The CFPB has issued a final rule that extends for five years (until July 21, 2020) the temporary exception in its remittance transfer rule that allows insured depository institutions to estimate fees and exchange rates in certain circumstances. The rule also includes “several clarifications and technical corrections” to the rule and commentary. Additionally, the CFPB released a revised version of its compliance guide for industry to reflect the finalized changes.
The CFPB’s remittance transfer rule implemented Section 1073 of Dodd-Frank, which amended the Electronic Fund Transfer Act to establish new requirements for remittance transfer providers. Section 1073 included a provision that until July 21, 2015 temporarily excepted insured depository institutions from the general requirement for a provider to disclose the actual exchange rate and actual remitted amount prior to and at the time of payment. Until the exception expires, such institutions can estimate the exchange rate, the total amounts to be transferred and received, and covered third-party fees when providing remittance transfers to their accountholders for which they cannot determine exact amounts for reasons beyond their control. The exception is implemented through Section 1005.32(a) of the remittance rule.
Dodd-Frank allowed the CFPB to extend the temporary exception for an additional five years if it found that the exception’s sunset would negatively affect the ability of insured institutions to send remittances to locations in foreign countries. The CFPB proposed the extension because it found that such institutions needed additional time to develop reasonable ways to provide consumers with exact fees and exchange rates for all remittance transfers, and had preliminarily determined that, without an exception, their ability to send remittance transfers to certain parts of the world would be negatively impacted. The final rule reflects the CFPB’s “final determination” that the exception’s expiration would have such a negative impact.
Other clarifications and technical corrections made by the final rule include:
- The commentary is revised to clarify that U.S. military installations abroad are considered to be located in a state for purposes of the remittance rule.
- The commentary is revised to clarify that when transfers are made from an account, the primary purpose for which the account was established determines whether a transfer from the account is covered by the rule. The rule applies only when a transfer is requested by a consumer primarily for personal, family or household purposes. The clarification also provides that if a consumer indicates that the transfer is requested for other purposes, such as business or commercial purposes, the provider can deem the consumer not to be a “sender” for purposes of the rule even if the consumer is requesting the transfer from an account that is used primarily for personal, family or household purposes.
- The commentary is revised to provide that disclosures made by fax are treated as a writing for purposes of the rule’s general requirement for disclosures to be provided in writing. For purposes of the rule’s provision that allows pre-payment disclosures to be made orally when a “transaction is conducted orally and entirely by telephone” and certain other requirements are met, the commentary is revised to also allow oral disclosures for transfers that senders first initiate by fax, mail or e-mail. The revision allows a provider to treat a written or electronic communication as an inquiry rather than a request when the provider believes that treating the communication as a request would be impractical.
- The rule’s error resolution procedures are revised with regard to what qualifies as an error. Under the rule, an error includes a failure to make funds available to a designated recipient by the availability date stated in the disclosure provided to the sender unless the failure occurs for certain listed reasons. Such reasons include a delay related to a provider’s fraud screening procedures or the Bank Secrecy Act (BSA), OFAC requirements or similar laws or requirements. The rule is revised to state that only delays related to an individualized investigation or other special action by the provider or a third-party as required by the provider’s or other entity’s fraud screening procedures in accordance with the BSA, OFAC requirements or similar laws or requirements would be covered. The change is clarified by a commentary revision that adds the condition that the provider did not and could not have reasonably foreseen the delay so as to enable the provider to timely disclose an accurate date of availability when providing the sender with a receipt or combined disclosure.
- Other error resolution-related revisions include a revision to the rule clarifying that a provider must refund its own fee when funds were not made available by the disclosed availability date because the sender provided incorrect or insufficient information.
The final rule will be effective 60 days after its publication in the Federal Register. The CFPB has not yet finalized its January 2014 proposed rule that would allow it to supervise nonbank international money transfer providers that qualify as “larger participants” in the international money transfer market.
The CFPB has announced the participants for its mortgage eClosing pilot program, a three-month pilot set to begin later this year. The CFPB’s plans to conduct the pilot were unveiled at a forum on the mortgage closing process held in April 2014, together with the CFPB’s release of a report on the “major pain points associated with the closing process” and guidelines for the pilot program.
The pilot program is intended to explore how the increased use of technology during the mortgage closing process can address those “pain points,” affect consumer understanding and engagement, and save time and money for participants. It is part of the CFPB’s “Know Before You Owe” mortgage initiative.
The CFPB has described the 12 participants it has selected for the pilot as “a mix of technology vendors providing eClosing solutions, and creditors that have contracted to close loans using those solutions.”
The eClosing features that the CFPB plans to study in the pilot include (1) how pre-closing educational materials such as document summaries, term definitions, or process explanations can help improve the closing process for consumers, including whether the order of the documents changes the consumer experience, (2) various technologies that would let consumers see the entire package of closing documents ahead of time, and (3) how eClosings can help consumers and industry “save time and money by preventing last-minute surprises and unnecessary bottlenecks caused by outdated processes.”
On August 19, 2014, the CFPB issued a compliance bulletin and policy guidance updating and replacing its earlier guidance regarding mortgage servicing transfers. In replacing Bulletin 2013-01 (the “Original Guidance”), Bulletin 2014-01 (the “New Guidance”) reinforces the Original Guidance and adds several interesting components to the regulatory mix as a direct result of the implementation of the new Servicing Rules as well as the CFPB’s industry-related supervisory and enforcement activities over the last eighteen months. (We summarized the Original Guidance in a legal alert.)
