On September 29th, the Office of the Inspector General (OIG) that oversees the CFPB released a memorandum detailing the major management challenges facing the CFPB. The memo identified four areas of improvement that, unless addressed, would otherwise hamper the CFPB’s ability to accomplish its strategic objectives:
- Ensuring an Effective Information Security Program
- Ensuring Comprehensive Policies and Procedures Are in Place and Followed
- Maturing the Human Capital Program
- Managing and Acquiring Sufficient Workspace to Support CFPB Activities
Despite the vast quantities of consumer information being collected by the CFPB as part of its consumer protection mission, the CFPB has not fully implemented an information security continuous monitoring program, including a comprehensive data loss prevention system and oversight of contractor-operated information systems. Furthermore, the CFPB has not fully implemented processes within its internal network that would enable the agency to detect and better protect against unauthorized access to and disclosure of its sensitive information. Not only must the CFPB be concerned about hackers, the CFPB must also address the risk of insider threats. A review of the CFPB website reveals that the CFPB makes very few representations about the level of security being provided for consumer information. In the wake of the CFPB’s data security enforcement action against Dwolla, Inc. (see our prior blog post), the CFPB should be prepared to satisfy the same data security requirements that it expects to see among the companies that it regulates.
Additionally, the CFPB expects companies to maintain comprehensive compliance management systems, including written policies and procedures as well as employee training on those policies and procedures. However, the OIG concluded that the CFPB does not have a comprehensive set of policies and procedures for some program areas, and that the CFPB did not fully ensure that its staff members were aware of and complied with its existing policies and procedures. Despite clear guidance provided to industry about the minimum requirements of an effective compliance management system, as described in the CFPB Supervision and Examination Manual, the CFPB appears to have similar struggles in establishing its own internal governance.
On October 5th, the CFPB published a notice announcing the CFPB Office of Financial Education’s intent to compile a list of companies offering existing customers free access to their credit score. The CFPB’s stated intent in compiling this list is to educate consumers and help them make better informed financial decisions. Comments must be submitted to the CFPB by November 4, 2016.
The initial list will cover only credit card issuers. However, the CFPB may consider expanding the list or creating a separate future list to include non-credit card issuers in other markets. To be included in this list, these companies must meet certain specified criteria, including offering existing customers (at least some, but not necessarily all) the ability to obtain a free credit score that the company or other lenders use for account origination, portfolio management, or for other business purposes. The free credit score must be offered to existing customers on a continuous basis, as opposed to a time-limited or promotional basis. The free credit score made available to existing customers must also periodically be updated.
Financial institutions should carefully assess whether they wish to voluntarily seek inclusion on this list. The CFPB clearly states that inclusion on the list is not an endorsement, but the CFPB has noted in the past that making free credit scores available to customers is a best practice. Companies must consider the potential impact of being excluded from the list and what that choice may communicate to the CFPB and customers. On the other hand, the CFPB suggests that it “could” leverage this list to bring consumer attention to the topic of credit scores, and follow up with content to educate, inform, and empower consumers on the availability of credit scores and credit reports and how consumers can use this information. However, nothing in the notice limits the ability of the CFPB to use the information submitted by companies seeking inclusion on the list for other purposes. For example, the CFPB states that inclusion on this list will have no impact on the CFPB’s supervisory activity, but the CFPB reserves the right to conduct due diligence on a company’s assertions about free credit scores.
According to an announcement posted on the Servicemembers Civil Relief Act Website, “[a] bug in the SCRA website is causing the site to give false negatives for some National Guard members whose service should be positively reported by the site.” The DMDC advises that it is working to resolve the issue, but that a fix will not be in place until at least the evening of Thursday, October 6.
In the meantime, as a practical matter, it is virtually impossible for lenders to verify that they are in compliance with the SCRA. In these circumstances, it would be prudent for creditors to consider putting a temporary hold on all collection activities against individuals until the issue is resolved and to advise their counsel and other vendors enaged in collection activities accordingly.
