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Is the Consumer Financial Protection Bureau constitutional? Soon we will know. But what happens to the CFPB’s day-to-day work in the meantime? A student loan relief company decided to find out, and learned that the issue of the CFPB’s constitutionality will have no effect on the company’s obligation to respond to a civil investigative demand.

The constitutionality of the CFPB is the central question that the United States Supreme Court will be deciding in Seila Law LLC v. CFPB, which is scheduled for oral argument on March 3.

Meanwhile, at the end of October 2019, Equitable Acceptance Corporation received a civil investigative demand (“CID”) from the CFPB that included 10 interrogatories (with a whopping 57 sub-parts), a request for a written report (with 17 sub-parts), and 10 document requests – all due back within eight business days. Additionally, an investigative hearing covering eight topics was scheduled for November 14. EAC tried to ask for more time but was able to negotiate only a short extension. So, instead, EAC used the CFPB’s administrative ruling process to submit a petition seeking to set aside or modify the CID, based on the theory that the Supreme Court’s anticipated opinion in Seila Law LLC could “impact the Bureau’s ability to proceed with its enforcement function.”

On the day after Christmas, the CFPB effectively said nope, commenting: “[t]he Bureau has consistently taken the position that the administrative process set out in the Bureau’s statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the Bureau’s statute.” Director Kathleen L. Kraninger, who signed the formal ruling on EAC’s petition, also was unpersuaded by EAC’s arguments concerning the CID’s burdensome nature, commenting that “EAC is welcome to engage in discussions with the Bureau staff about any specific suggestions for modifying the CID.”

Based on this decision, it’s a safe bet that the usual duty to comply with a CID received from the CFPB will not be suspended while we wait for the Court’s decision in Seila Law LLC.

 

On December 11, PayPal, Inc. filed suit against the Consumer Financial Protection Bureau in the United States District Court for the District of Columbia alleging that the CFPB’s Prepaid Card Rule (“the Rule”) represents a “category error” and violates the First Amendment. At issue is the applicability of the Rule to digital wallets compared to general purpose reloadable cards (“GPR cards”). The CFPB subjects both GPR cards and digital wallets to the Rule.

PayPal’s primary offering is digital wallets. Digital wallets typically are used by a consumer to access his or her traditional payment instrument – such as a credit or debit card – to initiate an electronic fund transfer. A consumer links his or her payment instrument to a digital wallet, then PayPal completes the transfer of funds on the consumer’s behalf when a transaction is made through PayPal. A GPR card typically is a physical card that stores consumer funds until the consumer uses the card or transfers those funds. While funds can be stored in a digital wallet, consumers can make purchases or send money through PayPal without actually storing money in PayPal. Most of PayPal’s consumers use its service to transfer funds and make purchases, not to store funds. GPR cards primarily are used “to store the consumer’s bank account, debit card, credit card, and/or prepaid card credentials.”

PayPal alleges that GPR cards and digital wallets are materially different from one another, yet the CFPB subjects both to the same regulatory disclosure regime. During the rulemaking process, the CFPB acknowledged that differences exist between digital wallets and GPR cards, but the fact that digital wallets have the capacity to store consumer funds led the CFPB to take the position that digital wallets should be regulated in the same way as GPR cards.

PayPal alleges that the Rule requires PayPal to make misleading and confusing disclosures about its digital wallet fees and functionalities, and places unreasonable restrictions on the consumers’ ability to link payment instruments to their PayPal accounts. The Rule requires PayPal to make disclosures about fees that PayPal does not charge, and to use language that misrepresents the actual fees paid by most consumers to PayPal. As a result, PayPal alleges that consumers mistakenly would believe that PayPal charges fees to access funds stored with PayPal, or to make an electronic fund transfer. PayPal also alleges that the Rule prohibits PayPal from including explanatory phrases to clarify the disclosures and describe the nature of the fees that PayPal charges. PayPal says that the Rule effectively forces PayPal to make confusing consumer disclosures, and bars PayPal from providing information that would help consumers make informed payment decisions.

As to the First Amendment claim, PayPal alleges that its constitutional rights are infringed because the CFPB is forcing PayPal to convey a message “without regard for whether that compelled speech meaningfully advances the government’s professed interests.” The disclosures that PayPal must now make are confusing and misleading to its consumers, and the Rule prevents PayPal from providing its consumers with information in an attempt to clarify the fee disclosures.

With respect to restrictions placed on a consumer who desires to link his or her payment instrument to a PayPal account, the Rule bans consumers from linking payment instruments to digital wallets for the first 30 days after the consumer acquires a digital wallet. PayPal alleges that forcing this wait period before a consumer may link his or her payment instruments to a digital wallet would be confusing and would limit the consumer’s ability to benefit from one of the core features of a digital wallet – immediate accessibility.

