CFPB Monitor

News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

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.

Disparate impact cases against HUD: Illinois federal court issues decision; update on D.C. case

Posted in Fair Lending

Because of their potential impact on the CFPB’s conclusion that the ECOA and Regulation B encompass disparate impact claims, we have been following two insurance industry lawsuits involving a challenge to HUD’s Federal Housing Act (FHA) disparate impact rule, with one lawsuit filed in federal district court in D.C. and the other filed in an Illinois federal district court.

Last week, the Illinois federal court ruled on the summary judgment motion filed by the plaintiff Property Casualty Insurers Association of America, whose members sell homeowners insurance, and defendant HUD’s motion to dismiss or for summary judgment.  The plaintiff had alleged that the HUD rule violates McCarran-Ferguson as applied to the provision and pricing of homeowners insurance.  McCarran-Ferguson generally reserves the regulation of the insurance business to the states and provides that a federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law involved “specifically relates to the business of insurance.”  Under McCarran-Ferguson, a federal law is essentially “reverse-preempted” if it “directly  conflict[s] with state regulation” of the business of insurance or when “application of the federal law would frustrate any declared state policy or interfere with a State’s administrative regime.”  Humana Inc. v. Forsyth, 525 U.S. 299 (1999).  The plaintiff also claimed that (1) the disparate impact rule was promulgated in violation of the Administrative Procedure Act (APA) in that HUD failed to give adequate consideration to the  insurance industry’s comments that application of the rule would violate McCarran-Ferguson, and (2) the rule’s burden-shifting framework is contrary to law.  

With regard to the plaintiff’s McCarran-Ferguson preemption claim, the district court dismissed the claim for lack of subject matter jurisdiction because it found that the claim was not ripe.  According to the court, the claim was “best left for a concrete dispute challenging a particular insurance practice.”  With regard to the plaintiff’s APA claim, the court held that HUD acted arbitrarily and capriciously in failing to (a) provide a “reasoned explanation” for preferring a case-by-case approach to determining McCarran-Ferguson issues, (b) give adequate consideration to industry comments regarding the effect of the filed-rate doctrine, which precludes courts from changing rates filed with regulatory agencies, and (c) address industry’s concerns about the inappropriateness of applying disparate impact liability to insurers based on the fundamental nature of insurance.  In referring to the fundamental nature of insurance, the court observed that, “HUD made no effort to evaluate the substance of the insurance industry’s concerns, disregarding them merely because insurers would have an opportunity to raise their arguments as part of the burden-shifting framework.”  Accordingly, the court remanded the case to HUD “for further explanation.” 

Despite the case’s McCarran-Ferguson focus, the court’s ruling on the plaintiff’s challenge to the rule’s burden-shifting framework could have implications that extend beyond the insurance industry.  The plaintiff had argued that HUD’s more challenger-friendly framework was contrary to  the burden-shifting framework for disparate impact claims articulated by the U.S. Supreme Court in Wards Cove Packaging Co. v. Antonio, 490 U.S. 642 (1989).  In particular, the plaintiff noted that under Wards Cove, a challenger would have to attack a specific practice, rather than the decision making process as a whole.  A challenger would also have to show that the challenged practice resulted in a significant disparate impact, rather than just some disparate impact.  A challenger would have to carry the burden of proof at all times, rather than having the burden of proof shift on whether there is are legitimate business reasons for the practice.  A party whose practice was being challenged would not have to show that its legitimate business interest was ”essential” or “indispensible” but must prove its business interest was “necessary” under HUD’s framework.  And a challenger would have to show that any alternative was as “equally effective” as the challenged practice, rather than merely just articulating an alternative practice.  Nonetheless, according to the court, HUD’s framework was entitled to Chevron deference and reflected “HUD’s reasonable accommodation of the competing interests at stake.” 

The court noted that among the recent decisions that have applied the same approach adopted by HUD is the Fifth Circuit’s decision in Inclusive Communities Project v. Texas Dep’t of Housing and Community Affairs.  The petition for certiorari filed in that case in May 2014 by the Texas Department of Housing and Community Affairs is slated for consideration by the Supreme Court at its September 29 conference.  The case presents the Supreme Court with its third opportunity since 2012 to decide whether disparate impact claims are available under the FHA and (by analogy) the ECOA. 

The D.C. case challenging HUD’s disparate impact rule was filed in June 2013 by two insurance industry trade associations.  The complaint alleged that the text of the FHA does not proscribe facially-neutral practices that have discriminatory effects.  It also alleged that HUD rule is invalid as applied to insurance companies that issue homeowners insurance because it conflicts with McCarran-Ferguson.  On July 22, 2014, the district court heard oral argument on the plaintiffs’ summary judgment motion and HUD’s motion to dismiss or for summary judgment. 

As we have previously observed, if the district court in the D.C. action were to grant summary judgment to the plaintiffs solely on the basis that the HUD disparate impact rule is invalid under McCarran-Ferguson as applied to members of the plaintiff trade associations, its ruling would be inconsequential to lenders since it would not address whether disparate impact claims are cognizable under the FHA.  We had expressed concern that a decision by the Illinois district court invalidating the HUD rule on McCarran-Ferguson grounds might have prompted the district court in D.C. to base its ruling on McCarran-Ferguson grounds as well rather than address the broader issue of whether disparate impact claims are cognizable under the FHA.  The Illinois district court’s decision that McCarran-Fergusson issues are not ripe may now prompt the D.C. district court to reach that broader issue.

 

 

CFPB enforcement head underscores CFPB’s limited use of “abusive ” prong of UDAAP

Posted in CFPB Enforcement, UDAAP

Tony Alexis, the head of enforcement at the CFPB, spoke today in Chicago at a program sponsored by the Committee on Consumer Financial Services at the American Bar Association Section of Business Law’s Annual Meeting. The topic was the “Use of UDAP/UDAAP by Federal and State Regulators.” Mr. Alexis emphasized that the Bureau has very sparingly used the “abusive” prong of its UDAAP authority – in only three enforcement actions: (Ace Cash Express, American Debt Solutions and CashCall). There was an extended discussion of the CashCall action which is predicated on the CFPB’s claim that the payday loans were void under state law and that there was no merit to CashCall’s claim that the interest rate was lawful under tribal law which preempts state usury laws. It was pointed out by one of the other panelists that CashCall has a plausible argument to the effect that the loans were lawful. Where will the CFPB draw the line? Will they require that lenders disclose in writing any questions regarding the enforceability of provisions in the consumer contract?