Consumer Financial Services Alert - May 14, 2013

In coordination with the Department of Justice, the CFPB filed a complaint in the United States District Court for the Southern District of New York against two debt-relief service companies alleged to have violated the FTC's Telemarketing Sales Rule and engaged in deceptive and unfair practices in violation of the Consumer Financial Protection Act. According to the CFPB, the two debt-relief companies collected upfront fees for debt relief services, gave false statements about the fees and misled consumers. In particular, the CFPB alleged that many consumers received “zero or scant” benefit from the companies. The CFPB also alleged that the companies instructed consumers to cease communications with their creditors, when, in fact, the companies never contacted creditors on behalf of the consumers. More seriously, and the cause of referral to the DOJ, the CFPB alleged that the individuals engaged in criminal conduct by impersonating a government agency to induce a higher volume of sales calls from consumers who incorrectly believed that the company offered a government program. The CFPB is seeking to permanently enjoin the companies from continuing their operations and is asking the court to award restitution and civil money penalties and “order disgorgement of ill-gotten profits.”

This, along with the CFPB’s previous TROs and subsequent preliminary injunction of mortgage relief companies (see December 11, 2012 Alert), illustrates the range of measures available to the CPFB in its efforts to combat fraud in diverse aspects of the consumer financial services sector. Notably, in announcing the action, Director Richard Cordray stated that the Dodd Frank Act directed the CFPB to “root out unfair, deceptive, or abusive acts or practices in connection with consumer financial products and services.”

The CFPB issued a final rule that amends and finalizes its international remittance transfer rule. This final rule modifies earlier final rules issued by the CFPB in February, July, and August 2012 (see August 7, 2012 Alert). This rule amends three specific areas: (1) makes optional, in certain circumstances, the requirement to disclose fees imposed by a designated recipient’s institution; (2) makes optional the requirement to disclose taxes collected by a person other than the remittance transfer provider; and (3) revises certain aspects of the error resolution provisions. In particular, the rule amends Regulation E to no longer require remittance transfer providers to disclose "non-covered third party fees," which are "fees imposed by the designated recipient’s institution for receiving a remittance transfer into an account except if the institution acts as an agent of the remittance transfer provider." Instead, the rule requires remittance transfer providers to include disclaimers in the required disclosures notifying the recipient that he or she may receive less than the disclosed total due to fees and taxes. The disclaimers must be in language substantially similar to the language in the model forms.

The error resolution procedures amendments make it so a remittance transfer provider is not liable for the cost of funds that cannot be recovered because the sender provided the wrong account number or recipient institution identifier. To be eligible for this exemption, the provider will be required to: (1) demonstrate the sender provided the wrong account number or recipient institution identifier; (2) have used reasonably available means to verify that the recipient institution identifier provided by the sender was correct; (3) disclose that the sender could lose the transfer amount if an incorrect account number or recipient institution identifier is provided; and (4) use reasonable efforts to recover the amount. In addition, the error must have resulted in the amount being deposited into an account other than the designated recipient’s. This final rule, along with the remainder of Regulation E’s remittance transfer rules, are effective on October 28, 2013.

The CFPB is proposing to temporarily delay the June 1, 2013 effective date of a prohibition on creditors financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling, which was originally adopted in its final rule governing practices for the origination of consumer mortgage loans in January 2013 (see January 22, 2013 Alert). The final rule addressed loan originator compensation; qualifications of, and registration or licensing of loan originators; compliance procedures for depository institutions; mandatory arbitration; and the financing of single-premium credit insurance. The proposed temporary delay of the effective date of the prohibition on creditors financing credit insurance premiums in the final rule will allow the CFPB to clarify the prohibition’s applicability to transactions other than those in which a lump-sum premium is added to the loan amount at closing.

The final rule generally prohibited creditors from financing any premiums or fees for credit insurance (i.e., credit life, credit disability, credit unemployment, credit property insurance) in connection with any residential mortgage loan or with any extension of credit under an open-end consumer credit plan secured by a consumer’s principal dwelling. However, the prohibition does not apply to credit insurance for which the premiums or fees are calculated and paid in full on a monthly basis or to credit unemployment insurance for which the premiums are reasonable, the creditor receives no compensation, and the premiums are paid pursuant to a separate insurance contract and are not paid to the creditor’s affiliate.

In the lead up to the adoption of the final rule, consumer groups sought clarification on the prohibition’s applicability where credit insurance premiums are charged periodically, rather than as a lump-sum added to the loan amount at closing. In response, the CFPB attempted to clarify the applicability of the prohibition to the periodic premiums in the preamble to the final rule. However, this only drew comments from the industry that the text of the prohibition provision and the preamble left substantial uncertainty about the applicability of the prohibition on credit insurance products charged on a periodic basis. To address these concerns, the CFPB will issue a new proposal seeking further comment on the provision in June 2013, and in the interim is now proposing to temporarily delay the effective date of the provision due to the concern that creditors could face uncertainty about whether and under what circumstances credit insurance premiums may be charged periodically in connection with covered consumer credit transactions secured by a dwelling. The CFPB anticipates delaying the effective date only as long as necessary for any clarifications to be proposed, finalized and implemented, and is soliciting comments on what the new effective date should be. Comments on the proposed delay must be received by May 25, 2013.

