This past May, we wrote about the $60 million Servicemembers Civil Relief Act (SCRA) settlement announced by the Department of Justice (DOJ) and Department of Education (ED) with a major student loan servicer and expressed our concern that the settlement could be seen as changing the rules for when all servicers must reduce the interest rate on a loan to a servicemember to 6 percent. Indeed, in commenting on the settlement (which resulted from a referral by the CFPB to the DOJ), Holly Petraeus, Assistant Director of the CFPB’s Office of Servicemember Affairs, indicated that the settlement “should serve as warning not just to the student loan servicing industry, but to all institutions that provide or service loans to the military.”
Last week, those rules did change for federal student loans with the ED’s issuance of a “Dear Colleague Letter” (GEN-14-16) that provides SCRA guidance for servicers of Direct Loan and Federal Family Education Loan Program (FFEL) loans. Under SCRA Section 527(b)(1), to obtain a rate reduction on a loan originated before the borrower entered military service, a servicemember must submit a written request for relief and a copy of the military orders calling the servicemember to military service. The relief request and orders must be submitted within 180 days of the servicemember’s termination or release date from military service.
The ED guidance largely tracks the requirements that the ED imposed on the major student loan servicer as part of the settlement. It dispenses with the need for an ED servicer to receive a request from a servicemember or a copy of the servicemember’s military orders before applying an SCRA rate reduction. According to the guidance, the ED is implementing new procedures under which servicers can use the Department of Defense’s Defense Manpower Data Center (DMDC) database to determine a servicemember’s eligibility for a rate reduction. The ED indicates that it has determined that the DMDC “provides sufficient supporting documentation of an individual’s eligibility for the SCRA rate limitation by identifying borrowers who are, or who have been, in military service and by confirming the dates of service.” The ED states that it has directed its servicers to check the names of borrowers against the DMDC and reduce the interest rate of eligible borrowers without a request from the borrower. It also states that servicers will compare their databases of borrowers against the DMDC “on a regular basis” and apply the SCRA reduction as they identify eligible borrowers.
In the guidance, the ED also “authoriz[es] and encourag[es]” FFEL lenders and lender-servicers, effective August 25 (the date of the guidance), to use the DMDC database to identify borrowers who are eligible for an SCRA rate reduction. The ED indicates that “without a specific request from the borrower, FFEL loan servicers may affirmatively check the names of all borrowers whose loans they service against the DMDC database to identify borrowers who qualify for the SCRA interest rate limitation.” It further states that the once a servicer confirms a borrower’s status and serviced dates using the DMDC, it can use the DMDC information in lieu of requiring a request from the borrower and a copy of the borrower’s military orders. According to the ED, a lender that grants a rate reduction based on the DMDC information “will not be subject to any program liabilities” if such information is found to be incorrect. The guidance also indicates that because it dispenses with the need for a servicemember to submit a request for rate relief and military orders, the 180-day time limit on such submissions “cannot be applied.”
Questions that had been raised by the industry in the wake of the DOJ and ED settlement are now answered in the guidance. The SCRA eligibility of reservists is specifically addressed as is the treatment of federal consolidation loans. The guidance states that a reservist who has received orders to report for military service or who is in military service is entitled to the SCRA rate reduction and that a lender can confirm a reservist’s eligibility using the DMDC and rely on the dates reflected in the DMDC as the active-duty service period for which the borrower is eligible for the reduced rate, including using the reservist’s order notification date as the service period start date. The guidance goes on to explain that a federal consolidation loan will be considered eligible for rate relief as long as the borrower submitted his or her application prior to starting active duty service.
While the federal government is certainly free to adopt a more permissive approach when it comes to its own student loans, we note that the text of the SCRA, which reflects a measured approach by Congress as to how best to provide benefits to servicemembers, remains unchanged. That said, lenders and loan servicers in other sectors of the consumer financial services marketplace should carefully review their policies and procedures with counsel to confirm that they are complying with Section 527 and with any representations they may have made to servicemembers about interest rate relief or other military benefits.
Among the topics being examined by the CFPB in connection with its expected debt collection rulemaking are the debt collection practices of debt buyers.
Those practices could become the subject of a uniform state debt buying code if the committee authorized to be appointed by the Uniform Law Commission to study the need for and feasibility of such legislation concludes that a uniform code will produce significant benefits to the public. Named the “Study Committee on the Transfer and Recording of Consumer Debt,” the new committee will also investigate the viability of a registration system to record transfers of consumer debt from originating creditors to debt buying entities.
For more on the study committee, see our legal alert.
On September 24, 2014, Ballard Spahr will conduct a webinar, “Recent Developments in Regulatory Guidance for Debt Sellers and Buyers.” The registration form is available here.
The CFPB has announced that its Consumer Advisory Board will hold a public meeting on September 11 in Washington, D.C.
The meeting will focus on trends and themes related to technology and access to financial services. According to the agenda, in addition to a general discussion of such trends and themes, there will be a separate discussion of technology and access to financial services and a separate discussion of technology and consumer engagement. The CFPB also plans to introduce the new appointees to the Consumer Advisory Board.
