Consumer Financial Services Alert - October 15, 2013 October 15, 2013
In This Issue

CFPB, In Coordination with the Massachusetts Division of Banks, Announces Enforcement Action for HMDA Reporting Violations

In coordination with the Massachusetts Division of Banks, the CFPB announced that it entered a consent order against a nonbank and a national bank for violations of the Home Mortgage Disclosure Act finding that the entities compliance systems were inadequate and that they had severely compromised mortgage lending data. HMDA and its implementing regulation, Regulation C, requires mortgage lenders that meet certain threshold conditions to collect, report to Federal regulators, and disclose to the public certain data (e.g., loan amount, loan purpose) about applications for, and originations and purchases of, home purchase loans, home improvement loans, and refinancings for each calendar year. The consent decree comes after a CFPB investigation found significant data errors in the 21,015 mortgage loan applications the nonbank reported for 2011 and noted that both it and the Massachusetts Division of Banks found that the nonbank’s error rates exceeded applicable resubmission thresholds. The CFPB exam also found significant errors in the 5,785 mortgage loan applications the national bank reported for 2011. The consent orders call for civil money penalties against both entities and compliance monitoring. In particular, both entities are required to correct and resubmit their 2011 HMDA data and develop and implement an effective HMDA compliance management system to prevent future violations. This is the first such enforcement action for violations of HMDA by the CFPB.

In conjunction with the enforcement actions, the CFPB also issued a guidance bulletin “putting [mortgage lenders] on notice” about the importance of submitting correct mortgage loan information under HMDA. The bulletin provides guidance on effective structuring of HMDA compliance management systems, announces the CFPB’s HMDA Resubmission Schedule and Guidelines, which applies to the CFPB’s HMDA data integrity reviews beginning on or after January 18, 2014, and discusses factors that the CFPB may consider in deciding whether or not to pursue a public HMDA enforcement action (e.g., the size of the bank or nonbank’s mortgage lending activity, the error rate, the history of previous HMDA supervisory activity, including the history of any violations, and whether the institution self-identified or self-corrected any errors).

CFPB Takes Enforcement Action Against Payment Processor for Violations of Telemarketing Sales Rule

The CFPB filed a complaint and proposed order with the United States District Court for the Western District of Washington against a payment processor for the debt settlement industry alleged to have violated the Telemarketing Sales Rule. The TSR generally prohibits deception in telemarketing and prohibits debt-relief companies from charging advance fees. It is also a deceptive telemarketing act or practice under the TSR for a person to provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is violating the TSR. According to the CFPB, in violation of the TSR, the payment processor processed payments that enabled debt settlement companies to charge consumers upfront fees. The complaint further alleged that the payment processor knew that it was transmitting advance fees to debt settlement companies that had not yet settled consumers’ debts, helping debt settlement companies charge millions of dollars in unlawful fees to more than 11,000 consumers in multiple states. The CFPB is seeking to bar the payment processor from processing payments for debt settlement companies and for members of the related mortgage-settlement industry, subject the payment processor to monitoring by the CFPB, require compliance monitoring reports, and is asking the court to impose a civil money penalty of $1.36 million on the payment processor.

In announcing its action, the CFPB noted that the complaint and proposed order against the payment processor is part of a comprehensive effort to prevent consumer harm in the debt settlement industry. In particular, the CFPB noted that it has pursued several debt-settlement providers that charged consumers advance fees with this particular payment processor’s assistance and has filed a complaint against four other debt settlement companies. Both the CFPB and FTC have aggressively targeted debt settlement providers that charge consumers advance fees (see e.g., September 3, 2013 Alert).

CFPB Finalizes Policy for Testing New Consumer Disclosure Policy

The CFPB announced that it finalized its policy to approve requests by supervised entities for waivers from consumer disclosure obligations to allow for the testing of alternative disclosures. The Dodd-Frank Act gives the CFPB authority to approve trial disclosure programs. The policy is divided into four sections: (1) Section A describes which proposed programs will be considered eligible for a temporary waiver; (2) Section B lists factors the CFPB may consider in deciding which eligible programs to approve for such a waiver; (3) Section C describes the CFPB’s procedures for issuing waivers; and (4) Section D describes how the CFPB will disclose information about the programs. Some factors the CFPB will consider in determining whether to grant a waiver include improvements to consumer understanding, increased cost effectiveness and decreased consumer risk.

CFPB Releases Report on Impact of CARD Act

The CFPB releasedreport on the findings of its first major study on the impact of the Credit Card Accountability and Responsibility and Disclosure Act of 2009. The CARD Act prohibits credit card issuers from extending credit without assessing the consumer’s ability to pay and restricts the amount of upfront fees that may be charged during the first year after account opening, among other things. The report makes findings in five distinct areas: (1) cost of credit; (2) availability of credit; (3) agreements, disclosures and issuer practices; (4) product innovation; and (5) adequacy of protections. For example, the CFPB found that the CARD Act has impacted the way consumers pay for credit in the credit card marketplace. In particular, the CFPB found that over-the-limit fees and repricing actions have largely been eliminated. The report also identified the CFPB’s remaining concerns, which largely include add-on products, fee harvestor cards—cards in which the fee is paid prior to account opening, deferred interest products, and transparency issues such as online disclosures, rewards products and grace periods.

