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On March 14, the CFPB proposed a rule to allow it to supervise “larger participant” nonbank student loan servicers. The CFPB has authority to supervise, regardless of size, nonbanks that originate private education loans, and can define and supervise larger participants in other markets for consumer financial products or services. The CFPB proposes to supervise any nonbank student loan servicer whose volume exceeds one million accounts, which the CFPB expects will cover the seven largest servicers. The CFPB’s test to determine volume would consider the number of accounts serviced, whether for federal or private loans, for which an entity and its affiliated companies were responsible as of December 31 of the prior calendar year. After designation, a servicer would remain a larger participant until two years after the first day of the tax year in which the servicer last met the account volume test. The CFPB would use its existing student loan examination procedures to review larger participants’ “student loan servicing,” which the proposed rule defines as: (i) collecting and processing loan payments on behalf of holders of promissory notes, (ii) maintaining account records and communicating with borrowers on behalf of loan holders during deferment periods, and (iii) interacting with borrowers to facilitate collection and processing of loan payments. An entity notified that the CFPB intends to undertake supervisory activity would have an opportunity to challenge the larger participant determination. The CFPB is accepting comments on the proposal for 60 days following publication in the Federal Register.
On January 22, the FFIEC proposed guidance on the applicability of consumer protection and compliance laws, regulations, and policies to activities conducted via social media by federally supervised financial institutions, as well as nonbanks supervised by the CFPB. With regard to compliance and legal risks, the guidance addresses (i) the applicability of existing federal laws and regulations to the use of social media for marketing and originating new deposit and lending products and the use of social media to facilitate consumer use of payment systems; (ii) the need to apply BSA/AML internal controls to customers engaging in electronic banking through the use of social media, and e-banking products and services offered in the context of social media, as well as BSA/AML risks emerging through the growing use of social media; (iii) CRA monitoring of social media sites run by an institution; and (vi) customer privacy issues associated with social media. The guidance also reviews reputational risks related to social media, including risks related to (i) fraud and brand identity; (ii) social media vendor monitoring; (iii) privacy; (iv) consumer complaints; and (v) employee use of social media. Finally, the guidance addresses the vulnerability of social media to malware and the resultant operational risk. The FFIEC is accepting comments for 60 days after publication in the Federal Register. After the comment period, the agencies will issue supervisory guidance and will urge state regulators to follow.
On December 20, President Obama signed two bills impacting bank supervision and compliance. These bills were sent to the President after the Senate approved both measures on December 11. The first, H.R.4014, amends the Federal Deposit Insurance Act to protect information submitted to the CFPB as part of its supervisory process. For more information about these issues, please see our recent Special Alert. The second bill, H.R. 4367, amends the Electronic Fund Transfer Act to remove the requirement that ATMs have an attached placard disclosing fees. The amended law requires only that fees be disclosed on the ATM screen.
On December 17, the CFPB released its Student Lending Examination Procedures, which are an extension of the CFPB’s General Supervision and Examination Manual and will be used as a field guide by CFPB examiners to review student lender compliance with federal consumer financial laws. The Student Lending Examination Procedures are organized in seven modules: (i) Advertising, Marketing, and Lead Generation, (ii) Application, Qualification, Loan Origination, and Disbursement, (iii) Loan Repayment, Account Maintenance, Payoff Processing, and Payment Plans, (iv) Customer Inquiries and Complaints, (v) Collections, Accounts in Default, and Credit Reporting, (vi) Information Sharing and Privacy, and (vii) Examination Conclusion and Wrap-up. Under the first module, for example, CFPB examiners will assess whether a lender’s advertising and marketing practices are deceptive, misleading, or discriminatory by sampling all of the lender’s marketing and advertising materials, including print, electronic and other media, such as the Internet, email and text messages, telephone solicitation scripts, agreements and disclosures. With regard to borrower complaints, examiners will assess, among other things, the systems, procedures, and policies used by a lender for tracking, handling, investigating, and resolving consumer inquiries, disputes, and complaints. The CFPB has the authority to supervise large bank and nonbank student lenders, and, as with its other procedures, the CFPB will use the same examination procedures across both types of institutions.
