Consumer Financial Services Alert - February 5, 2013

Steve Antonakes was announced as the CFPB’s new Acting Deputy Director, following the departure of Deputy Director Raj Date on January 31, 2013. At the time of the announcement, Antonakes was serving as Associate Director of the Supervision, Enforcement, and Fair Lending Division; he will continue to perform the duties of that position in addition to his new duties as Acting Deputy Director.

The CFPB announced that it is temporarily delaying the effective date of the international remittance transfer rule that was scheduled to take effect on February 7, 2013, pending finalization of proposed amendments to the rule published on December 31, 2012 (see November 27, 2012 Alert). The proposal addressed three discrete issues related to foreign taxes and error resolution. The comment period on the proposal closed on January 30, 2013; the new effective date of the rule will be 90 days after the CFPB finalizes the proposal.

The CFPB published a Notice and Request for Information regarding financial products marketed to students through the colleges and universities they attend. Although the Credit Card Act of 2009 and CFPB regulations (see November 13, 2012 Alert) govern certain marketing practices on campuses by financial institutions, specifically with respect to credit cards, the CFPB is seeking to obtain more information about other financial products to determine whether students are "getting a good deal," and to better understand ways to promote good financial decision-making by younger consumers. The request seeks specific responses to issues such as: (1) what types of products are being offered; (2) how the products are offered; (3) what information about students the schools provide to the financial institutions; (4) what fees are being charged; and (5) what experiences students have had. Comments must be received by March 18, 2013.

The FFIEC issued proposed guidance regarding the use of social media by financial institutions and nonbanks. The proposed guidance does not impose any obligations, but instead seeks to make financial institutions and nonbanks aware of the potential risks involved with the use of social media. The proposed guidance defines social media as "a form of interactive online communication in which users can generate and share content through text, images, audio and/or video," which can include sites such as Facebook, Yelp, Flickr and LinkedIn, as well as virtual worlds and social games.

The proposed guidance outlines three categories of risk: (1) compliance and legal risks associated with marketing deposit and lending products, and facilitating the use of payment systems, specifically, as well as more general risks associated with privacy and anti-money laundering programs; (2) reputational risks related to fraud and brand identity and consumer complaints, among other things; and (3) operational risks arising from the use of information technology. The proposed guidance is seeking comments on other forms of or ways financial institutions use social media; other consumer protection laws and regulations potentially implicated by the use of social media; and technological or other impediments that may hinder compliance with the consumer protection legal framework. The comment period ends March 25, 2013.

The FRB issued guidance on internal audits to supplement its 2003 interagency policy statement and reflect changes in banking regulation. The supplemental policy mirrors and updates the 2003 framework and includes a new section on enhanced internal audit practices, that requires financial institutions to focus on all aspects of risk, ranging from risk analysis and risk tolerance, to ensuring that appropriate controls and infrastructure are in place to handle and respond to risk. The FRB noted that how the internal practices are implemented will affect an institution's safety and soundness, internal audit and consumer laws and regulations compliance assessments. The policy applies to "supervised institutions with greater than $10 billion in total consolidated assets."

The FTC has taken enforcement action in three cases against companies marketing debt reduction consulting services. In one case, the FTC settled with two California automotive debt consulting companies that advertised they could reduce borrowers’ monthly auto loan payments for a fixed up-front charge, with "a 100 percent money back guarantee." The complaint alleged the companies violated the FTC Act by communicating misleading statements on their websites and through telephone operators. As part of the settlement, defendants agreed to cease auto loan assistance business activities and to pay money damages of approximately $280,000.

The second FTC case was filed against a credit card debt consulting company that, according to the FTC, cold-called prospective customers and promised credit card debt reduction in exchange for an up-front payment that would be refunded if the promised debt reduction did not occur. According to the complaint, the company violated the FTC Act by falsely promising interest rate reductions, cost savings, and full refunds, and also by placing unauthorized charges on customers’ credit cards. The FTC further alleged the aforementioned conduct violated the "Telemarketing Sales Rule" and that the TSR was also violated by charging and collecting a fee in advance of providing the debt reduction service. The parties stipulated to a preliminary injunction placing the company in receivership, freezing the assets of the company and three individuals, and prohibiting future business activities.

The third FTC case recently resolved with a stipulated permanent injunction against a tax debt consulting service that permanently barred the company, its leader, and his spouse from providing debt relief services. The Court entering the injunction had previously placed the company in receivership and concluded it violated the FTC Act by misrepresenting both that it had previously secured tax debt reductions for thousands of customers, and that customers did in fact qualify for significant tax debt relief. The injunction prohibits defendants from engaging in any form of telemarketing or debt relief services, and also bans specific representations relating to any good or service. The Court imposed a $103.3 million money judgment against defendants. This sum included an $18.6 million dollar judgment against one defendant’s parents, who are alleged to have profited from, but not participated in, the tax debt relief scheme.

The FDIC recently announced eight new members of its Advisory Committee on Community Banking, which was formed in 2009 and provides advice on community bank policy and regulation. The eight new members are: Cynthia. L. Blankenship, Bank of the West; Leonel Castillo, American Bank of Commerce; Jane Haskin, First Bethany Bancorp., Inc.; Mark Hesser, Pinnacle Bank; James Lundy, Western Alliance Bank; Kim D. Saunders, Mechanics & Farmers Bank; David Seleski, Stonegate Bank; and Derek Williams, First Peoples Bank.

