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Tribally-affiliated lenders file opposition to CFPB’s petition to enforce CIDs

Posted in CFPB Enforcement, Payday Lending

We recently reported that the CFPB has filed a petition in U.S. District Court for the Central District of California seeking to enforce the civil investigative demands (CIDs) it issued in June 2012 to three tribally-affiliated payday lenders.  A hearing on the petition has been scheduled for April 28.

In their joint memorandum of law filed in opposition to the CFPB’s petition, the lenders argue that, as arms of sovereign tribes, they are not subject to the CFPB’s investigative authority.  The Consumer Financial Protection Act (CFPA) authorizes the CFPB to issue CIDs to “any person” and to petition to enforce a CID when “any person” fails to comply.  Citing to decisions of the U.S. Supreme Court and other federal courts, the lenders argue that “sovereigns” are presumptively not “persons” within the meaning of the CFPA.

According to the lenders, the exclusion of “sovereigns” from the term “person” also extends to arms of Indian tribes such as the lenders.  They further argue that because federally recognized Indian tribes are expressly included within the CFPA’s definition of “State,” and Congress intended “States” to be co-regulators with the CFPB rather than regulated entities, the CFPB cannot overcome the presumption that Congress did not intend to include sovereign entities within the definition of “person.”

The lenders make the additional arguments that the CIDs are barred by the lenders’ sovereign immunity, do not provide adequate notice of the purpose and scope of the CFPB’s investigation, and are overbroad.

House Committee on Financial Services Concerned with Decreased Consumer Choice

Posted in CFPB General, CFPB People, Payday Lending

As we previously reported, the House of Representatives Financial Services Committee held a hearing on the effects of regulatory “red tape.” In her opening statement, Meredith Fuchs, General Counsel of the Consumer Financial Protection Bureau, spoke about the goals of the CFPB in seeking input from impacted entities. Before enacting a rule, she said, the CFPB considers the costs and benefits to consumers and financial institutions, particularly the compliance burdens associated with a particular rule as compared to less burdensome alternatives.

Several Committee members were concerned with the CFPB’s disparate impact analysis. Chairman Hensarling started with a question regarding the CFPB’s failure to answer multiple letters to Director Cordray regarding the CFPB’s methodology in identifying whether there is a “disparate impact” on certain groups of consumers. Several other Congressmen, including Congressman Neugebauer, expressed their concern that the CFPB was actually making it harder for consumers to access credit.

Committee members were also concerned about Operation Choke Point, a Justice Department initiative aimed at scrutinizing banks that fail to meet their obligations as gatekeepers to the financial system, allowing easy access to predatory lenders and dubious online merchants. Congressman Meeks (D-NY) expressed his concern that the attempts to prevent fraudsters from accessing consumer bank accounts by cutting off their access to the payments system were essentially throwing the “baby out with the bathwater.” He related a story of a major financial institution that notified its customers that it was going to terminate the bank accounts of all check cashers. Richard Osterman, Acting General Counsel of the FDIC, responded that the FDIC focuses on helping institutions deal with the risk associated with working with third party payment processing companies, but did not address the Congressman’s underlying concern that legal entities were being pushed out along with entities with an illegal purpose. Mr. Osterman, in response to questions from Congressman Clay (D-MO) referenced a letter from September 2013 which reiterated that the FDIC’s supervisory efforts are focused on safety and soundness. Financial institutions should continue to keep these accounts open, he said, so long as the risk is acceptable to them. Mr. Osterman also stated that while Director Cordray is on the FDIC’s board, the FDIC and CFPB have no plans to release coordinated guidelines or rules on this issue. Rather, he repeated that financial institutions should be conducting their own due diligence to ensure that they are acting in a safe and sound manner.

Committee members and Congressman from both sides of the aisle raised concerns that excessive regulatory burdens could negatively impact consumers by taking away access to financial products on which they rely. Congressman Stivers (R-OH) expressed concern that Operation Choke Point was shutting down properly licensed businesses, and suggested that there be a safe harbor in place for businesses that are properly licensed by a state.

