A new CFPB report, “Growth in Longer-Term Auto Loans”, discusses a CFPB finding that there has been a significant increase in the use of longer-term “auto loans” since 2009.  The report could presage greater CFPB scrutiny of longer-term auto loans in supervisory examinations of banks and auto finance companies.  This greater scrutiny might include an attempt by the CFPB to use its UDAAP authority to restrict the availability of longer-term auto loans, such as by imposing an “ability to repay” standard with respect to such loans.

In December 2016, the CFPB unveiled Consumer Credit Trends, which it described as “a web-based tool to help the public monitor developments in consumer lending and forecast potential future risks.”  The tool uses de-identified credit information taken from a nationally-representative sample of credit records maintained by one of the nationwide consumer reporting agencies and tracks originations for mortgages, credit cards, auto loans, and student loans by borrower credit score, income level, and age.

When the tool was unveiled, the CFPB indicated that it planned to “offer analyses on notable findings as warranted.”  In the new report, which the CFPB describes as “the first Quarterly Consumer Credit Trends report” and an “update to the CFPB’s Consumer Credit Trends dashboard,” the CFPB “explore[s] what the data reveals about the increased use of these longer-term loans.”  For purposes of the report, “longer-term loans” are defined as loans with terms of six years or more.  In the accompanying press release, the CFPB stated that “the average length of ownership of a vehicle is approximately 6.5 years” and asserted that “[t]his means that many consumers might still owe on loans after they are no longer driving the vehicle.”

The report says that it uses the same definition of “auto loans” as is used in the Consumer Credit Trends dashboard. The dashboard defines the term to mean “closed-end loans used by consumers to finance the purchase of a new or used auto, where the auto is used as collateral for the loan.”  Although the dashboard uses the term “loan,” we assume that the data analyzed also includes the predominant form of purchase money auto finance transactions – retail installment sale transactions with automobile dealerships.

In purporting to paraphrase the dashboard definition of “auto loans,” the report also refers to leases used to finance automobile purchases.  We assume that this reference to leases was included unintentionally because the dashboard definition of “auto loans” does not refer to leases, and consumer lease transactions are not purchase money consumer credit transactions.

The CFPB report includes the following findings based upon its review of the sample “auto loan” dataset:

  • The share of longer-term loans increased from 26 percent of auto loans originated in 2009 to 42 percent of 2017 auto loan originations (with six-year term loans being the most common “longer-term loan”).
  • The credit scores of borrowers who obtain longer-term loans are lower than the scores of borrowers who obtain five-year loans. (The average credit score of borrowers taking out longer-term loans is 39 points below the average score of borrowers obtaining five-year loans, although the report notes that the lowest average credit scores are for borrowers who obtain loans with terms of less than three years.)
  • Longer-term loans tend to be used to finance larger amounts.
  • Default rates associated with longer-term loans are higher than those for shorter-term loans.

The CFPB makes the following observations based on its findings:

  • Consumers may be increasingly using longer-term loans because they are buying more expensive cars, making smaller down payments, or otherwise financing larger amounts.
  • While longer-term loans may make monthly payments more affordable, financing costs are higher over the life of the loan.  As a result, it is not clear consumers are better off obtaining longer-term loans or are likely to be more successful in repaying those loans.
  • Riskier borrowers are more likely to opt-for a longer-term loan to ease their monthly debt burden.
  • The movement toward longer-term loans may increase the likelihood of borrower default (although the CFPB notes that default rates for both five- and six-year loans have been increasing).

The first three observations appear to be statements of the obvious and/or inferences that are speculative in nature.  The last observation is based upon data comparing cumulative default rates by origination-year cohort for five- and six-year loans, with “default” being defined as 90 or more days past due or having a major derogatory event such as a repossession.  Notably, the report states that “[t]he higher default rates observed for six-year loans should not be interpreted as a causal relationship” since “riskier borrowers” may prefer longer-term loans.  Nevertheless, the report concludes that the absence of a decline in the default rates for six-year loans as they have become more widely used “suggests that the movement toward these longer-term loans may increase the likelihood of borrower default, potentially posing greater risks to both borrowers and lenders.”

This concluding observation of the CFPB regarding default rates, and its findings regarding credit scores and loan amounts, may foreshadow supervisory scrutiny with respect to the underwriting of “auto loans” with terms of six years or more.  The end result of such scrutiny may be to restrict the availability of longer-term loans to the ultimate detriment of consumers.

 

In May 2017, we blogged about press reports that the Government Accountability Office (GAO) had accepted a request from Senator Patrick Toomey for a determination concerning whether the CFPB Bulletin 2013-02, titled “Indirect Auto Finance and Compliance with the Equal Credit Opportunity Act,” is a “rule” within the scope of the Congressional Review Act (CRA).  Our blog post also noted reports that the GAO had accepted a similar request from Senator Toomey regarding the interagency leveraged lending guidance (Interagency Guidance) issued jointly by the OCC, the Fed, and the FDIC on March 22, 2013.  (While we did not have a copy of Senator Toomey’s request regarding the CFPB Bulletin when we blogged, we have since obtained a copy.  Both of Senator Toomey’s requests to the GAO were dated March 31, 2017.)

