Consumer Financial Services Alert - December 11, 2012 December 11, 2012
In This Issue

CFPB Issues Guidance and Warning Letters to Nationwide Specialty Consumer Reporting Agencies

The CFPB issuedguidance bulletin setting forth its expectations for nationwide specialty consumer reporting agencies in meeting their requirements under the Fair Credit Reporting Act and its implementing regulation, Regulation V. Nationwide specialty consumer reporting agencies are CRAs that maintain and provide information on consumers non-credit related history, such as medical payments, tenancy history, and check writing. The CFPB expects nationwide specialty CRAs to comply with FCRA and Regulation V by, among other things, providing and publishing in every telephone directory and on its website a toll-free number for consumers to request free annual file disclosures; providing  clear and understandable information and instructions to consumers (e.g., status of request or FAQs); and collecting only as much personal information from a consumer requesting a disclosure as is reasonably necessary to identify the consumer properly.

The bulletin was issued after a review of the phone listing and websites for nationwide specialty CRAs and attempts to request annual disclosures found that these CRAs were deficient in meeting their obligation to provide a streamlined process for consumers to request a free annual consumer report. In response, the CFPB issued warning letters to nationwide specialty consumer reporting agencies about their failure to comply with provisions of Regulation V. Consumer reporting agencies that received warning letters were advised to contact the CFPB within 30 days to advise the CFPB on the steps taken or that will be taken to comply with the requirements of FCRA and Regulation V. This is the second instance of the CFPB utilizing warning letters as a means of enforcement (see November 27, 2012 Alert discussing the MAP Rule violations warning letters).

CFPB Obtains Preliminary Injunction Against Another Mortgage Loan Modification Company

The United States District Court for the Central District of California granted the CFPB’s request for a temporary restraining order against a number of individuals alleged to have operated a fraudulent loan modification scheme in violation of federal consumer protection law. Upon referral from the Office of the Inspector General for the Troubled Asset Relief Program and the Department of Treasury’s Office of Financial Stability, the CFPB initiated an investigation and later charged several individuals and their company with numerous violations of the Consumer Financial Protection Act and violation of the Omnibus Appropriations Act and its implementing regulation, Regulation O, which generally prohibits unfair and deceptive acts or practices with respect to mortgage loans.

The mortgage loan modification company targeted distressed homeowners with promises of loan modifications. According to the CFPB, the individuals and their company violated the CFPA and Regulation O by collecting large upfront fees for modification services, misrepresenting their affiliation with government agencies, falsely claiming that they were providing legal representation, when, in fact, none of the individual defendants were attorneys, and instructing consumers to stop paying their mortgages. The Court granted the TRO, finding good cause that the individuals violated and were likely to continue violating the CFPA and Regulation O, and that the CFPB is likely to prevail on the merits. The TRO freezes the individuals and their company’s assets, disables the website and suspends the internet domain name registrations, and appoints a receiver to investigate the company’s operations. This, along with the CFPB’s previous TRO and subsequent preliminary injunction of a mortgage relief company (see November 27, 2012 Alert), continues the CFPB’s attention to combating and prosecuting fraudulent mortgage relief services; and illustrates the range of measures available to the CFPB in its efforts to combat fraud in diverse aspects of the consumer financial services sector.

CFPB Ombudsman Releases First Annual Report

The CFPB’s ombudsman released its first annual report detailing its activities from July 2011 through September 30, 2012. The report discussed the role of the Ombudsman—to provide “a fair process as between consumers, the providers of consumer financial products and services and the CFPB”—and also the issues it has dealt with over the past 10 months.  The report noted that the Ombudsman has handled over 700 individual consumer inquiries, ranging from questions concerning the CFPB’s interactions with consumers to website usage, and has also undertaken two systemic reviews.

The first review related to consumers’ lack of knowledge about the consumer complaint process. According to the report, consumers remain unclear about how the complaint process works, noting, for example, that consumers did not understand the timing for certain steps in the process. The Ombudsman recommended that the CFPB provide additional information to consumers about the process in any future oral or written communications. The second systemic review concerned the presence of enforcement attorneys at supervisory exams. The CFPB takes an integrated approach to supervision and enforcement—enforcement attorneys are present at the beginning, middle and end of the supervisory examination. This practice, a cause for concern among providers of consumer financial products and services, was examined by the Ombudsman, which spoke individually to bank officials, outside consultants and CFPB staff. As a result, the Ombudsman recommended that the CFPB review its approach and, until a full review is complete, establish ways to clarify the role of the enforcement attorney at the supervisory examination.

