The Consumer Financial Services Association of America (CFSA) issued a statement in which it reported that documents it received from the CFPB in response to a Freedom of Information (FOIA) request filed on December 31, 2015 “reveal for the first time more than 12,000 positive testimonials that payday loan customers submitted to the [CFPB] as part of the Bureau’s “Tell Your Story” initiative.”
According to the CFSA, during the five-year period covered by the FOIA request, 12,308 comments (or more than 98%) of the 12,546 comments submitted on short-term loans praised the industry and its products and services, or otherwise indicated positive experiences. The CFSA reported that the FOIA documents revealed that only an extremely small number of critical payday lending comments were submitted to the CFPB – just 240 or less than 2%. (According to the CFSA, of the 240 negative comments, 84 comments were mistakenly categorized as payday lending comments.)
The CFSA observed that this data is consistent with complaint data from the CFPB and FTC. It stated that “[s]ince the CFPB’s complaint portal came online in 2011, complaints regarding payday loans have been miniscule – just 1.5% of all complaints. Meanwhile, these complaints continue to decline.” The CFSA also stated that “[i]n its summary of 2015 consumer complaints, the FTC found that just 0.003% of more than three million complaints related to payday lending.”
The CFPB issued its payday loan proposal in June 2016 and comments are due by October 7, 2016. The CFSA asserted that, by pursuing this proposal, the CFPB is “ignoring the positive experiences shared by consumers.”
The Department of Defense (DoD) has issued an interpretive rule to assist the industry in complying with its July 2015 final rule amending the Military Lending Act’s implementing regulation. The much-anticipated guidance was published in the Federal Register on August 26, 2016, just over one month before the final rule’s October 3 compliance deadline for most products other than credit cards.
The DoD consulted with the CFPB in developing the final rule, and the CFPB actively supported the DoD’s plans to expand MLA coverage. The CFPB has authority to enforce the MLA against lenders as to whom it has TILA enforcement authority and can examine lenders as to whom it has supervisory authority for MLA compliance.
On September 20, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar on the interpretive rule: “The DoD’s 11th Hour Interpretive Rule For New MLA Rules.” More information about the webinar and the registration form is available here.
The interpretive rule consists of a series of 19 questions and answers that, according to the DoD, “represent official interpretations of the Department.” The DoD also states that the interpretive rule “provides guidance on certain questions the Department has received regarding compliance with the July 2015 Final Rule” and “does not substantively change the regulation implementing the MLA, but rather merely states the Department’s preexisting interpretations of an existing regulation.” In connection with the interpretive rule, the American Bankers Association (ABA) has made suggestions to representatives of the CFPB, Fed, OCC and FDIC for how the agencies can use their examination procedures to facilitate MLA compliance. Several of those suggestions are noted below.
Highlights of the interpretive rule include the following:
- Scope of purchase money exception. The MLA rule exempts a credit transaction that is expressly intended to finance the purchase of personal property when the credit is secured by the property being purchased. The interpretive rule states that the exception is limited to a loan that finances “only the acquisition of personal property” and does not apply to a “credit transaction that provides purchase money secured financing of personal property with additional ‘cash out’ financing.” The ABA suggests that examiners “should distinguish attempts to circumvent the MLA rule through phony ‘secured’ transactions from legitimate secured loans that include financing for incidental expenses related to the underlying purchase, such as shipping and delivery charges, taxes, warranties, and other services directly connected to the transaction. Therefore, the latter loans would qualify for the exemption so long as they meet the regulatory requirements for exclusion (i.e., are expressly intended to finance the purchase of the personal property and are secured by the personal property being purchased).” The ABA believes this approach should also apply to “vehicle” purchase loans.
