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OIG updated work plan adds focus to information security, compensation, and distribution of civil penalty funds

Posted in CFPB General

The most notable items added by the Office of Inspector General (OIG) to its work plan, updated as of July 7, 2014, are audits of the CFPB’s information security program, pay and compensation program, and distribution of civil penalty funds.

Information Security

Pursuant to the Federal Information Security Management Act of 2002 (“FISMA”), each agency Inspector General must annually evaluate the agency’s information security program. OIG will implement the statutory requirements by auditing

  • the Bureau’s compliance with FISMA and related information security policies, procedures, standards, and guidelines; and
  • the effectiveness of security controls and techniques for a subset of the Bureau’s information systems.

Pay and Compensation

The same 2010 Dodd-Frank legislation (“Dodd-Frank”) that created the CFPB requires it to provide employee compensation and benefits that are, at a minimum, comparable to those of the Board of Governors of the Federal Reserve System. As part of OIG’s audit of the Bureau’s pay and compensation program for compliance, OIG will evaluate the controls around setting employee pay.

Distribution of Civil Penalty Funds

Civil money penalties assessed by the prudential bank regulators are payable to the U.S. Treasury. By contrast, civil penalties obtained by the CFPB in either administrative or judicial actions must be paid into a Civil Penalty Fund (the “Fund”) established by Dodd-Frank. The purpose of the Fund is primarily to compensate consumers harmed by activities for which the civil penalties were imposed. A secondary purpose, to the extent that victims cannot be located or payment to them is impracticable, is to finance consumer education and financial literacy programs.

Although an audit of this fund was previously reported as being completed and no longer a “work in progress,” it appears there is more work to be done. OIG will audit the internal controls related to the Fund and will assess

  • the effectiveness of internal controls surrounding the distribution of money to victims, payment of administrative costs, and financing of consumer education and financial literacy programs;
  • compliance with applicable policies and procedures.

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Posted in CFPB General

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CFPB obtains $10 million of relief for payday lender’s collection calls

Posted in CFPB Enforcement, Payday Lending

Yesterday, the CFPB and ACE Cash Express issued press releases announcing that ACE has entered into a consent order with the CFPB. The consent order addresses ACE’s collection practices and requires ACE to pay $5 million in restitution and another $5 million in civil monetary penalties.

In its consent order, the CFPB criticized ACE for: (1) instances of unfair and deceptive collection calls; (2) an instruction in ACE training manuals for collectors to “create a sense of urgency,” which resulted in actions of ACE collectors the CFPB viewed as “abusive” due to their creation of an “artificial sense of urgency”; (3) a graphic in ACE training materials used during a one-year period ending in September 2011, which the CFPB viewed as encouraging delinquent borrowers to take out new loans from ACE; (4) failure of its compliance monitoring, vendor management, and quality assurance to prevent, identify, or correct instances of misconduct by some third-party debt collectors; and (5) the retention of a third party collection company whose name suggested that attorneys were involved in its collection efforts.

Notably, the consent order does not specify the number or frequency of problematic collection calls made by ACE collectors nor does it compare ACE’s performance with other companies collecting seriously delinquent debt. Except as described above, it does not criticize ACE’s training materials, monitoring, incentives and procedures. The injunctive relief contained in the order is “plain vanilla” in nature.

For its part, ACE states in its press release that Deloitte Financial Advisory Services, an independent expert, raised issues with only 4% of ACE collection calls it randomly sampled. Responding to the CFPB claim that it improperly encouraged delinquent borrowers to obtain new loans from it, ACE claims that fully 99.1% of customers with a loan in collection did not take out a new loan within 14 days of paying off their existing loan.

Consistent with other consent orders, the CFPB does not explain how it determined that a $5 million fine is warranted here. And the $5 million restitution order is problematic for a number of reasons:

  • All claimants get restitution, even though Deloitte found that 96% of ACE’s calls were unobjectionable. Claimants do not even need to make a pro forma certification that they were subjected to unfair, deceptive or abusive debt collection calls, much less that such calls resulted in payments to ACE.
  • Claimants are entitled to recovery of a tad more than their total payments (including principal, interest and other charges), even though their debt was unquestionably valid.
  • ACE is required to make mailings to all potential claimants. Thus, the cost of complying with the consent order is likely to be high in comparison to the restitution provided.

