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CFPB discusses handling of student loan partial prepayments by servicers

Posted in Student Loans

In a new blog post by Student Loan Ombudsman Seth Frotman, the CFPB discusses its concerns regarding how student loan servicers may be responding to borrowers seeking to make partial prepayments on their student loans and provides advice to such borrowers.

The CFPB expresses its concern that “student loan servicers may be making it harder for borrowers to get ahead who have made additional payments on their loans. A number of consumers have reported that, after trying to get ahead on paying off their student loans, they were sidetracked by their student loan servicer.”  According to the CFPB, these consumers have reported that by lowering their monthly payment amount, their servicers extended the repayment period, thereby increasing the amount of interest the borrower would pay.  The CFPB indicates that servicers are reported to have made such a change without a request from the borrower and, in some cases, without letting the borrower know the change would be made.

The CFPB warns borrowers who seek to pay down their loans more quickly to watch out for “surprise redisclosure” of payment terms by servicers, meaning a resetting of loan repayment  terms.

Borrowers are advised that if they discover from their monthly statement or account payment history that their servicer has lowered their monthly payment, they can tell their servicer to set their monthly payment back to their requested payment amount, or choose to make extra payments each month.  Borrowers who regularly make partial prepayments through automatic payments are advised that they should contact their servicer to establish a standing instruction as to how such prepayments will be applied (such as to the loan with the highest interest rate).  Borrowers are also advised that they can provide instructions with individual payments and to make sure partial prepayments are not advancing payment due dates by creating a “payment holiday.”

Finally, borrowers are advised to submit a complaint if they have trouble with their servicers.

In February 2014, the CFPB presented its findings based on responses it received to a letter sent to private student loan servicers asking them for information about their practices for handling extra payments from borrowers.  Such practices are routinely the subject of scrutiny by CFPB examiners.


CFPB September 2016 complaint report highlights money transfer complaints, complaints from Pennsylvania consumers

Posted in Remittance Transfers

The CFPB has issued its September 2016 complaint report which highlights complaints about money transfers and complaints from consumers in Pennsylvania and the Philadelphia metro area.  The CFPB began taking money transfer complaints in April 2013.

General findings include the following:

  • As of September 1, 2016, the CFPB handled approximately 982,400 complaints nationally, including approximately 28,700 complaints in August 2016.
  • Debt collection continued to be the most-complained-about financial product or service in August 2016, representing about 34 percent of complaints submitted and showed the greatest month-to-month increase, increasing 50 percent from July 2016.  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 67 percent of the complaints submitted in August 2016.
  • Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 78 percent from the same time last year (June to August 2015 compared with June to August 2016).  In March 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we noted in blog posts about prior complaint reports issued since March 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increase most likely reflects the change in where such complaints are sent.
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 18 percent from the same time last year (June to August 2015 compared with June to August 2016).  Complaints during those periods decreased from 461 complaints in 2015 to 379 complaints in 2016.  In the complaint reports for March through August 2016, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
  • Wyoming, Alaska, and Colorado experienced the greatest complaint volume increases from the same time last year (June to August 2015 compared with June to August 2016) with increases of, respectively, 29, 26, and 21 percent.
  • Maine, Nebraska, and Idaho experienced the greatest complaint volume decreases from the same time last year (June to August 2015 compared with June to August 2016) with decreases of, respectively, 36, 19, and 15 percent.

Findings regarding money transfer complaints include the following:

  • The CFPB has handled approximately 6,900 money transfer complaints, representing about 0.7 percent of total complaints.
  • Consumers using money transfer services to make purchases commonly report being the victims of fraud or scams, with sellers to whom they send funds not sending the items purchased.
  • Consumers reported that money transfer providers had placed holds on their accounts without providing an explanation.  Money transfer service providers have explained that the holds result from a risk-based model that will hold reserves to cover potential losses arising from reversals or chargebacks.
  • Sellers involved in transactions using an online money transfer service often reported encountering problems with the dispute resolution process.  Sellers describe several scenarios where they do not receive payments after sending the item to the buyer, which often occurs when the seller is told that the buyer’s payment has been accepted but is later cancelled.  Cancellation is either by the buyer directly due to a dispute, or by the buyer’s financial institution due to insufficient funds in the buyer’s account.  Sellers often indicate that money transfer service providers, when deciding a dispute in the buyer’s favor after the item has already been sent, will debit the seller’s account without guaranteeing that the buyer will return the item to the seller.
  • Consumers submitting complaints about international money transfers commonly report delays and restrictions when attempting to make transfers or the absence of an explanation for a denial.  Many of these complaints are the product of company risk-based assessments, review for OFAC compliance, and consumer identification efforts.

