Consumer Financial Protection Bureau (CFPB)

A recent objection by the U.S. Department of Justice to a proposed class action settlement in Cowen v. Lenny & Larry’s Inc.[1] may be an indication that the DOJ will be scrutinizing future settlements for the benefits to the class members. The DOJ argued in its objection that the bulk of the benefit from the settlement will go to the general public (in the form of free cookies) and to class counsel (in the form of cash) rather than the class members, rendering the settlement “fatally lopsided.”

The DOJ’s objection to this particular settlement could provide insights into how class settlements could trigger unfavorable DOJ attention moving forward.

Click here to read the Law360 article in its entirety.

 

 

 

 

 

 

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[1] Cowen v. Lenny & Larry’s Inc., No. 1:17-cv-01530 (N.D.Ill.)

On March 1, the Consumer Financial Protection Bureau released a report concerning mortgages made to members of the U.S. armed forces and veterans purchasing a first home.  It is part of a series of quarterly reports the CFPB will issue focusing on consumer credit trends.  This Quarterly Consumer Credit Trends report highlights trends among first-time homebuying servicemembers from 2006 through 2016 and compares them with trends of first-time homebuying non-servicemembers.  Some of the key trends found by the CFPB are the following:

  • Servicemembers increased their reliance on U.S. Department of Veterans Affairs guaranteed home loans by 33% between 2007 and 2009, equaling 63% of servicemembers using VA mortgages by 2009.  While the report identified a comparable trend of non-servicemembers increasing their reliance on government-sponsored loans going into 2009, non-servicemembers decreased their reliance on government-sponsored loans thereafter.  Servicemember reliance on VA mortgages continued to increase and was at 78% as of 2016.
  • The increased use of VA mortgages by servicemembers reflected a larger decrease in use of conventional loan products between the years of 2006 and 2009 by all consumers, both servicemember and non-servicemember.  At their peak during the years of 2006 through 2009, conventional mortgages served 60% of servicemembers and 90% of non-servicemembers.  As of 2016, conventional loans only served 13% of servicemembers.  Non-servicemembers’ use of conventional mortgages dropped to 41% as of 2009 but increased to 60% by 2016.
  • The median VA mortgage amount among servicemembers “increased in nominal dollars from $156,000 in 2006 to $212,000 in 2016.”  This figure closely follows a similar increase in the median amount that non-servicemembers have borrowed using conventional mortgages.  The report notes, however, that the median loan amount of Federal Housing Administration (“FHA”) and U.S. Department of Agriculture (“USDA”) mortgages among servicemembers grew more slowly.
  • During 2006 and 2007, servicemembers with nonprime credit scores experienced early delinquencies (a mortgage 60 days or more delinquent within a year of origination) on VA mortgages at a rate between 5% and 7%, while collectively all nonprime FHA and USDA mortgages (for both servicemembers and non-servicemembers) experienced early delinquencies reaching 13%.  After 2009, early delinquencies among nonprime VA mortgages originated in 2016 dropped to just above 3%.  Conversely, conventional mortgages dropped below 2% and FHA and USDA mortgages dropped to 5% (for both servicemembers and non-servicemembers).
  • Delinquency rates for active duty servicemembers with nonprime credit scores were found to be lower than their veteran counterparts.  No such distinction in delinquency rates existed between active duty and veterans when the servicemembers had prime credit scores.

Troutman Sanders will continue to track trends in the mortgage industry as they are published by the CFPB.

Requiring an employee or consumer to submit any dispute to binding arbitration as a condition of employment or purchase of a product or service is commonly referred to as “forced arbitration.”  Many times, the employee or consumer is required to waive their right to sue or to participate in a class action lawsuit.  Critics argue that these arbitration agreements disempower the middle class and some in Congress have taken notice.

Last Thursday, Congressman Jerrold Nadler (D-N.Y.) and Sen. Richard Blumenthal (D-Conn.) announced a package of bills at a press conference that could end the practice of forced arbitration.

“One of the systems that is truly rigged against consumers and workers and the American people is our current system of forced arbitration,” Blumenthal said while introducing the Forced Arbitration Injustice Repeal Act.  Under the bill, companies would no longer be able to enforce arbitration agreements in consumer, employment, civil rights, or antitrust disputes.  The Democrats also introduced the Ending Forced Arbitration of Sexual Harassment Act which would eliminate arbitration in disputes that involve sexual harassment.