The New Guidance sets forth two new sections. The first, entitled “General Transfer-Related Policies and Procedures,” provides expanded examples of the policies and procedures that CFPB examiners may consider in evaluating whether servicers have satisfied their transfer-related requirements successfully. Included in this section are additional details on the post-transfer policies and procedures that CFPB examiners may focus on in future examinations, including regularly scheduled calls between the transferee and transferor servicers to identify, research and resolve any loan level issues “within a few days of them being raised.” The CFPB makes clear that the examples provided “are not exhaustive and in future examinations CFPB examiners will consider a servicer’s transfer-related policies and procedures as a whole” in determining whether they are reasonably designed to achieve compliance.
The second new section, entitled “Applicability of the New Servicing Rules to Transfers,” answers frequently asked questions about how revised Regulation X applies in the area of servicing transfers and describes certain areas of focus, including how transfers may implicate requirements under:
- Error Resolution Procedures (12. C.F.R. 1024.35) and Requests for Information (12. C.F.R. 1024.36)
- Force-placed Insurance (12. C.F.R. 1024.37, 1024.17(k))
- Early Intervention (12. C.F.R. 1024.39)
- Continuity of Contact (12. C.F.R. 1024.40)
- Loss Mitigation (12. C.F.R. 1024.41)
It is important to also note that the CFPB uses the New Guidance as a platform to reinforce three broader and consistently provided messages to the servicing industry. The first is that the CFPB expects all mortgage servicers to maintain a robust Compliance Management System (“CMS”). The CFPB notes that a robust CMS ensures that violations of consumer protection laws do not occur and includes mechanisms to remedy any such violations that do occur. The second is that the CFPB is continuing to closely monitor the mortgage servicing market and may engage in further rulemaking in this area. The third is that the CFPB’s concern regarding mortgage servicing transfers remains heightened due to the continuing high volume of servicing transfers.
The CFPB, together with the FTC, has filed an amicus brief in Hernandez v. Williams, Zinman & Parham, P.C., a Fair Debt Collection Practices Act case on appeal to the U.S. Court of Appeals for the Ninth Circuit.
The case involves the FDCPA requirement in 15 U.S.C. §1692g(a) for “a debt collector” to send a validation notice either in “the initial communication” or “[w]ithin five days after the initial communication with a consumer in connection with the collection of any debt.” The issue before the Ninth Circuit is whether the requirement only applies to the first debt collector that contacts a consumer to collect a particular debt or to each debt collector that contacts the consumer to collect that debt.
The plaintiff in the case claimed that the letter she received from the defendant containing the validation notice violated the FDCPA because the notice did not include all required information. The defendant argued that it was not subject to the FDCPA validation notice requirement because its letter was not the “initial communication” the plaintiff received about the debt. According to the defendant, because the debtor had previously received a validation notice complying with the FDCPA from another debt collector, the defendant was a subsequent debt collector that had no obligation to comply with the validation notice requirement.
The district court granted summary judgment to the defendant, concluding that the validation notice requirement did not apply to the defendant’s letter because it was not the initial communication that the plaintiff had received about the debt. According to the district court, the FDCPA’s plain text contemplated only one initial communication with a debtor on a given debt, meaning the initial communication from the initial debt collector.
In its amicus brief in support of a reversal of the district court’s decision, the CFPB argues that each debt collector that contacts a consumer — not just the first debt collector that attempts to collect a particular debt — must send a validation notice that complies with the FDCPA. According to the CFPB, §1692g(a) can naturally be read to apply to the initial communication of any debt collector, initial or subsequent, that contacts a consumer about a debt.
The CFPB also argues that for §1692g(a) to serve its purpose, which was to eliminate the problem of debt collectors attempting to collect the wrong amounts from the wrong consumers, it must apply to both initial and subsequent debt collectors. Finally, the CFPB asserts that to the extent there is any ambiguity in §1692g(a), the court should defer to the views of the CFPB and FTC (which shares concurrent enforcement authority with the CFPB).
The American Bankers Association has sent a second comment letter to the CFPB in which it recommends that the Office of Management and Budget not approve the CFPB’s proposed debt collection survey. The CFPB initially announced its plans to conduct the survey in a Federal Register notice published on March 7, 2014 and set a May 6, 2014 deadline for comments. In a notice published in July 2014, the CFPB announced that it would continue to take comments until August 22, 2014.
In the ABA’s initial comment letter, which was sent jointly with the Consumer Bankers Association, the ABA applauded the CFPB’s collection of information regarding actual consumer experiences with the debt collection industry, but expressed concern that as currently formatted, the survey would likely fall short of producing reliable and representative data that can be used to inform any related rulemakings or other agency actions.
In its new letter, the ABA comments that the CFPB’s revised survey submitted for OMB approval “only perfunctorily responds to stakeholder comments and reflects very little change to the Survey instrument. It fails to resolve material design and methodological shortcomings necessary to ensure that the data generated by the Survey will have practical utility for the debt collection rulemaking.”
The ABA is concerned that the revised survey still does not differentiate between consumer experiences with first-party creditors and third-party collectors. In its initial comment letter, the ABA suggested that the survey should be administered exclusively online. In the new comment letter, the ABA calls the CFPB’s plan to provide an online option as a way of responding to the ABA’s suggestion an “illusory change” that “demonstrates [the CFPB's] indifference to stakeholder feedback.”
Finally, the ABA comments that the revised survey “does not reflect a commitment to transparency, public participation, and collaboration.” It observes that the CFPB has not made a commitment to sharing survey results with stakeholders or adequately addressed the risk of response bias described in the ABA’s initial letter.
The ABA’s new letter includes the following pointed statement:
Given the Bureau’s track record of manipulating the public release of research rather than pursuing a peer review process, these methodological shortcomings risk being overwhelmed by the agency’s spin at time of publication. As a consequence, the impact of potential sources of error very likely will be under-disclosed and under-reported.
We hope the CFPB will revisit the survey in light of the legitimate concerns raised by the ABA.
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.
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.
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.
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.
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.