As anticipated, the Department of Defense’s proposed regulations to implement provisions of the Military Loan Act added by the 2013 Defense Authorization Bill would significantly expand MLA coverage. The proposed revisions would limit interest charged to servicemembers and their dependents on all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards and require creditors to screen all applicants against a DoD database before offering such products with rates greater than 36 percent. If adopted, the rule would increase significantly the regulatory and litigation risks that lenders face because the 2013 MLA amendments also included a new civil liability provision that allows private actions for MLA violations to be filed in federal court.
In its current form, the MLA rule covers only three types of consumer credit: closed-end payday loans with a term of 91 days or fewer in which the amount financed does not exceed $2,000; closed-end vehicle title loans with a term of 181 days or fewer, and closed-end tax refund anticipation loans. The MLA rule provides protections to a consumer who is a servicemember or the dependent of a servicemember at the time he or she becomes obligated on certain types of consumer credit transactions, such as limiting interest to 36 percent, prohibiting arbitration and prepayment penalties, and requiring delivery of special disclosures before consummation of the transaction (including oral disclosures, which in certain instances may be satisfied by providing a toll-free telephone number the consumer may call to receive the disclosures).
In developing the proposal, the DoD consulted with the CFPB as well as the FTC and federal banking regulators. Following the DoD’s release of the proposal, Director Cordray issued a statement praising the proposal in which he stated that it “would shut down the predatory lending to the military that has flourished through exploiting legal technicalities. By broadening the types of credit covered under the law, this proposal would carry out the will of Congress by enabling the CFPB to stop lenders from harming servicemembers in ways the law was intended to stop.” Assuming Director Cordray had in mind the CFPB’s ability under the proposal to stop lenders from using pre-dispute arbitration agreements on more MLA-covered loans, might he be signaling the direction of the CFPB’s arbitration study that is expected to be concluded in December?
For more on the DoD’s proposal, see our legal alert.
The CFPB has announced a new project as part of its Project Catalyst initiative, which the CFPB describes as ” designed to encourage consumer-friendly developments in markets for consumer financial products and services.” The new project is a research pilot to examine the effectiveness of early intervention credit counseling for consumers who are at risk of default on their credit card debt. Project Catalyst was launched in November 2012, at which time the CFPB discussed its plans to use the initiative to establish lines of communication with innovators who may be affected by the CFPB’s regulations, understand new and emerging products to be prepared to make necessary regulatory changes, and engage with innovators to better understand which existing laws work and do not work for innovators.
According to the CFPB, as part of the new project, two institutions, one described as a “global credit card issuer” and the other as a “consumer credit counseling service provider based in Philadelphia,” have agreed to share insights with the CFPB from a credit card credit counseling trial project that will offer early-intervention credit counseling to consumers at risk of defaulting on their credit card debt. The CFPB indicates that this research may also help inform whether similar strategies could be effective for consumers facing default on other products such as home, auto or other loans. The CFPB states that it plans to de-identify the information shared by the two institutions and take “appropriate precautions…to ensure that individual consumers cannot be identified through the data.” The CFPB’s research questions and goals are set forth in a summary that accompanied the CFPB’s announcment.
The CFPB has published a notice stating that as part of its Owning a Home project, it plans to seek approval from the Office of Management and Budget to conduct a field study of the project. The project consists of a various online tools and resources developed by the CFPB to help consumers make decisions about mortgages. Comments are due by November 25, 2014.
According to the CFPB, the purpose of the field study is to evaluate and improve its Owning a Home project. Among the issues as to which the CFPB seeks to gain insight through the study are whether and how the project impacts consumers and which consumer segments or profiles benefit most from the project. To conduct the field study, the CFPB plans to recruit prospective homebuyers and assign them to one of two study groups: those exposed to the project (treatment group) and those not exposed (control group). The CFPB then plans to survey both groups as they go through the mortgage shopping process, track the treatment group’s usage of Owning a Home tools and resources, and compare the two groups’ attitudes, behaviors and outcomes.
In May 2013, we reported that the CFPB’s amicus program scored a victory when the U.S. Court of Appeals for the Second Circuit ruled that the sale of a single-floor condominium unit in a multistory building was subject to the disclosure and reporting requirements of the Interstate Land Sales Full Disclosure Act (ILSFDA). At the court’s invitation, the CFPB had filed a letter brief supporting the consumer/appellee’s position that the ILSFDA covered such sales.
