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Senator Brown urges funding of Dodd-Frank small dollar loan programs

Posted in Deposit Accounts, Payday Lending

Senator Sherrod Brown, ranking member of the Senate Banking Committee, has sent a letter to President Obama that asks the President to prioritize funding in his FY 2017 budget proposal for programs in Title XII of the Dodd-Frank Act that are intended to assist lower income borrowers.  Title XII has not yet been implemented.

The programs authorized by Sections 1205 and 1206 of Title XII provide federal grants and other financial support to “eligible entities” to enable them to provide “low-cost, small loans to consumers that will provide alternatives to more costly small dollar loans.”  “Eligible entities” include community development financial institutions, federally-insured depository institutions, and state, local, or tribal government entities.

Community development financial institutions (CDFI) are financial institutions that provide credit and financial services to underserved markets and populations that are certified by the Treasury Department’s Community Development Financial Institutions Fund (CDFI Fund) which provides funds to CDFIs through various programs.  Section 1206 would establish limits on a CDFI’s small dollar loan program supported by the CDFI Fund, including that the loans may not exceed $2500, must be repayable in installments, and have no prepayment penalty.

Senator Brown was among a group of U.S. Senators who sent a letter to Director Cordray in June 2015 urging him “to issue the strongest possible [payday lending] rules to end the damaging effects of predatory lending.”

Title XII also authorizes a program intended to expand access of low- and moderate-income individuals to the mainstream  banking system.  Under Section 1204, the Treasury Department can provide grants and other financial  support to promote initiatives designed to enable such individuals to establish accounts in federally-insured depository institutions.

CFPB issues third appropriations report

Posted in CFPB General

The CFPB has issued its third report entitled “Report of the Consumer Financial Protection Bureau Pursuant to Section 1017(e)(4) of the Dodd-Frank Act.”  That Dodd-Frank section requires the CFPB’s Director to submit an annual report to the House and Senate Committees on Appropriations “regarding the financial operating plans and forecasts of the Director, the financial condition and results of operations of the Bureau, and the sources and application of funds of the Bureau, including any funds appropriated in accordance with [Section 1017(e)].”  (The CFPB’s previous appropriations report covered the period October 1, 2013 through September 30, 2014.)

The new report covers the period October 1, 2014 through September 30, 2015.  It repackages (often verbatim) the information contained in three previous CFPB reports: the seventh Semi-Annual Report to the President and Congress covering the period from October 1, 2014 to March 31, 2015, the eighth Semi-Annual Report to the President and Congress covering the period from April 1, 2015 through September 30, 2015, and the FY 2015 financial report.

CA federal court refuses to dismiss CFPB lawsuit against online lending companies alleging UDAAP violations based on state law violations

Posted in CFPB Enforcement, Payday Lending, UDAAP

A federal district court has refused to dismiss the lawsuit filed by the CFPB in December 2013 against CashCall, several related companies and their principal, which asserted UDAAP violations based on the defendants’ efforts to collect loans that were purportedly void in whole or in part under state law.  The companies allegedly funded, purchased, serviced and collected online high-rate installment loans made by a tribally-affiliated lender the CFPB did not sue.

In its original complaint filed in federal district court in Massachusetts, the CFPB alleged that the loans in question were void in whole or in part as a matter of state law because the lender charged excessive interest and/or failed to obtain a required license.  The original complaint identified eight states with laws of this kind—Arkansas, Arizona, Colorado, Indiana, Massachusetts, New Hampshire, New York and North Carolina—and alleged that the effort to collect amounts in excess of the amounts lawfully due under state law was “unfair,” “deceptive” and “abusive” as a matter of federal law.  In April 2014, the CFPB amended its complaint to add eight more states with similar laws that purportedly made the loans the defendants sought to collect void in whole or in part.  The eight states were Alabama, Illinois, Kentucky, Minnesota, Montana, New Jersey, New Mexico and Ohio.

