Consumer Financial Services Alert - April 30, 2013

The CFPB released its report and factsheet on the findings of its first major study on storefront payday and deposit advance loans. According to Director Richard Cordray, the CFPB found that there is "not much difference, from the consumer’s perspective, between payday loans and deposit advance loans" and the two products "have similar purposes and …similar usage by consumers." As detailed in the CFPB’s report, payday and deposit loan products can lead to a cycle of indebtedness for consumers. The CFPB noted its focus on "sustained use"—the long-term use of a short-term high-cost product evidenced by a pattern of repeatedly rolling over or consistently re-borrowing resulting in the consumer incurring a high level of accumulated fees. The CFPB found that a sizable share of payday loan and deposit advance users conduct transactions on a long-term basis. The CFPB attributed the "absence of significant underwriting" and "current repayment schedule" to the risk that some borrowers are caught in a cycle of high-cost borrowing over an extended period of time. For example, the report found that the median consumer conducted 10 transactions over a 12 month period and paid a total of $458 in fees, which did not include the loan principal.

The CFPB also announced it is separately analyzing the borrowing activity by consumers using online payday loans, and that it is already looking at bank and credit union deposit account overdraft programs that provide short-term, small-dollar immediate access to credit. Results from the CFPB’s study of overdraft practices are expected later this spring.

The CFPB finalized its rule amending Regulation Z, which implements a provision in the Credit Card Accountability Responsibility and Disclosure Act of 2009 that requires credit card issuers to evaluate a consumer’s ability to make payments based on his or her independent income or assets prior to opening an account. The changes are in response to findings that a significant number of otherwise creditworthy individuals may have been denied access to credit cards because their income is dependent upon their spouse or partner (see November 13, 2012 Alert). The rule removes references to an "independent" ability to pay from the relevant provisions and permit accessible income to be included in the evaluation of a consumer’s ability to pay, provided that the consumer has a reasonable expectation of access to the funds. Card issuers, however, must still consider the independent ability-to-pay standard for consumers under the age of 21 without a cosigner or similar party who is 21 years or older. The rule clarifies in the commentary the circumstances in which the expectation of access is deemed reasonable or unreasonable. For example, proceeds from student loans may be considered as current or reasonably expected income, but only to the extent those proceeds exceed the amount disbursed or owed for tuition and other expenses. Finally, the final rule clarifies that the independent ability-to-pay standard for consumers under 21 does not violate Regulation B’s prohibition against age-based discrimination.

The CFPB released a report on “senior designations” for financial advisers, which are credentials acquired by a variety of financial advisers and professionals to signify that they have special expertise in providing financial advice to seniors. The Dodd Frank Act requires the CFPB’s Office of Financial Protection for Older Americans to make recommendations to Congress and the SEC on, among other things, best practices for methods in which a senior can verify a financial adviser’s credentials. As detailed in the report, the CFPB found that the training requirements and quality control among senior designations is lacking. For example, the CFPB noted that there are more than 50 senior designations currently used all with a variety of training and requirements. The CFPB also noted that professionals who use senior designations are subject to varying regulatory regimes (e.g., the SEC, FINRA, and various state securities regulators) and there are no uniform rules for providing financial advice, services and products to seniors. The report makes recommendations to address dissemination of information to consumers and recommendations to address consumer confusion around senior designations and consumer protection. In particular, the report recommends that the SEC establish a centralized tool that would make it easy for seniors to verify and compare their financial advisers’ designations. The report also recommended that policymakers provide minimum standards of conduct for persons holding a senior designation (e.g., prohibitions on misleading use of certifications and setting standards for advertisements and customer communications).

The CFPB released a compliance guide to assist small creditors and their business partners in implementing the escrow rule finalized by the CFPB in January (see January 22, 2013 Alert). The escrow rule, which goes into effect June 1, 2013, is designed to ensure that consumers set aside funds to pay property taxes and other expenses, by lengthening the time creditors must collect and manage escrows for higher-priced mortgage loans. Similar to the compliance guide for small creditors on the ability-to-repay and qualified mortgage rules (see April 16, 2013 Alert), this guide is intended to be an "easy-to-use summary" of the escrow rule and highlights issues that small creditors may face when implementing the rule.

The CFPB issued final determinations regarding whether the Electronic Fund Transfer Act and its implementing regulation, Regulation E, preempt certain provisions of the unclaimed property laws of Maine and Tennessee. The EFTA and Regulation E grant the CFPB the authority to make a preemption determination as to whether any inconsistency exists between the EFTA and state law relating to the "expiration dates of gift certificates, store gift cards, or general-use prepaid cards." In August 2012, the CFPB issued a notice of its intent to make a preemption determination (see August 21, 2012 Alert) related to Maine’s Unclaimed Property Act and Tennessee’s Uniform Disposition of Unclaimed (Personal) Property Act.

