InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB Announces Two Actions Related To Virtual Currencies
On August 11, the Consumer Financial Protection Bureau (the CFPB or Bureau) issued a "consumer advisory" concerning virtual currency and also announced that it would begin accepting consumer complaints about virtual currency or virtual currency companies. These actions are the consumer agency’s first foray into virtual currencies, and they follow a recent GAO report that recommended the CFPB play a larger role in the development of federal virtual currency policy.
Consumer Advisory
The advisory describes virtual currencies, briefly notes their potential for innovation, and cautions consumers about the numerous and significant risks the CFPB believes virtual currencies present for consumers. Specifically, the CFPB cautions virtual currency consumers that there are risks related to hackers, fewer consumer protections, costs, and scams. The advisory elaborates on the risks for each stage of a virtual currency transaction: purchasing, storing, or transacting in virtual currencies. For example:
- Purchasing: Warns consumers purchasing virtual currencies to beware of cost fluctuations and potential scams.
- Storage: Expresses concerns about data security risks and the lack of federal insurance for virtual currencies.
- Transactions: Advises consumers transacting in virtual currencies to read their agreement with their wallet provider and be mindful of the risks of linking their digital wallet account to their bank account or payment card.
Consumer Complaints
The Bureau announced that it is working on a new form for virtual currency complaints, but in the meantime will accept such complaints using its money transfer complaints form.
Virtual currency complaints will be subject to the CFPB’s standard complaint process. As described in the CFPB’s most recent consumer complaint report, once a complaint is submitted, the CFPB sends the complaint to the appropriate company and works with the company to get a response within 15 calendar days. Each complaint is published in a public database after the company responds to the complaint or after the company has had the complaint for 15 days, whichever comes first. If a company can demonstrate within the 15-day period that it has been wrongly identified, no data for that complaint will be posted unless and until the correct company is identified. The CFPB states that if it receives a complaint about an issue outside its jurisdiction, the Bureau will forward the complaint to the appropriate federal or state regulator.
Jurisdictional issues notwithstanding, the Bureau promises to use all virtual currency complaints it receives to better understand the virtual currency market and its effect on consumers. The CFPB also asserts that it will use complaints to help enforce federal consumer financial laws and, if appropriate, take consumer protection policy steps. The Bureau has demonstrated through its examination and enforcement activity in other areas that consumer complaints play a significant role in the Bureau’s risk-based approach to supervision and enforcement. Moreover, the CFPB recently proposed to publish consumer complaint narratives with other complaint data already made public, noting in its proposal that by increasing consumer complaint volume, publication of narratives would benefit “the many Bureau functions that rely, in part, on complaint data to perform their respective missions including the Offices of Supervision, Enforcement, and Fair Lending, Consumer Education and Engagement, and Research, Markets, and Rulemaking."
* * *
Our Digital Commerce & Payments Practice group is experienced in regulatory matters arising at the intersection of digital payments, financial institutions, and technology providers, and is uniquely positioned to assist virtual currency and related companies whose business brings them into contact with the CFPB.
Our Consumer Financial Protection Bureau group has advised clients in dozens of CFPB examinations, investigations, and enforcement actions and frequently represents clients in connection with CFPB supervision preparedness and matters pertaining to compliance with CFPB rulemakings and regulatory expectations, including consumer complaint issues.
Please contact one of the attorneys listed below if you would like to discuss the CFPB advisory or complaints announcement.
- Manley Williams, (202) 349-8060
CFPB Pressures Banks To Disclose Campus Marketing Agreements
On August 6, the CFPB’s Student Loan Ombudsman, Rohit Chopra, published a blog post addressing the financial arrangements between financial institutions and institutions of higher education that market financial products to students. Last year, the CFPB urged banks to disclose any agreements with colleges and universities to market debit, prepaid, and other products to students and warned that “[t]he CFPB prioritizes its supervisory examinations based on the risks posed to consumers” and “[failing to make] college financial product arrangements transparent to students and their families . . . increase[s] such risks.” In this latest review, the CFPB assessed the Big Ten schools and found that at least 11 have established banking partners to market financial products to students. Of those 11, the CFPB found only four contracts on the bank websites, and it characterized three of those four contracts as “partial”—i.e. in the CFPB’s view, the disclosed agreements “did not contain important information, such as how much they pay schools to gain access to students in order to market and sell them financial products and services.” Concurrent with the blog post, the CFPB sent letters to schools asserting that “their bank partner has not yet committed to transparency when it comes to student financial products.”
