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On June 27, 2017, the Consumer Financial Protection Bureau (“CFPB”) announced approximately $2 million in fines and penalties against four credit repair companies and three associated individuals for allegedly misleading consumers and charging improper fees.  Under two proposed final judgments that the CFPB filed in United States District Court for the Central District of California, Prime Credit, LLC, IMC Capital, LLC, Commercial Credit Consultants, Blake Johnson and Eric Schlegel will be paying approximately $1.5 million in civil penalties, while Park View Law and Arthur Barens will be paying $500,000 in relinquished funds to the U.S. Treasury.  The remedies are notable, in part, because the CFPB is imposing them not only on the companies allegedly primarily engaged in the accused conduct but also individuals involved as principals in the companies.  As such, this enforcement action reflects a not-uncommon view of the CFPB and other regulatory agencies, particularly the Federal Trade Commission, that principals who control and direct the conduct of a business entity are as much directly subject to enforcement action as is the company itself.

According to the CFPB, between 2009 and 2015, the entities at issue engaged in improper credit repair practices to the detriment of consumers and in violation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the Telemarketing Sales Rule.  Specifically, the CFPB claims that the defendants charged consumers illegal advance fees, failed to disclose the limits on “money-back guarantees” that they were offering, and misled consumers about the benefits of their services.  For example, the CFPB claims that these companies misrepresented that their services would lead to the removal of negative entries on consumers’ credit reports and would result in a substantial increase to consumers’ credit scores.

The proposed final judgments also include an injunctive relief component, in addition to the monetary penalties.  Under the final judgment, the defendants – including the individuals — are prohibited from doing business in the credit repair industry for five years.  They are also prohibited from violating the Dodd-Frank Act or the Telemarketing Sales Rules.

 

The Consumer Financial Protection Bureau (“CFPB”) sent letters to the top retail credit card companies at the beginning of June, encouraging the companies to use more transparent promotions, citing a major retailer’s decision to end deferred-interest programs associated with its credit card.  In the letter, the Bureau outlined its concerns that temporary promotions – such as deferred-interest promotions – can surprise consumers with high, retroactive interest charges once the promotion expires.

“With its back-end pricing, deferred interest can make the potential costs to consumers more confusing and less transparent,” said CFPB Director Richard Cordray in a statement.  “We encourage companies to consider more straightforward credit promotions that are less risky for consumers.”

Deferred-interest promotions typically are often associated with retail store credit cards and offer consumers a way to buy goods such as appliances and furniture and pay the cost over time.  Some cards even permit consumers to purchase medical or dental services under a deferred-interest promotion.  Under the majority of these plans, consumers do not pay any interest if they pay off the purchase amount within a set period, usually six months to one year.  If any balance remains after the promotional period, credit card companies charge consumers accrued interest dating back to the original purchase.  A 2015 report issued by the Bureau concluded that the number of purchases using deferred-interest promotions rose 21 percent between 2010 and 2013.

However, the CFPB has cautioned consumers about the risks associated with deferred-interest promotions, citing lack of transparency on the part of retail credit card companies.  The Bureau instead advocates for a zero-percent-interest promotion in its letter to card companies.  Under the terms the CFPB outlines, companies would not charge interest retroactively if the balance is not paid off by the end of the promotional period but, instead, would only charge interest on the remaining balance.  According to the Bureau, a zero-percent-interest plan would be easier for consumers to understand and would not require the same “robust compliance management systems” associated with deferred-interest promotions.

The CFPB has recently highlighted the complaints received regarding credit cards, noting 116,200 consumer complaints related to credit cards received by the Bureau since its inception in July 2011.

In July of 2016, the Consumer Financial Protection Bureau released an outline of new rules targeting third-party debt-collection operations. The new rules targeted various areas including: Debt validation, Limits on Contact, Consumer Disputes, and Deceased Consumers. At the time, the CFPB stated it planned to release rules relevant to first-party creditors at a later date. However, Richard Cordray, the director of the CFPB, announced at the agency’s Consumer Advisory Board meeting in Washington D.C. on June 8, 2017 that the new rules on debt validation will cover both first-party creditors and third-party debt collectors.

The topic of debt validation concerns the information debt collectors maintain on debts, such as consumer name and the debt amount, as well as the practices collectors engage in to confirm the debt is valid. Under the proposed rules, debt collectors would have a much higher burden to prove a debt is valid before starting collection. After reviewing feedback on the proposed rules, the CFPB concluded that rules on debt validation should cover both first-party creditors and third-party debt collectors because much of the information third-party collectors maintain is obtained from and created by first-party creditors such as banks and other lenders. To ensure all collectors have the correct information about a debt and the debtor, the CFPB found all parties in the collection process must work together, warranting a uniform set of rules with respect to the validation process.