Maine’s abandoned property law provides that gift obligations and stored-value cards are presumed abandoned two years after the later of December 31of the year in which the obligation arose or the most recent transaction involving the obligation or stored-value card occurred. However, Maine’s Office of the State Treasurer, which requested the preemption determination, interprets Maine’s law to require a holder to continue to honor a gift card even after the property is presumed abandoned under the law and may only request reimbursement from the state. The CFPB determined that Maine’s law was not preempted because it "does not interfere with consumers’ ability to use their gift cards at the point-of-sale for at least as long as they are guaranteed that right by the EFTA and Regulation E."

However, the CFPB determined that Tennessee’s gift card law was preempted by federal law because "the effect of the [Tennessee law governing abandoned property] is to permit cards and their underlying funds to expire sooner than is permitted under the EFTA and Regulation E." In particular, Tennessee’s abandoned property law provides, in relevant part, that property "is presumed abandoned if it remains unclaimed by the owner upon the earlier of: (1) the expiration date of the certificate; or (2) two years from the date the certificate was issued." Under Tennessee law, the property must be transferred to the state by May 1 of the following year and, pursuant to state law, the person that transferred a gift cards’ value may elect to honor the card and request reimbursement from the state. Unlike Maine’s law, Tennessee’s law does not require issuers to honor the gift card when the funds are presumed abandoned.

The CFPB, in alignment with its recent focus on student loans, will hold a field hearing on student loan borrowers in Miami, Florida on May 8, 2013. The CFPB previously released a report on private student loans (see October 16, 2012 Alert), its private student loan examination manual (see January 10, 2013 Alert) and issued a proposed rule defining "larger participants" of the student loan market (see March 19, 2013 Alert).

The CFPB issued a proposal to clarify and make technical amendments to the ability-to-repay and mortgage servicing rules it finalized in January (see January 22, 2013 Alert). The proposal seeks to clarify four provisions of the mortgage rules. First, the CFPB seeks to clarify the relation between Regulation X, the implementing regulation for RESPA, servicing provisions and state law. In particular, the CFPB proposes to amend the commentary to Regulation X to clarify that under the preemption provisions, Regulation X does not occupy the field of regulation of the practices covered by RESPA or Regulation X including mortgage servicing. Second, the CFPB seeks to clarify the small servicer exemption from certain servicing rules. For example, the proposal seeks to clarify which mortgage loans to consider in determining small servicer status and the application of the small servicer exemption with regard to servicer/affiliate and master servicer/subservicer relationships. The CFPB also proposed that three types of mortgage loans not be considered in determining small-servicer status: (1) loans voluntarily serviced for an unaffiliated entity, without payment; (2) reverse mortgages and (3) mortgage loans secured by a consumer’s interest in timeshare plans. Third, the CFPB proposes to clarify that a loan meeting eligibility requirements defined in agreements between the creditor and a GSE or government agency (such as HUD or VA) may be considered qualified mortgages, and seeks to provide additional clarification on how repurchase or indemnification demands by the GSEs or agencies may affect the qualified mortgage status of a loan. In particular, a repurchase or indemnification demand by the GSEs or a federal agency is not dispositive in determining the loan status as a qualified mortgage. Finally, the CFPB proposes to amend Appendix Q to facilitate compliance. For example, the proposal revises the criteria in Appendix Q for determining whether a consumer’s income is stable for purposes of debt-to-income ratio.

The CFPB announced the following changes in senior leadership: Catherine Galicia will serve as the new Assistant Director for Legislative Affairs; Lisa Konwinski, former Assistant Director for Legislative Affairs, will now serve as Deputy Associate Director for External Affairs; and Hubert Humphrey will step down as Assistant Director in the Office of Older Americans, and will remain with the CFPB to continue his work in this area as a Senior Liaison Officer. In addition, Dan Smith, former Director for Industry and State Relations at Freddie Mac, joins the CFPB as the first ever Assistant Director for the newly-created Office of Financial Institutions and Business Liaison. The Office of Financial Institutions and Business Liaison is intended to facilitate communication and collaboration between the CFPB and trade associations, businesses, and financial institutions.

The CFPB announced its policy for consulting with tribal governments about the development of new or amended policies, regulations, and programs that are directed at tribal governments or members. The policy addresses guiding principles (e.g., recognition of the unique legal relationship between tribes and the federal government), matters for tribal consultation (i.e., proposed new and amended policies that are expressly directed to tribal governments or members or have direct implications) and methods of consultation (e.g., outreach to exchange views about a policy or issue).

