A Federal Register entry published last week details a proposed data-sharing arrangement between the Department of Defense (DoD) and the Department of Education (DoE) designed to reduce the amount of interest that certain active duty service members pay on federal student loans.

In 2008, Congress amended the Higher Education Act to provide for the removal of interest on federal student loans for military borrowers during service in war zones. To date, no formal mechanism has existed for transmitting this data from DoD to DoE, and the CFPB estimated in 2016 that eligible service members have paid over $100 million in unnecessary interest expenses since 2008.

In effect, DoD is proposing to modify its Defense Manpower Data Center Data Base to aid DoE in identifying whether certain borrowers are eligible for 0% interest while serving. Described in the DoD proposal as a “matching agreement,” this newly announced data conduit between DoD and DoE is intended to ensure that service members “who have received imminent danger pay (IDP) or hostile fire pay (HFP) benefits and who have student loans under Part D, Title IV of the Higher Education Act of 1965 (HEA), as amended, receive the no interest accrual benefit on their eligible loans during the period of time they received IDP or HFP pay.”

The comment period is open through May 16, 2019, after which the proposal will go into effect “unless comments are received which result in a contrary determination.”

This Wednesday April 24th, the Federal Deposit Insurance Corporation and Duke University’s Fuqua School of Business and Innovation and Entrepreneurship Initiative will host a conference titled “Fintech and the Future of Banking” in Arlington, Virginia. The FDIC describes the catalyst for the event as the belief that “at the intersection of research and experience lies good public policy.”

The conference features a brief introduction with Treasury Secretary Steven Mnuchin and FDIC Chairman Jelena McWilliams. Afterwards, the conference programming includes discussions regarding regulatory approaches to innovation, data and technology in lending, industry competition, the role of venture capital, and the potential benefits and unintended consequences of using data and technology to inform financial consumer decision-making.

The description of the event emphasizes that while the financial services industry innovated long before the advent of smartphones and machine learning, the activity in recent years “marks a shift from earlier eras.” The FDIC views current advances in payments, credit, and funding as having the potential to transform how banks conduct business and how consumers interact with financial institutions.

On April 18, 2019 the U.S. Department of Housing and Urban Development (HUD) issued Mortgagee Letter 2019-06 setting forth new documentation requirements for down payment assistance provided by government entities to be used in connection with Federal Housing Administration (FHA) insured mortgage loans. Significantly, the new requirements are effective for case numbers assigned on or after April 18, 2019.

The new requirements apply when funds from a government entity will be used to pay a portion or all of the borrowers 3.5% minimum required investment (MRI) in the home purchase transaction. FHA mortgagees must document that the borrower’s MRI was provided by a government entity as either a gift or through secondary financing in a manner consistent with the National Housing Act and HUD Handbook 4000.1. Specifically, the new documentation requirements provide in part that mortgagees must obtain:

  • For federal, state or local government agencies, a copy of documentation from a jurisdiction in which the property is located, which granted governmental authority to the entity;
  • A legal opinion signed and dated within two years of closing of the transaction by attorneys for the governmental entity stating:
    • The attorney has reviewed the governmental entity’s down payment assistance program; and
    • Either
      • The governmental entity is considered within the jurisdiction in which the property is located to be either a federal, state (as defined in Section 201(d) of the National Housing Act (12 U.S.C. §1707(d)), or local government or agency or instrumentality thereof, as provided in Section 528 of the National Housing Act (12 U.S.C §1735f-6), and 24 CFR 203.32(b) and further clarified in the Handbook 4000.1;
      • The governmental entity is a federally recognized Indian Tribe operating on tribal land in which the property is located or to enrolled members of the tribe; or
      • The governmental entity is a Federal Home Loan Bank;
  • Evidence that the down payment assistance is being provided by the governmental entity by collecting either:
    • A letter from the governmental entity, signed by an authorized government official, establishing that the funds provided towards the borrower’s MRI were provided in the governmental entity’s governmental capacity in the jurisdiction in which the property is located consistent with its down payment assistance program and that the provision of such funds is not contingent upon any future transfer of the insured mortgage to a specific entity, and a canceled check, evidence of wire transfer or other draw request showing that prior to or at the time of closing the governmental entity had authorized a draw of the funds provided towards the borrower’s MRI from the governmental entity’s account; or
    • A letter from the governmental entity, signed by an authorized official, establishing that the funds provided towards the borrower’s MRI were funds legally belonging to the governmental entity and were provided in the governmental entity’s governmental capacity in the jurisdiction in which the property is located or for the federally recognized Indian Tribe’s enrolled member, consistent with its down payment assistance program, at or before closing. The letter must make clear that the provision of the down payment assistance is not contingent upon any future transfer of the insured mortgage.

