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Showing its continuing regular focus on the background screening industry, on October 3, 2019, the Consumer Financial Protection Bureau (CFPB) published a report, entitled Market Snapshot: Background Screening Reports. The report highlights the increased demand for background screenings by employers as well as consumer challenges that may arise from their use given the vast array of data sources and consumer reporting agencies. The report follows an announcement by the Federal Trade Commission (FTC) and CFPB of a joint workshop to be held in December 2019 on issues affecting the accuracy of both traditional credit reports and employment and tenant background screening reports. The workshop will include industry representatives, consumer advocates, and regulators. While the CFPB report does not explicitly indicate future regulatory action, it underscores regulators’ interest in oversight of the background screening industry.

Summary of the Report

The report details common reporting challenges that can result in adverse outcomes for consumers, especially as it pertains to reporting criminal records. Challenges highlighted include:

  • Inconsistent systems for information collection across sources. For example, court systems’ access to public records, including criminal records, may vary among jurisdictions. Courts also may use varying terminology to describe the same public record.
  • The lack of unique identifying information which can result in improperly affiliating consumers with someone else’s information. In other words, some courts impose policies relating to redacting personal identifying information on public records, which makes it more difficult to match a particular consumer to a record and thus can lead to false matches.
  • Duplicative reporting of criminal records, which results in multiple listings of the same convictions or arrests, leaving the impression a consumer has multiple offenses.
  • Out of date, expunged, or sealed criminal information. For example, expunged records pose a particular problem because it is typically difficult to determine based on court records which cases have been expunged.
  • The inability of consumers to review reports or the underlying information prior to the information being received by employers. Given that there are several thousand background screening firms that employers may use, consumers likely cannot identify the specific firm that a particular employer may use. Even if the background screening firm can be identified, the firm may not have information on the consumer or may not be able to provide the same information to the consumer as provided to the employer.
  • Delays in updating information possessed by consumer reporting agencies. If, for example, an error exists in a court record itself, the process for the consumer to resolve the error varies by court and can be difficult and time-consuming.

In the report, the CFPB also touches on three recent developments in consumer reporting accuracy. First, the report highlights how background screening firms are utilizing technology involving machine learning and greater access to consumer data to verify identities and match criminal records. According to the report, companies may use staff or algorithmically driven database searches to determine whether there is a “hit” in the database.

Second, the report references new and expanded state expungement laws, which expand criminal records eligible for expungement. It notes a recent Pennsylvania law that requires that certain offenses be automatically sealed from public view after 10 years. Further, it references the adoption by Minnesota and Pennsylvania of the “lifecycle file”—an agreement by subscribers of those states’ contracts for bulk data purchases to update files on a near real-time basis with court records that reflect expungement and other events. Subscribers are also subject to court audits of their data.

Finally, the report states that as of early 2019, 35 states, the District of Columbia, and over 150 cities and counties, have adopted a “Ban-the-Box” or similar law that prohibits prospective employers from inquiring about an applicant’s criminal history until after an initial offer has been made. According to the report, the background screening industry has expressed concern regarding inconsistent variations of policy on the state and local level.

Key Takeaways from the Report and Proposed Workshop

The report provides a general overview of consumer report accuracy issues. While it does not provide any specific CFPB guidance, it does highlight the agency’s interest and concerns with respect to accuracy in consumer reports. Background screening companies should carefully review the challenges highlighted by the CFPB as they could be the subject of future regulatory action.

Troutman Sanders LLP will continue to monitor changes in the regulatory landscape, and it will further report on any further developments in this regard, including after the December FTC/CFPB workshop.

The Consumer Financial Protection Bureau published its quarterly consumer credit trends report on September 25. In the Report, the CFPB gave an in-depth look at bankruptcy trends and the impact of filing for the period 2001-2018, which includes the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) and the Great Recession.

