The CFPB’s newly-released Summer 2018 edition of Supervisory Highlights represents the CFPB’s first Supervisory Highlights report covering supervisory activities conducted under Acting Director Mick Mulvaney’s leadership.  The Bureau’s most recent prior Supervisory Highlights report was its Summer 2017 edition, which was issued in September 2017.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.”  The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of two consent orders entered into by the Bureau, including its settlement with Triton Management Group, Inc., a small-dollar lender, regarding the Bureau’s allegations that Triton had violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing the finance charge on auto title pledges entered into with consumers.)

The report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.  It includes the following information:

Automobile loan servicing.  The report indicates that in examinations of auto loan servicing activities, Bureau examiners focus primarily on whether servicers have engaged in unfair, deceptive, or abusive acts or practices prohibited by the CFPA.  It discusses instances observed by examiners in which servicers had sent billing statements to consumers who had experienced a total vehicle loss showing that the insurance proceeds had been applied to the loan so that the loan was paid ahead and the next payment was due months or years in the future.  The CFPB found the due dates in these statements to be inconsistent with the terms of the consumers’ notes which required the insurance proceeds to be applied to the loans as a one-time payment and any remaining balance to be collected according to the consumers’ regular payment schedules.  According to the CFPB, sending such statements was a deceptive practice.  The CFPB indicates that in response to the examination findings, servicers are sending billing statements that accurately reflect the account status after applying insurance proceeds.

The Bureau also found instances where servicers, due to incorrect account coding or the failure of their representatives to timely cancel the repossession, had repossessed vehicles after the repossession should have been cancelled because the consumer had entered into an extension agreement or made a payment.  This was found to be an unfair practice.  The CFPB indicates that in response to the examination findings, servicers are stopping the practice, reviewing the accounts of affected consumers, and removing or remediating all repossession-related fees.

Credit cards.  The report indicates that in examinations of the credit card account management operations of supervised entities, Bureau examiners typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of add-on products.  The Bureau found instances where entities failed to properly re-evaluate credit card accounts for APR reductions in accordance with Regulation Z requirements where the APRs on the accounts had previously been increased. The report indicates that the issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to the examination findings.

Debt collection.  In examinations of larger participants, Bureau examiners found instances where debt collectors, before engaging in further collection activities as to consumers from whom they had received written debt validation disputes, had routinely failed to mail debt verifications to such consumers. The Bureau indicates that in response to the examination findings, the collectors are revising their debt validation procedures and practices to ensure that they obtain appropriate verifications when requested and mail them to consumers before engaging in further collection activities.

Mortgage servicing.  The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers.  In reviewing the practices of servicers with policies providing for permanent modifications of loans if consumers made four timely trial modification payments, the Bureau found that for nearly 300 consumers who successfully completed the trial modification, the servicers delayed processing the permanent modification for more than 30 days.  During these delays, consumers accrued interest and fees that would not have been accrued if the permanent modification had been processed.  The servicers did not remediate all of the affected consumers ,did not have policies or procedures for remediating consumers in such circumstances, and attributed the modification delays to insufficient staffing.  The Bureau indicates that in response to the examination findings, the servicers are fully remediating affected consumers and developing and implementing policies and procedures to timely convert trial modifications to permanent modifications where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, had engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes.  The Bureau indicates that in response to the examination findings, the servicers are remediating affected consumers (presumably by refunding or credit the unauthorized amounts) and correcting loan modification terms in their systems.

With regard to foreclosure practices, Bureau examiners found instances where mortgage servicers had approved borrowers for a loss mitigation option on a non-primary residence and, despite representing to borrowers that they would not initiate foreclosure if the borrower accepted loss mitigation offers in writing or by phone by a specified date, initiated foreclosures even if the borrowers had called or written to accept the loss mitigation offers by that date.  The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and stating that the servicer would notify the borrowers of their decision on the applications in writing within 30 days.  However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application.  Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