The CFPB will move forward with the remaining draft rules on other third-party collection activities separately, as originally contemplated. Specifically, the agency is focusing on new rules regarding disclosures third-party debt collectors must make to consumers about the debt collection process and consumer rights. The agency stated it planned to “move forward quickly” with these additional proposed rules.

The CFPB’s decision is a further step in the CFPB’s efforts to extend statutory and regulatory collection obligations to first-party creditors. While this may seems a logical step in the CFPB’s enforcement efforts, it will likely prompt controversy among first-party creditors as it expands the current state of the law, and may be viewed as a move towards still further expansion.

In its fifth annual fair lending report, the Consumer Financial Protection Bureau highlighted redlining, mortgage and student loan servicing, and small business lending as areas of focus for 2017.  CFPB Director Richard Cordray specifically noted these areas for enhanced enforcement actions, describing them as “significant or emerging fair lending risk to consumers.”

“In 2017 we will increase our focus in the areas of redlining and mortgage and student loan servicing to ensure that creditworthy consumers have access to mortgage loans and to the full array of appropriate options when they have trouble paying their mortgages or student loans, regardless of their race or ethnicity,” wrote Patrice Alexander Ficklin, Director of the Office of Fair Lending and Equal Opportunity.  “In addition, we will focus more fully on pursuing our statutory mandate to promote fair credit access for minority- and women-owned businesses.”

According to the Bureau, agency priorities are determined through a risk-based model, incorporating the quality of an institution’s compliance management system, market intelligence, consumer complaints, tips from advocacy groups and government agencies, supervisory and enforcement history, and results from Home and Mortgage Disclosure Act analysis.  After reevaluating these indices of consumer risk, the CFPB has outlined specific points to address in the coming year:

  • Redlining.  The Bureau will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods from applying for credit.
  • Mortgage and Student Loan Servicing.  The CFPB indicates that it will evaluate whether certain borrowers who are behind on loan payments have greater difficulty reaching a resolution with servicers due to their race, ethnicity, gender, or age.
  • Small Business Lending.  With a Congressional mandate to ensure fair access to credit for women- and minority-owned businesses, the Bureau will take action in the area of small business lending.  The CFPB maintains that action in this area will also enhance the Bureau’s institutional knowledge of credit processes and existing data collection processes, as well as the nature, extent, and management of fair lending risks.

As we have reported, state regulators are also active in these areas.  Over the last 15 years, state attorneys general have grown adept at collectively utilizing their resources to bring major multistate investigations.  We anticipate increased state enforcement actions aimed at industries such as debt buying and collecting, auto finance, service-member lending, payment processing, credit reporting, cybersecurity, information governance, and privacy.

On May 31, the Consumer Financial Protection Bureau released a report summarizing the complaints the Bureau received from senior citizens since the CFPB opened its doors in July 2011.  In its nearly six years of operation, the Bureau has handled approximately 1,163,200 complaints, with 103,100 complaints coming from consumers 62 years of age and older.

The report spotlights those consumer protection-related issues that older consumers frequently encounter, including those that are unique to, or have unique implications for, older consumers.  For instance, consumers over 62 are more likely to submit complaints regarding mortgage servicing, while younger consumers are more likely to submit complaints regarding auto lending and student loan servicing.

The Bureau’s report highlights specific financial products, including:

  • Traditional mortgages.  Twenty-six percent of complaints from older consumers were related to mortgages, compared to only sixteen percent of complaints from consumers not considered to be older.  In addition, many senior citizens complained about servicing problems relating to the transition to a new mortgage servicer and servicers’ failures to adjust escrow payment amounts after enrolling in a tax relief program.
  • Reverse mortgages.  In 2017, a number of older consumers enrolled in reverse mortgages reported being at risk of foreclosure when they were unable to pay their property taxes and homeowner’s insurance.  Some non-borrowing spouses complained about reverse mortgage servicers’ slow response after the death of the primary borrower, delays which sometimes resulted in the initiation of foreclosure proceedings.
  • Credit cards.  Many older consumers reported using credit cards to handle large, unanticipated financial expenses, usually related to medical care.  In many instances these consumers reported that they misunderstood or did not understand completely the terms and conditions of certain products, including the distinction between deferred interest plans and no-interest plans.
  • Bank accounts and services.  Older consumers often report difficulties after being defrauded or having their identities stolen.  Furthermore, consumers described problems using a power of attorney to manage an older consumer’s bank account as well as difficulties organizing and navigating finances following the death of a spouse or family member.