The CFPB Report focuses on consumers who filed for bankruptcy protection under Chapters 7 or 13 of the United States Bankruptcy Code. Under a Chapter 7 bankruptcy, a debtor’s non-exempt assets are liquidated in order to repay creditors, and any remaining debt is generally discharged. (Some debts are not dischargeable in bankruptcy. They include, but are not limited to, student loans whose payment would not impose an undue hardship; debts resulting from fraud on the part of the debtor; and domestic support obligations. See 11 U.S.C. § 523(a)(8)(B); 11 U.S.C. § 523(a)(2)(A); and 11 U.S.C. § 523(a)(5).) Under a Chapter 13 bankruptcy, a debtor usually enters a three- or five-year repayment plan to repay a portion of their debt based upon their income. Upon successful completion of their plan, the debtor’s non-mortgage debt is generally discharged. (Not all non-mortgage debt is dischargeable in Chapter 13. See 11 U.S.C. § 1328(a).)

The information regarding the use of the bankruptcy system and its effects is pivotal to understand the role bankruptcy plays in aiding consumers’ recovery from financial difficulties, the bankruptcy/debt collection dichotomy, and how filing for bankruptcy affects the cost and availability of credit.

A few key findings from the Report include:

  • Most personal bankruptcy filings result in a dismissal or a discharge. A dismissal occurs if the debtor fails to meet the requirements set forth by the bankruptcy court. If a debtor files a Chapter 7, it is a safe bet that the debtor will receive a discharge, which takes about four months from filing the petition. If a debtor files a Chapter 13, they have less than 50 percent odds of completing their repayment plans. At no point in the timeframe analyzed by the Report have discharges for Chapter 13 exceeded dismissals.
  • In each year from 2001 to 2004, Chapter 7 bankruptcies made up about 75 percent of personal bankruptcy filings. BAPCPA took effect in October 2005, establishing a means test to qualify for filing under Chapter 7. This means that for those with income above a certain limit, they would have to file a Chapter 13 instead of a Chapter 7. This created a rush to file Chapter 7 in the weeks prior to October 17, 2005, increasing the share of Chapter 7 filings to 80 percent of all personal bankruptcy filings that year. Chapter 7 filings immediately dropped in 2006 to around 60 percent, but the percentages increased in the years leading up to the Great Recession, reaching those pre-BAPCPA levels of around 75 percent in 2009 and 2010. Since that time, Chapter 7 filings have consistently declined, appearing to have stabilized at about 63 percent of personal bankruptcy filings – 14 percent lower than in 2001.
  • After the passage of BAPCPA, personal bankruptcy filers’ median credit score one year prior to filing bankruptcy increased each year until 2009. After 2009, filers’ median credit score one year prior to filing dropped precipitously in 2010 and continued a negative trend until 2013 for Chapter 13 and 2014 for Chapter 7, likely due to financial difficulties filers faced during the Great Recession which lowered credit scores.
  • During the Great Recession, personal bankruptcy filers were facing more than twice the mortgage debt than debtors filing before and after the Great Recession. Student loan debt has steadily increased from 2001 to 2018 for those filers, which is consistent with the increase in the number of outstanding student loans for that time period.
  • Median credit scores increased for both Chapter 7 and Chapter 13 filers after filing a bankruptcy petition. Chapter 7 filers receive a quick rise in the first few years as opposed to Chapter 13 filers, likely because a Chapter 7 is discharged in an average of four months, as opposed to Chapter 13 filers’ three- or five-year plan, and the higher likelihood of receiving a discharge in Chapter 7 than Chapter 13. Unfortunately, those filers who filed between 2001 and 2004 were affected by the Great Recession, slowing the recovery in median credit scores.

Because of the proximity between the enactment of the BAPCPA and the beginning of the Great Recession, the CFPB was unable to differentiate the effects each had on bankruptcy filers’ credit scores and debt levels. The CFPB indicates that more research is needed to understand the full ramifications of the BAPCPA.

Troutman Sanders will continue to monitor emerging developments.