It is clear that the Committee is continuing to grapple with what it views as government overreach on the part of regulators. This is particularly true when the regulatory standards and rules are unclear, making it impossible for financial institutions and entities to conform their behavior to the law. Congressman Duffy (R-WI) stated that like tap water and glasses, the CFPB is better when it is transparent, and suggested that it amend its closed-door meeting policy for its advisory groups. We previously reported on Congressman Duffy’s efforts to open the CFPB’s advisory committee meetings, including H.R. 4262. Introduced by Congressman Duffy, H.R. 4262 would specifically apply the requirements of the Federal Advisory Committee Act to the CFPB and require the advisory meetings to be open to the public. Given the Committee’s continued emphasis on the importance of transparency, we hope that Director Cordray takes the Committee’s comments to heart and amends the CFPB’s policy on this issue.

CFPB publishes guidance regarding RESPA-TILA integrated disclosure forms

Posted in CFPB General, Mortgages

The CFPB recently published guidance (the Guide) to assist mortgage originators and settlement service providers in completing the Loan Estimate and Closing Disclosure forms required under the RESPA-TILA Integrated Disclosure Rule (the Rule). The Guide provides step-by-step instructions that industry participants can follow when completing each page of the required forms. The Rule becomes effective August 1, 2015.

The Guide is written in similar detail and style to the Small Entity Compliance Guide issued last month. Each page of the Loan Estimate (3 pages) and Closing Disclosure (5 pages) receives a section-by-section breakdown of the required disclosures and provides illustrative examples of how to complete the necessary fields. Importantly, the CFPB provides guidance on how to make essential calculations. Generally, each section is accompanied by citations to the Rule and examples of various scenarios that could arise during form completion. The Guide spans 96 pages, highlighting the complexity of the Rule and its requirements for completing the Loan Estimate and Closing Disclosure.

CFPB proposes extension of remittance transfer rule depository institution exception and other revisions

Posted in Remittance Transfers

The CFPB has issued a proposal to extend for five years the temporary exception in its remittance transfer rule that allows insured depository institutions to estimate fees and exchange rates in certain circumstances.  The proposal also includes “several clarificatory amendments and technical corrections” to the rule and commentary. 

The CFPB’s remittance transfer rule implements Section 1073 of Dodd-Frank, which amended the Electronic Fund Transfer Act to establish new requirements for remittance transfer providers.  Section 1073 includes a provision that temporarily excepts insured depository institutions from the general requirement for a provider to disclose the actual exchange rate and actual remitted amount prior to and at the time of payment.  Until July 21, 2015, such institutions are allowed to estimate the exchange rate, the total amounts to be transferred and received, and covered third-party fees when providing remittance transfers to their accountholders for which they cannot determine exact amounts for reasons beyond their control.  The exception is implemented through Section 1005.32(a) of the remittance rule. 

Dodd-Frank allows the CFPB to extend the temporary exception until ten years after Dodd-Frank’s enactment (i.e., July 21, 2020) if it finds that the exception’s sunset would negatively affect the ability of insured institutions to send remittances to locations in foreign countries.  In explaining its decision to propose a five-year extension of the exception until July 21, 2020, the CFPB indicates that an extension is needed to give such institutions additional time to develop reasonable ways to provide consumers with exact fees and exchange rates for all remittance transfers.  According to the CFPB, some insured institutions reported that current market conditions would make it impossible to know the exact fees and exchange rates associated with certain of their remittance transfers and that, without the exception, they would be unable to continue sending some transfers to certain parts of the world that they currently serve.  Accordingly, the CFPB states that it has “preliminarily determined” that such institutions’ ability to send remittance transfers would be negatively impacted without an extension. 

In the proposal, the CFPB seeks comment on whether (and if so, how) it should clarify the treatment of U.S military installations abroad for purposes of the rule.  Specifically, the CFPB seeks comment on whether or not it is appropriate or advisable to treat locations on such installations as being located within a State or a foreign country.  

The rule applies when a sender located in a “State” sends funds to a designated recipient at a location in a “foreign country.”  Whether money is received in a foreign country depends on whether the funds are received at a location physically outside of any State and, in the case of transfers to or from an account, the rule looks to the location of the account rather than the account owner’s physical location at the time of transfer. 

