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CFPB files amicus brief in U.S. Supreme Court Article III standing case

Posted in CFPB General, Credit Reports

The CFPB, together with the DOJ, has filed a second amicus brief in Spokeo, Inc. v. Robins, the case pending before the U.S. Supreme Court in which the issue is whether a plaintiff who cannot show any actual harm from a violation of the Fair Credit Reporting Act (FCRA) nevertheless has standing under Article III of the U.S. Constitution to sue for statutory damages in federal court.  The consequences of the Supreme Court’s eventual decision will likely extend significantly beyond FCRA litigation, and affect numerous other statutes and the viability of class actions where alleged technical violations did not cause any actual harm.  The Supreme Court is scheduled to hear oral argument on November 2, 2015.

In Spokeo, the plaintiff claimed that the defendant website operator willfully violated the FCRA by allegedly publishing inaccurate personal information about him. After initially denying the defendant’s motion to dismiss based on standing, the district court reconsidered and dismissed the action.  The court ruled that the plaintiff had failed to plead an injury in fact, and any injuries pled were not traceable to the defendant’s alleged FCRA violations.  Reversing the district court, the U.S. Court of Appeals for the Ninth Circuit ruled that the defendant’s alleged violation of the plaintiff’s FCRA statutory rights established an injury sufficient to satisfy Article III.

The CFPB and DOJ  previously filed an amicus brief opposing the Supreme Court’s grant of certiorari.  The brief was filed in response to a Supreme Court order inviting the Solicitor General to file a brief to express the Obama administration’s views on whether certiorari should be granted.  The court granted certiorari on April 27, 2015.

In their new merits stage amicus brief in support of the plaintiff, the CFPB and DOJ argue that a plaintiff can satisfy the “injury in fact” requirement for Article III standing “by demonstrating an invasion of his own legally protected interests” provided the invasion is “actual and concrete.”  They assert such requirement is satisfied by the Spokeo plaintiff’s allegation that the defendant’s failure to exercise due care resulted in the actual dissemination of inaccurate personal information about him.

Among their other arguments is that courts have historically found that the violation of a plaintiff’s personal rights provides a constitutionally sufficient basis for Article III standing even if the plaintiff has identified no consequential harm beyond the violation itself.  They characterize the plaintiff’s claim that the defendant violated his FCRA rights by disseminating false information about him as “closely analogous to a common-law defamation claim.”  Based on that characterization, they argue that allowing the plaintiff’s suit to proceed would be consistent with traditional judicial practices in adjudicating common-law actions for written defamation without proof of reputational harm or other actual loss.

Atlanta federal district court interprets CFPA standard for “substantial assistance” liability

Posted in CFPB Enforcement, Debt Collection, UDAAP

Earlier this year, the CFPB filed a complaint in Atlanta federal district court targeting an alleged debt collection scam in which not only were the debt collectors named as defendants (Debt Collectors) but three companies involved in providing payment processing services to the Debt Collectors were also named as defendants.  One of those companies processed payments for the debt collectors and the other two companies were independent sales organizations (ISO) that marketed the processor’s services to merchants and were responsible for screening and underwriting merchants.

In its complaint, the CFPB charged the processor and ISOs (collectively, the Processors) with providing “substantial assistance” to the Debt Collectors’ unfair and deceptive conduct in violation of 12 U.S.C. Section 5536(a)(3).  This section of the Consumer Financial Protection Act (CFPA) makes it unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 [which prohibit unfair, deceptive or abusive acts or practices]…and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

The court recently issued an opinion denying a motion to dismiss filed by the Processors.  In their motion, the Processors argued that the substantial assistance claim should be dismissed because the CFPB had not adequately alleged that they acted knowingly or recklessly.  According to the Processors, in interpreting the CFPA provision, courts should look to case law interpreting Section 20(e) of the Securities and Exchange Act of 1934 which establishes liability for “any person that knowingly or recklessly provides substantial assistance to another person in violation of [securities laws].”  Such case law requires the SEC to show that a defendant acted with a level of recklessness that qualifies as “severe recklessness.”  To qualify, there must be “highly unreasonable omissions or misrepresentations [by the defendant] that involve not merely simple or even inexcusable negligence, but an extreme departure from the standards of ordinary care, and that present a danger of misleading buyers or sellers which is either known to the defendant or is so obvious that the defendant must be aware of it.”