Findings regarding complaints from Pennsylvania consumers include the following:

  • As of September 1, 2016, approximately 34,700 complaints were submitted by Pennsylvania consumers of which approximately 69 percent (about 24,100) were from Philadelphia consumers.
  • Debt collection was the most-complained-about product, representing 25 percent of the complaints submitted by Pennsylvania consumers and 27 percent of complaints submitted by consumers nationally.
  • The percentage of mortgage complaints submitted by Pennsylvania consumers, 22 percent, was lower than the 25 percent national average.  However, the percentage of mortgage complaints submitted by Philadelphia consumers, 26 percent, was higher than the national average.
  • Average monthly complaints received from Pennsylvania consumers increased 9 percent from 2014 to 2015, similar to the increase of 8 percent nationally.






CFPB enters into consent order with auto title lender

Posted in Auto Title Loans, CFPB Enforcement

The CFPB announced that it has entered into a consent order with TMX Finance, LLC to settle allegations that the company did not provide sufficient information to consumers about the terms of auto title loans, pawns or pledges, and engaged in unfair collection practices.  The consent order requires TMX Finance to pay a $9 million civil money penalty.

The consent order involves 30-day credit transactions made by TMX Finance under the brands TitleMax and TitleBucks at storefronts in Alabama, Georgia and Tennessee.  Under the applicable laws of the three states, consumers can renew or extend a transaction by paying the finance charge at the end of each 30-day period.  According to the CFPB’s findings of fact and conclusions of law set forth in the consent order (which TMX Finance does not admit or deny), the company engaged in the following conduct in violation of the Consumer Financial Protection Act:

  • After telling a consumer the amount of credit for which he or she was eligible, a company employee would ask the consumer to indicate the number of months over which he or she would like to repay the transaction or how much the consumer would like to pay each month.  After the consumer identified a payback period or target monthly payment, the employee would show the consumer a payback guide showing the monthly payments required to repay the principal balance in full at the end of a stated period.  The payment guide did not disclose the total finance charge that a consumer would pay if he or she chose to renew a transaction multiple times but showed the amount of finance charge and principal that needed to be paid at the end of each 30-day period for the transaction to amortize over the consumer’s selected term.  The CFPB found the use of the payback guide was “abusive” in violation of the CFPA because it materially interfered with a consumer’s understanding of the terms and cost of the transactions.  More specifically, the CFPB found that the company’s sales pitch and the guide materially interfered with a consumer’s ability to understand such things as that guide was not an actual payment plan, renewing the transaction over an extended period would substantially affect the overall cost of the transaction, and the transaction would be more expensive the longer it took the consumer to it pay off.
  • Company employees were permitted to conduct “in-person” visits to a consumer’s home or places of employment if a consumer failed to make a timely payment and did not respond to communications from company employees.  The CFPB found that during such visits, employees disclosed the existence of a consumer’s debts to third parties.  It also found that employees visited places of employment even after being informed by a consumer or a consumer’s supervisor that such visits were not permitted.  The CFPB found that the company’s practice of making in-person visits was “unfair” in violation of the CFPA.

In addition to requiring payment of the civil money penalty, the consent order contains various restrictions on the company’s conduct.  Such restrictions include a prohibition on in-person visits unless they are for the purpose of locating and repossessing vehicles and using a payback guide or similar document.

As TMX Finance noted in a press release issued in connection with the settlement, the consent order does not require TMX Finance to pay any restitution to consumers.  The press release included a statement from the company’s president in which he affirmed the company’s continuing commitment to remaining a reliable source of credit for customers facing short-term financial setbacks like medical emergencies or home repairs.  The press release noted that the payback guide was designed to assist customers in understanding the ramifications of renewing or extending their 30-day credit transactions.