The FTC released its report on the first comprehensive study on debt buyers and sellers, titled “Structure and Practices of the Debt Buying Industry.” The study was commenced in December 2009 as the result of an increase in consumer complaints related to debt collection. The aim of the study was to gain insights into the selling and buying of debt, including the terms and conditions of purchase and sale agreements. The FTC mandated that 9 of the 10 largest debt buyers from 2008 participate in the study—the consumer debt purchased by these entities included medical, utility and mortgage debt, with the vast majority, 76%, being credit card debt. The report is broken into eight parts that focus on the legal framework for debt collection and debt buying; the study’s methodology; the history and current status of the debt buying industry, including the current debt buying process; an evaluation of the type and sufficiency of documentation that debt sellers provide to debt buyers; and the FTC's general conclusions.

Notably, the study found that most of the conduct that could result in consumer harm or complaints was the result of debt sellers’ failure to provide sufficient documents or time to request additional documents. For example, the report noted that many purchase and sale agreements limit the time periods that debt buyers can request additional documentation for free and, in the case of secondary debt sellers—buyers that purchase debts from resellers of debt—the agreements may not provide them any right to request additional documentation. Moreover, many agreements do not represent or warrant that the information provided is accurate, which could lead to incorrect amounts being collected or incorrect persons being contacted. The report recommends additional research on topics that were not covered by the study, such as debt collection litigation and the practices of small buyers of debt.

The FTC issued a report addressing privacy concerns and recommendations related to the use of mobile devices. The report, "Mobile Privacy Disclosures: Building Trust Through Transparency," acknowledges that the mobile market continues to grow and, with that growth, increasing concerns regarding data collection emerge. For example, according to the report, at least 57% of mobile application users have uninstalled an application due to privacy concerns. The report addresses all players of the mobile market, including application developers and developer trade associations, advertising networks, mobile platforms and analytics companies. While the report has specific recommendations for each segment of the industry, the overarching theme is that consumers must be provided with upfront disclosures that they can read and access prior to installing an application, and that applications must provide for affirmative express consent. The FTC also released a data security business guide for application developers.

The United States Court of Appeals for the District of Columbia Circuit ruled that the appointment of three National Labor Relations Board members was unconstitutional. The petitioner appealed a board decision on the ground that, because the members’ appointments were unconstitutional, the NLRB did not have a quorum, thus making the decision invalid. The Court addressed the question of whether the recess appointments were in fact "recess" appointments, within the meaning of Article II, Section 2, Clause 3 of the Constitution, which states that "[t]he President shall have Power to fill up all Vacancies that may happen during the Recess of the Senate, by granting Commissions which shall expire at the End of their next Session." Focusing on the terms "the Recess" and "happen," the Court held that the appointments were invalid.

In reaching its decision, the Court rejected the NLRB's argument that the term "the Recess" applied to intercession recesses. Relying on the generally accepted notion "that ‘Session’ refers to the usually two or sometimes three sessions per Congress," and that "the" is a definite article suggesting specificity, the Court held that "the Recess should be taken to mean only times when the Senate is not in one of those sessions." In support of its holding, the Court cited to the meaning of "recess" at the time the Constitution was drafted, as well as that for 80 years after the Constitution’s ratification, no President relied upon the clause to make an intercession recess appointment. Notably, the Court refused to adopt the Eleventh Circuit’s opinion in Evans v. Stephens, 387 F.3d 1220, 1224 (11th Cir. 2004), holding that "the Recess" includes intercession recesses. The Court undertook a similar analysis in reaching its conclusion that the NLRB vacancies did not "happen" during a recess.

The Court's opinion may have implications for the CFPB and Director Richard Cordray, who was a recess appointment, and whose appointment has also been challenged on similar constitutional grounds (see June 26, 2012 Alert).

The Illinois Department of Financial and Professional Regulation adopted final regulations under the Payday Loan Reform Act, which provide protections to servicemembers and their dependents. The regulatory restrictions are substantially taken from section 670 of the John Warner National Defense Authorization Act, 10 U.S.C. § 987, and include: a 36% annual percentage rate cap, mandatory written and oral disclosures, and a number of prohibitions on rolling over, renewing, repaying, refinancing or consolidating a loan with the same lender with the proceeds of another loan; requiring arbitration; using a check, financial account or car title as security for an obligation; requiring payment through allotments; prepayment penalties; and restrictions on provisions prohibiting prepayment. The final regulations are effective February 19, 2013.

The New Jersey General Assembly is considering a bill that would expand the definition of "an unlawful practice" under New Jersey's Consumer Fraud Act to include "making deferred deposit loans." The bill defines "deferred deposit loan" as "any transaction in which a short-term cash advance is made … in exchange for the consumer's personal check, in the amount of the cash advance plus a fee, whereby the lender agrees to defer depositing or presenting the personal check until a certain date." The bill would apply to lenders "wherever located," apparently targeting out-of-state lenders who solicit New Jersey residents to take out payday loans online, by mail, telephone, television, or by other means. A statement accompanying the bill recognizes that deferred deposit lending is already subject to usury restrictions and other laws, but that the proposed legislation would "expressly prohibit[] payday loans." Violations would be punishable by a penalty of up to $10,000 for a first offense and $20,000 for each subsequent offense.

A company that provides mortgage technology and processing services has reached a consent judgment to settle with another group of state attorneys general, as part of a nationwide settlement totaling $127 million and covering 46 states and the District of Columbia. Only Nevada continues litigation against the company. The company and its subsidiaries executed loan- and foreclosure-related documents on behalf of loan servicers under a "surrogate signing" arrangement. Allegedly, some documents were executed without authorization from the servicer, without verification of the documents’ accuracy, and without proper notarial acknowledgement—practices often referred to as "robo-signing."

The recent settlement included permanent injunctive relief barring surrogate signing and related practices, interference with legal services that foreclosure and bankruptcy counsel provide to loan servicers, and volume-based employee incentives. The company was further ordered to beef up oversight of its third-party business partners and implement a process for escalating consumer complaints. The settlement also required the company to identify documents executed from 2008 to 2010 "that may require remediation and to remediate those documents."