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CFPB’s Final Prepaid Card Rule: Long Form Disclosures

Posted in Prepaid Cards

The final Prepaid Card Rule requires not only so-called “packaging” or short form disclosures prior to acquisition of the prepaid card account, but also that a long form disclosure be provided to the consumer. Whereas the short form disclosures are intended to aid in comparison-shopping, the long form disclosure provides the complete, unabridged itemization of fees and program information.

The long form disclosure is required to include: a title, with the name of the prepaid account program; information on fees that may be imposed and the conditions under which they may be imposed; a statement regarding registration and FDIC/NCUA insurance; a statement regarding linked overdraft credit features; a statement containing the financial institution’s contact information; a statement directing the consumer to the CFPB’s website for general information on prepaid accounts; and a statement directing the consumer to the CFPB to submit complaints related to prepaid accounts.

The rule allows some leeway on the requirement that the long form disclosure be provided “preacquisition.” “Preacquisition” occurs generally as when the account is opened, the card is sold to the consumer, or where the consumer agrees to accept payment to the account. For prepaid cards sold at retail locations where the short form disclosures are provided on the packaging, and where the packaging indicates how to access the long form disclosure by phone and through a website, it is permissible to provide the long form disclosure after the card is purchased. Similarly, for a prepaid card account obtained by phone, the business must tell the consumer prior to opening the prepaid account that the long form disclosure is available by phone and on the web. The long form disclosure must then be provided to the consumer after he or she opens the prepaid account and must be made available by phone and online.

Notably, when disclosures are provided electronically, there is no need to comply with the full requirements of E-Sign, and the company may provide the disclosures to the consumer without E-Sign consent, generally in a manner that is reasonable based on how the consumer opened the account and in a manner that the consumer may keep.

While the original draft rule required that the long form disclosure appear “substantially similar” to the CFPB’s sample disclosure, that requirement was dropped from the final rule due to the wide variety of different structures and account conditions that a financial institution may have in place. The sample now serves as a template for, but not a firm requirement, as to how the long form disclosure must be designed.

Petition for writ of certiorari filed in case asserting recess appointment defense to CFPB enforcement action

Posted in CFPB General

Since it was filed in a California federal court in July 2012, we have been following CFPB v. Chance Edward Gordon, a case in which the CFPB alleged that an attorney duped consumers by falsely promising loan modifications in exchange for advance fees and, in reality, did little or nothing to help consumers.  The CFPB charged the defendant with violations of the Consumer Financial Protection Act and Regulation O, the Mortgage Assistance Relief Services Rule.

As part of his affirmative defenses to the CFPB’s complaint, the defendant included a challenge to President Obama’s recess appointment of Director Cordray.  In his summary judgment motion, the defendant asserted that, based on the reasoning of the D.C. Circuit’s decision in NLRB v. Noel Canning, Mr. Cordray was not validly appointed as CFPB Director.  He argued that in the absence of a validly-appointed Director, the CFPB had no authority over non-banks and the CFPB’s action against him was therefore rendered invalid.  The U.S. Supreme Court subsequently affirmed the D.C. Circuit’s ruling that the NLRB appointments at issue in Canning were invalid.

The district court did not address the merits of the defendant’s argument that the CFPB lacked authority to bring the action because of Director Cordray’s unconstitutional appointment, concluding that the argument had been waived.  It found that the defendant had violated the CFPA and Regulation O and ordered approximately $11.4 million in disgorgement and restitution.

In its opinion affirming the district court’s finding of liability, the Ninth Circuit considered whether the district court had Article III jurisdiction to hear the CFPB’s enforcement action (an issue which the defendant had not raised but was raised in an amicus brief).  According to the Ninth Circuit, any defects in Director Cordray’s appointment did not deprive the court of Article III jurisdiction because the CFPB retained its enforcement authority, and therefore its standing to sue, despite such defects. The Ninth Circuit also ruled that Director Cordray’s invalid recess appointment did not render the enforcement action against the defendant invalid because Director Cordray’s subsequent valid appointment coupled with his notice ratifying the actions he took as Director while serving as a recess appointee cured any initial constitutional deficiencies.