The CFPB notes that because the rule currently does not expressly address fund transfers to and from U.S. military installations, there is the potential for confusion about how these concepts in the rule apply to such transfers.  For example, the CFPB observes that there could be confusion as to whether the rule applies when a consumer in the United States sends a cash transfer to be picked up by a recipient at a financial institution on a foreign military base, with the result depending on whether the institution is deemed to be located in a “foreign country” or a “State.”  Similarly, depending on whether a foreign military installation is deemed to be in a “State,” there could be confusion as to whether the rule applies to a cash transfer from a consumer on the installation to a recipient in a surrounding country. 

Proposed revisions to the remittance rule include the following:               

  • The rule’s commentary would be revised to provide that when transfers are made from an account, the primary purpose for which the account was established determines whether a transfer from the account is covered by the rule.  The rule applies only when a transfer is requested by a consumer primarily for personal, family or household purposes. 
  • The rule’s commentary would be revised to provide that disclosures made by fax are treated as a writing for purposes of the rule’s general requirement for disclosures to be provided in writing.  For purposes of the rule’s provision that allows pre-payment disclosures to be made orally when a “transaction is conducted orally and entirely by telephone” and certain other requirements are met, the commentary would be revised to also allow oral disclosures for transfers that senders first initiate by fax, mail or e-mail.  The revision would allow a provider to treat a written or electronic communication as an inquiry rather than a request when the provider believes that treating the communication as a request would be impractical.  The provider could then call the customer by telephone and consider the transaction as conducted orally and entirely by telephone.
  • The rule’s error resolution procedures would be revised with regard to what qualifies as an error.  Under the rule, an error includes a failure to make funds available to a designated recipient by the availability date stated in the disclosure provided to the sender unless the failure occurs for certain listed reasons.  Such reasons include a delay related to a provider’s fraud screening procedures or the Bank Secrecy Act (BSA), OFAC requirements or similar laws or requirements.   The rule would be revised to state that only delays related to an individualized investigation or other special action by the provider or a third-party as required by the provider’s or other entity’s fraud screening procedures in accordance with the BSA, OFAC requirements or similar laws or requirements would be covered.  The change would be further clarified by commentary revisions.
  • Other error resolution-related proposed revisions to the rule and commentary would clarify that a provider (1) must refund its own fee when funds were not made available by the disclosed availability date because the sender provided incorrect or insufficient information, and (2) is not required to refund the amount delivered to the designated recipient or apply funds to a new transfer if the transfer is delivered late but before the remedy is determined (and would only be required to refund appropriate fees and taxes paid by the sender). 

Comments on the proposal will be due on or before 30 days after its publication in the Federal Register.  The CFPB proposes that the revisions take effect thirty days after a final rule is published in the Federal Register and also seeks comments on whether a later effective date would be more appropriate. 

In January 2014, the CFPB issued a proposed rule that would allow it to supervise nonbank international money transfer providers that qualify as “larger participants” in the international money transfer market.  The comment period on the proposal ended on April 1.

Bill introduced to limit CFPB smaller bank supervisory authority

Posted in CFPB Exams

A bill introduced by Republican Senator Dan Coats would further limit the CFPB’s supervisory authority as to insured depository institutions and credit unions with total assets of $10 billion or less.

Under Dodd-Frank, such institutions continue to be examined by the OCC, FDIC or NCUA, with the CFPB only allowed to include its examiners “on a sampling basis” in examinations.  The CFPB is also allowed to require reports from such institutions “to support the role of the Bureau in implementing Federal consumer financial law, to support its [limited]examination activities, and to assess and detect risks to consumers and consumer financial markets.”  The CFPB is directed to use, to the fullest extent possible, reports that have been provided or required to have been provided to a federal or state agency or publicly-reported information.  

