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The Consumer Financial Protection Bureau recently released a Compliance Bulletin regarding fees that companies may charge consumers when they pay by phone.

The Bulletin highlights certain practices related to phone payment fees that may violate the Dodd-Frank Act’s prohibition on committing unfair, deceptive, or abusive acts and practices (UDAAPs), including:

  • Failing to disclose all available phone payment options when they carry materially different fees;
  • Misrepresenting the available payment options or that a fee will be applied if a person pays by phone;
  • Not disclosing that a phone fee will be added, or creating the impression that there is no service fee when, in fact, there is one; and
  • Not monitoring employees or service providers in a way that could lead to misrepresentations or failing to disclose all available payment and fee options. The bulletin echoes the CFPB’s previous guidance regarding the potential for consumer harm when companies have incentive programs for employees that process phone payment fees.  The CFPB cautions that when employees are given incentives to steer consumers towards certain payment methods, or even when employees are simply pressured to complete calls quickly, it can increase the risk that the company will violate a UDAAP law.
  • This guidance is applicable for any business or entity that solicits or offers payments over the telephone.  Companies should review their internal policies and procedures to ensure they align with the CFPB’s guidance.  The Bulletin does not require that companies disclose pay-by-phone fees in any particular fashion.  However, it does recommend that companies take certain proactive steps to ensure compliance, including:
  • This last point highlights an issue that is raised several times throughout the bulletin, which relates to entities that rely on phone representatives to disclose applicable fees.  Even if a company has adequate policies and procedures in place regarding fee disclosures, there is still the risk of a UDAAP violation if phone representatives deviate from standard call scripts.  The bulletin stresses the importance of adequate monitoring to ensure that both employees and third-party service providers appropriately disclose fees and make consumers aware of available options.
  • Reviewing state and federal law to confirm whether the company may charge phone payment fees;
  • Reviewing policies and procedures on pay-by-phone fees, both internal and those of service providers, including call scripts and training materials;
  • Incorporating pay-by-phone concerns into the monitoring or audits of consumer calls; and
  • Reviewing consumer complaints.

While Compliance Bulletins are non-binding statements of policy, they are important guidance that reflects the agency’s stance, and they indicate potential areas of enforcement.  Companies should carefully review these bulletins to ensure they are not risking an enforcement action.  Troutman Sanders’ attorneys have significant experience counseling companies on compliance methods, risks and strategies – before and after enforcement actions.

Twenty-one Democratic state attorneys general wrote to Senate leaders Mitch McConnell and Charles Schumer to express their opposition to S.J. Res. 47, which would nullify the Arbitration Rule issued by the Consumer Financial Protection Bureau under the Congressional Review Act.  The AGs requested that both senators oppose the Joint Resolution of Disapproval and vote against it.

As we covered here, the CFPB issued a final Rule on July 10, banning arbitration provisions for covered entities, as well as requiring such entities to provide information to the Bureau regarding any efforts to compel arbitration.  Subject to certain enumerated exemptions, the Rule applies to most “consumer financial products and services” that the CFPB oversees, including those companies involved with the storage, transmittal or exchange of money, and “affiliates” of such companies when those affiliates act as service providers.

The Rule prohibits entities from relying on pre-dispute arbitration agreements entered into after March 19, 2018, to avoid class actions concerning covered consumer financial products or services.  Starting with the compliance date, consumer arbitration agreements are required to include specified language set forth in the Rule.

Ten days after the Bureau issued the Rule, Sen. Mike Crapo (R-Idaho) introduced S.J. Res. 47, which would set aside the Rule.

Writing under the letterhead of Massachusetts AG Maura Healey, the Democratic AGs urged Sens. McConnell and Schumer to oppose S.J. Res. 47, contending that “[t]he Arbitration Rule appropriately prevents consumer financial services companies from requiring their customers to agree to a contract that waives their right to join a class action filed against the company.”

According to the AGs, “most consumers simply lack the time and resources to arbitrate a dispute on their own or to hire an attorney to file a claim on their behalf.”  The AGs also argued that most consumers find arbitration as intimidating as individual lawsuits and assert that the Rule “would deliver essential relief to consumers, hold financial services companies accountable for their misconduct, and provide ordinary consumers with meaningful access to the civil justice system.”

Additional signatories to the letter include attorneys general Xavier Becerra (Calif.), George Jepsen (Conn.), Brian E. Frosh (Md.), Eric Schneiderman (N.Y.), and Mark Herring (Va.).