PayPal asks the Court to: (1) declare the Rule arbitrary, capricious, and an abuse of discretion; (2) vacate the Rule and enjoin the CFPB from implementing, applying, and enforcing the Rule; and (3) declare the Rule unconstitutional as an infringement on protected commercial speech.

On November 25, the Consumer Financial Protection Bureau announced settlements with a military travel lender, its principal, and the servicer of its loans. The now defunct Edmiston Marketing, LLC, operating under the name of Easy Military Travel, provided financing to military servicemembers and their families for the purchasing of airline tickets. The CFPB determined that Easy Military Travel and its principal, Brandon Edmiston, violated the Consumer Financial Protection Act of 2010 by misrepresenting the true credit cost of financing the purchase of airline tickets and by improperly disclosing a finance charge.

Furthermore, the CFPB concluded that Easy Military Travel failed to provide to consumers: certain credit information required by the Truth in Lending Act and its Regulation Z, such as the amount financed and the total number of payments; and the total cost of purchasing airline tickets through financing as required by the Telemarketing Sales Rule (“TSR”).

The CFPB concluded that Edmiston “provided substantial assistance to Easy Military Travel’s violations of the CFPA and the TSR,” and that he directed Easy Military Travel representatives to quote “falsely low monthly interest rates over the telephone to consumers.”

USA Service Finance, LLC (“USASF”) services travel-related loans for servicemembers, including loans issued by Easy Military Travel. The CFPB found that USASF violated the CFPA’s prohibition against deceptive practices “by overcharging servicemembers and their families for a debt-cancellation product for loans financing airline tickets made by Easy Military Travel and purchased and serviced by USASF.” The CFPB also concluded that USASF violated Regulation V, which implements the Fair Credit Reporting Act, by failing at any point to establish, review, or update “any written policies or procedures regarding the accuracy and integrity of the consumer information it furnished to consumer reporting agencies.”

While the consent order against Easy Military Travel and Edmiston provides for a $3,468,224 judgment, the full payment will be suspended contingent upon them completing certain obligations. The consent order also requires Easy Military Travel and Edmiston to pay restitution to certain servicemembers and their families who paid the hidden finance charge, plus a civil money penalty of $1. It further prohibits any future targeting of servicemembers and their families with consumer lending services.

The consent order against USASF requires it to pay$54,625 in cash restitution to overcharged borrowers with no outstanding balance on their loans, plus an undefined amount in credits to overcharged borrowers with outstanding balances. USASF also is to pay $25,000 in a civil money penalty to the CFPB.

The consent order also “prohibits USASF from collecting on or selling the travel loans purchased from Easy Military Travel,” and requires it to “establish and update reasonable written policies and procedures for the accuracy and integrity of consumer information it furnishes to consumer reporting agencies.”

A major background check vendor has settled charges by the Consumer Financial Protection Bureau (CFPB) that matching practices – the bases by which it attributes a criminal record to a specific individual – violated the Fair Credit Reporting Act (FCRA). At bottom, the settlement attempts to establish a standard that name and Date of Birth matching alone is insufficient to comply with the FCRA’s accuracy requirements, “three-factor” matching (name, DOB and address for example) is the minimum compliant matching standard. The settlement also covered other noteworthy business practices in the background check industry.

On November 22, 2019, the CFPB filed a Complaint against Sterling Infosystems, Inc. in the United States District Court for the Southern District of New York alleging violations under the FCRA and simultaneously filed a Proposed Stipulated Final Judgment and Order.

The 10-page Complaint against Sterling alleges the company violated sections 1681e(b), 1681k(a) and 1681c(a) of the FCRA. Each alleged violation is described below.

1. Alleged Failure to Employ Reasonable Procedures to Assure Maximum Possible Accuracy (1681e(b))

In the Complaint, the CFPB alleges that the following procedures, or lack of procedures, led Sterling to report erroneous adverse items of information on consumer reports:

(i) Matching Based on Two Identifiers: Between December 16, 2012, and October 2014, Sterling matched criminal records using two identifiers (which could include (i) first and last name and (ii) date of birth). This policy allegedly created a heightened risk of false positives because many commonly named individuals (e.g., John Smith) share the same first and last name and date of birth. Because of the widespread lack of access to Social Security numbers in criminal records, background check companies need to determine whether a given record applies to a given consumer using matching criteria. The CFPB takes the position that two-factor matching consisting of name and date of birth is inadequate.

