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CFPB Supplements Consumer Reporting Guidance, Holds Consumer Advisory Board Meeting, Issues Consumer Reporting Complaints Report
On February 27, the CFPB issued supplemental guidance related to consumer reporting and held a public meeting focused on consumer reporting issues. The CFPB also released a report on consumer reporting complaints it has received.
Supervisory Guidance
The CFPB issued a supervision bulletin (2014-01) that restates the general obligations under the Fair Credit Reporting Act for furnishers of information to credit reporting agencies and “warn[s] companies that provide information to credit reporting agencies not to avoid investigating consumer disputes.” It follows and supplements guidance issued last year detailing the CFPB’s expectations for furnishers.
The latest guidance is predicated on the CFPB’s concern that when a furnisher responds to a consumer’s dispute, it may, without conducting an investigation, simply direct the consumer reporting agency (CRA) to delete the item it has furnished. The guidance states that a furnisher should not assume that it ceases to be a furnisher with respect to an item that a consumer disputes simply because it directs the CRA to delete that item. In addition, the guidance explains that whether an investigation is reasonable depends on the circumstances, but states that furnishers should not assume that simply deleting an item will generally constitute a reasonable investigation.
The CFPB promises to continue to monitor furnishers’ compliance with FCRA regarding consumer disputes of information they have furnished to CRAs. Furnishers should take immediate steps to ensure they are fulfilling their obligations under the law.
Consumer Advisory Board Meeting
The public session of this week’s two-day Consumer Advisory Board (CAB) Meeting featured remarks from Director Cordray, and a discussion among CAB members, industry representatives, and consumer advocates on several major topics: (i) use of credit history in employment decisions; (ii) consumer access to credit information; and (iii) the credit dispute process.
Mr. Cordray focused on steps the CFPB has taken related to the credit reporting market, including: (i) launching a complaint portal through which consumers have submitted 31,000 consumer reporting complaints, nearly 75% of which have related to the accuracy and completeness of credit reports; (ii) beginning to supervise large credit reporting companies and many large furnishers; (iii) identifying process changes, including upgrades to the e-Oscar consumer dispute system to allow consumers to file disputes online and to provide furnishers direct access to dispute materials; and (iv) issuing guidance to furnishers on resolving consumer disputes.
Mr. Cordray also expressed support for a “major initiative” in the credit card industry to make credit scoring information more easily and regularly available to card holders. Mr. Cordray stated that he sent letters to the CEOs of the major card companies “strongly encouraging them to consider making credit scores and educational content freely available to their customers on a regular basis.” He added that he sees “no reason why this approach should not be replicated with customers across other product lines as well.”
In his CAB remarks, Mr. Cordray also identified some persistent concerns that resulted in the additional furnisher guidance issued today, discussed above. He stated that “[s]ome furnishers are taking short-cuts to avoid undertaking appropriate investigations of consumer disputes. For example, a consumer may find an error on the credit report and file a dispute about an incorrect debt or a credit card that was never opened. In response, the furnisher may simply delete that account from the information it passes along to the credit reporting company.” He stated that such practices deprive consumers of important protections.
During the discussion session, consumer advocates complained that credit reports provided to consumers are not the same as the reports provided to creditors. They claimed that consumers receive “sterilized” versions and do not, for example, get to see if their file is mixed with some else’s file. They also complained that the reports do not provide credit scores.
With regard to the CFPB’s support for creditors disclosing credit scores on a regular basis, several participants, including a representative for CRAs, stated that creditors should be free to provide the credit score of their choice, and not only FICO. Mr. Cordray and the CFPB’s Corey Stone responded that the CFPB is encouraging voluntary participation in score disclosure programs, but stated the Bureau does not believe that any one score needs to be disclosed. Instead, Mr. Stone explained that creditors should provide the score that is most relevant and useful for its customers. Mr. Cordray stressed the importance of providing educational information with the score, regardless of what score is provided.
The consumer advocates also were sharply critical of the CRAs and certain creditors’ dispute resolution processes. One participant raised specific concerns about the lack of human interaction in online dispute processes and the sale of certain add-on products offered during the dispute process.
