CFPB Monitor

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CFPB to hold May 23 field hearing on prepaid cards: an ominous sign?

By Barbara S. Mishkin on Posted in Prepaid Cards

The CFPB has announced that it will be holding a field hearing on prepaid cards in Durham, North Carolina on Wednesday, May 23, 2012. Director Cordray will be delivering remarks and testimony is expected from consumer and civil rights groups, industry representatives, and members of the public. The event is open to the public but an RSVP is required, which can be sent to cfpb.events@cfpb.gov

We view the CFPB’s announcement as a likely precursor to the CFPB’s issuance of a proposal for it to supervise “larger participants” in the prepaid cards market. In the June 2011 notice the CFPB published to solicit comments for developing a “larger participant” proposal, the prepaid cards market was identified by the CFPB as one of the potential markets in which it would supervise “larger participants.” While the CFPB has only targeted the debt collection and credit reporting industries in its initial “larger participant” proposal issued in February 2012, the CFPB made clear in the background discussion of the proposal that it anticipates further rulemaking to define larger participants in other markets.

Companies in the prepaid cards industry should begin preparing for CFPB exams by reviewing their practices and procedures for federal law compliance with experienced counsel. Lawyers in Ballard Spahr’s Consumer Financial Services Group are currently assisting clients in preparing for the expected CFPB examinations.

FTC Holder Rule opinion may guide CFPB

By Barbara S. Mishkin on Posted in CFPB General

On May 3, the Federal Trade Commission issued an advisory opinion interpretating its Holder Rule (officially titled the Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses). The Holder Rule provides protection for consumers who obtain credit from a seller or seller-arranged credit to finance the purchase of goods or services.

The rule allows the consumer to assert all claims and defenses against the holder of the credit contract that the consumer could assert against the seller. The FTC opinion concludes that a consumer’s right to an affirmative recovery under the Holder Rule isn’t limited to circumstances where the consumer can legally rescind the transaction or had purchased worthless goods. We have issued a legal alert on the opinion.

The Holder Rule was included in the CFPB’s list of rules that it will enforce. (See our prior legal alert discussing the CFPB’s list.) We expect the CFPB to follow the FTC’s expansive interpretation.

Just who really is a larger participant?

By John L. Culhane, Jr. on Posted in Debt Collection

In February, the CFPB published its proposed rule defining larger participants in the debt collection and credit reporting industries. In general, the proposal advised that the CFPB would be guided by and would use a definition of annual receipts adapted from that used by the Small Business Administration in identifying small business concerns. In particular, as discussed in our legal alert, the CFPB proposed to define as larger participants credit reporting companies with more than $7 million in annual receipts and debt collection companies with more than $10 million in annual receipts.

Remarkably, in doing so, the CFPB made no reference whatsoever to the fact that on October 12, 2011 the Small Business Administration published a proposal to revise its size standards for small business concerns in the debt collection and credit reporting industries to $14 million. Nor did it mention that in considering such changes, the SBA specifically assesses competition within an industry to determine whether most of an industry’s activity is attributable to larger or smaller firms. Fortunately, ACA International (“ACA”) has submitted a supplemental comment letter calling these discrepancies to the attention of the CFPB.

As the ACA has observed, unless the CFPB increases the larger participant threshold for the debt collection industry, “it will create a regulatory scheme in which debt collectors with $10 million in annual receipts will be small business concerns under the SBA’s rules, while being subject to the CFPB’s burdensome supervisory authority as larger participants.” We would add that, likewise, unless the CFPB increases the larger participant threshold for the consumer reporting industry, the same result would hold true for credit reporting agencies as well.

The ACA’s letter also points out that the SBA makes periodic inflation adjustments to its monetary-based small business size standards and conducts a detailed review of at least one-third of all size standards every 18 months and a complete review of all size standards at least once every 5 years. The ACA urges the CFPB to also incorporate periodic inflation adjustments into its larger participant thresholds and to provide a mechanism, for conducting comprehensive reviews and modifications to such thresholds. We agree and would encourage the CFPB to include such provisions in its final rule.

 

 

CFPB joins DOJ brief defending constitutionality of FCRA

By Barbara S. Mishkin on Posted in Credit Reports

The CFPB’s participation in a memorandum brief filed by the Department of Justice in support of the constitutionality of a provision of the Fair Credit Reporting Act is the most recent example of the CFPB’s activist approach. As we reported, the CFPB previously announced that it’s committed to filing amicus briefs in cases involving federal consumer financial protection laws, and has already filed amicus briefs in at least four federal appellate court cases involving a Truth in Lending rescission issue and in two federal appellate court cases involving Fair Debt Collection Practices Act issues.

The DOJ’s brief, in which both the CFPB and the Federal Trade Commission joined, was filed on May 3 in King v. General Information Services, Inc., a case that’s pending in the U.S. District Court for the Eastern District of Pennsylvania. The brief defends the constitutionality of 15 U.S.C. Sec. 1681c(a), which includes time limits beyond which consumer reporting agencies (CRA) may not include certain adverse information on credit reports, including information about bankruptcies, civil suits and judgments and accounts placed for collection.

