Despite the CFPB’s efforts to build support for the Department of Defense’s proposal to significantly expand Military Loan Act coverage, it now appears that the proposal may be put on hold.
The DoD proposal would revise the scope of “consumer credit” subject to MLA restrictions to include, regardless of term or amount, all unsecured open-end lines of credit, credit cards, payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, and installment loans. It would also shift from service members and their dependents to lenders the responsiblity to screen all loan applicants to determine their military status or dependence on someone in service. The proposal has drawn strong criticism from the financial services industry.
The source of the hold is a proposal for the Fiscal Year 2016 National Defense Authorization Act (NDAA) recently released by the House Committee on Armed Services Subcommittee for Military Personnel. The Subcommittee has proposed to include in the NDAA a provision requiring the DoD to provide a report concerning any MLA rulemaking. The information that the Subcommittee wants the DoD to provide in the report includes an assessment of the impact on military readiness, if any, resulting from service member access to financial products such as payday and vehicle title loans since the MLA’s implementation in 2007. A House vote on the NDAA is currently scheduled for May 15.
For more on the proposal’s possible hold, see our legal alert.
The U.S. Department of Justice recently issued the Attorney General’s 2014 Annual Report to Congress Pursuant to the Equal Credit Opportunity Act Amendments of 1976. The report discusses the DOJ’s 2014 ECOA enforcement activities as well as what the report describes as the DOJ’s “lending work” under the Fair Housing Act and the Servicemembers Civil Relief Act.
The report indicates that at the end of 2014, the DOJ’s Civil Rights Division was conducting 10 joint fair lending investigations with the CFPB resulting from CFPB referrals and that in five of those investigations, the parties were engaged in pre-suit negotiations. According to the report, the types of alleged discrimination resulting in the 10 investigations was as follows: five involve race/national origin, one involves national origin, three involve race/national origin/sex and one involves marital status/age/sex/source of income. The report also indicates that the DOJ returned five referrals to the CFPB.
The report includes a general description of the subject matter of the 25 DOJ investigations that were open at the end of 2014 but does not specify which of the 25 are among the 10 joint investigations with the CFPB. It states that there are ongoing investigations regarding “race and national origin discrimination in the pricing of vehicle secured loans” and ongoing investigations regarding “race, national origin, gender or age discrimination in the pricing of indirect automobile and motorcycle loans,” and that the latter includes investigations regarding “discretionary interest rate markups.”
Yesterday, the House of Representatives, by a vote of 235-183, passed H.R. 1195, titled the “Bureau of Consumer Financial Protection Advisory Boards Act.” As originally proposed, the bill would codify the CFPB’s existing advisory councils for community banks and credit unions (and rename them “advisory boards”) and establish a new Small Business Advisory Board.
According to media reports, an amendment was added to H.R. 1195 before the House vote that would reduce the CFPB’s funding. Since we have not yet been able to obtain the amendment’s text, the extent of the proposed cut is unclear. Based on some reports, it appears the amendment would reduce the maximum amount of funding the CFPB can request from the Federal Reserve by $9 million over each of the next five years. However, such reports also indicate that, according to CFPB estimates, the amendment would not only reduce the CFPB’s budget by $45 million over the next five years, but it would result in a $100 million reduction over the next ten years.
The White House issued a Statement of Administrative Policy which stated that “if the President were presented with H.R. 1195 as currently amended, his senior advisors would recommend that he veto the bill.” (The statement indicated that the White House did not oppose the originally reported version of H.R. 1195 which was limited to establishing the advisory boards.)
Student loan servicers and providers of campus financial product were the focus of remarks given yesterday by Director Cordray at the Ohio College Presidents’ Conference.
Director Cordray stated that the CFPB estimates that eight million Americans “are now in default on a student loan – and strengthening student loan servicing is essential to getting this growing problem under control.” He also stated that the CFPB shares “the concerns of many in the higher education community that student loan servicing needs drastic improvement.”
Servicing issues related to the collection of defaulted student loans were specifically identified in the CFPB’s Winter 2015 Supervisory Highlights. In addition, earlier this year, the CFPB sent letters to check on the progress that student loan lenders and servicers have made in developing modification options. However, to date, the CFPB has said nothing further about the responses it has received.
With regard to campus financial products, Director Cordray continued to take colleges to task for failing to adequately disclose their marketing agreements with financial institutions. He referenced the model “Safe Student Account Scorecard” the CFPB issued for comment in January 2015 which is intended to be used by colleges and universities to obtain information from prospective financial institution partners offering financial products to students.