- Oral disclosures. The MLA rule requires a creditor to provide to a covered borrower, before or at the time the borrower becomes obligated on the transaction or establishes an account for consumer credit, a clear description of the covered borrower’s payment obligation. A creditor can satisfy this requirement by providing the information orally in a payment schedule or account-opening disclosure. The interpretive rule states that “an oral recitation of the payment schedule or account-opening disclosure is not the only way a creditor” can comply. It provides that a creditor “may also orally provide a clear description of the payment obligation of the covered borrower by providing a general description of how the payment obligation is calculated or a description of what the borrower’s payment obligation would be based on an estimate of the amount the borrower may borrow.” The interpretive rule also states that “a generic oral description of the payment obligation may be provided, even though the disclosure is the same for borrowers with a variety of consumer credit transactions or accounts.”
- Prohibited terms. The MLA rule makes it unlawful for a creditor to extend consumer credit to a covered borrower pursuant to a credit agreement that includes certain terms, such as a mandatory arbitration provision. The interpretive rule states that a creditor can use a single credit agreement for both covered and non-covered borrowers, provided that “the agreement includes a contractual ‘savings clause’ limiting the application of the proscribed term to only non-covered borrowers, consistent with any other applicable law.”
- MAPR 36 percent limit. The MLA rule prohibits a creditor from imposing a military annual percentage rate (MAPR) greater than 36 percent in connection with an extension of consumer credit that is closed-end credit or in any billing cycle for open-end credit. The interpretive rule recognizes that a covered borrower’s use of an open-end account could result in fees and/or periodic charges that would cause the MAPR to exceed 36 percent. It states that “nothing in [the MLA rule] prohibits a creditor from complying by waiving fees or finance charges, either in whole or in part, in order to reduce the MAPR to 36 percent or below in a given billing cycle.”
- Limitation on use of checks and other access methods. The MLA rule prohibits a creditor from extending consumer credit to a covered borrower with respect to which the creditor uses a check or other method of access to a deposit, savings,or other financial account maintained by the covered borrower. The interpretive rule states that the prohibition makes it unlawful for a creditor to use a borrower’s account information to create a remotely created check or remotely created payment order to collect payments or to use a post-dated check provided at or around the time that credit is extended. It provides that the prohibition does not prevent a covered borrower from tendering a check or authorizing access to a deposit, savings, or other financial account to repay a creditor (including authorizing automatically recurring payments in compliance with the EFTA and Regulation E) or from granting a security interest to a creditor in the covered borrower’s checking, savings or other financial account. The interpretive rule further provides that the prohibition does not prevent a creditor from exercising a statutory right under federal or state law to take a security interest in funds deposited in a covered borrower’s account. The ABA suggests that MLA examination procedures make clear that there is no limit on the timing of when a creditor can take a security interest.
- Safe harbor for assignees. The MLA rule provides a safe harbor for a creditor that determines a consumer’s military status using the DoD database or a credit report. The interpretive rule states that the safe harbor extends to a creditor’s assignee “provided that that the assignee continues to maintain the record created by the creditor that initially extended the credit.”
In addition to providing suggestions for MLA examination procedures, the ABA, joined by six other prominent industry trade groups, recently wrote to the CFPB and federal banking agencies (Fed, OCC, FDIC, NCUA) seeking to postpone by six months the date on which examiners will begin transactional testing of depository institutions for compliance with the MLA final rule.
The CFPB has issued a report that describes a new “developmentally informed, skills-based model” for helping youth achieve financial capability. Entitled “Building blocks to help youth achieve financial capability,” the report highlights key milestones from early childhood through young adulthood that support the development of adult financial capability, and makes recommendations “for delivering evidence-based, age-appropriate, and developmentally appropriate financial education policies and programs.” The CFPB also issued a “Report brief” that discusses the research presented in the report and a teaching tool to enhance personal financial education in schools that the CFPB refers to as “a personal finance pedagogy.” The report, brief, and teaching tool were issued in conjunction with a “Youth Financial Capability Town Hall” held in Dallas, Texas at which Director Cordray delivered prepared remarks.
The CFPB defines financial capability as “the capacity to manage financial resources effectively, understand and apply financial knowledge, and the ability to make a plan, stick to it and successfully complete financial tasks.” The CFPB’s initiatives to build financial capability are based on its view that individuals with financial capability are more likely to be able to meet current and ongoing financial obligations and feel more secure in their financial futures.