Last week, the GAO issued a response to Senator Toomey’s request regarding the Interagency Guidance.  The GAO concluded that the Interagency Guidance “is a general statement of policy and is a rule under the CLA.”  Under the CRA, an agency must submit a final rule to the GAO and Congress “before a rule can take effect.”  Once this notification requirement has been satisfied, there is a limited period of time during which a joint resolution of disapproval can be introduced and acted upon.  If a joint resolution of disapproval is passed by both houses of Congress, it is sent to the President for executive action.  Most significantly, the CRA establishes a fast-track process under which a joint resolution of disapproval cannot be filibustered in the Senate and can be passed by the Senate by a simple majority vote.

In analyzing the Interagency Guidance, the GAO applied the Administrative Procedure Act’s definition of “rule” which the CRA generally adopts.  The CRA provides that a rule is “the whole or a part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency.”  Three types of rules are excluded from the scope of the CRA: (1) rules of particular applicability; (2) rules relating to agency management or personnel; and (3) rules of agency organization, procedure or practice that do not substantially affect the rights or obligations of non-agency parties.

According to the GAO, the gist of the banking agencies’ argument was that their Interagency Guidance was merely a statement of policy rather than a rule subject to the CRA.  The GAO agreed with the agencies’ characterization of their guidance document as a statement of policy that:

[p]rovides information on the manner in which the Agencies will exercise their authority regarding leveraged lending activities, does not establish a ‘binding norm,’ and does not determine the outcome of any Agency examination of a financial institution.  Rather, the Guidance expresses the regulators’ expectations regarding the sound risk management of leveraged lending activities.

The GAO nevertheless framed the issue presented as “whether this general statement of policy is a rule under the CRA.”

In concluding that the Interagency Guidance is a rule subject to the CRA, the GAO relied on its prior decisions finding general statements of policy to be rules subject to congressional review.  In doing so, the GAO pointed to floor statements made by the principal sponsor during final congressional consideration of the bill that became the CRA as well as the analyses of legal commentators.  Among other things, the principal sponsor had stated that the types of documents covered by the CRA include “statements of general policy, interpretations of general applicability, and administrative staff manuals and instructions to staff that affect a member of the public.”  The GAO specifically rejected the argument that an agency action cannot be a rule under the CRA unless it establishes legally binding standards that are certain and final and it substantially affects the rights or obligations of third parties.

The CFPB Bulletin setting forth its indirect auto finance guidance was issued on March 21, 2013.  Its stated purpose was to “provide[ ] guidance about compliance with the fair lending requirements of the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B, for indirect auto lenders that permit dealers to increase consumer interest rates and that compensate dealers with a share of the increased interest revenues.”  There are very compelling arguments that the CFPB guidance falls squarely within the CRA definition of a “rule” because it is an agency statement of future effect that is designed to implement, interpret or prescribe law or policy, and it is not one of the types of rules that is expressly excluded from the scope of the CRA.  Additionally, the GAO determination regarding the Interagency Guidance suggests that it would similarly reject any CFPB assertion that the indirect auto finance guidance is not a “rule” because it is a non-binding statement of policy that merely provides information on the manner in which the CFPB will exercise its enforcement and supervisory authority with respect to the subject addressed.

A GAO finding that the CFPB guidance is a “rule” under the CRA could have several potential consequences.  Because the CRA requires an agency to submit a final rule to the GAO and Congress “before [it] can take effect,” the guidance arguably would be ineffective because it presumably was not reported to the GAO and Congress in the manner required by the CRA.

Additionally, any member of Congress might respond to a GAO determination that the CFPB guidance is a “rule” by introducing a joint resolution of disapproval.  According to a Congressional Research Service report, in prior instances where the GAO determined that an agency action satisfied the CRA definition of a “rule” and joint resolutions of disapproval were subsequently introduced, “the Senate has considered the publication in the Congressional Record of the official GAO opinions . . . as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”

Finally, a GAO determination that the CFPB guidance is a “rule” could open the door to GAO determination requests and CRA challenges to other CFPB guidance documents that might likewise satisfy the CRA definition of a rule.  As our readers are well aware, CFPB compliance bulletins announcing regulatory expectations have been issued on a wide range of regulatory compliance topics including debt collection, credit reporting, and credit card add-on products.

 

The United States Department of Justice announced last week that Westlake Services LLC and its subsidiary, Wilshire Consumer Capital LLC, have agreed to pay $760,788 to resolve allegations the companies violated the Servicemembers Civil Relief Act (“SCRA”) by repossessing 70 vehicles owned by SCRA-protected servicemembers without obtaining the required court orders.