The CFPB released additional compliance guides to assist small creditors in complying with the Home Ownership and Equity Protection Act rule, the ECOA valuations rule, and the rules on appraisals for higher-priced mortgages under TILA all finalized by the CFPB in January 2013 (see January 22, 2013 Alert). The guides are intended to be an "easy-to-use summary" of the rules and highlight issues that small creditors may face when implementing the rules. The guides also provide implementation and compliance considerations for small creditors. For example, the CFPB noted that when mapping out a compliance plan, in addition to the obligations under the rules, the compliance plan may: (1) identify affected products, departments and staff; (2) identify the business-process, operational and technology changes that will be necessary for compliance; (3) identify impacts on key service providers or business partners; and (4) identify training needs.

In conjunction with its field hearing on student loans, the CFPB released a report analyzing public comments submitted in response to its request for information on its Initiative to Promote Student Loan Affordability (see March 5, 2013 Alert). The CFPB sought and received the public’s feedback on questions such as how student loan burdens may impact the broader economy, how distressed borrowers manage their student loan obligations, and what options currently exist for borrowers to lower their monthly payments on student loans. The report discussed three general themes of the comments received: (1) the potential impact of student debt burden, (2) recent interventions in the student loan market, and (3) developing affordable loan repayment options. For example, the CFPB received comments about the impact of high student debt on borrowers including limiting a borrower’s ability to take on new financial obligations. In particular, at the hearing, Director Richard Cordray noted the economic implications of student loan debt on homeownership, small business development and retirement savings. In addition, commenters suggested a number of options for policymakers to encourage affordable repayment options on private student loans. For example, commenters suggested restructuring private student loans to offer similar repayment options as those available for federal student loans, incentivizing a refinance market, and increasing loan forgiveness options for certain borrowers, such as members of the military and those employed in public service. The CFPB noted that the comments it received were consistent with and supplement concerns previously raised by the CFPB and other monitors of the financial system.

The Consumer Advisory Board will host a meeting on May 15-16, 2013 to discuss challenges and opportunities faced by new Americans in the consumer marketplace. Agenda topics include the CFPB international remittance rule, payday loan and deposit advance products (see April 30, 2013 Alert), senior designations (see April 30, 2013 Alert), and the launch of a Spanish version of the CFPB website. Consumers are invited to join by sending an RSVP to the CFPB.

The CFPB's Office of Servicemember Affairs released its Semi-Annual Complaint Report providing a "snapshot" of the complaints it has received from servicemembers, veterans, or their spouses and dependents from January 1, 2012 through December 31, 2012. The report noted that mortgage-related issues, (e.g., loan modification, collection and foreclosure), credit card, and credit reporting issues (e.g., inaccurate information on credit report) were most frequently the subject of complaints; while vehicle or consumer loan issues were least frequently the subject of complaints by servicemembers.

The CFPB announced the unveiling of its policy recommendations for youth financial education, Transforming the Financial Lives of a Generation of Young Americans, directed to state and local entities for implementation. In announcing the policy recommendations, Director Richard Cordray stated that the CFPB hopes "to spark a national conversation about youth financial capability." The recommendations come as part of an effort to combat the lack of sufficient understanding of major decisions individuals are confronted with in the consumer financial marketplace, by focusing on young people and seeking to make financial education a fundamental element of basic education. The recommendations include:

• Introducing key financial education concepts early and continuing to build on that foundation consistently throughout the K-12 school years. Additionally, the CFPB encourages states to make a stand-alone financial education course a graduation requirement for high school students.
• Including personal financial management questions in standardized tests.
• Providing opportunities throughout the K-12 years to practice money management through innovative, hands-on learning opportunities.
• Creating consistent opportunities and incentives for teachers to take financial education training with the express intention of teaching financial management to their students.
• Encouraging parents and guardians to discuss money management topics at home and provide them with the tools necessary to have money conversations with their children.

The recommendations are intended to build on some of the practices currently underway, which include teaching some form of financial education in schools, bank-at-school programs, youth savings accounts programs, non-school based learning, online teaching tools and resources, and additional experiential learning opportunities.

The FHFA announced that GSEs must limit their future mortgage acquisitions to loans that meet the requirements for a qualified mortgage under the CFPB’s qualified mortgage and ability-to-repay rules, including loans that meet special or temporary qualified mortgage requirements and mortgages that are exempt from the ability-to-repay requirements. As a result, beginning January 10, 2014, the effective date of the CFPB’s ability-to-repay and qualified mortgage rules (see January 10, 2013 Alert), Fannie Mae and Freddie Mac will no longer purchase loans that are subject to the ability-to-repay rule if the loan is not fully amortizing, has a term in excess of 30 years or generally has points and fees in excess of 3% of the total loan amount.

Both Fannie Mae and Freddie Mac will continue to purchase loans that meet the requirements of their respective selling guides. In determining whether a loan is a qualified mortgage, the GSEs will rely on a lender’s representations and warranties. The GSEs will also be determining whether changes will be made to their post-purchase file review process, repurchase requirements, and the required representations and warranties. Both Fannie Mae and Freddie Mac issued lender letters highlighting the changes.

HUD announced that it has settled claims alleging a bank violated the Fair Housing Act by requiring a home loan applicant to return to work and obtain a letter from her employer detailing her leave of absence before the bank would approve the application. The terms of the settlement require the bank to pay $18,000 to the applicant, provide fair lending training to its loan officers and underwriters and adopt parental leave guidelines. The bank also agreed to take additional actions as it determines may be needed to promote fair lending and ensure compliance with the Fair Housing Act. This is the second such HUD settlement involving pregnancy discrimination (see February 19, 2013 Alert) and highlights the renewed focus of federal regulators on fair lending discrimination (see March 5, 2013 Alert discussing CFPB’s focus on fair lending issues).