The CFPB announced that it has entered into a consent order with Navy Federal Credit Union to settle allegations that the credit union engaged in unfair and deceptive collection practices in violation of the Consumer Financial Protection Act. The consent order, which appears to be the CFPB’s first consent order involving a credit union, requires Navy Federal to pay a civil money penalty of $5.5 million.
According to the CFPB’s findings of fact and conclusions of law set forth in the consent order (which Navy Federal does not admit or deny), the credit union is alleged to have engaged in the following unlawful conduct:
- The credit union sent letters to members threatening to take legal action unless they made a payment but, in reality, seldom took legal action, with the CFPB finding that the credit union’s “pay or be sued” message “was inaccurate about 97% of the time, even among consumers who did not make a payment in response to the letters.”
- In addition to making similar threats of legal action in telephone calls, the credit union threatened to garnish members’ wages when it had no intention to do so.
- The credit union threatened in letters and telephone calls to contact a member’s commanding officer if he or she did not promptly make a payment when it had no intention to do so. In addition, the credit union would not have been authorized to make such contacts because the provision in the credit union’s agreements that purported to authorize the credit union to disclose a servicemember’s debts to his or her commanding officer “was not consented to by consumers because the contract clause was buried in fine print, non-negotiable, and not bargained for by consumers.” Because the credit union was not authorized to contact a member’s commanding officer and did not intend to do so, its threats to members were deceptive in violation of the CFPA’s prohibition of unfair, deceptive, or abusive acts or practices.
- The credit union sent letters to members who had fallen behind on their loans that stated the member “would find it difficult, if not impossible, to obtain additional credit because of your present unsatisfactory credit rating” with the credit union and that the member could repair his or her credit by calling the credit union. The credit union had no basis for its assertions regarding the member’s ability to obtain additional credit and misleadingly implied that the credit union issued a credit rating as would a credit reporting agency and that it offered credit repair services.
- The credit union froze electronic account access and disabled certain electronic services after consumers became delinquent on a credit product without adequately disclosing this policy to consumers when an account was opened or when the consumer became delinquent.
The CFPB’s finding that members had not consented to the provision authorizing the credit union to contact a member’s commanding officer because it was “buried in fine print, non-negotiable, and not bargained for” could be used to invalidate many provisions contained in consumer contracts. We are unaware of any terms in consumer contracts that are ever negotiated. Is the CFPB suggesting that a company may no longer use form contracts? While we doubt that they intended to send that message, the consent order seems to say that it is unlawful to include a provision in a form contract if the provision is in “fine print.” Under what circumstances will the print be considered “fine print”? Must there be a minimum font size? Finally, to what contract provisions does this “new rule” apply? Does it apply to all provisions or just those that consumers or the CFPB deem important? The consent order appears to be another example of the CFPB’s practice of “rulemaking by consent order.”
In addition to payment of the $5.5 civil money penalty, the consent order requires the Navy Federal to pay $23 million in redress to consumers who, between January 1, 2013 and the date of the consent order, made a payment to the credit union within 60 days of receiving an allegedly deceptive debt collection letter or received a letter threating to communicate with the consumer’s commanding officer. The credit union is also prohibited from continuing to engage in the practices that are the subject of the consent order, must remove any references to contacting employers, including military employers from its consumer-facing disclosures and agreements, and can no longer restrict electronic account access in the event of delinquencies or overdrafts.
The Federal Reserve has announced that on November 9, 2016, it will host a webinar on overdraft practices. Webinar speakers will discuss issues identified through consumer complaints, examinations, and enforcement actions.
In addition to a CFPB representative, the speakers will include representatives from the Fed, FDIC, OCC and NCUA. The presentation will be followed by a Q&A segment. Information about registration is available here.
The CFPB is currently considering whether to propose an overdraft rule. It has issued a June 2013 white paper and a July 2014 report on checking account overdraft services.
The CFPB has published a final rule in the Federal Register that makes several corrections to Regulation E (which implements the Electronic Fund Transfer Act). The corrections, which the notice describes as “clerical and non-substantive,” are effective on November 14, 2016.
The CFPB has published a notice in the Federal Register announcing that a meeting of its Consumer Advisory Board (CAB) will be held on October 27, 2016.
The notice indicates that the CAB will discuss “student loan servicing issues and trends and themes in debt collection.” Presumably, the student loan servicing issues will include servicers’ handling of partial payments, which was the subject of a recent CFPB blog post, and the Department of Education’s recent announcements concerning student loan servicing. The debt collection discussion can be expected to include the debt collection proposals that the CFPB is considering, which it outlined in July 2016 in anticipation of convening a SBREFA panel.