Payday/title lending.  Bureau examiners identified instances of payday lenders engaging in deceptive acts or practices by representing in collection letters that “they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities.”  The CFPB observed that such representations were made “despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles.”  The Bureau indicates that in response to the examination findings, these entities are ensuring that their collection letters do not contain deceptive content.  Bureau examiners also observed instances where lenders had used debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized them to use to debit funds in connection with a defaulted single-payment or installment loan.  According to the Bureau, when lenders’ attempts to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that a borrower had identified on authorization forms executed in connection with the defaulted loan were unsuccessful, the lenders would then seek to collect the entire loan balance via EFTs using debit card numbers or ACH credentials that the borrower had supplied to the lenders for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue.  The Bureau found this to be an unfair act or practice.  With regard to loans for which the consumer had entered into preauthorized EFTs to recur at substantially regular intervals, the Bureau found this conduct to also violate the Regulation E requirement that preauthorized EFTs from a consumer’s account be authorized by a writing signed or similarly authenticated by the consumer.  The Bureau indicates that in response to the examination findings, the lenders are ceasing the violations, remediating borrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.

Small business lending. The Bureau states that in 2016 and 2017, it “began conducting supervision work to assess ECOA compliance in institutions’ small business lending product lines, focusing in particular on the risks of an ECOA violation in underwriting, pricing, and redlining.”  It also states that it “anticipates an ongoing dialogue with supervised institutions and other stakeholders as the Bureau moves forward with supervision work in small business lending.”  In the course of conducting ECOA small business lending reviews, Bureau examiners found instances where financial institutions had “effectively managed the risks of an ECOA violation in their small business lending programs,” with the examiners observing that “the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework.  Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary.”  The Bureau adds that “[e]xaminations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”  With regard to self-monitoring, Bureau examiners found that institutions had “implemented small business lending monitoring programs and conducted semi-annual ECOA risk assessments that include assessments of small business lending.  In addition, one or more institutions actively monitored pricing-exception practices and volume through a committee.”  When the examinations included file reviews of manual underwriting overrides at one or more institutions, Bureau examiners “found that credit decisions made by the institutions were consistent with the requirements of ECOA, and thus the examinations did not find any violations of ECOA.”  The only negative findings made by Bureau examiners involved instances where institutions had collected and maintained (in useable form) only limited data on small business lending decisions.  The Bureau states that “[l]imited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.”

Supervision program developments.  The report discusses the March 2018 mortgage servicing final rule and the May 2018 amendments to the TILA-RESPA integrated disclosure rule.  With regard to fair lending developments, it discusses recent HMDA-related developments and small business lending review procedures.  With regard to small business lending, the Bureau highlights that its reviews include a fair lending assessment of an institution’s compliance management system (CMS) related to small business lending and that CMS reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring and/or audit, and complaint response), and service provider oversight.  The CFPB indicates that in some ECOA small business lending reviews, examiners may look at an institution’s fair lending risks and controls related to origination or pricing of small business lending products, including a geographic distribution analysis of small business loan applications, originations, loan officers, or marketing and outreach, in order to assess potential redlining risk.  It further indicates that such reviews may include statistical analysis of lending data in order to identify fair lending risks and appropriate areas of focus during the examination.  The Bureau states that “[n]otably, statistical analysis is only one factor taken into account by examination teams that review small business lending for ECOA compliance. Reviews typically include other methodologies to assess compliance, including policy and procedure reviews, interviews with management and staff, and reviews of individual loan files.”

In the CFPB’s RFI on its supervision program, one of the topics on which the CFPB sought comment is the usefulness of Supervisory Highlights to share findings and promote transparency.  The new report indicates that the Bureau “expects the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with Federal consumer financial law.”  Presumably, this means that we will now again be seeing new editions of Supervisory Highlights on a regular basis.

 

I am pleased to announce that Chris Ford, an attorney who has led some of the country’s largest and most innovative Fintech and payment systems transactions, has joined Ballard Spahr as a partner in the firm’s Consumer Financial Services Group.  He will be based in the firm’s Washington, D.C. office.

Chris advises clients on large-scale commercial transactions, particularly those involving financial services, payments, technology, and outsourcing.  He also provides strategic counsel to clients on co-brand and private-label card transactions, card processing and network-related deals, merchant acquisition, and information technology and business process outsourcing.

