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CFPB Proposes Rule to Supervise Nonbank Auto Finance Companies

Posted in CFPB Exams

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.

 

 

CFPB and FTC file lawsuits against online payday lenders

Posted in CFPB Enforcement, Payday Lending

Earlier this month, the CFPB and FTC filed lawsuits against different groups of interrelated companies and their individual principals for engaging in allegedly unlawful online payday lending schemes.

The CFPB’s lawsuit, which the CFPB made public yesterday, was filed under seal on
September 8, 2014 in a Missouri federal court contemporaneously with an ex parte application for a temporary restraining order to halt the defendants’ operation and freeze its assets (which was granted).  (We found it flattering that, in support of its request to file the action under seal, the CFPB referenced our blog’s extensive coverage of CFPB enforcement actions and the possibility that our blog would cover the CFPB’s filing if it were not sealed.) 

The CFPB’s complaint alleges that the defendants purchased consumers’ sensitive personal and financial information directly from lead generators or data brokers to whom lead generators had sold such information to make payday loans, many of which were unauthorized by the consumers to whom they were made, and to make unlawful withdrawals from those consumers’ accounts.  The complaint alleges the defendants engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act as well as violations of the Truth in Lending Act and the Electronic Fund Transfer Act.  According to the complaint, the defendants’ unlawful actions included:  

  • After depositing loan proceeds into consumers’ accounts without authorization, withdrawing a finance charge from such accounts every two weeks indefinitely and, after consumers reported such unauthorized deposits and withdrawals to their banks, misrepresenting to such banks that the transactions were authorized and providing such banks with bogus documentation
  • Not providing TILA disclosures before consummation or providing TILA disclosures that did not reflect the terms of the loans as actually structured
  • Not obtaining authorization for preauthorized electronic funds transfers and requiring repayment by such transfers 

The FTC’s complaint was also filed on September 8, 2014, also initially under seal in the same Missouri federal court in which the CFPB’s complaint was filed.  (As in the CFPB’s lawsuit, the court immediately entered a restraining order stopping the defendants’ operation and freezing its assets.)  The FTC defendants’ alleged unlawful conduct is substantially similar to the conduct in which the CFPB defendants are alleged to have engaged.  Like the CFPB, the FTC alleges that the defendants’ conduct violated TILA and the EFTA.  However, instead of alleging that such conduct also violated the CFPA, the FTC alleges that it constituted deceptive or unfair acts or practices in violation of Section 5 of the FTC Act.

OMB gives go-ahead to CFPB telephone survey of consumers for arbitration study

Posted in Arbitration

Over the vigorous objections of industry trade groups, on September 4, 2014, the Office of Management and Budget (OMB) approved the CFPB’s request to conduct a national telephone survey of 1,000 credit card holders as part of its study of the use of mandatory pre-dispute arbitration agreements in connection with consumer financial products and services.

The CFPB initially gave notice in June 2013 that it was seeking OMB funding for the survey. It provided a 30-day period for comments on the draft survey questions and the proposed methodology. In their comments, industry trade groups questioned the value and usefulness of any telephone survey. However, both industry and consumer advocates who commented agreed that if the CFPB did proceed with its telephone survey, it needed to substantially revise the proposed survey questions.

In response to those initial comments, on May 29, 2014, the CFPB gave notice that it had revised the survey, and it posted the revised survey for comment, along with a description of the proposed statistical methods to be utilized in the survey. The revised notice indicated that the survey will explore: (a) the role of dispute resolution provisions in consumer card acquisition decisions and (b) consumers’ default assumptions (meaning consumers’ awareness, understanding, or knowledge without supplementation from external sources) regarding their dispute resolution rights vis-à-vis their credit card issuers, including their awareness of their ability, where applicable, to opt-out of mandatory pre-dispute arbitration agreements.

The revised survey questions were generally less overtly hostile to arbitration than the original survey questions. Nevertheless, like the initial survey, the revised survey will not gather data regarding respondents’ post-fact satisfaction with arbitration or litigation proceedings. The CFPB stated that it is not seeking such data because of “the difficulty in finding consumers that have had personal experience with both forums.” This severely limits the usefulness and relevance of the telephone survey because post-fact satisfaction with individual arbitration compared with class action litigation is extremely relevant to the question of whether consumer arbitration is in the public interest.