According to Nadler, the goal of these proposals is to help workers and consumers obtain justice.  “All Americans deserve their day in court,” Nadler said.  “We make a mockery of this principle when we allow individuals to be forced to take their claims to private arbitration.”

These lawmakers aim to reverse the Supreme Court’s ruling in Epic Systems Corp. v. Lewis – that employers may require employees to settle collective disputes in individual arbitration, thereby barring them from banding together in class-action lawsuits against employers.  Justice Neil Gorsuch wrote the decision for the majority.  The ruling was a contentious 5-4 decision along party lines.

Blumenthal believes that the bills will pass because Democrats have a majority in the House of Representatives.  However, it is unclear whether these bills are dead-on-arrival in the Republican-controlled Senate.  Furthermore, it appears unlikely that President Trump will sign a bill reversing the decision written by his first nomination to the Supreme Court.  Therefore, it appears that, notwithstanding the present legislation, the enforceability of arbitration provisions is here to stay for the time being.

Troutman Sanders will continue to monitor and report on important developments involving the changing landscape of arbitration.

On February 25, the Federal Trade Commission and the Consumer Financial Protection Bureau reauthorized their Memorandum of Understanding, or “MOU.”

The MOU, which governs the FTC’s and CFPB’s joint operations, focuses on five key areas of cooperation:

  • Joint law enforcement efforts – The agreement requires one agency to give notice to the other prior to commencing an investigation. Both agencies are required to give the other details about the proceedings they are initiating, including the court in which the proceeding is being brought, the alleged facts surrounding the case, and the agency’s requested relief. Importantly, the agreement also allows either agency to intervene in any action commenced by the other agency, as long as the intervening agency shares jurisdiction.
  • Joint resolution efforts One agency must also notify the other prior to proposing or entering into any consent decree or settlement with an MOU Covered Person. Each agency must also notify the other prior to issuing no-action letters, warning letters, or closing letters.
  • Joint rulemaking efforts – The agencies must consult and notify one another prior to issuing proposed rules or agency guidance under statutes such as the Omnibus Appropriations Act of 2009, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act, and UDAAP.
  • Supervisory Information and Examination Schedules – The CFPB must provide, and the two agencies must confer as to, the CFPB’s plans to examine MOU Covered Persons, and the CFPB must provide the FTC with Confidential Supervisory Information relating to MOU-covered persons subject to FTC jurisdiction, upon request from the FTC.
  • Consumer Complaints – Under the agreement, the agencies are to direct consumers to the agency best suited to resolve their complaints and are to make consumer complaints available to one another.

According to the FTC, the MOU is an agreement for “ongoing coordination between the two agencies under the terms of the Consumer Financial Protection Act,” aiming to avoid duplication of law enforcement and rulemaking efforts between the FTC and CFPB.  The full MOU is available here

The Supreme Court agreed to hear a consumer’s appeal from the Third Circuit’s ruling that his claims under the Fair Debt Collection Practices Act were time-barred despite being brought within one year of discovering the violation.  The circuits have been split on whether the one-year statute of limitations under the FDCPA begins to run when an alleged violation takes place or when it is discovered.  The split has caused a lot of uncertainty about potential liability under the FDCPA and, on February 26, the Supreme Court granted certiorari in a case squarely presenting the issue.

We previously reported on Kevin Rotkiske v. Paul Klemm, et al., No. 16-1668 (3d Cir. May 15, 2018).  There, Kevin Rotkiske sued Paul Klemm, claiming that a judgment obtained by Klemm against Rotkiske in 2009 violated the FDCPA.  However, Rotkiske did not file his FDCPA claims until 2015 – five years outside of the FDCPA’s one-year statute of limitations.  In response to Klemm’s motion to dismiss, Rotkiske asserted that his FDCPA claims were timely because he did not find out about the judgment until 2014.  The trial court dismissed Rotkiske’s claims and he appealed.

The Third Circuit affirmed the dismissal and held that the plain language of the statute controls.  In particular, the FDCPA requires that actions for violations of the statute must be brought “within one year from the date on which the violation occurs.”  15 U.S.C. § 1692k(d).  Although the language leaves no room for argument, the plaintiff’s bar has claimed over the years that the discovery rule should apply.  The Fourth Circuit and the Ninth Circuit have agreed.  On the other hand, the Eighth Circuit, Eleventh Circuit, and now Third Circuit have rejected this reading of the statute and have held that the one-year statute of limitations begins to run from the time of the alleged violation, not its discovery.