He also commented that “all contracts between schools and financial institutions to offer financial products to students-including checking account products, prepaid account products, and credit card products-should be entirely transparent to students, their families, and the public. I frankly see no reason why any school would fail to put these contracts on-line as an easy means of disclosure that allows ready access to their terms. That is now easy as a matter of technology, and any further obstacles to this kind of transparency are not justified.”
Director Cordray’s remarks on campus financial products echo statements made in the CFPB’s fifth annual report on college credit card agreements issued in December 2014. In that report, the CFPB appeared to be criticizing colleges and financial institutions for not disclosing marketing agreements for such products on their websites.
As we commented when we blogged about the report, the CFPB’s apparent position that adequate public disclosure of campus agreements requires the agreements to be posted on a website finds no support in applicable law. The Official Commentary to Regulation Z expressly allows colleges to satisfy the CARD Act requirement for public disclosure of their credit card marketing agreements either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost. And unlike credit cards, there is no federal law that requires financial institutions to publicly disclose their marketing agreements or similar information for other financial products.
The December 2014 report contained a veiled threat of increased CFPB scrutiny for financial institutions that fail to meet the CFPB’s expectations for disclosure of campus marketing agreements. Director Cordray’s latest remarks suggest that both financial institutions that partner with colleges and student loan servicers will continue to be a CFPB focus in 2015.
The CFPB has praised an announcement by FICO that it will make credit scores available to financially struggling consumers through nonprofit credit and financial counseling organizations as “a step in the right direction” that will allow “millions of consumers…to receive the credit scores and credit reports that nonprofit credit counselors purchase on their behalf.” In its announcement, FICO stated that it will allow eligible nonprofit counseling organizations to participate in its existing program that allows business customers to share credit scores they purchase with consumers at no additional cost.
According to the CFPB, FICO’s announcement signals a change in the “no-sharing policy” commonly found in contracts signed by business users of credit reports and scores that prohibits the user from sharing the report or score with any entity, including the consumer. However, the CFPB observes that even with FICO’s policy change on credit scores, counseling organizations typically continue to be prohibited from giving a credit report to the consumer under their contracts with the credit reporting agencies.
In its announcement, FICO indicated that Experian “has agreed to allow qualified credit counselors to share Experian credit reports with their clients.” The CFPB comments that it is “encouraged” by Experian’s action and “urge[s] the other credit reporting agencies to take steps to make this credit information available as well.”
The CFPB has filed an amicus brief in Billings v. Propel Financial Services, LLC, a case on appeal to the U.S. Court of Appeals for the Fifth Circuit. The issue in the case is whether a private lender extends“consumer credit” under TILA by providing loans to consumers for the purpose of paying residential property taxes.
The plaintiffs in the case had obtained a loan from a licensed property tax lender to pay property taxes on their home. According to the CFPB’s brief, Texas law allows licensed property tax lenders to charge annual interest of up to 18% and specified fees on “property tax loans.” Such loans are generally defined as an advance of money in connection with the payment of property taxes and related closing costs in which the taxing unit’s lien is transferred to the property tax lender. The plaintiffs alleged that they entered into a Property Tax Payment Agreement (Payment Agreement) with the lender under which they financed the amount of their unpaid taxes, plus closing costs and loan origination and processing fees, at an interest rate of 13.5%.
In their class action complaint, the plaintiffs alleged various TILA violations by the lender. The district court dismissed the complaint, holding that property taxes are not a debt under Texas law and allowing individuals to defer payment of tax obligations did not constitute an offer of credit. The court also held that the plaintiffs’ property tax loan was not “consumer credit” subject to TILA because property tax obligations are for the public’s benefit.
In its brief in support of the plaintiffs, the CFPB argues that because the Payment Agreement provided for an advance of funds by the lender to pay the plaintiffs’ property taxes in exchange for which the lender received the plaintiffs’ promise to pay back the loan with interest, the arrangement constituted an extension of credit under TILA. In support, the CFPB points to a comment in the Regulation Z Official Staff Commentary which provides that while tax obligations are not “credit” under TILA, third party financing of such obligations is credit.
It further argues that, in concluding that a property tax loan is not subject to TILA, the district court gave undue significance to the transfer of the tax lien to the lender. According to the CFPB, the district court incorrectly concluded that the loan did not pay off the plaintiffs’ taxes and create a debt owed by the plaintiffs but instead only transferred the tax lien to a new party. In addition, the CFPB argues that, in concluding that the loan was not “consumer credit,” the court incorrectly focused on the state’s purpose in imposing taxes for the public benefit, rather than the plaintiffs’ consumer purpose in obtaining the loan.