In their earlier comments, industry trade groups had urged the CFPB to conduct “apples to apples” empirical research comparing the benefits that consumers derive from individual arbitration to the benefits they derive from class action litigation. In particular, they suggested that the CFPB study: (a) whether class actions provide meaningful benefits to individual consumers as compared with individual arbitration in terms of outcomes, duration, costs, ease of access and consumer satisfaction; (b) the costs and impact of class action lawsuits, including frivolous or nuisance class action lawsuits, on consumers, businesses and the courts; and (c) whether class actions are an efficient, cost-effective mechanism to ensure compliance with the law given the range of enforcement powers afforded to the CFPB and other state and federal enforcement authorities.

Accordingly, the trade groups had urged the CFPB to expand the proposed telephone survey to include questions concerning consumers’ satisfaction with individual arbitration as compared with class action litigation. A consumer who has prevailed in an individual arbitration within months of initiating the arbitration may have a much different perspective about arbitration than a consumer who has received a $5 check or a product coupon after many years of class action litigation, particularly if the attorneys for the class have received six or seven figures (or more) in attorneys’ fees.

Because a consumer’s actual experience with arbitration and class action proceedings is at least as important as a consumer’s awareness of the arbitration provision, if not more so, in ascertaining whether consumer arbitration is in the public interest, it was very disappointing that the revised telephone survey eschewed that important data. It is difficult to see how information concerning “the role of dispute resolution provisions in consumer card acquisition decisions” and “consumers’ default assumptions regarding their dispute resolution rights vis-à-vis their credit card issuers” will help the CFPB determine whether arbitration provisions in consumer financial services products actually benefit consumers, especially when compared with class actions.

Comments on the revised telephone survey were due on or before June 30, 2014. Industry trade groups once again submitted comments criticizing the revised survey. They strongly recommended that OMB not approve the proposal “because it will not produce information of practical utility, remains materially flawed, and is inconsistent with the statutory mandate.” Instead, these groups recommended that the CFPB “focus on obtaining important consumer information related to arbitration, including information with more utility than it seeks to obtain from this survey, through more effective means rather than through a telephone survey.” In particular, they urged the CFPB to find alternative ways to capture data that would compare how consumers benefit from arbitration as opposed to class action litigation.

Nevertheless, the CFPB now has OMB approval to proceed with the revised consumer telephone survey. The CFPB estimates that the telephone survey will take 645 hours. This suggests that it could be concluded before the end of 2014, which is the CFPB’s target date for completing its consumer arbitration study.

The CFPB’s arbitration study was mandated by Congress in Section 1028 of the Dodd-Frank Act. Section 1028 also authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” such agreements based on the study results. In April 2012, the CFPB published a request for information about the scope, methodology and data sources for the study. In December 2013, the CFPB published preliminary study results. This past April, at the 19th Annual Consumer Financial Services Institute in Chicago (which Alan Kaplinsky co-chaired), Will Wade-Gery (who is managing the study for the CFPB) indicated that the study will be completed by the end of this year.

Florida and Connecticut AGs file lawsuit asserting Dodd-Frank enforcement authority

Posted in UDAAP

On July 29, 2014, another Section 1042 lawsuit was filed jointly by the Attorneys General of Florida and Connecticut in a Florida federal court.  The lawsuit alleges that four individuals and their four businesses formulated and participated in a mortgage rescue scam that deceived consumers into paying upfront fees to be included as plaintiffs in so-called “mass-joinder” lawsuits against their mortgage lenders or servicers.

In addition to asserting claims under their states’ unfair trade practices acts, the AGs allege in their amended complaint that the defendants’ conduct violated the federal Mortgage Assistance Relief Services Rule (MARS Rule).  The MARS Rule (also known as Regulation O) prohibits collection of upfront fees from consumers before obtaining a loan modification, prohibits misrepresenting to consumers the services and relief they would receive, and requires several disclosures aimed at protecting consumers.  The AGs assert their MARS Rule claim pursuant to Section 1097 of Dodd-Frank (12 USC Section 5538), which authorizes a state AG to bring civil actions on behalf of his or her state’s residents to enforce the MARS Rule.

