Late last week, on February 12, the CFPB announced actions against three mortgage companies for alleged violations of Regulation N, the Mortgage Acts and Practices Advertising Rule. Among other restrictions, Regulation N bars any commercial misrepresentation of the relationship between a credit provider and a government. According to the CFPB, the three mortgage companies at issue—All Financial Services, Flagship Financial Group, and American Preferred Lending—wrongfully depicted their affiliation with the U.S. government in direct mail advertisements.
The three actions—one civil suit and two consent orders—mark the first we’ve heard from the Bureau or the FTC regarding their joint “sweep” of roughly 800 mortgage-related advertisements since the two agencies issued warning letters to several institutions in November 2012.
The facts articulated in the two consent orders are markedly similar. As alleged by the CFPB, Flagship Financial Group sent more than one million direct mail advertisements claiming to be a “HUD-approved” lender when, in fact, it was not. Thousands more Flagship mailers allegedly opened with a reference to an FHA press release, “HUD No. 12-045,” and instructed recipients to phone an “assigned FHA loan specialist.” According to the order, Flagship’s name was buried in a disclaimer on the reverse side of the ad. Likewise, the CFPB alleged that American Preferred Lending sent 100,000 mailers featuring an FHA-approved lender logo and a reference to a web address, FHAdept.us. While American Preferred is authorized to originate FHA-insured loans, it enjoys no greater affiliation with the government than any other lender authorized to engage in the same activity. The Bureau determined that these representations connoted the authors’ affiliation with the U.S. government, and, as such, they violated Regulation N. Flagship and American Preferred agreed to pay penalties of $225,000 and $85,000, respectively, and both are required to establish compliance plans subject to the Bureau’s approval. Pursuant to the consent orders, however, neither Flagship nor American Preferred admitted or denied any of the Bureau’s findings of fact or conclusions of law.
The facts articulated in the civil complaint differ slightly. Like Flagship and American Preferred, All Financial Services allegedly sent thousands of mailers with arguably misleading allusions to an affiliation with the government, including an official-looking seal and a heading that read, “Government Lending Division.” Unlike its peers in last week’s announcement, however, All Financial also allegedly misrepresented the terms of its reverse mortgage product by saying that no monthly payments “whatsoever” would be due “as long as you and your spouse live in the home.” According to the Bureau, this representation fails to depict the actual cost of the product, which does require payment of taxes and insurance, and it masks the reality that payment could be due on death of the borrower, even if the borrower’s spouse remains in the home.
The Bureau’s announcement does not indicate whether these actions effectively conclude the joint sweep effort, or whether additional actions based on the same investigation(s) may be forthcoming.
Last week, Director Cordray spoke at a National Credit Union Administration town hall webinar. While his prepared remarks were not particularly revealing, the American Banker reported that Director Cordray was unusually candid during the Q&A part of the program.
In discussing the CFPB’s work on a proposed rule for overdraft products, Director Cordray indicated that the CFPB is not planning on banning overdraft products, but is “reviewing the size of fees, frequency of fees, occasion for fees, [and] the ordering of transactions.” He indicated that rules relating to prepaid cards, payday loans and the Home Mortgage Disclosure Act are a higher priority for the CFPB than rules for overdraft and debt collection. Finally, during the Q&A session, Director Cordray emphasized that the CFPB is not going to ease up on using the disparate impact theory to hold indirect auto finance companies liable for unintentional discrimination. Under this highly controversial theory—currently before the Supreme Court—a lender can be found to have violated the law without any evidence of intentional discrimination but based on statistical differences between groups that cannot be ascribed to legitimate business considerations.
The majority of Director Cordray’s prepared remarks did not include new information. The remarks focused on the CFPB’s actions in the mortgage space including the proposed changes to the definitions of “rural” and “small creditor” in Regulation Z. Additionally, Director Cordray promoted that the “Rate Checker” tool on the CFPB’s website, which allows consumers to check various mortgage rates in a specific area, as a critical feature that helps consumer make informed mortgage decisions. This comment suggests the CFPB is unlikely to be receptive to recent industry comments, including those from the American Bankers Association (“ABA”), urging the CFPB to remove the mortgage rate calculator from its website. (The ABA believes that the Rate Checker is an inadequate tool for consumer to use to compare financing because it lacks the ability to review all relevant information.)
Finally, we find it interesting that in his remarks, Director Cordray profusely praises the work of small lenders. We hope that Director Cordray continues to recognize the importance of small lenders as the CFPB prepares future proposed rules.