In the end, the overbroad restitution is not what gives me most pause about the consent order. Rather, the CFPB has exercised its considerable powers here, as elsewhere, without providing context to its actions or explaining how it has determined the monetary sanctions. Was ACE hit for $10 million of relief because it failed to meet an impossible standard of perfection in its collection of delinquent debt? Because the CFPB felt that the incidence of ACE problems exceeded industry norms or an internal standard the CFPB has set?

Or was ACE penalized based on a mistaken view of its conduct? The consent order suggests that an unknown number of ACE collectors used improper collection practices on an unspecified number of occasions. Deloitte’s study, which according to one third party source was discounted by the CFPB for unidentified “significant flaws,” put the rate of calls with any defects, no matter how trivial, at approximately 4%.

Ironically, one type of violation described in the consent order was that certain collectors sometimes exaggerated the consequences of delinquent debt being referred to third-party debt collectors, despite strict contractual controls over third-party collectors also described in the consent order. Moreover, the entire CFPB investigation of ACE depended upon ACE’s recording and preservation of all collection calls, a “best practice,” not required by the law, that many companies do not follow.

Despite the relative paucity of problems observed by Deloitte, the good practices observed by ACE and the limited consent order criticism of formal ACE policies, procedures and practices, in commenting on the CFPB action Director Cordray charged that ACE engaged in “predatory” and “appalling” tactics, effectively ascribing occasional misconduct by some collectors to ACE corporate policy. And Director Cordray focused his remarks on ACE’s supposed practice of using its collections to “induc[e] payday borrowers into a cycle of debt” and on ACE’s alleged “culture of coercion aimed at pressuring payday borrowers into debt traps.” Director Cordray’s concern about sustained use of payday loans is well-known but the consent order is primarily about incidences of collector misconduct and not abusive practices leading to a cycle of debt.

CFPB rule-making is on tap for both the debt collection and payday loan industries. While enhanced clarity and transparency would be welcome, this CFPB action will be unsettling for payday lenders and all other financial companies involved in the collection of consumer debt.

We will discuss the ACE consent order in our July 17 webinar on the CFPB’s debt collection focus.

CFPB to hold July 17 field hearing on consumer complaints

Posted in CFPB General

The CFPB has announced that on July 17, 2014, it will hold a field hearing in El Paso, Texas on consumer complaints.  Director Cordray will be speaking at the event, which will also feature testimony from consumer groups, industry representatives, and members of the public. 

Given the CFPB’s practice of using field hearings as a forum to announce related CFPB developments, it is likely the event will include such an announcement.  As the CFPB is currently moving forward on a proposed small dollar loan rule, one possibility is that the CFPB will use the event to announce the release of a report on the payday loan complaints it has received.  The CFPB began taking such complaints in November 2013.  It has previously issued “snapshot” reports on other categories of complaints it has received, such as private student loan complaints and complaints from military servicemembers, but has not yet issued a report on payday loan complaints.

Another possibility is that the CFPB will announce a further expansion of its complaint system to include a new product or service, such as complaints about prepaid cards.  The CFPB is expected to issue a proposed prepaid card rule at the end of this summer.


The CFPB issues guidance on ensuring equal treatment for same-sex married couples

Posted in CFPB General

On June 25, 2014, the CFPB issued guidance setting forth basic principles on the issue of equal treatment for legally-married same-sex couples. The CFPB noted that this guidance was issued in response to the decision in United States v. Windsor, 133 S. Ct. 2675 (2013), in which the U.S. Supreme Court struck down as unconstitutional Section 3 of the Defense of Marriage Act (“DOMA”). Section 3 of DOMA provided: “In determining the meaning of any Act of Congress, or of any ruling, regulation, or interpretation of the various administrative bureaus and agencies of the United States, the word ‘marriage’ means only a legal union between one man and one woman as husband and wife, and the word ‘spouse’ refers only to a person of the opposite sex who is a husband or a wife.”

