Developments at the Consumer Financial Protection Bureau September 10, 2014 – October 14, 2014

Developments at the Consumer Financial Protection Bureau

September 10, 2014 – October 14, 2014

Julius L. (“Jerry”) Loeser and Todd Zywicki

1. On September 12, Rohit Chopra, the Student Loan Ombudsman at the CFPB, spoke on a panel at a meeting of the American Bar Association Business Law Section.  He expressed concerns about a lack of data and transparency in the student lending area, which he believes leads to student and co-signers making less than optimal decisions.  He also urged that loan modification be made more available even where loans are not actually in default as often co-signers make payments.  He also repeated criticism of servicer payment processing in the case of multiple loans, particularly failure to follow borrower instructions as to application of payments.
2. Also on September 12, Frederick J. Hanna & Associates, a collection law firm that is the target of a CFPB enforcement action in the U. S. District Court for the Northern District of Georgia, moved to dismiss.  The law firm argues that the Dodd-Frank Act expressly prohibits the CFPB from suing a lawyer for conduct that constitutes the practice of law.  It also argues that the Fair Debt Collection Practices Act (FDCPA) prohibition against representing attorney involvement absent  meaningful attorney involvement only applies to debt collection letters not lawsuits. The CFPB had also alleged that the firm had filed affidavits signed by persons lacking personal knowledge, and the law firm challenged the factual basis for the CFPB’s assertion.  Finally, the firm argued that CFPB efforts to bring claims arising as long ago as 2009 is barred by a one-year statute of limitations in the FDCPA and the non-retroactivity of Dodd-Frank.
3. On September 15, Mortgage Professional Magazine published an interview with former CFPB Deputy Director Raj Date.  The occasion was a recent announcement of the combination of Mr. Date’s mortgage venture, Fenway Summer, with Ethos Lending LLC to build a national mortgage origination business focusing on agency mortgages and prime non-qualified mortgages.
4. On September 16, the CFPB sued Corinthian Colleges, Inc., a for-profit college that had been disciplined by the Department of Education and is in the process of liquidation.  The CFPB alleged that Corinthian used fraudulent statistics on employment prospects (e.g. counting jobs that lasted only one day) and false promises of placement assistance (e.g. while actually sometimes doing little more than distributing Craigslist job postings) to enroll students, charging inflated tuition (five times as much as tuition for comparable courses elsewhere in order to exceed federal student loan caps), inducing them to borrow to pay tuition, and then using illegal actions to collect on the loans.  The CFPB alleges that Corinthian actually paid employers to hire graduates temporarily.  Tens of thousands of students received more than 130,000 loans between July, 2011 and March, 2014.  Current outstandings exceed $568 million.  More than 60 percent are in default.  One remedy that the CFPB seeks is rescission of the loans.

Corinthian disputes the allegations asserting that thousands of its graduates are hired into permanent positions annually and that less than 40 percent of its students use the loan program. 