The CFPB’s research found that adult financial capability most likely stems from three “building blocks” of youth financial capability:
- Executive functions: a set of cognitive processes used to plan, focus attention, remember information, and juggle multiple tasks successfully
- Financial habits and norms: the values, standards, routine practices, and rules of thumb used to routinely navigate day-to-day financial life
- Financial knowledge and decision-making skills: familiarity with financial facts and concepts, and the ability to do financial research and make conscious and intentional financial choices
In the report, the CFPB discusses how and when children and youth acquire these building blocks and details the specific competencies that children and youth develop during early childhood, middle childhood and adolescence. Based on this “developmental model,” the CFPB makes the following recommendations for helping children and youth acquire the three building blocks:
- For children in early childhood, focus on developing executive function
- Help parents and caregivers to more actively influence their child’s financial socialization
- Provide children and youth with financial experiential learning opportunities
- Teach youth financial research skills (e.g. skills to find and evaluate financial information)
For each recommendation, the CFPB explains why the recommendation helps build financial capability and provides examples from the field and potential strategies for putting the recommendations into place. The CFPB deserves to be commended for its innovative efforts towards helping children and youth achieve financial capability.
The American Bankers Association, joined by six other prominent industry trade groups, is seeking to postpone by six months the date on which examiners will begin transactional testing of depository institutions for compliance with the Military Lending Act (MLA) final rule adopted by the Department of Defense (DoD) in July 2015 that dramatically expanded the scope of the MLA’s coverage. The request was made in a letter to the CFPB, the Fed, the FDIC, the OCC, and the NCUA (Agencies). The DoD consulted with the CFPB in developing the final rule, and the CFPB actively supported the DoD’s plans to expand MLA coverage.
MLA coverage was previously limited to only three types of consumer credit extended to active-duty service members and their dependents: closed-end payday loans with a term of 91 days or less in which the amount financed does not exceed $2,000, closed-end vehicle title loans with a term of 181 days or less, and closed-end tax refund anticipation loans. The final rule extends the MLA’s 36 percent interest cap and other restrictions to a host of additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, and all types of deposit advance, refund anticipation, vehicle title, and payday loans (but residential mortgages and purchase-money personal property loans are excluded). Although the DoD’s final rule took effect on October 1, 2015, it applies only to consumer credit transactions or accounts that are consummated or established after October 3, 2016 for most products, and after October 3, 2017 for credit cards.
In their letter, the trade groups seek “express assurances” from the Agencies that until March 3, 2017, “MLA examinations will be limited to inquiries about the status of preparations to comply and that examiners will postpone transactional testing for compliance,” thereby “giving industry six months to implement and test its MLA compliance systems.”
The trade groups note that it was not until last week, on August 26, 2016, that the DoD published in the Federal Register an interpretive rule to provide guidance regarding compliance with the July 2015 final rule. They state in their letter that because of the absence of clear guidance on how to interpret and comply with several requirements of the final rule, depository institutions have been unable to finalize and test their MLA compliance policies and programs. They also state that the Agencies have similarly been unable to issue examination procedures, which depository institutions review to confirm their understanding of the final rule and ensure their implementation plans comply with supervisory expectations. The trade groups also note that credit bureaus do not expect to be able to provide military status information to depository institutions until mid-September, which would leave very little time to train staff and vendors and test systems before the October 3 effective date.
The CFPB has issued its August 2016 complaint report which highlights complaints about bank accounts or services and complaints from consumers in Ohio and the Columbus metro area. The CFPB began taking bank account or service complaints on March 1, 2012.
As noted below, the report indicates that consumers commonly complain about the use of consumer and credit reporting data for account screening. In February 2016, the CFPB held a field hearing on checking account access. In conjunction with the hearing, the CFPB issued a compliance bulletin “warning banks and credit unions that failure to meet accuracy obligations when they report negative account histories to credit reporting companies could result in Bureau action.”