Chris’ clients include Fortune 100 companies, merchants, and financial institutions.  His work includes representing one of the world’s largest financial institutions in its global, retail, commercial, and small business credit card processing agreements; assisting a global finance company in the issuance of a credit card in the United States; assisting one of the largest merchant-acquiring companies in a strategic partnership with a major credit card issuer; and advising a major grocery retailer in its merchant-acquiring and payment processing arrangements.

To learn more about our new colleague, read our firm’s announcement.

The CFPB has issued a report focusing on end-of-year credit card borrowing and repayment of credit card balances in the following year.  The report is based on data from the Bureau’s Consumer Credit Panel, a nationally-representative sample of approximately five million de-identified credit records maintained by one of the three nationwide credit reporting companies.

The report explores how credit card borrowing evolves during and after the annual November/December peak in consumer spending, how quickly these balances are repaid in subsequent months, and how the year-end period of borrowing may correlate with financial distress.

The report’s key findings include:

  • The year-end rise in consumer debt is most pronounced in general purpose credit card debt and retail store card debt.  General purpose credit card balances rise nearly 4 percent from their October baseline as compared with retail store card balances which rise 8 percent increase from their October baseline.  In contrast, auto loans and home equity credit lines do not exhibit similar seasonality.  The CFPB observes that to the extent the consumers who take on new credit card debt during the holiday season are the same consumers who repay that debt shortly thereafter in the following year, it is an indication that, on average, consumers may use year-end credit card borrowing as relatively short-term financing.
  • The seasonality in borrowing on general purpose credit cards is most pronounced for consumers with prime and superprime credit scores. In contrast, general purpose credit card balances for consumers with subprime credit scores exhibit relatively little seasonality.  The CFPB observes that this difference is at least partially attributable to higher card utilization rates of consumers with subprime credit scores.
  • Delinquency rates on credit cards rise during and after the holiday season, with the seasonality in delinquencies apparently driven by consumers with subprime credit scores.  These patterns may indicate financial distress among some credit card borrowers at the end of the year.  The CFPB observes that the decline in delinquencies that begins in February and accelerates in March may be attributable to consumers’ receipt of tax refunds and the use of such refunds to pay down debt.

The CFPB released its sixth annual report to Congress on college credit card agreements.  The annual report is mandated by the CARD Act.

The CARD Act requires mandatory reporting to the CFPB by card issuers on agreements with institutions of higher learning or certain affiliated organizations (such as alumni associations).  The information in the report is current as of the end of 2016.

Beginning with its 2014 report, the CFPB’s annual report consolidated its CARD Act-required reporting on college credit card agreements with “other information on financial products offered or marketed to students collected via our various market monitoring tools.”  The CFPB had stated that this consolidation was intended to “further the Bureau’s mandate in a manner consistent with our goal to focus holistically on the suite of issues facing student financial consumers beyond directly financing the costs of their education.”  For that reason, the CFPB “reframed” its 2016 report by titling it an annual report on “Student banking” and using one section of the report to discuss student debit cards and bank accounts and another section to discuss college credit cards.  The 2017 report, which revives the title “College credit card agreements,” abandons that practice and discusses only college credit card agreements.

The CFPB’s findings based on the agreements and related information that issuers are required to submit annually to the CFPB include:

  • Continuing a trend that began in 2009, the number of college credit card agreements, the total number of associated credit card accounts and the amount paid by issuers to schools and affiliated organizations declined again in 2016.
  • Agreements between issuers and alumni associations remained the dominant agreements and alumni associations increased their share of issuer payments.
  • The largest agreements by each of the three metrics of agreement size—year-end open accounts, new accounts, and payment volume—continued to increase their share of the overall market, with the ten most lucrative agreements representing 43% of payments by all issuers.

For several years, the CFPB has used its annual report as an opportunity to take schools to task for not meeting their obligation under the CARD Act to publicly disclose their college credit card marketing agreements (which, pursuant to the Official Commentary to Regulation Z, can be fulfilled by either posting the agreements on a school’s website or by making the agreements available on request, as long as the procedure for requesting the documents is reasonable and free of cost.)  The new report makes no mention of this issue.