Now, it is condominium unit developers who have scored a victory with the Senate’s unanimous approval of H.R. 2600 on September 18, 2014, following the bill’s similar unanimous passage in the House last year. While not exempting condominium unit sales from the ILSFDA’s antifraud requirements, the bill exempts condominium unit developers from the requirement to register their projects under the ILSFDA and provide federal property reports to purchasers. Barring a veto by President Obama, the new exemption will take effect approximately six months from now.
For more on the bill, see our legal alert.
Sixteen industry trade groups, including the American Bankers Association, the Mortgage Bankers Association, and Financial Services Roundtable, have sent a letter to Director Cordray in which they requested that the CFPB provide additional guidance to help the mortgage industry implement the new TILA-RESPA Integrated Disclosures Rule that will become effective on August 1, 2015.
In the letter, the trade groups asked the CFPB to provide clear written authoritative guidance in addition to offering oral guidance through webinars and other venues. The trade groups expressed their belief that due to the complexity of the rule, the CFPB should memorialize its guidance on issues to ensure a timely and effective implementation.
In the letter, the trade groups said, “Uniform written guidance developed with stakeholders’ input that can be relied upon will further fair competition and minimize the possibility of undue liability increasing costs. Most importantly, it will ensure that consumers will not be harmed by unnecessary confusion.”
In order to successfully put the new law into effect, the trade groups also recommend that the CFPB:
- Continue to actively participate in conferences and forums
- Provide additional exemplar forms
- Maintain contact with industry vendors
- Resolve conflicting regulations
We have extensively covered the CFPB and Federal Reserve Board’s June and August webinars that have addressed questions about the final TILA-RESPA Integrated Disclosures Rule. The recommendations of the trade groups echo concerns we have heard from industry members, and we consider the concerns to be valid.
While industry continues to voice its opposition to the CFPB’s proposal to publicly disclose consumer complaint narratives, some news groups think the CFPB’s proposal doesn’t go far enough. The Reporters Committee and eight news organizations have submitted a comment letter asking the CFPB to remove from its proposal the requirement for a consumer to consent to disclosure of his or her narrative. They assert in the letter that the complaints are already subject to disclosure as public records under the Freedom of Information Act, regardless of whether the sender opts to post them online.
A new report from the Government Accountability Office on the CFPB’s data collection efforts finds that the CFPB needs to do more to reduce the risk of improper collection, use or release of such data. The CFPB’s data collection efforts have been the focus of criticism from lawmakers during several hearings at which Director Cordray and Deputy Director Antonakes testified. In its background discussion, the GAO indicates that it conducted the review in response to requests from lawmakers and to fulfill a statutory mandate for such a review in the Consolidated Appropriations Act of 2014.
The GAO reviewed the CFPB’s 12 large-scale ongoing and one-time data collections undertaken from January 2012 to July 2014. Subjects of the collections included mortgages, student loans, overdraft fees, online and storefront payday loans, deposit advance products, and arbitration case records. Of the 12 collections, 3 included information that identified individual consumers (arbitration case records, deposit advance products and storefront payday loans). The GAO indicates that it was told by CFPB staff that while most of the 12 collections were conducted under the CFPB’s supervisory authority, several were conducted using its market monitoring authority. The report reviews large-scale data collections conducted by the Fed, OCC and FDIC and finds that such other regulators collect “similarly large amounts of data” as the CFPB but that the other regulators’ collections generally do not contain information that directly identifies consumers. It also reviews the CFPB’s information sharing agreements with other regulators and finds overlap in the data collected by the CFPB, Fed and OCC.
The GAO’s key conclusions are:
- The CFPB lacks written procedures for its data intake process, including for evaluating whether statutory restrictions related to collecting personally identifiable financial information apply to a large-scale data collection, documenting determinations of whether these collections are subject to Paperwork Reduction Act requirements (such as the need for OMB approval and to seek comments on a proposed collection), and assessing and managing privacy risks of these collections.
- Although it has informal procedures for anonymizing data collections that contain personally identifiable financial information, the CFPB has not established written procedures for anonymizing data. (The report cites specific instances in which the CFPB failed to remove sensitive information in some of its collections.)
- The CFPB did not consistently or comprehensively document its information security risk-assessment results.
