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CFPB Partners with New York City to Build Local Consumer Protection Capacity Nationwide
On April 2, the CFPB and New York City Mayor Michael Bloomberg announced a partnership between those entities and the Mayor’s Cities for Financial Empowerment Fund (CFE Fund) to help cities around the country “enhance their local consumer protection and financial empowerment abilities.” The CFE Fund provides technical assistance and funding for the Cities for Financial Empowerment Coalition, a group of municipal governments dedicated to using municipal powers and opportunities to help their residents with low incomes achieve financial stability. The CFE Fund assists local leaders to identify, develop, fund, and implement pilots and programs designed to help families build assets and maximize their financial resources. In addition to New York City, the Coalition includes San Francisco, Chicago, Hawai'i County, Los Angeles, Louisville, Miami, Newark, Providence, San Antonio, Savannah, and Seattle. The partnership with the CFPB also is intended to leverage New York City’s Department of Consumer Affairs, which enforces local consumer protection laws through licensing and other regulatory powers, and empowers consumers with low incomes through professional financial counseling, safe banking, and asset building programming.
CFPB Issues Third Semiannual Report
On March 29, the CFPB released its third semiannual report, which covers the Bureau’s activities from July 1, 2012 through December 31, 2012. The report reviews, among other things, the CFPB’s supervision, enforcement, and rulemaking activities over the subject period. With regard to fair lending, the report confirms that the CFPB is developing a fair-lending focused component of its Compliance Analysis Solution system that collects, validates, and analyzes loan portfolio data, and highlights previously reported fair lending activities, including those in its December 2012 fair lending report. The report also touches on many other familiar topics – it again reviews the CFPB’s complaint handling process and summarizes complaints received to date, discusses challenges consumers have reported with regard to student loan obligations, and highlights “shopping challenges” allegedly present in small dollar lending. Finally, the report provides vague timeframes for rulemakings, including the CFPB’s plan to (i) “accelerate work on” amendments to HMDA to require creditors to collect and report additional lending data, and (ii) propose a prepaid card rule in 2013.
CFPB Updates Status of Standard for Assessing Diversity at Supervised Institutions
On March 29, the CFPB’s Office of Minority and Women Inclusion (OWMI) published its annual report about the CFPB’s diversity and inclusion efforts from January 1, 2012 until December 31, 2012. The Dodd-Frank Act created the CFPB OWMI and similar offices at other federal financial regulatory agencies and tasked each office with advising its agency head on the impact of the policies and regulations of the agency on minority-owned and women-owned businesses, and developing standards for (i) equal employment opportunity and the racial, ethnic, and gender diversity of the agency workforce and senior management; (ii) increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency; and (iii) assessing the diversity policies and practices of entities regulated by the agency. With regard to regulated entities, the report notes that in February 2013 the CFPB entered into a Memorandum of Understanding with the Equal Employment Opportunity Commission to access employment demographic survey data, which will provide a starting point to analyze the composition of regulated entities. The CFPB also reports that the various OWMIs are developing a common standard for assessing the diversity policies and practices of regulated entities and plan to publish draft standards for comment sometime in 2013.
CSBS Urges CFPB to Adopt Rural Designation Petition Process
On April 2, the CSBS released a letter it sent to encourage the CFPB to adopt an additional procedural mechanism for the CFPB to utilize when determining whether an area should be defined as “rural.” The CSBS explains that the Dodd-Frank Act confers Qualified Mortgage benefits on balloon loans if they are made in rural or underserved areas and that the CFPB has elected to utilize the USDA Economic Research Service’s Urban Influence Codes as the basis of their definition of “rural.” The letter identifies inconsistencies with the existing rural classification systems, and suggests that the CFPB adopt a petition process whereby institutions can seek a determination that a specific area be considered rural for purposes of certain Truth in Lending rural requirements.
Housing Counselor Survey Alleges Banks Fail to Comply with National Mortgage Settlement.
On April 3, a California borrower advocacy organization published the results of its survey of housing counselors, which the organization claims reveals that problems persist with the implementation of the national servicing settlement’s servicing standards, including with regard to single points of contact, dual tracking, timelines, and documentation. The report also claims that borrowers of color and other groups face additional challenges to obtaining relief under the settlement. The report recommends that (i) the National Mortgage Settlement Monitor and state attorneys general collect, analyze and report the race, ethnicity, gender, and census tract of those who have received assistance and those who have not; (ii) the OCC and the Federal Reserve Board collect, analyze and make public the same data beyond the national settlement, and include all loss mitigation activity; (iii) the CFPB promptly issue a rule to establish new HMDA categories; (iv) the Monitor impose penalties on outliers; (v) the Monitor, the CFPB, and state AGs tighten rules around “complete loan mod app”, servicing transfers, and widows; (vi) regulators prioritize in the revamped Independent Foreclosure Review process principal reduction relief, keeping people in their homes, and restoring wrongful foreclosure victims to their homes by forcing servicers to go back through their files, rescind improper foreclosure sales, and fix mistakes; (vii) authorities provide more financial support for housing counseling and legal services; and (viii) regulators ensure that servicers have sufficient capacity and training to work with homeowners at risk of foreclosure.