 

The CFPB issued its third biennial report on the credit card market last week.  The report represents the first major report issued by the CFPB since former Director Cordray’s resignation and President Trump’s designation of Mick Mulvaney as Acting Director.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires the CFPB to perform periodic market reviews.  The CFPB’s first CARD Act report was issued in October 2013 and its second report was issued in December 2015.  Unlike those reports, the new report does not identify “areas of concern” or “areas of interest” that create risks for consumers and instead takes an objective approach to the information presented.

Also unlike the prior reports, the new report does not begin with an introductory message replete with editorializing similar to the “Message from Director Corday” that began the prior reports.  In addition, the CFPB’s press release announcing the new report, unlike the CFPB press releases announcing the prior reports, also takes an objective approach by describing several of the report’s key findings and eliminating “sensationalized” headlines or judgmental language suggesting improper industry conduct.  Indeed, rather than adopting a tone that is critical of industry, the CFPB observes in the “Final Note” of the report’s Executive Summary that the quantitative and qualitative indicators discussed in the report “generally suggest a positive picture for consumers in the credit card market” and states that this proposition is supported by direct consumer surveys such J.D. Power’s report “that in 2017 consumers reported their highest level of satisfaction with this market to date.”

The CFPB’s findings include:

  • Most measures of credit card availability have remained stable or increased since the 2015 report, with total outstanding credit card debt now at pre-recession levels and delinquency and charge-off rates showing an increase over the last year.
  • The importance of private label cards and secured credit cards in the non-prime market is growing, with issuers appearing to put increased weight on credit line management as a risk control mechanism.
  • Overall, since 2015, issuers have lowered their daily limits on debt collection phone calls for delinquent credit cards and appear to have pursued more internal collection activity either through in-house or first-party collectors rather than third party collectors, with a majority of issuers now supplementing their internal collection strategy with email use.  Fewer issuers sold debt in 2015 and 2016 than in prior years, with those continuing to sell debts planning to increase their sales of charged-off debt in 2017.
  • More consumers are now engaging with financial products, including credit cards, through digital portals on computers and mobile devices and shop for, originate, and service credit card accounts digitally.

Among the “areas of concern” identified in the 2013 and 2015 CARD Act reports were rewards programs and deferred interest products.  With regard to rewards programs, while the new report notes that the 2015 report “identified a number of area of potential concern regarding rewards card practices” and  “a number of these issues persist,” it states that “progress has been made by others.”  Referencing a letter to the CFPB from the American Bankers Association setting forth principles and practices “that would address at least some of those concerns” if adopted by rewards-cards issuing banks, the CFPB commented that it was “encouraged by efforts to improve the clarity and user-friendliness of rewards cards products and disclosures, and continues to monitor rewards programs closely for opportunities to improve consumer experiences and outcomes.”

With regard to deferred interest, although the CFPB notes in the new report that deferred interest promotions benefit consumers who pay their promotional balance in full within the promotional period but “are more costly for consumers who do not,” the CFPB does not raise concerns about consumers’ understanding of these products as it did in prior reports.  Consumer concerns are only referenced in a footnote in which the CFPB states that although industry contends that deferred interest promotions provide value to consumers, consumer advocates have called for such promotions to be banned or substantially restructured.

In the 2015 report, the CFPB raised various concerns about subprime credit cards, such as their fee structure and the education level of the consumers to whom they were marketed.  Rather than highlighting risks presented by subprime cards, the CFPB describes such cards in the new report as products that “offer [consumers who lack prime credit scores] the dual possibility of access to the credit card market as well as an avenue for building or rehabilitating credit record when timely payments are made.”  The report reviews the products offered by “subprime specialists,” a term that covers “card-issuing banks as well as non-bank program managers that may play a role in designing and servicing credit card products in this segment of the market.”  The CFPB looks at product structure and issuer practices for unsecured general purpose cards, secured general purpose cards, and private label cards, as well as consumer experiences and outcomes in the subprime market.  Also indicative of the CFPB’s change in tone is the following statement in its discussion of secured cards:

“The major risk to consumers using secured credit cards is that of severe delinquency or default.  A consumer who fails to make timely payments on their secured card could find that their attempt to rehabilitate or establish their credit record has failed.  However, the credit reporting consequences of secured card failure are generally no different than for any other credit card.  This risk is the risk all consumers take when they utilize card credit.”

