Consumer Financial Services Alert - July 24, 2012

At a field hearing on credit reporting in Detroit, Michigan, Director Richard Cordray announced that the CFPB had adopted a final rule defining “larger participants” for consumer reporting agencies.  Under Section 1074 of the Dodd-Frank Act, the CFPB has authority to supervise nonbank “larger participant[s] in markets for other consumer financial products or services.”  In his prepared remarks, Mr. Cordray noted that the credit reporting industry “exerts a tremendous and growing influence over the ways and means of [consumers’] financial lives.” As a result of this influence, Mr. Cordray announced that the CFPB will gather data to determine how it can “best act to protect consumers” by focusing on: (1) recordkeeping and reporting practices of lenders, and quality and reliability testing and screening of information provided to credit reporting companies; (2) accuracy of assembly and maintenance of the information contained in the consumer credit reports; and (3) consumers’ experiences in disputing errors contained in their credit reports.

Under the final rule, which closely mirrors the February 2012 proposed rule defining “larger participants” of the consumer reporting and debt collection markets (see February 21, 2012 Alert), the CFPB will have supervisory authority over consumer reporting agencies with more than $7 million in annual receipts.  Under this definition, the CFPB’s supervision authority will reach 30 firms which account for 7% of market participants and 94% of industry receipts.  More information about the rule and its requirements can be found on the fact sheet.

The CFPB also released a consumer advisory on the consumer reporting industry, a list of credit reporting agencies, and answers regarding consumer reporting companies on the Ask CFPB database. The rule becomes effective September 30, 2012. The CFPB plans to release a rule defining “larger participants” for debt collection agencies soon.

The CFPB announced its first public enforcement action – a consent order against a bank alleging violations of Federal consumer protection laws for deceptive marketing of payment protection and credit monitoring products.  According to the consent order, the bank’s third-party service provider engaged in improper sales practices (e.g., misleading consumers by stating that the products would improve their credit score and result in credit limit increases, and referring to the payment protection product as a “back-up fund”).

The consent order calls for civil money penalties of $25 million to be deposited in a civil penalty fund, and up to $140 million in restitution to consumers.  The consent order also requires a compliance plan that must (1) address the manner in which marketing and solicitation of the products may occur; (2) develop scripts that clearly and prominently explain and accurately assess a customer’s eligibility for the products; (3) provide certain disclosures (i.e., charges for the product and cancellation policy); (4) mail a disclosure within 3 business days after the customer purchases the product; and (5) submit periodic statements and disclosures to the CFPB for review prior to implementation. The CFPB issued a consumer advisory and fact sheet on the consent order for the bank’s customers and a general consumer advisory on credit card fees.

The CFPB also issued a guidance bulletin setting forth a general warning to supervised institutions and its expectations for the marketing of add-on products. The CFPB expects institutions to “take steps to ensure that they market and sell credit card add-on products in a manner that limits the potential for statutory and regulatory violations and related consumer harm.”  Some of the steps highlighted include ensuring that marketing materials are not deceptive or misleading to consumers; that employee incentives or compensation do not provide an incentive for disseminating inaccurate information; and that credit card applicants are not required to purchase add-on products as a condition of obtaining credit.

The OCC also announced a consent order against the same bank for violations of Section 5 of the Federal Trade Commission Act.  The consent order provides for $35 million in civil money penalties and up to $150 million in restitution.

The CFPB and the Department of Education released a private student loan market study.  In its press release, the CFPB noted that the study generally found that the private student loan market has increased, but that underwriting standards have loosened, resulting in many private student loan borrowers struggling to repay their loans.  The study also found that private student loans are disproportionately used by undergraduate students attending for-profit colleges (over 42%, compared to 14% for all undergraduate students).  

Importantly, the study found potential fair lending issues in the current private student loan market.  In particular, the study noted that unlike traditional forms of credit, although the private student loan borrower lacks income and credit history, the loans are fully funded. This practice results in different standards to determine ability and willingness to repay. As such, “cohort default rates”—a measure of the federal student loan repayment history of a particular group or “cohort” of borrowers—are used to assist private student loan lenders in eligibility, underwriting and pricing decisions.  However, according to the study, the use of such rates may implicate fair lending issues under the CFPB’s disparate impact approach because racial and ethnic minority students are disproportionately concentrated in schools with higher cohort default rates.

To address the concerns arising from the study, the CFPB and the Secretary of Education made similar recommendations including:

• Requiring school certification of private student loans (e.g. affirmative certification from school that loan amount does not exceed student need);
• Modification and clarification of the definition of “private student loan” under the Truth in Lending Act; and
• A centralized database to access information about private student loans similar to the National Student Loan Data System provided to borrowers of Federal loans.

Both agencies stressed that a review of the Federal Bankruptcy Code is needed to determine if additional relief for borrowers in the private student loan market may be found there.  The agencies also noted that private student loans do not offer similar debt management or mitigation options that Federal student loans borrowers enjoy (e.g., forbearance, rehabilitation, or deferment).

The CFPB also released a fact sheet on its study of the private student loan market and announced a web tool in conjunction with the Department of Education to help borrowers who have defaulted on their student loans. The CFPB previously published public comments on borrower’s experiences and issued a notice and request for information on existing private student loan complaints (see June 26, 2012 Alert).

The CFPB published its spring regulatory agenda, listing topics that will be the focus of its regulatory efforts through May 31, 2013.  The agenda identifies topics of potential significance to the financial services industry, including timetables for expected actions.  For example, the CFPB is considering whether to propose additional requirements on loan servicers for early intervention and continuity of contact for troubled and delinquent borrowers.

