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D.C Circuit rejects constitutional challenge to SEC’s use of administrative law judges

Posted in CFPB Enforcement

A challenge to the constitutionality of the SEC’s use of administrative law judges (ALJ) was rejected by the U.S. Court of Appeals for the D.C. Circuit.  In Raymond J. Lucia Companies, Inc. et al. v. Securities and Exchange Commission, the petitioners contended that the SEC’s decision imposing sanctions for violations of the Investment Advisors Act should be vacated because the ALJ rendering the initial decision was an “inferior Officer” who, pursuant to the Appointments Clause of Article II of the U.S. Constitution, could only be appointed by the President, a court, or the head of a “Department.”  Since the ALJ was hired by the SEC’s Office of Administrative Law Judges and not appointed by an SEC commissioner, the petitioners argued that the ALJ’s appointment was unconstitutional.

Pointing to statutory language which provides that an ALJ’s “action,” when not reviewed by the SEC, shall “be deemed the action of the Commission,” the petitioners argued that SEC ALJs were Officers and not employees because they had the ability to issue final decisions of the SEC.  The court rejected this argument, observing that under SEC rules, an ALJ’s decision does not become final until the SEC determines not to review the decision.  The court noted that even if a petition for review is not filed, the SEC “can always grant review on its own initiative, and so it must consider every initial decision, including those in which it does not order review.”

As we have previously noted, because the CFPB is housed within the Federal Reserve, it could be argued that Director Cordray is not a “Department” head who can appoint “inferior Officers” under the Appointments Clause.  Thus, if an Appointments Clause challenge were made to the CFPB’s use of an ALJ, it might be necessary for the CFPB to establish that its ALJ was an employee rather than an Officer.

CFPB solicits information on registration system for nonbanks

Posted in CFPB General

In a Request for Information (RFI) posted on the Federal Business Opportunity website last month, the CFPB solicited information from vendors so the CFPB can “better understand current, state-of-the-art capabilities and strategies to aid its consideration on whether to propose a registration system for nonbank financial institutions.”  Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”  The CFPB stated in its Fall 2015 and Spring 2016 rulemaking agendas that in addition to considering  “larger participant” rules for consumer installment loans and vehicle title loans, it was “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision.”  In the RFI, the CFPB stated that should it propose a registration rule, “it would provide notice and an opportunity for comment pursuant to the Administrative Procedure Act” and “would issue a final rule only after giving careful consideration to all comments.”

In the RFI, the CFPB stated that it is considering “whether to procure a comprehensive and interactive online web based Registration System that would allow nonbank financial institutions supervised or regulated by the CFPB to apply for, amend, update, or renew registration online using a single set of uniform applications and would allow the CFPB to process these registration applications and amendments through automated workflows.”  The CFPB further stated that such a system “might also be used to collect financial and operational data as well as organizational structure data.  The registration information collected might include business register data such as the name, address, aliases, industry, and ownership information.  The system might also be used to integrate data with other regulatory data.”

To “determine the availability and cost associated with” an automated online registration system that would meet the CFPB’s potential requirements (which are described in the RFI), the CFPB asked vendors interested in providing related services to provide information regarding their capabilities, past performance, and costs for a system and system support.  The CFPB also asked vendors to provide any comments or suggestions related to the CFPB’s potential requirements.  Responses to the RFI were due by July 29, 2016.

At the American Association of Residential Mortgage Regulators Annual Conference last week in Tampa, Bill Mathews, President of State Regulatory Registry LLC (SRR), announced that SRR had responded to the RFI.  (SRR is the entity that owns and operates the Nationwide Multistate Licensing System & Registry (NMLS).)  The NMLS (which uses a uniform application and allows licensees to amend, update and renew licenses on-line) is the system of record for non-depository, financial services licensing or registration for more than 60 state or territorial governmental agencies.  It is the sole system of record for mortgage companies for 58 state agencies, the sole system of record for individual mortgage loan originators for 59 state and territorial agencies, and the sole system of record for the registration of depositories, subsidiaries of depositories, and mortgage loan originators under Regulation G.  Currently, more than half of the states manage additional license types in the money services business, debt and consumer finance industries, with new states and new license types being added fairly regularly.

Given that NMLS is already the system of record for so many state agencies, it would be very surprising if the CFPB elected to use a different vendor, particularly as SRR is in the midst of designing and then launching NMLS 2.0, which will purportedly address some of the limitations under the current version of NMLS and provide for even more automation and  functionality.