The industry’s representative defended recent enhancements to the dispute process and highlighted the efficiency benefits of online disputes, including quicker resolution. He added that many furnishers prefer to hear directly from their customers, and that the real issue is how creditors respond.
Report on Consumer Reporting Complaints
The “credit reporting complaint snapshot” states that of the nearly 300,000 complaints the CFPB has received on a range of consumer financial products and services, approximately 31,000 or 11 percent have been about credit reporting. The CFPB accepts consumer credit reporting complaints in five categories: (i) incorrect credit report information; (ii) credit reporting company’s investigation; (iii) improper use of a credit report; (iv) inability to obtain credit report or score; and (v) credit monitoring or identity protection services. The CFPB reports that the most common complaints related to incorrect information on a credit report, while very few complaints related to identity protection or credit monitoring services. The report reviews the complaint handling process, and indicates that companies have resolved approximately 91 percent of the complaints submitted to them.
CFPB Sues For-Profit Educational Institution Over Private Student Loan Origination Practices
On February 26, the CFPB filed its first enforcement action against a for-profit higher-education company, alleging that the company engaged in unfair and abusive private student loan origination practices.
In a civil complaint filed in the U.S. District Court for the Southern District of Indiana, the CFPB asserts that the company offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The CFPB claims that when the short-term loans came due at the end of the first academic year and borrowers were unable to pay them off, the company forced borrowers into “high-rate, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations. Moreover, the CFPB claims that the company’s business model is dependent on coercing students into “high-rate, high-fee” private loans, despite the low average incomes and credit profiles of the students, and a 64 percent default rate on such loans.
The company issued a statement denying the charges, criticizing the CFPB’s decision to file suit, and challenging the CFPB’s jurisdiction. The statement describes the suit as an “aggressive attempt by the Bureau . . . to extend its jurisdiction into matters well beyond consumer finance” and expresses the company's intent to “ vigorously contest the Bureau's theories in court.”
The complaint details a number of alleged “high-pressure” origination tactics the CFPB claims resulted in part from the compensation structure the company established for its financial aid staff, which included commissions based on loan origination volume. The complaint also details the loan programs at issue, asserting that the programs were ostensibly run by third parties, but were controlled and guaranteed by the company, which allowed it to establish lenient lending criteria to maximize student participation. The company also is alleged to have misrepresented to prospective students the company’s accreditation and the placement rates and salaries of its graduates.
For certain students who did not obtain private student loans to pay-off the short-term company product and instead carried balances on the short-term credit through graduation, the CFPB asserts the company offered a “graduation discount” if the borrowers agreed to pay off some or all of the balance in a lump sum rather than through an installment plan. The CFPB reasons that to the extent the lump sum discounts were not applied to the installment plans, such discounts constituted finance charges subject to TILA’s disclosure requirements. The CFPB asserts that the company failed to clearly and conspicuously disclose those charges in writing to borrowers who opted not to pay a lump sum and instead entered into installment plans.
The CFPB brings claims for violations of the Consumer Financial Protection Act’s prohibitions on unfair and abusive practices, as well as for violations of TILA. In addition to injunctive relief, the CFPB is seeking unspecified monetary relief, including restitution for harmed borrowers, disgorgement, rescission, and civil money penalties.
CFPB Continues RESPA Enforcement With Action Against Nonbank Lender
On February 24, the CFPB announced that a nonbank mortgage lender agreed to pay an $83,000 penalty to resolve violations of RESPA’s Section 8. The lender primarily offers loss-mitigation refinance mortgage loans to distressed borrowers. According to the consent order, after the lender ceased obtaining funding for its loans from two subsidiaries of a hedge fund, the lender continued to split loss-mitigation and origination fees with the subsidiaries on 83 additional loans originated over an eight-month period, even though neither subsidiary provided financing or any other service in any of those transactions.
The lender self-reported the violation, admitted liability, and provided information related to the conduct of others, which the CFPB stated has facilitated other enforcement investigations. In addition, the consent order requires the lender make its “officers, employees, representatives, and agents” available for interviews and testimony, and to produce all non-privileged documents requested by the CFPB, “in connection with this action and any related judicial or administrative proceeding or investigation commenced by the Bureau or to which the Bureau is a party.” The company also cannot apply for a tax deduction or credit for the penalty, and cannot seek indemnification from any source. The CFPB indicated that the lender’s self-reporting and cooperation, which were consistent with the Bureau’s Responsible Business Conduct bulletin, played a part in mitigating the penalty.