The CFPB has announced a settlement with two companies that processed military allotments and were alleged to have charged fees to servicemembers that the companies failed to adequately disclose. The consent order requires the companies to pay a $3.065 million judgment to be deposited into a fund administered by the CFPB or its agent to be used for redress to injured consumers.
The military allotment system allows servicemembers to automatically direct a portion of their paychecks to creditors or others of their choosing. (Effective January 1, 2015, the system was changed to no longer allow servicemembers to make allotments for certain types of purchases such as vehicles, appliances or household goods, and electronics.)
According to the consent order, allotments of servicemembers who enrolled for the companies’ processing service would be deposited into a bank account controlled by the companies from which the companies paid servicemembers’ creditors. The enrollment instructions directed a servicemember to add a payment processing charge imposed and collected by the companies to the monthly creditor payment to arrive at the allotment amount. Excess funds or “residual balances” would frequently accumulate in the payment account, such as when a servicemember’s debt was paid off but the servicemember had not yet stopped the allotments.
The CFPB claimed that the companies engaged in unfair, deceptive and abusive acts or practices by routinely charging various fees against the residual balances without adequately disclosing such fees before charging them or notifying servicemembers when they incurred such fees. According to the consent order, while monthly letters were sent to servicemembers with residual balances to inform them of the balance amount and how to retrieve funds, the letters did not state the amount or types of residual balance fees that would be charged. In addition to a $5 fee for each such letter, the consent order indicates that the residual balance fees included a $5 fee to send a letter to a servicemember’s current or past creditor indicating that the companies continued to receive the servicemember’s allotment despite it appearing that the creditor had been paid in full, and a monthly dormant fee of $12 to $20 if there was no bill payment activity for six or more months. While servicemembers could access their allotment accounts online, they could not view residual balance fees online and could only see such fees by requesting an account history for which the companies sometimes charged a fee.
The consent order states that the companies stopped offering the processing service in March 2014 and “since that date have expended substantial resources” to return residual balances to servicemembers. The consent order requires the companies to cooperate with the CFPB to identify and locate servicemembers who paid residual balance fees. It also states that if the CFPB “determines , in its sole discretion that redress to consumers is wholly or practically impracticable or if funds remain after redress is completed, the Bureau may apply any remaining funds for such other equitable relief (including consumer information remedies) as determined to be reasonably related to the [alleged violations described in the] Consent Order. Any funds not used for equitable relief will be deposited in the U.S. Treasury as disgorgement.”
The CFPB has announced that it will hold a research conference in Washington, D.C. on
May 7-8, 2015. According to the announcement, the conference “will be focused on high-quality consumer finance research, with academic and government researchers presenting their research papers.”
The CFPB further states that the conference’s goal is to “connect the core community of researchers and policymakers with the best research being conducted across the wide range of disciplines and approaches that can inform the topic of consumer finance.” The CFPB hopes the conference will be attended by “a diverse audience from academia, government agencies, nonprofit agencies, and industry.”
The announcement states that the event is open to the public, “space permitting,” and requires registration by May 1.
Earlier this week, the House of Representatives passed a bill to amend the TILA definition of “points and fees” that is used to determine whether a loan is a high-cost mortgage or, for purposes of TILA’s ability to repay provisions, a qualified mortgage.
The “Mortgage Choice Act,” H.R. 685, would amend the points and fees definition to exclude amounts escrowed for insurance and amounts for title charges (such as title examination and title insurance) paid to an affiliate of the creditor or mortgage originator.
The amendment regarding insurance escrows is viewed as a technical amendment. The amendment regarding title charges would conform the treatment of such charges for points and fees purposes regardless of whether the charges are received by an affiliate or non-affiliate. Currently title charges paid to a non-affiliate are excluded from points and fees.
The CFPB has issued a final rule to assist lender compliance with RESPA and TILA homeownership counseling requirements. Under RESPA, a lender must provide applicants for a federally related mortgage loan with a list of certified homeownership counselors. TILA prohibits a creditor from making a high-cost mortgage loan unless it receives written certification that the borrower has obtained mortgage counseling from an approved counselor. The final rule updates a 2013 CFPB interpretative rule regarding the list requirement.
Regulation X gives lenders two methods for generating the required list. A lender can use a tool developed and maintained by the CFPB on its website. Alternatively, a lender can use data made available by the CFPB or HUD, provided the data are used in accordance with instructions provided with the data. The final rule provides instructions for lenders to use in complying with the second method for generating a list. The rule addresses the number of counselors to appear on a list, the use of zip codes to generate a list, counselor contact information, accompanying information, and combining the list with other disclosures.
The final rule also addresses the qualifications necessary to provide pre-loan counseling for high-cost mortgages and lender participation in such counseling.