The CFPB referred the matter to the Justice Department’s Civil Rights Division’s Housing and Civil Enforcement Section in 2016, after receiving a complaint that Los Angeles-based Westlake Services and Wilshire Consumer Capital were conducting repossessions in violation of the SCRA.  The Justice Department sued the companies in United States District Court for the Central District of California.

The United States’ complaint alleged that Westlake and Wilshire repossessed vehicles in violation of 50 U.S.C. § 3952(a) and 50 U.S.C. § 3953(c), respectively.  Both provisions require lenders to obtain a court order before repossessing a covered servicemember’s motor vehicle, with the latter provision extending that protection for one year following the termination of military service.  The complaint alleged the companies failed to check the Defense Manpower Data Center (DMDC) database to determine whether customers were SCRA-protected servicemembers before repossessing vehicles without a court order.

The settlement agreement requires that Westlake and Wilshire pay $10,000 per violation to each of the affected servicemembers, plus an amount to compensate them for any lost equity they suffered in the repossessed vehicle, plus interest.  The companies must also repair the credit reporting of all affected servicemembers and pay a $60,788 civil penalty to the United States.  The companies also agreed that they would not repossess an SCRA-protected servicemember’s vehicle without obtaining a court order or valid SCRA waiver in the future and that they would implement enhanced policies and procedures and training to ensure compliance with SCRA requirements.  The Settlement Agreement is available here.

This is not the first time that Westlake and Wilshire have been the target of a federal agency.  In 2015, the companies entered into a Consent Order with the CFPB under which the companies agreed to pay a $4.25 million civil money penalty and $44.1 million in refunds and debt forgiveness to borrowers for alleged unlawful conduct including engaging in debt collection practices in violation of the Fair Debt Collection Practice Act and advertising auto financing in violation of the Truth in Lending Act.  The alleged unlawful debt collection conduct included:  threatening to refer borrowers for criminal prosecution; illegally disclosing information about debts to borrowers’ employers, friends and family; and using a software program, Skip Tracy, which disguised the phone number and caller ID text information of outbound calls so that the calls appeared to originate from other callers, such as pizza delivery services, flower shops or the borrower’s family and friends.  See “Consent Order with the CFPB.”

American Banker has reported that the Government Accountability Office has accepted a request from Senator Pat Toomey on whether the CFPB’s indirect auto finance guidance issued in March 2013 is a “rule” under the Congressional Review Act (CRA).  It reported that the GAO also accepted a similar request from Senator Toomey regarding the leveraged lending guidance issued jointly by the OCC, Fed and FDIC.  While we have been unable to obtain a copy of Senator Toomey’s request regarding the CFPB guidance, we presume his request regarding the leveraged lending guidance, which we did obtain, is substantially similar to his CFPB request.

The CRA created a fast-track legislative process for Congress to nullify a covered federal “rule” by passing a joint resolution of disapproval that would then be presented to the President for approval or veto.  Under the CRA, “before a rule can take effect,” an agency must submit a final rule to the GAO and Congress.  Upon receipt of the rule by Congress, members of Congress have a limited time window during which they can submit and take action on a joint resolution disapproving the rule.  If the resolution is passed by both the House and Senate, it is sent to the President for signature or veto.  Most significantly, the CRA establishes a process under which a joint resolution of disapproval cannot be filibustered in the Senate and can be passed with only a simple majority.

A GAO finding that the CFPB guidance is a “rule” under the CRA could have several potential consequences.  Because the CRA requires an agency to submit a final rule to the GAO and Congress “before [it] can take effect,” the guidance would potentially be ineffective because it was never submitted to the GAO and Congress under the CRA.  As a result, the CFPB would be faced with the choice of challenging the GAO’s finding, withdrawing the guidance, or reissuing it as rule under the Administrative Procedure Act (APA) notice and comment procedures.

Should the CFPB elect to disregard the GAO’s finding, a private plaintiff might file a lawsuit challenging the guidance’s effectiveness based on the CFPB’s failure to comply with the CRA.  The CRA provides that “No determination, finding, action, or omission under [the CRA] shall be subject to judicial review.”  This prohibition would literally appear to preclude such a lawsuit.  However, according to a Congressional Research Service (CRS) report, a joint statement published by the CRA’s principal sponsors in the Congressional Record indicated that the limitation on judicial review was not intended to prohibit a court from determining that a rule has no legal effect due to an agency’s failure to comply with the requirement to submit a final rule to the GAO and Congress.

Finally, in addition to asserting that the guidance is ineffective due to the CFPB’s failure to comply with the CRA, Republican lawmakers might respond to a GAO finding that the guidance is a “rule” by introducing a CRA joint resolution of disapproval.  According to another CRS report issued in November 2016, the GAO has issued 11 opinions at the request of members of Congress as to whether an agency action was a rule under the CRA.  The report indicates that in seven opinions, the GAO determined that the agency action satisfied the CRA definition of a “rule” and that after receiving these opinions, some members submitted CRA resolutions of disapproval for the “rule” that was never submitted to Congress.  The report also indicates that “in these cases, the Senate has considered the publication in the Congressional Record of the official GAO opinions…as the trigger date for the initiation period to submit a disapproval resolution and for the action period during which such a resolution qualifies for expedited consideration in the Senate.”

