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CFPB sends warning letters on military allotment practices

Posted in Military Issues

The CFPB announced that it sent warning letters this month to several companies that sell retail goods to military servicemembers regarding their acceptance of payments made through military allotments.  The military discretionary allotment system allows servicemembers to automatically direct a portion of their paychecks to financial institutions or others of their choosing.  Effective January 1, 2015, Department of Defense rules were changed to prohibit active duty servicemembers from using allotments for the following types of purchases:
(1) vehicles, such as automobiles, motorcycles and boats; (2) appliances or household goods, such as furniture, washers and dryers; (3) electronics, such as laptops, tablets, cell phones and televisions; or (4) other consumer items that are tangible and moveable.

A sample CFPB warning letter advises that the Consumer Financial Protection Act “prohibits unfair, deceptive, and abusive acts and practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”  It also includes the following statement:

According to your website, ————– seems to be offering
active-duty servicemembers the option to repay loans by military allotment even after January 1, 2015, when the Department of Defense prohibited servicemembers from allotting their pay to buy, lease, or rent personal property.  We have not determined whether your conduct violates the CFPA, but we urge you to review your practices to ensure that you comply with all relevant laws.

This notice does not waive the Bureau’s right to take action based on any violations of Federal law, including violations related to the conduct described above.

In December 2014, the CFPB announced the settlement of a lawsuit filed against a retailer selling merchandise online and in retail stores located near military bases that offered financing through retail installment contracts for alleged unlawful debt collection practices.  The lawsuit included claims of alleged unfair conduct by the retailer in connection with the acceptance of payments made through allotments.  In April 2015, the CFPB announced a settlement with two companies that processed military allotments and were alleged to have charged fees to servicemembers that the companies failed to adequately disclose.

Ballard Spahr partner Dee Spagnuolo to be faculty member at ABA diversity and inclusion webinar

Posted in Diversity and Inclusion

On August 12, 2015, Dee Spagnuolo, a Ballard Spahr partner, will be a faculty member at an American Bar Association webinar: “Dodd-Frank: Implications for Your Diversity and Inclusion Program.”  The program will focus on how Dodd-Frank Section 342 impacts regulated entities, including financial institutions and publicly traded companies, and include a discussion of best practices for compliance.

New Diversity and Inclusion Standards jointly issued by six federal agencies pursuant to
Section 342 went into effect on June 10, 2015.  The Standards apply to all entities regulated by any one of the federal agencies subject to Dodd-Frank.  Thus, the entities affected do not just include financial institutions, but any publicly traded company, mortgage company, and any other entity regulated by one of the six agencies, including all of the federal banking agencies and the CFPB.

A link to register is available here.

FOIA Lawsuit Filed Challenging CFPB Research Methodology

Posted in Credit Reports, Research

The law firm Covington & Burling LLP has filed a Freedom of Information Act (FOIA) lawsuit against the CFPB in Washington, D.C. federal district court seeking  information relating to the CFPB’s report on, “Consumer Voices on Credit Reports and Scores.”  Covington argues that the information requested, “is necessary for the public to verify the quality of the study’s methodology.”  The Covington litigation is likely being filed on behalf of a client that prefers not to invoke the ire of the CFPB by requesting the information directly.  The litigation could lay the ground work for transparency into the CFPB’s research processes, not only when releasing reports, but also when compiling data and findings that could inform future CFPB actions, such as rulemaking.

The CFPB previously responded to Covington’s initial FOIA request by releasing only 187 full pages and 111 redacted pages of responsive records, but the CFPB withheld 1,196 pages.  The CFPB claimed that the pages are shielded from disclosure by:

  • FOIA Exemption 4 relating to “commercial or financial information obtained from a person that is privileged or confidential;”
  • FOIA Exemption 5 relating to “deliberative or decision-making processes within the agency;” and
  • FOIA Exemption 6 relating to “personal privacy.”

In the lawsuit, Covington challenges the CFPB’s FOIA response, claiming that the CFPB has failed to identify the documents withheld, establish any factual basis for their withholding, or establish that the documents contained no reasonably segregable factual information.  Covington’s appeal is focused on the following documents:

  • (1) records of the process of, and parameters for, selecting focus group participants and focus group locations;
  • (2) focus group participants’ responses; and
  • (3) demographic data of focus group participants.