The 20th Annual Consumer Financial Services Institute, sponsored by the Practising Law Institute, will take place on April 6-7, 2015 in New York City (and by live webcast and groupcast in Cleveland, Philadelphia, Pittsburgh, Mechanicsburg, PA and New Brunswick, NJ) and on April 27-28, 2015 in Chicago.
As I have done for the past 19 years, I will again be co-chairing the event. My partner, Chris Willis, will be speaking on the CFPB Speaks panel and the fair lending panel.
The Institute will feature a panel titled “The CFPB Speaks: Recent Initiatives and Upcoming Activities.”
Several CFPB representatives will make presentations on the following topics:
- Regulatory developments (Diane C. Thompson, Managing Counsel, Office of Regulations)
- Supervisory developments (Peggy Twohig, Assistant Director, Office of Supervision Policy)
- Enforcement developments (Anthony “Tony” Alexis, Assistant Director of Enforcement)
The Institute will also focus on a wide variety of cutting-edge issues and developments, including privacy and data security, mortgage litigation, and credit, debit, retail banking and emerging payments, state AG enforcement, class action developments, TCPA and FDCPA.
For a complete description of the event and to register, visit PLI’s 20th Annual Consumer Financial Services Institute page.
The CFPB’s payday loan rulemaking was the subject of a NY Times article this past Sunday which has received considerable attention. According to the article, the CFPB will “soon release” its proposal which is expected to include an ability-to-repay requirement and limits on rollovers.
Two recent studies cast serious doubt on the rationale typically offered by consumer advocates for an ability-to-repay requirement and rollover limits—namely, that sustained use of payday loans adversely affects borrowers and borrowers are harmed when they fail to repay a payday loan.
One such study is entitled “Do Defaults on Payday Loans Matter?” by Ronald Mann, a Columbia Law School professor. Professor Mann compared the credit score change over time of borrowers who default on payday loans to the credit score change over the same period of those who do not default. His study found:
- Credit score changes for borrowers who default on payday loans differ immaterially from credit score changes for borrowers who do not default
- The fall in credit score in the year of the borrower’s default overstates the net effect of the default because the credit scores of those who default experience disproportionately large increases for at least two years after the year of the default
- The payday loan default cannot be regarded as the cause of the borrower’s financial distress since borrowers who default on payday loans have experienced large drops in their credit scores for at least two years before their default
Professor Mann states that his findings “suggest that default on a payday loan plays at most a small part in the overall timeline of the borrower’s financial distress.” He further states that the small size of the effect of default “is difficult to reconcile with the idea that any substantial improvement to borrower welfare would come from the imposition of an “ability-to-repay” requirement in payday loan underwriting.”
The other study is entitled “Payday Loan Rollovers and Consumer Welfare” by Jennifer Lewis Priestley, a professor of statistics and data science at Kennesaw State University. Professor Priestley looked at the effects of sustained use of payday loans. She found that borrowers with a higher number of rollovers experienced more positive changes in their credit scores than borrowers with fewer rollovers. She observes that such results “provide evidence for the proposition that borrowers who face fewer restrictions on sustained use have better financial outcomes, defined as increases in credit scores.”
According to Professor Priestley, “not only did sustained usage not contribute to a negative outcome, it contributed to a positive outcome for borrowers.” (emphasis supplied). She also notes that her findings are consistent with findings of other studies that because consumers’ inability to access payday credit, whether generally or at the time of refinancing, does not end their need for credit, denying access to original or refinance payday credit may have welfare-reducing consequences.
Professor Priestley also found that a majority of payday borrowers experienced an increase in credit scores over the time period studied. However, of the borrowers who experienced a decline in their credit scores, such borrowers were most likely to live in states with greater restrictions on payday rollovers. She concludes her study with the comment that “despite several years of finger-pointing by interest groups, it is fairly clear that, whatever the “culprit” is in producing adverse outcomes for payday borrowers, it is almost certainly something other than rollovers—and apparently some as yet unstudied alternative factor.”
We hope that the CFPB will consider the studies of Professors Mann and Priestley in connection with its expected rulemaking. We understand that, to date, the CFPB has not conducted any research of its own on the consumer-welfare outcomes of payday borrowing in general, nor on lending to borrowers who are unable to repay in particular. Given that these studies cast serious doubt on the presumption of most consumer advocates that payday loan borrowers will benefit from ability-to- repay requirements and rollover limits, it is critically important for the CFPB to conduct such research if it hopes to fulfill its promise of being a data-driven regulator.