The new requirements further specify that mortgagees must either document the actual transfer of funds in satisfaction of the obligation or liability by the governmental entity prior to the submission of the mortgage for insurance or obtain documentation of the satisfaction of the obligation or liability by the governmental entity after submission and maintain such documentation in the mortgagee’s files.

The immediate effective date of the new requirements will affect many transactions in progress, and in various cases may require a change of down payment assistance programs or other changes for the transaction to move forward. Government housing finance agencies and other government agencies that provide down payment assistance will need to assess the effect of the new requirements on their respective programs.

The new requirements will be incorporated into HUD Handbook 4000.1.

The CFPB has announced that it will hold a symposia series “exploring consumer protections in today’s dynamic financial services marketplace.”  Director Kraninger revealed the Bureau’s plans to hold the symposia series in her remarks yesterday to the Bipartisan Policy Council.

The announcement indicates that the series is intended to assist the Bureau in its policy development process, including possible future rulemakings.  During each symposium, the Bureau will host a public discussion among members of a panel comprised of experts with a variety of viewpoints on the topic under consideration.

As Director Kraninger stated in her remarks, the first symposium will look at clarifying the meaning of abusive acts or practices under Section 1031 of the Dodd-Frank Act.  Other symposia topics will include behavioral law and economics, small business loan data collection, disparate impact and the Equal Credit Opportunity Act, cost-benefit analysis, and consumer authorized financial data sharing.

Several of these topics have been the subject of CFPB requests for information.  In May 2018, the CFPB issued an RFI and white paper on small business lending.  In November 2016, the CFPB issued an RFI on consumer access to financial information.

In the preamble to its Fall 2018 rulemaking agenda, the CFPB announced that it was considering whether it should engage in rulemaking to clarify the meaning of “abusive” and included such rulemaking on its list of long-term actions.  The preamble also indicated that the future activity being considered by the Bureau included “reexamining the requirements of the Equal Credit Opportunity Act (ECOA) in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”  The bulletin set forth the CFPB’s disparate impact theory of assignee liability for so-called auto dealer “markup” disparities.

 

 

 

 

Mortgage servicing continues to be a CFPB supervisory focus.  In this week’s podcast, we take a close look at the CFPB’s findings involving late fees, PMI cancellation requests, handling of loss mitigation applications, and notices to successors of deceased reverse mortgage borrowers regarding  foreclosure avoidance, share observations on what the findings indicate about the CPPB’s approach to these issues, and discuss the findings’ compliance implications.

Click here to listen to the podcast.

The second presentation of PLI’s 24th Annual Consumer Financial Services Institute will take place in Chicago on May 20-21, 2019.  The Institute is considered the country’s premier consumer financial services CLE program and this year’s Institute will once again explore in detail important developments in consumer financial services regulation and litigation.  I am again co-chairing the event, as I have for the past 23 years.  Approximately 400 people attended the first presentation in NYC, live and on the web, on March 25-26, 2019.

The leadership of the CFPB, OCC, FDIC and FTC is now firmly under Republican control.  While this has altered these agencies’ priorities, all continue to be very active in enforcing consumer financial laws and the CFPB’s supervisory activities remain substantially unchanged.  At the same time, state attorneys general and regulators are increasing their regulatory and enforcement activity to fill any void created at the federal level.  In addition, the improved economy, the deregulated federal environment, and the rapid increase in technological innovation has resulted in new entrants into the consumer financial services industry and the offering of new products and services by existing players.