Lead generator files petition to set aside CFPB CID

Posted in CFPB Enforcement

A lead generation company and its employee recently filed a petition with the CFPB to modify or set aside a civil investigative demand (CID).

Among the arguments made in the petition for why the CID should be set aside is that the company is neither a “service provider” nor “covered person.”  The company argues that it is not a “covered person” because it does not offer or provide a “financial product or service” as defined in Dodd-Frank.

The company also asserts that it is not a “service provider” as defined in Dodd-Frank.  Under Dodd-Frank, a “service provider” is a person who provides a “material service” to a covered person in connection with the offering of a financial product or service, including a person that “participates in designing, operating or maintaining the consumer financial product or service” or “processes transactions relating to the consumer financial product or service [other than unknowingly or incidentally transmitting or processing undifferentiated financial data].”  The definition includes an exception for providers of a “support service of a type provided to businesses generally or a similar ministerial service.”

The company argues that it does not provide any “material service” to covered persons nor does it provide services that fall within the specific examples contained in the statutory “service provider” definition.  It asserts that lead generation services instead fall within the exception for services “provided to businesses generally.”  According to the petition, lead generation services “are no different than advertising agency services, public relations services, marketing consultants and strategists and any other of the numerous support services which are now inextricably woven into the fabric of the American business model.  They have nothing to do with core financial services functions.”

CFPB seeks to hire administrative law judge

Posted in CFPB Enforcement

The CFPB recently posted a job opening for an administrative law judge (ALJ).  According to the government jobs website, the position is closed which suggests that it has been filled.  A recent Politico article indicated that the CFPB posted the opening because it has ended its arrangement with the SEC to borrow ALJs.  (The Politico article also indicated that the CFPB has needed to borrow SEC judges for two administrative cases.)

The constitutionality of the SEC’s use of ALJs was recently called into question by an Atlanta federal court in Hill v. Securities Exchange Commission.  In Hill, the court issued a preliminarily injunction enjoining an SEC administrative proceeding, finding that the plaintiff had established a substantial likelihood of success on the merits of his claim that “the SEC has violated the Appointments Clause [of Article II of the U.S. Constitution].”

The court found that the ALJs’ powers made them “Inferior Officers” under Article II because they exercise “significant authority pursuant to the laws of the United States.”  Such authority included the power to issue subpoenas, make evidentiary rulings, and recommend decisions.  The court rejected the SEC’s argument that the ALJs were “mere employees” in part because they could not issue final orders.  As “inferior officers,” the court concluded that the ALJs were subject to the Appointments Clause, which vests the power to appoint all “inferior officers” in “the President alone, in the Courts of Law, or in the Heads of Departments.”  Since the ALJ in Hill was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the court ruled that the ALJ’s appointment was “likely unconstitutional.”

Assuming the CFPB now has its own ALJ, it might face a similar constitutional challenge.  Under the CFPB’s Rules of Practice for Adjudication Proceedings, which are modeled on the SEC’s Rules of Practice, the CFPB’s ALJs have powers similar to those of SEC ALJs, including the power to issue subpoenas, make evidentiary rulings, and recommend decisions.  Thus, a CFPB ALJ might also be deemed an “inferior officer” subject to the Appointments Clause.  As such, the ALJ would need to be appointed by for the President, a court, or the head of a “Department.”  However,  because the CFPB is housed within the Federal Reserve, Director Cordray’s status as a “Department” head who can appoint ALJs might be called into question.  See, e.g., Barnett, The Consumer Financial Protection Bureau’s Appointment with Trouble, American University Law Rev. (2011)

CFPB launches monthly complaint report

Posted in CFPB General

The CFPB has issued a complaint report which it describes as “the first in a new series of monthly reports to highlight key trends from consumer complaints submitted to the Bureau.”  In addition to providing overall data on complaint volume, each monthly report will spotlight a particular product and geographic location.  The July 2015 report spotlights debt collection complaints and complaints from consumers in Milwaukee, Wisconsin.

As described by the CFPB, the monthly reports will use “a three-month rolling average, comparing the current average to the same period in the prior year where appropriate, to account for monthly and seasonal fluctuations.”  In some cases, it will  use “month-to-month comparisons to highlight more immediate trends” and, for company-level complaint data, it will use” a three-month rolling average of complaints sent to companies for response.”  The CFPB states that the company-level complaint data “lags other complaint data in this report by two months to reflect the 60 days companies have to respond to complaints, confirming a commercial relationship with the consumer.”

