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CFPB issues guidance on deposit reconciliation practices; Ballard to hold June 21 webinar

Posted in Deposit Accounts

The CFPB and four other agencies have issued “Interagency Guidance Regarding Deposit Reconciliation Practices.”  The other agencies are the OCC, Fed, FDIC, and NCUA.  The guidance is intended to set forth the agencies’ supervisory expectations regarding consumer account deposit reconciliation practices.

For purposes of the guidance, a “credit discrepancy” is created when the amount that a bank credits to a customer’s account differ from the total of the items deposited.  The guidance refers to a discrepancy that results in a customer being credited with less than the full amount deposited as “a detriment to the customer” that “benefits the financial institution, if not appropriately reconciled.”  The guidance indicates that “[t]echnological and other processes exist that allow financial institutions to fully reconcile discrepancies in deposit accounts.”  (The agencies acknowledge, however, that there are limited circumstances in which items cannot be reconciled, such as when an item is damaged to the point that its true amount cannot be determined.)  The guidance notes that the agencies have observed that “[i]n some instances, financial institutions do not research or correct [all discrepancies], resulting in the customer not receiving the full amount of the actual deposit.”

The guidance discusses applicable laws, such as the funds availability requirements of the Expedited Funds Availability Act and Regulation CC, and notes that a financial institution’s policies or practices that do not appropriately reconcile credit discrepancies within the prescribed time frames could raise Regulation CC concerns if a customer is left without timely access to the correct amount of funds due to a discrepancy.  It also notes that a financial institution’s deposit reconciliation practices, depending on the facts and circumstances, can result in unfair or deceptive practices that violate Section 5 of the FTC Act or Sections 1031 and 1036 of the Dodd-Frank Act.

The agencies state that they expect financial institutions “to adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged.”  They further state that financial institutions are expected to “effectively manage their deposit reconciliation practices to comply with Regulation CC and other applicable laws or regulations and to prevent potential harm to their customers.”  Financial institutions are also expected to provide accurate information to customers about their deposit reconciliation practices and implement “effective compliance management systems that include appropriate policies, procedures, internal controls, training, and oversight and review processes to ensure compliance with applicable laws and regulations, and fair treatment of customers.”

At a minimum, the guidance appears to mean that a bank should not have policies or practices under which the amount encoded on the deposit slip is automatically accepted as correct in all circumstances or when such amount does not vary from the amount of the items deposited by more than a specified amount.  Such policies or practices would necessarily create the potential for the customer to receive a credit for less than the amount actually deposited.

Instead, it appears a bank should have policies and practices that (1) pending further investigation, automatically give the customer the benefit of the greater amount when the amount encoded on the deposit slip varies from the items deposited (either regardless of the amount of the discrepancy or when the discrepancy is not more than a specified amount), or (2) immediately investigate and reconcile all discrepancies (or any discrepancies for which the customer is not automatically given the benefit of the greater amount).

On June 21, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the guidance:  Interagency Deposit Reconciliation Guidance: Will Your Bank’s Practices Meet Expectations?  The webinar registration form is available here.

 

The CFPB’s auto title loan report: last step to a payday/title loan proposal?

Posted in Auto Title Loans

The CFPB has issued a new report entitled “Single-Payment Vehicle Title Lending,” summarizing data on single-payment auto title loans.  The latest report is the fourth report issued by the CFPB in connection with its anticipated rulemaking addressing single-payment payday and auto title loans, deposit advance products, and certain “high cost” installment and open-end loans.  The previous reports were issued in April 2013 (features and usage of payday and deposit advance loans), March 2014 (payday loan sequences and usage), and April 2016 (use of ACH payments to repay online payday loans).

In March 2015, the CFPB outlined the proposals then under consideration and, in April 2015, convened a SBREFA panel to review its contemplated rule.  Since the contemplated rule addressed title loans but the previous reports did not, the new report appears designed to supply the empirical data that the CFPB believes it needs to justify the limits on auto title loans it intends to include in its proposed rule.  With the CFPB’s announcement that it will hold a field hearing on small dollar lending on June 2, the new report appears to be the CFPB’s final step before issuing a proposed rule.

