The American Bankers Association has reported that on May 25, 2016, the CFPB will hold a webinar on how banks and credit unions can protect older consumers from financial exploitation. The webinar will highlight the CFPB’s March 2016 report that contained recommendations for banks and credit unions on how to prevent, recognize, report, and respond to financial exploitation of older consumers.
On May 6, 2016, Ballard Spahr attorneys conducted a webinar, “The CFPB’s New Report on Elder Abuse and What Financial Institutions Need to Do in Response.”
On April 20, 2016, Congressman Sean Duffy sent a letter to Director Cordray indicating that the House Financial Services Committee is investigating “the examination and possible regulation by the [CFPB] of pre-dispute arbitration agreements in contracts for consumer financial products and services.” Now that the CFPB has formally released its proposed arbitration rule banning the use of class action waivers, that investigation is likely to intensify.
In his letter, Mr. Duffy requested the following information by May 4, 2016:
- All communications relating to pre-dispute arbitration agreements between the CFPB and the American Associations for Justice, National Consumer Law Center, National Association of Consumer Advocates, Alliance for Justice, and Public Justice.
- All internal CFPB communications relating to pre-dispute arbitration agreements
- All draft reports concerning arbitration agreements
- All records relating to the SBREFA process used in considering any actions pertaining to pre-dispute arbitration agreements
Politico reported that, according to a House aide, the Committee had not received a response from Director Cordray as of May 4.
As widely anticipated, the CFPB announced at its field hearing today in Albuquerque, New Mexico that it is proposing regulations that 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 proposed regulations 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.
On May 23, 2016, Ballard Spahr attorneys will hold a webinar on the proposal from 12 p.m. to 1 p.m. ET. The webinar registration form is available here.
Comments on the proposal will be due on or before 90 days after it is published in the Federal Register. In the proposal, the CFPB confirmed that “[c]onsistent with the Dodd-Frank Act, the proposed rule would apply only to agreements entered into after the end of the 180-day period beginning on the regulations’ effective date.”
The CFPB is proposing an effective date of 30 days after a final rule is published in the Federal Register. Therefore, the proposed regulations would not apply to arbitration agreements entered into before 210 days after a final rule is published in the Federal Register. (Nevertheless, the proposed regulations raise numerous questions concerning whether arbitration agreements entered into before the effective date survive when various circumstances surrounding the agreements change after the effective date).
Thus, it is likely that any final rule would not take effect until the second quarter of 2017, at the earliest. In the meantime, companies that do not presently use arbitration agreements in their financial services contracts should strongly consider adding them, since agreements entered into before a final rule becomes effective are grandfathered under existing law which is favorable to class action waivers. Moreover, companies currently using arbitration agreements should promptly consult with counsel to consider what steps they can take to reduce litigation risks in light of the CFPB’s proposal.
Alan Kaplinsky, who leads Ballard Spahr’s Consumer Financial Services Group, was invited by the CFPB to attend the field hearing to present the financial services industry’s position on the proposal. For more information on the proposal and Alan’s testimony, see our legal alert.
The Dodd-Frank Act gave the CFPB authority to regulate “unfair, deceptive, or abusive” acts or practices. Republican Congressman Blaine Luetkemeyer has introduced the “Unfair or Deceptive Acts or Practices Uniformity Act,” (H.R. 5112), which would remove the CFPB’s authority to regulate abusive acts or practices.
The bill would also prohibit the CFPB from taking any enforcement action to prevent covered persons or service providers from engaging in an unfair or deceptive act or practice (UDAP) unless the CFPB “first consults the covered person or service provider’s primary financial regulatory agency, if any.” In addition, the bill would require the CFPB, when engaging in UDAP rulemaking, to comply with FTC Act UDAP rulemaking requirements applicable to the FTC. Those requirements include publishing two notices of proposed rulemaking, meeting a restrictive standard for justifying a new rule, and providing an opportunity for informal hearings.
The CFPB recently joined other federal regulators who have indicated a growing interest in marketplace lending with its announcement that it is accepting consumer complaints about loans obtained through marketplace lenders. The U.S. Department of the Treasury had previously demonstrated its interest in marketplace lending by issuing a request for information (RFI) in July 2015.
Politico has reported that “multiple sources have indicated” that the Treasury will release a white paper next week containing its findings from the responses it received to the RFI. According to Politico, the Treasury received over 100 responses. Politico also reported that a Treasury spokesperson indicated in a statement that the white paper will contain research and recommendations on the industry.