5. On September 17, the CFPB published a report on fair lending in the indirect auto loan market.  The report indicated that the CFPB has been examining indirect auto lenders and that those examinations have resulted in the lenders paying $136 million to 425,000 consumers without formal enforcement actions.  The report also  was accompanied by a “white paper” that explains the CFPB methodology (“Bayesian Improved Surname Geocoding” or “BISG”) that uses surnames as proxies for race and ethnicity to ferret out unlawful discrimination.  Release of the “white paper” is intended to enable lenders to perform the same fair lending analysis that the CFPB uses.
6. Also on September 17, the CFPB  proposed a regulation to supervise large nonbank automobile lenders, i.e. those that originate (including purchase or acquire) 10,000 or more auto loans or leases a year.  Auto dealers would be excluded.  The CFPB estimates that 38 firms would be covered; those firms originate 90 percent of auto loans and leases.
7. Also on September 17,  the CFPB sued the Hydra Group, an on-line payday lender, that allegedly purchases information from on-line lead generators to access consumer checking accounts, by falsifying loan documents, depositing payday loans proceeds, and withdrawing fees without customer consent.  For example, according to the complaint, Hydra would deposit $200 into an account and then withdraw $60 every two weeks indefinitely.  Such practices would violate Regulation Z, Regulation E, the Fair Debt Collection Practices Act, and as well as fraud laws.
8. On September 22, the Government Accountability Office issued a report about the CFPB entitled “Some Privacy and Security Procedures for Data Collections Should Continue Being Enhanced.”  The GAO  reported that the CFPB has undertaken 13 large data collection programs including one that collects information on 173 million mortgage loans, 75 million credit card accounts, and 40 million payday loans.  While the GAO cited steps that the CFPB is taking to protect and secure its data collections, it did determine that additional efforts were needed in several areas to reduce the risk of improper collection, use, or release of consumer financial data.  GAO reported that the CFPB lacks written procedures for a number of processes, including information security risk assessments, and that the CFPB has not fully implemented a number of privacy control steps and information security practices, including staff training.
9. Also on September 22, Congressman Jeb Hensarling (R-TX) released a statement on the GAO report.  He noted that “it literally took an act of Congress to obtain this information because the unaccountable CFPB would not answer our questions.”  (Congress passed legislation in January requiring the GAO to examine the CFPB’s data collection efforts after the CFPB refused to disclose information to Congress about the scope of its program.)  He  further observed that “[i]t seems the CFPB is trying to out-NSA the NSA when it comes to accumulating information on Americans.”
10. On September 23, CFPB Director Cordray spoke on public service and student debt.  He said that student debt  today amounts to $1.2 trillion, second only to mortgages as a category of consumer finance.  He said that debt-ridden students were delaying major purchases, thus hurting the economy.  He estimated that more than seven million student loan debtors are in default on over $100 billion in student loans, making it harder for them to pass background checks for jobs and home loans.  He decried that the homeownership rate for young people is down more than 15 percent, and he reasoned that debt influences career choices and can act as a barrier to public service where many people of color work, finally suggesting that African American college graduates take on nearly 15 percent more debt than their peers.  He praised recent legislation that provides for student debt forgiveness for public service workers.
11. Also on September 23, the CFPB published a final rule that would subject nonbank international money transfer  providers  of more than 1,000,000 transfers annually to CFPB supervision and examination effective December 1.  The CFPB estimates that this will cover 25 firms.
12. On September 24, the CFPB issued a blog post updating its reverse mortgage guide. 
13. On September 25, the CFPB and the OCC issued separate orders against U. S. Bank, Cincinnati, Ohio, for allegedly charging without written authorization, over the last 11 years, more than 420,000 consumer accounts for add-on products, such as identity theft and credit monitoring, through a vendor, Affinion. U.S. Bank terminated its relationship with Affinion two years ago.  The order imposed $57 million in fines and restitution.  The CFPB has brought several enforcement actions involving add-on products offered to credit card customers.
14. Also on September 25, the CFPB announced a research pilot to study the effectiveness of early intervention credit counseling for consumers at risk of default on credit card debt.  Part of the CFPB’s “Project Catalyst,” the new project contemplates a “global credit card issuer” and “a consumer credit counseling service provider in Philadelphia” working with the CFPB on this.
15. Also on September 25, the Washington Post published an article raising the question whether Wal-Mart’s provision of debit cards, check cashing, and credit cards and Apple’s establishment of a mobile payment system, Apple Pay, might subject them to oversight by the CFPB at least as third-party service providers to supervised firms.  The article was triggered by a blog post by Georgetown law professor Adam Levitin.  Wal-Mart commented that its financial services were actually offered by other firms that undertook compliance obligations.  The CFPB declined to comment for the article.
16. Also on September 25, Forbes published a “Guest Post” by U. S. Senator Mike Crapo (R-ID) commenting on the CFPB’s data collection activities.  Noting that consumers do not consent to this collection, Senator Crapo explained that the amounts of data being collected and the ease with which it is being collected is unprecedented.  He cited the above-referenced GAO report on the subject that indicated that the CFPB was collecting information on 11 million credit reports, 700,000 auto sales, 10.7 million consumers, and 5.5 million student loans and that also cited weaknesses in the CFPB’s data security, relating that to recent massive data breaches at retailers.
17. On September 26, the CFPB issued a statement applauding the Department of Defense’s proposal to expand the types of credit products covered by a 36 percent rate cap and other protections in the Military Lending Act, originally intended to apply to closed-end payday loans for no more than $2,000 with a term of 91 days or less, closed-end auto title loans with a term of 181 days or less, and closed-end tax refund anticipation loans.
18. On September 29, the CFPB ordered Flagstar Bank, Troy, Michigan, to comply with the CFPB’s new mortgage servicing rules’ foreclosure relief requirements.  The CFPB criticized the amount of time to process applications for foreclosure relief, communication to borrowers, the denial of loan modifications, and delay in finalizing loan modifications.  The CFPB required Flagstar to pay $27.5 million to affected borrowers and a $10 million fine.