A copy of the Bureau’s report is available here.

Many predicted that newly-elected President Donald Trump would remove Richard Cordray, Director of the Consumer Financial Protection Bureau, upon taking office.  Cordray remains the head of the CFPB, but uncertainty still looms at the agency.  President Trump has characterized the Dodd-Frank Wall Street Reform and Consumer Protection Act, the legislation which created the CFPB, as “a disaster” and directed the Treasury Secretary to review the law.  Further, the Department of Justice recently submitted a brief to the D.C. Circuit in CFPB v. PHH Corporation, asserting that the Bureau’s single-director structure is unconstitutional.  Even if the CFPB survives PHH, it still faces attack from pending legislation that would replace the current structure of the Bureau with a five-member Board of Directors.

However, a reorganized CFPB does not mean that regulatory action in the consumer protection space will lessen.  State attorneys general have begun taking a more active role in recent years, instituting regulatory investigations by issuing subpoenas and civil investigative demands (“CIDs”), and many AGs have indicated that if the CFPB’s consumer protection activities decrease, they will increase efforts to fill the gap.

One of the areas that state attorneys general have targeted in recent months is consumer lending.  AG actions in this area include the following:

  • Payday loans and payday lending.  In November 2016, Virginia Attorney General Mark Herring submitted a letter to the CFPB providing comments regarding payday loans, vehicle title loans, installment loans, and open-end lines of credit.  Herring suggested that additional rulemaking is necessary to address the specific risks and harms these products impose on consumers.
  • Tribal lending.  Minnesota Attorney General Lori Swanson announced a settlement with CashCall, Inc. in August 2016.  The state sued CashCall in 2013, alleging that it engaged in a “rent-a-tribe” scheme in which it used a front company affiliated with a Native American tribe to originate unlawful loans.
  • Redlining.  In September 2015, New York Attorney General Eric Schneiderman settled claims with Evans Bank over discriminatory mortgage practices.  Schneiderman alleged that Evans Bank denied mortgage access to borrowers in predominately African-American neighborhoods in the city of Buffalo because of the racial composition of the communities.

As these examples from just one industry demonstrate, regulatory investigations persist in the new political landscape, with activity increasing at the state level rather than the federal level.

On April 27, the Consumer Financial Protection Bureau filed a lawsuit in an Illinois federal court against four online installment loan companies operated by a California Native American tribe.  Although the tribe operates the installment loan companies, the CFPB’s complaint alleges that the defendants are not “arms of the tribe” and therefore should not be able to share the tribe’s sovereignty.  The Bureau made these allegations in support of its belief that the defendants violated the Consumer Financial Protection Act (“CFPA”) by entering into loan agreements that violated state usury and lender licensing laws.  The Bureau alleged that the loans are void and cannot be collected under the CFPA because the loans are usurious under state laws.  The complaint also alleges that the defendants violated the Truth in Lending Act (“TILA”) by failing to disclose the cost of obtaining the loans. 

All four defendants extend small-dollar installment loans through their websites.  The Bureau’s complaint alleges that the defendants’ customers were required to pay a “service fee” (often $30 for every $100 of principal outstanding) and five percent of the original principal for each installment payment.  As a result, the effective annual percentage rates of the loans ranged from approximately 440% to 950%.  The complaint also alleges that each of the defendants’ websites advertises the cost of installment loans and includes a rate of finance charge but does not disclose the annual percentage rates.  The defendants made the loans at issue in Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, and South Dakota.   

During an investigation before the lawsuit was filed, the defendants claimed that they were entitled to tribal sovereign immunity because they acted as an “arm of the tribe.”  The CFPB’s complaint  disputes that defendants are entitled to tribal sovereign immunity because they allegedly do not truly operate on tribal land, that most of their operations are conducted out of Kansas (although the tribal members were in California), and that they received funding from other companies that were not initially owned or incorporated by the tribe.  

The relief requested by the CFPB includes a permanent injunction against the defendants from committing future violations of the CFPA, TILA, or any other provision of “federal consumer financial law,” as well as damages to redress injury to consumers, including restitution and refunds of monies paid and disgorgement of ill-gotten profits. 