The Consumer Financial Protection Bureau filed a lawsuit in the United Stated District Court for the District of Maryland against FCO Holding, Inc. and its subsidiaries, as well as Michael E. Sobota, the chief executive officer and 100% owner of FCO Holding, Inc. The Maryland debt collector entities operate collectively under the name Fair Collections & Outsourcing (“FCO”).

The CFPB alleges that FCO violated the Fair Credit Reporting Act, Regulation V, the Consumer Financial Protection Act, and the Fair Debt Collection Practices Act by failing to conduct reasonable investigations into indirect credit disputes from the credit reporting bureaus and falsely representing that it has a reasonable basis to assert that consumers owe certain debts. Specifically, the CFPB alleges that FCO provided limited written guidance to its employees who respond to indirect credit disputes, and never instructed its employees to conduct an inquiry into the substance of a credit dispute. For example, in credit disputes regarding identity theft complaints, employees were merely instructed to verify the information as accurate as long as the Social Security number and name matches its files, even in cases where consumers provided identify theft police reports.

The CFPB also alleges that FCO failed to incorporate appropriate guidelines such as Appendix E of Regulation V, the implementing regulation for the FCRA, in its policies and procedures regarding the handling of indirect disputes. Additionally, it alleges that FCO failed to update its indirect dispute handling policies and procedures for at least seven years between November 2010 and December 2017 and thus failed to update the policies and procedures in response to two significant changes with E-Oscar in 2013 and 2016. Further, the CFPB alleges that FCO continued to represent that it has a reasonable basis to assert that consumers owe certain debts when, in fact, it does not have a reasonable basis based on past dealings with specific portfolios of debt.

The CFPB seeks a permanent injunction as well as damages, restitution, disgorgement for unjust enrichment, and civil money penalties.

 

On September 10, the Consumer Financial Protection Bureau issued three new policies to promote innovation and facilitate compliance: the Policy on No-Action Letters (NAL), Policy to Encourage Trial Disclosure Programs (TDP), and Policy on the Compliance Assistance Sandbox (CAS). The policies were proposed in 2018 and went through a period of public comment after their proposal.

The CFPB previously issued an NAL Policy in 2016 which allowed for NALs to be issued to provide increased regulatory certainty through a statement that the CFPB would not bring a supervisory or enforcement action under specifically articulated circumstances. The new NAL Policy provides a more streamlined review process to provide innovative products and services that will benefit consumers.

The new TDP Policy gives protections for entities to conduct trial disclosure programs and streamlines the application and review process. According to the Bureau, under the TDP Policy, “entities seeking to improve consumer disclosures may conduct in-market testing of alternative disclosures for a limited time upon permission by the Bureau.”

The new CAS Policy allows testing of a financial product or service when faced with uncertainty. The Policy provides applicants with a “safe harbor” from liability for previously approved conduct during the testing period. Approvals provided under the CAS Policy will protect applicants from liability under the Truth in Lending Act, the Electronic Funds Transfer Act, or the Equal Credit Opportunity Act.

In a statement regarding the new policies, CFPB Director Kathleen Kraninger stated, “Innovation drives competition, which can lower prices and offer consumers more and better products and services. New products and services can expand financial options, especially to unbanked and underbanked households, giving more consumers access to the benefits of the financial system. The three policies we are announcing today are common-sense policies that will foster innovation that ultimately benefits consumers.”

On August 14, the Consumer Financial Protection Bureau, along with the Office of the Arkansas Attorney General, filed a proposed settlement with Andrew Gamber, Voyager Financial, and SoBell (collectively “Defendants”). This settlement follows a complaint the CFPB and Arkansas filed against Defendants in the United States District Court for the Eastern District of Arkansas, alleging violations of the Consumer Financial Protection Act and its state law equivalent, in connection with Defendants’ brokering of contracts offering high-interest credit to consumers, most of whom were veterans.