Last week, the CFPB announced that it had filed administrative enforcement actions against five Arizona auto title lenders for alleged violations of Truth in Lending Act advertising requirements.


Congressman introduces fintech bill

Posted in Technology

Republican Congressman Patrick McHenry, Vice Chair of the House Financial Services Committee, has introduced the “Financial Services Innovation Act of 2016,” which is intended to provide a streamlined regulatory process for innovative fintech products and greater certainty about compliance requirements.

The federal agencies covered by the bill include the CFPB, Federal Reserve, FDIC, NCUA, OCC, FTC, and HUD.  The bill would require each agency to publish in the Federal Register within 60 days of enactment and biannually thereafter a list that identifies 3 or more areas of existing regulations that apply or may apply to a “financial innovation” and that the agency would consider modifying or waiving if it received a petition as contemplated by the bill.  “Financial innovation” is defined as “an innovative financial service or product, the delivery of which is enabled by technology, that is or may be subject to an agency regulation or Federal statute.”

The bill contemplates that each agency would establish a “Financial Services Innovation Office” (FSIO) to support the development of financial innovations.  The FSIO would consider petitions from persons that offer or intend to offer a financial innovation and seek to enter into an “enforceable compliance agreement containing a modification or waiver of an agency  regulation or Federal statutory requirement under which the agency has supervisory or rulemaking authority with respect to the [petitioner] or a financial innovation the [petitioner] offers or intends to offer.”

While a petition is pending, the bill would create a safe harbor barring the agency from bringing an enforcement action relating to the financial innovation that is the subject of the petition.  The agency would be required to publish the petition in the Federal Register and provide a 60-day notice and comment period.  If the agency disapproves a petition, it would be required to provide the petitioner with a written notice that explains why the petition was rejected.

If a petition is approved, the petitioner would be able to enter into an “enforceable compliance agreement” with the agency that includes “the terms under which the [petitioner] may develop or offer the approved financial innovation to the public and any requirements of the [petitioner] and any agency with respect to the financial innovation.”  The agreement would also bar other agencies from bringing an enforcement action against the petitioner with respect to the financial innovation that is the subject of the agreement.  States would be barred from bringing an enforcement action if the petitioner has provided the state with a copy of the compliance agreement and a statement of policies and procedures the petitioner has in place to comply with applicable state laws.  Notwithstanding this limitation, the bill would allow a state to bring an enforcement action if a court were to determine “that the agency’s action was arbitrary and capricious and the financial innovation has substantially harmed consumers within such State.”

The bill does not appear to provide a safe harbor from civil litigation.  However, it provides that a petitioner “can elect to arbitrate any action initiated by another person relating to a financial innovation that is the subject of an enforceable compliance agreement.”  It is unclear whether this provision would trump the CFPB’s arbitration rule once it is final and effective.  Under the CFPB’s proposed rule, a class action waiver in an arbitration provision in a consumer financial services agreement would be invalid.

In November 2012, the CFPB launched “Project Catalyst,” an  initiative for facilitating innovation in consumer-friendly financial products and services.  Under Project Catalyst, the CFPB finalized a trial disclosure policy in October 2013 for exempting individual companies, on a case-by-case basis, from applicable federal disclosure requirements to allow those companies to test trial disclosures.  In February 2016, the CFPB issued a final policy statement on issuing “no-action” letters (NAL) for innovative financial products or services.  We have found the CFPB’s NAL policy to be lacking in many important respects.

By recognizing the need to create a more flexible regulatory environment for fintech innovations, Congressman McHenry’s bill appears to be a step in the right direction.






CFPB participates in FTC workshop on disclosure

Posted in CFPB General

The FTC recently held a workshop, “Putting Disclosures to the Test,” to explore the question of what should be done to make disclosures effective.  The workshop included reports on numerous studies related to consumer understanding of disclosures, and the efficacy of different methods and timing of consumer disclosures.