The section of the July 2015 report on complaint volume displays information by product, state and company.  With regard to company data, it identifies the “top 10 most-complained-about companies.”  The section on debt collection complaints displays information by type, state and company.  In addition to identifying the top 20 “most-complained-about companies for debt collection,” the company data identifies the five companies with the “largest percent increase in debt collection complaints,” the five companies with the  largest percent decrease in debt collection complaints,” the five companies with the “highest rate of untimely responses to debt collection complaints,” and the five companies with the “lowest  rate of untimely responses to debt collection complaints sorted by the most timely responses.”

In the section spotlighting Milwaukee complaints, the CFPB displays information showing complaints by product, volume trend over time, and company, identifying the ten “most-complained-about companies by Milwaukee consumers.”  The report also includes an appendix showing total complaints by month and product from July 2011 through June 2015, by state and product, and by the 30 “most-complained- about companies for debt collection” in comparable periods.

In its press release, the CFPB claims that “the reports will provide insight for the public into the hundreds of thousands of consumer complaints on financial products and services handled by the CFPB.”  In reality, without any normalization of the data that allows consumers to make meaningful comparisons, the CFPB’s lists of top “most-complained-about companies” can only serve to mislead consumers.  For example, larger companies may have more complaints simply because they have many more customers, not because their practices are more deserving of criticism.  The CFPB has recognized that lack of normalization is a problem, requesting “feedback on best practices for “normalizing” the raw complaint data it makes available via the Database so they are easier for the public to use and understand.”  Comments on normalization are due by August 31, 2015.

Even if the CFPB addresses the normalization issue, however, the monthly reports still can mislead consumers by failing to disclose that the CFPB has not vetted any of the complaints, let alone excluded complaints that have no basis in fact.  The CFPB refers to complaints as “submissions that express dissatisfaction with, or communicate suspicion of wrongful conduct by, an identifiable entity related to a consumer’s personal experience with a financial product or service.”  As we have often observed, however, many complaints arise not from wrongful company conduct, but rather from attempts to gain leverage over a company or simply from personal economic frustration.  If future monthly reports include excerpts of complaint narratives, the unfairness of the complaint portal will be magnified even further.



CFPB to host forum on eClosing

Posted in CFPB General

On Wednesday, August 5 at 1p.m. EDT, the CFPB will be hosting a forum on the “Know Before You Owe Initiative” on eClosing. The forum will feature remarks from Director Richard Cordray, and include a panel discussion with consumer groups, industry representatives, and members of the public.

The event is open to the public and requires an RSVP. The forum will also be live streamed on the CFPB blog.

While the announcement contains little details on the specific topics to be discussed, presumably the CFPB will address their eClosing pilot project to improve the closing process through the use of technology.  If so, this meeting will likely be a follow-up to the April 2014 eClosing forum where the CFPB presented its plan to shift the mortgage industry toward an electronic mortgage closing process.

Deputy Director Antonakes to leave CFPB

Posted in CFPB People

According to the American Banker and Politico, Deputy Director Steven Antonakes is leaving the CFPB to pursue opportunities in Massachusetts, his home state.  Mr. Antonakes, the CFPB’s second-in-command, has been with the agency since 2010 and has also been serving as the CFPB’s Associate Director for Supervision, Enforcement, and Fair Lending.

Director Cordray appears before Senate Banking Committee

Posted in Arbitration, CFPB General, Military Issues, Mortgages, Payday Lending

On Wednesday, July 15, CFPB Director Richard Cordray appeared before the Senate Committee on Banking, Housing, & Urban Affairs to answer questions regarding the Bureau’s Semi-Annual Report to Congress and the President, which it published on June 15, 2015.

Dir. Cordray observed that during the six month period covered by the report, from October 2014 through March 2015, the CFPB helped obtain more than $19 million in restitution for consumers through enforcement actions, including $2.5 million in relief for servicemembers for illegal debt collection practices, and more than $32 million in civil money penalties.  The report noted that during the same six month period CFPB supervisory actions resulted in financial institutions providing more than $114 million in redress to over 700,000 consumers.