At issue in King is Section 1681c(a)(2), (5) of the FCRA, which generally prohibits CRAs from including arrest records that antedate a credit report by more than seven years. The CRA challenged the provision as a violation of the First Amendment. The DOJ’s brief argues that the provision is a valid restriction on commercial speech under relevant U.S. Supreme Court jurisprudence.

Given that constitutional interpretation doesn’t fall within the CFPB’s designated area of statutory or regulatory expertise, we find the CFPB’s decision to join the DOJ’s brief surprising.

　

 

　

CFPB announces plans for mortgage loan origination standards; issues guidance on transitional licensing for originators

By John D. Socknat on Posted in Mortgages
The CFPB’s focus on mortgage reform is again in the spotlight with the CFPB’s announcement yesterday of some of its plans for implementing the residential mortgage loan originator compensation provisions in Title XIV of the Dodd-Frank Act.  The CFPB announced that it intends to propose origination standards this summer, with a goal of adopting final rules in January 2013. The standards will address the compensation of loan originators, the charging of discount points and origination points and fees, and uniform qualification requirements for individuals who are loan originators.  
 
The focus on uniform qualification requirements for loan originators is particularly interesting given the CFPB’s recent issuance of a bulletin dealing with transitional licensing.  As we reported in the Mortgage Banking Update, the CFPB confirmed that the SAFE Act permits a state to provide a transitional license to a mortgage loan originator licensed in another state, but also advised that Regulation H—the final SAFE Act Rule as issued by HUD and now under the CFPB’s authority—does not permit states to provide a transitional license for a registered mortgage loan originator moving from a depository institution to a licensed entity.
 
To the extent that qualifications for bank and non-bank originators do become more uniform, it supports transitional licensing for bank originators moving to licensed entities – at least that is what the industry likely will argue. Stay tuned as the industry continues its efforts on this front.
 
We have prepared a legal alert that describes the important elements of the proposal under consideration by the CFPB.

Date’s remarks underscore Bureau’s focus on mortgage reform

By Michael S. Waldron on Posted in Mortgages

On the heels of Director Cordray’s remarks about the CFPB’s focus on debt collection Deputy Director Raj Date spoke to mortgage industry members at MBA’s National Secondary Market Conference in New York City on May 7, 2012 and reminded the industry that “the place we’re spending most of our time is the mortgage market.”

Mr. Date’s remarks were tailored to an audience that “is probably the most keenly aware of how U.S. consumer finance markets work – and how it is that they don’t work.” Date specifically mentioned several key initiatives, including the TILA/RESPA integrated disclosure, addressing yield-spread premiums and the practice of brokers being “paid more to give borrowers a bad deal”, and the ability-to-repay rule, which Date said he was “confident” would be finalized before the January deadline. The majority of Date’s remarks, however, centered around broader concepts of “fairness”, “transparency”, and “common sense”, which are the Bureau’s common themes across all asset classes. Date stressed the importance of an even playing field by stating that, “If you want to be in the business of consumer finance, then you’ve got to play by the same rules as everybody else.” 

Knowing his audience, Mr. Date made clear that “there is nothing inherently wrong with risk,” and that “risk is why you get paid.” He went on to say, however, that “nobody should get paid for taking risk that they can’t understand, they can’t rank, they can’t quantify, or they can’t price”. Going further, in perhaps his most direct moment in his remarks, Date said, “Your market – the secondary mortgage market – should work like every other competitive market in the economy. If you are smart and take risks, then you should get paid. But if you are taking bad risks, then you shouldn’t get paid. For too long, we lived in a mortgage marketplace where people were able to take bad risks and get paid anyway.”

The CFPB’s proposals dealing with the initiatives described by Mr. Date are expected to be issued this summer. To finalize those proposals by January, as Mr. Date is “confident” the CFPB will do, means that the CFPB will have limited time to consider the avalanche of comments the proposals will likely generate. We will be working with clients to identify the most significant areas on which to focus their comments.

 

Some views from the other side

By Barbara S. Mishkin on Posted in CFPB General

We think two posts by Deepak Gupta that recently appeared on the Consumer Law & Policy Blog make for interesting reading.

Last July, on our blog, we wrote about how the hiring of Mr. Gupta by the CFPB’s Office of General Counsel might impact the CFPB’s position on the use of arbitration in consumer financial services contracts. In the first of his posts, Mr. Gupta discusses his departure from the CFPB earlier this year to start his own appellate litigation and policy consulting practice and makes some observations about his experiences at the CFPB.

In his second post, Mr. Gupta discusses the OCC’s new preemption rule, which (to no one’s surprise) he is highly critical of. (We also have written about the OCC rule, including, most recently, the likely impact of Thomas Curry’s appointment as Comptroller on the OCC’s preemption position.)