When it issued the RFI, the Treasury indicated that the information it sought was intended to allow it to study the business models of online marketplace lenders and the products offered to small businesses and consumers; the potential for online marketplace lending to expand credit access for historically underserved markets; and how the financial regulatory framework should evolve to support the industry’s “safe growth.”
The Federal Financial Institutions Examination Council (FFIEC), whose members include the CFPB, is proposing a new uniform interagency consumer compliance rating system to reflect changes in consumer compliance supervision since the current rating system was adopted in 1980. The other FFIEC members are the Fed, FDIC, NCUA, OCC and State Liaison Committee. The FFIEC states that the proposed revisions “were not developed to set new or higher supervisory expectations for financial institutions and their adoption will represent no additional regulatory burden.” Comments on the proposal are due on or before July 5, 2016.
The rating system uses a scale of 1 through 5, with 1 representing the highest rating and lowest degree of supervisory concern and 5 representing the lowest rating and most critically deficient level of performance and thus the highest degree of supervisory concern. In the proposal’s Supplementary Information, the FFIEC observes that when the current system was adopted, examinations focused more on transaction testing for regulatory compliance rather than on an institution’s compliance management system (CMS) to ensure compliance with regulatory requirements and prevent consumer harm. The proposed changes to the rating system “are designed to more fully align” the rating system with the risk-based approach to consumer compliance examinations that the FFIEC agencies have adopted over the intervening years.
The proposed rating system would include three categories of assessment factors: board and management oversight, compliance program, and violations of law and consumer harm. The assessment factors in the three categories would consist of the following:
- To assess an institution’s board and management oversight, examiners would consider: oversight and commitment to the institution’s CMS; effectiveness of the institution’s change management process; comprehension, identification and management of risks arising from the institution’s products, services, and activities; and any corrective action undertaken as consumer compliance issues are identified.
- To assess an institution’s compliance program, examiners would consider: whether the institution’s policies and procedures are appropriate to the risk in the institution’s products, services, and activities; the degree to which compliance training is current and tailored to risk and staff responsibilities; the sufficiency of monitoring, and if applicable, auditing, to encompass compliance risks; and the responsiveness and effectiveness of the consumer complaint resolution process.
- To assess an institution’s violations of law and consumer harm, examiners would consider: the root causes of any violations identified during examinations; the severity of any consumer harm resulting from the violations; the duration of time over which the violations occurred; and the pervasiveness of the violations. The rating system would include incentives for self-identification and prompt correction of violations.
An institution’s overall rating under the proposed system is intended to reflect a comprehensive evaluation of the institution’s performance under the rating system by considering the categories and assessment factors in the context of the institution’s size, complexity, and risk profile. The proposed system would not assign specific numeric ratings to any of the above assessment factors and an institution’s rating would not be based on a numeric average or any other quantitative calculation. As a result, an institution would not have to receive a satisfactory rating in all categories to receive an overall satisfactory rating. Conversely, even if some assessments are rated as satisfactory, an institution can still receive an overall less than satisfactory rating.
On May 25, 2016, from 12:00 PM to 1:00 PM ET, Ballard Spahr attorneys will conduct a webinar on “How to Ace Your CFPB Exam.” A link to register is available here.
The CFPB recently published a fact sheet for small creditors operating in rural or underserved areas. As we have reported, the CFPB issued a final rule, which became effective on January 1, 2016, revising the definitions of “small creditor” and “rural areas” under Regulation Z of the Truth in Lending Act (TILA). Regulation Z allows small creditors operating in rural or underserved areas to make balloon-payment qualified mortgage loans (under the ability to repay rule) and balloon-payment high cost mortgages, and may avoid the escrow account requirement for certain higher priced mortgage loans. The fact sheet explains the changes made to these definitions. The fact sheet also refers to the application process for requesting a county or census block to be designed as rural, which we previously addressed.
The CFPB also published a small creditor qualified mortgage flowchart reflecting the rules in effect as of April 1, 2016. The chart addresses small creditor qualification, loan features, balloon payment features, underwriting, points and fees, portfolio, and compliance presumption factors. Our discussion of some of these factors can be found here.
The factsheet and chart can be found under “Quick references” on the CFPB Compliance & Guidance page, at this link.
