Consumer Financial Services Alert - July 23, 2013

The Senate voted to confirm Richard Cordray as the Director of the CFPB. Mr. Cordray has served as acting director of the CFPB since his recess appointment in January 2012. He was re-nominated by President Obama to obtain Senate consent at the end of 2013 before his recess appointment expired. In speaking on his confirmation, Director Cordray stated that his confirmation brought "added certainty to the industries [the CFPB] oversee[s]."

The CFPB issued two bulletins addressing debt collection practices in response to practices observed by the CFPB during supervisory examinations and enforcement investigations. In announcing the bulletins, Director Richard Cordray noted that "[t]hese bulletins make clear that it doesn’t matter who is collecting the debt—unfair, deceptive, or abusive practices are illegal." The first bulletin describes conduct in the collection of consumer debt that could constitute unfair, deceptive or abusive acts or practices. The bulletin provides a "non-exhaustive list" of conduct considered to be unfair, deceptive and/or abusive acts or practices that the CFPB intends to "watch closely." Such conduct includes: misrepresenting to consumers that their debts will be waived or forgiven if they accepted a settlement offer, when the company does not, in fact, forgive or waive debt; misrepresenting whether information about a payment or nonpayment would be furnished to a credit reporting agency; or falsely representing the character, amount or legal status of the debt (e.g., falsely representing who owns the debt, the amount of the debt or the legal status of the debt).

The second bulletin provides guidance to creditors, debt buyers and third-party debt collectors about compliance with the Fair Debt Collection Practices Act and the Dodd Frank Act, which among other things, contains prohibitions on unfair, deceptive, or abusive acts or practices. Of considerable concern to the CFPB were claims made by debt collectors, which the CFPB defined as creditors, debt buyers, and third-party debt collectors, when making representations about the impact that payments of debts have on credit reports and scores. The CFPB noted that debt collectors often make "material representations intended to persuade consumers" to pay debts about improvements to a consumer’s credit score, credit report, creditworthiness, or the receipt of credit or more favorable credit terms from a lender. The CFPB noted that these type of "potentially deceptive claims are a matter of significant concern to the CFPB," and as such, debt collectors should take steps to ensure that such statements are not deceptive. Finally, the CFPB noted that in the course of its supervision activities and enforcement investigations, it plans to review communication materials, scripts, training manuals and other documentation to determine whether debt collectors are engaged in such conduct.

Testifying before the Senate Subcommittee on Financial Institutions and Consumer Protection, the CFPB’s Assistant Director of the Office of Deposits, Cash Collections, and Reporting Markets, Corey Stone discussed "three important challenges to debt collection" that the CFPB intends to focus on, which include: (1) medical and student debt; (2) the development of clear standards for data integrity and record-keeping in the debt collection market and (3) the age of the Fair Debt Collection Practices Act. In particular, Mr. Stone noted that the FDCPA was written prior to the use of cell phones, text messaging, e-mail, voicemail and faxes and such communication methods are "being used [] by some debt collectors to reach consumers in ways that can compromise both dignity and privacy." As a result of the changing technology and tactics by debt collectors, Mr. Stone testified that the CFPB intends to work with the FTC and Federal Communications Commission to establish clearer guidelines on the use of such communication methods by debt collectors. Mr. Stone also raised concerns about the integrity of information used to collect debts due to lost or changed information when a debt is assigned or sold. He noted that there was recent consensus at a CFPB roundtable "about the need for robust national documentation standards and the need to maintain the accuracy of information used to collect debts," which the CFPB will take into consideration as it moves toward a debt collection rulemaking process.