The CRA’s definition of a “rule” is generally the same as the definition of a rule for purposes of the APA.  The APA defines a rule as “the whole or part of an agency statement of general or particular applicability and future effect designed to implement, interpret, or prescribe law or policy or describing the organization, procedure, or practice requirements of an agency and includes the approval or prescription for the future of rates, wages, corporate or financial structures or reorganizations thereof, prices, facilities, appliances, services or allowances therefor or of valuations, costs, or accounting, or practices bearing on any of the foregoing….”

While Senator Toomey’s office confirmed that the GAO had accepted his requests, his staff was unwilling to provide a copy of the two GAO acceptance letters referenced in the American Banker article.  The reasons given by a staff member for not providing the letters was that they contained private contact information and little more than a sentence accepting the requests and indicating that the GAO was working on them.  According to American Banker, the letters gave no timetable for when the GAO would issue its opinions.

A GAO finding that the CFPB’s indirect auto finance guidance is a “rule” under the CRA could open the door to CRA challenges to other guidance issued by the CFPB.  Such guidance has covered a wide range of topics including debt collection, credit reporting, and credit card add-on products.

 

 

At the Auto Finance Risk and Compliance Summit held this week, Calvin Hagins, CFPB Deputy Assistant Director for Originations, stated that the CFPB is increasingly asking lenders about ancillary product programs during examinations, particularly about the percentage of consumers buying these products.

In June 2015, when the CFPB released its larger participant rule for nonbank auto finance companies, it also issued auto finance examination procedures in which ancillary products, like GAP insurance and extended service contracts, received heavy attention.  We commented that by giving so much attention to these products, the CFPB was signaling its intention to give lots of scrutiny to these products in the auto finance market.  Mr. Hagins’s comments confirm that the CFPB is in fact looking closely at these products in exams.

Speaking at the Summit as a member of a regulatory panel, Mr. Hagins indicated that companies should expect to get questions from CFPB examiners about ancillary products.  He indicated that the CFPB specifically looks at how the product is offered to the consumer, when in the contracting process is it offered, how disclosures are being provided to the consumer, and the acceptance rate.  As an example, he indicated that a 95% acceptance rate would cause CFPB examiners to raise questions about how the rate was achieved.

At the Summit, Colin Hector, an FTC attorney, indicated that the FTC is also interested in ancillary products, particularly whether there is a potential for consumer deception in how they are sold.  He commented that, in its enforcement work, the FTC has focused on ancillary product sales that occur at the end of the sales process when consumers may be led to believe they must purchase the products to obtain financing and the seller has increased leverage because the consumer is more invested in completing the transaction.

 

Republican members of the House Financial Services Committee recently released a report, prepared by the Republican Staff of the Committee, titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This is the third Republican Staff report examining the automotive ECOA enforcement actions of the CFPB with respect to what its characterizes as a “dealer markup” of the wholesale buy rate established by the assignee of a retail installment sale contract (“RISC”).  We previously wrote about the first investigative report in this series, which was titled “Unsafe at Any Bureaucracy: CFPB Junk Science and Indirect Auto Lending.”  The latest report discusses two subjects.

The “Vitiated Legal Case”

The third report is devoted principally to “demonstrat[ing] that under” the Supreme Court decision in Inclusive Communities, “if the CFPB were to rely upon the legal theory it deployed in previous enforcement actions against auto financiers, its claims would not survive judicial scrutiny.”  As a threshold matter, the report asserts that disparate impact claims are not cognizable under the ECOA because the ECOA does not contain “results-oriented language” like that which the Supreme Court relied upon in holding that disparate impact claims are cognizable under the Fair Housing Act (“FHA”).   The ECOA speaks instead in terms of discriminating against an applicant on a prohibited basis.  The report further asserts that Inclusive Communities interpreted the adoption of the FHA Amendments of 1988, which it said contemplated the existence of disparate impact liability, as Congressional ratification of prior appellate decisions holding that disparate impact claims are cognizable under the FHA.  By way of contrast, however, the report notes that “Congress has made no such amendments to ECOA.”

The staff report also asserts, and contains a robust discussion of, additional reasons why the Bureau could not establish a prima facie case of disparate impact liability against an assignee of RISCs.  Specifically, for reasons discussed therein, the report concludes that: (i) the asserted “discretion” to “mark up” the wholesale buy rate is not a specific “policy” upon which a disparate impact claim may be based; and (ii) the CFPB could not meet the robust causality standard that Inclusive Communities reiterated and expounded upon in its discussion of the safeguards against abusive disparate impact claims.  Finally, the report suggests that, “[b]y asking only whether a minority [buyer] paid more than the non-Hispanic white average, the CFPB does not accurately assess whether he or she was actually harmed by the disparate impact.”