Lenders affiliated with Native American tribes have been subject to both regulatory and private lawsuits for violations of consumer protection laws, as we previously reported here and here.  Recently, in January 2017, the Ninth Circuit Court of Appeals rejected the sovereign immunity arguments that tribal lenders made and affirmed a lower court’s decision that three tribal lending companies were required to comply with the Bureau’s civil investigative demands for documents.  The Ninth Circuit stated that generally applicable federal laws, like the Consumer Financial Protection Act, apply to Native American tribes unless Congress expressly provides otherwise and Congress did not expressly exclude the three tribal lending companies from the Bureau’s enforcement authority.

On April 25, the Consumer Financial Protection Bureau held its Spring 2017 Community Bank Advisory Council meeting in Washington.  The purpose of the meeting was to allow representatives from community banks an opportunity to provide additional input on the Bureau’s Request for Information (“RFI”) on the use of alternative data to assess creditworthiness of consumers applying for credit.  The Bureau also solicited input regarding consumer access to financial records from community bankers at the meeting.

The meeting follows the CFPB’s recent RFI to obtain feedback from stakeholders about the potential benefits and risks of using, applying, and analyzing unconventional sources of information to assess consumers’ creditworthiness.  For years, banks have used data maintained by the national credit reporting agencies (“CRAs”) to determine a consumer’s creditworthiness.  The problem, according to the Bureau, is that 26 million Americans are considered “credit invisible,” meaning that they have no credit history at all.  Another 19 million people have credit histories that, under most models, are too limited or have been inactive for too long to generate a reliable credit score.  This means that 45 million Americans are unable to access low-cost credit, according to the Bureau.

In recent years, lenders and fintech companies have increasingly looked to use alternative forms of data and newer methods of analyzing that data to assess an applicant’s creditworthiness.  According to the CFPB, such innovations could expand access to credit, especially for people with thin credit histories.   At the same time, the Bureau is worried that there may be risks and unintended consequences that come with using alternative data to assess creditworthiness.

The April 25 meeting offered the CFPB the chance to solicit comments from community banks as to the pros and cons of using alternative data.  At the outset of the meeting, the Bureau asked:

  • Will the use of alternative data to create or augment individual credit scores increase access to credit for consumers by helping lenders better assess their creditworthiness?
  • Will this practice lead to more complex lending decisions for both industry and consumers, and what risks would that pose?
  • How might the use of alternative data, new modes of analysis, and new technologies affect costs and services in the making of credit decisions?
  • What forms of alternative data might be prone to errors, and how hard will it be for consumers to identify such errors and get them corrected?
  • How may the use of alternative data affect certain groups in ways that might run afoul of fair lending laws or create other risks for vulnerable consumers?

Although the CFPB provided the community bankers with an overview of the RFI, the CFPB did not signal what future regulations may look like.  Instead, the CFPB listened to the concerns and opinions of community bankers.  The CFPB still appears to be trying to define what constitutes alternative data.  The CFPB has identified several possible sources of alternative data (including cell phone, utility, and banking account transactions), but it was clear that the CFPB is not entirely confident that it has captured everything that might be considered a source of alternative data.  Thus, the CFPB is interested in examining how lenders are using any data that would not be considered as part of a traditional credit report.

For their part, the community bankers in attendance largely supported the use of alternative data to assess creditworthiness as a means of providing credit to individuals who are considered “credit invisible.”  The general consensus indicated that alternative data (such as social accountability, long-standing customer or personal relationship, and trust) had been used for generations by community banks until fair lending laws limited their ability to use these factors as a basis for their lending decisions.  The community bankers seemed to agree that there is a fluid nature to alternative data such that what may be particularly relevant to one consumer (such as familial accountability) may have no bearing on another consumer.  That same consumer may be a good lending risk for another reason (such as demonstrated ability to remain current with their utility bills).

The community bankers cautioned the CFPB to avoid implementing burdensome regulations that might either restrict or prescribe such practices.

Troutman Sanders will continue to monitor the CFPB’s actions as they relate to the use of alternative data.

The Consumer Financial Protection Bureau is continuing its pursuit of third–party collection law firms it believes misrepresent to consumers the level of attorney involvement in their collection practices.

On April 17, the CFPB filed suit in the Northern District of Ohio against Weltman, Weinberg & Reis Co., L.P.A., for allegedly misrepresenting in millions of collections letters the firm’s level of attorney involvement in its collection cases.  In the complaint, the CFPB alleges the firm repeatedly created the false impression of meaningful attorney review on collection calls and letters when no such review actually occurred.

The case is Consumer Financial Protection Bureau v. Weltman, Weinberg & Reis Co., L.P.A. (Case No. 1:17-cv-00817, N.D. Ohio).  The complaint can be found here. 