The CFPB finalized its amendments to the mortgage rules clarifying and making technical amendments to the ability-to-repay and mortgage servicing rules it finalized in January 2013 (see January 10, 2013 Alert for discussion of ability-to-repay rule and January 22, 2013 Alert for discussion of mortgage servicing rules). As highlighted in the April 30, 2013 Alert, the finalized amendments clarifies and make technical changes to several provisions in the rules. First, the CFPB clarified the extent to which Regulation X, the implementing regulation for RESPA, preempts state regulation. In particular, the CFPB clarified that Regulation X does not “occupy the field” of regulation or prohibit states from legislating or regulating on the same subject matter so long as state law does not conflict with Regulation X. Second, the CFPB specified that the implementation dates for the adjustable-rate mortgage provisions hinged upon when the first rate adjustment notice was required to be provided. For example, under the requirement that the rate adjustment notice be issued between 210 and 240 days before the first rate-adjusted payment is due, “servicers will not be required to provide the [] notice when such payment is due 209 or fewer days from the effective date.” Third, the CFPB clarified that construction loans, bridge loans and reverse mortgages are excluded from the ability-to-repay requirements and, to prevent a gap in coverage that would have resulted from the ability-to-repay rule, the CFPB temporarily amended, from June 1, 2013 to January 9, 2014, the escrows rule to ensure that construction loans, bridge loans, and reverse mortgages are excluded from the ability-to-repay requirements (see May 28, 2013 Alert). Fourth, the CFPB clarified that three types of mortgage loans will not be considered in determining small-servicer status: (1) loans voluntarily serviced for an unaffiliated entity; (2) reverse mortgages and (3) mortgage loans secured by a consumer’s interest in timeshare plans. The CFPB also confirmed that the definition of “mortgage loans” as used in the requirements governing periodic statements, refers only to “closed-end consumer credit transactions secured by a dwelling.” Fifth, the CFPB clarified that the rules granting qualified mortgage status to loans eligible for purchase or insurance by a GSE or the FHA only incorporated those GSE and FHA rules that had an impact on the borrower’s ability-to-repay—rules that are “wholly unrelated to credit risk or the underwriting of the loan” are not relevant to determination of qualified mortgage status.

Finally, and of import, the CFPB issued substantive revisions to Appendix Q of the mortgage rules to facilitate compliance with the ability-to-repay requirements. For example, the CFPB amended Appendix Q’s calculation of debt-to-income ratio to reduce the extent to which creditors must predict future income. The CFPB also replaced a requirement in the rules that creditors assess the borrower’s qualifications for, training for, and education applicable to a job in predicting probability of future employment. As amended, the requirements under the ability-to-repay rule require only that the creditor examine the borrower’s “past and current employment.”

The CFPB announced that it and five other federal regulators—the FRB, FDIC, FHFA, NCUA, and OCC issued a proposal to amend Regulation Z, the implementing regulation for the Truth in Lending Act, with regard to appraisal requirements for a subset of higher-priced mortgage loans. The proposal seeks to create exemptions from certain appraisal requirements for higher-priced mortgage loans. Under the rule, a creditor that makes a higher-priced mortgage loan must obtain a written appraisal report, prepared by a licensed or certified appraiser, based on a physical inspection of the interior of the property. The rule also requires creditors to provide applicants with a copy of the appraisal at least 3 days prior to the closing date at no charge to the applicant and to provide the applicant with a statement that any appraisal prepared for the mortgage is for the sole use of the creditor and that the applicant may choose to have a separate appraisal conducted at the applicant’s expense. The proposal seeks to exempt three types of higher-priced mortgage loans from these appraisal requirements, which include: (1) loans of $25,000 or less, (2) certain "streamlined" refinancings and (3) certain loans secured by manufactured housing. The agencies seek comment on several areas within the proposal. For example, the agencies seek comment on the valuation practices of private creditors for refinanced loans where the private owner or guarantor remains the same and the loans are not sold to a GSE or insured or guaranteed by a federal government agency, including how often no valuation is obtained. Comments must be received by September 9, 2013.