CFPB Announces Major Update to Consumer Complaint Database
On March 28, the CFPB released tens of thousands of consumer complaints related to mortgages, student loans, bank accounts and services, other consumer loans, and credit cards. Credit reporting complaints, will be released in the near future. The expanded database is a live database that is updated daily. It includes one million data points, covering approximately 450 companies, and allows users to track, sort, search, and download information. The CFPB has made the data available in formats that allow developers to build applications, conduct analyses, and perform research, and the database includes functionality to let users build their own visualizations, charts and graphs, and embed the data on other websites or share it through social media. The CFPB is encouraging consumers, analysts, developers, data scientists, civic hackers, and companies that serve consumers, to analyze, augment, and build on the public database to develop ways for consumers to access the complaint data or “mash it up” with other public data sets. The CFPB also released a fact sheet about the database, which provides some summary analysis of the data, as well as a “snapshot” report that provides information about the CFPB’s complaint handling process and additional summary presentation of the data. The CFPB also held a field hearing to review the complaint database and solicit public feedback. Consumer groups participating in the event repeatedly stressed the need for more specific data, including the full narrative description of complaints submitted by consumers, while industry representatives continued to caution the regulator about risks associated with unverified data.
CFPB Implements Change to ATM Fee Notice Requirements
On March 26, the CFPB published a final rule to conform Regulation E to an amendment to the Electronic Fund Transfer Act enacted by Congress in December 2012 that removed the requirement that ATMs have an attached placard disclosing fees. The final rule removes the corresponding regulatory language and official commentary, and retains the remaining statutory requirement that fees be disclosed only on the ATM screen.
CFPB Narrows Application of Credit Card Fee Limit
On March 28, the CFPB published a final rule to remove from Regulation Z a limitation on fees charged prior to credit card account opening. Effective immediately, the rule amends a restriction adopted by the Federal Reserve Board in April 2011, which expanded the 2009 Credit CARD Act fee limitation on certain fees charged during the first year after the account is opened to include fees charged prior to account opening. The CFPB rule eliminates the limitations on fees charged prior to account opening, and covers only those fees charged during the first year after account opening. The rule responds to a legal challenge to restricting the amount of fees charged prior to account opening, which resulted in a court issuing a preliminary injunction to halt the implementation of the Federal Reserve Board’s broader application of the fee limit.
CFPB Issues Guidance on Indirect Auto Finance
On March 21, the CFPB issued Bulletin 2013-02, which provides guidance to bank and nonbank indirect auto lenders about compliance with federal fair lending requirements, and specifically addresses the practice by which auto dealers “mark up” the indirect lender’s risk-based buy rate and receive compensation based on the increased interest revenues. The CFPB explains that indirect auto lenders are creditors under ECOA and Regulation B if they regularly participate in making credit decisions. Based on information the Bureau has collected to date, it believes the “standard practices” of indirect auto lenders constitute participation in a credit decision.
The CFPB contends that by permitting dealer markup and compensating dealers on that basis, lenders may be liable under the legal theories of both disparate treatment and disparate impact when pricing disparities on a prohibited basis exist within their portfolios. As such, the CFPB urges indirect lenders to (i) impose controls on, or otherwise revise, dealer markup and compensation policies, and monitor the effects of those policies and address unexplained pricing disparities on prohibited bases; or (ii) eliminate dealer discretion to mark up buy rates and compensate dealers in some other way.
The guidance also identifies what the CFPB considers to be core aspects of a robust fair lending compliance program, including: (i) an up-to-date fair lending policy statement; (ii) regular fair lending training for all employees involved with any aspect of the institution’s credit transactions, as well as all officers and board members; (iii) ongoing monitoring for compliance with fair lending and other policies and procedures intended to reduce fair lending risk; (iv) review of lending policies for potential fair lending violations, including potential disparate impact; (v) depending on the size and complexity of the financial institution, regular analysis of loan data in all product areas for potential disparities on a prohibited basis in pricing, underwriting, or other aspects of the credit transaction; (vi) regular assessment of the marketing of loan products; and (vii) meaningful oversight of fair lending compliance by management and, where appropriate, the institution’s board.