The Ninth Circuit has ruled that the FDCPA requirement in 15 U.S.C. §1692g(a) for “a debt collector” to send a validation notice either in “the initial communication” or “[w]ithin five days after the initial communication with a consumer in connection with the collection of any debt” not only applies to the first debt collector that contacts a consumer to collect a particular debt, but also applies to subsequent debt collectors that communicate with the consumer about the same debt.
The CFPB, together with the FTC, filed an amicus brief in support of the plaintiff. However, the Ninth Circuit found that it was unnecessary for it consider whether the agencies’ interpretation was entitled to deference. It commented that “[b]ecause application of the tools of statutory construction yields a clear answer to the question presented in this case, our inquiry is at an end without consideration of the interpretation advanced by the [CFPB] and the [FTC].”
The plaintiff in the case claimed that the letter she received from the defendant, a debt collection law firm, containing the validation notice violated the FDCPA because the notice did not include all required information. The defendant argued that it was not subject to the FDCPA validation notice requirement because its letter was not the “initial communication” the plaintiff received about the debt. According to the defendant, because the debtor had previously received a validation notice complying with the FDCPA from another debt collector, the defendant was a subsequent debt collector that had no obligation to comply with the validation notice requirement.
The district court granted summary judgment to the defendant, concluding that the validation notice requirement did not apply to the defendant’s letter because it was not the initial communication that the plaintiff had received about the debt. According to the district court, the FDCPA’s plain text contemplated only one initial communication with a debtor on a given debt, meaning the initial communication from the initial debt collector.
FDCPA 1692g(a) provides that “within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing [the information specified].” In reversing the district court, the Ninth Circuit found the text of §1692g(a) to be ambiguous because nothing in the provision limited its application to only the first debt collector or clarified whether ‘the initial communication’ referred to the first communication ever sent about the debt or the first communication sent by each and every debt collector seeking to collect it.
However, the Ninth Circuit found that an examination of “the full text of the FDCPA reveals that Congress used the phrase “a debt collector” throughout the statute to impose obligations and restrictions on all debt collectors throughout the entire debt collection process.” The Ninth Circuit also concluded that interpreting “the initial communication” to refer to the first communication by any debt collector was “more in keeping with the FDCPA’s declared purpose of protection consumers from abusive debt collection practices.”
The Ninth Circuit also stated that it was unnecessary “to resort to external sources to interpret §1692g(a)” because “Congress’s intent to require each debt collector to send a validation notice with its initial communication is clear from the statutory text.” Nevertheless, the court observed that even if any ambiguity remained, the legislative history “extinguishes any doubt that Congress intended the validation notice to protect consumers throughout the entire lifecycle of a debt.”
The CFPB released a report, “Tools for saving: Using prepaid accounts to set aside funds,” that presents the results of a research project involving a pilot program offering an incentive to prepaid card users to use a savings feature.
In December 2014, as part of its Project Catalyst, the CFPB’s initiative for facilitating innovation in consumer-friendly financial products and services, the CFPB announced a new research pilot program using insights from behavioral economics and an American Express pilot program to evaluate the effectiveness of certain practices to encourage prepaid card users to develop regular saving behavior.
From January to March 2015, American Express launched a pilot program to encourage prepaid card users to use a feature that allows users to set money aside dedicated for savings and keep it separate from funds in their main prepaid account. The trial program included about 540,000 prepaid card users, with certain of such users receiving various forms of encouragement to sign up for the savings feature. The company used four strategies consisting of emails highlighting the benefits of savings, direct mail sending a refrigerator magnet highlighting the benefits of savings, an offer of $10 if an individual saved $150 by March 31, and encouragement to use an automatic transfer feature they could sign up for.
The project findings included the following:
- The $10 incentive was highly effective in encouraging card users to enroll in the savings feature.
- Usage of the savings feature was tracked for nine months after the three-month pilot program ended. The study found that for customers still using the savings feature, savings balances generally did not decrease after the pilot ended.
- Users who were offered the $10 incentive reported significantly less payday loan use than those who were not offered the incentive.