While referring to the issue as a “challenge” rather than an “area of interest or concern,” the CFPB does raise a concern about disclosures in its discussion of digital account servicing, meaning online account servicing portals and smart-phone based account servicing applications.  The CFPB comments that while digital platforms that allow consumers to access and manage their accounts can have clear benefits for consumers and issuers, they “may also present some challenges.”  The CFPB observes that consumers who do not receive paper statements but also do not digitally access their statements, “may not see required disclosures containing certain account information, such as the full picture of the fee burden on an account, or the expected cost of carrying balances over certain lengths of time.”  Noting that the 2015 report found that only 10% of active accounts actually opened an online statement in a given quarter, the CFPB states that, combined with the increasing share of accounts opting out of paper statements, “this means that, for a significant and growing portion of accounts, the account holder does not see account statements at all.”

The new report includes a detailed discussion of third-party credit card comparison (TPC) websites that allow consumers to obtain information about multiple cards.  For purposes of its report, the CFPB looked at TPC sites that are operated by a third party that is not a credit card issuer, are regularly and frequently updated to reflect new product information, display different information in response to user input, and link directly to issuers’ product application sites.  Among the topics discussed in the report are how a consumer interacts with a TPC, the nature of the information provided by a TPC site, and TPC site business practices such as revenue agreements and models, how the cards shown to consumers are selected and presented, and editorial independence.  The report also includes a section on product innovation that discusses how adoption of the Europay, MasterCard, and Visa standard (i.e. “chip” cards) has progressed in the United States, the types of mobile wallets that have seen growth in recent years, developments in the personal installment loan market that have resulted from increasing participation by fintech and other non-bank lenders, and  developments in closed-end point-of-sale lending products.

The report’s objective approach is certainly a welcome change.  The  CFPB’s general satisfaction with the industry, however, does not mean that it will cease to hold issuers responsible for compliance with the consumer financial protection laws, including the Truth in Lending Act and Regulation Z.  While CFPB enforcement activity is likely to decrease under the Trump administration, CFPB supervisory activity is not expected to change significantly.

In addition, Democratic state AGs have indicated that they intend to fill any vacuum created by a less aggressive CFPB approach to enforcement.  State AGs and regulators have direct enforcement authority under various federal consumer protection statutes and, pursuant to Section 1042 of the Consumer Financial Protection Act, can bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.

On February 7, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The Federal Reserve Board announced that it had issued a Consent Order against Mid America Bank and Trust Company (Bank) for alleged deceptive marketing practices in violation of section 5 of the FTC Act related to balance transfer credit cards issued by the Bank to consumers through independent service organizations (ISO).  The Consent Order requires the Bank to pay approximately $5 million in restitution to nearly 21,000 consumers.

The Bank had acquired portfolios of balance transfer credit cards from other financial institutions.  It had also entered into agreements with ISOs to issue new credit cards in the Bank’s name that consumers could use to pay charged-off or past-due debts purchased by the ISOs.  The new cards were marketed and issued under the same programs used for the cards in two of the portfolios acquired by the Bank.  According to the Consent Order, the Bank engaged in the following deceptive practices in connection with the new cards by failing to do the following in solicitation or welcome letters:

  • Explain that the assessment of finance charges and fees would limit the amount of available new credit even if the consumer made payments on the account.  As a result, consumers could have reasonably believed that by continuing to make timely payments, they would receive credit equal to the amount paid when, in fact, they did not due to the assessment of finance charges and fees.
  • Accurately disclose that participating in the card program would restart the statute of limitations for out-of-statute debt.

The Fed also claimed that in connection with one of the portfolios, the Bank had engaged in deceptive practices because it had stopped reporting cardholder payments to consumer reporting agencies but did not disclose to consumers that it would not report.  It appears the Fed found this to be deceptive because when the cards were issued, the issuing bank had told consumers that reporting to CRAs would be a way for the consumer to build positive payment records.