CFPB debt collection proposals would create problematic new substantiation standard

Posted in Debt Collection

The debt collection proposals outlined by the CFPB for the SBREFA panel are driven in large part by the CFPB’s reliance on the data derived from its complaint portal and a consumer survey conducted by the Bureau over several months in 2014-15.  The survey results are remarkable in how closely they mirror the complaint portal data.  Both sources indicate that the most common complaints made by consumers are that collectors have the wrong person or are asking for the wrong amount.  The CFPB has never attempted to demonstrate systematically whether the complaints in the portal have any factual validity.  And despite the fact that the survey developers apparently employed sophisticated methodology in targeting respondents, the Bureau also made no effort to take a subset of survey responses and attempt to verify whether or not the complaints had any basis in fact.

There is some very telling extrinsic evidence that the complaint data from both sources is flawed.  One would not have to look long at the 10,000 FDCPA cases that are filed each year to determine that only a very small fraction of them involve the wrong person or the wrong balance—despite the fact that there could be no easier cases for consumers to win or lawyers to solicit.  So it is not without some irony that the CFPB is now driving a series of reforms predicated on the belief that the collection industry operates on incomplete or inaccurate information when the CFPB has made no effort at external validation of its own data.

The proposals under consideration would require a debt collector to “substantiate” that a consumer owes a debt before starting collection.  The CFPB’s proposed standard—that the collector “form a reasonable basis for claims of indebtedness”—follows from the Bureau’s view that “when a collector seeks to have a specific consumer pay a specific debt, the collector is at least implicitly claiming that the individual owes the debt or amount.”  This view turns existing law on its head.

Under the FDCPA, a collector sending an initial collection letter only implicitly claims that it is familiar with the general business practices of its client such that its billing and accounting practices are reliable to a point where the collector may contact the consumer about a debt.  An “implicit claim” that the specific consumer owes the precise amount in question is exactly what a generation of compliance lawyers have labored to eliminate from initial collection letters since the FDCPA’s inception.  Many initial letters do not even ask for payment. There is no tacit message that the collector has reached back and conducted an audit of the client before sending its letter.  If the consumer knows that the collector has made a mistake, the Validation Notice invites the consumer to make his or her objections.

The CFPB’s proposals set forth the following five sets of “fundamental information” that should be available to a collector so that it can form a reasonable basis as to a claim of indebtedness:

  • ŸThe full name, last known address and last known telephone number of the consumer. There are cases where phone numbers have been reassigned, which usually means the phone numbers will be deleted from the creditor’s system.  And there may be accounts with other valid information that collectors can use to correctly identify consumers.  Will accounts that require initial skip tracing be suspect?
  • Ÿ The account number of the consumer with the debt owner at the time the account went into default. For some consumer creditors, account numbers change when accounts charge-off, although most creditors retain the original account numbers in their systems.  There are creditors, however, such as hospitals and clinics, that do not provide consumers with individual account numbers, but rather assign a specific account number to each visit or type of service.  It would be confusing for a collector to have to send the consumer multiple collection letters for a related series of medical services.  Will the collector need to develop tests or algorithms to ascertain if the account numbers are valid or properly assigned or will the collector be allowed to rely on the account numbers it receives?  In cases where judgments are collected, there are no account numbers for the simple reason that judgments are not accounts.  What then? 
  • ŸThe date of default; the amount owed at default and the date and amount of any credit applied after default. Many consumer lenders move their delinquent accounts to separate recovery platforms at the date of charge-off because charge-off, not the date of first delinquency, is the relevant date for collection purposes.  As a result, collectors who receive accounts from these lenders see most data only from the charge-off date.  Many lenders, including most larger ones, will have to invest significant time and expense in changing their own internal systems to capture and share this information.
  • ŸEach charge for interest or fees imposed after default and the contractual or statutory source for such interest and fees. What level of review is the collector to conduct with this data?  Will the creditor provide statutory and contractual annotations for each charge?  How can a debt collector interpret the contractual or statutory sources for interest and fees without having an attorney conduct a legal review?
  • ŸThe complete chain of title from the debt owner at the time of the default to the collector. Major debt buyers already have the resources and sophistication to conduct the kind of due diligence necessary to resolve complex chain of title questions.  Large collection agencies and some large national collection law firms will be able to retain the kind of legal talent necessary to interpret and resolve these issues.  It is unlikely that smaller agencies and law firms will be in a position to conduct these reviews—either because they will not be able to afford the legal resources or because credit grantors may not be inclined to share confidential information about securitization pools, accounts receivable financing, and other arrangements which affect title to their accounts with a large group of external vendors.
  • Ÿ A written representation from the debt owner that its data is accurate. The proposals contemplate that a creditor at time of default or a debt buyer would provide the collector with written assurance that it has “adopted written policies and procedures to ensure the accuracy of transferred information and that the transferred information is identical to the information in the debt owner’s records.”  This “Representation of Accuracy” could be a very useful resource for collectors—especially smaller companies that do not have the ability to become familiar with the operation of large or distant creditors.  However, if the document has the potential to create a roadmap for litigants to go after the deeper pockets of many creditors, it is unlikely to see widespread adoption.

