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.
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.
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.
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.
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.
On Monday, April 7, CFPB General Counsel Meredith Fuchs warned that debt collection, payday lending, prepaid cards and privacy notices are priorities for the Bureau in the coming months. Appearing before the Practicing Law Institute’s 19th Annual Consumer Financial Services Institute in New York City, Ms. Fuchs noted that the CFPB has already received in excess of 22,000 comments in response to its debt collection advanced notice of proposed rulemaking (ANPR). Calling “certain debt collection practices a source of concern,” Ms. Fuchs did not promise that the CFPB would issue its proposed debt collection rule in 2014. She justified the protracted process by noting that no federal agency has issued debt collection rules governing how the FDCPA should be applied to modern technology. Fuchs did suggest that the debt collection rule could cover (1) the collection or attempt to collect time-barred debt; (2) first-party collection tactics and (3) the transfer of consumer’s information between the original creditor and the debt buyer. We are not surprised that the potential debt collection rule would go beyond the scope of the FDPCA. Indeed, we have written previously that the CFPB would invoke its UDAAP authority to cover first-party collectors in its proposed rule.
Turning to payday lending, Fuchs cited the recent CFPB report in explaining that the CFPB remains concerned with consumers’ sustained use of short-term, small dollar loan products, the amortization of these products and the use of these products by the elderly and others that depend on fixed government benefits. While Fuchs vacillated on the specific timing for payday lending rule-making, she did indicate that the CFPB would continue to aggressively police the ACH, lead generators and other “choke points” that payday lenders rely upon to reach consumers. Given that the CFPB does not intend to commission any further studies analyzing the benefits of payday loans, we anticipate that the proposed rule will impose rigid, arbitrary limits on numerous payday loan features.
Fuchs also indicated that prepaid cards are a high priority for the CFPB in 2014. Noting that Regulation E is not applicable to prepaid cards, Fuchs insinuated that a proposed rule could be issued in 2014 and feature model disclosures and mandatory error resolution procedures.
Lastly, Fuchs reiterated the CFPB’s intention to streamline privacy notice rules. The General Counsel indicated that the CFPB is inclined to eliminate the annual privacy notice in certain circumstances (e.g. if an institution’s internal policy has not changed in that year). We would applaud such a move as neither the institution nor the consumer benefits from excessive paperwork.
A bill to require the CFPB to establish a small business advisory board was recently introduced by Republican Congressman Robert Pittenger and Democratic Congressman Denny Heck.
H.R. 4383, entitled the “Bureau of Consumer Financial Protection Small Business Advisory Board Act,” would establish a board comprised of at least 12 members who are “representatives of small business concerns that provide eligible financial products or services.” The board would be required to meet at least twice yearly.
The CFPB currently has four advisory groups: the Community Bank Advisory Council, the Credit Union Advisory Council, the Academic Research Council, and the Consumer Advisory Board. The CFPB’s closed-door meeting policy for the advisory groups has been the subject of criticism by us and others.
The CFPB’s first publicly announced criminal referral has resulted in the entry of guilty pleas by a debt settlement company and its principal, according to a Reuters report. The referral, which was made to the U.S. Attorney for the Southern District of New York, arose out of the CFPB’s investigation of two debt-relief service providers and related entities and was announced by Director Cordray at a May 2013 press conference.
The CFPB had also filed a civil complaint in the SDNY federal district court against the debt settlement company and its principal alleging that the defendants had charged advance fees in violation of the FTC’s Telemarketing Sales Rule and engaged in deceptive and unfair practices in violation of the Consumer Financial Protection Act of 2010 (meaning Title X of Dodd-Frank).
The guilty pleas were reported to have been entered on conspiracy charges of mail and wire fraud. According to Reuters, the company and its principal agreed to forfeit $2.2 million as part of the plea agreement. The principal reportedly faces up to 10 years in prison, although the actual sentencing guidelines range is likely lower than 10 years, while the company reportedly faces an additional fine of up to $4.39 million. It was also reported that four other employees of the company had previously pleaded guilty and charges against a fifth employee are still pending. The principal’s attorney is reported to have told the judge assigned to the criminal case that the CFPB plans to dismiss the civil lawsuit.
The CFPB has also named individuals as defendants in a number of other enforcement actions it has filed. Based on reported statements by Director Cordray that the CFPB is committed to pursuing individuals, and not just companies, when exercising its enforcement authority, the CFPB can be expected to continue to name individual defendants in enforcement actions. In addition, given that Director Cordray stated when he announced the CFPB’s first criminal referral that the CFPB would be looking for more opportunities “to coordinate and collaborate” with the U.S. Attorney, more criminal referrals by the CFPB of both companies and individuals can also be expected.
The CFPB has announced that it will be holding a forum on the mortgage closing process in Washington, D.C. on April 23, 2014. The announcement states that the event will feature remarks from Director Cordray, and a discussion with consumer groups, industry representatives, and members of the public.
The CFPB has indicated that the next phase of its “Know Before You Owe” initiative is to identify ways to improve the closing process. To kick off that phase, the CFPB published a notice in the Federal Register in January 2014 in which it asked 17 questions intended to provide the CFPB with information about “what consumers find most problematic about the current closing process.” The forum appears to be a continuation of those information gathering efforts.
We will be attending and reporting on the forum.
Section 1071 of Dodd-Frank amended the Equal Credit Opportunity Act to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. Such data includes the race, sex, and ethnicity of the principal owners of the business.
In April 2011, the CFPB issued guidance indicating that the CFPB would not enforce Section 1071 until the CFPB issued implementing regulations.
Since then, the development of regulations to implement Section 1071 appeared as a “long-term action” item in the CFPB’s semiannual rulemaking agendas issued in January and July 2013 but was not mentioned in its most recent semiannual rulemaking agenda issued in December 2013.
At the Practicing Law Institute’s 19th Annual Consumer Financial Services Institute (co-chaired by Alan Kaplinsky) held earlier this week in New York City, a CFPB representative indicated that the CFPB will not be issuing regulations this year to implement Section 1071.