I will co-moderate the morning sessions on the first day, which will feature two panel discussions focusing on federal regulatory, enforcement, and supervisory developments.  The first panel will include discussion among CFPB and FTC representatives.  The second panel will include discussion among OCC and FDIC representatives.  I am very pleased that the Chicago program will feature the following attorneys from these agencies:

  • Thomas Pahl, CFPB, Policy Associate Director, Division of Research, Markets & Regulations
  • Allison Brown, CFPB, Deputy Assistant Director for Servicing, Office of Supervision
  • Cara Petersen, CFPB, Principal Deputy Enforcement Director
  • Leonard Chanin, FDIC, Deputy to the Chairman
  • Ian Campbell, OCC, Counsel

My partner Chris Willis will participate in two panel discussions featured in the afternoon session of the first day.  One of those panels is titled “Fair Credit Reporting Act/Debt Collection Issues” and will include a discussion of the CFPB’s debt collection rulemaking, FCRA litigation trends, and state activity. The other panel, which I will moderate, is titled “The Rapidly Evolving Landscape for FinTech” and will examine the intersection between new technologies and products and as well as existing regulatory frameworks, such as Big Data and the use of Artificial Intelligence (AI) and Blockchain (including virtual currency).

The Institute will also focus on a variety of other cutting-edge issues and developments, including:

  • Privacy and data security issues
  • TCPA developments
  • Class action and litigation developments
  • State regulatory and enforcement developments
  • Consumer advocates’/plaintiff lawyers’ perspectives on current regulatory and litigation issues

We hope you can join us for this informative and valuable program.  PLI has made a special 25 percent discounted registration fee available to those who register using the following priority code: RDH9 CHAIR.  To register and view a complete description of PLI’s 24th Annual Consumer Financial Services Institute, click here.

For assistance with registration, contact PLI Customer Service at 800-260-4PLI.

 

The CFPB has issued its Consumer Response Annual Report, which analyzes the approximately 329,800 complaints received by the CFPB between January 1 and December 31, 2018. The Report details the trends in consumer complaints across various categories and provides information about the CFPB’s process for handling complaints.

Of the 329,800 complaints received in 2018, the CFPB sent approximately 80% of the complaints to companies for review and response, referred 14% to other regulatory agencies, and found 4% to be incomplete. At the end of the reporting period, approximately 0.4% of complaints were pending with the consumer, while 1% were pending with the CFPB.

Companies responded to the vast majority of complaints sent to them for review. Approximately 4% of such complaints were closed with monetary relief; 12% were closed with non-monetary relief (e.g., mortgage foreclosure alternatives, stopping unwanted calls from debt collectors, correcting information in a consumer report, etc.); 74% were closed with explanation (i.e., the response substantively meets the consumer’s desired resolution or explains why no action was taken); 3% resulted in an administrative response requiring further review by the CFPB; 5% are still being reviewed by the company; and, 2% did not receive a timely response.

According to the CFPB’s breakdown by category, complaints regarding credit reporting (126,300 or 38%), debt collection (81,500 or 25%), mortgages (30,100 or 9%), credit cards (28,700 or 9%), and checking or savings (25,900 or 8%) accounted for approximately 89% of the 329,800 total complaints. Servicemembers submitted complaints at similar rates as non-servicemembers. Older consumers, in contrast, complained less often about credit reporting, debt collection, and student loans and more often about mortgage, credit card, and checking and savings issues than consumers under 62 years old.

Several complaint categories saw considerable change from 2017. Complaints decreased from 2017 numbers in the categories of student loans (-48%), payday loans (-20%), personal loans (-19%), and mortgages (-19%). Complaints increased in 2018 most significantly for credit repair (+33%), money transfers/virtual currency (+31%), and credit reporting (+27%).

Notably, the CFPB recognizes that market information, such as product or service market size and company share, is often necessary to put the number of consumer complaints (including the number of complaints involving a specific company) into context. However, it “has not yet identified an approach to contextualize multiple products, services, and markets without imposing a significant burden on companies to provide data” and “continues to welcome suggestions and best practices about how to publish information about complaints.”

Since complaints continue to play a role in the Bureau’s use of its supervisory and enforcement authority, minimizing the number of consumer complaints submitted to the CFPB remains a key step to avoid ending up on the regulator’s radar.

In remarks today at the Bipartisan Policy Center (BPC), CFPB Director Kathy Kraninger outlined how she plans to use the various “tools” available to the CFPB.  While consistent with her recent testimony to House and Senate committees, her BPC remarks provide a more detailed view of the approach she plans to take in wielding the CFPB’s authority.