The proposals would not mandate that a collector have access to all five categories of “fundamental information” or a Representation of Accuracy from the debt owner.  But it appears that demonstrated reliance on these elements may provide some sort of safe harbor.  The collector has the option of forming reasonable support for substantiating the debt with alternative information.  However, in so doing, the collector has the burden of justifying its alternative approach.

Once the “fundamental information” is obtained, the collector has the responsibility to review the information, looking for “warning signs” that the information for an individual debt or an entire portfolio is not clearly understandable, facially implausible, or contradictory.  The collector must also review the entire portfolio with an eye towards whether a significant percentage of accounts have missing or implausible information, or unresolved disputes.

Under the proposals, collectors would be responsible for failing to respond to any warning signs that they detect or should have detected.  And this responsibility does not end after the first collection letter is sent.  Collectors will have a continuing duty to respond to unspecified warning signs that might arise during the collection process in some unspecified way, and then would have to take additional steps to further substantiate those accounts (or even an entire debt portfolio) before proceeding.

My nearly 30 years of experience in the collections industry, which includes managing a national collections agency and founding one of the country’s largest collection law firms, allows me to assess the CFPB’s proposals from a unique vantage point.  It is perhaps fair to say that there are suggested practices in these proposals, which if adopted pragmatically, could make good business and legal sense for many collectors.  And there is no question that there are a substantial number of collectors with internal practices and controls that exceed those contemplated by the proposals under consideration.  The question is whether a regulatory framework can be devised that can be assimilated and complied with by many of the smaller and very small businesses that make up the collection industry.  That prospect seems unlikely.


Fed to host conference on financial innovation

Posted in Marketplace Lending

While the CFPB has indicated it will be monitoring FinTech innovations, it has not yet held a public event devoted to FinTech or financial innovation.  Both the FTC and OCC have already held such events this year and now the Federal Reserve’s Board of Governors has announced that it will be hosting a research and policy conference on financial innovation, “Online Lending to Households and Small Businesses,” in Washington, D.C. on December 2, 2016.  According to the Fed, the purpose of the conference “is to bring together academics, industry participants, and policymakers to discuss current academic research related to innovations in online lending and its implications for borrowers, traditional lenders, the macroeconomy, financial stability, and regulatory policy.”  Attendance at the conference is by invitation only.

In connection with the conference, the Fed has issued a call for “high quality research papers in all areas related to online lending” and has identified topics of particular interest.  The topics include the characteristics of online borrowers and lenders; similarities and differences between online lenders and traditional lenders in areas such as underwriting and risk standards, production processes, technology, cost structure, and profitability; new regulatory challenges posed by the emergence of online lending; and consumer protection and online lending.  The conference’s organizing committee will select papers for presentation.


CFPB issues final rule amending mortgage servicing regulations

Posted in CFPB General, CFPB Rulemaking

The CFPB issued its final rule amending the mortgage servicing rules under Regulations X and Z.  The proposal for these amendments was issued in November 2014.  The amended provisions cover a wide range of topics, including the following:

  • Tailored periodic statements and early intervention notices for borrowers in bankruptcy;
  • Additional procedures for communicating with, and confirming, a wide variety of potential successors in interest;
  • Application of loss mitigation procedures and foreclosure protections more than once over the life of the loan;
  • An additional notice required upon completion of a loss mitigation application;
  • Clarification of how certain requirements apply in the context of a servicing transfer; and
  • Relief from the periodic statement requirement for certain charged-off loans.

Most of the provisions will go into effect 12 months after publication in the Federal Register.  However, the amended provisions relating to successors in interest and periodic statements for borrowers in bankruptcy will take effect 18 months after publication.

Also of note, the CFPB issued an accompanying interpretive rule concerning the interaction of the Fair Debt Collection Practices Act (FDCPA) and the servicing rules.  Characterized as an advisory opinion for purposes of the FDCPA, the interpretive rule aims to provide a safe harbor from FDCPA liability for compliance with the following requirements under Regulation X:

  • The requirement to communicate with a potential successor in interest regarding an existing loan (i.e., communicating with a third party regarding a debt);
  • The requirement to send early intervention notices despite a borrower’s cease communication request pursuant to the FDCPA; and
  • The requirement to respond to borrower-initiated communications regarding loss mitigation, despite a borrower’s cease communication request pursuant to the FDCPA.

