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TRID rule technical correction?

Posted in Mortgages

In today’s Federal Register the CFPB published a correction to the TILA/RESPA Integrated Disclosure (TRID) rule supplementary information as published on December 31, 2013 with regard to property taxes and certain similar charges.  The move apparently is intended to address an apparent oversight in the TRID rule regarding the treatment for tolerance purposes of property taxes and similar charges paid in advance, but not into an escrow or impound account.  However, it does not appear that the CFPB’s actions actually address the issue in the appropriate manner.

In the pre-TRID rule environment, property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower was required to pay in advance to the applicable parties (and not into an escrow or impound account) were not subject to a specific percentage tolerance.  However, based on a typographical error in the supplementary information to the TRID rule, such charges were referred to as charges that were subject to tolerances in both the TRID rule and pre-TRID rule worlds.  While that was unfortunate, the bigger problem was the TRID rule itself.

In the pre-TRID rule environment, fees and charges were not subject to any tolerance unless Regulation X under RESPA specifically provided that the fee or charge was subject to the 0% tolerance or the 10% aggregate tolerance.  The TRID rule takes a different approach in that every fee and charge is subject to the good faith standard, unless there is an express exception.  The good faith standard effectively imposes a 0% tolerance on fees and charges, unless an exception applies.  Due to an apparent oversight, in identifying fees and charges that are not subject to a tolerance the CFPB neglected to list property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account).  Thus, it appeared to many in the industry that such items are subject to an effective 0% tolerance.

After this issue was raised with the CFPB with regard to property taxes, the CFPB staff informally advised that property taxes are charges paid for third party services not required by the creditor.  Under the TRID rule, charges paid for third party services not required by the creditor are not subject to any specific percentage tolerance.  The CFPB now states in the Federal Register release that property taxes, homeowner’s association dues, condominium fees and cooperative fees are charges paid for third party services not required by the creditor.  The CFPB also corrects the typographical error in the supplementary information to the TRID rule to provide that property taxes, homeowner’s association dues, condominium fees and cooperative fees are not subject to tolerances.  The CFPB, however, does not actually amend the TRID rule.

It is questionable if the CFPB’s actions address in the appropriate manner the issue regarding property taxes, homeowner’s association dues, condominium fees and cooperative fees that a borrower is required to pay in advance to the applicable parties (and not into an escrow or impound account).  Although the CFPB states that property taxes, homeowner’s association dues, condominium fees and cooperative fees are charges paid for third party services not required by the creditor, often a creditor will require that such items due within a certain period of time after closing be paid by the borrower.  So, in many cases these items are in fact charges that the creditor requires to be paid.  Also, in addressing recording fees, the TRID rule commentary provides that “Recording fees are not charges for third-party services because recording fees are paid to the applicable government entity where the documents related to the mortgage transaction are recorded . . . .”  If recording fees are not charges for third party services, how are property taxes charges for third party services?

The definitive way to address this issue is to simply amend the TRID rule to add an item (F) to section 1026.19(e)(3)(iii) to read as follows: “(F) Property taxes, homeowner’s association dues, condominium fees and cooperative fees, whether or not paid into an escrow, impound, reserve or similar account.”  We hope that the CFPB will act promptly to propose amendments to the TRID rule to address this and other important issues.

 

Democratic Senators introduce bill to limit use of arbitration agreements

Posted in Arbitration

Democratic Senators Patrick Leahy and several other Democratic Senators have cosponsored a bill that would place new limits on the use of arbitration agreements.  According to Senator Leahy’s press release, the “Restoring Statutory Rights and Interests of the States Act of 2016,” responds to the New York Times’ publication last November of a series of three articles that were highly critical of arbitration.

The bill would amend the Federal Arbitration Act to:

  • Make the FAA inapplicable to forced arbitration of claims brought by individuals or small businesses “arising from the alleged violation of a Federal or State statute, the Constitution of the United States, or a constitution of a State.”
  • Provide that the grounds “at law or in equity for the revocation of any contract” that allow an arbitration agreement to be declared invalid include “a Federal or State statute, or the finding of a Federal or State court, that prohibits the agreement to arbitrate on grounds that the agreement is unconscionable, invalid because there was no meeting of the minds, or otherwise unenforceable as a matter of contract law or public policy.”
  • Require the determination of whether the FAA applies to an arbitration agreement to be made by a court.