The CFPB and Arkansas alleged that under Defendants’ scheme, contracts were established between consumers and investors whereby consumers received lump-sum payments. In exchange, these consumers were obligated to repay a much larger amount by assigning to investors part of their monthly pension or disability payments for five to ten years. Most of the consumers were veterans with disability pensions from the Department of Veterans Affairs or pensions administered by the Defense Finance and Accounting Service. Under the scheme, veterans were required to go into their VA or DFAS online portals and change their entire pension direct-deposits or their monthly allotments to be routed directly into a bank account controlled by Defendants or their agents.

The CFPB and Arkansas argued that the contracts were invalid and not enforceable because federal law prohibits agreements under which another person acquires the right to receive a veteran’s pension payments. Additionally, Defendants represented to the consumers that these were not high-interest credit offers, specifically informing them in sales materials that “[i]t is important to note that this is not a loan” but then failing to disclose the interest rates. Further, Defendants misrepresented to consumers when they would receive their funds.

Under the proposed settlement, Defendants will be permanently banned from the industry, including engagement in brokering, offering, or arranging agreements between pension recipients and third parties under which the consumer would purport to sell a future right to an income stream from the consumer’s pension. In addition, the settlement requires redress of $2.7 million, a civil monetary penalty of $1 to the CFPB, and a payment of $75,000 to the Arkansas AG’s Office. The stipulated final judgment and order setting forth settlement terms awaits entry by the Court.

On July 25, the Consumer Financial Protection Bureau released an Advance Notice of Proposed Rulemaking (“ANPR”) asking for the mortgage industry’s opinion on the scheduled expiration of a provision in its Ability to Repay/Qualified Mortgage Rule (“Rule”), commonly known as the “QM patch.” The QM patch allows certain mortgage loans that are eligible for purchase or guarantee by Fannie Mae and Freddie Mac (“GSEs”) to qualify as a Qualified Mortgage (“QM”) loan under the Rule. The QM patch is scheduled to expire by January 10, 2021.

To encourage lenders to originate loans that comply with the QM loan standards, the Rule gives QM loans safe harbor from legal liabilities associated with not complying with the Rule. Also, to help avoid restrictions in lending behaviors as the industry became familiar with the Rule, the Bureau created the QM patch. It allows lenders to receive the safe harbor protection without meeting the QM loan’s 43 percent Debt-to-Income (“DTI”) limit. It also allows lenders to use the GSEs’ standards for verifying and calculating income instead of the QM loans standards.

Despite the Bureau’s original expectation that lenders’ use of the QM patch would decrease with time, it has remained a “large and persistent” part of “originations in the conforming segment of the mortgage market.” By the Bureau’s estimates, close to a million GSE-purchased or -guaranteed loans met the QM patch standards but did not meet the QM loan standards due to having DTIs greater than 43 percent. This accounted for 16 percent of all closed-end first lien residential mortgages originated in 2018. While a significant figure, this estimate likely fails to fully represent lenders’ sizable reliance on the QM patch. First, the Bureau’s estimate did not account for QM patch loans purchased or guaranteed by the GSEs that did not meet QM loan standards for reasons other than the DTI limit. Second, the Bureau’s estimate did not account for loans that did not meet the QM loan standards for any reason but were sold to non-GSE entities as QM patch loans.

While conceding it may provide a short extension to help the market transition away from the QM patch, the Bureau appears very intent on letting the QM patch expire. The Bureau believes that making the QM patch permanent, “could stifle innovation and the development of competitive private-sector approaches to underwriting.”  It further believes the QM patch “may be contributing to the continuing anemic state of the private mortgage-backed securities market.”

Considering the significant number of loans, and originating lenders, that would be impacted by expiration of the QM patch, the Bureau’s ANPR asks for industry feedback on potential changes to the QM loan standards to compensate for the QM patch expiring. Some include:

  • Replacing the DTI limit or creating alternatives to the DTI limit;
  • Either increasing or decreasing the DTI limit from 43 percent or creating a set of compensating criteria that would permit a lender to exceed 43 percent; and
  • Updating the standards used by lenders to calculate and verify debt income.

