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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.
CFPB Reports on Effect of the CARD Act
On December 3, the CFPB published a report summarizing the impact of the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) on consumers and the credit market. According to the report, access to credit has increased by 10% since early 2012, with more than 60% of adults owning at least one credit card account. The report states that as a result of the CARD Act placing limitations on the use of over-limit fees, and its requirement that such fees and other penalty fees be “reasonable and proportional” to the underlying violation of account terms, consumers saved billions of dollars from 2011 through 2014. The CFPB’s outstanding areas of concern relating to the credit market include: (i) deferred-interest promotions; (ii) debt collection practices; and (iii) rewards program offers that provide only partial information.
CFPB Issues Fall Rulemaking Agenda, Potential Student Loan Servicing Rules on Horizon
On November 20, the CFPB released its fall rulemaking agenda. The CFPB’s notable current initiatives include: (i) addressing arbitration clauses in contracts related to consumer financial products and services and providing an outline of rulemaking ideas such as “whether to propose rules that would prevent companies from using these agreements to foreclose consumers’ ability to bring class action lawsuits”; (ii) developing a Notice of Proposed Rulemaking, with an anticipated release date in the first quarter of 2016, to address concerns relating to payday and auto title lending; (iii) finalizing its December 2014 proposed rule, “Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z),” to address consumer protection concerns relating to reloadable cards and other similar prepaid products; and (iv) considering rules to designate consumer installment loans and vehicle title loans as “larger participants” under the CFPB’s supervisory authority. Looking ahead, the CFPB’s report highlights the potential for rulemaking to address issues related to credit reporting and student loan servicing. Regarding student loan servicing, the CFPB stresses that it “has made it a priority to take action against companies that are engaging in illegal servicing practices,” and that it will “continue to monitor the market for trends and developments and evaluate possible policy responses, including potentially proposing rules.”
House Report Examines the CFPB's Methodology in Auto Finance Investigations
On November 24, Republicans on the House Committee on Financial Services issued a report regarding the CFPB’s approach for determining discrimination in the auto lending industry. The report questions the CFPB’s proxy methodology and its authority to bring claims against banks involved in indirect auto lending under the Equal Credit Opportunity Act’s (ECOA) disparate impact theory. According to the report, disparate impact “is a controversial legal theory of liability in discrimination cases.” The report further states that, even if it assumes that the ECOA permits disparate impact claims, the CFPB is nonetheless required to identify the following to establish a prima facie case: (i) a specific policy or practice adopted by the creditor; (ii) disparate impact on a prohibited basis; and (iii) a causal relationship between the challenged practice and the alleged disparate impact. The report states, “[d]ocuments obtained by the Committee show that the Bureau will likely have difficulty proving any one of these requirements, much less all three.” Notably, the report criticizes the CFPB’s adoption of the Bayesian Improved Surname Geocoding proxy method, which “combines surname- and geography-based information into a single proxy probability for race and ethnicity,” labeling it as “faulty and unreliable.” The report further suggests that the CFPB observed the method to be “less accurate . . . than some proprietary proxy methods that use nonpublic data.” In closing, the report comments on the CFPB’s “ambition to eliminate dealer markup” by summarizing (i) a December 2013 settlement in which the CFPB used its leverage over a bank holding company to negotiate the settlement terms; (ii) the agency’s plans to increase the number of individual enforcement actions on dealer markup and compensation policies; and (iii) potential ECOA rulemaking to “promulgate a regulation prohibiting lenders from compensating dealers based on the terms of a loan.”
CFPB Takes Action Against Nationwide Credit Reporting Company and Owner
On December 3, The CFPB took action against a nationwide credit reporting company and its owner over alleged violations of the Fair Credit Reporting Act. According to the CFPB, the defendants (i) obtained consumer reports, without permissible purpose, from third-party CRAs to generate marketing presentations for prospective clients; and (ii) failed to investigate consumer disputes, including those relating to identity theft. The CFPB further alleged that the company “routinely failed” to provide consumer dispute information to furnishers. In addition to an $8 million civil money penalty, the consent order requires the defendants to submit to the CFPB a compliance plan that ensures their “practices for obtaining Consumer Reports and conducting reinvestigations of disputes [comply] with all applicable federal consumer financial laws, as defined in the CFPA.” Finally, the order prohibits the company from engaging in certain practices, such as the selling or reselling of any consumer report to any person whose purpose for obtaining the report is to consider purchasing any service provided by the defendants, or to generate a lead.
CFPB Releases HMDA Implementation Resources
On December 1, the CFPB released a group of resources designed to help financial institutions understand their obligations under HMDA and Regulation C, as amended by the Bureau's October 15 final rule. The resources include a brief 5-page executive summary of the recent changes, the HMDA Small Entity Compliance Guide, two reference tools that show when data must be collected, recorded, and reported and when data can be reported as "not applicable," and HMDA institutional coverage charts for both 2017 and 2018.
The most substantial of these resources is the HMDA Small Entity Compliance Guide that the Bureau describes as, "a plain-language guide to the new rule which makes the content more accessible for industry constituents, especially smaller businesses with limited legal and compliance staff." The guide is 109 pages and covers key changes and effective dates, institutions and transactions that are covered under the new rule, the data points that must be reported and how they should be recorded and reported, as well as small sections on practical implementation and how mergers and acquisitions affect the applicability of the new rule. The guide also provides an e-mail address and phone number for anyone who has reviewed all of the available materials and still has a specific regulatory interpretation question.