We expect that in the first half of 2016, the CFPB will issue its proposal for regulating the use of arbitration agreements in certain consumer financial services contracts.  Last October, the CFPB convened a SBREFA panel to review the proposals under consideration.  Because of the bill’s overlap with the CFPB’s proposals, we do not expect the bill to get any traction until the CFPB completes its arbitration rulemaking.

 

Another auto finance company agrees to change dealer compensation policy to settle ECOA claims alleged by CFPB and DOJ

Posted in Auto Finance, Fair Credit

The CFPB and Department of Justice (the “Agencies”) announced recently that they have entered into a settlement with Toyota Motor Credit Corporation (TMCC) to resolve charges that TMCC engaged in unlawful discrimination in violation of the Equal Credit Opportunity Act (ECOA).  The settlement includes TMCC’s agreement to change its so-called “dealer compensation policy” and pay up to $21.9 million in remediation to affected consumers.  According to the CFPB press release, the CFPB did not assess a civil penalty “because of the proactive steps the company is taking that directly address fair lending by substantially reducing or eliminating discretionary pricing and compensation systems.”

The DOJ consent order includes a statement by TMCC in which it asserts that “it has treated all of its customers fairly and without regard to impermissible factors such as race or national origin” and entered into the settlement “solely for the purpose of avoiding contested litigation with the [DOJ] and instead to devote its resources to providing fair and industry-leading services to its customers.”  In another statement issued after the settlement was announced, TMCC stated that it “respectfully disagrees with the agencies’ methodologies to determine whether industry lending practices have been discriminatory.”

The settlement arises out of a joint CFPB and DOJ investigation that, as described in the CFPB consent order targeted TMCC’s alleged “policy and practice that allows dealers to mark up a consumer’s [contract] rate above [TMCC’s] established buy rate” and then compensate dealers “from the increased [finance charge] revenue to be derived from the dealer markup.”  The CFPB claimed that the so-called dealer “markups” were “based on dealer discretion” and “separate from, and not controlled by, the adjustments to creditworthiness and other objective criteria related to [buyer] risk in setting the buy rate.”

Based on a portfolio-level analysis of the dealer “markups” on “non-subvented” retail installment contracts (i.e., contracts not subsidized by the auto manufacturer) purchased by TMCC in 2011 to 2013, using the “Bayesian Improved Surname Geocoding” proxy methodology, the Agencies claimed that African-American and Asian and/or Pacific Islander buyers were charged higher dealer “markups” than similarly-situated white buyers.  According to the Agencies, TMCC’s dealer compensation policy violated the ECOA because it had a disparate impact on African American and Asian and/or Pacific Islander buyers.  In its complaint filed in the United States District Court for the Central District of California, the DOJ alleged that TMCC’s “policy“ was “not justified by legitimate business need that cannot reasonably be achieved as well by means that are less disparate in their impact on” such minority buyers.

Under the terms of the substantially similar DOJ and CFPB consent orders, TMCC must implement one of three dealer compensation policies: Option One provides substantially lower limits on dealer discretion in setting the contract rate; Option Two provides for the establishment of a standard dealer participation rate (within the substantially lower rate spread limits) with downward deviations pursuant to authorized exceptions; and Option Three allows no dealer discretion in setting contract rates.  The settlement includes additional requirements regarding TMCC’s maintenance of general compliance management systems, sending annual notices to dealers regarding ECOA compliance, monitoring of dealers for compliance with the limits on dealer discretion in setting the contract rate, and submission of portfolio-level data to the Agencies.

The settlement also includes monetary relief consisting of a $19.9 million settlement fund to provide redress for affected consumers who allegedly were “overcharged” when they entered into retail installment sale contracts from January 1, 2011 through the Effective Date.  (The Effective Date is the date on which the CFPB Consent Order is issued or on which the DOJ Consent Order is approved and entered by the district court.).  TMCC can be required, however, to deposit up to an additional $2 million into the settlement fund based upon a determination by the Agencies as to need for additional redress attributable to the period from the Effective Date until the date by which TMCC has fully implemented its new dealer compensation policy.  This additional redress apparently relates to affected consumers who enter into contracts during the pre-implementation window period after the Effective Date.

While the TMCC settlement closely tracks the terms of the Agencies’ two most recent settlements of this nature, there are some differences. Two of these differences are particularly noteworthy.

First, although it is not provided for in either the TMCC consent orders, the CFPB’s and DOJ’s press releases issued by each of the Agencies stated that TMCC “has further committed that it will not fund any additional nondiscretionary component of dealer compensation by increasing its posted risk-based buy rates.”