19. Also on September 29, the American Banker published an article suggesting that auto loan add-on products may become a target of the CFPB.  The CFPB has taken a number of enforcement actions against the marketing of add-on products, such as identity theft protection, to credit card customers, and it has also focused on auto lending.  Add-on products in the context of auto lending might include extended warranties, rust proofing, roadside protection, and theft prevention services.
20. Also on September 29, CFPB Director Cordray  addressed the Society for Financial Education and Professional Development.  He attributed the financial crisis in part to lack of financial education.  Besides explaining a number of initiatives that the CFPB has undertaken to educate consumers, he also described a project that specifically examines “what financial well-being means to consumers.”  First, the CFPB is developing “a consumer-driven definition” of “financial well—being”.  Second,  the CFPB is “researching the key knowledge, skills, attitudes, and behaviors that contribute to individual financial well-being.”  Third, the CFPB is “developing a way to measure financial well-being” so that all of those working on the issue can have shared standards as a common reference point.  
21. Also on September 29, the Joint Federal  Reserve/CFPB Office of the Inspector General issued a report that concluded that the CFPB rulemaking process generally complies with law.
22. On September 30, the CFPB ordered Lighthouse Title, a Michigan title insurance agency, to pay a civil money penalty of $200,000 for violating the Real Estate Settlement Procedures Act prohibition against paying for referrals in connection with residential real estate mortgage loans.  Lighthouse Title allegedly had entered into so-called “Marketing Services Agreements” with real estate brokers under which such brokers would refer mortgage closings and title insurance business to Lighthouse.  Payments by Lighthouse were supposed  to be based on marketing services to be provided to Lighthouse by the brokers, but, allegedly, in fact, were based, in part, on the number of referrals made or expected.
23. Also on September 30, the CFPB issued a report entitled “Manufactured-Housing Consumer Finance in the United States.”  The report indicates that manufactured housing accounts for six percent of all occupied housing in the U.S., but is an important source of affordable housing.  The report found that manufactured housing is disproportionately located in non-metropolitan areas and that its residents tend to be older and have lower incomes or net worth.  Per square foot cost of such housing is less than half that of new site-built housing.  Approximately sixty percent of  residents in such housing who own their home own the land underneath, and about 54% of borrowers who own the land financed their purchase with more expensive “chattel loans.”  The availability of financing for manufactured housing grew rapidly in the 1990s, but then contracted in the early 2000s as consumers experienced repayment problems, leading to a drop in production of such housing.  The report decries a scarcity of information about manufactured housing and indicates that the CFPB is, therefore, considering using the Home Mortgage Disclosure Act to collect additional data by adding a new field to its HMDA data collection form to indicate whether a manufactured housing loan is secured by real or personal property.
24. On October 1, Paul Hastings LLP announced that it had hired Gerald Sachs, a senior counsel for policy and strategy in the CFPB’s Office of Enforcement.
25. Also on October 1, the CFPB co-hosted a webinar with the Federal Reserve Board on  more than 30 technical questions raised by the final TILA-RESPA Integrated Disclosure Rule, specifically to respond to questions received by the CFPB from the mortgage industry and technology vendors.  This was the third webinar the CFPB has held on the new rule.  The webinars are a substitute for formal written guidance.
26. On October 2, the CFPB announced a research pilot program to encourage low-income consumers to place tax refunds into savings.  The CFPB will work with H&R Block on this effort.
27. On October 6, CFPB Director Cordray met with President Obama and  the chairs of other regulatory agencies to discuss the economy and ongoing implementation of Wall Street reform.  The President commended “the strongest consumer protections in history that have afforded millions of hard-working Americans new rights and protections within the financial sector.”  The agency heads noted budget constraints and expressed a need for additional resources.
28. Also on October 6, the CFPB announced a new program developed with the FDIC to provide financial education for older adults.  The program is called “Money Smart,” and it is intended to prevent financial exploitation of the elderly.  The CFPB envisions collaboration between banks, on the one hand, and providers of senior services and adult protective services, on the other.  The program is available in English and Spanish.
29. On October 7, the Ballard Spahr LLP law firm announced that it had hired Bowen Ranney, formerly a CFPB examiner-in-charge to provide its clients “rare insights into the  [CFPB’s] Division of Supervision, Fair Lending, and Enforcement.”
30. On October 8, the CFPB released an updated mortgage rules “Readiness Guide” that included the new TILA-RESPA Integrated Disclosure Rule.
31. Also on October 8, CFPB Director Cordray, in remarks at a forum hosted by the CFPB on checking account access and screening, criticized banks and credit unions for checking credit reports before permitting consumers to open checking accounts.  Apparently disregarding the fact that checking accounts can access credit via overdrafts, Director Cordray said that “checking accounts are not inherently credit vehicles, but instead are products for depositing and transferring funds.”  He did  also say that “the Bureau would be concerned if banks or credit unions were to grant credit to consumers without regard to their prior credit history.”  Director Cordray particularly complained of reports of NSF activity, outstanding bounced checks, overdrafts, involuntary account closures, and fraud, saying that such reports contain too many “imperfections and inconsistencies.”  Any CFPB effort to prevent banks and credit unions from considering such reports before opening checking accounts would appear to raise a fundamental conflict that some cited in the establishment of the CFPB, that between consumer protection and bank safety and soundness.
32. Also on October 8, the CFPB proposed a process under which it would issue “no action letters,” but only where a new financial product or service promised substantial consumer benefit.
33. On October 9, the American Bankers Association published “The New CFPB Origination Rules Deskbook.”
34. Also on October 9, the CFPB announced that M&T Bank Corp., Buffalo, New York, will pay $3.1 million  in fines and reimbursements to settle claims by the CFPB that the bank’s “Free Checking” accounts were marketed with advertisements that did not disclose requirements necessary to avoid charges, i.e. account activity at least every 90 days.  When consumers failed to meet those requirements, the CFPB alleged, the accounts were converted without notice to customers into accounts with fees.  $2.9 million of the $3.1 million is to refund fees charged 59,000 customers, and $200,000 represents a fine.  M&T  also agreed to update credit reports that reflected account closures due to negative account balances.