CFPB Releases Fair Lending Report and Announces Coordination with Department of Justice on Coordination of Fair Lending Enforcement

The CFPB announced it and the Department of Justice have entered into a Memorandum of Understanding setting forth the general framework for cooperation in the enforcement of fair lending laws. Both the CFPB and the DOJ have authority to enforce the Equal Credit Opportunity Act, which prohibits creditors from discriminating against applicants in credit transactions based on the applicant’s race, color, religion, and national origin, among other things. Key components of the MOU include: information sharing and confidentiality; joint investigation and coordination; and referral and notice procedures.

In conjunction with the announced coordination with the DOJ, the CFPB released its annual Fair Lending Report to Congress detailing its efforts to fulfill the Dodd-Frank mandate to ensure “fair, equitable, and nondiscriminatory access to credit.” As a follow-up to its report on the private student loans market (see July 24, 2012 Alert), the CFPB highlighted the potential fair lending implications from the use of “cohort default rates”—a measure of the federal student loan repayment history of a particular group or “cohort” of borrowers—to set school eligibility cutoffs raised fair lending concerns. In particular, the report noted that racial and ethnic minorities are disproportionately concentrated in schools with higher cohort default rates.

CFPB Issues Statement of Intent for Sharing Information with State Regulators

The CFPB outlined best practices for sharing information with state banking and financial services regulators with which it has entered into an MOU. In the Statement of Intent, the CFPB noted that the list provided was not exhaustive, and that the CFPB would use its best efforts to share information. Some of the means of information sharing include: (1) coordinating with, and provide nonbank supervision examination schedules to state regulators; (2) providing access to consumer complaint information on a systematic basis; and (3) sharing Registered Mortgage Loan Originator information. The CFPB also noted that, in connection with enforcement activities, it will, among other things, provide reasonable notification to state regulators prior to initiation of a public enforcement action, consult with regulators during the enforcement process, and engage in regular consultation to identify mutual enforcement priorities.

CFPB Seeks Public Comment on Its Proposed Information Collection on Financial Education Program Evaluation

The CFPB issued a notice and request for comment concerning its proposed “Clearance for Financial Education Program Evaluation.” The CFPB’s Office of Financial Education is responsible for developing and implementing strategies to increase consumers’ financial literacy and ability to make informed financial choices. The OFE seeks to collect information designed to identify financial education programs with a focus on “increasing household non-retirement savings and/or reducing financial distress.” Written comments are due by January 7, 2013 and a copy of the proposed collection is available by writing to the address contained in the notice.

FinCEN Seeks Comment on Proposal to Amend the Definitions of “Funds Transfer” and “Transmittal of Funds”

FinCEN issued a notice of proposed rulemaking to amend the definitions of “funds transfer” and “transmittal of funds” under the regulations implementing the Bank Secrecy Act, in light of recent amendments to the Electronic Fund Transfer Act and its implementing regulation, Regulation E. Under the current BSA regulations, namely the Recordkeeping and Travel Rules which impose certain recordkeeping and reporting requirements on funds transfers and transmittal of funds of $3,000 or more, transactions governed by the EFTA are excluded from the definitions of “transmittal of funds” and “funds transfer.” When the BSA regulations were initially implemented, the exclusion of EFTA-covered transactions worked because the EFTA only covered certain electronic funds transfers, and the BSA and EFTA had different goals—recordkeeping and reporting, and consumer protection, respectively.

The Dodd-Frank Act amended the EFTA to include consumer protections for remittance transfers, which are broadly defined to include transactions that typically were governed by the BSA.  Thus, under the current regulatory framework, these transactions would no longer be subject to the Recordkeeping and Travel Rules’ requirements.  Accordingly, FinCEN’s proposed rule seeks to modify the definitions of “funds transfers” and “transmittal of funds” to exclude electronic fund transfers as defined in Section 903(a)(7) of the EFTA.  The proposed change would allow remittance transfers that do not meet the definition of electronic fund transfer to remain in the regulatory domain of the BSA.