In a notice published in today’s Federal Register, the CFPB announced that it has given its “official approval” to a revised and redesigned Uniform Residential Loan Application (2016 URLA) and to the collection of expanded Home Mortgage Disclosure Act information on ethnicity and race in 2017.
2016 URLA. The 2016 URLA approved by the CFPB was issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association and is included as an attachment to the CFPB’s notice. The notice indicates that the CFPB’s staff has determined that the relevant language in the 2016 URLA complies with the provisions in Regulation B (which implements the ECOA) that limit requests by creditors for certain information in applications, such as information about race and other protected characteristics, a spouse, marital status, or income from alimony and certain other sources. The CFPB stated that while a creditor’s use of the 2016 URLA is not required under Regulation B, a creditor that uses the 2016 URLA without any modification that would violate these Regulation B provisions would be in compliance with such provisions.
The CFPB noted that a version of the URLA dated January 2004 is included in appendix B to Regulation B as a model form and describes the safe harbor provided in appendix B for creditors that use the model form. The CFPB also noted that the Official Staff Commentary to Regulation B provides that creditors can use a previous version of the URLA dated October 1992 without violating Regulation B. The CFPB stated that its official approval “is being issued separately from, and without amending” the Official Staff Commentary and that it will consider whether to address the treatment of outdated versions of the URLA in the Commentary at a later date.
Expanded HMDA Information Collection. The amendments to Regulation C (which implements HMDA) finalized in 2015 will require financial institutions covered by HMDA to permit applicants to self-identify using disaggregated ethnic and racial categories beginning January 1, 2018. In the notice, the CFPB stated that before such date, such inquiries would not be allowed under Regulation B Section 1002.5(a)(2) which limits inquiries by creditors about race or other protected characteristics. Believing there will be significant benefits to permitting creditors to ask consumers to self-identify before January 1, 2018, the CFPB gave approval for a creditor “at any time from January 1, 2017, through December 31, 2017…at its option, [to] permit applicants to self-identify using disaggregated ethnic and racial categories as instructed in appendix B to Regulation C, as amended by the 2015 HMDA final rule.” A creditor adopting that practice “shall not be deemed to violate” Section 1002.5(a)(2) and “shall also be deemed to be in compliance with Regulation B § 1002.5(a)(2) even though applicants are asked to self-identify using categories other than those explicitly provided in that section.”
The notice also includes instructions for creditors to use to submit information concerning ethnicity and race collected under the approval in connection with applications received from January 1, 2017 through December 31, 2017. The instructions distinguish between applications on which final action is taken during the 2017 calendar year and those on which final action is taken on or after January 1, 2018.
For applications on which final action is taken during the 2017 calendar year, a financial institution is directed to submit the information on ethnicity and race using only the aggregate categories and codes provided in the filing instructions guide for HMDA data collected in 2017, even if the financial institution has permitted applicants to self-identify using disaggregated categories pursuant to the approval. For applications on which final action is taken on or after January 1, 2018, a financial institution is given the option to submit the information on ethnicity and race using disaggregated categories if the applicant provided such information instead of using the transition rule adopted by the 2015 HMDA final rule or to submit the information using the transition rule.
The Securities and Exchange Commission has announced that it will host a public forum in Washington, D.C. on November 14, 2016 to discuss financial technology innovation in the financial services industry. The forum is designed to foster greater collaboration and understanding among regulators, entrepreneurs and industry experts about fintech innovation and evaluate how the current regulatory environment can most effectively address these new technologies.
The panels will discuss issues such as blockchain technology, automated investment advice or robo-advisors, online marketplace lending and crowdfunding, and how they may impact investors. The forum will be open to the public and webcast live on the SEC’s website.
A bill was recently introduced by Congressman Patrick McHenry that would establish a “Financial Services Innovation Office” within various federal agencies, including the CFPB and SEC, that would consider petitions from persons that offer or intend to offer a financial innovation and seek to enter into an agreement under which the agency would agree to waive or modify regulatory or statutory requirements applicable to the innovation.