The AGs also assert a claim under Section 1042 of Dodd-Frank, which authorizes a state AG to bring a civil action to enforce provisions of Dodd-Frank Title 10 or regulations issued under Title 10.  Dodd-Frank Section 1097 provides that a violation of the MARS Rule “shall be treated as a violation of a rule prohibiting unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act of 2010.”

In invoking their Section 1042 enforcement authority, the AGs are seeking to enforce the
Dodd-Frank provision (Section 1036) prohibiting unfair, deceptive or abusive acts or practices (UDAAP).  (They assert that pursuant to Section 1097, a violation of the MARS Rule is a UDAAP under Dodd-Frank.)  By also bringing a Section 1042 claim, the AGs might be able to obtain remedies under Dodd-Frank that are not available under state law or the MARS Rule directly.  Alternatively, or in addition, they may view Section 1042 as an alternate way of challenging the defendants’ conduct should their MARS Rule or state law claims fail.

Contemporaneously with the filing of the original complaint, the court entered a temporary restraining order freezing certain of the defendants’ assets and appointing a receiver.  On
August 22, 2014, the court entered a preliminary injunction continuing such relief.

We have been following several other Section 1042 lawsuits filed by the AGs of Illinois, Mississippi and New York and by a New York regulator.

CFPB finalizes rule to supervise larger participant international money transfer providers

Posted in CFPB Exams, Remittance Transfers

The CFPB has issued a final rule that will allow it to supervise nonbank international money transfer providers that qualify as “larger participants” in the international money transfer market.  Consistent with the proposed rule, the final rule defines larger participants as those providers that engage annually in 1 million or more international money transfers.  The final rule takes effect on December 1, 2014.

The rule is based on the CFPB’s Dodd-Frank authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.”  The rule represents the CFPB’s fourth “larger participant” rule.  It has previously finalized such rules for consumer reporting, consumer debt collection, and student loan servicing.

The rule means CFPB examiners will be able to examine nonbank international money transfer providers that qualify as larger participants for compliance with all relevant federal consumer financial laws, most notably the Electronic Fund Transfer Act and Regulation E (which includes the CFPB’s Remittance Transfer Rule which became effective on October 28, 2013) and “unfair, deceptive or abusive” standards.  For more on the rule, see our legal alert.

CFPB may provide details on auto finance disparate impact methodology at tomorrow’s field hearing

Posted in Auto Finance, Fair Lending

Since the CFPB issued its guidance on indirect auto finance in March 2013, lawmakers and industry have been asking the CFPB to provide details concerning its methodology and proxies for analyzing potential fair lending violations. While the CFPB has provided some information in response to letters from lawmakers, its responses have left many questions unanswered. Some of those questions could be answered by the CFPB in a white paper or report to be issued in conjunction with its field hearing tomorrow on auto finance. (As we previously said, we are expecting the CFPB to announce the release of a proposed larger participant rule on auto finance tomorrow.)

According to a Bloomberg article published yesterday by Carter Dougherty, individuals who have been briefed by the CFPB on its plans for the hearing have indicated that the CFPB at the hearing (1) “will outline its methodology for determining whether discrimination is occurring,” and (2) reveal information about how it has reached nonpublic resolutions of fair lending issues with certain banks.

The ABA Responds on Mobile Financial Services (Plus, Apple Inc.’s “Response”)

Posted in CFPB General, Electronic Payments, Mobile Payments, Richard Cordray, Technology

In an interesting coincidence, the comment period for the CFPB’s Request for Information (“RFI”) on mobile financial services closed the same day, September 10th, that Apple announced “Apple Pay”—a new mobile wallet included with the iPhone 6 that could shake up the mobile payments landscape.  The RFI, which we reported on earlier, speaks optimistically of potential cost savings for underbanked consumers while expressing concern about ensuring that consumers remain adequately protected.  Director Cordray repeated these twin messages in his prepared remarks to the Consumer Advisory Board on September 11th.  Director Cordray stated that “mobile devices . . . can make some transactions cheaper or faster or both.  But we need to make sure that the legal and regulatory framework can keep up effectively . . .”