The report’s discussion of the “vitiated legal case” against assignees of RISCs concludes with the observations that “[f]uzzy logic and false comparisons are unfortunately prevalent in the” Bureau’s ECOA auto enforcement actions, as is a “lack of rigor that leads to unsupported and unreliable conclusions.”  We have written previously about some of the issues discussed in the report, including in our articles on the Supreme Court decision in Inclusive Communities, “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” and a February 2006 Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words That Actually Are There.”

The Auto Finance Larger Participant Rule

The press release issued by the Republican members of the Committee highlights the final subject covered by the report.   Titled “CFPB Director Failed to Heed Attorney Advice on Auto Lending Rule, Likely Violated Federal Law,” the press release asserts that the Bureau may have violated the Administrative Procedures Act in adopting the larger participant rule for the automobile financing market (the “LPR”).  Quoting from the Supplementary Information accompanying the proposed LPR, the report states that the definition of a “larger participant” is “based upon ‘quantitative information on the number of market participants and their number and dollar volume of annual originations’ taken from Experian’s AutoCount database.”

According to the report, during the comment period for the proposed LPR, the Bureau received requests for a list of the companies that it believed would qualify as “larger participants” under the proposed rule, and “‘a number of comments pertaining directly or indirectly to the Experian list.’” Believing the Experian AutoCount data, and any information derived from it, to be proprietary information that it was not at liberty to disclose, the Bureau did not respond with the requested information.

The report indicates, however, that after the comment period ended, Experian informed the Bureau that it had no objection to: (i) releasing the list of the names of the entities that the Bureau estimated would be “larger participants” under the proposed volume threshold for larger participant status; and (ii) the relative market share for each listed entity.  Relying upon internal CFPB documents obtained by the Committee, the report asserts that the Bureau did not follow an internal legal recommendation to reopen the comment period, publish this information and request comments with respect to it before proceeding to adopt a final LPR for the automobile financing market.

In its Fall 2016 Supervisory Highlights, which covers supervision work generally completed between May and August 2016, the CFPB highlights violations found by its examiners involving origination and servicing of auto financing, debt collection, mortgage origination and servicing, student loan servicing, and fair lending.

On December 2, 2016, from 12 p.m. to 1 p.m ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Fall 2016 Supervisory Highlights: Looking Beyond the Headlines.”  A link to register is available here.

The report states that recent non-public supervisory actions have resulted in restitution of approximately $11.3 million to more than 225,000 consumers.  The report also indicates that the CFPB’s supervisory activities “have either led to or supported” two recent public enforcement action described in the report that resulted in over $28 million in consumer remediation and $8 million in civil money penalties.

The CFPB’s “supervisory observations” include the following:

  • Servicing of auto financing.  CFPB examiners concluded that it was an unfair practice to detain or refuse to return personal property found in a repossessed vehicle until the consumer paid a fee or where the consumer requested return of the property, regardless of what the consumer agreed to in the contract.  Even when the consumer agreements and state law provided support for lawfully charging the fee, examiners concluded there were no circumstances in which it was lawful to refuse to return property until after the fee was paid, instead of simply adding the fee to the borrower’s balance as companies do with other repossession fees.  Examiners also found that in some instances, one or more companies were engaging in the unfair practice of charging a borrower for storing personal property found in a repossessed vehicle when the consumer agreement disclosed that the property would be stored, but not that the borrower would need to pay for the storage.  The report indicates that in upcoming exams, CFPB examiners “will be looking closely at how companies engage in repossession activities, including whether property is being improperly withheld from consumers, what fees are charged, how they are charged, and the context of how consumers are being treated to determine whether the practices were lawful.”
  •  Debt collection.
    • Fees. CFPB examiners determined that a “convenience fee” charged by one or more debt collectors to process payments by phone and online violated the FDCPA where the consumer’s contract did not expressly permit convenience fees and applicable state law was silent on whether such fees are permissible.  CFPB examiners also found that debt collectors had made false representations in violation of the FDCPA by demanding unlawful fees, stated that the fees were “nonnegotiable,” or withholding  information from consumers about other methods to make payments that would not incur the fee after the consumer requested such information.  CFPB examiners also found that one or more debt collectors violated the FDCPA by charging collection fees in states where collection fees were prohibited or in states that capped collection fees at a threshold lower than the fees that were charged.  The report notes that examiners “also observed a [compliance management system (CMS)] weakness at one or more collectors that had not maintained any records showing the relationship between the amount of the collection fee and the cost of collection.”
    • Collection calls; third party communications. CFPB examiners determined that collection calls made by one or more debt collectors involved false representations or deception in violation of the FDCPA where collectors (1)  purported to assess consumers’ creditworthiness, credit scores, or credit reports when collectors could not assess overall borrower creditworthiness, represented that an immediate payment was necessary to prevent a negative impact on a consumer’s credit, (3) impersonated consumers while using a creditor’s consumer-facing automated telephone system to obtain information about a consumer’s debt, or (4) told consumers that the ability to settle an account was revoked or would expire.  At one or more debt collectors, examiners also identified several instances where collectors violated the FDCPA by disclosing the consumer’s debt to a third party (which the CFPB stated was often the result of inadequate identity verification during telephone calls) or by an employee’s disclosure of the debt collection company’s name to a third party without first being asked for that information by the third party.
    • FCRA. CFPB examiners determined that “one or more entities” failed to provide adequate guidance and training to staff regarding differentiating FCRA disputes from general customer inquiries, complaints, or FDCPA debt validation requests.  One or more of such entities were directed to develop and implement “reasonable policies and procedures to ensure that direct and indirect disputes are appropriately logged, categorized, and resolved” and/or “a training program appropriately tailored to employees responsible for logging, categorizing, and handling FCRA direct and indirect disputes.”  Examiners also determined that one or more debt collectors violated the FCRA by not investigating indirect disputes that lacked detail or not accompanied by attachments with relevant information from the consumer or, for disputes categorized as frivolous, sending notices that did not indicate what the consumer needed to provide in order for the collector to complete the investigation.
    • Regulation E. Examiners found that one or more debt collectors violated Regulation E by failing to provide consumers with a copy of the terms of an authorization for preauthorized electronic fund transfers.  Some of these debt collectors had instead sent consumers a payment confirmation notice before each electronic fund transfer.  The CFPB stated that such notices did not satisfy the Regulation E requirement to provide a copy of the terms of the authorization because the notices did not describe the recurring nature of the preauthorized transfers from the consumer’s account, such as by describing the timing and amount of the recurring transfers.
  • Mortgage origination. CFPB examiners found that one or more entities offering mortgage loan programs that accepted alternative income documentation for salaried consumers as part of their underwriting requirements had violated Regulation Z ability to repay (ATR) requirements. Such entities indicated that they relied primarily on the consumer’s assets when making an ATR determination, but also established a maximum monthly debt to income (DTI) ratio in their underwriting policies and procedures.  CFPB examiners “found that the income disclosed on the application to calculate the consumer’s monthly DTI ratio was not verified, but instead was tested for reasonableness using an internet-based tool that aggregates employer data and estimates income based upon each consumer’s residence zip code address, job title, and years in their current occupation.”  CFPB examiners also found that one or more federally-regulated depository institutions were using employees of a staffing agency to originate loans who were improperly registered in the National Multistate Licensing System and Registry as employees of the depository institutions.
  • Student loan servicing. In addition to finding that one or more servicers were engaging in an unfair practice in violation of the Dodd-Frank Act UDAAP prohibition by denying, or failing to approve, applications for income-driven repayment (IDR) plans that should have been approved on a regular basis, CFPB examiners cited servicers for the unfair practice of failing to provide an effective choice on how payments should be allocated among multiple loans.  Such servicers had failed to provide an effective choice through such practices as not giving borrowers the ability to allocate payments to individual loans in certain circumstances, not effectively disclosing that borrowers had the ability to provide payment instructions, or not effectively disclosing important information (like the allocation methodology used when instructions are not provided).  The CFPB also cited a student loan servicer for engaging in a deceptive practice in violation of the Dodd-Frank Act UDAAP prohibition in connection with loans considered to be “paid ahead.” CFPB examiners concluded that one or more servicers’ billing statements could have misled reasonable borrowers to believe additional payments during or after a paid-ahead period would be applied largely to principal. According to the CFPB, the statements, which noted that nothing was due in months that the borrower was paid ahead, misled consumers as to how much interest would accrue or had accrued, and how that would affect the application of consumers’ payments when the borrower began making payments.  The CFPB directed one or more servicers to hire independent consultants to conduct user testing of the servicer’s communications to improve how the communications describe the basic principles of the servicer’s payment allocation methodologies, the consumer’s ability to provide payment instructions, and the accrual of interest during a paid-ahead period.  The CFPB refers servicers to the policy direction on student loan servicing issued in July 2016 by the Department of Education for guidance on IDR application processing, billing statements, and  allocation methodologies.  (Issues related to IDR plan applications were highlighted in the midyear report of the CFPB’s Student Loan Ombudsman released in August 2016.)
  • Fair lending.
    • LEP consumers. CFPB examiners “observed situations” in which financial institutions’ treatment of limited English proficiency (LEP) and non-English-speaking consumers posed fair lending risk, such as marketing only some credit card products to Spanish-speaking consumers, while marketing additional credit card products to English-speaking consumers.  The CFPB noted that one or more such institutions lacked documentation describing how they decided to exclude those products from Spanish language marketing, thereby “raising questions about the adequacy of their compliance management systems related to fair lending.”  According to the CFPB, to mitigate any compliance risks related to these practices, one or more financial institutions revised their marketing materials to notify consumers in Spanish of the availability of other credit card products and included clear and timely disclosures to prospective consumers describing the extent and limits of any language services provided throughout the product lifecycle.  The CFPB observed that such institutions “were not required to provide Spanish language services to address this risk beyond the Spanish language services they were already providing.”  The report includes a list of “common features of a well-developed” CMS that considers treatment of LEP and non-English-speaking consumers.
    • Redlining. The report lists factors considered by the CFPB in assessing redlining risk in examinations and describes how the CFPB conducts its analysis of redlining risk, such as its use of HMDA and census data to assess an institution’s  lending patterns and its comparison of an institution to peer institutions.  The report indicates that in their initial analysis, CFPB examiners will compare an institution’s lending patterns to other lenders in the same MSA to determine whether the institution received significantly fewer applications from minority areas relative to other lenders in the MSA.  Examiners may also compare an institution to a more refined group of peers which can be defined in various ways, such as lenders that received a similar number of applications, originated a similar number of loans in the MSA, or offered a similar product mix.  Examiners have also considered an institution’s own identification of its peers in particular markets.
  • Examination procedures and guidance. The CFPB references recent updates to its reverse mortgage, student loan, and Military Loan Act examination procedures, as well as its recent amendment of its service provider bulletin.  According to the CFPB, some small service providers reported that entities have imposed the same due diligence requirements on them as for their largest service providers. The CFPB stated that this may have resulted from some entities having interpreted its 2012 bulletin to mean they had to use the same due diligence requirements for all service providers no matter the risk for consumer harm.  The amendment was intended to clarify that a risk management program can be tailored to the size, market, and level of risk for consumer harm presented by the service provider.