The CFPB has posted on its TILA-RESPA implementation webpage updated versions of its Small Entity Compliance Guide and Guide to Loan Estimate and Closing Disclosure Forms. The updates focus on various guidance provided in recent TILA/RESPA Integrated Disclosure (TRID) rule webinars provided by the Bureau. We have previously addressed the content of the March 1, 2016 and April 12, 2016 webinars.
Among the changes, the CFPB added the following language to the second Guide, apparently to address the issue in the industry regarding whether same payment range must be disclosed in multiple columns for an adjustable rate loan when a rate change can move the payment within the disclosed range, even though the payment range remains the same:
“Adjustable Rate loans – the Projected Payments table will have a new column, up to a maximum of four columns, for each scheduled rate adjustment. Because the Principal & Interest amount may change each time the rate is scheduled to adjust, a new column is required, up to a maximum of four columns. There is a new column, up to a maximum of four columns, even if the range of payments will stay the same. For example, there is a new column, up to a maximum of four columns, even when the range will stay the same because the range is the minimum and maximum interest rate caps listed in the contract. (Comment 37(c)(1)(i)(A)-1).”
The D.C. Circuit issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly-owned) mortgage reinsurer, the court made several landmark rulings.
First, it held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the “critical check” of presidential control or the “substitute check” of a multi-member governance structure necessary to protect individual liberty against “arbitrary decisionmaking and abuse of power.” The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.
It also rejected the CFPB’s argument that statutes of limitations do not apply to its administrative enforcement actions. The court’s holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. “[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”
In addition, the court held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited. We have blogged about the CFPB’s erroneous interpretation of the RESPA provisions at issue in this case.
Finally, the court further admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.”
Notably, the court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB’s view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court’s decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.
The opinion of the court also did not address one aspect of the CFPB Director’s prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director’s approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.
Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.
The comment period for the CFPB’s proposed rule on Payday, Title and High-Cost Installment Loans ended Friday, October 7, 2016. The CFPB has its work cut out for it in analyzing and responding to the comments it has received.
We have submitted comments on behalf of several clients, including comments arguing that: (1) the 36% all-in APR “rate trigger” for defining covered longer-term loans functions as an unlawful usury limit; (2) multiple provisions of the proposed rule are unduly restrictive; and (3) the coverage exemption for certain purchase-money loans should be expanded to cover unsecured loans and loans financing sales of services. In addition to our comments and those of other industry members opposing the proposal, borrowers in danger of losing access to covered loans submitted over 1,000,000 largely individualized comments opposing the restrictions of the proposed rule and individuals opposed to covered loans submitted 400,000 comments. So far as we know, this level of commentary is unprecedented. It is unclear how the CFPB will manage the process of reviewing, analyzing and responding to the comments, what resources the CFPB will bring to bear on the project or how long it will take.
Like other commentators, we have made the point that the CFPB has failed to conduct a serious cost-benefit analysis of covered loans and the consequences of its proposal, as required by the Dodd-Frank Act. Rather, it has assumed that long-term or repeated use of payday loans is harmful to consumers.
Gaps in the CFPB’s research and analysis include the following:
- The CFPB has reported no internal research showing that, on balance, the consumer injury and costs of payday and high-rate installment loans exceed the benefits to consumers. It finds only “mixed” evidentiary support for any rulemaking and reports only a handful of negative studies that measure any indicia of overall consumer well-being.
- The Bureau concedes it is unaware of any borrower surveys in the markets for covered longer-term payday loans. None of the studies cited by the Bureau focuses on the welfare impacts of such loans. Thus, the Bureau has proposed to regulate and potentially destroy a product it has not studied.
- No study cited by the Bureau finds a causal connection between long-term or repeated use of covered loans and resulting consumer injury, and no study supports the Bureau’s arbitrary decision to cap the aggregate duration of most short-term payday loans to less than 90 days in any 12-month period.
- All of the research conducted or cited by the Bureau addresses covered loans at an APR in the 300% range, not the 36% level used by the Bureau to trigger coverage of longer-term loans under the proposed rule.
- The Bureau fails to explain why it is applying more vigorous verification and ability to repay requirements to payday loans than to mortgages and credit card loans—products that typically involve far greater dollar amounts and a lien on the borrower’s home in the case of a mortgage loan—and accordingly pose much greater risks to consumers.