In his petition to the Supreme Court, Rotkiske argued that the result reached by the Third Circuit was unjust and “absurd.”  In response, Klemm emphasized that courts could prevent any unfairness by applying the doctrine of equitable tolling in FDCPA cases involving a defendant’s fraudulent or concealed conduct which would effectively stop the statute of limitations from accruing until the violation is discovered.

It is hoped that a Supreme Court decision in this case will bring long-awaited certainty to the issue of the FDCPA’s statute of limitations.

On February 20, the Consumer Financial Protection Bureau released a compliance guide for small entities that summarizes payment-related provisions of the Payday Lending Rule.

The Payday Lending Rule governs payday loans, vehicle tile loans, and certain high-cost installment loans.  The Guide focuses on the payment provisions of the Payday Lending rule, found in Subpart C of the Rule.  It also discusses general coverage provisions, including lenders and servicers subject to its mandates, prohibited payment transfer attempts, and disclosure of payment transfer attempts, which are found in Subpart A of the Rule.  Lastly, the Guide focuses on the record retention and compliance program requirements, found in Subpart D of the Rule.

The Guide should be reviewed in conjunction with the Rule as the Guide does not include interpretations issued or released after February 2019.

A copy of the Guide can be found here.

Troutman Sanders will continue to monitor and report on developments regarding the CFPB.

A group of 21 states and the District of Columbia submitted a comment letter opposing the Consumer Financial Protection Bureaus effort to revise and boost its Policy on No-Action Letters (NAL Policy) and the creation of a CFPB Product Sandbox.  The NAL Policy and Product Sandbox will allow companies to provide innovative financial services and products under a relaxed regulatory regime.  In a February 11 letter, the states express concern that relaxed regulation could lead to consumer harm and are asking the CFPB to reevaluate its proposed policies given the significant risks to consumers and the entire U.S. financial system.

As an initial matter, the participating states doubt whether the CFPB can take such action without the formal rulemaking procedures required by the Administrative Procedure Act because the proposals create substantive CFPB policy.  Under the revised policy, the immunity granted to companies ties the states hands because approvals or exemptions granted by the CFPB … confer on the recipient immunity from both federal and state authority.  However, even if the CFPB does have the authority to take the action without formal rulemaking, the states point out that there are other issues that are of importance.

A company could apply to the CFPB for a no-action letter that would give the company an official assurance by a duly authorized CFPB official that the CFPB will not pursue enforcement measures against the company.  The purpose is to foster technological innovation, but it is effectively a get-out-of-jail-free card for a company trying new products and services.  The revised NAL Policy would also speed up the time in which the CFPB would grant or deny an application for a no-action letter to 60 days.

The Product Sandbox would grant companies similar relief under the NAL Policy, but would also provide two forms of additional exemption relief:  “1. Approvals by order under three statutory safe harbor provisions (approval relief); and 2. Exemptions by order from statutory provisions under statutory exemption-by-order provisions (statutory exemptions), or from regulatory provisions that do not mirror statutory provisions under rulemaking authority or other general authority (regulatory exemptions).”  The Product Sandbox also fosters technological innovation by allowing companies to test new disclosures for financial services and products.

Given the effects of the 2008 financial crisis, the states oppose the revised policy because the potential benefits are outweighed by the risks.  The states point out various issues that undermine the potential effectiveness of the proposed policy, focusing primarily on the potential for consumer harm and the lack of understanding of emerging technology.  For example, marketplace lenders may rely on machine-learning or other types of artificial intelligence to make underwriting decisions, but the lenders may be unable to determine why a particular decision was made. The states claim that until technology and its implications for consumers are better understood, it is ill-advised to give companies such broad relief from enforcement actions.  The states assert that the CFPBs commitment to fostering technological advances should not be used in a way that jeopardizes consumer protection.

 

On January 29, the Consumer Financial Protection Bureau released a snapshot report of consumer complaints to provide a high-level overview of the trends in complaints it has received over the past 24 months.  The report is split into two sections – a summary of the volume of all consumer complaints received by the CFPB per state and consumer financial product type, and a highlight of mortgage-related complaints. 

