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CFPB Monthly Complaint Snapshot Highlights Money Transfer Complaints
On December 22, the CFPB released its monthly complaint report, which focuses on money transfer complaints. According to the report, as of December 1, the CFPB has handled approximately 5,100 money transfer complaints, domestically and internationally. The most complained-about issues include difficulties with the safe and efficient transfer of money, as well as fraud allegations. Additional complaints include inadequate customer service and issues resolving refund errors. Similar to previous complaint snapshots, the report identifies the most-complained-about companies. The CFPB identified the District of Columbia and Delaware as having the highest complaint volume per capita in the country, and placed Georgia as its geographic spotlight, noting that as of December 1, consumers submitted more than 31,000 complaints, with mortgage-related complaints taking the lead.
New York AG Announces Settlement Payments to Consumers Affected by Alleged Predatory Lending Scheme
On December 22, New York AG Schneiderman announced that more than 3,000 consumers received partial compensation from funds stemming from a global settlement negotiated by AG Schneiderman and the CFPB. In July 2014, the CFPB and 13 state AGs announced a consent order with a military consumer lender requiring it to provide $92 million in debt relief to approximately 17,000 U.S. servicemembers and other consumers affected by the company’s alleged predatory lending scheme. At the time of the order, the company was in Chapter 7 bankruptcy and the redress requirement was suspended until it complied with the debt-relief provisions of the consent order. The recent redress payment exceeds $3.7 million and was issued to 82 victims in New York.
Vendor Management in 2015 and Beyond
With evolving regulatory expectations and increased enforcement exposure, financial institutions are under more scrutiny than ever. Nowhere is this more evident than in the management and oversight of service providers. When service providers are part of an institution’s business practice, understanding the expectations of regulators, investors, and counterparties for compliance with consumer financial laws is critical.
CFPB GuidanceIn 2012, the CFPB issued Bulletin 2012-03, which outlines the CFPB’s expectations regarding supervised institutions’ use of third party service providers. Banks and nonbanks alike are expected to maintain effective processes for managing the risks presented by service providers, including taking the following steps:
- Conducting thorough due diligence of the service provider to ensure that the service provider understands and is capable of complying with federal consumer financial law
- Reviewing the service provider’s policies, procedures, internal controls, and training materials
- Including clear expectations in written contracts
- Establishing internal controls and on-going monitoring procedures
- Taking immediate action to address compliance issues
Implementing consistent risk-based procedures for monitoring third party service provider relationships is an extremely important aspect of meeting the CFPB’s expectations and mitigating risk to the institution.
The Risk Management Lifecycle and Best Practices
The CFPB is but one of many agencies that have circulated vendor management guidance. Other federal prudential regulators—most notably the Office of the Comptroller of the Currency—have developed regulatory guidance describing a “lifecycle” for oversight of third parties that supervised institutions are expected to follow. The risk management lifecycle of a service provider relationship consists of:
- Planning/risk assessment
- Due diligence and service provider selection
- Contract negotiation and implementation
- Ongoing relationship monitoring
- Relationship termination/contingency plans
Supplemented by enhanced risk management processes, including meaningful involvement by the Board of Directors and extensive monitoring of performance and condition, the new framework for oversight of third parties can present both cost and operational challenges for all institutions. Financial institutions would be prudent to implement the following best practices into their vendor management procedures, among others:
- Staffing sufficiently to ensure that service providers are properly monitored
- Incorporating Board and senior executive involvement throughout the process
- Documenting its efforts at every stage of the lifecycle
CFPB Reports on Credit Card Agreements and Warns Colleges of Potential CARD Act Violations
On December 16, the CFPB issued its annual report to Congress regarding credit card marketing agreements between colleges and issuing credit card organizations. Pursuant the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, credit card issuers must disclose the details of those agreements to the CFPB, and colleges and universities are required to publicly disclose their marketing agreements, either by posting the actual contracts to their websites or by posting the information needed to request a copy of the agreement and subsequently providing a copy to the requestor. According to the report, a review of 25 sample colleges with active credit card agreements determined that “most institutions of higher education [did] not make copies of [the] agreements available on their websites to students and other affected parties.” The CFPB further noted that “[w]ith only rare exceptions, [the] institutions also fail[ed] to provide alternative reasonable means of access to those agreements.” In light of its findings, the CFPB sent a letter to the 17 colleges that may not have adequately disclosed a credit card agreement. The letter explained that the school received the notice because its marketing agreement with a card issuer “could not be publicly obtained using reasonable procedures and in a reasonable timeframe.” While the CFPB’s letter stated that it had yet to determine if the schools’ inaction violated the CARD Act, it urged the recipient schools to “reconsider [their] approach to public disclosure.”