Senator Coats’ bill , entitled the “Community Financial Protection Act,” would amend Dodd-Frank to provide that:

  • the CFPB can only request reports from an institution for the purposes currently specified in Dodd-Frank through the prudential regulator, and must demonstrate to the regulator that publicly available information is insufficient for such purposes
  • any report requested by the CFPB must be institution-specific and cannot be an industry-wide report
  • the prudential regulator can deny any CFPB request for a report
  • in fulfilling the CFPB’s request for a report, a prudential regulator must, to the fullest extent possible, do so by using reports that have been provided or required to have been provided to a federal or state agency
  • the CFPB must accept existing reports in the format they were submitted to the prudential regulator or federal or state agency if the prudential regulator has determined that the reports provide the information requested by the CFPB

FDIC regional offices issue UDAP guidance on continuous overdraft fees

Posted in Deposit Accounts

Based on the CFPB’s rulemaking agenda issued in December 2013, we continue to expect overdraft programs to be the subject of another CFPB white paper and/or an advance notice of proposed rulemaking this year.  (In June 2013, the CFPB issued a white paper reporting its initial data findings on overdraft programs.)

Any future CFPB rulemaking on overdraft programs is likely to rely in some measure on the CFPB’s authority to prohibit unfair, deceptive or abusive acts or practices.  Recently-issued guidance on continuous or extended overdraft or negative balance fees from certain of the FDIC’s regional offices discusses how a bank’s programs and practices relating to such fees could give rise to violations of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices.  The guidance encourages bankers “to review the information provided to consumers concerning overdraft services, particularly any extended overdraft and negative balance fees, and conduct transactional testing to ensure that the bank is charging these fees as disclosed from a reasonable consumer’s perspective.”

The guidance includes a series of issues a bank should consider when reviewing bank products and transactions.  For example, the guidance suggests that if a bank’s disclosures provide that overdraft fees may be charged “after” a certain number of days, the bank should consider whether its system ensures that such fees will not be charged on or before the indicated day.  It further suggests that a bank consider how it handles continuous overdraft situations that occur over a weekend or holiday period where the final day of the period to cure an overdraft falls on a non-business day.  The guidance explains that if a bank assesses a fee based on calendar days but only allows customers to cure an overdraft on business days, it could be problematic if the bank’s disclosures indicate that customers have a certain number of days to cure before an overdraft fee is assessed.  

To illustrate this problem, the guidance observes that if a bank were to charge a continuous overdraft fee after three days and an overdraft occurred on a Thursday, the third calendar day after the overdraft would be Sunday.  As Sunday would likely be a non-processing day, the bank would only be giving the customer one day, not three, to cure the default if it charged the fee the prior Friday. The guidance notes that such practices have been cited as unfair in violation of Section 5. 

Other suggested issues for banks to consider include whether assessment of bank service charges can cause an extended negative balance fee to be assessed and the amount of time provided between when a customer receives notice of an overdraft and when a continuous overdraft or negative balance fee is assessed.  The guidance advises banks that find discrepancies between their disclosures and the fees assessed to consider issuing new disclosures and making voluntary restitution.  It further indicates that correcting such issues, including making full restitution, will be considered by the FDIC in reviewing a bank’s disclosures and practices.

Hints of future payday rule-making

Posted in Payday Lending

Laura Udis, the CFPB’s program manager for the payday lending industry, spoke on April 10 in Los Angeles on a panel sponsored by the American Bar Association Consumer Financial Services Committee.  CFPB staff members are generally somewhat constrained in commenting on future CFPB actions.  However, Ms. Udis advised that, in its rule-making, the CFPB may take a look at required payment plans, databases and multiple loan limits.  

Quoting Director Cordray’s promise that the CFPB would be “grappling with all aspects of this issue,” Ms. Udis also advised that the CFPB might consider imposing: (1) disclosure requirements concerning the likelihood of loan renewals (something Texas has done); (2) longer repayment periods (something Colorado did under Ms. Udis’ direction); and (3) different approaches to underwriting, including required analysis of ability to repay without re-borrowing and refinancing, loan to income limits and payment to income limits. 

Hilary Miller, a leading industry lawyer, commented that, in threatening to move forward with rule-making soon, the CFPB is presuming that sustained use of payday loans harms consumers.  He noted that, to date, the CFPB has adduced no evidence of harm.  Certainly, Ms. Udis did not point to any such evidence.  Ms. Udis was unable to advise whether (or when) the CFPB would release results of its online payday loan study.  This study was designed to pair online payday lending data with consumer financial health outcomes.  Of course, this is exactly the kind of study that could demonstrate consumer injury from payday lending —if, in fact, there is any measurable injury.  