The CFPB stated that its guidance was for purposes of all statutes, regulations and policies enforced, administered or interpreted by the CFPB. It declared that, to the extent permitted by federal law and consistent with the legal position announced by the U.S. Department of Justice, it will be the CFPB’s policy to recognize all marriages valid at the time of the marriage in the jurisdiction where the marriage was celebrated. Thus, a person who is married in any jurisdiction will be regarded as married nationwide for purposes of the federal statutes and regulations under the CFPB’s jurisdiction regardless of the person’s place of residency. However, consistent with other federal agencies, the CFPB will not regard a person to be married by virtue of being in a domestic partnership, civil union or other relationship not denominated by law as a marriage.

Under this policy, the CFPB stated that it will use and interpret the terms “spouse,” “marriage,” “married,” “husband,” and “wife,” and similar terms relating to marriage or family status, to include same-sex marriages and married same-sex spouses. The CFPB stated that it will apply this policy to the Equal Credit Opportunity Act and Regulation B, the Fair Debt Collection Practices Act, the Interstate Land Sales Full Disclosure Act and Regulation J, the Truth in Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, the Bureau Ethics Regulations, and the Procedures for Bureau Debt Collection. As part of its discussion, the CFPB noted specific parts of each such statute or regulation that use words or phrases such as “spouse,” or “husband and wife,” and stated that it will apply this language to married same-sex couples and gender-neutrally.

CFPB Provides Guidance on Ability to Repay Rule Application to Assumptions of Residential Mortgage Loans

Posted in CFPB General, CFPB Rulemaking, Mortgages

On July 8, 2014 the CFPB provided guidance on the application of the Regulation Z ability to repay rule (section 1026.43) to assumptions of residential mortgage loans for purposes of clarifying the application of the rule in cases in which a relative acquires title to a security property upon the death of the borrower and wants to assume the loan, and also in similar situations. Creditors may rely on the CFPB interpretation under Truth in Lending Act section 130(f), which provides a safe harbor from TILA liability for actions taken or omitted in good faith in conformity with a CFPB rule, regulation or interpretation.

Prior CFPB guidance indicated that the ability to repay rule applied to refinancings and assumptions under Regulation Z sections 1026.20(a) and 1026.20(b), respectively. The CFPB notes that both industry and consumer advocates have expressed uncertainty regarding the application of the rule in cases in which a successor seeks to be added as an obligor or substituted for the current obligor on an existing mortgage. The CFPB describes a successor as a person who receives legal interest in a property, typically by a transfer from a family member, by operation of law upon another’s death, or under a divorce decree or separation agreement. Although the successor acquires title to the property, by virtue of the acquisition the successor does not become legally obligated on any existing mortgage loan. Last October, the CFPB addressed the obligations of servicers with regard to successors in Bulletin 2013-02, and while the CFPB provided guidance regarding assumptions it did not address the ability to repay rule. We previously reported on the Bulletin.

The CFPB notes that there can be significant consequences for a successor who is not able to become an obligor on an existing mortgage loan, and provides an example of a successor not being able to obtain a modification because he or she is not a party to the existing loan and cannot enter into a modification agreement. As the CFPB observes, if the ability to repay rule applies to a successor’s assumption of an existing mortgage loan, such an assumption is less likely to occur.

The CFPB interprets the ability to repay rule as incorporating the existing Regulation Z standard for transactions involving a change in obligors as set forth in section 1026.20(b) and, therefore, unless a change in obligors satisfies the definition of “assumption” under that section the change does not trigger the ability to repay rule requirements. The CFPB then notes that an “assumption” for purposes of section 1026.20(b) occurs when a creditor agrees in writing to accept a new consumer as a primary obligor on an existing mortgage loan, and the loan would constitute a residential mortgage transaction for that new consumer. Under Regulation Z, a residential mortgage transaction is a transaction in which a consumer finances the acquisition or initial construction of the consumer’s principal dwelling.

The CFPB interprets the ability to repay rule as not applying when a creditor agrees in writing to allow a successor to become the obligor on an existing mortgage loan because there is no assumption for Regulation Z section 1026.20(b) purposes. Because the successor had previously acquired title to the property, the transaction is not a residential mortgage transaction for the successor and, therefore, is not an assumption subject to the ability to repay rule.