- The CFPB has not yet developed a comprehensive privacy plan that brings together existing policies and guidance, has not established a regular schedule of periodic reviews of its privacy program, or completed development of a role-based privacy training program.
- The CFPB did not comprehensively evaluate the service provider that processes consumer financial data on its behalf for compliance with contract provisions.
The report contains 11 specific recommendations for executive action by the CFPB to remedy the weaknesses identified by the GAO. It also contains a letter from Director Cordray concurring with the GAO’s recommendations and outlining the actions being taken by the CFPB in response.
The report’s conclusions seem particularly ironic given the importance the CFPB places on implementation of data security procedures and service provider oversight by the entities it supervises. We expect Director Cordray to hear more from lawmakers about the GAO’s conclusions when he next appears before Congress for an oversight hearing. Indeed, House Financial Services Committee Chair Jeb Hensarling has already issued a statement on the report commenting that it “reveals troubling deficiencies in the CFPB’s data security procedures and privacy controls, as well as an apparent effort by the CFPB to skirt the consumer privacy protections required by Congress in both the Dodd-Frank Act and the Paperwork Reduction Act. ”
Along with its proposed larger participant rule for the auto financing market, the CFPB recently issued a special edition of Supervisory Highlights (“report”) describing its fair credit supervisory activity in what it characterizes as “the indirect automobile lending market.”
The report indicates that CFPB supervisory examination teams have been conducting targeted Equal Credit Opportunity Act compliance reviews of “indirect auto lenders. “This is the segue into the surprising news that multiple targeted ECOA reviews conducted during the last two years have resulted in non-public, supervisory resolutions with several auto “lenders” involving approximately $56 million in redress for approximately 190,000 consumers.
The report includes numerous assertions and observations drawn from supervisory examinations. It also explains the CFPB’s use of the hybrid Bayesian Improved Surname Geocoding (BISG) methodology to proxy for unidentified race and ethnicity in the non-mortgage context. The report was accompanied by a white paper explaining this proxy methodology in further detail and reporting that a study conducted by the CFPB had concluded that this “integrated approach to building a proxy is more accurate than either surname or geographic data individually.”
Our legal alert containing a detailed discussion of the report and the white paper on the BISG proxy methodology is available here. On October 16, 2014, Ballard Spahr attorneys will discuss these developments in a webinar, “Auto Finance II: Fair Credit,” from 12:00 p.m. to 1:00 p.m. ET. The registration form is available here.
The CFPB has announced that it will hold a meeting of its Credit Union Advisory Council on October 1, 2014. The meeting will be take place in Washington, D.C. and Director Cordray is scheduled to attend. According to the agenda, the meeting topics will be overdrafts and consumer complaints. Attendance requires an RSVP.
The CFPB has issued a proposal to supervise nonbank companies that qualify as “larger participants of a market for automobile financing.” Comments on the proposal will be due 60 days after its publication in the Federal Register.
The proposal is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.” Nonbank larger participants would include specialty finance companies, “captive” finance companies, and “Buy Here Pay Here” finance companies.
The proposal defines as “larger participants” nonbank entities that engage in “automobile financing” that have at least 10,000 aggregate annual originations. An entity’s “annual originations” is calculated by adding the following transactions for the preceding calendar year: (1) credit granted for the purpose of purchasing an automobile, refinancings of such credit obligations and any subsequent refinancings thereof; (2) purchases or acquisitions of such credit obligations (including refinancings); and (3) automobile leases and purchases or acquisitions of automobile leases.
Ballard Spahr attorney Peter Cubita notes that “the CFPB’s proposal also would define certain automobile leasing activity as a financial product or service, thereby effectively expanding the statutory definition of a ‘financial product or service’ as it relates to a personal property lease.” Peter is one of the nation’s leading consumer financial services attorneys with extensive experience in auto finance and leasing. He recently joined our Consumer Financial Services Group as of counsel in the firm’s New York office.
Auto finance companies that qualify as larger participants will be subject to examination by the CFPB for federal law compliance once a final rule becomes effective. On September 30, 2014, Ballard Spahr attorneys will hold a webinar, “Auto Finance I: How the CFPB’s Larger Participant Rule for the Auto Finance Market Will Change the Game for Nonbank Auto Finance Companies,” from 12 p.m. to 1 p.m. ET. More information on the webinar and a link to register are available here.
For more on the proposal, see our legal alert.