Troutman Sanders advises clients both within and outside the CFPB’s authority in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing financial institutions and other consumer–facing companies in a plethora of types of class actions and individual claims. We will continue to monitor these regulatory developments.

 

Financial professionals often recommend a reverse mortgage loan as a way to delay claiming Social Security benefits.  A reverse mortgage, federally insured through the Federal Housing Association’s (“FHA”) Home Equity Conversion Mortgage Program (“HECM”), allows homeowners age 62 and older to borrow against the equity in their homes and defer payment of the loan until they pass away, sell, or move out.  The borrower may receive the loan proceeds in one of three ways:  as a lump-sum payment, in monthly payments, or as a line of credit.  With this strategy, a homeowner uses the income from a reverse mortgage to replace the income otherwise received in Social Security benefits in the years between the minimum benefits age (62 years) and full benefits age (67 years), or later.  When Social Security benefits are delayed, individuals receive a permanent increase in monthly benefits, which results in an increased cumulative lifetime benefit.

On August 24, the Consumer Financial Protection Bureau issued a report alerting older consumers that this strategy may not actually save them money because the costs of the reverse mortgage, in many cases, exceed the lifetime benefits of increased monthly Social Security income realized from delaying benefits until age 67 or later.  The CFPB also warned older consumers that they risk losing equity in their homes that they may need to meet expenses later in life.  The report advises older consumers of these risks and is accompanied by a new consumer guide and video to help older consumers and their families understand the risks, benefits, and requirements of a reverse mortgage so that they can make an informed decision before choosing this path.

Specifically, in the report, the CFPB compared the increased lifetime benefits that a homeowner will receive by delaying the age of Social Security benefits with the average cost of a reverse mortgage.  Using age 62 and a seven-year loan period, the average length of a reverse mortgage loan, the CFPB determined that reverse mortgage loan costs will exceed the lifetime amount of money gained from an increased Social Security benefit if the consumer lives to age 85.  The longer the consumer lives, the more the loan cost exceeds the cumulative social security benefits.  In addition, the CFPB found that a reverse mortgage reduces the equity that homeowners have available to use or pass on to their heirs because the loan balance is likely to grow faster than home values.

While the CFPB’s report does not suggest that it will take steps to implement any new rules or regulations governing reverse mortgages, it highlights mounting concern with the HECM loan product generally.  This report piggybacks another report issued by the CFPB two years ago, addressing consumer complaints and frustration with reverse mortgages, as well as a growing trend by plaintiffs’ attorneys to file lawsuits against reverse mortgage lenders and servicers for alleged improprieties in loan servicing.  The discussion surrounding reverse mortgages is far from over.

The report can be found here.

On August 17, the Consumer Financial Protection Bureau filed a complaint and proposed settlement against Aequitas Capital Management, Inc. and its related entities, alleging that the loan buyer aided the Corinthian Colleges’ predatory lending scheme.  According to the Bureau, Aequitas enabled Corinthian to make high-cost private loans to Corinthian students, giving the impression that the school was raising enough outside revenue to meet the requirements for federal student aid funds.  If the District of Oregon approves the settlement, over 40,000 Corinthian students could receive approximately $183 million in loan forgiveness and debt reduction.

“Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare,” CFPB Director Richard Cordray said in a statement.  The action “marks another step by the Bureau to bring justice and relief to the borrowers still saddled with expensive student loan debt.  We will continue to address the illegal lending practices of for-profit colleges and those who enable them.”

The CFPB’s complaint alleges that Aequitas violated the Dodd-Frank Wall Street Reform and Consumer Protection Act by funding and supporting Corinthian’s “Genesis loan” program in the amount of $230 million.  The Bureau contends that Aequitas and Corinthian together created the appearance that outside funders were sustaining Corinthian in the form of the Genesis loans, when Corinthian actually was paying Aequitas to support the loan program.  On March 10, 2016, the Securities and Exchange Commission took action against Aequitas, alleging the company had defrauded over 1,500 investors.  A receiver has been appointed to wind down the company and distribute its assets.

Under the terms of the proposed settlement, Aequitas and its related entities would be required to forgive Genesis loans for borrowers who meet certain eligibility requirements and forgive all outstanding balances for any Genesis loans that were 270 days or more past due as of March 31, 2017.  In addition, Aequitas must reduce the principal amount owed on all other Genesis loans by 55 percent and forgive any accrued and unpaid interest, fees, and charges that were 30 or more days past due as of March 31, 2017.

