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Furnishers Beware – CFPB Signals That Civil Penalties May Be Appropriate Even Without Any Actual Consumer Injury

Posted in Auto Finance, CFPB Enforcement, CFPB General, Vehicle Loans

Yesterday, the CFPB announced a consent order with First Investors Financial Services Group, Inc., an auto finance company that both makes loans to consumers and purchases retail installment sale contracts from auto dealers. Under the terms of the consent order, First Investors agreed to pay a $2.75 million civil penalty relating to allegations that it knowingly failed to fix flaws in a computerized credit reporting system it had purchased from a third-party vendor. Although First Investors notified the vendor of the problem, the CFPB took issue with First Investors continuing to use that system without any fix being put in place by the vendor.

Importantly, this consent order suggests that the CFPB does not place much significance on whether it can show any resulting consumer injury in determining that a practice warrants a significant civil penalty. Notably, although “the severity of the risks to or losses of the consumer” is one of the mitigating factors to be taken into account in determining the amount of a civil penalty under Dodd-Frank, there is no mention of any actual consumer injury in the CFPB’s consent order, press release, or related prepared remarks. Instead, the CFPB stated only that First Investors “potentially harmed tens of thousands of its customers” and that in “strategically target[ing]” subprime consumers and then “knowingly” sending incorrect information to the credit reporting agencies, First Investors “put consumers with credit profiles that were already impaired into an even more perilous position.”

As such, the CFPB seems to say that the mere existence of a practice that it believes poses significant risks to consumers is sufficient to warrant a civil penalty in the millions. This means that companies cannot take comfort in the fact that a practice the CFPB may deem problematic resulted in only potential, not actual, consumer harm. The potential for consumer injury appears to be as unacceptable to the CFPB as injury in fact.

This consent order also reminds us of the need to monitor and exercise significant oversight of any vendors involved in providing financial products and services to consumers at all levels – origination, servicing, marketing, collections, and so on. Here, although First Investors did notify its vendor of the flaws in the credit reporting system, the CFPB determined that First Investors “knew there was a problem with its computer system but did not make sufficient efforts to fix the errors.” The CFPB further remarked that “[c]ompanies cannot pass the buck by blaming a computer system or vendor for their mistakes. . . . Using a flawed computer system purchased from an outside vendor does not get you off the hook for meeting your own obligations.” The message is clear. The CFPB wants to see companies demanding results from their vendors when issues arise, or suspend their impacted operations until those issues are addressed.

The CFPB also sent an unequivocal warning yesterday to furnishers that they must take “all necessary steps to ensure they are complying with federal laws.” These steps include: (1) monitoring consumer disputes for patterns or indications of systemic inaccuracies; (2) promptly modifying or deleting inaccurate information when it comes to the furnisher’s attention; and (3) making sure that any products or vendors furnishers use to assist in furnishing information do so in an accurate and legal manner. This warning is consistent with advice we already provide to our clients in connection with their efforts to prepare for a potential CFPB examination or enforcement action. The CFPB is unlikely to be sympathetic to any companies that do not take note of this warning with respect to their vendor relationships.

Finally, this consent order also has a number of direct impacts on the auto finance industry, an area in which we anticipate seeing additional enforcement and rulemaking activities by the CFPB in the near future. Ballard Spahr is hosting a four-part auto finance webinar series this fall and invites you to attend to further explore the current issues and trends in this area. We will begin the series on September 9, How the CFPB’s Larger Participant Rule for the Auto Finance Market Will Change the Game for Nonbank Auto Finance Companies, and follow it with a Fair Credit in the Auto Finance Industry presentation on September 30. On October 16 we will present The Application of UDAAP Proscriptions to Auto Finance and Leasing. The series will conclude on November 5 with a presentation on Regulatory Scrutiny of Ancillary Products in Auto Finance and Leasing. All of these programs will take place from noon – 1 p.m. Eastern on these dates. To register for any of these programs, simply click on the name of the event you’d like to attend and complete the registration form.