In a press release, CFPB Director Richard Cordray stated that “[d]ebt collectors who misrepresent that a lawyer was involved in reviewing a consumer’s account are implying a level of authority and professional judgment that is just not true.”  He further noted that “Weltman, Weinberg & Reis masked millions of debt collection letters and phone calls with the professional standards associated with attorneys when attorneys were, in fact, not involved.  Such illegal behavior will not be allowed in the debt collection market.”

The suit alleges violations of the Fair Debt Collection Practices Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  Specifically, the CFPB alleges that since at least July 2011, Weltman misrepresented the level of attorney involvement in violation of Section(s) 1692(e)(3) and –(10) of the FDCPA by sending collection letters on formal law firm letterhead with “Attorneys at Law” in the banner and the law firm’s name in the signature line.  The letters also allegedly included coupons for payments made directly to the law firm, and some referred to possible “legal action” against consumers who did not make payments.  The CFPB also alleges that despite implying meaningful attorney involvement throughout these letters, no attorney had ever reviewed the account or made any legal evaluation in the vast majority of cases.

The CFPB further alleges that Weltman, Weinberg & Reis misrepresented attorney involvement in collection calls.  According to the complaint, the firm’s debt collectors regularly told consumers during such calls that they were calling from a law firm, specifically the “largest collection law firm in the United States,” or that the debt had been placed with “the collections branch of our law firm.”  In the CFPB’s view, this wrongfully implied attorney involvement where no such meaningful attorney review had taken place.

The suit seeks injunctive relief, penalties, and compensation for consumers.

As we have previously reported here and here, the CFPB for some time has been actively investigating law firms for lack of meaningful case oversight by attorneys.  For example, in January of 2017 the CFPB alleged that the Work & Lentz law firm sent out collection letters without having an attorney review the consumers’ files and make any professional judgment about the account, thereby failing to meet the FDCPA’s standard of “meaningful attorney involvement.”  The recent Weltman complaint is part of this pattern, and demonstrates the CFPB’s continuing efforts to enforce meaningful attorney involvement requirements in the debt collection field.

 

At the end of January, the Consumer Financial Protection Bureau published its Prepaid Rule – Small Entity Compliance Guide.  The Bureau intends for the Guide to provide a user-friendly summary of the Prepaid Rule, issued in October, but cautions that the Guide is not a substitute for reviewing the Rule, Regulation E, or Regulation Z.  The new Guide complements the previously-released Prepaid Card Fact Sheet, published by the CFPB in November. 

The Guide provides general definitions of applicable terms, such as “prepaid card,” in addition to describing those entities subject to the Rule and offering examples that illustrate the new Rule in action.  The Guide also gives considerable guidance on the numerous new disclosures required by the Rule, including pre-acquisition disclosures, disclosures on access devices, and initial disclosures.  Notably, the Prepaid Rule requires financial institutions to provide customers with both a short form and a long form disclosure before opening a prepaid account.  The Guide explains both of these disclosures and provides links to sample forms in fillable, .pdf versions. 

The Prepaid Rule was originally scheduled to take effect on October 1, 2017.  However, on March 9, the Bureau proposed delaying the effective date of the Rule by six months.  According to the CFPB, members of the industry have expressed concern over complying with certain provisions of the new Rule by the October deadline.  “While we are not proposing to change any other part of the prepaid accounts rule at this time, we are asking the public to provide comments about any implementation challenges that may affect consumers, and how additional time will impact the industry, consumers, and other stakeholders,” the CFPB said in a statement. 

On April 4, the American Bankers Association (“ABA”) submitted commentary to the CFPB, welcoming the Bureau’s proposal to delay the Rule’s effective date.  In the letter, however, the ABA also encouraged the CFPB to adopt a more objective definition of “prepaid account” as any product marketed or labeled as a prepaid account or card.  “Absent a usable distinction, banks face unfair and significant compliance risk and liability for inadvertent violations if an examiner or plaintiffs’ lawyer asserts that the bank’s checking account should be treated as a prepaid account and subject to the related disclosures and restrictions of the rule,” the ABA wrote.  According to the ABA, ambiguity in the current definition could discourage banks from offering checkless checking accounts and prevent the development of other products to serve the unbanked. 

These proposed changes may not be the final word on the Rule.  As we reported previously, Republicans in both the House and Senate have proposed killing the Rule entirely and have offered bills that would submit the Rule to a vote of disapproval under the Congressional Review Act.