The CFPB argued that the lower standard of recklessness found in the Restatement (Third) of Torts should apply under which a person acts recklessly if he or she “knows of the risk of harm created by the conduct or knows facts that make the risk obvious to another in the person’s situation” and “the precautions that would eliminate or reduce the risk involves burdens that are so slight relative to the magnitude of the risk as to render the person’s failure to adopt the precaution a demonstration of the person’s indifference to the risk.”

Noting the absence of case law interpreting the CFPA  substantial assistance provision, the court agreed with the Processors that a “severe recklessness” standard should apply.  However, the court found that the CFPB had alleged facts that satisfied the higher standard.  According to the court, the CFPB’s allegations regarding numerous warning signs of fraudulent debt collection activity ignored by the Processors plausibly alleged that they had acted with severe recklessness.

The court also found that such allegations supported a finding that the Processors provided substantial assistance to the Debt Collectors.  It rejected the Processors’ argument that even if they acted knowingly or recklessly, they still did not provide substantial assistance under the allegations in the complaint because they did not establish that the Processors’ conduct was the proximate cause of consumer harm or even a substantial causal connection.  The court ruled that while proximate cause is relevant to establishing a substantial assistance claim, it is not required.

In its complaint, the CFPB also alleged that the Processors were independently liable under the CFPA provision that makes it unlawful for any covered person or service provider to engage in unfair, deceptive or abusive acts or practices.  The Processors argued that the UDAAP claim should be dismissed because they were not covered persons.  Additionally, the ISOs argued that they were not service providers.  (The payment processor did not dispute that it was a service provider.)

With regard to their status as covered persons, the court cited the CFPA’s definition of “covered person” which is “any person that “engages in offering or providing a consumer financial product or service” and affiliates of such a person that acts as such person’s service provider.  It also cited the CFPA’s definition of “consumer financial product or service,” which “list[s] eleven categories of services, one of which is ‘providing payments or other financial data processing products or services to a consumer by any technological means, including …through any payments system or network used for processing payments data.'” (emphasis supplied).  The court then observed that the CFPB had not alleged that the Processors provided financial services to consumers and instead had only alleged they provided services to the Debt Collectors.

However, the court also observed that even if the Processors were not covered persons, they could still be subject to UDAAP liability as service providers.  It then ruled that the ISOs were service providers because they provided material services to the Debt Collectors by processing their applications and assisting them in obtaining accounts with the payment processor.  As further grounds for dismissal of the UDAAP claim, the Processors’ argued that the CFPB had not shown that the Processors had engaged in acts or practices that caused harm to consumers as required by the CFPA’s definition of an unfair act or practice or that they had entered into a transaction with a consumer.  The court also rejected these arguments, finding that the CFPB had adequately alleged that the Processors had engaged in acts that proximately caused consumer harm and that a service provider need not engage directly with a consumer to commit a UDAAP violation.

CFPB obtains preliminary injunction against debt relief companies

Posted in CFPB Enforcement, UDAAP

A Florida federal district court has entered a preliminary injunction against several companies and an individual who were named as defendants in a complaint filed by the CFPB in August 2015 charging them with violations of the Consumer Financial Protection Act (CFPA) and Telemarketing Sales Rule (TSR).

The complaint alleges that the defendants operated debt relief businesses that charged advance fees in violation of the TSR.  According to the complaint,  in anticipation of the TSR’s ban on advance fees which became effective in 2010, the defendants developed a plan to avoid the ban by “continuing operations under the guise of providing legal services” and began promising consumers both debt relief services and legal representation, including through a local attorney.  The complaint alleges that the defendants engaged in deceptive acts and practices in violation of the CFPA because consumers did not receive legal representation as promised by the defendants.