The new report is based on the CFPB’s analysis of about 3.5 million single-payment auto title loans made to over 400,000 borrowers in ten states from 2010 through 2013.  The loans were originated in storefronts by nonbank lenders.  The data was obtained through civil investigative demands and requests for information pursuant to the CFPB’s authority under Dodd-Frank Section 1022.

The most significant CFPB finding is that about a third of borrowers who obtain a single-payment title loan default, with about one-fifth losing their car.  Additional findings include the following:

  • 83% of loans were reborrowed on the same day a previous loan was paid off.
  • Over half of “loan sequences” (which include refinancings and loans taken within 14, 30 or 60 days after repayment of a prior loan) are for more than three loans, and more than a third of loan sequences are for seven or more loans.  One-in-eight new loans are repaid without reborrowing.
  • About 50% of all loans are in sequences of 10 or more loans.

The CFPB’s press release accompanying the report commented: “With auto title loans, consumers risk their car or truck and a resulting loss of mobility, or becoming swamped in a cycle of debt.”  Director Cordray added in prepared remarks that title loans “often just make a bad situation even worse.”  These comments leave little doubt that the CFPB believes its study justifies tight restrictions on auto title loans.

Implicit in the new report is an assumption that an auto title loan default evidences a consumer’s inability to repay and not a choice to default.  While ability to repay is undoubtedly a factor in many defaults, this is not always the case.  Title loans are frequently non-recourse, leaving little incentive for a borrower to make payments if the lender has overvalued the car or a post-origination event has devalued the auto.  Additionally, the new report does not address whether and when any benefits of auto title loans outweigh the costs.  Our clients advise that auto title loans are frequently used to keep a borrower in a car that would otherwise need to be sold or abandoned.

 

CFPB schedules June 2 field hearing on small dollar lending; Ballard to hold June 15 webinar

Posted in Auto Title Loans, Payday Lending

The CFPB has announced that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.

On June 15, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the CFPB’s expected proposal: The CFPB’s Proposed Payday/Auto Title/High-Rate Installment Loan Rule: Can Industry Adapt to the New World Order?  The webinar registration form is available here.

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OCC to hold forum on financial innovation

Posted in CFPB General

In his April 2016 appearance before the Senate Banking Committee, Director Cordray made clear that FinTech companies are on the CFPB’s radar screen.  In particular, he indicated that while FinTech companies should not have an advantage in the marketplace over banks because they are not complying with same rules, the CFPB would seek to enforce the laws without stifling innovation.

On June 23, 2016, the OCC will hold a forum in Washington, D.C. on “Supporting Responsible Innovation in the Federal Banking System.”  The forum will bring together representatives from banks, financial technology companies, and community and consumer groups to discuss developments, opportunities, and challenges related to financial innovation.  Topics will include risk management and strategic planning, financial inclusion, consumer protection, supervisory expectations, and regulatory concerns.  Registration is free.

In March 2016, the OCC released a white paper: “Supporting Responsible Innovation in the Federal Banking System: An OCC Perspective.”  The white paper recognizes that many innovations in financial services, such as those related to mobile wallets, distributed ledger technology, and marketplace lending, are taking place outside of the banking industry, often in lightly-regulated  FinTech companies.  In order to understand these new technologies, render timely decisions on matters requiring regulatory approval, and issue guidance about the OCC’s supervisory expectations, the OCC seeks to develop a framework for evaluating products, services, and processes that encourages responsible innovation.  The white paper discusses the OCC’s eight guiding principles for responsible financial innovation.  For more on the white paper, see our legal alert.

 

 

CFPB Sues All American Check Cashing

Posted in CFPB Enforcement, CFPB People, Hot Issues, Payday Lending, UDAAP

On May 11, 2016, the CFPB sued All American Check Cashing, Mid-State Finance and their President and owner Michael E. Gray. It alleged that the Defendants engaged in abusive, deceptive, and unfair conduct in making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.