A petition for rehearing en banc was denied on  July 20, 2016.  On November 17, 2016, the defendant, represented by the Washington Legal Foundation, filed a petition for a writ of certiorari with the U.S. Supreme Court.

The certiorari petition presents two questions.  The first question is whether a federal official can retroactively ratify an ultra vires government action when (1) no federal official was authorized to perform the act at the time it was initially undertaken, (2) the purported ratification does not include an examination of any facts related to the act performed, and (3) the ratification purports to encompass not only the initial act but also federal court rulings entered in response to the act.  The second question presented is whether federal courts possess Article III subject matter jurisdiction to hear a case filed at the behest of an individual who, from the time suit was filed until judgment was entered, lacked authority to vindicate the Executives Branch’s interest in seeing that the law is obeyed.

The petition asserts that the Ninth Circuit’s ruling conflicts with decisions of the Supreme Court and other appeals courts regarding the authority of federal officials to ratify actions that were unauthorized when undertaken.  It also asserts that because the filing of the lawsuit was not approved by a validly-appointed federal officer, the CFPB lacked standing to prosecute it and the case should have been dismissed for lack of Article III jurisdiction.

The petition also contends that the case raises separation of powers issues, arguing that the Ninth Circuit’s decision “constitutes a significant relaxation of Article III’s standing requirements and thus erodes the separation of powers.”  It asserts that the importance of such issues “is highlighted by the D.C. Circuit’s recent PHH decision.”  In that decision, the D.C. Circuit ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional but noted that it “need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions.”  The petition argues that by granting review in this case, the court “can provide desperately needed guidance to the many courts that already face challenges to [the CFPB’s claims regarding ratification of its past actions].”

 

 

Receiver for payday lenders sued by CFPB files malpractice lawsuit

Posted in Payday Lending

The court-appointed receiver for a group of interrelated companies sued by the CFPB in September 2014 for engaging in allegedly unlawful online payday lending activities has filed a malpractice lawsuit against the law firm that assisted in drafting the loan documents used by the companies.

The companies sued by the CFPB included entities that were directly involved in either making payday loans to consumers or providing loan servicing and processing for those loans.  The CFPB alleged that the defendants engaged in deceptive and unfair acts or practices in violation of the Consumer Financial Protection Act as well as violations of the Truth in Lending Act and the Electronic Fund Transfer Act.  According to the CFPB’s complaint, the defendants’ unlawful actions included providing TILA disclosures that did not reflect the automatic renewal feature and conditioning the loans on the consumer’s repayment through preauthorized electronic funds transfers.

According to the receiver’s complaint, the companies’ payday lending was initially done through entities incorporated in Nevis and subsequently done through entities incorporated in New Zealand.  The companies’ loan servicing and processing (including customer service) was done through two entities that were incorporated in Missouri and maintained offices, employees, and mailing addresses in Missouri.

The receiver alleges that the law firm assisted in drafting the loan documents which, on their face, violated the TILA, EFTA and CFPA.  He claims that the law firm committed attorney malpractice and breached its fiduciary obligations to the companies by failing to advise them that because of the U.S. locations of the servicing and processing entities, the loan documents used by the companies had to comply with the TILA and EFTA, and that once the CFPA went into effect, the servicing and processing entities could also be liable for such violations as “covered persons” under the CFPA.

 

 

FTC seeks information on class action claims rates

Posted in Arbitration, FTC

The FTC has announced that to study the effectiveness of various class action settlement notice programs, it has issued orders to eight claims administrators requiring them to provide information on their procedures for notifying class members about settlements and the response rates for various methods of notification.