The preliminary injunction entered on September 2, 2015 includes an asset freeze, appointment of  a receiver, and disablement of the defendants’ websites.

FTC provides guidance on FCRA requirements for employer background checks

Posted in Credit Reports

When examining banks and companies subject to CFPB supervisory authority for FCRA compliance, CFPB examiners will look at whether the bank or company has followed FCRA requirements for use of background checks on employees and job applicants.

Those requirements were the subject of a recent letter by FTC staff to a California company.  The FCRA requirements for employers using background checks include exceptions for certain communications for employee investigations.  FCRA Section 603(y) excludes from the FCRA’s definition of a “consumer report” communications made to an employer “in connection with an investigation of (i) suspected misconduct relating to employment; or
(ii) compliance with Federal, State, or local laws and regulations, the rules of a self-regulatory organization, or any preexisting written policies of the employer.”

In the letter, the FTC staff indicates that such exceptions only apply to an employer’s investigation of current employees and do not apply to investigations of job applicants.

CFPB seeking approval for national web survey on overdraft disclosures

Posted in Overdrafts

The CFPB has published a notice indicating that it is seeking approval from the Office of Management and Budget to conduct “a national web survey of 8,000 individuals as part of its study of ATM/debit card overdraft disclosure forms.”

The CFPB states in the notice that the survey “will explore consumer comprehension and decision-making in response to revised overdraft disclosures.”  The survey will also explore “financial product usage, behavioral traits, and other consumer characteristics that may interact with a consumer’s experiences with overdraft programs and related disclosure forms.”  The CFPB also states that the survey will include a representative sample of the U.S. adults that hold checking accounts and oversample respondents who are more likely to have experience with overdraft fees.

Comments are due by November 3, 2015.  In its Spring 2015 rulemaking agenda released in May 2015, the CFPB stated that it planned “to release the results of further studies on overdraft programs and their effects on consumers.  The CFPB is also considering whether rules governing overdraft and related services are warranted, and, if so, what types of rules would be appropriate.”  The Spring 2015 agenda gave an October 2015 date for further prerule activities, which presumably include the web survey.


CFPB issues technical reports on National Mortgage Database and National Survey of Mortgage Borrowers

Posted in Mortgages

On August 27, 2015, the CFPB issued two Technical Reports:  one on the National Mortgage Database (NMDB), and the other on the National Survey of Mortgage Borrowers (NSMB).

The NMDB project is a joint undertaking by the FHFA and CFPB and is designed to give information about the U.S. Mortgage Market based on a 5% sample of residential mortgages.  The project has two components:  (1) the NMDB, and (2) the quarterly NSMB.  The NMDB will enable the FHFA to meet its statutory requirements to collect data on the characteristics of mortgages and on the creditworthiness of borrowers.  For the CFPB, the project will support policymaking and market monitoring.

Technical Report 15-01 National Mortgage Database

  • The report is designed to provide users of the NMDB data with background on development of the database as well as an assessment on the quality of data.
  • The core data in the NMBD are drawn from a random 1-in-20 sample of all closed-end first-lien mortgage files outstanding at any time between January 1998 and June 2012 in the files of Experian, one of the three national credit repositories.  The random sample of mortgages newly reported to Experian is added each quarter and they are followed in the database until they terminate through prepayment (including refinancing), foreclosure or maturity.  Information from the credit repository files on each borrower associated with the mortgages in the NMDB sample is collected from at least one year prior to origination to one year after termination of the mortgage.  The information on borrowers and loans in the NMDB does not include any directly identifying information.
  • The report discusses the development of the contract with Experian, outlines the process of selecting the initial historical sample, describes how the initial sample data were processed, how the data is updated and how administrative date is merged into the NMBD.   The final section evaluates the NMBD sample frame.