Alan Kaplinsky, who leads Ballard Spahr’s Consumer Financial Services Group, has been asked by the CFPB to testify as an industry representative at the CFPB’s May 5 field hearing on arbitration. We expect the hearing to coincide with the CFPB’s release of a proposed rule on the use of arbitration agreements in certain consumer financial services contracts that would prohibit financial institutions from using arbitration agreements to block consumers from filing class action lawsuits.
The May 5 field hearing will be the fourth field hearing that the CFPB has held about arbitration. The first hearing was held in Dallas, Texas on December 12, 2013. Alan testified as an industry representative at the second hearing, which was held on March 10, 2015 in Newark, New Jersey, and at the third hearing, which was held on October 7, 2015 in Denver, Colorado.
The U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness has sent a letter to Director Cordray suggesting a series of issues for Mr. Cordray to address in his prepared remarks at the CFPB’s field hearing on arbitration scheduled for this Thursday, May 5.
As the Chamber’s letter notes, the CFPB foreshadowed in the materials given to the SBREFA panel that the CFPB was contemplating a ban on the use of class action waivers in arbitration agreements. The Chamber observes that the CFPB’s final arbitration study did not analyze whether the practical effect of a rule prohibiting class action waivers would be to eliminate the use of consumer arbitration from the consumer financial services market altogether. The Chamber suggests that Director Cordray provide the CFPB’s views on this issue in his prepared remarks.
Among the other issues the Chamber would like Director Cordray to address in his remarks is “how a consumer with a small claim based on unique circumstances would be able to vindicate those legal claims if companies, faced with the need to reserve millions of dollars for class action defense, were to cease subsidizing consumer arbitration programs.” The Chamber notes that under current class action rules, many small claims that involve issues of concern to consumers, such as alleged overcharges or the failure to timely credit a deposit, are unlikely to be classable because they are individualized disputes. The Chamber observes that for such claims, “consumers will therefore have virtually no economically rational options for seeking redress: arbitration (in which most companies pay for consumers to bring claims against them, making it free to the consumer) will be gone; class action litigation will not be available; and rational consumers are not going to pay a $400 filing fee to pursue a $25 claim in court. ”
We note that, in a blog post today, Professor Jeff Sovern commented on the Chamber’s letter, asking whether consumers would “really suffer if they couldn’t bring arbitration claims for $25?” According to Professor Sovern, the CFPB’s arbitration study “found that consumers almost never bring arbitration claims when less than $1,000 is at issue, so the ability to assert small claims in arbitration isn’t worth much.” He asserts that consumers who want to assert $25 claims could still do so in small claims courts.
Professor Sovern’s comments overlook the fact that because the AAA due process protocol requires a carve-out in arbitration agreements for small claims that can be pursued in small claims court. The predicate of the Chamber’s hypothetical example is a one-off individual claim that is not classable because it is not part of a systemic problem involving many consumers. As a result, small claims court is the only recourse for a $25 claim of this kind and not class actions as Professor Sovern suggests.
In addition, the Chamber is likely concerned about non-classable claims that, because they exceed the small claims court limit, are ideal cases to be resolved in arbitration. Neither the CFPB nor Professor Sovern have determined how such cases will be resolved if the result of the CFPB’s rule is the abandonment of consumer arbitration by consumer financial services providers. Without arbitration, consumers with such non-classable claims will lose their only practical recourse.
The CFPB has announced that it is amending the Interstate Land Sales Full Disclosure Act’s implementing regulations to allow electronic registration filings.
The Dodd-Frank Act transferred rulemaking authority over the ILSA from HUD to the CFPB. The ILSA requires certain developers to register their subdivisions plans and provide disclosures to consumers regarding the lots or condominiums being purchased. The amendments to Regulations J and Regulation L permit developers to submit registration filings electronically in addition to the current paper filing procedure. The CFBP also launched a new webpage dedicated to the ILSA and which includes instructions for electronic filings.
These amendments mark the first rulemaking from the CFPB related to the ILSA. The regulations will become effective, and the electronic filing option will become available, 30 days after publication in the Federal Register. The regulations were finalized by the CFPB without notice and comment based on the CFPB’s position that notice and comment was not required under the Administrative Procedure Act because the amendments relate only to agency procedure and practice.
The CFPB has been working to implement an electronic registration system since at least the spring of 2013. Electronic filing likely will make the registration process easier for developers. The move away from paper filings also allows the CFPB to track and quantify data concerning registrations, such as quantifying the number of lots registered in each state or identifying trends in a certain geographic area.