In a letter to the CFPB, several members of the House Financial Services Subcommittee on Financial Institutions and Consumer Credit urged the CFPB to structure the qualified mortgage rule as a “strong legal safe harbor” as opposed to a rebuttable presumption. The letter pointed out the FRB’s statement in the preamble to the rule, which noted the “drawback” of treating a qualified mortgage as providing a rebuttable presumption of compliance because of the legal uncertainty and “little incentive to make the ‘qualified mortgage.’”  The letter warned of the possibility of restricting credit accessibility for borrowers should the rule not be structured as a legal safe harbor.

FinCEN announced the release of a study identifying thousands of instances where financial institutions, particularly banks and money services businesses, filed suspicious activity reports involving real estate title and escrow companies.  The purpose of the study, which found that structuring, false statement, and mortgage loan fraud were the primary activities reported, was to identify various types of activities and corresponding regulatory gaps.  “Persons involved in real estate closings and settlements” are listed as financial institutions for the purpose of the Bank Secrecy Act, but FinCEN has not defined who is included in this category, and current FinCEN regulations do not require real estate title and escrow companies to establish anti-money laundering programs or file SARs.  In an effort to close the gap, new regulations that require non-bank residential mortgage lenders and originators to establish anti-money laundering programs and file SARs must be complied with by August 13, 2012.

The FRB announced the release of examination procedures for abandoned foreclosures, which are foreclosure proceedings that are not completed after they have been initiated. The examination procedures cover safety and soundness and consumer compliance matters as part of the supervisory process, including notification to borrowers, communications, notification to local authorities and obtaining and monitoring collateral values.  One important concept identified in the examination procedures, is the idea that banking organizations should employ the same extensive methods in notifying borrowers of the abandoned foreclosures, as they use to contact borrowers in connection with payment collection activities.

The FDIC issued a Financial Institutions Letter cautioning insured depository institutions about passing deposit insurance assessment fees on to depositors, labeled as “FDIC fees,” “FDIC Insurance Premium” or some other similarly-described fee.  The FDIC’s concern is not with the passing on of the fee, which is allowed, but that by labeling them as such, insured depository institutions run the risk of disclosing supervisory information, such as their rating, or misleading consumers about the nature of the fees.  The FDIC also withdrew prior advisory opinions that pre-dated risk based pricing and allowed insured institutions to pass insurance costs on to depositors with notice that the cost was for that purpose.

The FTC announced that it will hold a summit to examine robocall problems.  The summit, which will be held on October 18, 2012 in Washington, DC, “will focus on exploring initiatives that could potentially be used to trace robocalls, prevent wrongdoers from faking caller ID data, and stop illegal calls.”  In the press release announcing the summit, the FTC noted that robocalls are the target of an enforcement crackdown by the FTC, and also that the FTC recently answered questions related to robocalls via Facebook and Twitter. The summit will be open to the public.

The GAO released a report on the regulatory oversight of the Servicemember Civil Relief Act, which provides protections to active duty servicemembers, in the foreclosure context.  Overall, the GAO found a lack of regulatory oversight by the federal banking agencies, and that servicemembers have lost some of the protections afforded to them under SCRA, such as interest rate caps and prohibition against foreclosures without a court order.  In particular, the study found federal banking agencies, the Federal Housing Administration, the Department of Veterans Affairs, and the Federal Housing Finance Agency do not share information on SCRA compliance amongst themselves.  Such sharing, according to the report, “could help them to more quickly identify compliance problems that may adversely affect servicemembers.” The report also noted the challenges to SCRA compliance cited by mortgage servicers (e.g., lack of clarity on military orders), and that federal oversight of SCRA compliance has been limited and varies by year, by federal regulator and by institution.  For example, the FDIC and the FRB reviewed a significantly higher percentage of institutions for SCRA compliance compared with the OCC.

The United States Court of Appeals for the Ninth Circuit dismissed a claim by plaintiffs, ATM cardholders, alleging that defendants violated the Sherman Act by colluding to artificially increase network interchange fees, and then pass those fees to plaintiffs as part of the defendants’ foreign ATM fee.  Relying on the seminal holding in Illinois Brick Co. v. Illinois, the Court held that because plaintiffs were indirect purchasers, they lacked standing to bring the claim.  431 U.S. 720 (1977). Under Illinois Brick, indirect purchasers cannot use a pass-on theory to recover damages.  In reaching its decision, the Court found that none of the Illinois Brick exceptions applied, which requires co-conspirators to fix the price paid, as plaintiffs did not allege that defendants fixed the foreign ATM fee.

The Department of Justice announced the second largest fair lending settlement—$175 million—in the Department’s history.  The DOJ investigated defendant’s alleged deceptive conduct amidst allegations that it had engaged in racial discrimination by steering African American and Hispanic borrowers into higher-cost subprime loan products, while similarly qualified white borrowers received prime loans. In its complaint, the DOJ alleged that defendant collected higher fees from its non-white borrowers as a result of this practice.  Under the terms of the settlement, the bank will pay $125 million to compensate borrowers who were victims of racial discrimination, as well as provide $50 million in direct down payment assistance to borrowers in communities around the country where the DOJ has identified large numbers of discrimination victims and which were hard hit by the housing crisis.

Fannie Mae recently launched its Know Your Options Customer Care program, a customer engagement strategy and training program for servicers, aimed at preventing foreclosures through consultative relationships with homeowners.  The program provides trainings, led by Fannie Mae personnel, for servicers’ call center employees and includes scripts for interactions with homeowners.  A key element of the program is the creation of a single point of contact in the call center for each homeowner.  According to reports by participating services, using a SPOC has resulted in a 20-30% increase in workouts.  The program is currently being implemented with 18 of Fannie Mae’s largest servicers, and the program training is now being offered through online webinars free of charge.