This past May, the CFPB announced that was ending its closed-door meeting policy for its four advisory groups and would open the meetings to the public. (In addition to the Consumer Advisory Board, those groups consist of the Community Bank Advisory Council, the Credit Union Advisory Council, and the Academic Research Council.)
In a notice published in today’s Federal Register, the CFPB announced that in late 2014, it plans to launch a financial coaching project for transitioning veterans and economically vulnerable consumers and seeks comments to include with its request for approval from the Office of Management and Budget.
The CFPB estimates that the project, which will provide direct financial coaching to these individuals, will serve tens of thousands of consumers over three years. The CFPB indicates that it will need to evaluate the program to understand whether it is effective and for financial coaches to deliver efficient services and track clients over time. The key data collection efforts that will be involved in the evaluations are administrative data collected by financial coaches about clients, interview data collected by evaluators, and self-reported survey data from coaches and coaching clients. Such data is expected to include personal information, performance data and other related information.
Comments are due by November 3, 2014.
The CFPB has issued a bulletin warning credit card issuers that offer certain promotional APRs of the risk that they may be engaging in deceptive and/or abusive acts or practices when making solicitations for such offers even if such solicitations are in compliance with Regulation Z.
The bulletin focuses on promotional offers that allow consumers to transfer a credit card balance or make a purchase that will be subject to a zero or low APR for a stated time period. The CFPB indicates that the offers covered by the bulletin include, but are not limited to, convenience checks, deferred interest/promotional interest rate purchases, and balance transfers.
According to the bulletin, “CFPB advisory experience has observed that some card issuers do not adequately convey in their marketing materials that a consumer who accepts such a promotional offer will lose his grace period on new purchases if he does not pay the entire statement balance, including the total amount subject to the promotional APR, by the payment due date.” The CFPB describes “affected consumers” as those “who maintain a grace period on purchases by paying their full statement balance by the payment due date each month, accept the promotional offer, and then continue to make purchases using the credit card.”
The bulletin warns that issuers risk engaging in deceptive advertising practices by giving affected consumers the impression that the only cost of obtaining the promotional APR will be the transaction fee set forth in the tabular Reg Z disclosure or the promotional APR will be the only rate at which the consumer will incur interest charges. The CFPB states that it has found that “one or more card issuers” did not adequately convey that a promotional offer came with an additional contingent cost to affected consumers—namely that the consumer must repay the entire balance (both the promotional balance and any new purchase balance) by the statement due date to avoid paying interest on new purchases. According to the CFPB, “the absence of clear language [about the loss of the grace period for affected consumers] placed in a prominent location” could cause reasonable consumers to be misled about card costs.
Issuers are also warned in the bulletin that they risk engaging in an abusive act or practice by failing to make reasonable efforts in their marketing materials to alert consumers to the relationship between the grace period on new purchases and accepting a promotional offer. The CFPB indicates that by failing to provide such information, an issuer could be deemed to have taken unreasonable advantage of consumers who do not understand that the grace period for new purchases is conditioned on full payment of the promotional balance and exploited that lack of understanding to impose additional costs.
While acknowledging in the bulletin that Reg Z does not require additional disclosures alerting consumers to the effect of accepting a promotional offer on the loss of the grace period on new purchases, the CFPB indicates that it expects issuers “to incorporate into their compliance management systems adequate measures to prevent violations of Federal consumer financial laws, including the Dodd-Frank Act’s [UDAAP prohibition].” According to the CFPB, those steps should include (but are not limited to) ensuring not only Reg Z compliance but also clearly, prominently, and accurately describing in all marketing materials:
- the material costs, conditions and limitations associated with promotional APR offers, and
- the effect of promotional APR offers on the grace period for new purchases.
This past June, the House Committee on Financial Services reported a series of bills intended to promote greater transparency and accountability at the CFPB. The Congressional Budget Office (CBO) recently released cost estimates for three of the bills as follows:
- The CFPB Advisory Commission Transparency Act (H.R. 4262) would require all CFPB advisory committees established by the CFPB to comply with the Federal Advisory Committee Act. The bill includes requirements for the public availability of information about activities of advisory committees, including meeting notices, records and minutes. Among such requirements is one requiring the CFPB to open its advisory council meetings to the public. At the hearing on the bills, the Financial Services Committee heard from witnesses who testified that the requirement was still needed despite the CFPB’s decision to end its closed-door meeting policy. According to such witnesses, because CFPB policies are determined by a single director, a legislative mandate was necessary to prevent the CFPB from reversing its position. The CBO estimated the bill would increase direct spending by $1 million over the 2015-2024 period resulting from additional costs that the CFPB would incur to train staff, review committee activities annually, prepare reports and provide accommodation for public meetings.