The case was subsequently transferred to a California federal district court.  Last week, that court entered an order denying the defendants’ motion for judgment on the pleadings.  In their motion, the defendants argued that the CFPB (1) exceeded its authority under the Consumer Financial Protection Act (CFPA) by basing its claims solely on state law violations, and (2) seeks to establish a federal usury limit, which is prohibited by the CFPA.

In its decision, the court indicated that the defendants’ first argument was “based on a mischaracterization” of the CFPB’s complaint.  According to the court, the CFPB had not alleged, as defendants contended, that a state law violation constituted a per se violation of the CFPA’s UDAAP prohibition.  Instead, the court accepted the CFPB’s characterization of its complaint as not alleging that the defendants violated the CFPA because they violated state law but because their conduct in attempting to collect debts consumers did not owe satisfied the requisite elements for “unfair,” “deceptive,” and “abusive” acts and practices under the CFPA.

In the court’s view, while the defendants’ alleged state law violations were “necessary to” the CFPB’s claims, “that does not necessarily mean that the Bureau is ‘ federalizing’ state law.”  The court concluded that “the proper question in the context of a CFPA claim is whether the plaintiff has alleged an action that falls within the broad range of conduct prohibited by the CFPA.”  The court found that the defendants had failed “to argue or meaningfully demonstrate that the alleged conduct does not fall within the broad range of conduct prohibited by the CFPA.”

The court also ruled that the CFPB was not seeking to establish a usury limit and instead was “seeking to enforce a prohibition on collecting amounts that consumers do not owe.”

While this decision addresses the conduct of CashCall in attempting to collect supposedly void loans, we worry that it will embolden the CFPB to continue to aggressively expand its reach to service providers and others that partner with, and provide legitimate services to, consumer finance companies.

On January 25, 2016, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: CFPB v. CashCall: The CFPB’s Enforcement of State Law and Expansive View of Dodd-Frank’s UDAAP Prohibition.  A link to register is available here.


CFPB responds to industry concerns about TRID rule liability

Posted in Mortgages

Reacting to reports of investors refusing to purchase loans based on various, often technical, violations of the TILA/RESPA Integrated Disclosure (TRID) rule, the Mortgage Bankers Association (MBA) sent a letter to the CFPB on December 21, 2015 seeking guidance to allay investor concerns.  (The version of the letter released by the MBA does not include the attachment referenced in the letter.)

In a letter dated December 29, 2015, Director Cordray responded to the MBA.  While the letter does not provide for any type of safe harbor or protection from liability during the TRID rule implementation period, it does provide some helpful guidance on TRID rule liability.

Director Cordray notes the TRID rule provisions that permit the correction of certain errors post-closing, and states that the provisions can be used to correct non-numerical clerical errors, or as part of the cure for violations of the monetary tolerance limits.  The Director then makes an important statement that “consistent with existing Truth in Lending Act (TILA) principles, liability for statutory and class action damages would be assessed with reference to the final closing disclosure issued, not to the loan estimate, meaning that a corrected closing disclosure could, in many cases, forestall any such private liability.”  This statement likely is directed at the MBA concern that investors were rejecting loans based on technical errors in the Loan Estimate.  The TRID rule does not expressly provide that accurate information in the Closing Disclosure will correct a technical error in the Loan Estimate.

The Director also states that the pre-existing TILA statutory cure provisions apply to the disclosures under the TRID rule.  The Director confirms that the statutory cure provisions permit a creditor to cure violations in the TRID rule disclosures, as long as the creditor notifies the borrower of the error and makes appropriate adjustments to the consumer’s account before the creditor receives notice of the violation from the consumer.

