CFPB Monitor

News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

CFPB increases appraisal requirement exemption threshold

Posted in Mortgages

The CFPB, Fed, and OCC have adjusted the threshold for smaller loans that are exempt from the appraisal requirement for “higher priced mortgage loans.”  The appraisal requirement became effective January 18, 2014, and the exemption, which is subject to annual adjustment for inflation, currently applies to credit extensions of $25,000 or less.

Effective January 1, 2015 through December 31, 2015, the exemption threshold is increased to $25,500.

NY regulator settles lawsuit filed using Dodd-Frank authority

Posted in UDAAP

A settlement has been announced in the lawsuit filed by Benjamin Lawsky, the Superintendent of the New York Department of Financial Services, using his Dodd-Frank Section 1042 authority.  Section 1042 allows state attorneys general and regulators to bring civil actions for violations of Dodd-Frank’s prohibition of unfair, deceptive, or abusive acts or practices.  Mr. Lawsky’s lawsuit represented the first lawsuit by a state regulator using his Section 1042 authority. (We have also been following several lawsuits filed by state AGs using their Section 1042 authority.)

In his lawsuit, which was filed in a New York federal court against a large subprime auto lender and its CEO, Mr. Lawsky alleged that the lender had systematically concealed from its customers the fact that they had refundable positive credit balances and failed to make refunds except when expressly requested by a customer.  In addition, the complaint alleged that the lender submitted false unclaimed property reports to the New York State Comptroller’s Office denying that certain customers had positive credit balances. It also alleged that the lender lacked basic information security measures, thereby endangering the security of its customers’ personally identifiable information. The complaint also included the allegation that the lender had violated TILA by calculating interest based on a 360-day year and applying the resulting daily interest rate to its customers’ loan accounts each of the 365 days during the year. According to the complaint, this practice resulted in customers paying interest in excess of the disclosed APR.

In the consent judgment submitted to the court for approval, the defendants admit to violations of Dodd-Frank, TILA and New York law.  The consent judgment requires the defendants to pay a $3 million civil penalty, refund all positive credit balances and interest charged in excess of the disclosed APR, plus nine percent interest on such amounts.  Following the sale of the lender’s remaining loan portfolio by the receiver appointed by the district court, the consent judgment requires the lender to surrender its licenses in all states.  If a customer is found by the DFS to have suffered identity theft within two years of the consent judgment that is traceable to the lender’s conduct, the consent judgment requires the individual defendant to pay such customer any damages resulting from the identity theft and provide free credit reporting to such customer for two years.

 

Prepaid card proposal published

Posted in Prepaid Cards

With the publication of the CFPB’s proposed prepaid card rule in today’s Federal Register, the clock is now running on filing comments.  Comments must be filed on or before March 23, 2015.  The CFPB had issued the proposal on November 13.  As published in the Federal Register, the proposal is reduced from its original length of 870 pages to a “mere” 234 pages.

For a summary of the proposal, see our legal alert.

Banking industry trade groups comment on Defense Department’s proposed amended MLA regulations

Posted in Military Issues

The American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, National Association of Federal Credit Unions, and Association of Military Banks of America have submitted a 59-page letter commenting on the Department of Defense’s proposed revisions to its Military Loan Act regulations.

The proposal, which was issued in September to implement MLA amendments made by the 2013 Defense Authorization Bill, would significantly expand MLA coverage to include all payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards.  In its current form, the MLA rule covers only three types of consumer credit: closed-end payday loans with a term of 91 days or fewer in which the amount financed does not exceed $2,000; closed-end vehicle title loans with a term of 181 days or fewer, and closed-end tax refund anticipation loans.  The 2013 MLA amendments also included a new civil liability provision that allows private actions for MLA violations to be filed in federal court.