Republican Committee Leaders Question CFPB On Recess Appointment Activities
On July 29, House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Senate Banking Committee Ranking Member Mike Crapo (R-ID) sent a letter to CFPB Director Richard Cordray questioning the CFPB’s authority to take certain actions during the period of Mr. Cordray’s recess appointment—January 4, 2012 through July 16, 2013—which was made in the same manner and on the same day as other appointments that were subsequently invalidated by the Supreme Court. Citing the Dodd-Frank Act, the letter asserts that new CFPB authorities created by the Act—as opposed to those transferred from another agency—could only be exercised by a Senate-confirmed director. The lawmakers state that as a result of the Supreme Court’s decision on recess appointments, two primary legal questions now exist regarding the CFPB’s authority during the relevant time: (i) whether the Director had authority to exercise CFPB powers as a recess appointee; and (ii) whether the Director’s ratification of actions taken during his recess appointment is valid. The letter asks the CFPB to produce by September 1, 2014: (i) “a full accounting of all CFPB actions taken” during the recess appointment period that were not derived from transferred authorities; (ii) all documents related to the validity or standing of CFPB actions taken during the recess appointment period that were not derivative of the transferred powers; (iii) all documents justifying the CFPB’s authority and the Director’s standing to ratify past actions; and (iv) all documents related to the impact of the Supreme Court’s recess appointment decision. The requests include internal documents and those involving outside counsel.
CFPB Extends Deadline To Comment On Complaint Narrative Proposal
On July 29, the CFPB announced that it extended 30 days to September 22, 2014 the deadline for submitting comments on its proposal to publish consumer complaint narratives. In doing so, the CFPB again defended the proposal as consistent with practices at other government agencies and as an extension of its efforts to give voice to consumers’ concerns. The extension followed a request from a group of industry trade associations that noted the numerous legal and practical issues raised by the proposal.
CFPB Concerned Overdraft Opt-In Requirement Not Protecting Consumers
On July 31, the CFPB released its latest assessment of overdraft data it has collected from large banks. The report provides the following summary findings:
- Overdraft and non-sufficient funds (NSF) fees constitute the majority of the total checking account fees that consumers incur. For opted-in consumers, overdraft and NSF fees account for about 75% of their total checking account fees and average over $250 per year.
- Most overdraft fees are paid by a small fraction of bank customers—8% of customers incur nearly 75% of all overdraft fees.
- Opted-in accounts are three times as likely to have more than 10 overdrafts per year as accounts that are not opted in. And opted-in accounts have seven times as many overdrafts that result in fees as accounts that are not opted in.
- Transactions that lead to overdrafts tend to be small—for debit card transactions, the median amount that leads to an overdraft fee is $24 and the median amount of a transaction that leads to an overdraft fee for all types of debits is $50.
- Most consumers who overdraft bring their accounts positive quickly.
- Younger customers tend to overdraft more than older customers.
As the CFPB explains, since mid-2010, Regulation E generally requires financial institutions to obtain affirmative consent from account holders to be charged fees for overdraft coverage on ATM and non-recurring point of sale (POS) debit card transactions. The CFPB states that as a result, institutions are less likely to authorize overdrafts on these types of transactions for account holders who have not opted in. However, the CFPB believes the study confirms that opting in for overdraft coverage for debit card and ATM transactions is an expensive way to manage a checking account, and the agency’s press release and Director Cordray’s remarks about the report indicate the CFPB is concerned about the ability of the opt-in requirement to protect consumers. Director Cordray raised specific concerns about the use of debit cards for purchases, stating that “consumers are now using their debit cards more than ever” and that “overdraft fees should not be ‘gotchas’ when people use their debit cards.”
The CFPB acknowledged that it has not sufficiently assessed the causal nature of the relationship between opt-in status and overdrafting. And Director Cordray stressed that “nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage.” But he called for continued review of “whether current overdraft practices are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.”