The Director also confirms that the TRID rule did not change the fundamental principles of liability under TILA or the Real Estate Settlement Procedures Act (RESPA) and that, as a result, for non-high cost mortgage loans:

  • There is no general TILA assignee liability unless the violation is apparent of the face of the disclosure documents and the assignment is voluntary.
  • TILA limits statutory damages for mortgage disclosures, in both individual and class actions, to failures to provide a closed-set of disclosures.
  • Formatting errors and the like are unlikely to give rise to private liability unless the formatting interferes with the clear and conspicuous disclosure of one of the TILA disclosures listed as giving rise to statutory and class action damages.
  • The disclosures listed in TILA section 130(a) (15 U.S.C. § 1640(a)) that give rise to statutory and class action damages do not include either RESPA disclosures or the new Dodd-Frank Act disclosures, including the Total Cash to Close and Total Interest Percentage.

This guidance confirms important limitations on the extent of TILA statutory damages that have created concerns among many industry members.

At the end of the letter the Director makes two very important statements regarding TILA private liability: (1) in light of the points made in the letter about the existing TILA cure provisions, the specific TRID rule cure provisions, and the limits of private liability under TILA, “we believe that the risk of private liability to investors is negligible for good-faith formatting errors and the like,” and (2) “the Bureau believes that that if investors were to reject loans on the basis of formatting and other minor errors . . . they would be rejecting loans for reasons unrelated to potential liability associated with” the TRID rule.

With regard to administrative liability, the Director confirms that the CFPB and other regulators initially will focus on good faith efforts to come into compliance with the TRID rule.


CFPB issues TRID rule corrections

Posted in Mortgages

The CFPB has issued a final rule containing “technical corrections” to the final TILA-RESPA Integrated Disclosure (TRID) rule that became effective on October 3, 2015.  The corrections are effective December 24, 2015, the date of their publication in the Federal Register.

According to the supplementary information accompanying the corrections, the publication of the TRID rule in the Federal Register “resulted in several unintended deletions of existing regulatory text from Regulation Z and the Official [Regulation Z Commentary] and, in one case, the omission of regulatory language in the [final TRID rule] from the [Code of Federal Regulations].”  While not clear from the CFPB’s statement, we understand that the final TRID rule was published correctly in the Federal Register but was incorrectly codified in the CFR by the Government Printing Office.

To correct the CFR, the final rule reinserts existing regulatory text that was “inadvertently deleted” from Regulation Z and its Commentary and amends the Commentary to Appendix D to Regulation Z to add a paragraph that had been included in the final TRID rule published in the Federal Register but “inadvertently omitted” from such Commentary.  The CFPB describes the corrections as “non-substantive changes” to the final TRID rule.

During 2015, despite requests from the industry to address many apparent errors with the TRID rule, the CFPB has so far decided not to act, not even to address issues that would be relatively simple to correct.  For example, because of an apparent error, property taxes paid at closing were not included in the list of items that are not subject to a specific percentage tolerance.  There also are disclosure issues, such as the provisions for determining how to complete the Cash to Close sections of the Loan Estimate and Closing Disclosure, which if followed as set forth in the TRID rule can result in (1) disclosing that there are no closing costs being financed when, in fact, the lender is financing closing costs and (2) disclosing a cash to close amount that is lower than the actual cash needed to close.  And, there is the so-called “black hole” issue that appears to prevent a creditor, in various cases, from being able to reset the tolerances with a Closing Disclosure.  Perhaps the CFPB will see fit to address the many issues in 2016.

CFPB urges federal district court to disclose names of plaintiffs filing lawsuit against CFPB

Posted in CFPB Enforcement

In October 2015, the D.C. federal district court ruled that the plaintiffs’ names should be redacted in all documents filed in a lawsuit against the CFPB initiated by the plaintiffs.  The plaintiffs are a group of businesses and an individual who provide services related to consumer credit counseling and are under investigation by the CFPB.  In a motion filed on December 16, 2015, the CFPB is asking the court to reconsider its decision and require the plaintiffs to disclose their names and other identifying information.

