The FTC released its annual Consumer Sentinel Network Data Book on February 27, 2014, providing national and state-by-state data on consumer complaints received by the FTC, all U.S. and Canadian Better Business Bureaus, the CFPB and other federal and state agencies in the previous year. For the second year in a row, the total number of complaints received exceeded 2 million, and the top three categories of complaints consisted of identity theft (290,056 complaints, or about 14% of the total), debt collection (204,644 complaints, or about 10%), and banks and lenders (157,707 complaints, or about 7%). Although identity theft remained the most complained-of category, the number of identity theft complaints decreased by over 20% from 2012, while the number of complaints about debt collection increased by 2.5% and the number of complaints about banks and lenders increased by over 15%.
Also on February 27, the PIRG released a report entitled “Debt Collectors, Debt Complaints” analyzing consumer complaints made to the CFPB and tracked in the CFPB’s Consumer Complaint Database. According to the PIRG report, although the CFPB only began accepting complaints about debt collection in July 2013, debt collection complaints have already outpaced complaints about bank accounts and credit cards and represent the second-highest volume of complaints received about any financial service between July 2013 and January 2014. (Consumers complained to the CFPB most about mortgages during that time period.) The PIRG reports that the CFPB received an average of 2,000 customer complaints about debt collection each month since July 2013.
The most common debt collection complaints reported to the CFPB involved attempts to collect debts that did not belong to the consumer (about 25% of the total), followed by repeated phone calls (about 13%) and failure to provide information sufficient to verify the debt (13%). Since July 2013, approximately 22% of complainants reported receiving relief in connection with their debt collection complaints. The majority of those consumers received non-monetary relief, such as stopping repeated phone calls. Approximately 16% of consumers who received responses to their debt collection complaints found the response unsatisfactory and continued to pursue their complaint with the CFPB.
The timing of the FTC and PIRG reports coincides with the close of the period for commenting on the CFPB’s debt collection Advance Notice of Proposed Rulemaking. In light of the fact that the CFPB has cited the high volume of debt collection-related complaints as a reason for its focus on the debt collection industry, the CFPB likely will use the reported increase in such complaints as further support for the need to impose debt collection regulations.
After hinting for months that it intends to use its enforcement powers to police lending in the higher education arena, the CFPB dropped the hammer on ITT Educational Services, filing suit against the for-profit college over alleged predatory lending practices.
On February 26, the CFPB filed a complaint against ITT in the Southern District of Indiana, accusing the educator of violating the Dodd-Frank ban on unfair, deceptive, or abusive practices by misleading borrowers about job placement rates and salaries after graduation, misrepresenting information about accreditation and the transferability of credits, and strong-arming students into high-interest loans that the company knew students would be unable to repay.
The complaint also alleges that ITT violated the Truth in Lending Act by failing to accurately disclose finance charges. In particular, the complaint alleges that ITT offered graduating students the ability to repay their loan balance in a lump sum with a discount applied, or in installments without a discount. The CFPB alleges that the “foregone discount” associated with the installment plan constituted a finance charge that should have been disclosed to the borrowers. The CFPB seeks an injunction against ITT’s allegedly improper acts, as well as unspecified civil penalties and restitution for all affected consumers.
The complaint highlights the broad scope of the enforcement authority claimed by the CFPB over for-profit education lending, as it asserts four separate ways in which ITT is subject to the jurisdiction of the Consumer Financial Protection Act. In particular, the CFPB asserts claims against ITT in its capacity as: (a) a lender (offering ITT loan products); (b) a broker (brokering loans by other lenders); (c) a financial advisory service (providing advice to students through ITT’s financial aid staff); and (d) a service provider to other lenders (based on its designing, operating, and maintaining a private loan program).