It is anticipated that such information will demonstrate that only a very small fraction of class members who must file claims to participate in a settlement fund actually do so.  Such information would provide support for critics of the CFPB’s proposed arbitration rule and serve as further evidence that the CFPB’s premise that consumers obtain more meaningful relief through class actions than in arbitration is incorrect.

The CFPB’s own arbitration study included data showing that even class members entitled to benefits frequently fail to obtain them.  The study found that in “claims made” class action settlements, the unweighted average claims rate was 21 percent and median was 8 percent.  The weighted average claim rate was only 4 percent.  Moreover, claims rates fell nearly 90 percent if documentary proof was required.  Presumably, the funds not distributed to the class members either reverted to the company or were used for a cy pres distribution

For more information on the FTC’s announcement, see our legal alert.

 

CFPB issues request for information on consumer access to financial information

Posted in CFPB General

In conjunction with its field hearing yesterday on consumer access to financial information, the CFPB has issued a request for information (RFI) about market practices related to such access.  Comments in response to the RFI must be filed no later than 90 days after it is published in the Federal Register.  The CFPB states that in addition to potentially helping industry develop best practices to deliver benefits to consumers and address potential consumer harms, the information obtained in response to the RFI could help the CFPB “in prioritizing resources,” such as “to evaluate whether any guidance or other action by the Bureau is called for, including future rulemaking.”

The RFI uses the term “consumer-permissioned access” to refer to consumer access to consumer financial account and account-related information, whether directly or through a third-party acting with the consumer’s permission.  In discussing the regulatory framework applicable to consumer-permissioned access to account information, the RFI cites to Section 1033 of the Dodd-Frank Act which requires that “[s]ubject to rules prescribed by the Bureau, a covered person shall make available to a consumer, upon request, information in the control or possession of such person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related  to any transaction, or series of transactions, to the account including costs, charges, and usage data.”

The RFI discusses current market practices in connection with consumer-permissioned access to account information, including the role of account aggregators in transmitting consumer data.  It reviews consumer benefits from specific market uses of consumer-permissioned account data access as well as current market issues and risks.  With regard to risks, the CFPB discusses privacy and security concerns of providers of consumer financial accounts that arise from the role of account aggregators or other permissioned parties as well as provider concerns about their liability for unauthorized transactions.  The CFPB states that it “does not believe that consumer views have been adequately represented in this area” and is therefore concerned “that some market participants may decide to restrict consumer-permissioned access to data in ways that undermine consumer interests identified in section 1033–and that are broader than  necessary to address legitimate privacy and security concerns.”

The RFI contains a series of 17 questions about current market practice related to consumer-permissioned access to account information and three questions intended to obtain information about commenters’ views on how market practices may or should change over time.  The information sought about current practices include the types of products and services currently made available to consumers that rely on consumer-permissioned electronic access to account data; the incentives or disincentives for account providers to facilitate or discourage consumer-permissioned access to account data; the impediments, obstacles or risks faced by account providers in allowing access to permissioned parties or account aggregators and by permissioned parties or account aggregators in obtaining such data; the security and other risks consumers incur if they permit access to their account data and the steps being taken by account providers, aggregators, and permissioned parties to mitigate such risks; and the industry standards, if any, that currently exist to enable consumer-permissioned access to account data.

The questions about future market developments include whether industry standard practices “that provide consumers with data access comparable to that envisioned by section 1033 of the Dodd-Frank Act [are] likely to be broadly adopted by consumer financial account providers, permissioned parties and account aggregators in the absence of regulatory action.”

Several of these questions were posed to the panelists at the field hearing.  The panelists consisted of representatives of Public Interest Research Group, Center for American Progress, Center for Financial Services Innovation, American Bankers Association, The Clearing House, and an account aggregator company.  When asked whether industry standards that balance competing interests are likely to be adopted in the absence of regulation, consumer group representatives predictably warned of the need for regulation to avoid consumer harm while industry representatives stressed the danger that prescriptive regulation could interfere with innovation and favored the development of industry standards.