CFPB Takes Action Against "Buy-Here, Pay-Here" Auto Dealer and Affiliated Financing Company
On December 17, the CFPB announced a consent order against a Minnesota-based auto dealer and its affiliated financing company for alleged violations of the FCRA and the CFPA. The CFPB alleged that the auto dealer, acting through its financing company, (i) repeatedly furnished inaccurate consumer credit information for more than 84,000 customers from January 2009 through September 2013; and (ii) engaged in deceptive acts and practices by failing to report “good credit” to the credit reporting agencies (CRAs) for tens of thousands of consumers after making written representations that the it would report positive credit information to help consumers build and maintain good credit. Alleged FCRA violations include: (i) inaccurately reporting that vehicles were repossessed and borrowers owed balances after the vehicles were returned to the dealer in accordance with the company’s 72-hour return policy; (ii) inaccurately reporting that consumers had outstanding balances after issuing documentation that disputed accounts had been settled; and (iii) failing to establish and maintain reasonable written policies and procedures to ensure the accuracy and integrity of consumer information furnished to CRAs.
Under the terms of the consent order, the companies are required to pay a $6,465,000 civil money penalty. In addition, the companies must (i) establish and implement written consumer-information furnishing policies and procedures that comply with the Furnisher Rule; (ii) identify and correct inaccurate consumer-information that was furnished to the CRAs (iv) cease from making false representations that it will report “good credit” or other positive information to the CRAs; (v) provide affected consumers with free credit reports; and (vi) implement an effective audit program of its credit reporting practices.
CFPB Names Mary McLeod as New General Counsel
On December 17, the CFPB announced that Mary McLeod will join the Bureau in early 2016 as its General Counsel. McLeod will replace Meredith Fuchs, who announced her departure from the Bureau earlier this year and is currently serving as the CFPB’s General Counsel and Acting Deputy Director. McLeod first joined the State Department in 1977 and has headed the Office of the Legal Adviser of the State Department since January 2013.
CFPB Orders Small-Dollar Lender to Pay $10 Million for Debt Collection Practices; Releases Compliance Bulletin
On December 16, the CFPB announced a consent order against a Texas-based small-dollar lender for alleged violations of the Consumer Financial Protection Act, the Electronic Fund Transfer Act (EFTA), and the EFTA’s implementing regulation, Regulation E. According to the CFPB, beginning in July 2011, the company engaged in unfair or deceptive acts or practices and violated Regulation E by (i) visiting consumers’ homes and places of employment to collect debts; (ii) contacting third parties for reasons other than to acquire consumers’ location information, which put consumers at risk of their information being disclosed to third parties, and ignoring requests to stop calling consumers’ workplaces; (iv) making false threats of litigation if consumers did not pay the past due amount; (v) misrepresenting the company’s ability to, and routine practice to, run credit checks on loan applicants; (vi) requiring consumers to pay using pre-authorized electronic fund transfers; (vii) causing consumers to incur fees from their banks due to electronic withdrawal practices; and (viii) misrepresenting a consumer’s ability to repay loans early and to revoke authorization for electronic withdrawal authorization. The CFPB’s administratively-filed consent order requires the company to pay $7,500,000 towards refunding consumers affected by its practices, and pay a civil money penalty of $3,000,000. In addition, the order prohibits the company from collecting on defaulted loans owed by approximately 130,000 consumers, and from engaging in unfair and deceptive debt collection practices in the future.
The CFPB simultaneously released Compliance Bulletin 2015-07, warning creditors, debt buyers, and third-party collectors of potentially unlawful in-person debt collection practices. Specifically, the bulletin reminds the financial services industry of debt collection practices prohibited by the Dodd-Frank Act and the Fair Debt Collection Practices Act, including (i) engaging in unfair, deceptive, or abusive acts or practices; (ii) communicating with a consumer at any place or time that the debt collector knows, or should know, to be inconvenient to the consumer; (iii) communicating with persons other than the consumer (and other identified parties, except in certain circumstances) for purposes other than acquiring location information; (iv) “‘us[ing] unfair or unconscionable means to collect, or attempt to collect, debt’”; and (v) “‘engag[ing] in any conduct the consequences of which is to harass, oppress, or abuse a person in connection with collecting a debt.’”