While this is the first enforcement action filed by the CFPB against a for-profit education company, other for-profit educators may also be the subject of CFPB scrutiny. “We believe ITT used high-pressure tactics to push many consumers into expensive loans destined to default,” Director Cordray said. “Today’s action should serve as a warning to the for-profit college industry that we will be vigilant about protecting students against predatory lending tactics.”
The CFPB is not alone in its investigation of for-profit education companies. Several state attorneys general have initiated investigations of the marketing practices of for-profit education companies, and the CFPB suit against ITT coincided with the announcement by the attorney general of New Mexico that he was filing suit against ITT for alleged misrepresentations with respect to its nursing program.
While the recent actions and pronouncements have focused on the for-profit education business, nonprofit schools are not necessarily immune from lawsuits of this nature.
On February 25, the Financial Literacy and Education Commission (FLEC) held a field hearing as part of America Saves Week to discuss financial education in the workplace, including how to deliver financial education to employees. During the field hearing, CFPB Director Richard Cordray, who also serves as the FLEC vice chair, delivered remarks encouraging employers to voluntarily implement financial education programs for their employees.
Cordray characterized himself and the CFPB as just another employer leading by example through implementation of a financial education program that the CFPB hopes will serve as a set of best practices for other employers. Cordray stated that implementing such programs is the “smart thing for their employees and their businesses.” Cordray also noted that, “We can insist that from this day forward, both the public sector and the private sector in the United States will commit themselves to the concept that American citizens need to be fully capable of economic self-governance, just as we expect them to be able to participate on full and equal terms in our democratic system of government.”
In recognition of the varying ability of employers to devote resources to financial education, Cordray described a range of cost-effective practices that could be implemented at “little or no cost”, that “go beyond the basics”, and that are “more innovative in their approach.” We applaud the CFPB for its initiative and hope employers will respond positively to the CFPB’s call to action.
The text of Cordray’s remarks is available here. On March 11, Ballard lawyers will be conducting a webinar on, “The CFPB’s Financial Literacy Mandate: What It Means for Industry.” The webinar will include a discussion of the CFPB’s expectations that financial institutions will not only participate in the delivery of financial education resources developed by the CFPB, but will also take an active role in developing and implementing their own financial literacy initiatives. More information and a registration form is available here.
Please join us in offering well wishes to Karen Morgan, a Mortgage Banking Group associate in the Washington, D.C., office who is leaving Ballard Spahr for a new opportunity at the Consumer Financial Protection Bureau. Karen will be Attorney-Advisor in the CFPB’s Office of Supervision Policy under its Division of Supervision, Enforcement, and Fair Lending.
Karen has been a highly valued member of the Group. She counsels national mortgage servicers and financial institutions on compliance issues and legal risks under state and federal financial services laws and regulations. In this regard, she has a very keen understanding of how the CFPB’s regulatory and enforcement actions affect the mortgage banking industry.
Karen has been a wonderful part of the team, and we will miss her considerable legal talents. But we know that those same talents will make her a tremendous asset to the CFPB.
According to a report by Kim Chipman and Carter Dougherty of Bloomberg, in a Q&A with state attorneys general that followed a speech today in Washington, D.C. to the National Association of Attorneys General, Director Cordray said that issues relating to payday and title loans and other small-dollar lending products will be “very much on the [CFPB's] plate” in 2014. Director Cordray is also reported to have said that scrutiny of such products “could easily be expanded to things like pawnbroking and overdrafts.”
The CFPB’s collaboration with state attorneys general was the focus of Director Cordray’s remarks today to the National Association of Attorneys General. Director Cordray discussed the role of such collaboration in various CFPB enforcement actions, including its actions against Payday Loan Debt Solutions and CashCall. He also commented that in addition to cases that have resulted in public filings, “our teamwork is much more deeply embedded” with the CFPB “speaking with, meeting with, or working with” state AG offices on a daily basis.
Director Cordray indicated that the CFPB was particularly interested in obtaining input from state AGs in connection with its debt collection advance notice of proposed rulemaking. He also identified “unfair and deceptive marketing practices by for-profit colleges” as an “area of mutual engagement” and noted shared concerns regarding online lending.