Technical Report 15-02 National Survey of Mortgage Borrowers

  • The NSMB component of the NMDB project is designed to provide de-identified data for analyzing housing mortgage related public policy, improving lending practices and the mortgage process.
  • The voluntary survey is conducted by mail and supplements the NMDB by providing information that is not in the database.  One example is information related to mortgage shopping.
  • The survey sample is derived from mortgages that are part of the NMDB and targets newly originated closed-end first-lien residential mortgages.
  • For the NSMB, a random sample of about 6,000 loans per quarter is drawn from loans newly added to the NMDB.
  • The report provides background data on how the NSMB was developed, discusses the development of the survey questionnaire, the survey sample frame and the logistics of conducting the survey.  In addition, the report analyzes survey responses for four waves, discusses how the usable population for analysis is derived, and describes the processes to refine the usable survey dataset and sampling error of the survey.
  • The survey cover letter and NSMB questionnaire are included as an Appendix to the report.

Please refer to the Technical Reports for more detailed information.

ABA comments on normalization of CFPB consumer complaint data

Posted in CFPB General

In response to the CFPB’s Request for Information seeking “best practices for normalizing relevant data” in the CFPB’s Consumer Complaint Database, the American Bankers Association has submitted a comment letter in which it asserts that normalization will not remedy the significant flaws inherent in the CFPB’s public disclosure of consumer complaint data.  The ABA takes the position that the CFPB should not undertake normalization until it remedies the unreliability of the underlying data.  According to the ABA, normalization is not such a remedy and instead may suggest the data has an undeserved legitimacy.

In its letter, the ABA makes the following additional key points:

  • Normalization should only be used for elements of a complaint that constitute data, or measurable, verifiable facts that can be normalized and readily compared.  The ABA believes that the only complaint elements in the Database that currently meet this description are elements that reflect upon a financial institution’s response to a customer complaint, including (1) the status of the financial institution’s response to the consumer; (2) whether the institution responded in a timely manner; and (3) whether the consumer disputed the institution’s response.
  • In considering whether to normalize complaint information, the CFPB should give priority to selection of the proper metrics.  The ABA observes that normalization is not a “one size fits all” process.  As examples, the ABA indicates that complaint data could be normalized by the number of customer accounts at the financial institution that is subject to the complaint, the number of transactions conducted by the institution, the number of customer interactions involving the institution, asset size of the institution, or composition of the institution’s customer base.
    It also notes that (1) “certain metrics will be appropriate for the normalization of complaints about certain financial products, while other metrics will be needed to normalize complaints about other types of products, based on differing markets (including demographics of customers), differing product designs among competitors offering the same (or similar) product, and customer uses of the product, among other factors,” and (2) “[i]n many—if not most—instances, multiple metrics will need to be applied simultaneously to provide a reliable basis for comparison.” (emphasis supplied).  The ABA warns that use of one metric or set of metrics to normalize complaint data when another set of metrics arguably would have produced more meaningful results will risk misinforming consumers and interfering with competition.  It urges the CFPB, in selecting and implementing normalization metrics, to consult extensively with financial institutions, on an on-going basis, “to ensure that the most informative metrics are selected for each category of complaints and to ensure that the substantive and technical aspects of normalization are done properly.”  The ABA also recommends that the CFPB take an incremental approach to normalization and begin with complaint data regarding a single product or service, instead of attempting to normalize simultaneously complaint information regarding the full range of products and services currently reported on in the Database.  In the ABA’s view, this approach would allow the CFPB “to focus its energies on identifying and applying appropriate metrics for one product” and “to consider the utility to consumers of the resulting contextual information.”
  • The ABA states that proper normalization may require the CFPB to have “new, confidential, and (in many instances) proprietary information” from financial institutions.  It asserts that before collecting such information, the CFPB must show that the complaint data will “usefully inform consumer decisions.”  According to the ABA, the CFPB has so far “failed to provide any meaningful evidence that the complaints contained [in the Database] provide any utility to consumers,” and to the ABA’s knowledge, “has not conducted surveys or focus groups or otherwise sought evidence that the publication of consumer complaints assists consumers with making financial decisions.” (emphasis supplied).