 

 

FTC continues vigorous use of enforcement authority; Ballard Spahr to hold Jan. 4 webinar

Posted in FTC

As observers ponder the CFPB’s future in a Trump Administration, the Federal Trade Commission’s continuing role as an enforcer of federal consumer financial protection laws should not be overlooked.  Over the approximately five years the CFPB has been operational, the FTC has demonstrated its intention to vigorously use its enforcement authority as to nonbanks even where it shares that authority with the CFPB.

On January 4, 2017, from 12 p.m. to 1 p.m., Ballard Spahr attorneys will conduct a webinar, “Beyond the CFPB: The Enforcement Role of the FTC and Other Federal Regulators Post-Election.”  A link to register is available here.

Under the Consumer Financial Protection Act, the FTC retained its authority to enforce Section 5 of the FTC Act against all nonbanks within its jurisdiction.  Section 5 prohibits unfair or deceptive acts or practices.  It also retained its enforcement authority for nonbanks under the “enumerated consumer financial laws.”  Such laws include the TILA, CLA, EFTA, ECOA, FDCPA, FCRA and Gramm-Leach-Bliley.

Other laws that can be enforced by the FTC as to nonbanks include the Military Loan Act, the Telemarketing and Consumer Fraud and Abuse Protection Act, and the Credit Repair Organizations Act.

 

 

Application of FDCPA to Social Security benefits at issue in CFPB Second Circuit amicus brief

Posted in Debt Collection

The CFPB has filed an amicus brief in support of the plaintiff in Arias v. Gutman, Mintz, Baker & Sonnenfeldt, PC and 1700 Development Co., a FDCPA case on appeal to the U. S. Court of Appeals for the Second Circuit.  In its brief, the CFPB states that its interest in the case stems from its FDCPA enforcement authority and its special mandate to protect older Americans from unfair, deceptive or abusive practices.

The defendants in the case are a landlord and a debt collection law firm seeking to collect a default judgment against the plaintiff for unpaid rent obtained by the landlord.  The law firm issued a restraining notice to the plaintiff’s bank  which restrained a portion of the plaintiff’s funds on deposit after establishing that the remaining funds were automatically protected as deposits of Social Security benefits.  The plaintiff subsequently claimed an exemption for all of the funds in his account on the basis that  the only deposits to the account were monthly Social Security benefits.  The law firm objected to the exemption claim by commencing a special proceeding in state court supported by an affirmation.   In its supporting affirmation, the law firm claimed that (1) it was not possible to determine the amount of exempt funds because the plaintiff did not provide any records starting from a zero balance, and (2) the Social Security benefits would lose their exempt status if commingled with non-exempt funds and the plaintiff failed to provide documents showing there had been no commingling.  The law firm eventually stipulated to the release of the restrained funds.

The plaintiff thereafter filed an action in federal district court in which he alleged that the law firm’s objection was false, misleading, and deceptive in violation of the FDCPA and was also unfair and unconscionable in violation of the FDCPA.  The district court assumed the claims made by the law firm in the objection were false but determined they were not actionable because they were not material.

The court found that the misrepresentations would not have impeded the ability of the “least sophisticated consumer” to respond to or dispute collection because the objection sought a prompt hearing and, even though he appeared pro se, the plaintiff had received an exemption notice that included information about how to obtain free legal representation.  The court also determined that the least sophisticated consumer would realize that the law firm’s misstatement about commingling funds would not have been a sufficient ground to allow the law firm to garnish the funds.

In addition, the court concluded that the law firm could not have engaged in unfair or unconscionable conduct because it had objectively complied with New York process, whether or not it had acted in bad faith.  The court also found that the existence of a separate remedy under New York law made it  unnecessary to impose liability under the FDCPA.  Accordingly, the court granted judgment on the pleadings to the defendants.