On December 17, the CFPB announced a reorganization of part of its Division of Supervision, Enforcement, and Fair Lending. Effective immediately, CFPB staff members responsible for supervision activities are organized in two offices: Examinations and Policy. Previously, supervision staff were organized into offices for Nonbank Supervision and Large Bank Supervision. According to the CFPB’s announcement, the Examinations team will (i) recruit, train, and commission examiners, (ii) ensure policies and procedures are followed, and (iii) plan and execute examinations appropriately in light of resources and priorities. The CFPB’s four regional offices will report to the Examinations team, which is being led, on an acting basis, by Paul Sanford. Mr. Sanford had been Acting Assistant Director for Large Bank Supervision. The CFPB explains that its Policy team will ensure that policy decisions for supervision are consistent with both the law and the CFPB’s mission, and that such decisions are consistent across markets, charters, and regions. The Policy team will be further organized by product or service market, rather than by the type of financial institution. Each market team will be responsible for developing supervision strategy and policy across both bank and nonbank markets. Peggy Twohig, formerly the head of the CFPB’s Nonbank Supervision office, will be the Assistant Director of Supervision Policy.
On December 13, the CFPB issued a white paper on its review of 2011 data to determine how the three largest consumer reporting agencies (CRAs) manage consumer data and complaints. According to the CFPB press release, its review of the data revealed that more than half of the trade lines (the accounts in a consumer’s name reported by creditors) in the CRAs databases are supplied by the credit card industry, with 40 percent related to bank cards, such as general credit cards, and 18 percent from retail credit cards. Only seven percent comes from mortgage lenders or servicers, and only four percent comes from auto lenders. The CFPB also reported that (i) almost 40 percent of disputes have to do with collections, and debt in collection is five times more likely to be disputed than mortgage information, (ii) fewer than one in five people obtain copies of their credit report each year, (iii) most information contained in credit reports comes from a few large companies, and (iv) most complaints are forwarded to the furnishers that provided the original information, while the CRAs resolve an average of 15 percent of consumer disputed items internally. The report adds that certain documentation provided by consumers to support their cases may not be getting passed on to the data furnishers for them to properly investigate and report back to the CRA, but the report does not offer any policy prescriptions.
Yesterday, the Senate passed H.R. 4014, an important bill that clarifies that privileged materials produced to the Consumer Financial Protection Bureau (CFPB) retain their privileged character as to third parties. Because the House passed the same bill in March, the measure will now go to President Obama, who is expected to sign it.
The bill amends 12 U.S.C. § 1828(x) to place the Bureau on equal footing with the banking agencies—a so-called “legislative fix” that many observers have called for to address concerns that the Dodd-Frank Act did not provide clear guidance with respect to the status of privileged material provided to the CFPB. The amended statutory provision would read:
The submission by any person of any information to the Bureau of Consumer Financial Protection, any Federal banking agency, State bank supervisor, or foreign banking authority for any purpose in the course of any supervisory or regulatory process of such Bureau, agency, supervisor, or authority shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim with respect to such information under Federal or State law as to any person or entity other than such Bureau, agency, supervisor, or authority.
The language “any person” makes clear that the bill applies to submissions by banks, non-banks, and individuals. The bill also amends 12 U.S.C. § 1821(t)(2)(A) to allow the Bureau to share information with other federal agencies without waiving “any privilege applicable” to that information.
Once it receives the President’s signature, the bill will partly resolve some long-standing debates over the effect of producing privileged information to the CFPB. In a January 2012 bulletin, the Bureau first argued that the production of privileged information to the agency would not waive any applicable privileges. Many supervised entities were skeptical, given the absence of any non-waiver statute or regulation applicable to the CFPB. Just a few months later, the agency finalized a regulation that also purported to preserve such privileges. But again, several groups remained concerned that the CFPB’s assurances were not enough to avoid waiver.
H.R. 4014 now offers some measure of comfort to CFPB-supervised entities, but a number of questions remain. For instance:
- Although the amendment to Section 1821(t) explains how privileges are affected when the CFPB shares information with federal agencies, it does not say how privileges will be affected if the CFPB shares such information with state and local authorities—as it has said it intends to do and it has agreed to do in various compacts with state regulatory agencies and enforcement officials.
- The bill does not speak at all to the question of whether, as the CFPB has maintained, it is entitled to obtain privileged material in the first place. The bill only provides that the transmitter may still assert privilege as to third parties if such material is transmitted to the CFPB. The CFPB to date has aggressively sought privileged and attorney work product material relating to institutions’ fair lending compliance efforts. Where institutions turn that material over, the bill would provide no protection against the CFPB’s use of the material to prosecute the institution.