In the FTC’s 2014 annual letter to the CFPB summarizing the FTC’s debt collection activities, the FTC describes the CFPB as a “valuable partner” with whom the FTC anticipates an “even stronger [partnership] in the future.” The letter includes a discussion of the FTC’s collaboration with the CFPB on several amicus briefs in cases involving FDCPA issues, specifically Delgado and Buchanan dealing with the collection of time-barred debts and Hernandez dealing with the requirements for a collector’s “initial communication.” The letter also indicates that the FTC has been consulting with the CFPB in connection with the CFPB’s expected debt collection rulemaking.
The letter’s centerpiece is the FTC’s description of its “aggressive law enforcement activities” in the debt collection arena. The FTC states that in 2014, it filed 10 new cases against 56 new defendants, resolved 9 cases and obtained nearly $140 million in judgments, and banned 47 companies and individuals “that engaged in serious and repeated violations of law from ever working in debt collection again.” The letter highlights cases in which the FTC was successful in obtaining judgments or injunctive relief that involved (1) deceptive, unfair or abusive collector conduct generally, (2) abusive collection practices targeting Spanish-speaking consumers, (3) phantom debt collection, and (4) debt brokering and consumer data integrity.
The CFPB has issued a “Snapshot of reverse mortgage complaints” covering complaints submitted to the CFPB from December 2011 (when the CFPB began accepting consumer complaints on reverse mortgages) through December 2014.
According to the report, the CFPB handled approximately 1200 reverse mortgage complaints during that period. The issues those complaints involved and the percentage of such complaints that dealt with each such issue were as follows: problems when unable to pay (38%), making payments (32%), applying for the loan (18%), signing the agreement (10%) and receiving a credit offer (3%).
The CFPB states that the complaints indicate “confusion and frustration over the terms and requirements of reverse mortgages.” For example, the CFPB found that many consumers were frustrated when they could not refinance their loans due to insufficient equity. In the CFPB’s view, these complaints suggest homeowners may not understand that the loan proceeds and accrued interest on the loan over time will substantially decrease the amount of available equity. Among the other issues as to which the CFPB found consumer confusion were the ability to obtain loan changes, such as adding additional borrowers to extend the loan term, and the consequences of a reverse mortgage borrower’s death on non-borrower family members living in the home at the time of the borrower’s death.
The complaints also involved loan servicing problems such as: difficulty paying off a reverse mortgage that had become due and payable; failure by the servicer to keep accurate records; and unresponsiveness by the servicer when a borrower was attempting to prevent foreclosure.
The CFPB concludes the report with the comment that “[a]s the likelihood increases that older Americans will use their home equity to supplement their retirement income, it is essential that the terms, conditions and servicing of reverse mortgages be fair and transparent so that consumers can make informed decisions regarding their options.” While the CFPB has posted a new consumer advisory on its website to address some of the concerns raised by the complaints, this concluding comment suggests the CFPB is also likely to consider imposing additional disclosure and other requirements on reverse mortgages.
Not surprisingly, letters sent to the CFPB this week by New York Financial Services Superintendent Benjamin Lawsky and by 12 House Republicans urge the CFPB to take very different approaches as it considers payday and short-term loan rulemaking.
In their letter, the House Republicans set forth the following five principles which they believe the CFPB should follow in adopting rules for payday and short-term loans:
- Maintain a data-driven approach in which rulemaking is based on large scale data analysis and tested research, not anecdotal or agenda-driven rhetoric
- Consider the impact on small businesses that provide access to credit through the use of their own capital and employment opportunities
- Consider the impact on rural communities which can be disproportionately impacted by overzealous regulations
- Conduct a qualitative and quantitative cost-benefit analysis
- Consider state models in states that have passed short-term lending laws
In contrast, Mr. Lawsky’s letter does not propose that the CFPB engage in a deliberative rulemaking process but instead supplies anecdotal stories and background about his agency’s “multifaceted effort to protect consumers from illegal, online payday lending” to support his call for the CFPB to craft “strong national rules.” According to Mr. Lawsky, such rules should include the following:
- A ban on the use of remotely created checks in connection with collecting on payday loans
- Restrictions on the sharing of sensitive personal information with payday lenders, payday loan lead generators and other third parties
- A rigorous ability-to-repay standard
Mr. Lawsky also wants the CFPB to make clear that its rules are minimum standards that do not preempt more restrictive state laws.
The National Consumer Law Center is urging the CFPB to ban the collection of debts on which the statute of limitations has run.