The restitution payments required by the Consent Order are different for each card program.  For example, for the program involving the statute of limitations disclosure issue, the Bank must refund all payments made by consumers with closed accounts and cancel or waive certain charged off amounts and forgive certain amounts owed by consumers with active accounts.  For the other programs, the Bank must refund or credit certain fees and interest.

It is noteworthy that the Fed did not allege that the Bank failed to provide any required disclosures in connection with the new cards it issued, such as those required by the Truth in Lending Act.  The Consent Order thus illustrates the need for banks to not only review marketing disclosures for compliance with applicable requirements but to also consider whether additional disclosure is needed to address UDAP risk.

For example, in addition to making the restitution payments, the Consent Order requires the Bank to take certain remedial actions, such as disclosing clearly and prominently in any balance transfer credit card solicitation, and on the same page, any representation about credit limits or available credit and the effect of any fees and finance charges on the amount of available credit.  Other federal and state regulators have raised similar UDAP concerns in connection with the marketing of other high fee credit card programs.

 

 

 

The Military Lending Act (MLA) will apply to credit card accounts starting Tuesday, October 3. The final rule took effect last October but provided a one-year exemption for “credit extended in a credit card account under an open-end (not home-secured) consumer credit plan.” Although the final rule permits the Secretary of Defense to extend the exemption for up to one year (October 3, 2018), the DoD declined to do so and is allowing the exemption to expire next week.

The MLA final rule imposes a host of requirements in connection with extensions of “consumer credit” to active-duty servicemembers and their dependents (“covered borrowers”), including a 36-percent cap on the Military Annual Percentage Rate (MAPR), substantive oral and written disclosures, and prohibitions against subjecting covered borrowers to certain contractual terms. In particular, creditors are prohibited by the final rule from including pre-dispute arbitration provisions in consumer credit contracts extended to covered borrowers, a fact that has been overlooked (or ignored) by some proponents of the CFPB’s arbitration rule. As such, even if Congress were to repeal the CFPB arbitration rule using the Congressional Review Act, servicemembers and their dependents who are protected by the MLA would still have the right to take their cases to court.

Credit card issuers should take steps to ensure that they (and their servicers) are prepared to comply with the MLA final rule with respect to credit card accounts opened on or after Tuesday, October 3.

The CFPB has published a final rule regarding various annual adjustments it is required to make under provisions of Regulation Z (TILA) that implement the CARD Act, HOEPA, and the ability to repay/qualified mortgage provisions of Dodd-Frank.  The adjustments reflect changes in the Consumer Price Index in effect on June 1, 2017 and will take effect January 1, 2018.

CARD Act.  The CARD Act requires the CFPB to calculate annual adjustments of (1) the minimum interest charge threshold that triggers disclosure of the minimum interest charge in credit card applications, solicitations and account opening disclosures, and (2) the fee thresholds for the penalty fees safe harbor.  The calculation did not result in a change for 2018 to the current minimum interest charge threshold (which requires disclosure of any minimum interest charge above $1.00).  The calculation also did not result in a change for 2018 to the first and subsequent violation safe harbor penalty fees.  Such fees remain at $27 and $38, respectively.

HOEPA.  HOEPA requires the CFPB to annually adjust the total loan amount and fee thresholds that determine whether a transaction is a high cost mortgage.  In the final rule, for 2018, the CFPB increased the current total loan amount threshold from $20,579 to $21,032, and the current points and fees threshold from $1,029 to $1,052.  As a result, in 2018, a transaction will be a high-cost mortgage (1) if the total loan amount is $21,032 or more and the points and fees exceed 5 percent of the total loan amount, or (2) if the total loan amount is less than $21,032 and the points and fees exceed the lesser of $1,052 or 8 percent of the total loan amount.