Director Kraninger began her remarks by indicating once again that the CFPB’s focus under her leadership will be on the prevention of harm to consumers. She then provided the following outline of how the CFPB would use its four “tools” (education, rulemaking, supervision and enforcement) to prevent consumer harm:

  • Education.  The CFPB will pursue education initiatives intended to empower consumers to make financial decisions that best suit their individual needs.  She noted as an example the CFPB’s savings initiative that is intended to help consumers increase their savings, particularly savings for emergency needs.
  • Rulemaking. The CFPB will no longer engage in rulemaking through enforcement and will pursue rulemaking “deliberately and transparently” using the APA rulemaking process.  She indicated that rulemaking would be used to provide “clear rules of the road” to regulated entities and that the Bureau “must acknowledge” that compliance costs impact consumer access to and the availability of credit.
  • Supervision.  CFPB examiners will look for a “culture of compliance” at supervised entities and seek to use examinations to “head off trouble.”  Director Kraninger suggested that the CFPB would take a favorable view of companies that self-report and take corrective action to remedy consumer harm.  She indicated that in her role as FFIEC Chairman, she would seek to strengthen coordination between federal and state regulators.
  • Enforcement.  The CFPB will engage in “careful and purposeful enforcement” where “bad actors” have violated clear rules or where the CFPB believes a public enforcement action is needed “to send a clear message” to deter wrongful behavior.  Director Kraninger indicated that the CFPB will move expeditiously in deciding whether or not to pursue an enforcement action.

With regard to the CFPB’s highly anticipated debt collection proposed rule, Director Kraninger indicated that the proposal will be issued “in the coming weeks” and include limits on the number of calls collectors can make on a weekly basis, address communications by email and text, and require new disclosures at the beginning of the collection process.

She also announced that the CFPB will be launching a series of symposiums on topics related to the CFPB’s mission, with the first symposium to look at clarifying the meaning of “abusive acts or practices” in the Dodd-Frank Act.  In its Fall 2018 rulemaking agenda, the CFPB announced that it was considering whether it should engage in rulemaking to clarify the meaning of “abusive.”  Director Kraninger indicated that the symposium, which would include experts and stakeholders, would help to inform the CFPB’s decision on such rulemaking.

In response to questions from audience members, Director Kraninger indicated that:

  • She agreed with former Acting Director Mulvaney’s philosophy that the CFPB should go no further than what its statutory authority expressly provides.
  • While “there’s a place” for CFPB guidance, she would need to look carefully at what the Bureau could address through guidance and that rulemaking, rather than guidance, would be appropriate for something that the CFPB wanted “to hold institutions to.”
  • She is looking at staffing levels but has no goal of increasing or decreasing the number of CFPB staff members.

A memorandum issued by the Office of Management and Budget entitled “Guidance on Compliance with the Congressional Review Act” imposes a new review process on final rules issued by the CFPB and other independent regulatory agencies such as the Federal Reserve, the FCC, the FDIC, the FTC, and the OCC.  The new process will take effect on May 11, 2019.

The CRA provides a mechanism for Congress to overturn federal regulations by enacting a joint resolution of disapproval.  (A recent notable example is Congress’ use of the CRA to override the CFPB’s arbitration rule.)  The CRA requires “major” rules to be accompanied by a GAO report and have a delayed effective date of at least 60 days to give Congress additional time to consider whether to overturn a major rule before it goes into effect.  The CRA defines a major rule as a rule determined by the Administrator of the Office of Information and Regulatory Affairs (OIRA) of the Office of Management and Budget to meet certain criteria such as that the rule “is likely to result in an annual effect on the economy of $100,000,000 or more.”  The CRA does not, however, specifically require agencies to submit their rules to OIRA for such a determination to be made.

Pursuant to Executive Order 12866, agencies must submit a list of their planned regulatory actions to OIRA and indicate which actions, if any, an agency believes is a “significant regulatory action.”  OIRA must then review the list to determine whether any actions that the agency has not designated as “significant” should be considered a “significant regulatory action.”  The Executive Order defines a “significant regulatory action” to include an action that is likely to result in a rule that may “have an annual effect on the economy of more than $100 million or more.”  A “significant regulatory action” is subject to certain requirements set forth in the Executive Order.  According to a 2016 Congressional Research Service (CRS) report, in most cases, a rule determined to be ‘economically significant’ under the Executive Order will also be major under the CRA, and vice versa.”  (The CRS prepares reports for members of Congress and Congressional committees.)

Most notably, the requirement for OIRA review does not apply to independent regulatory agencies.  The CRS report states that because the Executive Order exempts independent agencies but “OIRA is still tasked [by the CRA] with determining whether an independent regulatory agency’s rule is major…it is not clear whether and how rules issued by the independent regulatory agencies should be designated as major under the CRA.”  The report then notes that “recent accounts suggest…that at least some of the independent agencies no longer appear to be acknowledging a role for OIRA in the determination of rules as major.  Rather, these agencies appear to be making the determination themselves.”