Among the panelists at the workshop was Heidi Johnson, a CFPB research analyst.  She discussed research being conducted by the CFPB, through its Decision Making and Behavioral Studies team, that is exploring the factors that influence the efficacy of disclosures in financial services, how to use different methodologies to study disclosure, and the market effects of disclosures.

For more information about the workshop, including key takeaways from studies that were presented, see our legal alert.


CFPB sues credit repair company

Posted in CFPB Enforcement

The CFPB announced that it has filed a lawsuit in a California federal district court against a credit repair company for alleged violations of the Consumer Financial Protection Act (CFPA) and Telemarketing Sales Rule (TSR).  The CFPB has previously brought enforcement actions against debt settlement companies, including its first criminal referral.  The announcement was accompanied by the CFPB’s release of a consumer advisory entitled “How to avoid credit repair service scams” that includes a list of “red flags” and a consumer’s right under the FCRA to obtain free credit reports and dispute inaccurate information.

In its complaint, the CFPB alleges the company violated the CFPA and TSR by engaging in conduct that included the following:

  • Charging unlawful advance fees before providing consumers with a credit report showing that the promised results were achieved
  • Misleading consumers about the costs of its services, such as by failing to disclose to consumers during sales calls that they would be charged a monthly fee or representing that a monthly fee would be charged only if the consumer affirmatively elected to continue services beyond 60 days while, in reality, automatically charging a monthly fee
  • Failing to disclose that the money-back guarantee offered by the company was subject to significant limits, such as a requirement for a consumer to pay for at least six months of services to be eligible for the guarantee
  • Misleading consumers about the benefits of the company’s services by representing that its services would, or likely would, result in the removal of certain negative entries on a consumer’s credit report or a significant increase in a consumer’s credit score when the company lacked a reasonable basis for making such claims

CFPB announces enforcement actions against auto title lenders

Posted in Auto Title Loans, CFPB Enforcement

The CFPB announced that it has filed administrative enforcement actions against five Arizona auto title lenders for alleged violations of Truth in Lending Act advertising requirements.  According to the CFPB, the lenders violated TILA by advertising a periodic interest rate for their loans on their websites without advertising a corresponding annual percentage rate.  As examples, the CFPB alleges that one lender advertised a monthly interest rate but did not include the APR and another lender asked consumers to take its advertised rate and multiply it by 12 without informing consumers that the resulting number was the APR.

In its press release, the CFPB states that its Rules of Practice for Adjudication Proceedings allow it to publish the Notice of Charges ten days after the company is served and, if allowed by the hearing officer, to publish the charges on its website.

In June 2016, the CFPB issued its proposed payday lending rule which, in addition to payday loans, covers auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  Comments on the proposal are due by October 7, 2016.


CFPB builds case for ECOA protection for gender identity and sexual orientation; Ballard to conduct Nov. 3 webinar

Posted in Fair Lending

While CFPB officials have suggested in public remarks that the Equal Credit Opportunity Act’s prohibition against discrimination on the basis of “sex” includes discrimination based on gender identity and sexual orientation, a letter dated August 30, 2016 from Director Cordray goes further by describing how, in the CFPB’s view, current law provides strong support for that position.  To our surprise, Director Cordray’s letter does not appear to be available on the CFPB’s website and there has been little reporting about it.

Even prior to Director Cordray’s letter, it came to our attention that the CFPB had been asking entities it supervises about how they incorporate sexual orientation and gender identity into their policies, procedures, and fair lending analyses.  By signaling that discrimination on the basis of gender identity and sexual orientation will be a focus of CFPB fair lending supervision and enforcement going forward, Director Cordray’s letter raises the potential stakes for bank and non-bank creditors.  On November 3, 2016 from 12 to 1 p.m. ET, Ballard Spahr will conduct a webinar, “ECOA Protection for Gender Identity and Sexual Orientation: What the CFPB’s Pronouncements Mean for Industry.”  A link to register is available here.

Director Cordray’s letter was sent in response to a letter from Services and Advocacy for GLBT Elders (SAGE) in which SAGE posed the question “whether the [CFPB] views credit discrimination on the bases of gender identity and sexual orientation, including but not limited to discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes, as forms of sex discrimination prohibited under the [ECOA].”