The Ballard Spahr Mortgage Banking Group continues to review this voluminous offering from the CFPB (just over 900 pages), and will have further comments in the near future.  In addition, a webinar covering this final rule and other recent servicing developments is scheduled for Tuesday, September 13th.

CFPB proposes changes to higher-priced mortgage loan exemption threshold

Posted in CFPB General, CFPB Rulemaking, Mortgages

On August 4, 2016, the CFPB published for comment proposed substantive and organizational changes to the Regulation Z Commentary regarding the calculation of the annual exemption threshold  amount for the special appraisal requirements for higher-priced mortgage loans under section 129H of the Truth in Lending Act (TILA).  Both the Office of Comptroller of Currency and the Federal Reserve Board have proposed corresponding proposed rules.  Comments must be received on or before September 6, 2016.

When originally adopted by the CFPB in 2014, the final rule for appraisals in connection with higher-priced mortgage loans exempted, among other loan types, transactions of $25,000 or less.  The final rule also required that the $25,000 amount be adjusted annually based on any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).

Among other changes, the proposed rule would bifurcate the calculation of the annual exemption threshold amount into actual and baseline threshold amounts.  The actual threshold amount would be the exemption amount for the upcoming year and could not be less than the prior year’s actual threshold amount.  The baseline threshold amount would be used to calculate the actual threshold amount for a year following a year in which the actual threshold amount was not adjusted because the previous year’s CPI-W would have caused a decrease in the actual threshold amount.

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Democratic lawmakers urge adoption of CFPB arbitration proposal

Posted in Arbitration

A total of 102 Democratic lawmakers, consisting of 37 Democratic Senators joined by Independent Senator Bernie Sanders and 65 House members, have signed on to letters sent to Director Cordray expressing support for the CFPB’s proposed arbitration rule.  The proposal would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposal would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.

Both letters tout the benefits of class actions for consumers and urge the CFPB to proceed “quickly” to finalize its proposal.  However, they rely heavily on the CFPB’s March 2015 empirical study on consumer arbitration, which actually contradicts their position that class actions benefit consumers.  The study showed that individual arbitration is faster, cheaper and far more beneficial to consumers than class action litigation.  For example, according to the CFPB’s study, while the average payment to consumers from class action settlements was a mere $32.35, the average arbitration award to consumers was $5,389.00, and the dispute was resolved in a few months rather than several years.

Comments on the proposal must be submitted by August 22.





CFPB issues 2016 Plain Writing Act Compliance Report

Posted in CFPB General

The CFPB has issued its 2016 Plain Writing Act Compliance Report.  Under the PWA, federal “executive agencies,” including the CFPB, are required to use plain language in documents that: are necessary for obtaining information about a federal government benefit or service or filing taxes; provide information about a federal government benefit or service; or explain to the public how to comply with a requirement that the federal government administers or enforces.

The report discusses the CFPB’s efforts to comply with the PWA and promote the use of plain writing in its communications.  As it did in previous PWA reports, the CFPB states in the new report that it has adopted plain language “as a core principle” for all of the CFPB’s printed and online consumer-facing content.  Examples given by the CFPB are its “Ask CFPB” online Q&A tool and its consumer-facing advisories and other information on various topics such as opening and managing a checking account, preventing elder financial abuse, sending money abroad, paying for college, and retirement planning.

In the new report, as in previous reports, the CFPB states that while the PWA does not apply to regulations, it generally provides summaries written in plain language at the beginning of proposed or final consumer protection regulations.  It also notes that its small entity compliance guides and other documents intended for use by industry in implementing regulations are “written in plain language appropriate for the intended audience.”


Ballard attorneys author article on CFPB’s “regulation by enforcement” approach

Posted in CFPB Enforcement

Earlier this year, in his appearance before the Senate Banking Committee and in remarks to the Consumer Bankers Association, Director Cordray attempted to defend the CFPB’s “regulation by enforcement” approach that relies on enforcement in place of rulemaking.  That approach has been widely criticized by industry and we have shared our own criticism in prior blog posts.

The CFPB’s “regulation by enforcement” approach was the subject of a recent article written for the Washington Legal Foundation by two of my colleagues, Stefanie Jackman and Dan Delnero.   The article, “CFPB’s Systemic Regulation of Four Industries: Enforcing Broader Changes Via Consent Order,” explores consent orders in the credit card, debt sales, auto finance, and data-security industries used by the CFPB to bring about systemic changes.