Year in Review: Auto Finance and the CFPB in 2015
The auto finance industry gained a new regulator in 2015 with the publication of the CFPB’s larger participant rule, which, for the first time, allows the Bureau to supervise larger non-bank auto finance companies. In this new compliance environment, larger participants would be prudent to examine past bulletins and consent orders executed by the CFPB to proactively prepare for examinations and enforcements in the coming year.Regulation by Bulletins and Consent Orders
CPFB Bulletin 2013-02, which set forth the CFPB’s initial views regarding the risk under the Equal Credit Opportunity Act associated with “allowing” dealers the discretion to “mark up” the rates of customers’ retail installment sale contracts, provided a basis for two 2015 consent orders. Broadly speaking, the Bulletin noted two possible ways auto finance creditors could mitigate their risk – eliminating dealer discretion or monitoring for disparities in dealer discretion and then providing customer remediation for such disparities.
Since 2013 there have been three public CFPB consent orders regarding dealer pricing discretion. The first order, executed with a large bank holding company and its subsidiary bank in 2013, required the respondents to pay remediation for past transactions within the order’s scope, pay a $18 million civil money penalty, and establish a program to monitor and remediate disparities going forward. This contrasts with the two public consent orders that were issued afterwards. Those subsequent orders, entered into with a captive finance company and a large regional bank in the summer and fall of 2015, respectively, provided the respondents with the option of reducing the range of acceptable “markup” (i.e., the difference between the rate of the installment contract and the institution’s buy rate) to 125 basis points for contracts with a term of 60 months or less and 100 basis points for contracts with a term of more than 60 months. If a respondent selected this option, then monitoring for compliance with these markup limits is required, but monitoring and remediating disparities in dealer markup is not required. Both orders also included other options involving reduced dealer discretion, but did not include an option to monitor and remediate disparities without any change in the permitted dealer discretion.
Larger Participant Rule for Auto Finance
The CFPB’s larger participant rule for auto finance, which became effective on August 31, 2015, extended the CFPB’s supervisory authority to nonbank auto finance companies that have at least “10,000 annual originations.”
- “Originations” in this case includes credit for the purpose of purchasing an automobile, leases of automobiles, refinancings of such transactions, and purchases of such transactions.
- The rule excludes title lending and securitization transactions.
- “Automobile” includes any self-propelled vehicle primarily used for personal, family, or household purposes for onroad transportation except for motor homes, RVs, golf carts, and motor scooters.
Now that the rule is in effect, CFPB examinations of non-bank auto finance companies are expected to follow. In light of this new rule, companies should examine other areas where the CFPB has been active in connection with other consumer financial products, in the event the Bureau extends such initiatives into auto finance. Those areas include:
- Fair lending
- Credit reporting
- Debt collection
- Treatment of servicemembers
- Ancillary products
- Vendor management
CFPB Announces Complaint and Proposed Consent Order Against Massachusetts Debt Collection Firm
On December 7, the CFPB announced the filing of a complaint and a proposed consent order against a Massachusetts-based debt collection firm for alleged violations of the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Dodd-Frank Act. In 2012, the firm’s subsidiary purchased a debt portfolio from a telephone service provider containing over three million defaulted, and predominantly outdated, cellphone accounts. The firm and its subsidiary entered into a collection services agreement, with the firm agreeing to remit money collected from consumers, less fees and expenses, to its subsidiary. According to the CFPB, the firm, having prior experience in the collection of telecommunications debt, knew that the portfolio likely contained defects, including inaccurate and incomplete dispute histories and unverified documentation. Still, even after customers disputed certain debt, the firm continued to report the debt to credit reporting companies and to collect on time-barred, disputed, fraudulent, and settled or paid debts. The CFPB further alleges that the firm reported faulty information to the credit reporting companies by initially reporting that the entire debt portfolio was disputed, and then removing and subsequently reinserting the dispute flags on the entire portfolio. The firm’s purportedly deceptive practices resulted in the collection of about $743,000 on more than 2,000 disputed accounts, where the debt was not verified.
Under the proposed consent order, the firm would be required to: (i) refund to customers the payments that it received for disputed debt that was not verified; (ii) cease collecting and reporting on unverified, disputed debt, and request the removal by the credit reporting companies of such reported information from customer files; (iii) for five years, review original account-level documents to verify a debt before collecting on it; (iv) for five years, refrain from reselling its purchased debt to other debt collectors; and (v) pay a penalty of $1.85 million.
The CFPB's Mortgage Originations Agenda in 2016
Now more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.TRID/KBYO
Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.
GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers. In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”
MSAs and RESPA Enforcement
The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services. Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.
This calls into question the legality of marketing services agreements (MSAs) generally. While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.
LO Compensation Rule
The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule. In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule. In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.
Examination Enforcement Trends and UDAAP
The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues. Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.
Fair Lending
“What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important. Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining. The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.