The CFPB notes that the transaction still is a consumer credit transaction and is subject to other Regulation Z requirements, including the requirement to provide monthly statements under section 1026.41 and the requirements to provide notices of interest rate adjustments under sections 1026.20(c) and (d).

CFPB Issues Report on the Use of Remittance Histories in Credit Scoring

Posted in Credit Reports, Remittance Transfers

On July 3rd, the CFPB released a Report on the Use of Remittance Histories in Credit Scoring (the “Report”). Section 1073(e) of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the CFPB Director to study the feasibility of and impediments to using remittance transfer information (i.e., information regarding electronic fund transfers made by U.S. consumers to recipients abroad) in credit scoring, ostensibly with the intention of determining the utility of such information as a way to enhance such consumer credit scores, and/or increase the numbers of persons for whom such scores could be assigned. The CFPB issued a report in fulfillment of that requirement in July, 2011.

In that report the CFPB stated it would conduct additional research to better explore the potential for remittance information to enhance credit scores, either by: (i) improving the ability of the credit scores to more accurately predict credit risk, or (ii) raising the scores of those consumers who send remittance transfers. This new Report discusses the CFPB’s empirical research efforts and results to date specific to these topics.

Regarding the first topic, the CFPB’s analysis suggests that remittance history information would provide insufficient additional benefit to the predictiveness of a credit scoring model to permit scores to be generated for consumers whose credit file alone would otherwise be unscorable.

With respect to the second topic, the Report concludes that it is unlikely that including remittance transfer information in a credit scoring process will increase the credit scores of consumers who send remittance transfers. In fact, the inclusion of such information was seen to have, if anything, the opposite effect, though the reasons for such results were seen as having less to do with the remittance information itself as potentially other selection effects.

In the course of its analysis of the second topic, the CFPB found that the observed credit predictive value of remittance transfer information varied according to the locations to which the remittances were actually sent. This finding led the CFPB to warn of a potential fair lending danger in using such geographic destination information for credit scoring models or otherwise in making credit decisions, in that such use may have a disproportionately negative impact on certain racial or national origin groups, and that a lender’s consideration of the geographic destination of an applicant’s remittances could itself constitute discrimination based on national origin.

OIG finds flaws in approval process used for CFPB headquarters renovation

Posted in CFPB General

The ballooning cost estimates for renovating the CFPB’s Washington, D.C. headquarters was the subject of verbal sparring between Director Cordray and Republican Congressmen during Director Cordray’s most recent appearance before the House Financial Services Committee.  That sparring is likely to become even more heated as a result of a letter issued earlier this week by the Office of Inspector General (OIG) for the Fed and CFPB evaluating the CFPB’s renovation budget. 

The OIG evaluation was requested by Republican Congressman Patrick McHenry, who chairs the Committee’s Subcommittee on Oversight and Investigations.  The letter indicates that the CFPB’s approval processes require major investments to be reviewed by the CFPB’s Investment Review Board (IRB) and while IRB approval is not necessary for the CFPB to include a major investment in its budget, such approval is needed for budgeted funds to be available for expenditure.  To obtain IRB approval, a CFPB program office must complete an IRB “business case” which, according to the CFPB’s internal guidance for making a “sound business case,” requires consideration of alternatives, including a comparison of the costs and benefits of alternatives and the rationale for the investment.  It also requires a return on investment to be shown and stresses the importance of a quantitative analysis. 

The OIG found that that CFPB did not follow all of its internal guidance when completing the business case for the renovation.  By way of example, the OIG found that while the CFPB listed alternatives in its business case, it did not complete any analyses of those alternatives and did not include any quantitative information or calculations related to a return on investment.  The OIG was informed by CFPB officials that the IRB approved the business case without such information “because funding approval was viewed as a formality given that the decision to proceed with the renovation had already been made.”  The CFPB, however, was unable to locate for the OIG any documentation of the decision to fully renovate the building. 

The OIG observes that “while the decision to renovate may pre-date the current IRB policies, these policies were in place when the business case was submitted for funding approval.”  Although the OIG states that it could not conclude that a complete analysis would have changed the decision to approve funding, it comments that without such an analysis, “the value of the IRB process as a funding control is diminished and a sound business case is not available to support the funding of the renovation.”  The OIG further comments that “expected cost information is not available as a baseline to facilitate management of changes in estimated renovation costs.”