The recommendation is made in a new NCLC report titled “Zombie Debt: What the CFPB Should Do about Attempts to Collect Old Debt.” The NCLC argues that “in light of the serious harm to consumers caused by time-barred collections, we urge the CFPB to prohibit all collections of time-barred debt-whether through litigation or non-litigation means-as unfair, deceptive, or abusive acts or practices.” The NCLC wants the ban to apply to creditors, debt collectors and debt buyers. According to the NCLC, even well-crafted disclosures are insufficient to protect consumers because “disclosures about the potential consequences of making a payment would be complex and also would be unlikely to adequately apprise the least sophisticated consumer of the risk from making the requested payment.”
As a fall back, the NCLC argues that should the CFPB permit some collection efforts of time-barred debt, those efforts must be “strictly controlled.” In the NCLC’s view, such controls should include prohibiting suits on time-barred debt even if a payment or acknowledgment has restarted the statue of limitations and prohibiting the sale of debt once the statute has run.
The NCLC’s position makes little sense given that by prohibiting all collection of time-barred debt, the CFPB would effectively be extinguishing debts that continue to be valid under state law. Such a prohibition would raise serious constitutional concerns.
Today, the CFPB entered a consent order that requires subprime credit card company, Continental Finance Company, LLC (“Continental”), to refund an estimated $2.7 million to consumers who were charged alleged illegal credit card fees. The consent order also imposes a civil penalty on Continental in the amount of $250,000.
In the consent order, the CFPB found that Continental required cardholders to pay fees during the credit card account’s first year that exceeded 25% of the account’s initial credit limit, in violation of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the “CARD Act”). As explained in the consent order, Continental cardholders generally received an initial $300 credit line with a required $75 annual “maintenance and set-up” fee, and certain cardholders were charged an additional $4.95 monthly fee for paper statements. For cardholders charged a paper statement fee, the total amount of fees during the first year exceeded the CARD Act’s 25% limit. The consent order notes that, as of December 2014, Continental charged approximately 98,000 cardholders more than $2,670,000 in paper statement fees.
The CFPB also found that Continental had engaged in certain deceptive acts and practices in violation of the Consumer Financial Protection Act of 2010. First, according to the consent order, Continental stated in its cardholder terms and conditions that a cardholder would be charged a monthly paper statement fee if he or she were to “elect” to receive paper statements. Continental, however, then automatically sent certain cardholders paper billing statements and required those cardholders to pay the monthly paper statement fee.
Second, the consent order states that the Continental cardholder agreements for secured and partially secured cards represented that a cardholder’s security deposit would be held in an FDIC insured financial institution. In reality, the consent order asserts, up to $1.8 million in consumer funds deposited during 2013 were not FDIC insured. The consent order also notes that no customer lost any part of his or her cash security deposit as a result of this limited FDIC insurance coverage.
In addition to requiring the estimated $2.7 million in refunds and imposing the $250,000 civil penalty, the consent order enjoins Continental from committing future violations of the applicable laws, and requires Continental to make the refunds by way of a credit, check, or both, to ensure cardholders are not required to take any action to receive their refunds.
Last December, the CFPB sued a Texas-based company, Union Workers Credit Services, alleging that the company deceived consumers into paying fees to sign up for a “platinum card” that purported to be a general-use credit card but, in actuality, could only be used to buy products from the company. See our prior post discussing the CFPB’s complaint here.
Yesterday, the CFPB requested court approval of a stipulated consent order that would impose monetary penalties on the company in the amount of $70,000, and permanently ban the company from offering any consumer credit products or services. Surprisingly, the consent order does not include any remediation for the company’s cardholders, although the CFPB’s announcement of the consent order states that such cardholders may be eligible for relief from the CFPB’s Civil Penalty Fund in the future.
The consent order also addresses allegations that the company had falsely advertised an affiliation with labor unions. Specifically, the consent order would prohibit the company from making any misrepresentations that it, or any consumer financial product or service it might offer, are associated with labor unions, including, but not limited to, through use of union-related words or images. In addition, the consent order would enjoin the company from violating the Fair Credit Reporting Act, which the CFPB alleged the company had violated by using consumer reports without the consumers’ consent. In light of the fact that the CFPB has permanently banned the company from offering any consumer credit products and services, these additional proscriptions in the consent order seem superfluous.
In its announcement of the consent order, the CFPB claimed that thousands of consumers had filed complaints against the company with law enforcement agencies and the Better Business Bureau, and further noted that the company has been sued by several government authorities, including the New York Attorney General and the U.S. Postal Service.