy rate for auto loans with terms of five years or less, and 1% for loans with longer terms; (ii) pay at least $19.9 million in redress to borrowers affected by its finance practices from January 2011 to February 2, 2016, and up to $2 million more from the date of the action until it implements a new pricing and compensation structure, which must be in place by August 2016; and (iii) hire a settlement administrator to ensure that affected borrowers receive compensation.
These enforcement actions are the fourth in a series of joint CFPB and DOJ actions addressing fair lending risks in the indirect auto lending industry.