 

 

OCC steps up SCRA focus in exams

Posted in Military Issues

As we have been reporting, the CFPB has made the Servicemembers Civil Relief Act (SCRA) a major focus and instructs its examiners to look at SCRA compliance during examinations.  The OCC has also stepped up its focus on SCRA compliance during examinations of national banks and federal savings associations, according to recent remarks by an OCC official at the 2014 Association of Military Banks of America Workshop. 

In her remarks, Grovetta Gardineer, Deputy Comptroller for Compliance Policy, indicated that the OCC’s stepped up SCRA focus responds to the significant risk associated with an institution’s failure to comply with SCRA requirements.  Ms. Gardineer stated that because of that risk, the OCC now requires its examiners “to include evaluation of SCRA compliance during every supervisory cycle.” 

In its Bulletin 2014-37 on Consumer Debt Sales issued earlier this month, the OCC included SCRA accounts as a type of account that banks should refrain from selling.

NCRC white paper seeks expansive CFPB rulemaking on small business lending data collection

Posted in CFPB Rulemaking, Fair Lending

The National Community Reinvestment Coalition (NCRC) has issued a white paper that urges the CFPB to take an expansive approach in developing regulations on the collection of small business lending data to implement Section 1071 of Dodd-Frank.  Section 1071 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.  

The NCRC’s white paper includes the following recommendations:

  •  Section 1071 requires certain data elements to be collected, such as the race, gender, and ethnicity of the principal owners of the business, the gross annual revenues of the business, the action taken on an application, and the loan type and purpose.  The NCRC recommends that the CFPB “drill down” on each of these elements to require expansive details.  For example, it asks the CFPB to consider “sub-categories to fully capture the experiences of Asians and Hispanics of various nationalities,” expanded revenue categories (e.g., not just revenues above or below $1 million), and separate reporting of originations, renewals, lines of credit, and refinances.
  • Section 1071 gives the CFPB discretion to require additional data elements that it “determines would aid in fulfilling the purposes of this section.”  The NCRC recommends that the CFPB require collection of various categories of additional data including pricing and creditworthiness data (similar to the HMDA data required by Dodd-Frank), number of employees, collateral pledged by borrowers, and start-up status of the business.
  • Section 1071 gives the CFPB discretion to grant exceptions from the data collection requirements.  The NCRC urges the CFPB to develop a rule “that provides for broad and comprehensive inclusion” of depository and non-depository institutions that make small business loans and not to create exemptions that would exclude “significant numbers of financial institutions.”

 In April 2011, the CFPB issued guidance indicating that it will not enforce Section 1071 until it has issued implementing regulations and, at the April 2014 Practicing Law Institute’s 19th Annual Consumer Financial Services Institute (co-chaired by Alan Kaplinsky), a CFPB representative indicated that the CFPB will not be issuing implementing regulations this year.

Trade groups take aim at NY Times call for CFPB action on subprime auto loans

Posted in Auto Finance

Two leading industry trade groups have disputed a recent New York Times editorial entitled  “When a Car Loan Means Bankruptcy,” which attempted to draw parallels between subprime auto loans and subprime mortgage loans.  The editorial concluded with a call to the CFPB and FTC “to move swiftly and aggressively” on subprime auto lending.

In a rebuttal to the editorial, Peter Welch, the president of the National Auto Dealers Association labeled the editorial “an unfair and unfounded attempt to portray the auto lending industry as a hotbed of deceptive practices and a harbinger of insolvency that could lead to another recession.”  Mr. Welch indicated that “[n]othing could be further from the truth. Auto loan defaults are at historic lows (less than 1 percent in June).”  He commented that
“[e]nforcement of existing laws against a small minority of bad players is in everyone’s interest, but smearing an entire industry for the misdeeds of a few is just plain wrong.”

A representative of the American Financial Services Association was reported to have also called the editorial off base and noted that unlike investors who bought subprime mortgages expecting the underlying assets to appreciate, there is no similar expectation for auto loans.

Industry trade group launches campaign targeting CFPB plan to disclose complaint narratives

Posted in CFPB General

The Financial Services Roundtable has launched as multimedia campaign to challenge the CFPB’s proposal to expand the consumer complaint data that it publicly discloses to include complaint narratives.