(ii) Insufficient Training on New Policies: Beginning in October 2014, Sterling adopted its first company-wide common-name matching criteria, which required a match on three personal identifiers. But continuing after October 2014 through July 31, 2016, Sterling continued reporting instances of erroneously matching criminal records on common-name applicants due to supposedly insufficient training on the new common-name matching policy. The CFPB seems to be taking the position that three-factor matching can be adequate.

(iii) Junior/Senior Issue: Other instances of reporting errors involving both common and uncommon names were the result of another policy where Sterling permitted matching criminal records with male applicants based solely on a matching first and last name and matching address. This too created an allegedly heightened risk of false positives because some males with the same first and last name (i.e., a junior and senior) live at the same address.

(iv) High-Risk Indicators: On one of its platforms, Sterling included in the Social Security Trace portion of its reports the notation ***HIGH-RISK INDICATOR*** next to an address, followed by a descriptor placing the address into a particular category. These categories included Psychiatric Hospital, Nursing and Personal Care Facility, Corrections Institution and Social Service Facility, among others. Sterling included a statement that the SSN Trace should not be used for an FCRA purpose. Sterling allegedly did not implement any procedures to verify the accuracy of these high-risk designations.

2. Alleged Failure to Maintain Strict Procedures to Ensure that Adverse Public Record Information Contained in the Consumer Reports was Complete and Up to Date (1681k(a))

The CFPB alleges that Sterling violated section 1681k(a) of the FCRA because: (1) Sterling has not, in many instances, notified applicants of the fact that it was reporting public record information about the application at the time that information was being reported, and (2) for the same reasons as described above, Sterling failed to maintain “strict procedures” to ensure that the public record information it reported is “complete and up to date.”

3. Alleged Reporting of Outdated Adverse Information (1681c(a))

Finally, the CFPB alleges that Sterling violated section 1681c(a) in the following ways:

(i) Outdated Addresses: In the Social Security Trace portion of its reports, Sterling reported the ***HIGH-RISK INDICATOR*** next to an address at which the applicant lived and was “last seen” more than seven years before the report was generated. Per the CFPB complaint, “such a designation may be an adverse item of information because it could cast the consumer in a negative or unfavorable light.”

(ii) Outdated Adverse Criminal Information: Beginning in May 2012 and continuing through February 2013, Sterling used the “disposition date” as the start date for the seven-year calculation. The CFPB alleges that “date of entry” should be used on records of arrest, and “date of criminal charge” should be used for other non-conviction criminal record information.

The parties’ Proposed Stipulated Final Judgment and Order provides for the following:

1. Monetary Payment:

▪$6,000,000 paid into a Redress Fund. The Redress Fund will be paid pro rata to approximately 7,100 consumers who successfully disputed criminal records.

▪$2,500,000 paid as a Civil Penalty.

2. Conduct Requirements:

▪The proposed order does not include any specifics in this section. Rather, the proposed order only repeats the requirements of the FCRA under sections 1681e(b), 1681k(a) and 1681c(a).

▪The only specifically defined change in conduct is that Sterling will not report High-Risk Indicators for the next 5 years.

3. Compliance Committee:

▪Sterling has to establish a Compliance Committee.

▪The Compliance Committee must meet at least once every two months and maintain minutes.

▪The Compliance Committee will be responsible for monitoring and coordinating Sterling’s adherence to the Order.

4. Role of the Board

▪The Board of Directors of Sterling is ultimately responsible for compliance with this Order and must review all submissions to the CFPB under this Order.

5. Reporting Requirements:

▪For 5 years, Sterling must provide a written compliance progress report that details the manner and form in which Sterling has complied with each paragraph of the Order.

On November 20, the Consumer Financial Protection Bureau announced that it is seeking public comments on the TRID Integrated Disclosure Rule, otherwise known as the “TILA-RESPA Integrated Disclosure” (“TRID Rule”) in accordance with Section 1022(d) of the Dodd-Frank Act. The TRID Rule implemented the Dodd-Frank Act’s directive to combine certain mortgage disclosures that consumers receive under TILA and RESPA and requires that all creditors use standardized forms for most transactions.

The CFPB is interested in determining the effectiveness of the TRID Rule, including whether it achieves the objectives of Title X of the Dodd-Frank Act. The public is invited to comment on the effectiveness of the TRID Rule, as well as provide recommendations to modify and improve it – or provide justification for eliminating the TRID Rule altogether.

A link to the notice and comment can be found here.

Once the notice is published in the Federal Register, the comment period will begin. The deadline for submissions is January 21, 2020.