General findings include the following:
- As of August 1, 2016, the CFPB handled approximately 954,400 complaints nationally, including approximately 24,000 complaints in July 2016. Debt collection continued to be the most-complained-about financial product or service in July 2016, representing about 27 percent of complaints submitted. Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 66 percent of the complaints submitted in June 2016.
- Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 64 percent from the same time last year (May to July 2015 compared with May to July 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 19 percent from the same time last year (May to July 2015 compared with May to July 2016). Complaints during those periods decreased from 451 complaints in 2015 to 367 complaints in 2016. In the complaint reports for March through July 2016, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
- Alabama, Wyoming, and Colorado experienced the greatest complaint volume increases from the same time last year (May to July 2015 compared with May to July 2016) with increases of, respectively, 29, 24, and 20 percent.
- Maine, Delaware, and Hawaii experienced the greatest complaint volume decreases from the same time last year (May to July 2015 compared with May to July 2016) with decreases of, respectively, 30, 23, and 22 percent.
Findings regarding bank account or service complaints include the following:
- The CFPB has handled approximately 94,200 bank account or service complaints, representing about 10 percent of total complaints.
- Checking accounts are the type of bank account or service product that consumers complain about most, representing 64 percent of complaints in this category. The most-complained-about issues involved problems with account management, deposits and withdrawals.
- Complaints about the use of consumer and credit reporting data for account screening are “increasingly common,” with consumers frequently mentioning that that they learned for the first time of negative information when they attempted to open a new deposit account.
- Complaints related to overdrafts “remain common,” including complaints about transaction ordering. Consumers also complained about overdrafts that took place because of confusion about the availability of funds they had deposited or were attempting to deposit. Consumers “regularly complain” about the size of overdraft fees when making small dollar purchases and are “often frustrated” by bank check holding policies, with “a number of these complaints” involving mobile deposit applications. (In its Spring 2016 rulemaking agenda, the CFPB stated that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the [overdraft] opt-in process.”)
- Complaints about promotional offers for opening accounts “were the focus of a number of complaints,” with the complaints sometimes involving the consumer’s eligibility for the offer or whether the consumer met the required terms for an offer.
- Consumers “frequently complain” about error resolution procedures, including timelines for investigation and provisional credit for disputed transactions.
Findings regarding complaints from Ohio consumers include the following:
- As of August 1, 2016, approximately 29,400 complaints were submitted by Ohio consumers of which approximately 22 percent (about 6,5000) were from Columbus consumers.
- Debt collection was the most-complained-about product, representing 30 percent of the complaints submitted by Ohio consumers and 27 percent of complaints submitted by consumers nationally.
- The percentage of mortgage complaints submitted by Ohio consumers, 22 percent, was lower than the 25 percent national average.
- Average monthly complaints received from Ohio consumers increased 10 percent from 2014 to 2015, similar to the increase of 8 percent nationally.
According to Politico, Holly Petraeus, Assistant Director of the CFPB’s Office of Servicemember Affairs, will be retiring from the CFPB.
During her tenure at the CFPB, the protection of military servicemembers and their families has been a focus of CFPB supervisory and enforcement activity. Among other things, Ms. Petraeus was a vociferous advocate for the Department of Defense’s rule expanding the protections of the Military Lending Act, which, with the exception of credit cards, requires compliance by October 3, 2016.
The Small Business Administration’s Office of Advocacy will host a roundtable in London, Kentucky on September 14, 2016 on the CFPB’s proposed payday loan rule. As the Office of Advocacy is an independent office within the U.S. Small Business Administration, the views expressed by the Office of Advocacy do not necessarily reflect the views of the SBA or the Administration. According to the Office, the roundtable will focus on the proposal’s potential economic impact on small entities and rural communities and feasible alternatives that might be available that would achieve the regulatory objectives in a less costly way. The tentative agenda indicates that a CFPB representative has been invited to attend.
Prior to issuing its proposed payday loan rule, the CFPB convened a SBREFA panel that met with small entity representatives (SERs) to provide input on the proposals under consideration by the CFPB. The Chief Counsel for Advocacy was a member of the SBREFA panel. We understand that the Office of Advocacy views the roundtables as an opportunity for all small businesses (such as those that did not serve as SERs) to provide input on the CFPB’s proposal. The Office of Advocacy has indicated that it is planning to hold additional roundtables on the CFPB’s payday loan proposal in Madison, WI and Washington, D.C. and submit a comment letter to the CFPB based on the input received at the roundtables.