In its announcement of the campaign, the Roundtable called the proposal a “plan that may misinform consumers by posting unverified, anonymous and potentially inaccurate complaints about financial services companies on a government website.”  As part of the campaign, the Roundtable launched a new website, CFPBRumors.com, that describes the proposal, identifies various problems with the proposal, discusses its potential impact, and questions the CFPB’s timing for implementing the proposal and its justification for the proposal.  The Roundtable also plans to use social media and advertisements posted in Washington D.C. metro stations to target the CFPB’s proposal.

The concerns with the CFPB’s proposal noted by the Roundtable are well-justified.  We have long shared industry’s concern about disclosing unverified data and observed that the inclusion of consumer narratives will only serve to increase the reputational risks inherent in such disclosures.

Senators introduce bill to increase “large bank” asset threshold for CFPB supervision

Posted in CFPB Exams

A bipartisan bill (S. 2732) has been introduced by Republican Senator Pat Toomey and Democratic Senator Joe Donnelly to increase the asset threshold for “large banks” that are subject to CFPB supervision.

The current threshold is total assets of more than $10 billion.  Entitled the “Consumer Financial Protection Bureau Examination and Reporting Threshold Act of 2014,” the bill would increase the current threshold to assets of more than $50 billion.  The higher threshold would be substantially the same as the threshold for a bank to be designated “systemically important” (i.e., assets of $50 billion or more).

Senator Crapo raises concerns with Department of Education campus financial product rulemaking

Posted in Campus Financial Products

Republican Senator Mike Crapo, Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, sent a letter last week to Department of Education (ED) Secretary Arne Duncan to raise several concerns with the ED’s Title IV rulemaking efforts.  Earlier this year, the ED engaged in negotiated rulemaking, with the CFPB among the those participating in support of the rulemaking.  Negotiated rulemaking did not reach a consensus, and the ED is expected to soon be issuing its proposal. 

In his letter, Senator Crapo raises the concern shared by many observers that the ED’s proposal will include significant new restrictions on products that banks sell to college students, even if the product is not specifically designed to distribute financial aid.  He observes that in the negotiated rulemaking, the ED proposed a definition of a “sponsored account” that would include any financial account that “an enrolled student or parent of an enrolled student may choose to open, obtain, or use…to receive Title IV, HEA program funds.”  He points out because the definition “could include a basic bank account set-up by a student during freshman orientation that never receives or was intended to receive Title IV funds,” it would be impossible for banks to know which account is a “sponsored account” and lead to a presumption that most accounts held by college students are “sponsored accounts” subject to the ED’s regulations.  He expresses concern that “such an expansive approach exceeds the [ED's] statutory authority under the HEA and will interfere with the prudential banking regulation of such financial products.” 

Senator Crapo also comments that based on outreach from his office to the federal banking regulators, the ED completed the negotiated rulemaking process “without a single consultation with prudential banking regulators even though the very product the [ED] is proposing to regulate—a consumer’s checking account—is subject to [a] myriad of existing Federal and state laws.”  He notes his concern that the ED has taken policy positions “without giving due regard to the current regulatory framework” which could lead to “inconsistent and confusing compliance regimes for financial institutions, supervisory challenges for Federal and state banking regulators, and to unintended consequences that may in the end limit student choice and convenience.” 

Finally, Senator Crapo expresses concern with the proposal’s timing.  He notes that the ED has said it intends to move quickly to have a final rule in place for next year.  According to Senator Crapo, because the ED would have to finalize its rule by November 1, 2014 for it to become effective in July 2015, this might not allow sufficient time for the ED to obtain and consider stakeholder input.  Commenting that “it is more important to get the rule right” than to finalize it by November 1, he states that the rule’s magnitude and complexity warrants a 90-day comment period.

 

CFPB publishes annual CARD Act, HOEPA and QM adjustments

Posted in Credit Cards, Mortgages

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank.  The adjustments made by the final rule are effective January 1, 2015. 

The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor.  The calculation did not result in a change to the current $1.00 minimum interest charge threshold.  However, in the final rule, the CFPB increased the current penalty fee safe harbor of $26 for a first late payment and $37 for a subsequent violation within the following six months to, respectively, $27 and $38. 