Recently, the Consumer Financial Protection Bureau, along with the states of Minnesota, North Carolina, and California, filed a lawsuit in California federal court against a student loan debt-relief operation. The CFPB alleges that the companies charged over $71 million in unlawful advance fees in connection with the marketing and sale of student loan debt-relief services to consumers.

Specifically, the CFPB alleges that since 2015, the companies deceived consumers by misrepresenting that they could qualify for loan forgiveness in a matter of months, when forgiveness typically takes at least 10 years of on-time payments and is determined by the Department of Education rather than the companies. Further, the companies falsely told consumers or led consumers to believe that their payments to companies would go toward their student loan balances. In actuality, initial fees, typically totaling about $900-$1,300, were paid for the companies’ services and were levied well before consumers had made a payment under their new loan agreement, in violation of the Telemarketing Sales Rule. The CFPB also alleges that the companies failed to inform consumers that they automatically request their loans be placed in forbearance (increasing the total amount owed) so that consumers are more likely to be able to pay the companies’ substantial fees.

The CFPB filed the lawsuit on October 21 and requested that the Court grant their request for a temporary restraining order against the student loan debt-relief operation. At this stage, the allegations remain unsubstantiated. However, if the Court grants the temporary restraining order, it would mean that an unfavorable ruling may lie ahead for the companies. The CFPB would likely obtain their request for damages, redress to consumers, disgorgement of ill-gotten gains, and the imposition of civil money penalties.

Troutman Sanders will monitor this matter for future developments.

In August 2017, the Consumer Financial Protection Bureau issued a Civil Investigative Demand (“CID”) to Libre by Nexus, Inc. and Nexus Services, Inc. (collectively, “Nexus”) seeking documents and information to investigate whether the companies were engaging in any unfair or deceptive business practices prohibited by the Consumer Financial Protection Act of 2010. Nexus’ business model is to help immigration detainees post bonds while they wait for immigration hearings. However, as a condition of the bond, Nexus requires recipients to wear a GPS monitoring device for which a monthly fee is charged. The business model and its associated fees have been controversial. 

Nexus initially objected to the CFPB’s CID and filed a complaint in the U.S. District Court for the District of Columbia seeking to have it enjoined. The CFPB responded with a petition asking it to be enforced.   

The district court referred Nexus and the CFPB to mediation, where they were able to reach an agreement in principle. In a modified CID, agreed to by both parties, the CFPB no longer sought the personal information of Nexus clients who had received help with immigration bonds. The district court entered the parties’ stipulated agreement.  

However, a dispute later arose over the terms of the modified CID. In particular, Nexus objected that, as an end run around the parties’ agreement, the CFPB was still seeking from third–party companies the same client information it had agreed not to seek from Nexus in the CID. Nexus filed a motion to enforce the modified CID, contending that the CFPB was acting in bad faith and contrary to the spirit of the parties’ agreement. 

The Court agreed with the CFPB that because the modified CID did not expressly preclude the CFPB from seeking information from third parties, it was free to do so. The Court explained that Nexus could have bargained for a total prohibition in the four corners of the CID but did not, so no prohibition existed. The Court further suggested that Nexus might even lack standing to contest any CID issued to a third party. 

Thus, companies under investigation by the CFPB should be aware of third–party sources of the same information sought by the CFPB and, if appropriate, expressly include non-disclosure of third–party information as a written term of any agreement.

A recent report issued by the Consumer Financial Protection Bureau Private Education Loan Ombudsman recommends actions against scammers who seek to take advantage of and abuse student loan borrowers by offering no-value and sometimes harmful services.

On October 15, the Consumer Financial Protection Bureau Private Education Loan Ombudsman issued its 2019 Annual Report, which actually reports on the Ombudsman’s activity for the past two years, from September 1, 2017 through August 31, 2019. During that period, the Ombudsman handled approximately 20,600 complaints related to private or federal student loans, of which approximately 13,900 related to federal loans and 6,700 to private loans. Each of the last two years saw a significant decrease in the overall volume of complaints. 

In addition to statistical reporting, a particular focus of the Report is the Bureau’s efforts to target scam student loan debt relief companies. The Report notes that such companies often (1) misrepresent their services and charge consumers thousands of dollars in monthly and upfront fees without providing promised services; (2) employ aggressive marketing tactics through direct mail, telecommunications, and social media platforms that suggest special expertise in student loan repayment or special access to government programs; (3) characterize themselves as affiliated with the federal government and represent that their fees are necessary for enrollment in income-driven repayment programs, although these programs are available to consumers for free in some cases; (4) purport to “guarantee” customized debt relief solutions, but only offer consolidation of federal loans into direct loans and then enrollment into direct loan repayment programs; or (5) take over consumers’ accounts by requiring consumers to give them their federal student aid personal identification numbers (“FSA PIN”) and changing the consumer’s contact and login information, effectively severing contact between the consumer and their student loan servicer.