The RFI and Director Cordray’s comments may be a trial balloon to test whether additional guidance, or even new regulation, is needed to specifically address mobile financial services.  Thus far, in addition to the RFI, the CFPB has only publicly addressed mobile financial services in the context of Project Catalyst and trial disclosures.

The American Bankers Association’s response to the RFI supported the goal of engaging the underbanked through the mobile channel, but questioned both whether mobile financial services will provide greater access to the underbanked and whether those services can be provided at a substantial discount.  The ABA pointed out that the top two reasons why people do not have bank accounts is that they “don’t have enough money” or “don’t need or want an account.”  The ABA also cited with approval the FDIC’s findings in an April 2014 whitepaper that providing access to mobile financial services alone may have limited success in getting the underbanked to use bank products.

On cost savings, the ABA stated that any savings to consumers from using mobile financial services would be “marginal.”  There are two reasons for this.  First, mobile banking, for example, is a channel that is an added service on top of all the other channels provided to consumers.  Second, there are unique compliance challenges with providing mobile financial services, which could cause banks to either not provide a product through a mobile channel or to charge more for the product.

We will be discussing these unique compliance challenges in greater detail in our webinar tomorrow.  Our webinar will also provide an overview of the mobile payments landscape, including a summary of the implications of Apple Pay.  The number of merchants, issuers, and consumers Apple will bring to the table through Apple Pay means that the new iPhone 6 has the potential to further accelerate the move toward mobile payments.  This in in turn could cause the CFPB and other regulators to move beyond RFIs and whitepapers in their efforts to ensure that consumers using mobile financial services are adequately protected.

Rohit Chopra from CFPB focuses on student loan modifications at ABA Consumer Financial Services Committee program in Chicago

Posted in Student Loans

I attended a program this morning entitled “All I Need to Know I Learned from the Government: A Look at the Regulatory and Enforcement Landscape for Student Lending .” Among the panelists was Rohit Chopra. Rohit serves as an Assistant Director at the CFPB where he leads an office that focuses on issues facing students and young Americans. In 2011, He was also designated by the Secretary of the Treasury as the Student Loan Ombudsman within the CFPB. Rohit discussed a wide range of student lending and servicing issues of concern to the CFPB. He expressed dismay at the lack of data and transparency associated in this area which results in students and co-signers making poor choices. He chastised the industry for failing to provide loan modification options which he indicated should not be available and offered just to borrowers in default since very often co- signers are keeping loans current.

Mr. Chopra also identified servicer payment processing as a significant problem. In particular, he said that servicers often fail to follow the borrower’s instructions on how to apply the proceeds of a refinancing of a student loan on situations where the servicer is servicing multiple loans for such borrower.

Hanna Law Firm Moves to Dismiss CFPB Complaint

Posted in CFPB Enforcement

Today, the law firm of Fredrick J. Hanna & Associates filed a motion to dismiss the enforcement action brought by the CFPB against it in the U.S. District Court for the Northern District of Georgia. A copy of the motion is available here.

The motion points out that the claims by the CFPB under the Dodd-Frank Act are barred because the Act expressly prohibits the Bureau from bringing any claim against a lawyer for conduct that constitutes the practice of law, and the claims asserted by the CFPB revolve solely around the practice of law – filing lawsuits in court and supporting those lawsuits with affidavits.

The motion also argues that the CFPB has failed to state a claim under the FDCPA or Dodd-Frank, because there is no standard under federal law requiring “meaningful attorney involvement” in filing a lawsuit in court – the “meaningful involvement” standard arose in connection with debt collection letters, and has no application to lawsuits filed in court. Further, the motion points out that the CFPB has failed to identify any instance in which the Hanna firm ever filed an affidavit from a client that “lacked personal knowledge,” or any facts from which it could be inferred that the firm was aware of any such affidavits.

Finally, the motion argues that the Bureau’s attempt to bring claims going back to 2009 is barred by the one-year statute of limitations in the FDCPA and the non-retroactivity of Dodd-Frank, which became effective in 2011.

My colleagues Stefanie Jackman and Jonathan Selkowitz and I are proud to represent Hanna in the lawsuit, along with our co-counsel, Mike Bowers and Chris Anulewicz at Balch & Bingham.