Consumer Financial Services Alert - February 4, 2014 February 04, 2014
In This Issue

CFPB Proposes Rule to Define Larger Participants of the International Money Transfer Market

Noting the challenges to providers and consumers, the CFPB issuedproposed rule to define “larger participants” of the international money transfer market that, when finalized, will hold certain nonbank international money transfer providers to the similar compliance requirements as the largest banks and credit unions under the Electronic Funds Transfer Act and its implementing regulation, Regulation E. Under the Dodd-Frank Act, the CFPB has the authority to supervise nonbank “larger participant[s] in markets for other consumer financial products or services.” The proposal establishes a test to determine whether a nonbank entity is a “larger participant” of the international money transfer market. An entity would be considered a “larger participant” if it has at least 1 million aggregate annual international money transfers (without regard to the individual or aggregate dollar amount of the transfers). This amounts, according to the CFPB, to supervision of approximately 25 of the largest nonbank providers (of the roughly 150 nonbank providers in the market), or 90% of the transfers made in the nonbank provider market. Of note, the annual international money transfers of a nonbank includes international money transfers in which an agent acts on behalf of a nonbank, but does not include transfers in which another person provided the international money transfer and the nonbank covered person performed activities as an agent on behalf of that other person. The CFPB noted that it is considering lower (e.g., 500,000 transfers) and higher thresholds (e.g., 3 million transfers); and whether it should adopt an alternative approach—establishing different thresholds for different destination regions.

The CFPB has already finalized rules defining “larger participants” of the debt collection, consumer reporting, and private student loan markets (see November 13, 2012 Alert, July 24, 2012 Alert, and December 10, 2013 Alert, respectively).  Comments must be received by April 1, 2014.

CFPB Issues Report on Problems in Mortgage Servicing

The CFPB released its Supervisory Highlights report highlighting problems in the mortgage servicing market during 2013. The report includes information gathered by the CFPB through its supervision program between July and October 2013. Specifically, the CFPB’s report describes several instances where servicers violated the Dodd-Frank Act’s ban on unfair, abusive or deceptive acts and practices. For example, examiners found that two servicers engaged in unfair practices by failing to honor existing permanent or trial loan modifications following a servicing transfer. Examiners also found that two other servicers unfairly required borrowers to agree to overly broad waiver clauses releasing the services from all claims in order to get a forbearance or loan modification agreement. The report also highlights payment processing issues by servicers. For example, a servicer allegedly misrepresented how certain bi-weekly payment plans worked, and another servicer allegedly falsely told borrowers that they would receive funds from their escrow accounts. According to the CFPB, the report makes clear that “mortgage servicing misconduct continued to plague consumers throughout 2013.” In all cases where the CFPB found servicing issues, the servicers were alerted of the CFPB’s concerns and any necessary remedial measures were taken.

The CFPB also announced developments in its supervision program including changes to examination reports and supervisory letters. In particular, the CFPB announced that beginning in January 2014, it was changing the format of its examination reports and supervisory letters sent to supervised entities. In particular, the CFPB plans to eliminate recommendations in the report, and instead, provide recommendations orally when examiners are onsite. The CFPB will also create a single section in the report, “Matters Requiring Attention”, that will include all items the CFPB expects the supervised entity to address when the review identifies violations of law or weaknesses in compliance.

FinCEN Issues Administrative Rulings on Virtual Currency Related to Miners and Investors

Prompted by requests, FinCEN published two administrative rulings on the application of its regulations requiring money services businesses to be registered under the Bank Secrecy Act. The first ruling, Application of FinCEN’s Regulations to Virtual Currency Mining Operations, addressed whether certain methods of disposing of Bitcoins “mined” by someone would make that person a money services business under the BSA. At the outset, FinCEN noted that the label used to describe a particular process of obtaining a virtual currency has no bearing on whether a person is a money services business under the BSA. The critical focus is on the use of the virtual currency and who such use benefits. FinCEN observed that “Bitcoin mining imposes no obligations on a Bitcoin user to send mined Bitcoin to any other person or place for the benefit of another.” Accordingly, so long as a miner uses a virtual currency for their own purposes and not for another’s benefit, that miner would not be considered a money services business. It was additionally noted that a miner’s conversion of virtual currency into real currency (or some other convertible virtual currency) does not, in and of itself, make the miner a money services business.

The second ruling, Application of FinCEN’s Regulations to Virtual Currency Software Development and Certain Investment Activity, addressed whether periodic investment in convertible virtual currency, and the production and distribution of software to facilitate purchase of virtual currency for a company’s own investment, makes a company a money service business under the BSA. According to FinCEN, so long as a company buys and sells convertible virtual currency exclusively as investments for its own account, it would not be considered a money services business because it is not exchanging the convertible virtual currency for other persons. FinCEN also noted, however, that any transfers to third parties at the behest of others “should be closely scrutinized, as they may constitute money transmission.” The ruling further provided that the production and distribution of software that facilitates the collection of virtual currency and payment for such currency, in and of itself, would not make a company a money services business.

FinCEN previously issued interpretive guidance on the application of the regulations implementing the BSA to “users”, “exchangers”, and “administrators” of convertible virtual currency (see April 2, 2013 Alert). The administrative rulings further delineate the extent to which a person’s conduct related to convertible virtual currency requires that person to be licensed as a money services business under the BSA.