In a new blog post by Student Loan Ombudsman Seth Frotman, the CFPB discusses its concerns regarding how student loan servicers may be responding to borrowers seeking to make partial prepayments on their student loans and provides advice to such borrowers.
The CFPB expresses its concern that “student loan servicers may be making it harder for borrowers to get ahead who have made additional payments on their loans. A number of consumers have reported that, after trying to get ahead on paying off their student loans, they were sidetracked by their student loan servicer.” According to the CFPB, these consumers have reported that by lowering their monthly payment amount, their servicers extended the repayment period, thereby increasing the amount of interest the borrower would pay. The CFPB indicates that servicers are reported to have made such a change without a request from the borrower and, in some cases, without letting the borrower know the change would be made.
The CFPB warns borrowers who seek to pay down their loans more quickly to watch out for “surprise redisclosure” of payment terms by servicers, meaning a resetting of loan repayment terms.
Borrowers are advised that if they discover from their monthly statement or account payment history that their servicer has lowered their monthly payment, they can tell their servicer to set their monthly payment back to their requested payment amount, or choose to make extra payments each month. Borrowers who regularly make partial prepayments through automatic payments are advised that they should contact their servicer to establish a standing instruction as to how such prepayments will be applied (such as to the loan with the highest interest rate). Borrowers are also advised that they can provide instructions with individual payments and to make sure partial prepayments are not advancing payment due dates by creating a “payment holiday.”
Finally, borrowers are advised to submit a complaint if they have trouble with their servicers.
In February 2014, the CFPB presented its findings based on responses it received to a letter sent to private student loan servicers asking them for information about their practices for handling extra payments from borrowers. Such practices are routinely the subject of scrutiny by CFPB examiners.
The CFPB has issued its September 2016 complaint report which highlights complaints about money transfers and complaints from consumers in Pennsylvania and the Philadelphia metro area. The CFPB began taking money transfer complaints in April 2013.
General findings include the following:
- As of September 1, 2016, the CFPB handled approximately 982,400 complaints nationally, including approximately 28,700 complaints in August 2016.
- Debt collection continued to be the most-complained-about financial product or service in August 2016, representing about 34 percent of complaints submitted and showed the greatest month-to-month increase, increasing 50 percent from July 2016. Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 67 percent of the complaints submitted in August 2016.
- Complaints about student loans showed the greatest percentage increase based on a three-month average, increasing about 78 percent from the same time last year (June to August 2015 compared with June to August 2016). In February 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 beginning in April 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 18 percent from the same time last year (June to August 2015 compared with June to August 2016). Complaints during those periods decreased from 461 complaints in 2015 to 379 complaints in 2016. In the complaint reports for March through August 2016, payday loan complaints also showed the greatest percentage decrease based on a three-month average.
- Wyoming, Alaska, and Colorado experienced the greatest complaint volume increases from the same time last year (June to August 2015 compared with June to August 2016) with increases of, respectively, 29, 26, and 21 percent.
- Maine, Nebraska, and Idaho experienced the greatest complaint volume decreases from the same time last year (June to August 2015 compared with June to August 2016) with decreases of, respectively, 36, 19, and 15 percent.
Findings regarding money transfer complaints include the following:
- The CFPB has handled approximately 6,900 money transfer complaints, representing about 0.7 percent of total complaints.
- Consumers using money transfer services to make purchases commonly report being the victims of fraud or scams, with sellers to whom they send funds not sending the items purchased.
- Consumers reported that money transfer providers had placed holds on their accounts without providing an explanation. Money transfer service providers have explained that the holds result from a risk-based model that will hold reserves to cover potential losses arising from reversals or chargebacks.
- Sellers involved in transactions using an online money transfer service often reported encountering problems with the dispute resolution process. Sellers describe several scenarios where they do not receive payments after sending the item to the buyer, which often occurs when the seller is told that the buyer’s payment has been accepted but is later cancelled. Cancellation is either by the buyer directly due to a dispute, or by the buyer’s financial institution due to insufficient funds in the buyer’s account. Sellers often indicate that money transfer service providers, when deciding a dispute in the buyer’s favor after the item has already been sent, will debit the seller’s account without guaranteeing that the buyer will return the item to the seller.