FTC Dallas debt collection program draws a crowd

Posted in Debt Collection

The FTC has announced that it is moving its second “Debt Collection Dialogue,” scheduled to be held in Dallas, Texas on September 29, 2015, to a larger venue.   The FTC is moving to the larger venue because the number of pre-registrations had almost reached the maximum for the previously scheduled venue.  It is also re-opening pre-registration, which closed on August 13.

The scheduled panelists for the program include Gregory Nodler, CFPB Senior Counsel for Enforcement Policy and Strategy.  A third “Debt Collection Dialogue” is scheduled to held in Atlanta, Georgia on November 18, 2015.

Interagency task force issues recommendations on federal student loan servicing contracts

Posted in Student Loans

Pursuant to a March 2015 Presidential directive, an interagency task force consisting of the Department of the Treasury, Department of Education, Office of Management and Budget, and Domestic Policy Council has issued recommendations on best practices in performance-based contracting intended to ensure that federal student loan servicers “help borrowers responsibly make monthly payments on their student loans.”  In developing its recommendations, the task force consulted with the CFPB.

The task force recommended that Federal Student Aid (FSA) take the following actions:

  • Use a compensation structure that provides incentives to servicers to keep all borrowers current and also provides targeted incentives based on the performance of borrowers identified by FSA as being at a greater risk of default when they leave school.  FSA should evaluate the impact of the targeted incentives on borrower performance to determine whether they should continue through the duration of the servicing contract.
  • Use an allocation formula that is structured to award new loan volume based on a comprehensive set of metrics that measure servicer performance in (i) driving positive borrower performance, (ii) providing quality customer service, and (iii) adhering to contract requirements and maintaining strong business practices and internal controls.
  • Establish a minimum level of required services to be provided by servicers that includes
    (i) certain standardized communications (such as “a core set of clear, easy-to-read tables that contain consolidated loan information that is most valuable for the borrower to make informed decisions”), and (ii) technology-enabled communication methods, with enhanced, “higher-touch” servicing requirements for borrowers at risk of default, including those identified as being at greater risk of default at school separation and those who become delinquent.  (The task force also recommended that servicers be allowed to apply for waivers of certain requirements on a subset of borrowers “to test innovative strategies that improve borrower outcomes.”)
  • In conjunction with the development of a centralized complaint system, implement a standardized complaint process that provides for clear borrower rights, a specific process to address borrower complaints about servicer interactions, and an escalation process with an FSA resource to address escalated complaints.
  • Use oversight and auditing of servicers to monitor compliance with contractual requirements and incorporate compliance assessments into performance metrics.  Servicers should be subject to administrative and contractual sanctions, including withholding of payment and penalties for noncompliance or other contract violations.

OIG report finds deficiencies in CFPB hiring processes

Posted in CFPB General

In a new report on the CFPB’s hiring processes, the Office of Inspector General (OIG) for the Fed and CFPB found that the CFPB’s Office of Human Capital (OHC) did not always follow established hiring controls.  For example, the OIG found that not all job analysis forms had evidence of managerial  approval.  According to the OIG, such forms are used by the OHC to document the qualifications needed for a position and the analysis informs how the OHC develops its assessment criteria for each position.  The OIG stated that “[w]ithout an appropriately validated and approved job analysis form, the OHC cannot be certain that the knowledge, skills, and abilities essential to a position are identified and considered during the recruitment and selection process.”   The OIG also found instances where sign-on bonuses were not appropriately documented.

While the report discusses several CFPB initiatives to improve internal controls for recruitment and selection, the OIG stated that notwithstanding such improvements, it identified areas in which enhanced controls could assist the OHC in achieving its recruitment and selection goals.  Among the OIG’s recommendations was for the OHC to enhance its monitoring activities for assessing whether internal controls for recruitment and selection are designed and operating effectively.

In a letter accompanying the report, the CFPB’s Chief Human Capital Officer agreed with the OIG’s recommendations and described the steps being taken by the CFPB to address such recommendations.