Whatever the ultimate form CFPB rule-making may take, it seems likely that rules will not become effective this year.  Ms. Udis agreed with one questioner that the CFPB would need to convene panels under the Small Business Regulatory Enforcement Fairness Act before finalizing any rules.  As previously reported by my colleague Glen Trudel, the need to comply with SBREFA will delay rule-making many months.

CFPB amends CashCall complaint

Posted in Payday Lending

The CFPB has filed an amended complaint in its lawsuit against CashCall and several related companies that funded, purchased, serviced and collected online payday loans to identify additional states in which the loans defendants sought to collect were purportedly void in whole or in part as a matter of state law.  The loans in question were made by a tribally-affiliated lender the CFPB did not sue. 

Filed in December 2013 in the U.S. District Court for the District of Massachusetts, the lawsuit broke new ground by asserting UDAAP violations based on the defendants’ efforts to collect loans that were purportedly void in whole or in part under state law.  The CFPB’s  complaint alleged that the loans in question were void in whole or in part as a matter of state law because the lender charged excessive interest and/or failed to obtain a required license.  The complaint identified eight states with laws of this kind—Arkansas, Arizona, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina—and alleged that the effort to collect amounts in excess of the amounts lawfully due under state law was “unfair,” “deceptive” and “abusive” as a matter of federal law.  

In the amended complaint, the CFPB has added another eight states with similar laws that purportedly made the loans the defendants sought to collect void in whole or in part.  The new states are Alabama, Illinois, Kentucky, Minnesota, Montana, New Jersey, New Mexico and Ohio.  

Also named as a defendant in the CFPB’s lawsuit was J. Paul Reddam, the president and sole owner of CashCall and the president or director and sole owner of the other two defendant companies.  The defendants have filed a motion seeking to have the case transferred to the U.S. District Court for the Central District of California or to have all claims against Mr. Reddam dismissed for lack of personal jurisdiction.

CFPB promotes online student financial aid resources

Posted in Student Loans

In a new blog post , the CFPB promotes its online financial aid resources to students who are now in the process of choosing which school to attend this fall. 

The blog post directs students to a just-launched “crisp new version of our Paying for College tool kit,” stating that “[m]aking apples-to-apples comparison of your financial aid offers has never been easier.”  The CFPB indicates that the kit incorporates “a more user-friendly design” and that the CFPB has also reintroduced “the GI Bill calculator, which gives servicemembers the ability to calculate the benefits available to them through the GI Bill and tuition assistance programs.”

The blog post also touts the CFPB’s continued piloting of  its “Financial Aid Shopping Sheet,” stating that the sheet will be sent to prospective students this fall by the “more than 2,000 schools” that have adopted the sheet.  The CFPB also includes a link to the Q&As about student loans that are part of the “ask cfpb” feature on the CFPB’s website.  

In a related blog post, Rohit Chopra, the CFPB’s Student Loan Ombudsman, indicates that the “Paying for College tool kit” reflects expected increases this fall in new federal student loan interest rates.  His blog post includes current and estimated new rates on direct subsidized and unsubsidized loans for undergraduate students, direct unsubsidized loans for graduate/professional students, and direct PLUS loans for parents and graduate/professional students, and shows the effect of the higher rates on monthly payments.

CFPB files petition in CA federal court to enforce CIDs issued to tribal payday lenders

Posted in Payday Lending

The CFPB recently filed a petition in U.S. District Court for the Central District of California seeking to enforce the civil investigative demands (CIDs) it issued in June 2012 to three tribally-affiliated payday lenders.  A hearing on the petition has been scheduled for April 28.

In September 2013, the CFPB issued an order denying the lenders’ petition requesting that the CFPB set aside the CIDs.  The order rejected the lenders’ argument that they were not subject to the CFPB’s CID authority because they are affiliated with, and “arms” of, Indian tribes.  The order also directed the lenders to produce all responsive documents, items and information covered by the CIDs by October 17, 2013. 

In its petition seeking to enforce the CIDs, the CFPB alleges that although it subsequently granted the request of the lenders’ counsel for an extension of the compliance deadline until October 24, 2013, the lenders have not complied with the CIDs.