 

 

 

The CFPB has unveiled its latest “Know Before You Owe” initiative aimed at consumers shopping for an auto loan.  The new initiative was accompanied by the CFPB’s release of a report entitled “Consumer Voices on Automobile Financing” that is intended to share the CFPB’s research about how consumers approach decisions about auto financing.

The CFPB’s overall objective is to help consumers make informed choices about financing when buying a car by encouraging them to do the following:

  • Shop for and compare financing options
  • Look beyond the monthly payment and consider the total cost of financing
  • Be aware of situations and financing features that could result in “costly surprises down the road”

Know Before You Owe.  The key component of the initiative is a shopping sheet that is intended to assist consumers by indicating which financing factors are negotiable (vehicle price, add-ons, fees, down payment, trade-in value, interest rate, loan term) and allowing them to compare the total cost of multiple loan offers.

The shopping sheet is also included in a guide entitled “Take control of your auto loan” that is intended to walk consumers through the auto financing process.  (The guide does not address leasing.)  The guide contains sections on (1) budgeting, (2) different types of auto financing (such as bank loans, dealer-arranged financing and “buy here pay here” dealer financing), (3) shopping for an auto loan (which includes advice encouraging consumers to checking current interest rates, consider the impact of an existing loan on a trade-in, and “think about optional add-ons ahead of time”), (4) negotiating an auto loan (which includes advice encouraging consumers to know what is negotiable and negotiate to lower the total cost and not just the monthly payment), and (5) closing the deal (which includes advice encouraging consumers to confirm that the documentation reflects what was negotiated).

Most of the information in the guide is also separately provided on the CFPB’s website.  Both the guide and the website information include highlighted tips, such as “If you finance add-ons as part of your loan, the amount you borrow and pay will increase,” “Be cautious of some biweekly payment plans,” and “In general, dealers and lenders are not required to offer the best rates available.  When negotiating, ask if you can get a better rate or more favorable terms.”

Report.  According to the CFPB’s press release, the auto loan initiative was informed by the research described in the report.  To research consumer experiences with auto financing, the CFPB conducted a series of focus groups with 308 consumers and examined narratives in consumer complaints submitted to the CFPB in the “vehicle loan or lease category.”

Themes that emerged from the focus groups included: (1) most consumers did advance research on the type and price of vehicles they wanted to buy but not on available financing options, (2) most consumers focused on the monthly payment and vehicle price, (3) many consumers did not consider or attempt to negotiate financing or interest rates, and (4) many consumers purchased add-on products despite having negative perceptions of the sales process for add-ons.

Themes that were identified in complaint narratives included a lack of understanding of financing options, difficulty understanding loan features during loan negotiations, and problems with add-ons such as paying for unwanted add-ons and reports of lenders insisting that the purchase of add-ons was necessary for loan approval.

 

 

 

I am proud to report that Ballard attorneys Peter N. Cubita and Christopher J. Willis have been selected to receive a 2016 Distinguished Legal Writing Award from The Burton Awards, which recognize outstanding legal writing.  They are being honored for their article entitled “Auto Finance and Disparate Impact: Substantive Lessons Learned from Class Certification Decisions,” which was published in the May 1, 2015, edition of the Consumer Financial Services Law Report.  This article argues that seminal class certification decisions rendered in employment and mortgage discrimination cases undercut the disparate impact theory of liability used to allege “discretionary pricing” rate spread claims against assignees, whether brought as private class actions or as governmental enforcement actions.