The action is the most recent taken by the CFPB against Corinthian Colleges.  In 2014, the Bureau sued Corinthian Colleges, Inc., alleging the for-profit college chain engaged in illegal predatory lending schemes.  The CFPB obtained a $530 million default judgment against the chain in 2015.

The Consumer Financial Protection Bureau recently released a “special edition” of its standard monthly complaint report.  The report gives statistics on the number and types of complaints received by the CFPB, both nationally and broken down by state.  By providing data on all fifty states and the District of Columbia, the CFPB gives consumers and businesses insight into the types and volume of complaints handled by the agency, and state-by-state variations in consumer concerns.

In a message given just prior to the report’s release, CFPB Director Richard Cordray stated, “By sharing complaint data publicly, we empower consumers with information they can use to make decisions and give public officials insight into issues affecting our communities.”

The report gives both a national and state-by-state snapshot look at:

  • Complaint totals – 1,163,156 complaints have been handled since July 2011.
  • How states compare – California, Florida, New York, and Texas had the highest volumes of total complaints.
  • Complaints submitted by “specialty populations” which includes service members, veterans and their families, and older consumers.
  • The top subject matter areas about which the CFPB receives complaints – Nationally, the top three complaint areas, by volume, were debt collection, mortgage and credit reporting-related issues.  The state-specific data shows how the number of complaints in a given subject matter area compares to the national average.
  • Complaint trends – The subject matter area with the largest change in complaints from last quarter was student loans, with complaints up 216%.
  • The percentage of timely company responses to complaints received by the CFPB – Nationally, companies have responded in a timely manner (within 15 days or less) 97% of the time since the CFPB began receiving complaints in 2011.

A copy of the report is available here.

On July 25, the United States House of Representatives voted to repeal the Consumer Financial Protection Bureau’s latest arbitration rule.  

As we reported previously, the CFPB issued a final rule banning class action waivers in arbitration provisions for covered entities, as well as requiring the covered entities to provide information to the CFPB regarding any efforts to compel arbitration.  This rule is of significance to any financial services company that utilizes consumer contracts containing arbitration provisions.  The rule is scheduled to take effect in mid-2018 and, if implemented, will govern contracts executed after that time. 

After passage of the rule, there was an outcry of criticism from businesses and Republican congressional representatives alike.  Institution of the rule contradicts longstanding federal policy – as repeatedly expressed by the Supreme Court in interpreting the Financial Administration Act (“FAA”) – of enforcing arbitration provisions as written.  The rule also increases legal costs for businesses that have relied on federal policy upholding arbitration terms in a contract.  These increased litigation costs will be passed on to consumers. 

Republican members of the House of Representatives agree that the rule would negatively affect businesses, and in a 231-190 party-line vote, the House voted to repeal the CFPB’s rule under the Congressional Review Act (“CRA”).  

House Democrats argued that the rule protects Americans’ right to seek redress of harms in court, while Republicans argued otherwise.  Republican Rep. Keith Rothfus (PA-12) specifically noted that the rule would increase litigation costs while providing no benefits to consumers.  

The resolution to repeal the CFPB’s rule has the White House’s blessing.  In a statement, the White House noted, “If allowed to take effect, the CFPB’s harmful Rule would benefit trial lawyers by increasing frivolous class action lawsuits; harm consumers by denying them the full benefits and efficiencies of arbitration; and hurt financial institutions by increasing litigation expenses and compliance costs, particularly for community and mid-sized institutions.”    

With the passage of the repeal measure in the House, the measure goes to the Senate for approval. 

Under the CRA, Congress is required to vote on resolutions disapproving a rule within 60 days of the rule’s publication in the Federal Register.  Once Congress votes to disapprove a regulation and the President signs the resolution, regulators are barred from creating a regulation similar to the one nullified by Congress without express congressional authorization.   

We will continue to monitor and report on developments as this resolution proceeds to the Senate.

The Consumer Financial Protection Bureau has issued a formal request for public commentary on proposed changes to the Prepaid Rule, which was issued in October 2016.  According to the Bureau, the proposed changes address those concerns raised by prepaid card issuers about potential problem areas for compliance. 