- It is not clear whether the newly-amended Section 1828(x) will apply retroactively to protect confidential information that has already been submitted to the CFPB.
BuckleySandler will continue to monitor these issues. In the meantime, questions regarding the matters discussed in this alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Benjamin B. Klubes, (202) 349-8002, firstname.lastname@example.org
- Jeffrey P. Naimon, (202) 349-8030, email@example.com
- Jonice Gray Tucker, (202) 349-8060, firstname.lastname@example.org
CFPB Ombudsman Issues First Annual Report, Makes Recommendation Regarding CFPB Supervisory Examination Process
On November 30, the CFPB Ombudsman’s Office submitted its first annual report to the Director of the CFPB. It describes the establishment of the office and highlights the office’s activities from July 2011 through September 30, 2012. The report also identifies two “systemic issues” that the Ombudsman reviewed: (i) consumer understanding of the CFPB complaint process and (ii) the presence of enforcement attorneys at supervisory examinations. Almost 40 percent of the questions the Ombudsman received from consumers related to the CFPB complaint process, so the Ombudsman recommended that the CFPB provide more information to the public about the complaint process using multiple methods to communicate that information. The Ombudsman also heard concerns regarding the CFPB’s policy that enforcement attorneys participate in supervisory examinations. After conducting her own review, the Ombudsman recommended that the CFPB review its implementation of the policy, and until that review is complete, establish ways to clarify the enforcement attorney role at the supervisory examination.
CFPB Reports Examination Findings, Updates Examination Manual, and Details Supervisory Appeals Process
The CFPB today released its first periodic Supervisory Highlights publication, along with an updated examination manual and a bulletin about the Bureau’s examination appeals process.
The Supervisory Highlights report describes the CFPB’s supervisory activity from July 2011 through September 2012, including with regard to credit cards, credit reporting, and mortgages, and “signal[s] to all institutions the kinds of activities that should be carefully scrutinized.” During its first year of conducting exams, the CFPB states that it has found compliance management system deficiencies, including with regard to fair lending compliance programs and oversight of affiliate and third-party service providers. The report also reviews nonpublic actions taken to enforce compliance with the CARD Act and FCRA, and identifies several areas of concern for mortgage originators.
Bulletin 2012-07 details the CFPB supervisory appeals process, and addresses confidentiality and the role of the CFPB Ombudsman. Finally, the updated Supervision and Examination Manual incorporates the various procedures issued since the manual first was published in October 2011, e.g. the payday lending and consumer reporting exam procedures. The updated manual also includes new references to the Code of Federal Regulations to reflect the republishing of federal consumer finance law regulations under the CFPB’s authority.
On October 24, the CFPB issued a final rule that will allow the Bureau to supervise certain debt collectors. Under this rule, debt collectors will be required to provide certain disclosures, provide accurate information, maintain a consumer complaint and dispute-resolution process, and communicate civilly and honestly with consumers. Beginning January 2, 2013, the CFPB will be able to examine and take enforcement actions against any entity that has more than $10 million in annual receipts from consumer debt collection activities. The CFPB anticipates that the rule will cover approximately 175 third-party debt collectors, debt buyers, and collection attorneys. The final rule retains the proposed annual receipts threshold used to identify “larger participants” but excludes from the definition of annual receipts those receipts that result from collecting debts originally owed to a medical provider. The final rule also limits covered consumer debt collection activities to those conducted by “debt collectors,” which are defined as persons whose principal business activity is debt collection or that “regularly” engage in debt collection. The CFPB declined to provide a blanket exemption to attorneys, as some commenters argued was required by the Dodd-Frank Act. Concurrent with the release of the final rule, the CFPB published procedures for use in examining covered debt collectors. This rule is the second “larger participant” rule, and it follows the July 2012 consumer reporting rule. The Dodd-Frank Act requires the CFPB to promulgate a rule to define “larger participant” nonbanks in certain consumer financial services markets.
- APPROVED Webcast: CFL license transition to NMLS
- Jonice Gray Tucker to discuss “Justice for all: Achieving racial equity through fair lending” at CBA Live
- Warren W. Traiger to discuss “On the horizon for CRA modernization” at CBA Live
- Jonice Gray Tucker to discuss “Government investigations, and compliance 2021 trends” at the Corporate Counsel Women of Color Career Strategies Conference
- Max Bonici to discuss “BSA/AML trends: What to expect with the implementation of the AML Act of 2020” at the American Bar Association Banking Law Fall Meeting