The CFPB announced the following new hires among its senior staff: Christopher Angelo, who recently served as Senior Advisor to Director Richard Cordray, will now serve as Chief of Staff; Nora Eisenhower will serve as the new Assistant Director for the Office of Elder Americans; Sartaj Alag, who previously worked in the Office of Consumer Response, will return as the Chief Operating Officer; and Laurie Maggiano, former Director of Policy in the Office of Homeownership Preservation at the Department of Treasury, will serve as the Program Manager for Servicing and Securitization Markets in the Division of Research, Markets and Regulations.

In coordination with the CFPB and the Department of Justice, the Federal Reserve Board of Philadelphia announced a webinar on August 6, 2013 to discuss fair lending considerations related to indirect auto lending programs. The CFPB recently issued guidance detailing its expectations of indirect auto lenders in ensuring compliance with the Equal Credit Opportunity Act and its implementing regulation, Regulation B (see April 2, 2013 Alert). For example, the CFPB recommended that indirect auto lenders take steps to ensure their compensation and markup policies comply with ECOA and Regulation B. The webinar will cover the CFPB’s bulletin, the definition of a "creditor" under ECOA, emerging issues and examination procedures, among other topics.

The CFPB has released its first annual report highlighting its activities and strategy to improve the financial literacy of consumers as mandated by the Dodd-Frank Act. As noted in the report, the CFPB has a three-part strategy to financial literacy: (1) research; (2) education initiatives and (3) outreach to stakeholders able to assist the CFPB in reaching the public and "fine-tuning" its approaches. The report highlighted the CFPB’s "AskCFPB" initiative, its quantitative evaluation of financial coaching programs, pilot programs and outreach efforts. For example, the CFPB noted its visits to military installations and units as well as its series of conference calls discussing student loan complaints with student groups, colleges and universities and consumer advocates among other stakeholders.

In conjunction with the release of its report, the CFPB announced that it was launching a financial literacy program designed to provide direct financial coaching services to transitioning veterans and economically vulnerable consumers. Beginning in 2014, the CFPB will place these financial coaches in strategic locations—locations where consumers receive other services (e.g., job training or housing counseling centers). The CFPB will also select various local organizations to "integrate and oversee" the financial literacy program for economically vulnerable consumers.

The CFPB published its baseline review modules for examination of compliance with the Equal Credit Opportunity Act. The modules will be used by examiners during ECOA baseline reviews to identify and analyze risks of ECOA violations and to inform fair lending prioritization decisions for future CFPB reviews, among other uses. The examination procedures contain the following six modules, which may be used in various combinations during examinations: (1) fair lending supervisory history; (2) fair lending compliance management system; (3) risks related to mortgage lending policies and procedures; (4) risks related to mortgage servicing; (5) risks related to auto lending and (6) risks related to other products.

Reflecting ongoing concern about third-party collection of debts originated by national banks and federal savings associations, the OCC issued a statement for congressional testimony, titled “Shining a Light on the Consumer Debt Industry.” The statement sets forth the policies and procedures that banks should have in place relating to the sale and collection of charged-off debt such as: identifying types of accounts that should not be sold; ensuring purchase and sale agreements clearly define all parties’ roles and responsibilities; providing detailed documentation to the debt buyer at the time of purchase and performing due diligence as to third party buyers to ensure proper licensing, good standing, and to identify regulatory or other legal action pending against them.

The statement also provides best practices, including, among other things: establishing an oversight committee for the bank’s debt-sale activities; using debt-buyer scorecards to assess legal and reputational risk; maintaining and documenting accounts accurately; providing sufficient documentation; limiting resale of debt and evaluating debt-buyers’ use of litigation as a collection tool. The OCC further notes that it is developing supervisory guidance for large banks in managing their debt management practices, though the OCC provides no timeframe for issuing such guidance. The issue of debt collection management and practices has been the recent focus of several federal agencies including the CFPB as described above, and the FTC, which issued a similar statement in its testimony before the Senate Banking Committee.