The plaintiffs filed the lawsuit to challenge the CFPB’s denial of their request to have their attorney attend an investigational hearing held in connection with CIDs issued to one of the plaintiffs and a company alleged to have acted as the plaintiffs’ business partner.  In addition to a complaint, the plaintiffs filed a TRO application to bar the CFPB from proceeding with the hearing without an attorney for the plaintiffs being present and a motion to seal the case.  After the court ordered the case temporarily sealed, it held a hearing on the TRO application and “events at the hearing largely mooted the case.”  The plaintiffs then voluntarily dismissed their complaint but maintained their motion to seal the case.  While rejecting the plaintiffs’ attempt to seal the entire case, the court ruled that it was appropriate “to re-caption this case as a John Doe suit and to afford Plaintiffs the opportunity to submit versions of all of the documents filed to date that redact their names and other identifying information.”

In its motion, the CFPB argues that the plaintiffs “should not be allowed to shield from public disclosure either their names or other identifying information simply because they are the subjects of a Bureau investigation.”  According to the CFPB, a litigant’s request to proceed pseudonymously can only be granted in “extraordinary circumstances” based on consideration of the following five factors:

  • Whether the justification for the request is merely to avoid the annoyance and criticism that can attend any litigation or is to protect privacy in a sensitive and highly personal matter
  • Whether there is a risk of retaliatory physical or mental harm as a result of  identification to the requesting party or innocent parties
  • The ages of the persons whose privacy interests are sought to be protected
  • Whether the action is against a governmental or private party
  • The risk of unfairness to the opposing party from allowing the action to proceed anonymously

The CFPB claims that none of these five factors weigh in favor of allowing the plaintiffs to proceed pseudonymously.  In response to the plaintiffs’ contention that they would suffer irreparable reputational and financial harm if they were tied to a government investigation, the CFPB cites to case authority which purportedly indicates that anonymity requests have consistently been rejected by courts faced with similar allegations of reputational and economic harm.  Accordingly, the CFPB asks the court to require the plaintiffs “to disclose their names and other identifying information as is required under the Federal Rules of Civil Procedure and this Court’s own Local Rules.”




Senators urges Dept. of Education to delay use of robocalls in collection of federal student loans

Posted in Student Loans

In a letter sent last week to U.S. Department of Education Secretary Arne Duncan, four U.S. Senators urge the ED “to direct federal student loan servicers, debt collectors, and all other third parties” to delay use of the new robocall authority given by the Bipartisan Budget Act of 2015.  Two Senators are Democrats (Elizabeth Warren and Edward J. Markey) and two Senators are Republicans (Michael S. Lee and Orrin G. Hatch).

Signed into law by President Obama on November 2, 2015, Section 301 of the Budget Act amended the Telephone Consumer Protection Act (TCPA) to create a new exemption for debt collection robocalls made to cellular and residential telephone numbers.  Prior to the amendment, such calls would have been prohibited absent the recipient’s prior express consent.  As amended by Section 301, the TCPA now allows such calls to be made without the recipient’s prior express consent if such call, when made to a cellular phone, “is made solely to collect a debt owed to or guaranteed by the United States,” or, when made to a residential line, “is made solely pursuant to the collection of a debt owed to or guaranteed by the United States.”

The Senators assert that the robocall authority should not be used until the ED can “demonstrate with data that the use of this authority will provide net benefits for both student loan borrowers and taxpayers and will not result in potentially abusive debt collection practices.”  They also contend that the new robocall authority cannot be used until the FCC issues implementing regulations and that such authority can only be used for calls to student loan borrowers and not to “their relatives or references that may be secondarily responsible for the debt.”  In their letter, the Senators ask the ED to tell them by January 11, 2016 whether it agrees with their interpretations of the TCPA amendments.