Cordray remarks and interview highlight CFPB focus on debt collection

By Alan S. Kaplinsky on Posted in Debt Collection

Director Cordray used his recent remarks at the University of Rochester’s Simon School of Business and an interview following his remarks as another opportunity to stress the CFPB’s focus on debt collection. In his remarks, Mr. Cordray spoke about the CFPB’s authority to supervise non-banks. As an example of how the products of non-banks “affect virtually every American,” Mr. Cordray observed that “over 30 million people are being pursued by debt collectors.”

According to an article that appeared in the May 4 American Banker reporting on Mr. Cordray’s remarks and interview, Mr. Cordray indicated that debt collection is “very much on the [CFPB's] priority list.” He also indicated that the CFPB intends to look not only at the collection practices of third party debt collectors and debt buyers but that it also intends to look at debt collection practices used by original creditors collecting their own debts (presumably using the CFPB’s authority to prohibit unfair, deceptive or abusive acts or practices since original creditors aren’t subject to the Fair Debt Collection Practices Act.)

Mr. Cordray also alluded to the documentation-related challenges original creditors, debt collectors and debt buyers are facing when attempting to collect mortgage and non-mortgage debts. Observing that “it doesn’t make a difference” from the consumer’s viewpoint whether he or she is dealing with an original creditor or a third party collector, Mr. Cordray stated that “it’s a concern” to the extent an original creditor is trying to collect a debt “it can’t vouch is accurate” or is “deceiving the courts.”

To assist clients in responding proactively to such documentation-related challenges, Ballard Spahr’s Consumer Financial Services Group’s recently formed Collection Documentation Task Force conducts extensive reviews of collection procedures and counsels on best documentation practices. The task force is also assisting clients to prepare for the intensive examinations of debt collectors and debt buyers that the CFPB is expected to begin soon.

Fourth Circuit TILA rescission decision adopts CFPB position

By Martin C. Bryce, Jr. on Posted in Mortgages

In an opinion issued on May 3, 2012, the U.S. Court of Appeals for the Fourth Circuit has held that a lawsuit seeking rescission is timely where the consumer provided notice of rescission within three years of closing but did not file suit until after the three-year deadline had passed. The Fourth Circuit’s decision in Gilbert v. Residential Funding LLC, et. al is the first by a federal appellate court to hold that a borrower need only send notice of rescission within the three-year period to validly exercise a right to rescind. We have prepared a legal alert with more information on Gilbert.

The Fourth Circuit’s decision represents a victory for the CFPB, which had filed an amicus brief in Wolf v. Federal National Mortgage Association, another Fourth Circuit appeal involving the same rescission issue. In its brief, the CFPB took the position that notice within the three year period is all that’s required to validly exercise a right to rescind. The CFPB has filed amicus briefs taking the same position in the Third, Eighth and Tenth Circuits.

As my partner Chris Willis and I observed in our prior blog posts on the CFPB’s Tenth Circuit amicus brief, while arguing that a borrower need not also file a rescission lawsuit within the three-year period, the CFPB provided no clear answer in that brief for the question of how long a borrower can wait to file suit. It also provided no clear answer in its Fourth Circuit brief. Instead, in both briefs, the CFPB suggests only that a time limit for bringing a rescission lawsuit may exist and offers possible sources for that limit. The question is similarly left unanswered by the Fourth Circuit, which merely acknowledges that after exercising a right to rescind, the creditor would either have to agree to rescind or the borrower would have to file a lawsuit for the rescission to be completed and the loan voided.

 

　

House members keep fiscal heat on Director Cordray

By Barbara S. Mishkin on Posted in CFPB General

Three members of the House Committee on Financial Services have sent a letter dated May 2, 2012 to Director Cordray to express their dissatisfaction with Mr. Cordray’s March 26 response to their February 22 written request for budget information. That information was sought as a follow up to Director Cordray’s testimony to the Subcommittee on Oversight and Investigations on February 15, 2012.

Authored by Randy Neugebauer, Chairman of the Subcommittee, Michael Fitzpatrick, Vice-Chairman of the Subcommittee, and James Renacci, the letter asserts that that “the CFPB has been wholly unresponsive” to their information request. The letter stresses the need to monitor the CFPB’s budget, noting that “every dollar the Fed sends to CFPB is one less dollar that can be used toward deficit reduction.”

The letter renews the Committee’s request for copies of any financial operating plans and forecasts, which the letter indicates are not interchangeable with the CFPB’s FY 2013 Budget Justification referred to by Director Cordray in his March 26 response. In its February 22 letter to Director Cordray, the Committee had expressed its view that the Budget Justification “lacked sufficient detail and was unnecessarily vague.” In the May 2 letter, the Committee states that Mr. Cordray’s response that the justification was substantially similar to other non-appropriated banking regulators represented an “inapposite” comparison because the budgets of non-appropriated banking regulators “do not affect the national debt.”

The letter also seeks (1) release of the CFPB’s written performance measures on or before July 21, 2012, (2) the CFPB’s agreement to provide transfer requests to Congress 48 hours prior to officially requesting a transfer of funds from the Fed, (3) a detailed construction and rehabilitations budget for the CFPB’s DC offices, and (4) written specifics on the CFPB’s “detailed process” for determining employment needs. Director Cordray is asked to provide the requested information by May 16.