The Bureau’s suggested changes would adjust error resolution requirements and provide more flexibility for accounts linked to digital wallets.  In the CFPB’s proposal, it noted that some companies claimed that fraud concerns could require them to make changes that might be problematic for those consumers who chose not to register their accounts.  Under the Bureau’s new proposal, consumers would be required to register their accounts to receive full fraud and error protection, including the right to dispute charges and restore stolen funds.  The proposed changes would also require companies to provide these protections to consumers with registered accounts even if the consumer had not fully completed the registration process when the theft or dispute occurred.  The CFPB’s suggested modifications to the Prepaid Rule would also address digital wallets, to ensure that consumers continue to receive full CARD Act protections on traditional credit card accounts if they choose to link those accounts to their digital wallet prepaid accounts. 

In addition to the call for comments, the Bureau also released a revised small entity compliance guide for the Prepaid Rule.  The updated guide includes information on the Bureau’s recent decision to delay the Prepaid Rule’s effective date, a change we covered here.  In addition, the guide also clarifies other areas of concern with the Rule, in response to feedback from prepaid account companies. 

Comments on the CFPB’s proposed changes are due 45 days following the proposal’s publish date in the Federal Register.  The full text of the proposal is available here.

 

On Tuesday, July 18, from 2-3 p.m. ET, Troutman Sanders attorneys David Anthony, Cindy Hanson and Tim St. George will present a webinar examining the impact of the CFPB’s new July 10, 2017 rule that bans class action waivers in contracts involving consumer financial services and products, and which also imposes a number of other reporting obligations on financial services companies. The webinar will address the history of the rule, the substance of the rule, the CFPB’s mechanisms for enforcement of the rule, and the administrative uncertainty regarding the ultimate enactment of the rule.

On June 27, the Consumer Financial Protection Bureau announced it had filed two consumer protection lawsuits against four credit repair companies and three executives for allegedly misleading consumers and charging improper advance fees.  On that same day, the CFPB filed corresponding stipulated final judgments providing for approximately $2 million in penalties against the named defendants.

On June 30, Central California U.S. District Court Judge John E. McDermott approved an agreed-upon $1.53 million settlement between the CFPB and three of the credit repair companies.  Prime Credit LLC, IMC Capital LLC, and Commercial Credit Consultants, as well as founder Blake Johnson and former president Eric Schlegel, were the subjects of the settlement which, in addition to the monetary component, prohibits all parties from participating in the credit repair business for five years.  Johnson sold the credit repair companies approximately two years ago.

The settlement requires the defendants to pay the entire penalty to the CFPB within ten days of entry of the order.

The six-count complaint alleged that the defendants charged consumers at least $31 million in advance fees between 2009 and 2015 in violation of the Consumer Financial Protection Act and the Telemarketing and Sales Rule.  The defendants are also alleged to have misrepresented the effectiveness of their credit repair services, failed to clearly convey the terms of their refund guarantee, and misrepresented the total cost of their services.  In the settlement agreement, the defendants neither admitted nor denied the allegations.

The CFPB’s lawsuit against Prime Credit LLC’s partner Park View Law and its owner Arthur Barens remains ongoing.  However, the CFPB and Barnes have agreed to a $500,000 settlement which is currently awaiting the Court’s approval.

We will continue to monitor this and similar cases, and will report on further developments.

 

On July 10, 2017, the Consumer Financial Protection Bureau issued its long-awaited final rule banning class action waivers in arbitration provisions for covered entities, as well as requiring the covered entities to provide information to the CFPB regarding any efforts to compel arbitration. This rule is of significance to any financial services company that utilizes consumer contracts containing arbitration provisions. The Rule is scheduled to take effect in mid-2018 and will govern contracts executed after that time.

Covered Entities and Products

Section 1028(b) of the Dodd-Frank Act gives the CFPB authority to promulgate regulations that prohibit or impose conditions on arbitration agreements for consumer financial services or products.

On May 5, 2016, the CFPB announced proposed rules that would restrict the ability of financial institutions to enter into mandatory arbitration clauses with consumers, including an outright ban on provisions that would prohibit consumers from pursuing class actions in court. After a period allowing for public comment, the proposed Rule was made final on July 10, 2017.

The Rule will take effect 60 days after July 10, 2017 and will apply only to agreements executed 240 days after the effective date of the rules (the “compliance date”), which will be approximately March 10, 2018.