In its brief, the CFPB argues that the district court erred in rejecting the consumer’s claims and asks the Second Circuit to vacate the judgment on the pleadings and remand the case to the district court.  According to the CFPB, under the objective least sophisticated consumer standard, the district court should have considered the effect of the law firm’s misstatement about commingling on a hypothetical consumer, rather than on a plaintiff who claimed never to have commingled his account.  It also asserts that the law firm’s misrepresentations were material because the information would have been important to the least sophisticated consumer in deciding how (and whether to) respond to the law firm’s objection.

The CFPB also calls the district court’s reliance on the law firm’s compliance with New York procedures “fundamentally misplaced,” arguing that the plaintiff’s allegation that the law firm filed a baseless pleading in the hopes of recovering exempt funds stated a FDCPA claim.  It also argues that the plaintiff’s claim “is no less viable because he could have also pursued relief under New York law.”

 

CFPB post-election changes could increase state enforcement activity; Ballard Spahr to hold Dec. 15 webinar

Posted in State Enforcement

Since last Tuesday’s election, there has been much discussion of how expected changes under a Trump Administration are likely to reduce the CFPB’s impact, particularly in the enforcement arena.  Little attention, however, has been paid to the election’s implications for the role of state attorneys general and state financial services regulators in enforcing federal and state consumer financial protection laws.

Faced with a less aggressive CFPB, state attorneys general and financial regulators may be emboldened to ramp up their enforcement activity, with Democratic-controlled states such as New York, California and Illinois already known for an activist approach likely to take the lead.  Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  Indeed, the New York AG, the New York Department of Financial Services, and the Illinois AG have already filed lawsuits using their Section 1042 authority.

Several federal consumer financial protection laws such as the TILA, FCRA, and RESPA directly give enforcement authority to state AGs.  In addition to relying on that authority, state AGs can be expected to take a more aggressive approach to enforcement of state law, including provisions in many states under which a federal law violation is deemed to be violation of state law.  When enforcing state law, state AGs can bring civil actions against national banks or federal savings associations to enforce state laws that are not preempted. (Such authority is expressly provided by the CFPA, which codified the U.S. Supreme Court’s 2009 decision in Cuomo v. Clearing House Association, LLC.)  The issue of which state laws are preempted could take on heightened significance in the face of increased state AG enforcement activity.

Providers of consumer financial services providers will need to be prepared to defend against this likely surge in state investigations and enforcement activity.  To help clients prepare, we will hold a webinar, “Beyond the CFPB: Preparing for State Enforcement Post-Election,” on December 15, 2016 from 12 p.m. to 1 p.m.  A link to register is available here.

 

As part of joint initiative with the CFPB, FTC launches updated, mobile-friendly Military Consumer website

Posted in Military Issues

Yesterday, the FTC announced the launch of a redesigned Military Consumer website as part of its joint initiative with the DoD, CFPB and others. Military.Consumer.gov is a financial readiness website designed to help servicemembers and their families navigate consumer decisions and protect against fraud. The website also provides tools for personal financial managers, counselors, and others in the military community to promote financial education. To facilitate navigation and utility, the website has been optimized for use on a mobile device and updated with “quick, mobile-friendly tips” for servicemembers to access on the go.

CFPB issues report on servicemember complaints

Posted in Military Issues, Mortgages

A new CFPB report, “A snapshot of servicemember complaints,” focuses on issues related to VA mortgage refinancing.

The report indicates that as of November 1, 2016, the CFPB had received over 12,500 mortgage complaints from servicemembers, veterans, and their dependents.  The CFPB determined based on a key word search of complaint narratives that approximately 18% (about 1,800) of those complaints concern refinance issues.

According to the report, the issues raised in the complaints involve aggressive solicitations, misleading advertisements, and “failed promises” due to processing delays that caused rate locks to expire or otherwise resulted in less favorable terms than expected; a lack of clarity regarding underwriting requirements to obtain a loan; and poor communications causing consumer confusion about changes to monthly payments and escrows.