The trade groups key comments include the following:

  • While data may support a tailored modification of MLA coverage, there is no data or evidence to support the proposed broad expansion of covered “consumer credit” from its current definition to capture nearly all non-mortgage, non-purchase money consumer credit (i.e. “mainstream depository institution products, including credit cards and affordable small-dollar loans”).  Accordingly, the trade groups recommend that the DoD should expand coverage as needed to address efforts at evasion but in a targeted fashion.  Specifically the trade groups recommend that the DoD broaden coverage by eliminating the current parameters in the existing definition of covered consumer credit related to loan terms and amount and the restriction to closed-end credit.
  • The DoD should exempt depository institutions “in light of its true targeted interest in products specialized in by non-depository institutions and in view of the recent legislative and regulatory enhancement of consumer protection oversight and regulation of depository institutions.”
  •  The proposed “military annual percentage rate” cap inflates and distorts the cost of credit and is particularly problematic for open-end credit, especially credit cards.
  • The prohibition against pre-dispute arbitration agreements “means that servicemembers and their spouses and dependents may lose that option as a means to resolve any dispute.  This fair and typically quicker alternative to litigation is particularly convenient to servicemembers who are deployed away from their civilian home or abroad, where they lack access to courts.”
  • The proposal would require lenders to access the DoD’s Servicemembers Civil Relief Act database for virtually all consumer credit loans rather than only when active military personnel self-identify as they currently must do.  The greatly increased volume of inquiries to the database, which today is frequently unavailable, will cause consumer credit to come to a halt when access to the database is unavailable.

 

 

 

CFPB settles with military base retailer and related companies for alleged unlawful debt collection practices

Posted in CFPB Enforcement, Debt Collection, Military Issues

As part of this week’s flurry of enforcement-related announcements, the CFPB announced the settlement of a lawsuit filed jointly with the Attorneys General of North Carolina and Virginia  against Freedom Stores, Inc. (Freedom), a retailer selling merchandise online and in retail stores located near military bases that offered financing through retail installment contracts (RIC), for alleged unlawful debt collection practices.  The complaint, which was filed in a Virginia federal district court, also named as defendants: Freedom Acceptance Corporation (FAC), a company that purchased RICs from Freedom, Military Credit Services LLC (MCS), a company catering to military customers that extended revolving credit for purchases from retailers in MCS’s retailer network, the individual who served as Freedom’s president, and another individual who served as president of FAC and MCS.

Under the consent order agreed to by the parties and submitted for court approval, the defendants are required to provide over $2.5 million in consumer redress (in the form of refunds and balance reductions) and pay a $100,000 civil penalty to the CFPB.  The consent order also enjoins the defendants from committing future similar violations, establishes procedures the defendants must follow to avoid future violations, and provides for compliance monitoring by the CFPB.

The complaint alleges that FAC and MCS engaged in conduct that violated the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices.  The UDAAP counts are asserted by the CFPB and the state AGs under Section 1042 of Dodd-Frank.  FAC and MCS were alleged to have committed UDAAP violations by engaging in the following conduct:

  • FAC and MCS were alleged to have filed debt collection lawsuits in Norfolk, Virginia against consumers who signed credit agreements “far away” from Norfolk and resided “far away” from Norfolk when the lawsuits were commenced.  The complaint alleges that the companies’ practice of filing of lawsuits “in a distant forum” was both an “unfair” and an “abusive” practice.  These UDAAPs claims are particularly noteworthy in two respects.First, the FDCPA requires “debt collectors” to bring non-mortgage collection actions only in the judicial district  in which the contract was signed or in which the consumer resides when the action is commenced.  The CFPB’s UDAAP claim appears to be an attempt to extend this FDCPA requirement to creditors collecting their own debts and could signal that such a requirement will be part of a proposed debt collection rule that the CFPB  is expected to issue.Second, the CFPB has so far been very sparing in its use of the “abusive” prong of its UDAAP authority, using it in only three enforcement actions (Ace Cash Express, American Debt Solutions and CashCall).  Thus, the CFPB’s decision to deem the defendants’ alleged conduct “abusive” represents a significant development.
  • When consumers elected to make payments through military allotments, FAC and MCS also allowed consumers to authorize withdrawals from a bank account as a back-up payment method.  The complaint alleged that because the companies’ payment processor relied on reports that sometimes incorrectly predicted allotments would not go through or would be insufficient to make a full payment, many consumers had their payments taken from both their allotments and bank accounts in the same month, often without their knowledge and before the payment due date.  This practice was alleged to be “unfair.”
  • FAC and MCS were alleged to have contacted servicemembers’ commanding officers and requested they intervene in obtaining  repayment, doing so in reliance on a provision in the credit contracts that purported to provide permission for the companies to contact third parties, including their chain-of-command, if they fell behind in payments.  The complaint alleged that because many consumers were unaware of such provisions or if they were aware, had no opportunity to bargain for their removal, the companies engaged in an “unfair” practice by contacting third parties.  (The consent order requires a written consent for the companies to contact a consumer’s chain-of-command that must be on a page separate from all other contract terms, separately signed by the consumer, and clearly and conspicously disclose that the transaction is not conditioned on providing consent.)
  • In instances where a third party such as a family member had authorized a one-time payment on behalf of a consumer, FAC and MCS were alleged to have charged the third party’s bank account or credit card for additional payments.  The complaint alleged that the companies engaged in an “unfair” practice by taking unauthorized payments from such third parties.

The complaint sought to hold the individual defendants liable for all of FAC’s and MCS’s alleged UDAAP violations as “covered persons” under Dodd-Frank.  The complaint also included claims asserted only by the CFPB that the ACH authorization forms used by Freedom violated the Electronic Fund Transfer Act and the open-end credit agreements used by MCS violated the Truth in Lending Act.  In addition, the complaint, in claims asserted only by the North Carolina AG, alleged violations of the North Carolina Debt Collection Act by FAC and MCS, and violations of the North Carolina Unfair and Deceptive Practices Act by FAC, MCS and the individual defendants.

The defendants released the following statement regarding the settlement:

“The CFPB has had a special focus on companies that operate in the military community since its 2011 founding, which led to the inquiry regarding Freedom Stores.  We support the Bureau’s efforts to root out bad actors in this space, but by the CFPB’s own admission, the complaint against Freedom Stores, is not a finding or ruling that the defendants have actually violated the law.”

“Regardless, Freedom Stores has voluntarily agreed to forgive more than two million dollars in loans and provide more options regarding where default litigation will be conducted.  In addition, we are redoubling our efforts to educate customers on money management fundamentals through our online MoneySKILL course.  More than 1000 customers have already completed the course, receiving a $100 Freedom Store gift card.  In 2015, we have set the goal of 5000.  We have also put new safeguards in place to ensure customers are charged for loan payments only as expected and will be creating a blue ribbon internal advisory board of former military personnel and other experts who will help guide our policies.  We are proud to make these changes to ensure we are providing the highest level of service to our customers.”

“Freedom Stores is a family-owned business that has proudly served the needs of those who serve in uniform for more than 31 years.  Approximately half of our employees are spouses of military personnel or retired from the military, so we are especially sensitive to their needs. We intend to continue to set the standard for excellence in all we do.  We are honored to meet the needs of those who serve.”

 

 

CFPB soliciting suggestions for its amicus brief program

Posted in CFPB General

The Consumer Law & Policy Blog has reproduced a copy of a letter sent yesterday by the CFPB seeking suggested cases for the CFPB’s amicus brief program.  The letter indicates that the amicus program has so far filed 14 amicus briefs in the federal courts of appeals and has worked closely with the Solicitor General’s Office on several amicus briefs in the U.S. Supreme Court.

The letter, which is not posted on the CFPB’s website, apparently was sent to a list of recipients selected by the CFPB.  In the letter, the CFPB states that it seeks the case recommendations of such recipients “as important stakeholders in the area of consumer finance.”  One wonders to whom the CFPB sent this letter in which it appears to be trolling for more opportunities to submit amicus briefs.  I’m not aware of any industry people who received this letter.