- The Ensuring Harmed Consumers Receive Compensation Act (H.R. 3389) would limit payments from the Consumer Financial Civil Penalty Fund to victims of the violations that gave rise to the penalties. Under current law, the funds are first to be used to compensate consumers who were harmed by the activities for which civil penalties were imposed. If funds remain after the CFPB has provided full compensation to all eligible victims or if payments to victims are impracticable because victims cannot be located or it is otherwise impracticable to pay victims, the CFPB can use the funds for consumer education and financial literacy programs. The CBO estimated the bill would reduce direct spending by $8 million over the 2015-2024 period. This represents the amount the CBO expects would be spent form the penalty fund, under current law, for financial literacy programs.
- The CFPB Research Transparency Act (H.R. 4539) would require the CFPB to make publicly available all studies, data and other analyses on which a research paper was based when releasing or issuing a research paper. The CBO estimated the bill would increase direct spending by $8 million over the 2015-2024 period resulting from additional costs for recordkeeping and documentation efforts for an estimated 10 research papers and other research products that would be published each year.
Last week, the CFPB published a report entitled “Financial wellness at work” that reviews “promising practices to promote financial wellness in the workplace.”
The CFPB’s research found that particularly since the recession, financial distress is widespread among the American workforce and can result in large associated costs to employers in terms of productivity loss and higher health care spending. According to the CFPB, such costs provide employers with “a potentially large incentive to explore cost-effective ways to enhance employee financial wellness.” The CFPB describes financial wellness programs as programs that educate employees to help them manage both short-term and long-term financial needs.
The CFPB states that the report is intended “to serve as a resource for employers who are interested in promoting employee financial well-being by helping their employees develop the skills to better manage their money.” In addition to making “the business case” for financial wellness programs and describing relevant research findings, the CFPB provides “case studies of some financial wellness practices that employers have found helpful and which might be useful to other companies interested in promoting financial wellness.”
We think the report is another demonstration of the CFPB’s commendable efforts to explore innovative approaches in carrying out its Dodd-Frank mandate to develop and implement financial education initiatives.
The proposed rule amending the Home Mortgage Disclosure Act and its implementing regulation, Regulation C, was published in the Federal Register today. As such, the official comment deadline will be October 29, 2014. We previously published a short description and analysis of the proposed rule that noted a different comment date. Our Mortgage Banking Group will continue to advise clients in connection with the proposed changes.
The CFPB announced that it has entered into a “Joint Higher Education Memorandum of Understanding” with the Departments of Veterans Affairs (VA), Defense (DOD), and Education (ED) as part of a joint effort by the agencies “to prevent abusive and deceptive recruiting practices by schools serving servicemembers, veterans, spouses and other family members.”
The MOU is described as carrying out the agencies’ “comprehensive strategy to strengthen enforcement and compliance mechanisms” developed in accordance with Executive Order 13607 signed by President Obama in April 2012. The order directed the Secretaries of Defense, VA, and Education to consult with the CFPB and the Department of Justice to take action to ensure that service members, veterans, spouses and other family members “have the information they need to make informed decisions concerning their well-earned Federal military and veterans educational benefits.” The Executive Order was intended to combat concerns about aggressive and deceptive targeting of such individuals by educational institutions to gain access to educational benefits. It also mandated the creation of uniform procedures for referring potential matters for civil or criminal enforcement to the DOJ or other agencies.
Under the Executive Order, the VA, DOD and ED were directed to establish “Principles of Excellence” (Principles) to apply to educational institutions receiving funding from federal military and veterans educational benefits programs. The Principles must require such educational institutions to provide various disclosures and protections, including information about school costs and federal financial aid eligibility as well as student support services. The MOU sets forth the responsibilities of each agency to support the Principles.
In the MOU, the CFPB agrees to:
- Designate its Assistant Director for Servicemember Affairs (currently Holly Petraeus) to serve as the point of contact for information sharing processes among the agencies
- Send alerts to each agency regarding potential significant trends and patterns of noncompliance identified in ongoing oversight activities
- Provide complaint data to the FTC’s Consumer Sentinel database
The Executive Order also required the creation of a centralized complaint system for students receiving military and veterans educational benefits to register complaints that can be responded to by various agencies including the CFPB. That system was launched in January 2014. In addition to submitting complaints about student loans via the CFPB’s complaint system, the system allows servicemembers using VA or DOD education benefits for higher education to submit complaints about educational institutions on the DOD or VA websites using new customized online reporting forms. Complaints received by the DOD or VA are forwarded to the FTC’s Consumer Sentinel database.
The CFPB has announced that it will be holding a field hearing on auto finance on September 18 in Indianapolis. The announcement indicates that the hearing will feature remarks from Director Richard Cordray, as well as “testimony” from consumer groups, industry representatives, and members of the public.
Given the CFPB’s history of using field hearings as the venue for announcing a related development, it seems highly likely that the field hearing will coincide with the CFPB’s release of a proposed larger participant rule for the auto finance market. The CFPB officially confirmed its plans to issue such a rule in the semi-annual update of its rulemaking agenda issued this past May and gave an August 2014 timetable for the proposal. That confirmation followed statements made by CFPB Deputy Director Steven Antonakes at a Consumer Bankers Association meeting in April 2014 that the CFPB’s next larger participant rule would relate to auto finance.