- Consumers submitting complaints about international money transfers commonly report delays and restrictions when attempting to make transfers or the absence of an explanation for a denial. Many of these complaints are the product of company risk-based assessments, review for OFAC compliance, and consumer identification efforts.
Findings regarding complaints from Pennsylvania consumers include the following:
- As of September 1, 2016, approximately 34,700 complaints were submitted by Pennsylvania consumers of which approximately 69 percent (about 24,100) were from Philadelphia consumers.
- Debt collection was the most-complained-about product, representing 25 percent of the complaints submitted by Pennsylvania consumers and 27 percent of complaints submitted by consumers nationally.
- The percentage of mortgage complaints submitted by Pennsylvania consumers, 22 percent, was lower than the 25 percent national average. However, the percentage of mortgage complaints submitted by Philadelphia consumers, 26 percent, was higher than the national average.
- Average monthly complaints received from Pennsylvania consumers increased 9 percent from 2014 to 2015, similar to the increase of 8 percent nationally.
The CFPB announced that it has entered into a consent order with TMX Finance, LLC to settle allegations that the company did not provide sufficient information to consumers about the terms of auto title loans, pawns or pledges, and engaged in unfair collection practices. The consent order requires TMX Finance to pay a $9 million civil money penalty.
The consent order involves 30-day credit transactions made by TMX Finance under the brands TitleMax and TitleBucks at storefronts in Alabama, Georgia and Tennessee. Under the applicable laws of the three states, consumers can renew or extend a transaction by paying the finance charge at the end of each 30-day period. According to the CFPB’s findings of fact and conclusions of law set forth in the consent order (which TMX Finance does not admit or deny), the company engaged in the following conduct in violation of the Consumer Financial Protection Act:
- After telling a consumer the amount of credit for which he or she was eligible, a company employee would ask the consumer to indicate the number of months over which he or she would like to repay the transaction or how much the consumer would like to pay each month. After the consumer identified a payback period or target monthly payment, the employee would show the consumer a payback guide showing the monthly payments required to repay the principal balance in full at the end of a stated period. The payment guide did not disclose the total finance charge that a consumer would pay if he or she chose to renew a transaction multiple times but showed the amount of finance charge and principal that needed to be paid at the end of each 30-day period for the transaction to amortize over the consumer’s selected term. The CFPB found the use of the payback guide was “abusive” in violation of the CFPA because it materially interfered with a consumer’s understanding of the terms and cost of the transactions. More specifically, the CFPB found that the company’s sales pitch and the guide materially interfered with a consumer’s ability to understand such things as that guide was not an actual payment plan, renewing the transaction over an extended period would substantially affect the overall cost of the transaction, and the transaction would be more expensive the longer it took the consumer to it pay off.
- Company employees were permitted to conduct “in-person” visits to a consumer’s home or places of employment if a consumer failed to make a timely payment and did not respond to communications from company employees. The CFPB found that during such visits, employees disclosed the existence of a consumer’s debts to third parties. It also found that employees visited places of employment even after being informed by a consumer or a consumer’s supervisor that such visits were not permitted. The CFPB found that the company’s practice of making in-person visits was “unfair” in violation of the CFPA.
In addition to requiring payment of the civil money penalty, the consent order contains various restrictions on the company’s conduct. Such restrictions include a prohibition on in-person visits unless they are for the purpose of locating and repossessing vehicles and using a payback guide or similar document.
As TMX Finance noted in a press release issued in connection with the settlement, the consent order does not require TMX Finance to pay any restitution to consumers. The press release included a statement from the company’s president in which he affirmed the company’s continuing commitment to remaining a reliable source of credit for customers facing short-term financial setbacks like medical emergencies or home repairs. The press release noted that the payback guide was designed to assist customers in understanding the ramifications of renewing or extending their 30-day credit transactions.
Last week, the CFPB announced that it had filed administrative enforcement actions against five Arizona auto title lenders for alleged violations of Truth in Lending Act advertising requirements.