HUD Proposes Definition of Qualified Mortgage

Largely piggybacking off of the CFPB’s definition of qualified mortgage finalized in January 2013 (see January 10, 2013 Alert), HUD issued a proposed rule defining qualified mortgages.  The rule requires a loan to have regular periodic payments (i.e., no balloon payments), a maximum loan term of 30 years, a 3% cap on points and fees, and verification of the borrower’s ability to repay using documentation and the underwriting standards in the CFPB’s ability-to-repay rule.  HUD will not insure loans that do not meet these criteria. Similar to the CFPB’s ability-to-repay and qualified mortgage rules, the rule creates a safe harbor for loans that satisfy the definition of qualified mortgage and are not “higher-priced” as defined by the CFPB and a rebuttable presumption for loans that are higher priced, but otherwise meet the qualified mortgage standard.

While the rule excludes reverse mortgages from the qualified mortgage standard, Title I insured mortgages (i.e., manufactured housing and home improvement loans), Section 184 mortgages (i.e., Indian Home Loan Guarantee Program), and Section 184A mortgages (i.e., Native Hawaiian Housing Loan Guarantee Program) can be qualified mortgages. However, these latter three types of mortgage are not subject to the 3% cap on points and fees or the interest rate restrictions, and will be granted “safe harbor” status until HUD has an opportunity to fully examine the impact of restricting interest rates, points, and fees. Streamlined refinancing transactions, on the other hand, are fully subject to the new rule.

Comments must be received by October 30, 2013. HUD plans that the effective date of the rule will coincide with the CFPB’s ability-to-repay and qualified mortgage rules, on January 10, 2014.

Third Circuit Holds FDPCA Can Apply in Bankruptcy Proceedings

The United States Circuit Court for the Third Circuit upheld a lower court’s decision that the Bankruptcy Code precluded a borrowers’ claims under the Fair Debt Collection Practices Act.   After filing for bankruptcy, defendants, attorneys for a debt collector, sent a letter to the borrowers’ attorney advising that the debt collector was considering challenging the dischargeability of the credit card debt. Among other things, the letter stated that the debt collector preferred to negotiate a stipulation of non-dischargeability or settle the debt for a reduced amount. In return, plaintiffs filed a complaint alleging defendants violated the FDCPA by, among other things, failing to include the “mini-Miranda warning” informing plaintiffs that the letter was “attempting to collect a debt and that any information obtained will be used for that purpose.” Defendant filed a motion to dismiss arguing that plaintiff’s allegations from which the FDCPA claims arose were governed exclusively by the Bankruptcy Code. The lower court agreed and dismissed plaintiffs’ complaint holding that the FDCPA claims were precluded by the Bankruptcy Code. Plaintiffs’ appealed.

At the outset, the Third Circuit rejected the argument that because there was no express demand for payment, defendants were not “debt collectors,” that their activity was not “debt collection,” and that the letter was not a “communication” under the FDCPA. The Third Circuit held that the FDCPA was not construed “so narrowly,” and that the absence of an explicit payment demand does not take the communication outside of the FDCPA. In addressing whether the Bankruptcy Code precludes relief under the FDCPA related to communications concerning a bankruptcy proceeding, the Third Circuit noted a split among circuits and district courts on the issue. Courts finding preclusion of FDCPA claims cite the Bankruptcy Code’s broad and comprehensive scope as evidence that Congress did not intend for alternate statutory remedies to be available concerning bankruptcy-related communications. The Third Circuit adopted the approach of the Seventh Circuit in Randolph v. IMBS, Inc., 368 F.3d 726, and rejected preclusion. The Third Circuit ruled that preclusion is not warranted when “[i]t is easy to enforce both statutes, and any debt collector can comply with both simultaneously.” Considering whether the alleged failure to include the “mini-Miranda warning” informing plaintiffs that the letter was attempting to collect a debt, the Third Circuit concluded that this claim was precluded by the Bankruptcy Code, because such a communication would have violated the Bankruptcy code’s automatic stay provision.

CFPB Ceases its Practice of Using Enforcement Attorneys During Supervisory Examinations

After concerns from the industry, its own ombudsman, and the Office of Inspector General for the Federal Reserve Board and the CFPB, the CFPB has announced that effective November 1, 2013, it will cease having enforcement attorneys present during examinations of supervised entities. Previously, the CFPB’s Ombudsman recommended the review of this practice (see December 11, 2012 Alert). The OIG also noted in March that it was evaluating the CFPB’s practice (see March 19, 2013 Alert). Such practice was a cause for concern among consumer financial service providers.