The CFPB’s snapshot reveals it received 7 percent fewer consumer complaints in 2018 than in 2017.  Between November 2016 and October 2018, New Jersey ranked 7th nationwide for most consumer complaints per 100,000 residents, while New York State ranked 13th.  Ultimately, New York experienced a 5 percent decrease in the volume of consumer complaints in 2018, while New Jersey complaints decreased by 9 percent.  One of the most significant trends the CFPB observed is a 15 percent decrease in total mortgage-related complaints across the country. 

New Jersey remains a hotbed for mortgagerelated complaints, ranking 3rd among the states as measured per 100,000 residents, while New York also finished near the top at 10th.  Although New Jersey witnessed a 17 percent decrease in mortgage-related complaints, New York experienced an even more substantial 39% reduction.  

Overall, based on consumer narratives, the CFPB reported that 42 percent of mortgage-related complaints across the country arise from issues related to servicing, specifically, consumers reporting trouble during the payment process.  These complaints range from issues regarding misapplication of payments to alleged failure of servicers to issue periodic statements.

On January 25, Consumer Financial Protection Bureau Director Kathleen L. Kraninger announced senior leadership changes within the Bureau, appointing five new members to the CFPB leadership team.  Kraninger, a recent appointee by President Donald Trump, previously served in the White House Office of Management and Budget in the Trump Administration.  The following individuals will join her among CFPB leadership:

  • Andrew Duke joins the CFPB as Policy Associate Director for External Affairs.  Duke’s background involves twenty years of experience on Capitol Hill, where he served three Republican members of congress – Robin Hayes (R-N.C.). Phil Roe (R-Tenn.), and, most recently, former Chairman of the House Financial Services Committee, Jeb Hensarling (R-Tex.).
  • Laura Fiene was elevated to the position of West Regional Director.  Prior to joining the CFPB in 2011, she served as a Financial Administrator and Programmer at the Office of Thrift Supervision in San Francisco.
  • Marisol Garibay assumed the role as Acting Chief Communications Officer.  She previously served as a senior advisor and an acting communications director in the Office of Management and Budget.
  • Delicia Reynolds Hand was appointed Deputy Associate Director for External Affairs.  She has been with the CFPB since 2012.  Prior to joining the CFPB, Hand served as the Legislative Director of the National Association of Consumer Advocates and spent nearly three years as Senior Counsel to Congressman John Sarbanes (D-Md.).
  • Lora McCray was appointed the Director for the Office of Minority and Women Inclusion.  She joined the CFPB from the Federal Reserve Bank of Boston where she worked as the Assistant Vice President of Diversity and Inclusion.

Last week, Navient Corp., the nation’s largest student loan servicer, moved for summary judgment on two enforcement claims brought against it by the Consumer Financial Protection Bureau alleging that Navient engaged in abusive and unfair practices under the Consumer Financial Protection Act.   

In January 2017, the CFPB filed an enforcement action in the U.S. District Court for the Middle District of Pennsylvania, alleging Navient engaged in harmful federal student loan servicing practices.  Specifically, the CFPB claimed that Navient injured “hundreds of thousands” of federal student loan borrowers by failing to inform them about repayment options based on income and instead pushed students to enroll in forbearance plans.  Incomedriven plans are typically more beneficial to students because they can lower their monthly payment amounts while bringing their accounts current.  Forbearance plans, while cheaper and faster for Navient and its employees, cause interest to add up and increases the amount students ultimately repay. 

In its motion for summary judgment, Navient asserts that the CFPB failed to raise “any real doubt” around whether borrowers were told about income-driven plans, and also failed to identify a single borrower supporting these allegations.  Of the fifteen borrowers identified by the CFPB, fourteen were deposed and all of them apparently were informed about the income-driven plans, including prior to and immediately after obtaining forbearance.  Navient claims this shows that none of the borrowers were “steered” into forbearance plans, and therefore there is no factual support for the allegations that Navient exploited borrowers for its own profit.  Navient argues that “simply put, Navient did not cause substantial injury to, or take advantage of, borrowers, as required to establish an unfair or abusive practice.”  

The CFPB will file a response to Navient’s motion for summary judgment and a decision from the Court will then issue.