Fourth Circuit Rejects Inherent Writing Requirement Under FDCPA

The United States Court of Appeals for the Fourth Circuit vacated a lower court’s ruling holding that the Fair Debt Collection Practices Act permits consumers to dispute the validity of a debt orally. Plaintiffs filed a class action against a debt collector alleging violations of section 1692(g)(3) of the FDCPA. Section 1692(g)(3) requires a debt collector to, within 5 days of initial communication, send consumers a written notice containing a statement that unless the consumer disputes the validity of the debt within 30 days after receipt of the notice, the debt will be assumed to be valid, among other things. Plaintiffs alleged that defendant’s collection notice violated section 1692(g)(3) because it stated that debtors could only dispute the validity of their debt in writing. Plaintiffs also alleged that defendant’s imposition of a writing requirement amounted to use of a false representation or deceptive means to collect or attempt to collect a debt, in violation of the FDCPA. Defendant filed a motion to dismiss arguing that its collection efforts complied with the FDCPA because section 1692(g)(3) contained an “inherent writing requirement.” The lower court agreed reasoning that “permitting an oral dispute of the validity of a debt would leave consumers ‘with fewer protections and in a potentially far more confusing station than if a writing is required.’” Plaintiffs appealed.

In vacating the lower court’s decision, the Court first looked to the language of the statute and agreed with holdings in the Second and Ninth Circuits, Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir. 2013) and Camacho v. Bridgeport Fin. Inc., 430 F.3d 1078 (9th Cir. 2005), respectively. The Court noted that the Second and Ninth Circuits found that the FDCPA “clearly defines communications between a debt collector and consumers.” In particular, the Court held that the provision requiring the written notice contain a validation notice “plainly” did not require written communication; whereas the other components of the written notice did (i.e., the requirement to state that if the consumer notifies the debt collector in writing within the 30-day period that the debt is disputed, the debt collector is required to obtain verification of the debt and mail it to the consumer). The Court also rejected defendant’s argument that an inherent writing requirement must be read into section 1692(g)(3) or otherwise, permitting oral disputes would “serve[] only to confuse consumers.” The Court held that under well-established principles of statutory construction, it was required to “give effect, if possible, to every clause and word of a statute” and avoid any interpretation that renders “any clause, sentence, or word… superfluous, void, or insignificant.” Therefore, relying on the writing requirements in other subsections of 1692(g) would violate such well-established principles, “leaving section 1692(g)(3) with no independent meaning.”

Automobile Dealer Trade Group Issues Guidance In Response to Recent CFPB Enforcement Action

In response to a recent joint enforcement action by the CFPB and Department of Justice alleging violations of the Equal Opportunity Credit Act, and its implementing regulation, Regulation B (see December 23, 2013 Alert), the National Automobile Dealers Association issued fair lending guidance for use by its dealer members. The CFPB and DOJ took enforcement action against a bank and its bank holding company alleging that the bank’s indirect auto lending program subjected minority borrowers to statistically significant higher “dealer markups” than similarly situated whites. Though the CFPB does not directly regulate automobile dealers, the potential liability of indirect auto lenders has led them to monitor dealer financing, with an eye toward identifying statistical disparities that could trigger liability using the disparate impact theory. As a result, NADA issued fair lending guidance designed to help dealers minimize any potential lender liability that could harm the dealers’ ability to obtain financing.

The guidance begins by suggesting a model in which financing terms do not vary on a customer-by-customer basis. Recognizing that such a model would substantially inhibit the pricing flexibility on which many auto dealers depend, the guidance suggests factors to consider in deviating from the fixed approach, such as the customers’ ability to repay the loan, the availability of competing credit, the applicability of a promotional offer that applies across customers, and vehicle-specific pricing adjustments. The guidance further urges dealers to establish written procedures to govern pricing, standardize forms, train employees, and document compliance efforts. The guidance also includes four templates for complying with fair lending laws: (1) a fair credit policy; (2) a standard dealer participation rate form; (3) an inventory reduction criteria form; and (4) a dealer participation certification form. The guidance provides instructions for customizing these templates to an individual dealership’s circumstances.

State Attorney Generals Settle with Online Payday Lenders

The Attorney General for the State of New York announced that it reached a settlement agreement with several online payday lenders for alleged violations of New York’s usury and licensed lenders laws. The terms of the settlement require the lenders to pay civil money penalties, modify existing loans, cease collections of loans where principal has been repaid, and cease collection of outstanding interest. On a similar note, the Attorney General for the State of Colorado also announced it had reached a settlement agreement with some of the same lenders for allegedly making unlicensed, high-cost loans to consumers in Colorado. The terms of the settlement require the lenders to pay a civil money penalty and prohibit the lenders from making any consumer loans in Colorado, collecting on any already-made loans to consumers, or selling these loans to third parties. The settlement also expressly ordered the lenders to “discharge, cancel, release, forgive, and adjust to a zero balance all” consumer loans made in Colorado.

These settlements follow similar action by the CFPB against payday lenders in what is a growing trend to reform the payday lending industry. In November 2013, the CFPB took its first public enforcement action against a payday lender for allegedly engaging in unfair and deceptive acts or practices (see November 26, 2013 Alert).

CFPB Initiates Administrative Proceeding Against Mortgage Lender

Subsequent to its denial of a mortgage lender’s petition to set aside a civil investigative demand in 2012 (see October 2, 2012 Alert), the CFPB publicly announced that it had served Notice of Charges, initiating an administrative proceeding against the mortgage lender. According to the CFPB, between 1995 and 2009, the mortgage lender used mortgage reinsurance arrangements to solicit and collect allegedly illegal kickback payments and unearned fees, which resulted in consumers paying increased mortgage insurance premiums in violation of the Real Estate Settlement Procedures Act. The CFPB is seeking civil money penalties, a permanent injunction and victim restitution. If allowed by the hearing officer, the Notice of Charges will be available on the CFPB website after February 12, 2014. This, along with the CFPB’s previous settlements with mortgage insurers for alleged violations of RESPA’s anti-kickback provisions (see November 26, 2013 Alert), illustrates the range of enforcement measures available to the CPFB.