The Senators’ interpretations do not appear to be supported by Section 301.  Section 301 has no explicit effective date.  In contrast, other Budget Act sections have explicit effective dates, including one section with an effective date that is tied to the issuance of implementing regulations.  While Section 301 directs the FCC, in consultation with the ED, to issue regulations to implement Section 301, it does not provide that that Section 301 is ineffective until such regulations are issued.  Also, the rulemaking authority provided by Section 301 only allows the FCC to “restrict or limit the number and duration of calls made to a telephone number assigned to a cellular telephone service to collect a debt owed to or guaranteed by the United States.”  Accordingly, such regulations would not impact robocalls to residential telephone numbers.

In addition, nothing in the language of the exemption suggests that it allows robocalls only to a student loan borrower and not to others who are liable for the loan.  The exemption’s only limitation is that the robocall must be made “solely to collect a debt owed to or guaranteed by the United States’’ or “solely pursuant to the collection of a debt owed to or guaranteed by the United States.”  Finally, the Senators are asking the ED to revisit a policy decision about the benefits of these calls that was made by the Congress in enacting the TCPA amendments and the President in signing them into law.

We will be interested to see whether the CFPB shares the Senators’ interpretations of the robocall exemption in connection with examinations of student loan servicers and debt collectors involved with federal student loans.


Money transfer complaints highlighted in CFPB December 2015 complaint report

Posted in Money Transfers

The CFPB has issued its December 2015 complaint report which highlights money transfer complaints and complaints from consumers in Georgia and the Atlanta metro area.

General findings include the following:

  • As of December 1, 2015, the CFPB handled approximately 770,100 complaints nationally, including approximately 21,000 complaints in November 2015.  For November 2015, debt collection continued to be the most complained-about financial product or service, representing about 30 percent of complaints submitted.  (The CFPB stated that this was the 27th consecutive month in which it handled more complaints about debt collection than about any other type of complaint.)  Debt collection complaints, together with complaints about credit reporting and mortgages, collectively represented about 68 percent of the complaints submitted in November 2015.
  • Complaints about prepaid cards showed the greatest percentage increase based on a three-month average, increasing about 215 percent from the same time last year (September to November 2014 compared with September to November 2015).
  • Payday loan complaints showed the greatest percentage decrease based on a three-month average, decreasing about 14 percent from the same time last year (September to November 2014 compared with September to November 2015).  Complaints during those periods decreased from 532 complaints in 2014 to 459 complaints in 2015.  (Payday loan complaints also showed the greatest percentage decrease in the October and November 2015 complaint reports.)
  • Idaho, Alabama and Vermont experienced the greatest complaint volume increases from the same time last year (September to November 2014 compared with September to November 2015).  The volume of complaints from Idaho, Alabama and Vermont increased by, respectively, 49, 38 and 36 percent.  The states with the greatest complaint volume decreases from the same time last year (September to November 2014 compared with September to November 2015) were Montana, Oklahoma and South Dakota with decreases of, respectively, 10, 10 and 7 percent.

Findings regarding money transfer complaints include the following:

  • Since April 4, 2013, the CFPB has handled approximately 5,100 money transfer complaints, representing about 1 percent of total complaints.
  • The most common complaints (42 percent) involved consumers complaining about being victims of fraud.  A common fraud involved the fraud perpetrator asking for a money transfer in order to provide relief to a family member in need.  In its press release about the report, the CFPB notes that while fraud is the most common type of money transfer complaint, it is not targeted at the actual money transfer service being provided.
  • Consumers often submitted complaints because the money transfer was not received by the intended recipient, the amount received was smaller than expected, or the transfer was delayed.
  • Other issues raised in complaints included problems with customer service, such as confusing information and long hold times, and error resolution problems such as long delays in obtaining refunds.