Consumer complaints also received considerable attention from Director Cordray. In particular, he described the portal that allows the CFPB to provide state agencies with “real time access” to complaints filed with the CFPB and allows regulators “to review complaints and even search and filter them by company, product, or issue.” He noted that the California, Virginia, Oregon, and Texas AGs, as well as banking regulators in fourteen states, were already partnering with the CFPB on sharing complaint information. Director Cordray urged “every attorney general to take advantage of this technology.”
The CFPB announced today that it has issued a Consent Order under which a Connecticut mortgage lender that self-reported potential RESPA Section 8 violations agreed to pay an $83,000 civil money penalty for such violations.
According to the CFPB’s press release, in addition to reporting its own potential violations, the lender provided information “related to the conduct of other actors” that facilitated other enforcement investigations. The CFPB stated that the lender’s self-reporting and cooperation were factored into the settlement, consistent with the CFPB’s June 2013 Responsible Business Conduct bulletin. Since the settlement only requires payment of the penalty, it is possible that as a result of its “good behavior,” the lender was able to avoid having to make any payments to affected borrowers.
The lender primarily provides loss-mitigation refinancing to distressed borrowers by offering them new loans with reduced principal amounts. At the closing of such a new loan, the lender would typically receive an origination fee and a loss-mitigation fee from the borrower. In 2010, the lender entered into an arrangement with a hedge fund to finance certain of its loans under which the lender gave the hedge fund a share of its revenues related to the mortgages, including a portion of the origination and loss-mitigation fees.
In 2011, the lender began using a new warehouse facility rather than the hedge fund to finance its loans. However, the lender continued to share revenues with the hedge fund on 83 loans. After the lender reported to the CFPB that its continued sharing of revenues with the hedge fund may have violated the RESPA Section 8 prohibition against fee splitting, the CFPB’s investigation confirmed that RESPA violations had occurred.
The settlement bars the lender from taking a tax deduction or credit for the civil money penalty or from seeking or accepting any reimbursement or indemnification for the penalty, including under any insurance policy. It also orders the lender to refrain from future violations of RESPA or other federal consumer financial laws.
The Independent Community Bankers of America (ICBA) wants to limit the application of a new Call Report requirement for banks to include a breakdown of their income from service charges on consumer deposit accounts.
In a notice published in the Federal Register on January 14, 2014, the Fed, FDIC and OCC (Agencies) announced that they are proposing to seek approval from the Office of Management and Budget for the new reporting requirement which would become effective March 31, 2015 for institutions with $1 billion or more in total assets that offer consumer deposit products. In response to the Agencies’ request for comments, ICBA submitted a comment letter on
February 13, 2014 in which it expressed its “grave concerns” about the burdens imposed by the new requirement and requested that it only be applied to institutions with consolidated assets of more than $10 billion.
The new requirement was among several Call Report changes first proposed in February 2013 by the Agencies under the auspices of the FFIEC. In addition to the Agencies, the CFPB is also a FFIEC member. According to the Agencies, the changes were proposed “for reasons of safety and soundness or other public purposes by the members of the FFIEC that use Call Report data to carry out their missions and responsibilities, including the agencies, the [CFPB], and state supervisors of banks and savings associations.” The Agencies indicate in the January 2014 notice that they are proposing to proceed with the new requirement despite the comment letters they received from numerous banking trade associations objecting to the February 2013 proposal.