The CFPB’s claims are mundane. The most interesting thing about the Complaint is the claim that isn’t there. Defendants allegedly made two-week payday loans to consumers who were paid monthly. They also rolled-over the loans by allowing consumers to take out a new loan to pay off an old one. The Complaint discusses how this practice is prohibited under state law even though it is not germane to the CFPB’s claims (which we discuss below). In its war against tribal lenders, the CFPB has taken the position that certain violations of state law themselves constitute violations of Dodd-Frank’s UDAAP prohibition. Yet the CFPB did not raise a UDAAP claim here based on Defendants’ alleged violation of state law.

This is most likely because of a possible nuance to the CFPB’s position that has not been widely discussed until recently. Jeff Ehrlich, CFPB Deputy Enforcement Director recently discussed this nuance at the PLI Consumer Financial Services Institute in Chicago chaired by Alan Kaplinsky. There, he said that the CFPB only considers state-law violations that render the loans void to constitute violations of Dodd-Frank’s UDAAP prohibitions. The Complaint in the All American Check Cashing case is an example of the CFPB adhering to this policy. Given that the CFPB took a more expansive view of UDAAP in the Cash Call case, it has been unclear how far the CFPB would take its prosecution of state-law violations. This case is one example of the CFPB staying its own hand and adhering to the narrower enforcement of UDAAP that Mr. Ehrlich announced last week.

In the All American Complaint, the CFPB cites an email sent by one of Defendants’ managers. The email contained a cartoon depicting one man pointing a gun at another who was saying “I get paid once a month.” The man with the gun said, “Take the money or die.” This, the CFPB claims, shows how Defendants pressured consumers into taking payday loans they didn’t want. We don’t know whether the email was prepared by a rogue employee who was out of line with company policy. But it nevertheless highlights how important it is for every employee of every company in the CFPB’s jurisdiction to write emails as if CFPB enforcement staff were reading them.

The Complaint also shows how the CFPB uses the testimony of consumers and former employees in its investigations. Several times in the Complaint, the CFPB cites to statements made by consumers and former employees who highlighted alleged problems with Defendants’ business practices. We see this all the time in the many CFPB investigations we handle. That underscores why it is very important for companies within the CFPB’s jurisdiction to be mindful of how they treat consumers and employees. They may be the ones the CFPB relies on for evidence against the subjects of its investigations.

The claims are nothing special and unlikely to significantly impact the state of the law. Although we will keep an eye on how certain defenses that may be available to Defendants play out, as they may be of some interest:

  • The CFPB claims that Defendants abused consumers by actively working to prohibit them from learning how much its check cashing products cost. If that happened, it is certainly a problem. Although, the CFPB acknowledged that Defendants posted signs in its stores disclosing the fees. It will be interesting to see how this impacts the CFPB’s claims. It seems impossible to hide a fact that is posted in plain sight.
  • The CFPB also claims that Defendants deceived consumers, telling them that they could not take their checks elsewhere for cashing without difficulty after they started the process with Defendants. The CFPB claims this was deceptive while at the same time acknowledging that it was true in some cases.
  • Defendants also allegedly deceived consumers by telling them that Defendants’ payday and check cashing services were cheaper than competitors when this was not so according to the CFPB. Whether this is the CFPB making a mountain out of the mole hill of ordinary advertising puffery is yet to be seen.
  • The CFPB claims that Defendants engaged in unfair conduct when it kept consumers’ overpayments on their payday loans and even zeroed-out negative account balances so the overpayments were erased from the system. This last claim, if it is true, will be toughest for Defendants to defend.

Most companies settle claims like this with the CFPB, resulting in a CFPB-drafted consent order and a one-sided view of the facts.  Even though this case involves fairly routine claims, it may nevertheless give the world a rare glimpse into both sides of the issues.