The CFPB issued a final rule implementing the requirement under the Dodd Frank Act to establish and maintain a civil penalty fund. The Dodd Frank Act requires the CFPB to deposit any civil penalty it obtains against any person in any judicial or administrative action under federal consumer financial laws. In announcing the rule, the CFPB noted that the rule "creates a transparent process for allocating money from the Bureau’s Civil Penalty Fund[.]" The final rule sets forth the CFPB’s interpretation of what types of payments to victims are appropriate and establishes procedures for allocating funds for payments to victims and for consumer education and financial literacy programs. For example, the rule establishes a Civil Penalty Fund Administrator and a Civil Penalty Fund Governance Board. The CFPB also released an overview of the civil penalty fund as well as FAQs on the fund. The CFPB is also seeking public comments on management of the fund. For example, under the rule, victims are entitled to payment from the civil penalty fund only if a final order in a CFPB enforcement action imposed a civil penalty for the violation that harmed the victim. The CFPB is seeking public comment on whether it should make payments to a broader category of victims—victims of any type of "activities for which penalties have been imposed even if no enforcement action imposed a civil penalty for the particular activities that harmed the victim.

The OCC and the FDIC issued proposed guidance highlighting concerns with deposit advance loan products. The guidance follows a report by the CFPB on consumer use of payday loans and deposit advances. While neither of the agencies have issued new rules for the offering of deposit advances, each agency’s guidance defines the elevated risk to financial institutions and consumers called out by the CFPB in its report, as including both safety and soundness supervisory risks as well as litigation and reputational risks. Reflecting the findings of the CFPB report, the agencies each note that, similar to payday loans, deposit advance loans bear a number of high-risk features, including high fees, very short, lump sum repayments often in advance of the customer’s other bills, and are routinely offered without due regard to the "fundamental and prudent banking practices" necessary to determine the customer’s ability to repay the loan while meeting other necessary financial obligations.

The guidance suggests that deposit advance loan products may bring a greater potential for harm to consumers while also presenting institutions with elevated safety and soundness, legal compliance, and consumer protection risks. The agencies identify several categories of risk: credit risk, legal risk, third-party risk and consumer protection. For example, the guidance concludes that borrowers who obtain deposit advance loans “may have cash flow difficulties” or “insufficient credit histories that limit other borrowing options,” thus imposing credit risk. This credit risk posed by such borrowers is amplified by repeated or continuous provisions of credit to high-risk individuals. The OCC’s guidance in particular notes that higher capital requirements will generally apply to loan portfolios that exhibit higher-risk characteristics, thereby potentially increasing the cost to an institution of offering deposit advance loans.

Despite these admonitions, the guidance neither calls for an outright ban on deposit advance loans nor does it announce the promulgation of new rules to govern their issuance. Instead, the guidance offers a number of specific recommendations intended to lessen the risks posed by deposit advance loans to consumers and institutions. Among the most significant of the recommendations, financial institutions are advised to: (1) review account histories of frequent users of the deposit advance product to ensure that the relationship is of sufficient duration to verify the regularity of a customer’s direct deposits; (2) mandate a “cooling off period” of at least one monthly statement cycle between deposit advances and (3) implement an ongoing review of credit eligibility on a customer-by-customer basis at least every six months.

The FRB also issued a statement on deposit advance products that largely mirrors the issues addressed in the OCC and FDIC guidance.

In advance of a workshop in November 2013, the FTC is seeking comments on the consumer privacy and security issues posed by the growing connectivity of consumer devices (e.g., cars, appliances, and medical devices). The FTC is concerned about how this interconnectivity, often referred to as "The Internet of Things," poses privacy and security risks with respect to data collection and sharing. The FTC is seeking public comment on a variety of topics, including, identifying: (1) the significant developments in services and products utilizing the connectivity, (2) the various types of technology enabling the connectivity, (3) benefits to consumers and (4) the unique privacy and security concerns associated with this type of connectivity. Comments are due to the FTC by June 1, 2013.

The Supreme Court of Minnesota invalidated a completed foreclosure sale because the mortgage assignment to the defendant, the foreclosing mortgagee, was not recorded until after that defendant commenced proceedings to foreclose by advertisement and sale—a non-judicial foreclosure. Plaintiff, the mortgagor, filed suit alleging, among other things, that defendant failed to strictly comply with the assignment recording requirement under Minnesota law. The trial court granted defendant’s motion to dismiss, finding that a "substantial compliance" standard applied to the statutory requirement for assignment recording prior to foreclosure. However, the appellate court reversed, ruling that a "strict compliance" standard governed all aspects of the foreclosure process, and therefore, the foreclosure was void. Defendant appealed.

In affirming the appellate court ruling, the Supreme Court of Minnesota held that the statute "unambiguously mandates strict compliance." Thus, the Court rejected defendant’s argument that recording the necessary assignments before the sale occurred—though after proceedings were underway—constituted substantial compliance with the statute. Ultimately, because defendant failed to strictly comply with the statutory requirement to record an assignment prior to initiation of foreclosure, the foreclosure was void. This case once again highlights the importance of complying with state-specific requirements for conducting foreclosures, which can vary widely from one jurisdiction to another.