To satisfy the new requirement, banks would need to separately itemize the following three categories of fees on deposit accounts “intended for individuals for personal, household, and family use”:
- overdraft-related service charges, which would include “service charges and fees related to the processing of payments and debits against insufficient funds, including ‘nonsufficient funds (NSF) check charges,’ that the institution assesses with respect to items that it either pays or returns unpaid, and all subsequent charges levied against overdrawn accounts, such as extended or sustained overdraft fees charged when accounts maintain a negative balance for a specified period of time, but not including those equivalent to interest and reported elsewhere [on the Call Report]
- monthly maintenance charges, including “charges resulting from the account owners’ failure to maintain specified minimum deposit balances or meet other requirements (e.g., requirements relating to transacting and to purchasing of other services), as well as fees for transactional activity in excess of specified limits for an account and recurring fees not subject to waiver
- ATM fees for transactions, including “deposits to or withdrawals from deposit accounts conducted through the use of ATMs or remote service units (RSUs) owned, operated, or branded by the institution or other institutions (but this category would not include ATM fees levied against deposit accounts maintained at other institutions for transactions conducted through the use of ATMs or RSUs owned, operated, or branded by the reporting institution)
In its letter, the ICBA states that the reporting of deposit services will distort fees paid by bank customers “because many of the fees paid relate to business or other non-consumer activities even though the account relationship may have originally started as being for household or family use or the relationship is of mixed use.” The ICBA also states that “disclosure of fees paid by bank customers is not relevant without also including disclosures about costs incurred by the bank related to servicing deposit accounts” and that, because service charges paid by consumers could be materially misstated, regulators may act improperly to the detriment of regulated institutions based on incorrect data.
Later this week, on March 1, the CFPB’s final rule defining larger participants of the student loan servicer market becomes effective.
We expect the CFPB to immediately begin examining entities that qualify as larger participants. Under the rule, the CFPB can supervise servicing of private and federal student loans by any nonbank entity that qualifies as a larger participant, regardless of whether it also offers or provides private student loans. The rule defines as “larger participants” servicers with an “account volume” exceeding 1 million.
We expect servicer exams to soon be followed by exams of service providers to student loan servicers. Because Dodd-Frank allows the CFPB to supervise, regardless of size, service providers to nonbanks it supervises, effective March 1, the CFPB will also be able to supervise all service providers to larger participant nonbank student loan servicers.
Briefs were filed last week by the “private” and “state” appellants in State National Bank of Big Spring, Texas, et al. v. Lew, et al., the case on appeal to the U.S. Court of Appeals for the D.C. Circuit that includes a challenge to the CFPB’s constitutionality. In August 2013, the district court granted the CFPB’s and other defendants’ motion to dismiss on standing and ripeness grounds.
The private appellants are State National Bank of Big Spring (SNB) and the two D.C. area non-profit organizations that joined SNB as plaintiffs when the original complaint was filed in June 2012. The state appellants are the eleven Republican state Attorneys General who subsequently joined as plaintiffs on the amended complaint filed in September 2012. In the original complaint, the private plaintiffs challenged the constitutionality of Director Cordray’s recess appointment and also alleged that the CFPB’s structure and authority violated the Constitution’s separation of powers. The AGs did not join that portion of the amended complaint and instead only joined a newly-added challenge that had nothing to do with the CFPB but dealt with their states’ status as potential creditors of a failed financial institution in the event of an “orderly liquidation” under Title II of Dodd-Frank.
The private appellants’ brief to the D.C. Circuit is primarily directed at challenging the district court’s holding that SNB lacked standing to challenge the CFPB’s constitutionality based on SNB’s alleged exit from the mortgage business and reduction in its remittance transfer business because of the increased risks and compliance costs resulting from the CFPB’s regulations and UDAAP authority. According to SNB, its alleged lost profits and increased compliance costs are sufficient injuries to establish standing.
According to the state appellants, because Title II gives the FDIC, as receiver for a failed financial institution in an orderly liquidation, discretion to discriminate among similarly situated creditors, all creditors lose the right to be repaid equally with other similarly situated creditors. In their brief to the D.C. Circuit, the state appellants argue that, contrary to the holding of the district court, this loss of legal rights represents an immediate injury to their states as potential creditors that confers standing and also makes their claims ripe.