Our thoughts on “Ask CFPB”

Posted in CFPB General

In a new blog post, the CFPB promotes its “Ask CFPB” website feature as “a source of clear, impartial answers to hundreds of financial questions.”

We agree that the feature can be a source of potentially helpful information for consumers on a wide range of topics such as bank accounts, credit reports and scores, debt collection, student loans, and mortgages.  However, we find it disappointing that the feature provides no questions and answers about dispute resolution, a topic about which “Ask CFPB” could also be a useful source of information for consumers.

Issues that could be addressed include what it means for a consumer to resolve his or her individual dispute in court (including small claims court) or through arbitration and what it means to be part of a class action in court.  As Alan Kaplinsky noted in his testimony at the CFPB’s May 5 field hearing on arbitration, the CFPB has not allocated any of its vast resources to educating consumers on the benefits of arbitration.

 

 

CFPB enforcement lawyer tries to clarify when a state law violation is also a UDAAP

Posted in CFPB Enforcement, UDAAP

On Thursday, May 11, 2016 in Chicago, I moderated the “CFPB Speaks” panel which was the lead-off panel at the sold-out Practicing Law Institute  21st Annual Consumer Financial Services Institute. The CFPB speakers were:  Jeff Ehrlich, Deputy Assistant Director, Office of Enforcement, Paul Mondor, Managing Counsel, Office of Regulations and Chris Young, Senior Counsel and Chief of Staff, Office of Supervision Policy. My partner, Chris Willis (who is the Practice Group Leader of our firm’s Consumer Financial Services Litigation Group and who has handled a huge volume of CFPB investigations) was one of two industry representatives on the panel.

Jeff Ehrlich attempted to clarify the confusion surrounding the CFPB’s position in the CashCall lawsuit in which the CFPB asserted that longer term installment loans with interest rates that exceed the rate allowed under the law of the state where the borrower resides are also UDAAP violations. Many in the industry read the CashCall complaint as evidence that the CFPB views state usury violations as per se UDAAP violations.

Jeff indicated that the CFPB’s position is that there is a UDAAP violation if a state usury law violation makes a loan void or if state law provides that loans made without a required license are void. If, for example, the state law penalty for violating the state usury law is less draconian (e.g., double the finance charge or overcharge), then the CFPB would not assert that there is also a UDAAP violation.

Jeff’s comments, however, are not fully consistent with the complaint filed by the CFPB against CashCall. Specifically, the complaint asserts that the loans alleged to be UDAAP violations were subject to state laws that “rendered void or limited the consumer’s obligation to repay.” The complaint includes Colorado as a subject state and acknowledges that loans that exceed the usury limit in Colorado and loans originated without a license in Colorado are not void.  Rather, it states that in Colorado, consumers are relieved of the obligation to pay any charge that exceeds the usury limit and are entitled to a refund from the lender or assignee for any excess amount that they paid. It also states that a lender’s or assignee’s failure to obtain a required license removes the consumer’s obligation to pay finance charges to the lender or assignee.

As a result of the inconsistency between Jeff’s statement that there exists a UDAAP violation for a state law violation only when a company seeks to collect a loan that is void under state law and the much broader theory of UDAAP liability in the CashCall complaint itself, confusion continues to exist as to the CFPB’s position on when a state law violation constitutes a UDAAP violation.

House to hold May 18 hearing on CFPB’s proposed arbitration rule

Posted in Arbitration

On May 18, 2016, the House Financial Services Committee’s Subcommittee on Financial Institutions and Consumer Credit will hold a hearing entitled “Examining the CFPB’s Proposed Rulemaking on Arbitration: Is it in the Public Interest and for the Protection of Consumers?”