In describing the CFPB’s “current thinking about how the law is continuing to evolve in this area,” Director Cordray sets forth the CFPB’s understanding of the terms “gender identity” and “sexual orientation.”  He states that the CFPB understands (1) “gender identity” to refer to “one’s internal sense of one’s own gender, which may or may not correspond to the sex that is assigned to a person at birth, and which may or may not be made visible to others,” and (2) “sexual orientation” to refer to “an individual’s physical, romantic, and/or emotional attraction to people of the same and/or opposite gender, such as straight (or heterosexual), lesbian, gay, or bisexual.”  (Director Corday notes that the CFPB’s understanding of these terms is consistent with Department of Labor guidance.)

Director Cordray concludes that the “current state of the law supports arguments that the prohibition of sex discrimination in ECOA and Regulation B affords broad protection against credit discrimination on the bases of gender identity and sexual orientation, including but not limited to discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes.”  In reaching that conclusion, he cites to Title VII cases involving alleged employment-related discrimination on the basis of sex and observes that “[i]n recent years, courts have increasingly concluded that the statutory proscriptions on sex discrimination [in Title VII] encompass discrimination motivated by perceived nonconformity with sex-based or gender-based norms, preferences, expectations, principles, or stereotypes, including those related to gender identity and sexual orientation.”

According to Director Cordray, there is “no apparent reason” why the reasoning used under Title VII “would not equally apply” to sex-based discrimination under the ECOA.  He cites to a 2000 First Circuit case as “clear precedent that gender identity claims can be brought under ECOA.”  In addition, he asserts that discrimination based on sexual orientation falls within the “principle of associational discrimination” under the ECOA, which prohibits creditors “from discriminating against applicants based on the sex of the people with whom an applicant is affiliated or with whom an applicant associates, or because of the sex of the people with whom an applicant has business dealings.”

Director Cordray’s letter also discusses Equal Employment Opportunity Commission decisions involving alleged employment-related discrimination on the basis of gender identity and sexual orientation in which “the EEOC has laid out its reasoning about how discrimination on these bases necessarily involves sex-based considerations.”   He deems the EEOC’s views of what constitutes sex-based discrimination under Title VII “highly relevant to the similar statutory analysis of what it means to discriminate based on ‘sex’ under ECOA.”

Most significantly, Director Cordray comments that the CFPB “recognizes and supports these recent developments in the law,” and regards them as “important and relevant to ensuring fair, equitable, and nondiscriminatory access to credit for both individuals and communities.”  His statement that the CFPB intends to strive to ensure that it interprets the ECOA and Regulation B in a manner that “appropriately reflect[s] the evolving precedents interpreting sexual discrimination law” leaves little doubt that the CFPB intends to apply ECOA protections to gender identity and sexual orientation discrimination.   Indeed, Director Cordray ends his letter by expressing the CFPB’s interest in knowing about “any situations in which creditors treat applicants less favorably because of gender identity or sexual orientation” or “if any creditors impose obstacles on transgender applicants who may submit applications designating their sex consistent with their gender identity.”





CFPB highlights impact of student debt on communities of color

Posted in Fair Lending, Student Loans

In a new blog post, the CFPB states that recent research “underscores the disproportionate impact of student debt on communities of color.”  According to the CFPB, federal government data shows that over 90 percent of African-American and 72 percent of Latino students leave college with student loan debt, compared to 66 percent of white students and 51 percent of Asian-American students.  The CFPB also states that while Asian-American students may be less likely to have federal student loans, separate research has shown that Asian-American students who need to borrow more than $30,000 may be more likely to rely on private student loans offering fewer borrower protections.

The CFPB describes “some things we have heard” about student loan debt “from a wide range of stakeholders, including researchers, consumer advocates, and the civil rights and labor communities.”  Such “things” include that student debt can prevent economic mobility of borrowers, “especially borrowers of color;” there is research suggesting “higher rates of student loan defaults and delinquencies in ZIP codes populated primarily by minorities with higher income levels;” and economic barriers continue to make it hard for African-American and Latino families to save and pay for college without having to take on large amounts of debt.