Second, as in prior consent orders and subject to certain compliance with documentation requirements, a footnote in the TMCC consent orders provides that TMCC is not precluded from using a “competitive modifier” to reduce its risk-based buy rate “based on competitive offers (e.g., a valid, dealer documented, competitive offer from another financing source) when it is necessary to retain the customer’s transaction.”  Prior consent orders have required, however, that the respondents’ policies relating to a “competitive modifier” of a risk-based buy rate shall “eliminate Dealer Discretion in the transaction.”  Instead of imposing a prohibition of this nature, the relevant footnote in the TMCC consent orders concludes with the following sentence: “Respondent’s dealer compensation policies shall not vary when Respondent reduces a risk-based buy rate; dealers may retain the discretion to mark up the modified buy rate, subject to the caps set forth in subparagraph (a) of this Option, ¶ 25(a).”

CFPB provides insight on treatment of big data

Posted in Fair Lending

This will follow up on Barbara Mishkin’s January 14, 2016 blog “FTC warns use of big data may violate federal consumer protection laws.”  At the American Bar Association’s Consumer Financial Services Committee meeting last month in Park City, Utah, Bryce Stephens and Jeffrey Langer from the CFPB provided insight as to how the CFPB treats the use of big data by creditors.  The main point made by Mr. Stephens, an economist with the CFPB, is that the CFPB is unlikely to object to the use of big data by creditors to reconsider credit applications that would otherwise be denied.  The CFPB will more closely scrutinize the use of big data when it is used to deny credit in the first instance.

Mr. Stephens indicated that the CFPB is continuing to develop an approach to analyzing the use of big data.  The concern with using big data is that it may present fair lending issues if its use causes a disparate impact.  Mr. Stephens advised that when a creditor determines that a big data factor may be leading to a discriminatory impact, the creditor should determine whether (1) the factor is highly correlated to the discriminatory impact, (2) there is a good basis for continuing to use that factor, and (3) there is a better variable that could be used for the same purpose that does not lead to a discriminatory impact.  With respect to the FTC report and guidance regarding big data discussed in Barbara’s blog, Mr. Stephens stated that there is an “expectation that lenders comply.”

Jeffrey Langer, the Assistant Director of Installment and Liquidity Lending Markets in the Bureau’s Research, Markets, and Regulations Division, stated that to the extent that creditors are using third parties for collection or use of big data variables, creditors must follow the CFPB’s third party vendor management policy.  Mr. Langer warned that creditors should be careful when using data that is predictive but could also have a disparate impact.

For more information about big data, attend our webinar, Big Problems with Big Data? FTC Report Warns Against Using Big Data, which we will host on February 17, 2016.  A registration link appears here.

 

CFPB Jan. 2016 complaint report highlights “other financial service” complaints, complaints from NY State/NY metro area consumers

Posted in CFPB General

The CFPB has issued its January 2016 complaint report which highlights “other financial service” complaints and complaints from consumers in New York State and the New York metro area.  In addition to the major complaint categories consumers can use when submitting online complaints to the CFPB, there is a miscellaneous category labeled “other financial service.”  This category includes complaints about debt settlement, check cashing, credit repair, refund anticipation checks, and money orders.

General findings include the following:

  • As of January 1, 2016, the CFPB handled approximately 790,000 complaints nationally, including approximately 20,300 complaints in December 2015.  For December 2015, debt collection continued to be the most complained-about financial product or service, representing about 31 percent of complaints submitted.  (The CFPB stated that this was the 28th consecutive month in which it handled more complaints about debt collection than about any other type of complaint.)  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 68 percent of the complaints submitted in December 2015.
  • Complaints about prepaid cards showed the greatest percentage increase based on a three-month average, increasing about 233 percent from the same time last year (October to December 2014 compared with October to December 2015).  Complaints during those periods increased from 138 complaints in 2014 to 459 complaints in 2015.
  • Student loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 14 percent from the same time last year (October to December 2014 compared with October to December 2015).  Complaints during those periods decreased from 582 complaints in 2014 to 499 complaints in 2015.
  • Mississippi, Montana and Arizona experienced the greatest complaint volume increases from the same time last year (October to December 2014 compared with October to December 2015).  The volume of complaints from Mississippi, Montana and Arizona increased by, respectively, 38, 37 and 34 percent.
  • The states with the greatest complaint volume decreases from the same time last year (October to December 2014 compared with October to December 2015) were Hawaii, Alaska and Oklahoma with decreases of, respectively, 22, 20 and 19 percent.