On May 5, 2016, the CFPB issued a proposed rule that would prohibit covered providers of certain consumer financial products and services from using pre-dispute arbitration agreements that contain a class action waiver.  The proposed rule followed the CFPB’s study of consumer arbitration mandated by Section 1028 of the Dodd-Frank Act.  As the Committee Memorandum notes, Section 1028 authorizes the CFPB to limit the use of consumer arbitration agreements only if, consistent with its study, it finds that doing so “is in the public interest and for the protection of consumers.”  Our analysis showed that, despite the CFPB’s claims that the study demonstrated that arbitration agreements are detrimental to consumers, the study’s data, in reality, confirmed that arbitration is a faster, less expensive, and far more effective way for consumers to resolve disputes with companies than class action litigation.

The witnesses at the hearing will be:

  • Professor Jason S. Johnston, Henry L. and Grace Doherty Charitable Foundation Professor of Law, University of Virginia School of Law
  • Dong Hong, VP and Regulatory Counsel, Consumer Bankers Association
  • Andrew Pincus, Partner, Mayer Brown LLP, on behalf of the U.S. Chamber of Commerce

While no other witnesses are listed on the Committee website, we would find it surprising if no consumer advocates appear as witnesses.

The CFPB announced its release of the proposal at a field hearing on arbitration in Albuquerque, New Mexico held on May 5.  Alan Kaplinsky, who leads Ballard Spahr’s Consumer Financial Services Group, was invited by the CFPB to attend the field hearing to present the financial services industry’s position on the proposed regulations.

On May 23, 2016, Ballard Spahr attorneys will hold a webinar on the proposal from 12 p.m. to 1 p.m. ET.  Information about the webinar and a link to register is available here.

 

 

 

 

CFPB Academic Research Council to meet on May 20

Posted in CFPB General

The CFPB has announced that there will be meeting of its Academic Research Council on May 20, 2016 in Washington, D.C. to discuss methodologies for CFPB research.

The agenda indicates that after welcomes from Director Cordray and Ron Borzekowski, a CFPB Assistant Director, there will be a subcommittee report and discussion followed by a presentation and discussion on the topic “Restoring Rational Choice: The Challenge of Consumer Financial Regulation.”

 

 

 

CFPB Publishes New Annotated Loan Disclosures

Posted in CFPB General, CFPB Rulemaking, Mortgages, TILA / RESPA

In emails sent to CFPB email subscription holders, the CFPB announced the publication of new annotated versions of the Loan Estimate and Closing Disclosure that include citations to sections in Chapter 2 of the Truth in Lending Act (TILA). The CFPB sent an original email on May 12, and then an updated email on May 13 that includes a direct link to the annotated forms. The emails provide that the citations are to TILA sections referenced in the Integrated Mortgage Disclosure final rule.

The use of the Loan Estimate and Closing Disclosure are required by the TILA/RESPA Integrated Disclosure (TRID) rule which became effective October 3, 2015. The rule incorporates both RESPA and TILA disclosure requirements, and the requirements are set forth in Regulation Z under TILA. Based on the varying nature of liability under RESPA and TILA, the CFPB addressed in the preamble to the TRID rule the sections of TILA, RESPA and/or the Dodd-Frank Act that it used as legal authority for the various TRID rule sections.

Unfortunately, the CFPB may have done more harm than good. For example, as we have previously addressed, in a December 29, 2015 letter to the MBA, Director Cordray addressed TRID rule liability concerns. The Director noted that “As a general matter, consistent with existing [TILA] principles, liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability.” The industry took this to mean that in many cases errors in the Loan Estimate could be cured through a correct Closing Disclosure. However, by issuing a Loan Estimate with citations to TILA sections the CFPB appears to have raised the issue of whether there is TILA liability for Loan Estimate errors.

Also, the annotated disclosures provide that both the Adjustable Payment (AP) Table and Adjustable Interest Rate (AIR) Table were adopted based on TILA section 128(b)(2)(C)(ii). However, the preamble to the TRID rule reflects that only the AP Table was adopted based on such section, and that the AIR Table was adopted based on general CFPB rulemaking authority.

As we reported, recently the CFPB also announced its intention to re-open the rulemaking corresponding with the TRID rule. Perhaps the CFPB can use the rulemaking initiative to better address industry concerns regarding TRID rule liability.