Findings regarding complaints from consumers in Georgia and the Atlanta metro area include the following:

  • As of December 1, 2015, approximately 31,300 complaints were submitted by Georgia consumers, of which about 23,600 (75 percent) were from Atlanta consumers.
  • Mortgages were the most-complained-about product, with mortgage-related complaints representing 33 percent of the complaints submitted by Georgia consumers.  (Nationally, mortgage complaints averaged 27 percent of all complaints received by the CFPB.)
  • Debt collection and credit reporting were, respectively, the second and third most-complained-about financial products by Georgia consumers.


CFPB enters into consent order with operator of consumer lead resale business

Posted in CFPB Enforcement, Lead Generation

The CFPB announced last week that it has entered into a consent order with an individual who had operated a defunct business that resold consumer leads to settle charges that the business sold leads to debt collectors who used the information to deceive and threaten consumers into paying debts they did not owe.  The debt collectors had been named as defendants in a complaint filed by the CFPB in federal district court in Atlanta in March 2015.

The leads sold by the reseller were purchased from lead generators.  According to the CFPB, the reseller undertook no reasonable due diligence to check whether one of the debt collectors purchasing the leads “offered a legitimate product or service to consumers” and the debt collector “could not have perpetrated its fraud on consumers without [the reseller’s] assistance.”  The CFPB claimed the reseller’s conduct was reckless and charged the reseller with violating Section 1036(a)(3) of the CFPA.  Section 1036(a)(3) provides that it is unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of the provisions of section 5531 [which prohibit unfair, deceptive or abusive acts or practices]…and notwithstanding any provision of this title, the provider of such substantial assistance shall be deemed to be in violation of that section to the same extent as the person to whom such assistance is provided.”

The consent order requires the operator of the reseller to disgorge $21,151 and permanently bans him from offering or providing any “consumer financial product or service” within the meaning of the CFPA, “including engaging in any business involving the purchase or sale of consumer leads, or facilitating any such conduct.”

In its complaint against the debt collectors, the CFPB also named as defendants three other companies.  One of the companies processed payments for the debt collectors and the two others were independent sales organizations that marketed the processor’s services to merchants and were responsible for screening and underwriting merchants.  The CFPB alleged that the three companies had violated Section 1036(a)(3) of the CFPA by providing “substantial assistance” to the debt collectors.

In September 2015, the court issued an opinion denying the companies’ motion to dismiss.  n their motion, the companies argued that the substantial assistance claim should be dismissed because the CFPB had not adequately alleged that they acted knowingly or recklessly.  While the court agreed with the companies that a “severe recklessness” standard should apply, it found that the CFPB had alleged facts that satisfied the higher standard.  It also rejected the companies’ argument that even if they acted knowingly or recklessly, they still did not provide substantial assistance under the allegations in the complaint because the CFPB’s allegations did not establish that the companies’ conduct was the proximate cause of consumer harm or even a substantial causal connection.  The court ruled that while proximate cause is relevant to establishing a substantial assistance claim, it is not required.

CFPB announces adjustments to HMDA/TILA asset-size exemption thresholds

Posted in Mortgages

The CFPB has announced annual adjustments to two asset-size exemption thresholds.  First, the CFPB is making no change to the asset-size exemption threshold under HMDA/Regulation C which is currently set at $44 million.  Banks, savings associations, and credit unions with assets at or below $44 million as of December 31, 2015 will continue to be exempt from collecting HMDA data in 2016.

Second, the CFPB has decreased the asset-size threshold under TILA/Regulation Z for certain small creditors operating primarily in rural or underserved areas to qualify for an exemption to the requirement to establish an escrow account for higher-priced mortgage loans (HPML).  The threshold is currently set at $2.060 billion.  Loans made by creditors operating primarily in rural or underserved areas with assets of less than $2.052 billion as of December 31, 2015 (including assets of certain affiliates) that meet the other Regulation Z exemption requirements will be exempt in 2016 from the escrow account requirement for HPMLs.  (The adjustment will also decrease the asset threshold for small creditor portfolio and balloon-payment qualified mortgages which references the HPML escrow account asset-size threshold.)