Consumer Financial Services Alert - May 27, 2014

The CFPB released a report regarding certain actions the CFPB discovered during its supervision of the payday, debt collection, and consumer reporting industries. The report, which covers the CFPB’s supervision of those industries between November 2013 and February 2014, notes that “many companies had systemic flaws in their compliance management systems.” With respect to payday lending, the CFPB found several problems, including: (1) lenders were allegedly deceiving consumers in the collection of debt; (2) lenders were harassing borrowers and engaged in workplace collection visits and (3) third-party debt collectors acting as service providers to creditors allegedly violated the Fair Debt Collection Practices Act and the Dodd-Frank Act’s prohibition on unfair, deceptive and abusive acts and practices (e.g., allegedly making false threats of litigation and referral for criminal prosecution). The report also found several issues regarding the debt collection industry, including, among others issues, failure to investigate consumer credit report disputes in violation of the Fair Credit Reporting Act. The report also notes that some consumer reporting agencies were improperly handling consumer credit report dispute documents and were encouraging consumers to file disputes online or by phone, but were then refusing to accept such disputes.

The CFPB extended the comment period on proposed revisions to its remittance transfer rule that were previously issued in April 2014 (see April 29, 2014 Alert). The comment period was set to expire on May 27, 2014, and will instead now end on June 6, 2014. The proposal, among other things, seeks to extend a temporary exemption under the Electronic Fund Transfer Act, currently due to expire on July 21, 2015. The exemption allows insured depository institutions and credit unions to estimate third-party fees and exchange rates when providing remittance transfers to their accountholders in the event that they are unable to determine the exact amounts. The proposal would extend the exemption until July 21, 2020. In extending the comment period, the CFPB noted that it is seeking to balance the parties’ desire to have additional time to properly respond to the issues raised in the proposal with the need to provide industry and consumers with certainty and ample time to plan in advance of July 21, 2015.

The Consumer Advisory Board will host a meeting on June 18, 2014 to discuss trends and themes in the mortgage market. Agenda topics include the mortgage rules generally, but in particular, special populations, new resources for consumers and opportunity for public comment. Consumers are invited to join by sending an RSVP to the CFPB.

The CFPB’s Office of Research released a report showing findings that medical debt that goes into collections and shows up on credit reports may result in over-penalization with regard to consumer credit scores. The study highlights the fact that certain credit scoring models might underestimate the creditworthiness of consumers who owe medical debt that has gone to collections. Such scoring models, according to the report, also might not be appropriately crediting consumers for repayment of that debt. The report notes that many of the complaints that it has received on the topic indicate that consumers are often unaware that their medical debt is in collection until they are contacted by a collection agency or otherwise discover that fact on their credit report. The report made two specific observations with respect to the adequacy of credit scoring model treatment of medical debt in collection: (1) credit scores might underestimate creditworthiness by 10 points for such debt and (2) credit scores might underestimate creditworthiness by up to 22 points after the medical debt has been repaid.

In a speech delivered to the Mortgage Bankers Association 2014 National Secondary Market Conference, Benjamin M. Lawsky, Superintendent of New York’s Department of Financial Services, targeted nonbank mortgage servicers with high-level yet pointed remarks. Perceiving nonbank mortgage servicers to be “lightly regulated,” Mr. Lawsky expressed concern that a “potential race to the bottom” could develop among servicers looking to minimize costs while scaling up capacity. Though acknowledging the benefits of technology and innovative servicing models, he emphasized the need for servicers to ensure they have the human capital in place to handle increasing volumes of servicing rights acquired from banks. In an apparent knock on overseas outsourcing of servicing functions, Mr. Lawsky referenced problems associated with “loan files strewn around the globe.” Mr. Lawsky also mentioned a focus on “ancillary services” (e.g., inspection, foreclosure and REO management services) that affiliates of mortgage servicers often provide, stating they posed “potential for conflicts of interest and self-dealing” at the expense of homeowners and investors, who purportedly “are at risk of becoming fee factories.” While criticizing the nonbank mortgage servicers, Mr. Lawsky did not mention any specific statutes or regulations, or any particular entity that he suspected of violating laws.

Superintendent Lawsky’s remarks are only the latest indication of increased regulatory scrutiny for this industry sector.  In December 2013, the CFPB and state regulators entered into a consent order with a nonbank mortgage servicer resolving alleged unfair, deceptive and abusive acts and practices (see December 23, 2013 Alert). Congresswoman Maxine Waters also urged the OCC to ensure borrowers are not adversely affected by servicing transfers from bank to nonbank servicers (see March 4, 2014 Alert). And earlier this month, the Financial Stability Oversight Council’s 2014 Annual Report discussed the risks it perceived from the growth of the nonbank mortgage servicing sector (see May 13, 2014 Alert).

The Illinois Attorney General, who filed suit two years ago under the Illinois Consumer Fraud and Deceptive Business Practices Act against a group of entities related to for-profit college financing, amended its complaint to add claims that the defendants engaged in unfair, deceptive and abusive acts or practices in violation of the Consumer Financial Protection Act. The Dodd-Frank Act permits state-level enforcement of the CFPA. The amended complaint alleges that the defendants engaged in unfair business practices. In particular, the complaint alleges that the defendants misled students about the financing costs and job opportunities while encouraging them to accept financing arrangements that commonly lead to default. The amended complaint also alleges that the defendants engaged in abusive business practices based on students trusting the university and its associated financing affiliates to act in the students’ interest, while the defendants allegedly provided misleading financial aid information and encouraged students to take out unreasonably risky loans. The additional claims against the defendants are based on information purportedly obtained through discovery, and many portions of the publicly available complaint have been redacted. The Illinois Attorney General joins the New York Attorney General (see April 29, 2014 Alert) as states that have used Section 1042 of the Dodd-Frank Act, which, subject to certain limitations, allows state attorneys general to bring enforcement actions under the CFPA.