Insights Into The Financial Fraud Enforcement Task Force Priorities for 2013
On March 20, 2013, Michael Bresnick, Executive Director of DOJ’s Financial Fraud Enforcement Task Force gave a speech at the Exchequer Club of Washington, DC highlighting recent accomplishments of the Task Force and outlining its priorities for the coming year. He began by discussing a number of areas of known focus for the Task Force, including RMBS fraud, fair lending enforcement, and servicemember protection. He then outlined three additional areas of focus that the Task Force has prioritized, including (i) the “government’s ability to protect its interests and ensure that it does business only with ethical and responsible parties;” (ii) discrimination in indirect auto lending; and (iii) financial institutions’ role in fraud by their customers, which include third party payment processors and payday lenders.
The third priority, which was the focus of Mr. Bresnick’s remarks, involves the Consumer Protection Working Group’s prioritization of “the role of financial institutions in mass marketing fraud schemes -- including deceptive payday loans, false offers of debt relief, fraudulent health care discount cards, and phony government grants, among other things -- that cause billions of dollars in consumer losses and financially destroy some of our most vulnerable citizens.” He added that the Working Group also is investigating third-party payment processors, the businesses that process payments on behalf of the fraudulent merchant. Mr. Bresnick explained that “financial institutions and payment processors . . . are the so-called bottlenecks, or choke-points, in the fraud committed by so many merchants that victimize consumers and launder their illegal proceeds.” He said that “they provide the scammers with access to the national banking system and facilitate the movement of money from the victim of the fraud to the scam artist.” He further stated that “financial institutions through which these fraudulent proceeds flow . . . are not always blind to the fraud” and that the FFETF has “observed that some financial institutions actually have been complicit in these schemes, ignoring their BSA/AML obligations, and either know about -- or are willfully blind to -- the fraudulent proceeds flowing through their institutions.” Mr. Bresnick explained that “[i]f we can eliminate the mass-marketing fraudsters’ access to the U.S. financial system -- that is, if we can stop the scammers from accessing consumers’ bank accounts -- then we can protect the consumers and starve the scammers.”
Mr. Bresnick stated that the Task Force’s message to banks is this: “Maintaining robust BSA/AML policies and procedures is not merely optional or a polite suggestion. It is absolutely necessary, and required by law. Failure to do so can result in significant civil, or even criminal, penalties under the Bank Secrecy Act, FIRREA, and other statutes.” He noted that banks should endeavor not only to know their customers, but also to know their customers’ customers: “Before they agree to do business with a third-party payment processor, banks should strive to learn more about the processors’ merchant-clients, including the names of the principals, the location of the business, and the products being sold, among other things.” They further should be aware of glaring red flags indicative of fraud, such as high return rates on the processor’s accounts: “High return rates trigger a duty by the bank and the third-party payment processor to inquire into the reasons for the high rate of returns, in particular whether the merchant is engaged in fraud.” (See BuckleySandler’s previous Spotlight on Anti-Money Laundering posts here, here and here.) Mr. Bresnick underscored this point by mentioning a recent complaint filed by the DOJ in the Eastern District of Pennsylvania.
With respect to the financial institutions’ relationships with the payday lending industry, Mr. Bresnick stated that “the Bank Secrecy Act required banks to have an effective compliance program to prevent illegal use of the banking system by the banks’ clients.” He explained that financial institutions “should consider whether originating debit transactions on behalf of Internet payday lenders – particularly where the loans may violate state laws – is consistent with their BSA obligations.” Although he acknowledged that it was not a simple task for a financial institution to determine whether the loans being processed through it are in violation of the state law where the borrower resides, he suggested “at a minimum, banks might consider determining the states where the payday lender makes loans, as well as what types of loans it offers, the APR of the loans, and whether it makes loans to consumers in violation of state, as well as federal, laws.”
In concluding, Mr. Bresnick said, “It comes down to this: When a bank allows its customers, and even its customers’ customers, access to the national banking system, it should endeavor to understand the true nature of the business that it will allow to access the payment system, and the risks posed to consumers and society regarding criminal or other unlawful conduct.”
The agenda outlined by Mr. Bresnick reinforces ongoing efforts by FinCEN and the FDIC, and adds to the priorities recently sketched out by CFPB and the OCC. Together they describe an ambitious, and increasingly aggressive, financial services enforcement agenda for federal regulators and enforcement authorities.