We hope that the comments submitted to the CFPB, including the 1,000,000 comments from borrowers, who know best the impact of covered loans on their lives and what loss of access to such loans will mean, will encourage the CFPB to withdraw its proposal and conduct serious additional research.
The Consumer Bankers Association and the American Bankers Association have submitted a comment letter setting forth their opposition to the CFPB’s proposed addition of a survey to the current complaint intake form.
In a notice published in the Federal Register in August 2016, the CFPB proposed to add a survey that consumers may choose to respond to, providing their feedback on the company’s response to their complaint. Consumers would be able to opt-in and provide this feedback publicly, much the way they can with their complaint narrative. The proposed survey would replace the existing “dispute” function that currently allows consumers to indicate their dissatisfaction with a company’s response. Instead, a consumer will have the option to score the company’s response from 1 to 5 and provide a narrative description of the rationale for the number he or she selected.
In their comment letter, the trade groups assert that consumers will not benefit from a highly subjective rating system. They describe the proposed survey as subjective in the following two ways:
- The pool of customers who take the time to respond will likely be those who are most dissatisfied with the company’s handling of their complaint. Customers who submit a complaint are dissatisfied already with the company, and the associations think it is unlikely that the company’s response will meaningfully alter their opinion of the company or improve the customer’s perception from the circumstances contributing to the complaint. As a result, any additional feedback the consumer provides likely will be based on the underlying complaint, and not on the company’s efforts to resolve that complaint.
- No criteria have been established to guide a consumer in making a selection under the proposed survey’s one-to-five scale. Without a description of the circumstances under which a particular value should be given, the ratings will reflect the idiosyncrasies of customers, not an accurate reflection of the company’s response to complaints it received. Therefore, the aggregate results of these ratings will provide little, if any, benefit to consumers.
The trade groups also assert that the option for a consumer to provide a narrative description of the rationale for the rating he or she selected will perpetuate the broader problems of potential reputational harm and misleading of consumers already created by the inclusion of unverified narratives in the complaint database. They urge the CFPB to consider several specific issues, such as whether a subjective rating of certain institutions will actually help consumers and whether consumers will expect an additional company response after completing the survey.
More generally, the trade groups observe that the CFPB has never conducted a study to show how the complaints are informing their work or if the information is providing benefit to consumers. They urge the CFPB to conduct a cost benefit analysis evaluating customer experience to date with the database’s overall costs to taxpayers and companies, and risks to customer privacy, and whether the benefit to consumers, if shown, outweighs those costs. Specifically, they ask the CFPB to look at whether consumers use the database as a shopping tool or in any other way other than lodging a complaint and whether consumers have received more prompt feedback or more favorable resolution to their complaints than had they submitted the complaints directly to the financial institution.
The trade groups also comment that the proposed survey continues the CFPB’s trend of skirting the formal rulemaking process and urge the CFPB not to proceed further with the proposal unless it does so through a formal Administrative Procedure Act rulemaking process, rather than as an information collection request under a Paperwork Reduction Act notice.
On October 13, 2016, the Brookings Institute will hold an event in Washington, D.C. titled: “How to make fintech work for all Americans.” Speakers include industry representatives and an FDIC representative. Brookings describes the event as “a conversation about the effects of the fintech boom, with a particular focus on how regulation and public policy can enhance or hinder the industry’s ability to solve some of the more intractable problems facing middle-class.”
Among the questions to be addressed are whether “regulation and policy inhibit innovation and skew benefits toward the well-to-do.” In discussing regulation and policy, speakers could address CFPB larger participant rulemaking for installment/marketplace lenders and other concerns raised by regulators concerning marketplace lending.
The CFPB has issued its long-anticipated final rule for general purpose prepaid accounts. As expected, the new regulations expand the products covered by Regulation E, introduce significant new disclosure requirements, extend consumer liability protections to prepaid accounts and add onerous requirements for accounts with overdraft or credit features. Many industry participants have already expressed disappointment with the CFPB’s decision to apply Regulation Z requirements to the overdraft features of prepaid accounts. Digital wallet providers and others working on digital product innovations also have concerns. The effective date for most requirements in the new regulations is October 1, 2017.
On November 17, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Final Prepaid Cards Rule.” A link to register is available here.
We have prepared a legal alert that discusses key components of the final rule (which weighs in at 1689 pages) based on our initial review. Once we complete our analysis of the rule, we will be publishing a series of posts focusing on key provisions, such as the rule’s treatment of overdraft and credit features and its coverage of digital wallets and P2P accounts.