The CFPB’s blog post follows an August 2016 letter sent by the National Consumer Law Center to the Secretary of Education in which the NCLC describes the “disproportionately negative impact [of student debt] on borrowers of color.”  In the letter, the NCLC suggests that the Department of Education’s efforts to track racial outcomes for federal student loans have been inadequate and urges the ED to conduct such tracking.  The NCLC lists various types of “borrower outcome data” it wants the ED to track, analyze by race, and report (e.g., borrowers who missed payments and are delinquent or who were charged collection fees).  In similarly describing student debt as having a disproportionate impact on communities of color, the CFPB may be signaling that it intends to make that issue a focus of supervisory and enforcement activity.



FTC staff paper on lead generation likely to inform CFPB

Posted in CFPB General, Hot Issues, Lead Generation

Almost a year ago, on October 30, 2015, the FTC conducted a workshop on lead generation entitled to “Follow the Lead.” We published a three-part series on the workshop highlighting the key takeaways. On September 15, 2016, the FTC published its own staff paper discussing the workshop and providing its own analysis. The paper appears intended to serve as a warning to lead buyers and sellers about FTC expectations. Indeed, the staff states that the workshop and paper will “Inform our ongoing law enforcement work.” The paper is also likely to inform the CFPB’s ongoing supervisory and enforcement activities.

While the staff paper acknowledges some of the many positive aspects of lead generation, it focuses on what regulators are likely to view as the negatives:

  • Complexity and Lack of Transparency: The FTC staff recognized that the online lead generation process is complex and often not transparent to consumers. They suggest that consumers may not understand the process, specifically:
    • That their information may be going to a lead generator not a lender,
    • That their information can be sold multiple times leading to multiple offers from lenders and marketers,
    • That the offer they receive may be coming from the company that bid the most to get their information, and
    • That lenders who buy their information may supplement it with additional information about the consumer obtained from other sources.The staff stated that all of these issues should be prominently disclosed to consumers.

The staff stated that all of these issues should be prominently disclosed to consumers.

  • Aggressive or Potentially Deceptive Marketing: The staff also called attention to lead generators who engage in blatantly misleading advertising. One example cited was a lead generator that disguised loan applications to look like job applications.
  • Potential Abuse of Sensitive Consumer Information: The staff further highlighted that bad actors may purchase or obtain consumer information from lead generators and aggregators and use it to commit acts of fraud. In one recent FTC enforcement action the staff noted, a company was accused of purchasing consumer information and using it to debit funds from consumers’ accounts without authorization.

The staff issued stern warnings to lead buyers and sellers alike that neither will be permitted to benefit from this kind of misconduct and avoid liability.

Lead buyers are warned that “companies who choose to ignore warning signs [of the above misconduct] and look the other way may be at risk of violating the law themselves.”  The staff acknowledged that many lead buyers are taking increasingly sophisticated steps to identify and reject leads potentially obtained through misleading advertising. For example, at least one company has developed an online tool that assigns unique identifiers to leads allowing them to be tracked throughout the lead generation ecosystem. Lead buyers can also carefully monitor and audit the sites of companies that they buy leads from. The staff’s warning makes clear that these and other steps are not options for lead buyers who wish to avoid violating the law.

To lead sellers, the staff warns that “ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC liability.” The staff explained that self-regulatory bodies such as the Better Business Bureau and the Online Lenders Alliance can help sellers in preventing fraud, if the bodies publish clear guidance and follow-it up with robust monitoring and enforcement. The staff also stated that lead sellers have an obligation to vet and monitor the companies they sell leads to. The staff paper indicates that FTC enforcement in this area will not let up. Thus, following industry best practices and the careful vetting and monitoring of lead buyers are essential for lead sellers to avoid liability.

As we’ve noted previously, we’re seeing an uptick in CFPB enforcement in this area even though the FTC seems to have taken primary responsibility for enforcement actions against lead generators. The FTC staff paper will likely inform the CFPB’s own expectations in its increasingly common enforcement activity in the lead generation ecosystem.