Findings regarding “other financial service” complaints include the following:

  • Since July 19, 2014,  the CFPB has handled approximately 2,700 other financial service complaints, representing about 0.3 percent of total complaints.
  • The most common products complained about were debt settlement (47 percent) and check cashing (14 percent). The most common issues identified by consumers were problems with fraud or scams (46 percent) and customer service or relations (21 percent).
  • Complaints about debt settlement or credit repair often involved reports of upfront fees being charged and more than 26 percent mentioned student loans.
  • Consumers who submitted check cashing complaints frequently mentioned high costs or inability to cash checks, often because of recommendations made by check authorization and warranty companies.

Findings regarding complaints from consumers in New York State and the New York metro area (which is comprised of certain zip codes from New York-Northern New Jersey-Long Island, NY and Pennsylvania) include the following:

  • As of January 1, 2016, approximately 50,400 complaints were submitted by New York State consumers and 57,700 were from consumers in the New York metro area.
  • Mortgages were the most-complained-about product, with mortgage-related complaints representing 25 percent of the complaints submitted by New York State consumers and 27 percent of the complaints submitted by consumers in the New York metro area.  (Nationally, mortgage complaints averaged 27 percent of all complaints received by the CFPB.)
  • Debt collection and credit reporting were, respectively, the second and third most-complained-about financial products by New York State and New York metro area consumers.

 

Human Rights Watch issues report on debt buyers

Posted in Debt Collection

A new report by Human Rights Watch (HRW) titled “Rubber Stamp Justice—US Courts, Debt Buying Corporations, and the Poor” is likely to find readers at the CFPB, which is expected to move closer early this year to proposing debt collection regulations.  In its Fall rulemaking agenda, the CFPB estimated that further prerule activities would occur in February 2016.  Those activities are expected to involve the convening of a SBREFA panel to consider the CFPB’s plans for debt collection regulations.

As might be expected from its title, the report is highly critical of the debt buying industry and court system.  For example, the report claims that “many debt buyer lawsuits rest on a foundation of highly questionable information and evidence” and purports to describe “the many ways courts across the US fail to stand up for the rights of disadvantaged defendants in debt buyer lawsuits, or put those defendants’ sophisticated corporate adversaries to their burden of proof.”

The report contains a series of recommendations directed at various parties, including  federal and state governments, state courts, and debt buyers.  Recommendations to state governments include considering the “lowering [of] statutorily mandated rates of post-judgment interest to a rate indexed to inflation.”  State court recommendations include adopting rules “barring judges from encouraging or ordering defendants in debt buyer cases to engage in informal negotiations with plaintiffs’ attorneys unless under the active supervision of a judge, a neutral mediator, or other designated officer of the court.”

Among the report’s recommendations to the federal government are to “pass legislation mandating that consumer debts will no longer continue to accumulate interest at rates in excess of those set down in state usury laws after being sold to a third party,” amend existing laws to reduce the maximum percentage of a debtor’s income that can be garnished, and pass legislation that prohibits creditors from garnishing a debtor’s bank account below a prescribed minimum balance.  The report asserts that federal law should recognize “that debt buyers are not in the same position as original creditors—they are seeking to appreciate an investment in bad debt, not to recoup money they have lent under agreed-upon contractual terms.  There is no compelling rationale for allowing debt buyers to accumulate interest at credit card rates after they purchase a debt.”  The report goes even further in recommending to debt buyers that they “refrain from adding interest to, and from collecting post-judgment interest on, the balance of purchased debts.”

The report seems to carry the suggestion that it would be better for debtors if banks stopped selling debts.  However, it is unlikely debtors would be better off for the simple reason that banks would sue the same debtors directly (as they often already do on a daily basis).  However, when suing debtors directly, banks are less likely to negotiate settlements on terms as favorable as those negotiated by debt buyers for the simple reason so often remarked upon by critics of debt buying–the debt buyer’s investment in the account is less than the amount lost by the bank.

While at first glance the report  appears as though it might be a focused criticism of the debt buying industry, it is not.  Its targets are, in equal parts, modern banking and consumer credit, lending money and charging interest, income inequality and, above all, capitalism.  The methodology used by HRW is anecdotal.  HRW conducted approximately 100 interviews before assembling this report.  While HRW’s reliance on personal accounts seems appropriate when trying to uncover crimes against humanity in failed states where there are precious few tools to obtain information, there is an abundance of reliable, non-anecdotal information available regarding the U.S. debt buying industry.