The report is part of the CFPB’s ongoing study of the overdraft market in advance of a potential rulemaking, and it is the second such report released to date. The CFPB recently substantially extended the timeline for its rulemaking on overdraft products, indicating in May that “prerule activities” could continue through February 2015; the CFPB previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could involve additional reports, or conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
CFPB, State AGs Announce Joint Enforcement Action Against Military Consumer Lender
On July 29, the CFPB and 13 state Attorneys General announced a consent order that requires a consumer lender currently in Chapter 7 bankruptcy to provide $92 million in debt relief for about 17,000 U.S. servicemembers and other consumers harmed by the company’s alleged predatory lending scheme. The lender offered credit to consumers purchasing computers, videogame consoles, televisions, or other products, which typically were purchased at mall kiosks near military bases. In some cases the lender was the initial creditor, and in other cases, the lender provided indirect financing by agreeing to buy the financing contracts from merchants who sold the goods.
Allegations
The CFPB claims the lender “lured consumers with the promise of no money down and instant financing.” Then, according to the CFPB, the lender and its merchant partners artificially inflated the disclosed price of the consumer goods being sold to mask finance charges collected by the lender. The CFPB also asserts that the company withheld information on billing statements, failed to obtain required lending licenses, and illegally collected on loans that were void pursuant to state licensing and usury laws.
Specifically, the CFPB alleges the lender violated TILA by (i) failing to accurately disclose the finance charge and annual percentage rate for financing agreements where they served as the creditor; and (ii) failing to disclose or accurately disclose in periodic billing statements for open-end financing agreements the annual percentage rate, the balance subject to interest rate, how that balance was determined, itemized interest charges, the closing date of the billing cycle, and the account balance on that date.
In addition, the CFPB claims the lender violated the Consumer Financial Protection Act’s UDAAP provisions by purchasing deceptive financing agreements from merchants and thereby facilitating the merchant’s deceptive disclosures. The CFPB also asserts UDAAP violations for servicing and collecting on consumer financing agreements that state laws rendered void or limited the consumer's obligation to repay.
Debt Relief
The order requires that all efforts to collect on any outstanding financing agreements cease—approximately $60 million in contracts owed by about 12,000 consumers—and that the liquidating trust created as part of the company’s bankruptcy plan stop collections on approximately $32 million owed by more than 5,000 consumers. Servicemembers may keep the merchandise they purchased. In addition, the company must update credit reporting agencies and notify servicemembers and other consumers of debt status.
Penalty & Redress
The order also requires the company, through its bankruptcy trustee, to make a $1 penalty payment to the CFPB’s Civil Penalty Fund. The CFPB states that the bankruptcy prevents it from assessing a larger penalty, but the $1 payment may allow harmed consumers to be eligible for relief from the Civil Penalty Fund in the future, although that determination has not yet been made. The order also requires redress payments for excess finance charges. Due to the company’s inability to pay, the redress requirement will be suspended once the company complies with the debt relief provisions.
CFPB Proposes Rule To Implement Dodd-Frank HMDA Changes
On July 24, the CFPB issued a proposed rule to expand the scope of HMDA data reporting requirements. Section 1094 of the Dodd-Frank Act transferred responsibility for HMDA and Regulation C to the CFPB and directed the CFPB to conduct a rulemaking to expand the collection of mortgage origination data to include, among other things: (i) the length of the loan; (ii) total points and fees; (iii) the length of any teaser or introductory interest rates; (iv) the applicant or borrower’s age and credit score; and (v) the channel through which the application was made. The Dodd-Frank Act also granted the CFPB discretion to collect additional information as it sees fit. The proposed rule would implement all of the new data points required by the Dodd-Frank Act, and also would utilize the CFPB’s discretionary authority to substantially expand the number of new data points required to be reported. In addition, the CFPB’s proposal would require reporting for all dwelling-secured loans, which would include some loans not currently covered by Regulation C, including reverse mortgages, and all home equity lines of credit irrespective of their purpose. The proposal follows a review initiated by the CFPB earlier this year to assess of the potential impacts of a HMDA rulemaking on small businesses. The CFPB released a summary of that review with the proposed rule. Comments on the proposal are due by October 22, 2014. We are reviewing the proposed rule and plan to provide a more detailed summary in the coming days.