The Bureau will accept comments on the ANPR until September 16, 2019. Considering how almost any change to the QM patch will significantly impact the mortgage lending landscape, Troutman Sanders strongly encourages industry participants to assess how the QM patch’s expiration will impact their business models and to use that assessment to submit comments to the Bureau. Troutman Sanders attorneys can assist you in making these assessments and in preparing any comments you may wish to provide to the Bureau.

On August 2, the Consumer Financial Protection Bureau announced that it would be extending the public comment period on its Notice of Proposed Rulemaking (“NPRM”) to amend Regulation F as part of implementing the Fair Debt Collection Practices Act. The CFPB announced that it is extending the public comment deadline to September 18, 2019.

On May 7, the CFPB issued a NPRM proposing to amend Regulation F, 12 C.F.R. part 1006, to prescribe Federal rules governing the activities of debt collectors, as defined by the FDCPA. The proposed rule seeks to address communications in connection with debt collection, interpret and apply prohibitions on harassment or abuse, false or misleading representations, and unfair practices in debt collection, as well as clarify requirements for certain consumer-facing disclosures. Our whitepaper outlining the provisions of the proposed rule can be found here.

The proposed rule seeks to clarify how debt collectors may employ newer communications technologies that have come to exist since the passage of the FDCPA, as well as consumer disclosure requirements. The proposed rule has four subparts, dealing with generally applicable provisions, proposed rules for FDCPA-covered debt collectors, as well as miscellaneous provisions. The bigger changes the NPRM entails include “limited-content messages,” which would identify what information a debt collector must and may include in a message left for consumers, allowing consumers to restrict the channels through which a debt collector may communicate with them, and putting in place a framework for how technologies such as email and text can be used for debt collection, among others.

The initial comment period on the NPRM was set to close on August 19, 2019. However, the CFPB received written requests asking to extend the comment period, including two written requests from consumer advocates and an industry trade group asking that the Bureau extend the comment period by either 60 or 90 days. The requests indicate that the interested parties would use the time to conduct additional outreach to relevant constituencies and to properly address the many questions presented in the NPRM.

In light of balancing interested parties’ desire to have additional time to consider the issues raised in the NPRM, gather data, and prepare their responses, with the Bureau’s interest in proceeding expeditiously with the debt collection rulemaking, the CFPB concluded it was appropriate to grant a 30-day extension of the NPRM comment period to September 18.

 

On July 18, the Consumer Financial Protection Bureau released a report analyzing market data from 2004 through 2018 on third-party debt collections tradelines reflected on credit reports compiled by the nationwide consumer reporting agencies. The CFPB segmented the report into two parts: buyers (entities that purchase debts and then collect on them) and non-buyers (entities that collect debts on behalf of others).

The Report marked the difference in the type of third-party collections tradelines reported by buyers as compared to non-buyers in 2018. Buyer tradelines primarily reported banking, retail, and financial debt, while nearly two-thirds of non-buyer tradelines reported medical debt. By comparison, only about one percent of buyer tradelines reported medical debt in 2018. When viewed more broadly, 58 percent of total third-party collection tradelines were for medical debt alone.

In 2018, the top four largest debt buyers by tradelines reported 90 percent of buyer tradelines while the top four largest non-buyers by tradelines reported 13 percent of non-buyer tradelines. Regarding consumer disputes, from 2012 through 2018, the percentage of disputed buyer tradelines grew from .07 percent to .56 percent while the percentage of non-buyer tradelines remained constant at around .02 percent.

The CFPB acknowledges that their findings do not allow for a conclusion on the cause of the data observed.