The exchanges between members of the committee and Dir. Cordray tread some familiar ground, such as concerns about renovations to the CFPB’s headquarters and CFPB data collection practices, but a few newsworthy points emerged:

  • Arbitration rulemaking to be commenced “in due course”: In response to Ranking Member Sherrod Brown’s questions about the rulemaking efforts he had encouraged the CFPB to undertake following publication of the Bureau’s arbitration study, Dir. Cordray said that the CFPB was “moving ahead” with rulemaking efforts that would address pre-dispute arbitration agreements in consumer financial products or services pursuant to its authority under section 1028(b) of the Dodd-Frank Act.  He noted that “in due course” the CFPB would convene “a small business review panel as the first step” in the rulemaking process.  (The American Bankers Association, the Consumer Bankers Association and The Financial Services Roundtable (“Associations”) have submitted a joint letter to the CFPB commenting on the arbitration study.  In the letter, the Associations assert that the study does not support rulemaking under section 1028 of Dodd-Frank.  Ballard Spahr served as counsel to the Associations in preparing the comment letter.)
  • Effective date for TILA-RESPA Integrated Disclosure (“TRID”) rule: As we’ve noted before, the CFPB proposed to delay the effective date of the TRID rule until October 3, 2015.  In response to concerns expressed by Sen. Tim Scott about requests from Congress for a grace period before industry will be expected to comply with the rule, Dir. Cordray noted that a delay to January, which had been requested by some members of Congress and some companies, would likely introduce new challenges given the “system freezes” that many companies schedule to occur at the end of each calendar year.  But he also stated that the CFPB had coordinated with other agencies to ensure an implementation grace period “which may last many months” would be afforded:

We went out and worked with the other agencies to get an agreement, which we have, that the early examination of this will be diagnostic and corrective. We don’t think people are out there, are going to be trying to exploit consumers on something like this. They’re just going to be trying to get it right. And so for the first period, which may last many months, the other agencies and ourselves as we look at this, if we see errors, we will point out what they are and how they should be corrected. We will not be looking to be punitive toward people. We have said that explicitly. I will say it again on the record here today to you that is how it will be. I can tell you that’s what we said about the mortgage rules two years ago and that is how it has been and nobody has said otherwise or complained and we’ve taken that to heart here as well.

  • Military Lending Act rulemaking by Department of Defense (“DoD”): In response to questions from Sen. Jack Reed regarding new rules under the Military Lending Act that were proposed by the DoD last year, Dir. Cordray telegraphed that he expects the new rules to be published by the DoD “very shortly”: “I believe that very shortly we’re going to have a new set of rules and servicemembers will have new important protections that they probably should have had several years ago.”
  • Rulemaking regarding payday loans and similar credit products: Several committee members addressed this pending rulemaking within their questions.  While no new details about the rules under consideration or the anticipated timeframe for publication of the proposed rules were disclosed, there was bipartisan agreement that the need for access to such credit would endure and that the rules under consideration by the CFPB should acknowledge that.  Sen. Heidi Heitkamp observed that the CFPB would need to strike a balance between protecting consumers and ensuring access to credit, noting that “sometimes people need diapers, and sometimes they need gas, and they have a flat tire and they can’t fix it.”  For such “folks that are living on the margin[,] I understand the need to protect people, but I also understand the need to have some form of small dollar, short-term lending.”  Chairman Richard Shelby agreed, noting that with the regulations under consideration, “we don’t want to drive the small, marginal consumer underground where there is no regulation, because that’s what we’ve had before . . . . [The thrust of the question is] how do we do this without overregulating this and how do we have access to some type of credit for these [consumers] because there will be credit, it’s a question is it going to be legal or illegal.”  Dir. Cordray affirmatively acknowledged Chairman Shelby’s comment.

The hearing failed to provide any news of note on other significant issues, including the evolution, if any, of the Bureau’s rulemakings on prepaid cards or the progress of pre-rulemaking activities on debt collection.


CFPB issues financial guides for new immigrants

Posted in Financial Literacy

The CFPB recently announced that it has developed “the Newcomer’s Guides to Managing Money to provide recent immigrants with straightforward information about basic money decisions.”

According to the CFPB, each guide features tips to help new immigrants, and people who may be new to the U.S. banking system, avoid financial pitfalls.  They also include information on how to submit complaints to the CFPB.  Consumers can download the guides in English or Spanish from the CFPB’s website or order printed copies.

The four guides deal with:

  • Ways to receive money
  • Checklist for opening a bank or credit union account
  • Ways to pay bills (by check or money order, direct debit, online, or in cash)
  • Selection of financial products and services (such as ATM cash withdrawals and debit card purchases)