We understand that the Office of Advocacy expects to post information about the roundtables on its website.
It has been reported that the SBREFA panel for the CFPB’s debt collection rulemaking met last week with small entity representatives (SER). In anticipation of convening the panel, the CFPB issued an outline of the proposals it is considering on July 28, 2016.
According to the report, SERs must submit their written comments by September 9, 2016. Assuming the CFPB does not plan to hold any further meetings with SERs, the next step will be for the panel to issue its report to the CFPB on the input received from the SERs. The panel has 60 days to submit its report from the date it is considered to have “convened.” Accordingly, it appears that the report will be due in October 2016. However, it will not become public until the CFPB issues its proposed rule. Based on prior experience with other SBREFA panels, we would expect the proposed rule to be issued during the first six months of next year.
The CFPB announced that it has entered into a consent order with First National Bank of Omaha to settle charges that the bank engaged in unfair or deceptive acts or practices in connection with the marketing and sale of credit card add-on products and the billing of consumers for such products. The consent order requires the bank to pay at least $27.75 million to provide restitution to approximately 257,000 consumers. The restitution will include the full amount paid for the products, plus any associated late fees, over-limit fees, and finance charges. In addition, the bank must pay a $4.5 million civil money penalty to the CFPB.
The CFPB’s announcement stated that its enforcement action was conducted in coordination with the Office of the Comptroller of the Currency (OCC), which entered into a separate consent order with the bank. According to the CFPB, its enforcement action represents “the eighth action the Bureau has taken in coordination with another regulator to address illegal practices with respect to credit card add-on products and the 12th action the Bureau has taken in total to address these practices.”
The CFPB’s consent order states that from approximately 2002 until August 2013, the bank marketed debt cancellation products to its credit card holders and, from approximately December 1997 to September 2012, it marketed credit monitoring/identity theft protection products to its cardholders. According to the consent order, the bank engaged in deceptive or unfair acts or practices in violation of the Consumer Financial Protection Act (which violations the bank does not admit or deny) that included the following:
- Misrepresenting the length of the card activation process to cause consumers to listen to solicitations for debt cancellation products and misrepresenting the existence of a purchase transaction when obtaining consumer consent
- Misrepresenting the terms, exclusions and benefits of the debt cancellation products through conduct that included failing to inform cardholders or correct confusion on the part of cardholders who had disclosed information suggesting they would be ineligible for some product benefits (such as that they were retired, self-employed or employed for less than 30 hours a week)
- Misrepresenting the ease of cancelling debt cancellation products by conduct that included instructing representatives to attempt to rebut cardholder cancellation requests, thereby causing consumers to be unable to cancel without making multiple demands for cancellation
- Administering the debt cancellation products in a way that obstructed cardholders from obtaining benefits, such as by imposing various restrictions, eligibility requirements, and administrative hurdles (for example, denying benefits to a cardholder who was employed for less than 30 hours a week or self-employed and defining a “pre-existing condition” to include any condition diagnosed or appearing for up to six months after enrollment)
- Billing cardholders for credit monitoring products when the product benefits were not provided, such as where the bank did not obtain the cardholder’s authorization for his or her credit reports to be released by the credit reporting company or where the credit reporting company did not process an authorization because it could not match the cardholder’s identification information to its records.
In addition to the payment of restitution and a civil money penalty, the consent order prohibits the bank from marketing any debt cancellation or credit monitoring/identity theft products until it submits an “Add-on Compliance Plan” to the CFPB and receives “a determination of non-objection.” The consent order details the items that must be included in the compliance plan. It also requires the bank to submit a written policy governing the management of service providers “with respect to the offering of consumer financial products and services” to the CFPB for a determination of non-objection and develop a written, enterprise-wide “Unfair, Deceptive, and Abusive Acts or Practices risk management program for any consumer financial products or services” offered by the bank or through service providers. While the CFPB has required banks to have UDAAP policies in other consent orders in enforcement actions involving credit card add-on products, those policies appear to have been limited to the sale of such products and did not appear to cover any consumer financial products and services offered by the bank.