This consent order is another public action the CFPB has taken under RESPA’s Section 8, although this action appears to be the first under Section 8(b) of RESPA, which prohibits fee-splitting and the payment and receipt of unearned fees. The CFPB has previously enforced Section 8(a), which prohibits referral fees and kickbacks, most recently in the case of a mortgage company that allegedly made inflated rental payments in exchange for mortgage referrals. The Bureau’s Section 8(b) action emphasizes the CFPB’s commitment to enforcing all of the aspects of Section 8, particularly against nonbank lenders.
CFPB Director Richard Cordray summed up the CFPB’s RESPA enforcement stance, stating: “These types of illegal payments can harm consumers by driving up the costs of mortgage settlements. The Bureau will use its enforcement authority to ensure that these types of practices are halted. We will, however, also continue to take into account the self-reporting and cooperation of companies in determining how to resolve such matters.”
FinCEN Director Discusses 2014 Priorities
On February 20, in remarks to the Florida International Bankers Association Anti-Money Laundering Conference, FinCEN Director Jennifer Shasky Calvery reviewed FinCEN’s key initiatives over the past year and outlined priorities going forward. She discussed FinCEN’s efforts with regard to virtual currency risks and stated that it is important for financial institutions that deal in virtual currency to put effective AML/CFT controls in place. She noted that it is also important for all stakeholders to keep virtual currency concerns in perspective given the relatively small size of the market. FinCEN is growing increasingly concerned with third party money launderers who layer transactions, create or use shell or shelf corporations, use political influence to facilitate financial activity, or engage in other schemes to infiltrate financial institutions and circumvent AML controls. FinCEN intends to pursue such actors regardless of where they are located. Director Shasky Calvery also reiterated concerns about securities firms that offer services similar to banks, and promised continued focus on threats posed by trade-based money laundering. With regard to its policy initiatives, FinCEN intends to engage stakeholders in a discussion of “balancing the policy motivations behind data privacy and secrecy laws in different jurisdictions with the need for an appropriate level of transparency to combat money laundering and terrorist financing.” The Director noted that this issue is particularly critical in the area of correspondent banking.
State Regulators Form Emerging Payments Task Force
On February 20, the CSBS announced the formation of an Emerging Payments Task Force to study changes in payment systems—including virtual currencies and other innovations—to determine the potential impact on consumer protection, state law, and banks and nonbank entities chartered or licensed by the states. The Task Force is comprised of nine state regulators, including New York State Department of Financial Services Superintendent Lawsky who has recently indicated New York will seek to become the first state to directly address virtual currency through new regulations. The Task Force will be chaired by David Cotney, Commissioner of the Massachusetts Division of Banks, who testified on these issues on behalf of the CSBS last fall before the Senate Banking Committee. The CSBS stated that the Task Force will “take a comprehensive approach to studying the changing payment systems” by engaging with a broad range of federal, state, and industry stakeholders to understand how new entrants and technologies affect the stability of payment systems and the broader financial marketplace and “to develop ideas for connecting the emerging payments landscape to the financial regulatory fabric.”
House Financial Services Committee Ranking Member Seeks Scrutiny Of Servicing Rights Transfers
On February 19, House Financial Services Committee Ranking Member Maxine Waters (D-CA) sent a letter asking Comptroller of the Currency Thomas Curry and National Mortgage Settlement Monitor Joseph Smith to “carefully scrutinize the sale of mortgage servicing rights from banks to nonbanks” to ensure nonbank servicers have the capacity to handle increased loan volume and that borrowers are not harmed. Representative Waters explained that consumer advocates are concerned that when a bank subject to the National Mortgage Settlement transfers MSRs to a nonbank not subject to the National Mortgage Settlement, the transferred loans are not afforded the same protections as they would be under that agreement. Ms. Waters is concerned that the CFPB rules that would apply to such transferred loans offer fewer protections than those in the National Mortgage Settlement. She also requested that the Comptroller and/or the Monitor examine the extent to which servicing transfers are potentially being used to “evade the modification of loans for borrowers who would benefit most from the terms of the Settlement.” Ms. Waters joins other policymakers, including the CFPB’s Deputy Director and New York’s banking regulator, who recently raised concerns about the impact on borrowers from the transfer of mortgage servicing rights.