Industry trade groups urge OMB not to approve CFPB arbitration telephone survey

Posted in Arbitration

Three prominent industry trade groups are urging the Office of Management and Budget (OMB) not to approve the CFPB’s proposal to conduct a national telephone survey of 1,000 credit card holders as part of its study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services. 

After releasing its initial proposed survey in June 2013, the CFPB revised the proposed survey in May 2014 based on the comments it received on the initial survey.  In its Federal Register notice announcing the revised survey, the CFPB indicated that the survey was intended to 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. 

While noting their appreciation of the CFPB’s efforts to incorporate the comments it received on its initial proposed survey, the American Bankers Association, the Consumer Bankers Association and the Financial Services Roundtable (Associations) state in their comment letter that they “strongly recommend that OMB not approve the [revised] proposal because it will not produce information of practical utility, remains materially flawed, and is inconsistent with the statutory mandate.”  The CFPB’s arbitration study is mandated by Section 1028 of the Dodd-Frank Act, which authorizes the CFPB to “prohibit or impose conditions or limitations on the use of” mandatory arbitration agreements if it finds that doing so is “in the public interest and for the protection of consumers.”  

According to the Associations, for responses to the proposed survey to be meaningful, the CFPB must obtain other information that cannot be reliably obtained through a telephone survey.  Examples of such other information given by the Associations are the reasons people may not be aware of their dispute resolution rights, the reasons such rights are not a factor in choosing a credit card, and consumer dispute resolution preferences.  The Associations assert that such reasons and preferences are materially important to the policy consideration of whether use of mandatory arbitration would be “in the public interest and for the protection of consumers” and without such information, the CFPB’s analysis will lack the factual basis “required to consider how consumers are or would be affected and the public interest best served.”  They further assert that because of its flaws, the proposed survey does not satisfy the standard for OMB approval which requires OMB to consider whether an agency’s proposed information collection “is necessary for the performance of the functions of the agency, including whether the information shall have practical utility….” 

The Associations recommend that the CFPB spend its resources on obtaining more useful and complete information through other means, such as consumer focus groups.  While asserting that the proposed survey is fundamentally inadequate, the Associations also suggest improvements to the survey. 

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 I 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.

GAO report recommends increased CFPB participation in virtual currency efforts

Posted in Hot Issues

In a report issued last week on virtual currencies, the Government Accountability Office recommended increased CFPB participation in interagency efforts related to such currencies. 

The report, entitled “Virtual Currencies: Emerging Regulatory, Law Enforcement, and Consumer Protections Challenges,” reviews various actions that federal financial regulators and law enforcement agencies have taken related to the emergence of virtual currencies.  Those actions include the issuance of regulatory guidance and the investigation of crimes and violations that have been facilitated by the use of virtual currencies.  

The report observes, however, that interagency working groups have not focused on consumer protection issues.  It states that “because virtual currency systems provide a new way of making financial transactions, and the CFPB’s responsibilities include ensuring that consumers have timely and understandable information to make responsible decisions about financial transactions,” the CFPB “might be a relevant participant in a broader set of collaborative efforts on virtual currencies.”  The report further states that without CFPB participation, “interagency groups are not fully leveraging the expertise of the lead consumer financial protection agency, and the CFPB may not be receiving information that it could use to assess the risks that virtual currencies pose to consumers.” 

The report includes the CFPB’s letter responding to the report in which in concurs with the GAO’s recommendations that the CFPB (1) identify which interagency working groups could help the CFPB maintain awareness of emerging consumer protection issues or would benefit from CFPB participation, and (2) decide, in coordination with the agencies already participating in efforts related to virtual currencies which efforts the CFPB should participate in. 

In November 2013, Ballard Spahr partner Mercedes Kelley Tunstall, who leads the firm’s Privacy and Data Security Group, testified on virtual currencies before two subcommittees of the U.S. Senate Committee on Banking, Housing and Urban Affairs.  Mercedes advises banking clients nationwide on payments and cybersecurity issues, including those involving virtual currencies.  At the hearing, she addressed the commercial viability of digital currencies, regulatory options, and how to respond to other emerging virtual currencies.