Run in association with the Library of Congress and co-sponsored by the American Bar Association, The Burton Awards is a non-profit, academic effort devoted to recognizing and rewarding excellence in the legal profession.  Law firm nominations for its Distinguished Legal Writing Awards are submitted annually for articles published during the prior year.  The nominated articles are reviewed by an Academic Board that includes law school professors and a former Chair of the White House Plain Language Committee.  Only 35 articles are selected each year from nominations submitted by many of the nation’s 1,000 largest law firms.

The 17th annual Burton Awards ceremony will be held at The Library of Congress in Washington, D.C., on May 23, 2016. U.S. Supreme Court Justice Stephen Breyer will be the featured speaker, and Justice Ruth Bader Ginsburg will memorialize Justice Antonin Scalia during the program.

As becomes readily apparent to those who have the pleasure of working with them, Peter and Chris have a talent for explaining complex subjects in a clear, concise and illuminating manner.  It does not surprise me that their article was selected as one of the 35 best articles published by law firm writers last year.

In their article, Peter and Chris discuss the substantive implications that class certification appellate decisions may have for disparate impact retail pricing claims alleged against assignees of motor vehicle retail installment sale contracts.  Peter previously received a 2007 Burton Award for Legal Achievement for his Business Lawyer article entitled, “The ECOA Discrimination Proscription and Disparate Impact – Interpreting the Meaning of the Words that Actually Are There.”  In that ground-breaking article, Peter discussed the threshold issue of whether disparate impact claims should be cognizable under the Equal Credit Opportunity Act.  Peter’s Business Lawyer article was cited in a November 2015 report, prepared by the Republican Staff of the House Financial Services Committee, entitled “Unsafe at Any Bureaucracy:  CFPB Junk Science and Indirect Auto Lending.”

 

Much of Director Cordray’s testimony in his appearance before the Senate Banking Committee yesterday consisted of his predictable defense of various CFPB positions.  While the hearing was much less contentious than last month’s hearing of the House Financial Services Committee at which Director Cordray appeared, the questions raised by Republican Senators focused on many of the same areas of concern as those of Republican House members.

In response to criticism of the CFPB’s enforcement actions against auto finance companies, Director Cordray continued to defend the CFPB’s reliance on disparate impact liability.  As he did in the House hearing, Director Cordray pointed to the U.S. Supreme Court’s Inclusive Communities decision as vindicating the CFPB’s position despite the fact that the decision did not address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act.  According to Director Cordray, the Supreme Court had “resoundingly reaffirmed” the validity of using disparate impact to prove discrimination.  He also defended the CFPB’s methodology for establishing disparate impact as well as its method for identifying consumers entitled to relief under the auto finance company settlements.

Director Cordray also gave no ground on the CFPB’s reliance on enforcement in place of rulemaking.  Indeed, he appeared to embrace the phrase “regulation by enforcement” used by industry to criticize the CFPB’s approach.  Director Cordray cited to his remarks last month to the Consumer Bankers Association in which he called it “compliance malpractice” for companies not to look at CFPB consent orders with others to assess their own compliance.

In addition to his continued defense of CFPB positions, Director Cordray did provide some noteworthy information in response to Senators’ questions:

  • In response to a question regarding the CFPB’s activities related to small business lending, Director Cordray appeared to acknowledge that the CFPB’s role is limited to its enforcement of the Equal Credit Opportunity Act and implementation of the expanded small business lending data collection requirements of Dodd-Frank Act Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.)  As we previously reported, the CFPB has been seeking to hire a new “Assistant Director, Small Business Lending,” who will be charged with leading its Section 1071 team.  Based on Director Cordray’s comment that he would welcome recommendations from Senators of candidates for the position, it appears that the position has not yet been filled.
  • In response to a question asking how consumers will be able to access small dollar loans in the wake of anticipated CFPB restrictions on payday loans, Director Cordray indicated that he envisions three categories of outlets: a “reformed” payday loan industry, community banks and credit unions, and Fintech companies.  With regard to Fintech, Director Cordray indicated that he envisions “real opportunities” for online lending but commented that small-dollar lending is “tricky” for Fintech companies.  He also commented that the CFPB will be “mindful” and “watchful” of the need for Fintech innovations “to be consumer friendly.”  He indicated that while Fintech companies should not have an advantage in the marketplace over banks because they are not complying with same rules, the CFPB would seek to enforce the laws without stifling innovation.
  • When questioned about the criticism directed at the CFPB’s policy on no-action letters for its restrictiveness, Director Cordray acknowledged that legitimate questions have been raised about the policy.  He indicated that he was “not satisfied” with the policy and that further thought would be given to it (while also noting that the CFPB was “leery” of the burden that would result from a high volume of requests for no-action letters).