At issue is the effect recent amendments to the EFTA will have the transactions historically governed by the BSA.  Specifically, the Dodd-Frank Act amended the EFTA to include a broad definition of “remittance transfers,” such that certain transactions, such as international funds transfers sent by consumers through banks and cash-based or account-based transmittal of funds sent by consumers through money transmitters will no longer be considered “funds transfer” and “transmittal of funds” under the BSA.  Comments on the proposed rule must be received by January 25, 2013.

FTC Proposes to Narrow Creditor Coverage in Identity Theft “Red Flags” Rule

The FTC announced its interim final rule amending the FCRA’s “red flags” rule, to reflect changes to the definition of a “creditor” in the Red Flag Program Clarification Act of 2010.  The term, “creditor,” was previously defined, by reference to the Equal Credit Opportunity Act’s definition of creditor, which is defined broadly. The new rule limits the definition by narrowing the definition to include “ECOA creditors” who regularly and in the ordinary course of business engage in at least one of the following types of conduct:

  • Obtain or use consumer reports, directly or indirectly, in connection with a credit transaction;
  • Furnish information to consumer reporting agencies in connection with a credit transaction; or
  • Advances funds to or on behalf of a person, where the person is obligated to pay or the funds are secured by certain property, such as a car title.

In addition to limiting the scope of coverage for creditors, the Red Flag Program Clarification Act of 2010 also gives the FTC and other banking agencies, the authority to determine whether to include any other type of creditor that offers or maintains accounts that are subject to a reasonably foreseeable risk of identity theft. The FTC noted that advanced notice and commentary was not necessary because the rule sought to codify the amended statutory definition, and any delay would result in uncertainty about the red flags rule’s application. The rule is effective February 11, 2013.

FTC Targets Debt Relief Agency

The FTC announced it has entered into a settlement agreement shutting down a debt relief services company focused on distressed auto loan borrowers. The FTC alleged that the company made false promises that it could obtain loan modifications and prevent repossession of their vehicles. According to the settlement agreement, the company collected fees while doing nothing to actually obtain modifications and stonewalled customers who sought refunds. In certain instances, the company allegedly instructed borrowers to stop payment and cease communication with their lenders after retaining its services. The settlement agreement also enjoins the company’s principal from engaging in debt relief service activities and imposes a civil money penalty of approximately $362,000.

Eleventh Circuit Holds Bank May Be Liable to Consumer in Fraudulent Funds Transfer Suit Based on Strict Application of Funds Transfer Agreement Terms

The United States Court of Appeals for the Eleventh Circuit issued an opinion addressing a bank’s obligations to adhere to an agreed upon security procedure prior to a funds transfer. Plaintiff filed suit against defendant to recover monies transferred, in an allegedly fraudulent payment order, to an individual in a foreign country on the grounds that defendant failed to comply with the agreed-upon security procedure.  The lower court granted judgment for defendant based upon language in the governing funds transfer agreement between it and plaintiff which set forth a specific security procedure for authenticating requests for funds transfer. The funds transfer agreement between defendant and plaintiff contained language that the bank “may use…any other means to verify any payment order or related transaction.

Interpreting Florida’s analog to Article 4A of the UCC, which governs practices for transfers of customer funds upon electronic or written orders, in the event of a fraudulent or unauthorized transfer, the Eleventh Circuit rejected the lower court’s interpretation of the “may use…any other means” language.  Noting that such language did not modify or supplant the steps called for by the security procedure itself, the Court held that the language did not amount to “an agreement by [plaintiff] that the bank had the power, at its sole discretion, to select any security procedure as long as the procedure was commercially reasonable.” Moreover, the Court dismissed the bank’s argument that the agreed-upon procedure, was in fact a “security procedure” under Florida law, which, along with Article 4A of the UCC, creates a safe harbor against liability for fraudulent transfers where a bank can demonstrate that it adhered to a pre-agreed verification process prior to completing the transaction.

While limited on its face to a question of Florida law, the reasoning behind the Eleventh Circuit’s ruling is likely of broader import in that it adopts a strict and narrow interpretation of the terms of a fund transfer agreement, holding that a bank cannot rely on the loss-shifting provisions of Article 4A unless it adheres strictly to the security procedures set forth in the agreement. The opinion thus weighs against arguments commonly made by bank defendants in support of loss-shifting where they may have failed to adhere strictly to the defined security procedures but nonetheless applied commercially reasonable means of authenticating a funds transfer request.