CFPB outlines future principles for loss mitigation

Posted in Mortgages

Looking forward to a post-financial crisis and post-HAMP mortgage marketplace, the CFPB has issued a document outlining principles intended to “provide a framework for discussion about the future of loss mitigation.”  The four principles discussed are Accessibility, Affordability, Sustainability, and Transparency.  This release by the CFPB echoes the principles discussed in the recent white paper issued by the Treasury, HUD, and the FHFA titled: “Guiding Principles for the Future of Loss Mitigation: How the Lessons Learned from the Financial Crisis can Influence the Path Forward.”

According to the document these principles build on, but are distinct from, the CFPB’s mortgage servicing rules, supervisory authority and enforcement authority.  The CFPB further notes that the document does not establish binding legal requirements, and is instead meant to “complement ongoing discussions among industry, consumer groups and policy makers on the development of loss mitigation programs.”  Notably, the document cautions that while the principles have applicability to most loss mitigation programs, certain recommendations may not align with government insured lending programs, such as those offered by FHA, VA, or Rural Housing Service.

Many of the principles are reflective of positions the CFPB has taken in the past, through guidance bulletins, supervisory highlights, or more specifically in the mortgage servicing rules.  Notably, however, certain of these principles are aimed at the terms of loss mitigation options made available to borrowers.  We note that the loss mitigation-related requirements under Regulation X give deference to the investor in terms of the loss mitigation options available.  Now, with HAMP’s expiration upcoming, it appears that the CFPB and other regulators will further seek to influence the types of loss mitigation options offered by private investors in terms of “affordability” and “sustainability.”

The principles provided in the document are set forth below.


  • Consumers can easily obtain and use information about loss mitigation options and application procedures from their servicers.
  • Consumers can submit a request for loss mitigation using a common and readily available form of application in order to expedite consideration and to better enable housing counselors and others to support consumers in the loss mitigation process.
  • Consumers are asked to submit only documentation necessary to enable consideration for available options, and servicers make appropriate efforts to obtain and verify information within the servicer’s control.
  • Consumers have ready access to individuals, including housing counselors and others, who can help them seek loss mitigation and understand the effect of the terms they are being offered.
  • Consumers’ requests for loss mitigation assistance are responded to timely and effectively by servicers.
  • Consumers have access to clear and effective escalation options.
  • Consumers are considered for appropriate loss mitigation options from imminent default through late stages of delinquency.
  • Consumers who are similarly situated receive fair and equal consideration for loss mitigation options within similar timeframes.
  • Servicers should generally be aware of and consider how they will meet the needs of those with limited English proficiency.


  • When repayment plans and modifications are offered, they are generally designed to produce a payment and loan structure that is affordable for consumers.
  • Modifications for consumers with hardships provide a meaningful payment reduction.
  • Loss mitigation options are flexible enough to assist special populations (e.g., pre-crisis subprime loans) or unique circumstances (e.g., disasters).
  • Consumers are not required to pay upfront costs or fees to obtain a loss mitigation option from their servicer.


  • The loss mitigation option offered is designed to resolve the delinquency.
  • Deficiency balances are not imposed on consumers experiencing hardship as a condition of a short sale or deed-in-lieu on their principal residence.
  • When modification options are used, they are designed to provide affordability throughout the remaining or extended loan term.
  • Where trial modifications are used, successful trials are converted to permanent modifications timely and efficiently.
  • Servicers and investors should consider modification options that reduce principal when doing so may benefit the investor, unless prohibited by statute.
  • Loss mitigation options are defined and made available for consumers who decline a loan modification offer.
  • Loss mitigation options are available for borrowers who re-default.
  • Loss mitigation outcomes are monitored by servicers and investors to determine their impact on re-default rates, and program terms are adjusted to achieve effective outcomes and respond to economic conditions


  • All terms (e.g., deferred interest, future rate or term changes, and repayment of forbearance amounts) are clearly described in a manner consumers can understand. Plain language should be used to the extent reasonably feasible.
  • Key loss mitigation vocabulary, e.g., hardship, imminent default, streamlined modification, etc., and data standards are defined and used consistently by mortgage servicers and investors.
  • Consumers get clear, concise information and rationales about loss mitigation decisions.
  • Consumers are not required to sign broad waivers of rights as a condition of receiving loss mitigation assistance.
  • Key loss mitigation data is reported publicly on a regular basis to ensure that loss mitigation programs are effectively meeting consumer and market needs.