FinCEN Finalizes AML Rules For Fannie Mae, Freddie Mac
On February 20, FinCEN finalized a rule that will require Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (the GSEs) to develop AML programs and to file SARs directly with FinCEN. Under the current system, the GSEs file fraud reports with the FHFA, which then files SARs with FinCEN when warranted under FinCEN's reporting standards. The new regulations are substantially similar to the version proposed in November 2011, and are intended to streamline the reporting process and provide more timely access to data about potential fraud. The AML provisions of the new regulations implement the BSA's four minimum requirements: (i) the development of internal policies, procedures, and controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training program; and (iv) an independent audit function to test programs. The SAR regulation requires reporting of suspicious activity in accordance with standards and procedures contained in all of FinCEN’s SAR regulations. In addition, under the streamlined system, the GSEs and their directors, officers, and employees will qualify for the BSA’s "safe harbor" provisions, which are intended to encourage covered institutions to report suspicious activities without fear of liability. The final rule does not require the GSEs to comply with any other BSA reporting or recordkeeping regulations, such as currency transaction reporting. The rule takes effect 60 days after publication in the Federal Register and the GSEs will have 180 days from publication to comply.
SEC Examinations To Target Never-Before Examined Investment Advisers
On February 20, the SEC’s Office of Compliance Inspections and Examinations (OCIE) launched a previously-announced initiative directed at investment advisers that have never been examined, focusing on those that have been registered with the SEC for three or more years. OCIE plans to conduct examinations of a “significant percentage” of advisers that have not been examined since they registered with the SEC. The examinations will focus on compliance programs, filings and disclosure, marketing, portfolio management, and safekeeping of client assets. The SEC plans to host regional meetings for investment advisers to learn more about the examination process.
Federal Reserve Board Finalizes Enhanced Prudential Standards For Large Bank Holding Companies, Foreign Banks
On February 18, the Federal Reserve Board issued a final rule that incorporates elements of two previously proposed rules related to U.S. bank holding companies with assets of $50 billion or more and foreign banking organization with assets of $50 billion or more. For covered domestic bank holding companies, the final rule (i) incorporates as an enhanced prudential standard previously-issued capital planning and stress testing requirements; and (ii) imposes enhanced risk-management, including liquidity risk-management standards. The rule further imposes a 15-1 debt-to-equity limit for companies that pose a grave threat to U.S. financial stability, as determined by the FSOC. For covered foreign banking organizations, the rule (i) implements enhanced risk-based and leverage capital requirements, liquidity requirements, risk-management requirements, stress testing requirements, and the debt-to-equity limit for FSOC-designated companies; and (ii) requires foreign banking organizations with U.S. non-branch assets of $50 billion or more to form a U.S. intermediate holding company (IHC) and imposes the same enhanced requirements on the IHC. The rule also establishes enterprise-wide risk-committee requirements for publicly traded domestic bank holding companies with total consolidated assets of $10 billion or more and for publicly traded foreign banking organizations with total consolidated assets of $10 billion or more, and implements stress-testing requirements for foreign banking organizations and foreign savings and loan holding companies with total consolidated assets of more than $10 billion. The final rule does not apply to non-bank financial firms designated as systemically important by the FSOC. The rule takes effect on June 1, 2014, but covered U.S. bank holding companies have until January 1, 2015 to comply. Foreign banking organizations must submit an implementation plan by January 1, 2015, but have until July 1, 2016 to comply. The final rule generally defers application of the leverage ratio to IHCs until 2018.
SEC Announces Cybersecurity Roundtable
On February 14, the SEC announced that it will host a roundtable on March 26, 2014, to discuss cybersecurity challenges for market participants and public companies. The roundtable will be held at the SEC’s Washington, D.C. headquarters and will be open to the public and webcast live on the SEC’s website.