While mortgage and student loan servicing violations cited by the CFPB in its Fall 2014 Supervisory Highlights have grabbed the headlines, the report also includes noteworthy observations regarding the violations found by the CFPB in debt collection, electronic fund transfers and consumer reporting. The report covers supervision work completed by the CFPB between March 2014 and June 2014. As in prior supervisory reports, the CFPB continues to be imprecise as to the number of entities at which it found the various violations discussed, thereby obscuring the magnitude or pervasiveness of the purported problems and detracting from the transparency it has promised.
The violations found by the CFPB include the following:
Mortgage servicing. The CFPB’s observations are based on targeted reviews it conducted for compliance with the new mortgage rules. The CFPB found that “one or more servicers” did not have any policies and procedures relating to oversight of service providers as mandated by the new rules or had policies relating to service providers that did not satisfy specific regulatory requirements. The CFPB also found violations relating to loan modifications. “[I]in at least one examination,” CFPB examiners found that a servicer had failed to timely convert a substantial number of trial modifications to permanent modifications after successful completion of the trial modifications. Observing that interest accrued during the delay at the original contract rate rather than the permanent modification’s lower rate, the CFPB indicates that “servicers” capitalized interest at the higher rate into the principal balance due under the modification and continued to report as delinquent borrowers who were delinquent at the beginning of their trial modifications. The delays combined with the negative consequences attributable to the delays were found by the CFPB to constitute an unfair practice.
“At least one servicer” was found to have initially sent permanent modification agreements to borrowers that did not match the terms approved by its underwriting software and, after receiving signed agreements from such borrowers, sent the borrowers updated modifications with materially different terms. Having characterized the initial agreements as “misrepresentations about the available terms,” CFPB examiners determined that “one or more servicers” engaged in a deceptive practice in connection with the modifications. The CFPB’s examiners also identified a deceptive practice “at one or more servicers” based on the servicer having told consumers that it would not seek a short sale deficiency judgment but not specifically waiving the loan owner’s right to pursue a deficiency judgment in short sale approval agreements.
Student loan servicing. The CFPB found that “one or more supervised entities” had engaged in an unfair practice by allocating partial payments proportionally, or pro rata, among all loans, thereby creating delinquencies on all of the borrower’s loans and then imposing a late fee charge on each loan. “[O]ne or more supervised entities” were also found to have engaged in unfair or deceptive practices by charging late fees on full payments received during the grace period.
“[A] student loan servicer” was found to have engaged in a deceptive practice by inflating minimum payments on periodic statements and online account statements through the inclusion of accrued interest on loans that were still in deferment. CFPB examiners found that “one or more student loan servicers” failed to provide consumers with information needed to deduct student loan interest payments on their tax returns, with “at least one examination” revealing that a servicer, without adequate disclosures, had engaged in a deceptive practice by requiring consumers to provide an additional certification regarding the loan’s use for higher education expenses to obtain 1098-E forms. CFPB examiners found it was a deceptive practice for the servicer if the certification was not completed, to issue online account statements indicating that the borrower had paid no deductible interest when the borrower had in fact paid such interest.
Other CFPB findings were that (1) “one or more supervised entities” had engaged in deceptive practices by communicating to borrowers that student loans were never dischargeable in bankruptcy, and (2) “at least one examination” revealed that a servicer had engaged in an unfair practice by using an automated dialer to make calls to delinquent borrowers that was not programmed to account for borrowers’ locations, thereby causing borrowers to receive “inconvenient” calls in the early morning or late at night (presumably the servicer was not considered to be a debt collector but was calling borrowers at times that would have been deemed to be inconvenient under or otherwise prohibited by the Fair Debt Collection Practices Act ).
Debt collection. CFPB examiners found “[i]n one or more examinations” that debt collectors had charged convenience fees to consumers who paid by credit or debit card and lived in states where (1) such fees were prohibited by state law, or (2) the law was silent regarding the legality of such fees and the agreements creating the debt did not expressly authorize such fees. The FDCPA limits fees that can be charged by a debt collector to those expressly authorized by the agreement creating the debt or “permitted by law.” The implication of the CFPB’s view that a debt collector violates the FDCPA by charging convenience fees when state law is silent and the agreement creating the debt does not expressly authorize such fees is that (notwithstanding case law to the contrary) a fee is not “permitted by law” within the meaning of the FDCPA when it is assessed pursuant to a subsequent contract.
“In at least one examination” CFPB examiners found that a debt collector violated the FDCPA by routinely threating consumers with litigation even though it only initiated litigation on a “small fraction” of the accounts it collected. “During one or more examinations,” CFPB examiners found debt collector employees had violated the FDCPA by regularly identifying their employer without being expressly requested to do so as required by the FDCPA. CFPB examiners “[i]n examining one or more financial institutions” found unfair practices relating to debt sales in the form of overstated APRs in the account documents provided to debt buyers and significant delays in forwarding to debt buyers post-sale payments received from consumers.
Electronic fund transfers. CFPB examiners found violations of the Regulation E error resolution requirements, including by “one or more institutions” that, when receiving oral notice of an error from a consumer, did not initiate an investigation until the consumer returned a dispute confirmation form or told consumers complaining about unauthorized transactions that they must first contact the merchant before an investigation could begin. “During one or more examinations,” CFPB examiners found a violation of the Regulation E limits on consumer liability for unauthorized transfers by denying the claim of a consumer who was unable to explain how his PIN was compromised even though the consumer had provided details about the theft of his debit card and subsequent unauthorized PIN-based transfers. CFPB examiners found that the standard error resolution notice used by “one or more of the financial institutions” examined failed to include a statement regarding the consumer’s right to obtain documentation relied on by the institution in investigating an error and that “at least one institution” used notice templates referring to the issuance of provisional credit regardless of whether such credit was issued.
Consumer reporting. CFPB examiners found that “one or more” consumer reporting agencies (CRA) did not comply with the Fair Credit Reporting Act requirements regarding the information that must be included in a notice informing the consumer of the results of a reinvestigation triggered by a consumer’s dispute of the completeness or accuracy of his or her credit report information. Other deficiencies observed by CFPB examiners were that the complaint procedures of “at least one or more nationwide CRA” failed to cover complaints received directly from consumers and “at least one specialty CRA” (1) provided inconsistent information to consumers about the ability to lodge disputes by telephone, and (2) maintained a weak consumer complaint program.
The CFPB’s report also includes a discussion of the CFPB’s use of resubmission standards in conducting Home Mortgage Disclosure Act data integrity reviews and recent CFPB public enforcement actions, supervisory guidance, and larger participant rulemaking. Among those enforcement actions is the CFPB’s action against Flagstar Bank, which represented the CFPB’s first enforcement action related to its new mortgage servicing rules.