Consumer Financial Services Alert - March 4, 2014

The CFPB announced it has entered into a consent order with a mortgage lender, engaged primarily in loss-mitigation refinancing, for violations of Section 8 of the Real Estate Settlement Procedures Act.  Section 8 of RESPA prohibits a person from paying or receiving a fee that has not been earned in connection with a real estate settlement service.  According to the CFPB, the mortgage lender, after ending its financing relationship with a hedge fund, continued to split origination and loss-mitigation fees on numerous loans with affiliates of the fund, even though none of the affiliates “provided financing or any other service for any of [the] mortgages.”

The terms of the consent order require the mortgage lender to pay a civil money penalty and to agree to not violate RESPA in the future. Importantly, the mortgage lender self-reported to the CFPB, consistent with the CFPB’s bulletin on Responsible Business Conduct (see July 9, 2013 Alert), that it believed it had violated RESPA by paying those fees, and the CFPB stated that it took the lender’s self-reporting into consideration in entering into the consent order. The bulletin on Responsible Business Conduct noted that “responsible conduct” includes self-policing, self-reporting, remediation and cooperation, and required a party to substantially exceed the standard of what is required by law in its interactions with the CFPB.

The CFPB announced that it had filed a complaint against a nationwide for-profit college’s student lending program for unfair and abusive practices. According to the CFPB, the college’s lending program extended in short-term loan to fill the gap between students’ costs of attendance and their federal financial aid. This credit took the form of a zero-percent loan that came due, in full, nine months later. The complaint alleged that when students were unable to make these payments, the college “coerced them into paying off their [short-term loan] with high-interest, high-fee private loans payable over ten years.” Such coercion purportedly took the form of “pulling students from class or withholding course materials or transcripts” for students who did not accept the ten-year restructuring. According to the CFPB, the terms of these loans were not adequately explained to the students, who sometimes did not realize they had even agreed to take out a loan.

The complaint further alleges that the college’s financial aid programs were “ostensibly run by third parties, but in reality controlled by” the college, which guaranteed the third parties against loss. The college was allegedly aware that 60% of the loans in question would default, but nonetheless, as it reported to investors, the college turned a profit. The CFPB, based largely on mystery shopping reports, alleges students with “low earnings” and “poor credit” were targeted and misled about post-graduation salary and employment prospects.

The CFPB is seeking a range of remedies including restitution, injunctive relieve, disgorgement, rescission, and civil money penalties.

The CFPB released a report on the findings of its first major study on credit reporting principally resulting from thousands of complaints received between July 21, 2011 and February 1, 2014. The CFPB noted that during this period, 11% of the consumer complaints it received were about credit reporting. According to the report, it received five types of complaints about credit reporting: (1) incorrect information on credit report; (2) issues with the credit reporting agency’s investigation; (3) inability to obtain a credit report or score; (4) improper use of a credit report; and (5) issues with credit monitoring or identity protection, with over 73% of the complaints about incorrect information on credit reports.

In conjunction with the report, the CFPB also issued a guidance bulletin and a letter to creditors. The guidance bulletin sets forth CFPB expectations for how companies that supply information for credit reports, commonly referred to as furnishers, should comply with the requirements of the Fair Credit Reporting Act in handling investigations of consumer disputes. FCRA requires consumer reporting agencies to notify and provide all relevant information to a furnisher when a consumer disputes the accuracy or completeness of information provided by the furnisher to the CRA. The furnisher is then required to conduct an investigation, including a review of "all relevant information" provided by the CRA. Of particular concern to the CFPB are furnishers’ practice of deleting an item from a consumer report rather than investigating a consumer’s dispute. The bulletin advises that investigations of disputes are “important because investigations provide a critical check on the accuracy of furnished items.” The CFPB believes that investigations can assist furnishers learn of systematic problems. The bulletin follows similar guidance issued by the CFPB on a furnisher’s duty to investigate (see September 13, 2013 Alert). The letter to creditors urged them to make credit scores “regularly and freely” available to consumers.

Federal banking regulators issued updates to its interagency examination procedures to reflect the new mortgage rules (i.e., ability-to-repay, loan originator compensation, and amendments to HOEPA) that became effective in January 2014.

Congresswoman Maxine Waters, who serves as the ranking member on the House of Representatives Committee on Financial Services, sent a letter to the Office of the Comptroller of the Currency and the Office of Mortgage Settlement Oversight urging them to carefully scrutinize the sale of mortgage servicing rights from banks to nonbank servicers to ensure that nonbank servicers have the capacity to handle the increased loan volume and that borrowers are not harmed by the fewer protections afforded to them as a result of the transfers to nonbanks. The letter follows a recent decision by the New York Department of Financial Institutions to prohibit the sale of mortgage servicing rights from a bank to a nonbank that had been the subject of an enforcement action by the CFPB and several state regulators related to improper mortgage loan servicing, unauthorized fees, and engagement in unfair and abusive foreclosure practices (see December 23, 2013 Alert). Among the many alleged violations contained in the consent order, the CFPB alleged that the mortgage servicer failed to honor permanent and/or trial loan modifications that were entered into prior to the transfer of the servicing rights. The letter also drew the recipients’ attention to the concern that transfers by banks subject to the National Mortgage Settlement to nonbanks would mean the underlying loans would cease to be subject to the National Mortgage Settlement and therefore, no longer subject to the servicing protections provided by the National Mortgage Settlement.