Adding to the split among circuits, the United States Circuit Court for the Eighth Circuit held that providing written notice to a lender of intent to exercise the right rescind under the Truth in Lending Act is insufficient to preserve a borrower’s right to rescission when the borrower fails to also file suit during the statute’s three-year rescission period. In reaching its decision, the Court relied heavily on the Tenth Circuit’s reasoning in Rosenfield v. HSBC Bank, USA, 681 F.3d 1172 (10th Cir. 2012) (see June 12, 2012 Alert), noting that “[t]he nature of a statute of repose and the remedy of rescission, in addition to the uncertainties as to title that would likely occur if the right is not effectuated by court filing within three years of the underlying transaction, are each compelling reasons for” its holding. The Court also noted that its interpretation of rescission rights under TILA did not create dissonance between the statute and Regulation Z. According to the Court, Regulation Z requires “notice to the lender of an intent to rescind, and the statute requires that rescission be accomplished within three years or the right expires.” The Eighth Circuit ruling is a rejection of the CFPB’s interpretation of rescission rights under TILA. In amici briefs filed with the Tenth Circuit (see April 3, 2012 Alert) and three other circuits including the Third, Fourth and Eighth circuits, the CFPB argued that the rescission period under TILA only defines the time to notify the lender and not the time to sue the lender.

The United States District Court for the Eastern District of New York dismissed a class action alleging that a law firm hired to conduct foreclosures violated both the Fair Debt Collection Practices Act and recently enacted New York statutes requiring pre-foreclosure settlement conferences. Plaintiffs, homeowners facing foreclosure, alleged that defendant violated the FDCPA by failing to provide them with a request for judicial intervention form used to arrange the pre-foreclosure settlement conference.

Recognizing that “[n]ot every violation of state or city law amounts to a violation of the FDCPA,” the Court dismissed the claims as a matter of law, explaining that because the alleged activity did not violate a specific provision of the FDCPA, nor any analogous provision of New York law, the failure to provide the required form was not actionable as an unfair debt collection practice. The Court further noted its hesitation, under principles of comity, to rule that the FDCPA would subsume comparable provisions of New York law governing debt collection—particularly in light of the ongoing judicial foreclosure suits at issue while the federal case was pending, and the unsettled nature of the appropriate remedy for failing to provide the required form. The Court also dismissed the one state-law claim, alleging violation of a New York statute prohibiting “deceptive act[s] or practice[s],” declining supplemental jurisdiction, but noted that the dismissal was without prejudice to plaintiffs’ pursuit of such a claim in state court.

The United States District Court for the Middle District of Florida held that an online payday loan referral service, as well as entities operating out of the same office space that provided discount services, engaged in unfair and deceptive acts and practices in violation of Section 5 of the FTC Act. The FTC filed suit against defendants and sought injunctive relief alleging that defendants violated Section 5 of the FTC Act by debiting consumers’ bank accounts without their consent and by failing to disclose material information on their websites. The FTC alleged that during the loan application process for payday loans, the websites presented consumers with offers for a discount program (e.g., long-distance phone service) through banner ads and pop-up boxes. Consumers were charged varying monthly or annual fees for the discount programs. However, many consumers were unaware they enrolled in the discount programs rather than merely submitting an application for a payday loan.

Agreeing with the FTC that defendants "took advantage of financially distressed consumers," the Court found that defendants were engaged in unfair practices—unfair billing practices—because defendants’ practices resulted in substantial harm to consumers, consumers could not reasonably avoid injury due to the "confusing and misleading way the payday loan application process operated" and the harm to consumers was not outweighed by a countervailing benefit, as the vast majority of consumers never used the discount services. The Court also held defendants engaged in deceptive acts because they did not "adequately disclose to consumers that in addition to using consumers’ financial information in connection with payday loan applications, [they] would also use that information to charge the consumers for unrelated products and services." As a result, the Court issued a permanent injunction and awarded over $9.5 million in equitable relief, which represented defendants’ net revenue from the marketing activities.