CFPB, FTC, And State Authorities Coordinate Action Against Foreclosure Relief Companies
On July 23, the CFPB, the FTC, and 15 state authorities coordinated to take action against foreclosure relief companies and associated individuals alleged to have employed deceptive marketing tactics to obtain business from distressed borrowers. The CFPB filed three suits, the FTC filed six, and the state authorities collectively initiated 32 actions. For example, the CFPB claims the defendants (i) collected fees before obtaining a loan modification; (ii) inflated success rates and likelihood of obtaining a modification; (iii) led borrowers to believe they would receive legal representation; and (iv) made false promises about loan modifications to consumers. The CFPB and FTC allege that the defendants violated Regulation O, formerly known as the Mortgage Assistance Relief Services (MARS) Rule, and that some of the defendants also violated the Dodd-Frank Act’s UDAAP provisions and Section 5 of the FTC Act, respectively. The state authorities are pursuing similar claims under state law. For example, New York Attorney General Eric Schneiderman announced that he served a notice of intent to bring litigation against two companies and an individual for operating a fraudulent mortgage rescue and loan modification scheme that induced consumers into paying large upfront fees but failed to help homeowners avoid foreclosure.
CFPB, State AGs Weigh In On TILA Rescission
This week, the CFPB and 25 states filed amicus briefs in Jesinoski v. Countrywide Home Loans, Inc., No. 13-684, a case pending before the U.S. Supreme Court that may resolve a circuit split over whether a borrower seeking to rescind a loan transaction under TILA must file suit within three years of consummating the loan, or if written notice within the three-year rescission period is sufficient to preserve a borrower’s right of rescission. In short, the CFPB argues, as it has in the past, that no TILA provision requires a borrower to bring suit in order to exercise the TILA-granted right to rescind, and that TILA’s history and purpose confirm that a borrower who sends a notice of rescission in the three-year period has exercised the right of rescission. The state AGs similarly argue that TILA’s plain meaning allows borrowers to preserve their rescission right with written notice. In so arguing, the government briefs aim to support the borrower-petitioner seeking to reverse the Eighth Circuit’s holding to the contrary. The majority of the circuit courts that have addressed the issue, including the Eight Circuit, all have held that a borrower must file suit within the three-year rescission period.
CFPB Expands Complaint Collection To Include Prepaid Cards, Additional Nonbank Products And Services
On July 21, the CFPB announced that it is now accepting consumer complaints regarding (i) prepaid products, including gift cards, benefit cards, and general purpose reloadable cards; (ii) credit repair services and debt settlement services; and (iii) pawn and title loans. The CFPB’s decision to field prepaid card complaints comes as the agency prepares a proposed rule related to those products. The press release states that the CFPB is planning to initiate the prepaid card rulemaking “in the coming months.” Director Cordray recently stated the rule would be proposed at the “end of the summer.”
The CFPB provides the following options for consumers to identify the nature of their complaints:
- Prepaid Cards - (i) managing, opening, or closing your account; (ii) fees; (iii) unauthorized transactions or other transaction issues; (iv) advertising, marketing or disclosures; (v) adding money; (vi) overdraft, savings or rewards features; or (vii) fraud or scam.
- Credit Repair and Debt Settlement - (i) advertising and marketing; (ii) customer service/customer relations; (iii) disclosures; (iv) excessive fees; (v) unexpected/other fees; (vi) incorrect exchange rate; (vii) lost or stolen money order; (viii) lost or stolen check; or (ix) fraud or scam.
- Pawn and Title Loans – (i) charged fees or interest I didn't expect; (ii) can't stop lender from charging my bank account; (iii) received a loan I didn't apply for; (iv) applied for a loan, but didn't receive money; (v) lender charged my bank account on wrong day or for wrong amount; (vi) lender didn't credit payment to my account; (vii) can't contact lender; (viii) lender sold the property / repossessed or sold the vehicle; or (ix) lender damaged or destroyed property / vehicle.
As with all of the CFPB’s complaint categories, consumers also have an opportunity to describe their complaints regarding these new products and services in narrative form. Last week, the CFPB proposed a policy change under which it would publish those consumer complaint narratives, a move it hopes will increase the number of complaints the CFPB fields. At the same time the CFPB released its latest “snapshot” of consumer complaints, which provides an overview of the complaint process and summary analyses of complaints handled by the CFPB since July 21, 2011.