The exemption of independent agencies from the Executive Order’s requirements for “significant regulatory actions” has been criticized for removing independent agency rules from Presidential control, because the President, through OMB, does not have direct influence over such rules.  It is this criticism that the new OMB memo is intended to address.

The memo applies to all final “rules” subject to the CRA.  For purposes of the CRA, a “rule” can include agency guidance.  (The GAO determined that CFPB’s indirect auto finance guidance was a “rule” subject to the CRA.  The guidance was subsequently disapproved by Congress pursuant to a joint CRA resolution.)

The memo provides that for rules submitted for review pursuant to Executive Order 12866, OIRA “will continue to incorporate the CRA major determination into its standard process.”  For “rules that would not be submitted to OIRA under Executive Order 12866”  (i.e. rules of independent agencies), the memo sets forth a process for determining whether such rules are major.  This process includes the following requirements:

  • An independent agency must provide a recommended designation of whether a rule is major. If the agency has designated a rule as not major, OIRA must inform the agency within 10 days wither it agrees with the agency’s designation.  Otherwise, the rule becomes subject to the major rule determination process using the “regulatory analysis principles” set forth in the memo.
  • If a rule is considered major by an agency or OIRA does not agree with an agency’s determination that a rule is not major, the agency must submit the rule and an analysis to OIRA for a CRA determination at least 30 days before the agency publishes the rule in the Federal Register or otherwise publicly releases the rule.
  • Once OIRA makes a designation, the agency can publish the rule in the Federal Register or otherwise publicly release the rule.  If the rule is designated major, the agencies must delay the effective date for 60 days from the date of the rule’s submission to Congress or its publication in the Federal Register, whichever is later (subject to applicable CRA exceptions.)

The memo indicates that OIRA anticipates that it will designate certain categories of rules “as presumptively not major” and therefore not subject to the major determination process set forth in the memo.

 

 

A payment processor and its individual owner have entered into a settlement with the FTC to settle charges that they violated a 2009 federal district court order that required them to review and monitor their merchant clients to ensure that the merchants were not engaged in deceptive or unfair practices.  The order is a stark reminder of the risks to payment processors of failing to implement adequate policies and procedures designed to avoid establishing or maintaining relationships with disreputable merchants.

The FTC’s 2006 complaint alleged that using consumers’ names and bank account information provided by its merchant client, the processor continued to debit thousands of consumers’ accounts despite high rates of returned transactions and complaints from consumers and banks.  The FTC alleged that such conduct constituted unfair practices in violation of the FTC Act.

In 2009, the court granted the FTC’s motion for summary judgment and entered an order that prohibited the processor and its owner from continuing to engage in the unfair practices alleged in the complaint and required them to undertake a “reasonable investigation” of prospective merchant clients to ensure that the charges to be processed are authorized and the client is complying with the FTC Act.  The order detailed the steps to be taken by the processor in conducting a “reasonable investigation.”  It also required the defendants to pay $1,779,000 for consumer redress.

On April 10, the court entered a stipulated final judgment and order superseding its 2009 judgment and order except with respect to the payment of consumer redress.  The stipulated judgment and order (1) finds that the defendants violated the 2009 judgment and order by failing to conduct reasonable investigations of prospective merchant clients and monitor clients’ activities, (2) permanently enjoins them from engaging in, and assisting others with, payment processing, and (3) requires them to pay an additional $1.8 million as a “compensatory contempt relief.”

Last summer, in testimony before Congress, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, discussed the FTC’s continued focus on payment processors.  While lawsuits against payment processors represent a small number of the total cases filed by the FTC, Mr. Smith indicated that the FTC views the payment processor’s role as integral to the agency’s anti-fraud efforts because of the processor’s role in facilitating fraudulent schemes.

In bringing claims against payment processors, the FTC has relied on two key legal theories. The first theory (which was used in the case described above) is that the payment processor, by failing to adequately monitor merchant clients, engages in unfair conduct in violation of the FTC Act.  The second theory is that the payment processor violates the FTC’s Telemarketing Sales Rule by “assisting and facilitating” a violation through its provision of services to an entity that the processor knows or consciously avoids knowing is violating the Rule.