The Consumer Financial Protection Bureau hosted a symposium with private attorneys to discuss the term “abusive” in “unfair, deceptive, and abusive acts and practices” (“UDAAP”) in late June. This was the first symposium, part of a symposia series, that will help the CFPB explore consumer protections in the changing financial services marketplace. There were two panels with four panelists on each panel. The first panel discussed the “abusive” policy background, and the second panel discussed the practical application of the “abusive” standard.

During the first discussion, panelists disagreed on “whether consumer harm is required for a practice to be abusive.” Some panelists thought that “unfair and deceptive” focuses on the impacts to the consumer, whereas “abusive” focuses on the company’s actions and not its impact on the consumer. Another set of panelists found it odd to separate the impact to the consumer and the company’s actions, specifically with respect to focusing on company conduct when there is no actual consumer harm – the two should not be looked at in isolation. In addition, the first panel discussed “whether abusive requires knowledge on behalf of the company.” While there is no “knowledge” requirement in the statute to determine whether a practice is abusive, a company’s knowledge may be taken into account to determine whether the practice was abusive.

During the second discussion, panelists disagreed on whether additional clarity needed to be given to the term “abusive.” Whether additional clarity is needed hinged on what can be taken from the statutory language and secondary sources. Some panelists believe there is enough information contained in the statute, secondary sources, and interpretations to clarify the term, while others believe that “abusive” is a catchall term that makes it difficult for companies to understand exactly what it entails. Further, it can be difficult to determine how the “abusive” standard works in practice because many of the enforcement actions typically focus on the “unfair and deceptive” aspects and not the “abusive” aspect of UDAAP. For the enforcement actions where “abusive” is included, the term is usually piggybacked on “unfairness and deception,” making it hard to distinguish between the terms.

Since the meaning of abusiveness is “less developed than the meaning of unfairness or deception,” the purpose of this symposium was to provide a public forum for the CFPB and the public to hear various perspectives regarding the definition of “abusive.” While only the first in a series, the symposium was intended to help create a transparent dialogue to help the CFPB potentially develop additional policy processes, including future rulemakings.

For the past ten years, financial institutions have been working under the framework of the Consumer Financial Protection Bureau’s Overdraft Rule. This rule limits the ability of financial institutions to charge overdraft fees on ATM and one-time debit card transactions that overdraw consumers’ accounts. In recent months, the CFPB has sought comment on whether to modify the Overdraft Rule. In a response this month, multiple state attorneys general objected to modifications that they believe could adversely impact consumers, but voiced favor for potential pro-consumer changes. 

Specifically, under the Overdraft Rule, financial institutions need to obtain their customers’ permission before charging an overdraft fee. If customers do not accept the coverage, the financial institutions decline transactions that would drop an account below zero. If customers decide to opt in, the bank will typically approve the purchase or withdrawal and charge a fee as a result. 

On May 13, the CFPB published a notice regarding its periodic review of regulations pursuant to Section 610 of the Regulatory Flexibility Act (“RFA”). In this notice, the CFPB requested public input on its first RFA review of the 2009 Overdraft Rule. The reason for a 610 review is to determine if a rule that has significant economic impact upon a substantial number of small business entities should be continued without change, be amended, or be rescinded. 

On July 1, twenty-four state attorneys general, the D.C. attorney general, and the Executive Director of the Hawaii Office of Consumer Protection asked the CFPB not to alter the rule as a result of the RFA review. New York Attorney General Letitia James is spearheading the effort to ensure the Overdraft Rule stays in place. In the July 1 letter, the attorneys general stated that they are unaware of “support for any claim that the Overdraft Rule has placed substantial economic burdens on small financial institutions that would justify modifications to the Rule.” They also indicated that they would support the expansion of the Overdraft Rule to apply to checks and automated clearinghouse (“ACH”) transactions. Further, they would be in favor of a cap on the overdraft fees that consumers actually pay to make them proportional to the amount paid by the bank to cover the transaction. 

Other industry trade groups, including the American Bankers Association, have requested the CFPB not to change the Overdraft Rule.  

Troutman Sanders will continue to monitor developments with the Overdraft Rule.