HOEPA requires the CFPB to annually adjust the total loan amount threshold that determines whether a transaction is a high cost mortgage when the points and fees are either 5 percent or 8 percent of such amount.  In the final rule, the CFPB increased the current dollar thresholds from, respectively, $20,000 to $20,391, and $1,000 to $1,020.  

Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan must not exceed to satisfy the requirements for a QM.  The CFPB must also annually adjust the related loan amount limits.  In the final rule, the CFPB increased these limits to the following :

  • For a loan amount greater than or equal to $101,953 (currently $100,00), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $61,172 (currently $60,000) but less than $101,953 (currently $100,000), points and fees may not exceed $3,059 (currently $3,000)
  • For a loan amount greater than or equal to $20,391 (currently $20,000) but less than $61,172 (currently $60,000), points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $12,744 (currently $12,500) but less than $20,391 (currently $20,000), points and fees may not exceed $1,020 (currently $1,000)
  • For a loan amount less than $12,744 (currently $12,500), points and fees may not exceed 8 percent of the total loan amount

CFPB settles with military base retailer for alleged fee scam; Senators seek CFPB investigation of retailer’s debt collection practices

Posted in CFPB Enforcement, Military Issues

The CFPB has announced a settlement with USA Discounters, a retailer that operates a chain of stores near military bases and offers financing for purchases through retail installment sales contracts (RICs), to resolve charges involving an alleged fee scam.  The consent order requires USA Discounters to make refunds to servicemembers of more than $350,000 and pay a $50,000 civil money penalty.  In the consent order, USA Discounters does not admit or deny “any findings of fact or violations of law” but does admit “the facts necessary to establish the CFPB’s jurisdiction over USA Discounters and the subject matter of this action.”

According to the consent order, the CFPB found that, to enter into a RIC with USA Discounters, an active duty servicemember had to agree to pay a $5 fee for a company called SCRA Specialists LLC to be the servicemember’s representative with respect to his or her rights under the Servicemembers Civil Relief Act (SCRA).  USA Discounters was found to have portrayed SCRA Specialists as an independent representative that would be available to receive notices of lawsuits filed by USA Discounters, inform USA Discounters of a change in the servicemember’s address, and verify the servicemember’s military status to determine whether the servicemember was eligible for protection under the SCRA.

The CFPB concluded that USA Discounters had engaged in unfair and deceptive acts and practices by conduct that included:

  • telling servicemembers that it would use SCRA Specialists to verify the servicemember’s active military status  and marketing this verification as a benefit, when in fact, USA Discounters was required by the SCRA to verify the servicemember’s military status to obtain a default judgment against the servicemember and routinely performed its own duty status verifications
  • misleading servicemembers into believing they would have an independent representative when, in fact, SCRA Specialist received all of its revenue from USA Discounters’ customers and did not provide any representational services to servicemembers
  • failing to provide the services that were promised in exchange for the $5 fee paid by servicemembers

The more than $350,000 in refunds that USA Discounters must make under the Consent Order is based on the CFPB’s finding that since 2009, the $5 fee was charged in more than 70,000 contracts which generated more than $350,000.  For consumers with repaid RICs, USA Discounters must send them a check for the full $5 plus interest and for consumers with accounts in collection, USA Discounters must deduct the $5 fee plus interest from the account balance.

In addition to requiring payment of the refunds and the $50,000 penalty, the Consent Order prohibits USA Discounters from engaging in the challenged practices, offering the performance for a fee of any SCRA-related service involving a RIC for which USA Discounters is a creditor or assignee, and accepting any payment in exchange for the performance of any such service.

While the CFPB obviously believes it has enforcement authority over USA Discounters, and the Consent Order contains USA Discounter’s admission of the facts necessary to establish the CFPB’s jurisdiction, it is worth noting that Dodd-Frank Section 1027(a) limits the CFPB’s rulemaking, supervisory and enforcement authority as to retailers of “nonfinancial goods or services.”  That provision, however, is one of the most confusing provisions of Dodd-Frank Title 10.