CFPB report highlights inadequate disclosure of campus financial products

Posted in Campus Financial Products

In its fifth annual report on college credit card agreements, the CFPB takes financial institutions as well as colleges and universities to task for failing to adequately disclose their marketing agreements for campus financial products.  The annual report is required by the CARD Act.

The CARD Act requires institutions of higher education to disclose publicly their credit card marketing agreements.  The CFPB “found little indication of institutions proactively disclosing their credit card agreements.”  The report states that the CFPB examined agreements covering 35 institutions and “[f]or the overwhelming majority of institutions within the sample, our review identified no information on their websites regarding the relevant agreement.”  According to the CFPB, these results “suggest that institutions of higher education are generally not choosing a method of disclosure whereby students and members of the public can reasonably ascertain whether an institution has a current affinity arrangement.”

In the CFPB’s report on campus financial products released in September 2013, the CFPB found that campus financial product marketing arrangements have shifted away from credit cards towards student checking and debit or prepaid cards.  In the new report, the CFPB states that “there are now more college debit and prepaid card agreements than credit card agreements.”  As it did in the 2013 report, the CFPB once again suggests that the shift is the result of CARD Act and other federal law restrictions on credit card affinity arrangements.  The CFPB’s press release on the new report notes that marketing arrangements have shifted “from credit cards toward other products such as debit and prepaid cards, which generally have fewer sunshine protections” and includes the following quote from Director Cordray: “Today, financial institutions are cutting more deals with colleges and universities to market student banking products that require less disclosure.”

In December 2013, the CFPB urged financial institutions to publicly disclose on their websites their marketing agreements for campus financial products other than credit cards, such as deposit accounts, prepaid cards and financial aid disbursement accounts.  In the new report, the CFPB states that “as a general matter, issuers and institutions [of higher education] have not chosen to disclose in a readily accessible manner these deposit account, debit card, or prepaid card agreements.”  The CFPB is apparently criticizing financial institutions for not disclosing these agreements on their websites.

The CFPB’s apparent position that adequate public disclosure of campus agreements requires the agreements to be posted on a website finds no support in applicable law.  The Official Commentary to Regulation Z  (Comment 1026.57(b)-1) expressly states that colleges and universities can satisfy the CARD Act requirement for public disclosure of their credit card marketing agreements either by posting the agreements on their websites or by making the agreements available on request, as long as the procedures for requesting the documents are reasonable and free of cost.  And unlike credit cards, there is no federal law requirement at all for financial institutions to publicly disclose their marketing agreements or similar information for other financial products.

The CFPB’s December 2013 call for disclosure was accompanied by the threat that a financial institution’s failure to disclose its campus marketing agreements could make it a target for examination and the new report includes another veiled threat.  The CFPB concludes the new report’s final section on compliance activity with the following statement: “Given the lack of transparency of these arrangements, as well as compliance problems related to institutions with significant market share, the Bureau will continue to carefully assess risks to consumers.”

 

Banking trade groups comment on CFPB’s proposed no-action letter policy

Posted in CFPB General, Technology

The American Bankers Association, American Bankers Insurance Association and Consumers Banking Association have submitted a joint comment letter on the CFPB’s proposed policy on issuing “no-action” letters for innovative financial products or services.

The trade groups expressed the overall concern that the proposal will not “serve as a viable approach to alleviating regulatory uncertainty” because it is “limited in its applicability and yet fraught with perils for the requester.”  The specific concerns raised in their comment letter included the following:

  • The information required by the process for requesting a no-action letter puts the requester “at the risk of providing a roadmap for inventive legal attack against the proposed product” by asking the requester to describe any creative liability that might attach to the new product.  The trade groups believe the process should be re-cast to emphasize how the new product’s features vary from products described by the existing rules and why its features achieve the consumer protections pursued by existing rules.
  • In its proposal, the CFPB stated that it plans to issue no-action letters “only rarely and on the basis of exceptional circumstances.”  The trade groups are concerned that this approach will discourage requests and believe the CFPB’s staff should instead pledge to provide a timely response to all requests, giving reasons for their action to grant or deny the request.
  • As proposed by the CFPB, a no-action letter would not provide an interpretation of a statute or regulation nor a safe harbor from the CFPB’s supervisory and enforcement authority.  It also could be modified or revoked by the CFPB at any time.  In the trade groups’ view, the extremely limited scope of a no-action letter “creates virtually no incentive for innovators to undertake the request process.”  The changes they recommend include an expansion of a letter’s scope “to assure against not only Bureau enforcement or supervisory criticism, but to preclude enforcement or supervisory criticism by any agency authorized to conduct such activities under the DFA with respect to institutions in its respective jurisdiction.”
  •  The CFPB indicated in the proposal that its disclosure of a no-action letter request and any data received from the requester in connection with a request is governed by the CFPB’s rule regarding disclosure of records and information.  As the CFPB observed, that rule generally requires the CFPB to disclose records unless they are subject to a FOIA exemption or exclusion.  The trade groups seek improved assurance of confidentiality for information submitted by requesters, commenting that the CFPB’s disclosure of the detailed information and legal analysis that the proposal would require requesters to provide could enable competitors to exploit the idea or add compliance or litigation risk.

 

CFPB sues company for alleged credit card sham

Posted in CFPB Enforcement

A new lawsuit filed by the CFPB alleges that a Texas-based company, Union Workers Credit Services, deceived consumers into paying fees to sign up for a “platinum card” that purported to be a general-use credit card but, in actuality, could only be used to buy products from the company.  The CFPB’s complaint, filed in a Texas federal district court, seeks restitution for victims, a civil penalty, and an injunction against the company.

The complaint alleges that the company engaged in deceptive conduct in violation of the CFPA prohibition of unfair, deceptive or abusive acts or practices by representing, expressly or impliedly, in its advertising and marketing that consumers would receive a general-use credit card if they enrolled and paid the membership fee.  The CFPB claims the company also engaged in deceptive conduct by falsely advertising an affiliation with labor unions.  According to the complaint, the company’s website contained a banner that included images of police, firefighters, and medical workers and its online application form sought information on applicants’ union affiliation and allowed them to select their union membership from a drop-down list.

The complaint also alleges that the company used consumer reports in violation of the Fair Credit Reporting Act and Regulation V.  According to the complaint, the company sent direct-mail prescreened credit offers that did not include the requisite prescreen opt out notice.

Congress votes unanimously to extend SCRA one-year foreclosure protection period

Posted in Military Issues

Congress has unanimously approved legislation to extend until January 2016 a provision of the Servicemembers Civil Relief Act (SCRA) that prohibits foreclosing on a servicemember’s house for one year following the servicemember’s return from active duty.  The CFPB has made SCRA compliance a priority issue.

Senator Sheldon Whitehouse proposed S.2404, known as the Foreclosure Relief and Extension for Servicemembers Act of 2014, last May.  The Senate approved the measure on December 11, and the House of Representatives approved the measure the following evening during a special 10-minute session.

“After fighting for our country overseas, our troops shouldn’t have to fight to keep a roof over their heads when they return home,” said Sen. Whitehouse in a press release. “Servicemembers returning from active duty often need time to regain their financial footing, particularly those in the National Guard and Reserves who give up their full-time jobs to fight for our freedom.  We should ultimately pass legislation to make this protection permanent, but I’m glad we were able to secure peace of mind for our veterans for one more year.”

Congress extended the protection period from three to nine months back in 2008 and then to one year in 2012.  Had Congress failed to act before the end of this year, the protection period would have reverted back to its pre-2008 level of three months.

In a letter dated December 4, the Financial Services Roundtable (FSR) encouraged congressional leadership to extend the protection for a minimum of one year, noting that a number of financial services companies had implemented a one-year protection period as a matter of company policy.  We, along with the FSR, applaud Congress for this legislation and fully expect President Obama to sign it into law.