Subject to certain enumerated exemptions, the Rule applies to most “consumer financial products and services” that the CFPB oversees, including those that involve lending money, storing money, and moving or exchanging money, as well as to the “affiliates” of such companies when the “affiliate is acting as that person’s service provider.”

In particular, according to the CFPB, for a product or service to be covered under the Rule, it must be both of the following:

  • A consumer financial product or service . Generally, this prong of the definition requires that a financial product or service be offered or provided to consumers primarily for personal, family, or household purposes or that it be offered or provided in connection with another financial product or service that is offered or provided to consumers primarily for personal, family, or household purposes.
  • Included in the Rule’s list of covered consumer financial products and services . Generally, the Rule defines covered products and services by reference to particular statutes or regulations. Generally, the list includes extending consumer credit, participating in consumer credit decisions, engaging in certain creditor referral or selection activity for consumer credit, acquiring or selling consumer credit, servicing an extension of consumer credit or collecting a consumer debt arising from a product or service covered by the Rule, extending or brokering certain automobile leases, providing consumers with information derived from their consumer credit file, engaging in credit repair or debt management activities, providing consumer asset accounts including deposit accounts and prepaid accounts, providing remittance transfers, accepting financial data for the purpose of initiating certain payments or card charges, and providing check cashing, check guaranty, or check collection services.

The Substance of the Rule

The Rule contains requirements that apply with regard to a provider’s use of a “pre-dispute arbitration agreement” that is entered into on or after the compliance date. The Rule defines “pre-dispute arbitration agreement” to mean an agreement that is: (1) between a covered person and a consumer; and (2) that provides for arbitration of any future dispute concerning a covered consumer financial product or service. The form or structure of the agreement is not determinative. An agreement can be a pre-dispute arbitration agreement under the Rule regardless of whether it is a standalone agreement, an agreement or provision that is incorporated into, annexed to, or otherwise made a part of a larger contract, is in some other form, or has some other structure.

The Rule prohibits a provider from relying on a pre-dispute arbitration agreement entered into after the compliance date with respect to any aspect of a class action that concerns any covered consumer financial product or service. That prohibition may apply to a provider with respect to a pre-dispute arbitration agreement initially entered into between a consumer or a covered person other than the initial provider, such as debt collectors seeking to collect on the contract or assignees of the contract. The CFPB also specifically stated that the Rule applies to “indirect automobile lenders,” using them as an example of covered entities.

The Rule requires that, upon entering into a pre-dispute arbitration agreement, a provider must ensure that certain language set forth in the Rule is included in the agreement. Generally, the required language informs consumers that the agreement may not be used to block class actions.

The Rule also requires providers that use pre-dispute arbitration agreements to submit certain records relating to arbitral and court proceedings to the CFPB. The requirement to submit these records applies to: (1) specified records filed in any arbitration or court proceedings in which a party relies on a pre-dispute arbitration agreement; (2) communications the provider receives from an arbitrator pertaining to a determination that a pre-dispute arbitration agreement does not comply with an due process or fairness standards; and (3) communications the provider receives from an arbitrator regarding a dismissal of or refusal to administer a claim due to the provider’s failure to pay required filing or administrative fees.

The CFPB will use that information it collects to continue monitoring arbitral and court proceedings to determine whether there are developments that raise consumer protection concerns that may warrant further Bureau action. The CFPB is also finalizing provisions that will require it to publish the materials it collects on its website with appropriate redactions as warranted, to provide greater transparency into the arbitration of consumer disputes.

Practical Significance

The Rule is in direct contradiction of the strong federal policy favoring arbitration. Indeed, the CFPB’s Rule is contrary to with the long-standing federal policy – as repeatedly expressed by the Supreme Court in interpreting the FAA – of enforcing arbitration provisions as written. It is inevitable that the CFPB’s rules will be challenged in court, with the ultimate validity perhaps turning on the quality of the CFPB’s study and analysis of the issues. The Supreme Court may again need to ultimately weigh in. In addition, the term of current CFPB director, Richard Cordray, is scheduled to end in July 2018, and there is possibility he will leave before then. In sum, the issuance of the final rule is very likely not to be the final word.

Troutman Sanders advised clients both within and outside the CFPB’s authority in developing and administering consumer arbitration agreements, and has a nationwide defense practice representing financial institutions and other consumer facing companies in a plethora of types of class actions and individual claims. We will continue to monitor these regulatory developments and any related litigation.