The OCC’s consent order with the bank settles charges that bank’s billing practices for the credit monitoring/identity theft protection products violated Section 5 of the FTC Act. The OCC’s consent order requires the bank to pay a $3 million civil money penalty and make restitution to customers who paid for identity theft protection they did not receive. In its announcement of the consent order, the OCC stated that restitution payments made by the bank pursuant to the OCC’s order “will also satisfy identical obligations required by the CFPB action.”
The Chamber of Commerce of the United States of America (Chamber) has filed an amicus brief opposing the CFPB’s petition filed in the Eastern District of Pennsylvania to enforce its civil investigative demand (CID) issued to J.G. Wentworth, LLC (JGW). In its brief, the Chamber challenges the CFPB’s attempt through the petition to expand its jurisdiction beyond the limits of Dodd-Frank.
JGW purchases structured settlements and annuities from consumers for lump sums. In September 2015, the CFPB issued a CID to the company to investigate alleged violations of consumer protection laws. JGW thereafter filed an administrative petition to set aside the CID as beyond the CFPB’s statutory authority, arguing that its purchase of settlements and annuities was not a consumer financial product or extension of credit subject to the CFPB’s UDAAP authority or the Truth in Lending Act. The CFPB denied the petition to set aside, asserting that JGW may be providing financial advisory services to consumers in connection with offers to purchase structured settlements or annuities, which would constitute a “consumer financial product or service” subject to Dodd Frank’s UDAAP prohibition. Alternatively, the CFPB asserted that the purchases might be extensions of credit subject to TILA. After the denial of its petition to set aside the CID, JGW produced some initial information to the CFPB, but ultimately refused to comply with the CID on the grounds the CFPB lacked jurisdiction over its activities.
In its amicus brief, the Chamber argues that, as an initial matter, TILA cannot be a basis for the CFPB’s jurisdiction because “the statute applies only to extensions of credit, and JGW does not extend credit.” It then argues that to qualify as a “financial advisory service” under Dodd-Frank, “the advice at issue must itself be an element of what is transacted for.” It also argues that because the CFPB’s UDAAP authority applies only to acts or practices committed “in connection with a transaction for a consumer financial product or service,” it is only where the consumer has transacted for the advice, such as when financial advice is offered for a fee, that the advice falls within the CFPB’s UDAAP authority. According to the Chamber, if the CFPB’s authority is not limited in this way, “all marketing statements in connection with every consumer transaction-from refrigerators to home sales to cars-would be regulated by the CFPB.”
In further support of its position, the Chamber argues that enforcement of the CID would result in an expansion of the CFPB’s authority far beyond the limits established by Congress in Dodd-Frank. The Chamber observes that in Dodd-Frank, Congress excluded certain businesses (such as realtors and retailers of manufactured homes) from the CFPB’s authority except to the extent those businesses engage in offering consumer financial products and services. It argues that by “interpreting the term ‘financial advisory services’ to capture any discussion of benefits of transactions otherwise outside the CFPB’s authority would deprive those limitations of meaning. For example, under the CFPB’s theory, it could demand all of the business records of a manufactured home retailer on the theory that it might have provided advice to consumers comparing the relative financial merits of purchasing or renting a home.”
JGW’s challenge could result in another defeat for the CFPB. The Chamber’s amicus brief references the April 2016 decision of a D.C. federal district court dismissing the CFPB’s petition to enforce a CID issued to the Accrediting Council for Independent Colleges and Schools (ACICS). The district court ruled that the CFPB exceeded its statutory authority by issuing the CID because the ACICS’s accreditation process for-profit schools, which was the focus of the CID, was not a financial product or service, and had no connection to a for-profit school’s private student lending practices. The CFPB has filed an appeal with the D.C. Circuit Court of Appeals.