The provision contains an exclusion from CFPB authority for retailers of nonfinancial goods or services to the extent the retailer “extends credit directly to a consumer…exclusively for the purpose of enabling that consumer to purchase such nonfinancial good or service directly from” the retailer.  It also states that the exclusion does not cover credit transactions arising from a transaction in which a retailer “of nonfinancial good or services regularly extends credit and the credit is subject to a finance charge.”  However, it further states that despite this limitation on the exclusion, a retailer “that is not engaged significantly in offering or providing consumer financial products or services” continues to be excluded from CFPB authority.  Thus, while USA Discounters may not have been able to take advantage of the retailer exclusion, the scope of the exclusion will undoubtedly be an issue in any CFPB enforcement efforts directed at a retailer.  (Of course, a retailer that is  not subject to the CFPB’s UDAAP enforcement authority would still be subject to the FTC’s UDAP enforcement authority.)

Despite agreeing to the Consent Order, USA Discounters could find itself the subject of further CFPB scrutiny as a result of a letter sent earlier this month to Director Cordray and Defense Secretary Hagel by a group of five Democratic Senators that urges the CFPB and Department of Defense (DOD) to investigate claims made in a recent report from ProPublica and the Washington Post that “certain retailers have undertaken aggressive debt collection actions against active duty servicemembers without affording them, arguably, a real opportunity to defend themselves.”

According to the Senators, the media has reported that certain retailers “may have violated the spirit” of the SCRA by including ” a provision in the fine print of their contracts that allow the retailers to bring suit against servicemembers in certain jurisdictions in the Commonwealth of Virginia, even though they may not be based there or, in fact, ever have been based there.”  The Senators asserted that the retailers have used such provisions to “force involuntary garnishment of servicemembers’ wages while they are serving our country.”

In addition to calling on the CFPB and DOD to investigate these claims, the Senators asked the CFPB and DOD to determine what actions can be taken to “ensure due process for our servicemembers, especially the practice of including contractual provisions that may limit servicemembers’ ability to defend themselves while they are on active duty.”

 

Media reports on student loan debt: distortions abound

Posted in Student Loans

Two recent articles highlight how student loan debt is often the subject of distorted reporting. 

An article from Hamilton Place Strategies observed that news stories often include anecdotal stories about families burdened by student debt.  After examining about 100 articles with such stories over a three month period, the authors found that the new stories “are distinctly unrepresentative of the actual facts about student debt.”  

According to the authors, while the news coverage reported an average student debt level of $85,400, government statistics for 2012 graduates indicated average debt of $29,400.  They noted that this means the average debt level reported through anecdotes represents the 98th percentile of all who have debt.  They commented that “this would be the statistical equivalent of surveying a selected group of American workers, finding an average income level of $360,000 and therefore reporting that the economy is doing well.”   They also stated that the greatest concern with this skewed news coverage is its potential to impact aspiring students making decisions based on such coverage.  More specifically, the authors fear potential students may “get the incorrect impression that a degree is not worth it and they take a pass on higher education all together.” 

A second article posted on Slate.com takes aim at a blog post that commented on a recent report from Goldman Sachs analysts.  After looking into whether student loans were keeping millennial from becoming homeowners, the analysts concluded that having student debt does not necessarily hurt housing.  The Slate author observed that, despite this conclusion, the blog post carried the headline “How student debt crushes your chances of buying a home.”  

The Slate author aptly commented that “Something had been lost in translation.”  He noted that on the whole, the Goldman report found that graduating from college, with or without debt, makes it easier to buy a house than if someone only finished high school and that, in most cases, owing student loans did not meaningfully change the chances that someone would buy instead of rent.   He also observed that while the Goldman report found that households between the ages of 25 and 34 with more than $50,000 in loans were 8 percentage points less likely to own a home than those with smaller debt burdens, it also found that based on the Federal Reserve’s Survey of Consumer Finances, only about 17 percent of all households with student loans have debt levels above $50,000.  In addition, while the Goldman report found that former students who spent more than 10 percent of their monthly income servicing their debt were 22 percentage points less likely to be homeowners, such students represent a minority of borrowers (with only 9 percent of households with student debt devoting one-tenth or more of their income toward loans).  

The Slate author concluded with the observation that “on the whole, there are probably much more important reasons [than student loan debt]—including the slow job market, which has been especially brutal on the young—that are preventing millennials from buying houses.”