As lawyers committed to a system of justice, we are as interested as anyone in understanding the societal and economic impact of debt buying.  But we are convinced that this knowledge cannot be gained through a limited series of interviews or objectively explained with three graphs copied from a Google search.  We hope that if our CFPB colleagues read this report, they will keep its biases and limitations in mind.

Senator Warren to address student loan activists

Posted in Student Loans

Senator Elizabeth Warren is scheduled to be the keynote speaker today for “National Student Debt Day,” an event in Washington, D.C. for “student loan activists from around the country.” The event is sponsored by Young Invincibles, which describes itself as “a national organization, working to engage young adults on issues, such as higher education, health care, and jobs.”

Her remarks can be expected to fuel CFPB and Department of Education efforts to place pressure on lenders and servicers to provide more refinancing options to student loan borrowers.

 

Federal court issues mixed ruling on PA AG’s Dodd-Frank UDAAP claim based on alleged “rent-a-bank” and “rent-a-tribe” schemes

Posted in UDAAP

An attempt by the Pennsylvania Attorney General to use her Dodd-Frank Section 1042 authority recently met with only partial success in Pennsylvania federal district court.  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 (UDAAP).  The AG’s action in Commonwealth of Pennsylvania v. Think Finance, Inc., et al., was brought against several companies and their individual principal for allegedly (1) engaging in “rent-a-bank” and “rent-a-tribe” schemes to market Internet loans, and (2) charging interest rates that were usurious under state law.

In addition to alleging various state law violations, including that the defendants had engaged in “racketeering,” the AG alleged that the defendants had violated the Dodd-Frank UDAAP prohibition by (1) conditioning loans on the borrower’s use of electronic payments in violation of the Electronic Fund Transfer Act (EFTA) prohibition on compulsory use; (2) “inducing consumers to provide highly personal information;” and (3) taking unreasonable advantage of consumers’ lack of understanding.  The AG also claimed that the defendants should be liable for the UDAAP claims under a “common enterprise” theory.

The AG claimed that the defendants had violated the EFTA and engaged in a UDAAP by giving customers “the option of receiving the loan proceeds in their bank account quickly if the consumer agrees to electronic direct deposit and repayment, while conditioning the alternative option of payment by mail on the consumer agreeing to wait as long as a week for the borrowed cash.”  The court ruled that the AG had not stated a claim for a UDAAP claim because the AG “fails to connect the Defendants’ incentivizing electronic payments with a lack of understanding on the part of the consumer.”  The court also observed that it “was difficult” to see how the automatic payment option was itself “unfair or deceptive.”  It noted that the AG had not pled that the option caused injury to consumers and commented that the defendants’ promise to provide loans by direct deposit “as soon as tomorrow” was not itself injurious but was “reflective of the desperation of the consumer prior to engaging with the Defendants.”

The court also found that the AG had failed to state a claim for a UDAAP violation based on the allegation that consumers were induced to provide “highly personal information.”  It agreed with the defendants’ argument that this ground failed because the AG had not indicated how consumers were harmed “beyond a general allegation that it ‘makes them vulnerable to future improper use of that information.'”

The court did, however, find that the AG had stated a claim for a UDAAP violation based on the allegation that the defendants had engaged in an abusive act or practice by taking unreasonable advantage of the consumer’s lack of understanding of material risks.  While agreeing with the defendants that the AG had not shown that the defendants had engaged in abusive conduct by failing to disclose the loan terms, it found that the AG had sufficiently pled abusive conduct by alleging that the defendants took unreasonable advantage of the consumer’s lack of knowledge by “[holding] these loans out to be legal.”

With regard to the AG’s attempted use of a “common enterprise” theory, the AG argued that because the FTC Act prohibits unfair or deceptive acts or practices and the FTC has been allowed to use the “common enterprise” theory in FTC Act enforcement actions, the theory should apply to Dodd-Frank UDAAP claims.  In rejecting that argument, the court distinguished the FTC Act by noting that it can only be enforced by the FTC and does not also prohibit abusive conduct.

While involving loans with triple-digit interest rates, the defendants’ inability to use federal preemption to obtain a dismissal of the AG’s racketeering and other state law claims also makes the decision particularly noteworthy for marketplace lenders that partner with banks to originate loans at much lower rates.  Most significantly, the court’s rejection of preemption demonstrates the need for marketplace lenders to be prepared to defend their bank partnerships against “true lender” challenges by revisiting their partnerships’ structure, documentation, and compliance controls with legal counsel.  For more information about the decision, see our legal alert.