The Report contains an appendix “designed to assist market participants and others in informing, educating and empowering consumers regarding student loan debt relief companies.” The Report further notes that some servicers “have been proactive and cooperative in identifying bad actors” by relying on “complaints, account analysis, and internal investigations to identify unscrupulous student loan debt relief companies and learn how they operate,” and then making referrals to appropriate federal and state agencies. In particular, the Report identified the following actions being taken by some servicers in this space:  

1. Coordination with federal and state law enforcement authorities to provide information regarding potential unscrupulous student loan debt relief companies, and making appropriate referrals for enforcement action;

2. Contacting borrowers to ensure that they are aware of a potential contact from a student debt relief company and that the services are offered for free through the Department of Education and servicers; and

3. Using social media to inform and educate borrowers and increase their awareness of student debt relief companies and that the services are available for free.

The Report also highlights a number of successful enforcement actions brought by the Bureau, the Federal Trade Commission, Department of Education, and state attorneys general against student loan debt relief companies with judgments totaling hundreds of millions of dollars. In particular, the FTC’s Operation Game of Loans has resulted in settlements and judgments totaling over $131 million for the past two years, while actions by the Bureau have yielded over $17 million in judgments.

The Report concludes with suggestions for policymakers, federal and state law enforcement agencies, and market participants, with a view to formalizing collaborative and cooperative enforcement efforts and expanding enforcement to include criminal actions. These recommendations include (1) sharing of information; (2) sharing data analytic tools; (3) creating task forces; (4) deciding how best to task-organize; and (5) determining how to best synchronize and de-conflict resources and expertise to achieve the maximum benefit for the consumer.

A copy of the full Report can be accessed by clicking here.

The Consumer Financial Protection Bureau is proposing changes to the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act (commonly referred to as “Dodd-Frank”). State attorneys general from 28 states have banded together to comment on the changes, which may impact an estimated 49 million American consumers who are contacted each year by debt collectors.   

The proposed rule changes would allow debt collectors to use social media as a form of debt collection communication. The rule would still ban the use of public-facing social media to contact consumers but opens the door for collectors to send private messages to consumers. The attorneys general are concerned that social media profiles are prone to misidentification and that using them in an attempt to contact debtors may raise privacy issues for individuals. 

According to the letter, many social media services do not require users to use their real names, which could lead to misidentification. There is also concern that social media providers will mine the data exchanged through private messages. The collection of this data may allow advertisers to inundate consumers with unwanted ads or news related to debt collection. The letter asks the CFPB not to let debt collectors use any form of social media for debt collection communications, whether public or private facing.  

It should be noted the proposed changes still allow states to create their own laws that would supersede federal regulations. This would allow states to develop proposals to prohibit the use of social media as a form of debt collection practices should the CFPB amend the social media rule as currently proposed.  

Troutman Sanders’ Consumer Financial Services litigation practice, the Law360 Consumer Protection Practice Group of the Year for 2018, will continue to monitor and report on the proposed rule changes.

The Consumer Financial Protection Bureau announced on October 11 that it will establish a taskforce of industry experts to examine the legal and regulatory environment facing consumers and financial service providers. The aim of the taskforce is to harmonize, modernize, and update consumer credit laws and their implementing regulations and to identify gaps in these laws and the ways to address them.

The taskforce sprang, in part, from a national commission, established in 1968 by the Consumer Credit Protection Act (“CCPA”), which conducted the original research and recommendations relating to the regulation of consumer credit.

The taskforce will produce new research and legal analysis and seek to simplify and modernize consumer financial regulation, where needed, to more effectively carry out the CFPB’s mission of protecting consumers in light of twenty-first century concerns. The CFPB also plans for the taskforce to address potential conflicts and inconsistencies in existing regulations and guidance.

The taskforce will have a chair and six members, all of whom will serve for a one-year term, and will bring on government employees from across the CFPB and federal government to assist in the effort.

Applications to serve on the taskforce may be accessed here and are due by 5:00 p.m. EDT on Friday, October 25, 2019. Applicants must have: (1) expertise in consumer protection and consumer financial products or services; (2) significant experience researching and analyzing consumer financial markets, laws, and regulations; (3) a past record of senior public or academic service; and (4) recognition for professional achievements and objectivity in economics, econometrics, or law.