Ability to repay/QM rule.  Pursuant to its ability to repay/QM rule, the CFPB must annually adjust the points and fees limits that a loan cannot exceed to satisfy the requirements for a QM.  The CFPB must also annually adjust the related loan amount limits.  In the final rule, the CFPB increased these limits for 2018 to the following:

  • For a loan amount greater than or equal to $105,158 (currently $102,894), points and fees may not exceed 3 percent of the total loan amount
  • For a loan amount greater than or equal to $63,095 (currently $61,737) but less than $105,158, points and fees may not exceed $3,155
  • For a loan amount greater than or equal to $21,032 (currently $20,579) but less than $63,095, points and fees may not exceed 5 percent of the total loan amount
  • For a loan amount greater than or equal to $13,145 (currently $12,862) but less than $21,032, points and fees may not exceed $1,052
  • For a loan amount less than $13,145 (currently $12,862), points and fees may not exceed 8 percent of the total loan amount

 

The CFPB announced that it sent letters to “top retail credit card companies” encouraging them to use zero-interest promotions instead of deferred-interest promotions.  The CFPB also provided a sample letter and published a new blog on its website for consumers to explain how deferred-interest and zero interest promotions operate and the key differences between them.

In the letter, the CFPB praised the decision of a “major U.S. retailer, in partnership with one of the largest U.S. credit card issuers, to end deferred-interest promotions on its credit card program” and to instead “offer its customers a 0% interest promotion, which is more transparent and carries less risks for consumers.”  In its second biennial report on the credit card market issued in December 2015, the CFPB discussed deferred-interest promotion as one of several “areas of concern for consumers.”  The CFPB references the 2015 report in its letter, particularly the CFPB’s conclusion in the report that its analysis of deferred-interest promotions called into question whether consumers fully understand how such promotions operate.

The CFPB concludes the letter with the observation that “it is important that every consumer fully understands the terms and true costs of promotional financing and is able to confidently make the best choice for his or her unique financial situation.  In recent years, attention to such responsible lending practices has greatly improved consumer trust and satisfaction with the credit card market.”

The views expressed by the CFPB in the letter regarding the risks created by deferred-interest promotions signal increased CFPB scrutiny of such promotions.  Moreover, retailers and card issuers should be mindful of the fact that the CFPB’s first biennial report issued in 2013 seemed to indicate that the CFPB equates the failure to benefit from a deferred-interest promotion with a lack of understanding as to how the program operates.  As a result, retailers and card issuers who continue to offer deferred-interest promotions should carefully review their policies and procedures, promotional materials, and program disclosures and agreements with counsel.

The CFPB has issued its March 2017 complaint report that highlights credit card complaints.  The report also highlights complaints from consumers in Massachusetts and the Boston metro area.  On April 13, 2017, from 12:00 p.m. to 1:00 p.m.ET, Ballard Spahr will hold a webinar, “The CFPB’s Consumer Credit Card Market RFI and Other Important Recent Credit Card Developments.”  Click here for more information and a link to register.

General findings include the following:

  • As of March 1, 2017, the CFPB handled approximately 1,136,000 complaints nationally, including approximately 26,300 complaints in February 2017.
  • Debt collection continued to be the most-complained-about financial product or service in February 2017, representing about 30 percent of complaints submitted.
  • Debt collection complaints, together with complaints about credit reporting and student loans, collectively represented about 62 percent of the complaints submitted in February 2017.
  • Complaints about student loans showed the greatest month-over-month decrease, decreasing 51 percent from January 2017.  According to the CFPB, there was a spike in student loan complaints in January 2017 “around the time the CFPB took a major enforcement action against a loan servicer.”  At the same time, student loans had the greatest percentage increase based on a three-month average, increasing about 429 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017).  In February 2016, the CFPB began accepting complaints about federal student loans.  Previously, such complaints were directed to the Department of Education.  As we have noted in blog posts about prior CFPB monthly complaint reports issued beginning in April 2016, rather than reflecting an increase in the number of borrowers making student loan complaints, the increasing percentages represented by student loan complaints received by the CFPB most likely reflects the change in where such complaints are sent.
  • Payday loans showed the greatest percentage decrease based on a three-month average, decreasing about 286 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017).  Complaints during those periods decreased from 399 complaints in 2015/2016 to 286 complaints in 2016/2017.  In the February 2017 complaint report, payday loans also showed the greatest percentage decrease based on a three-month average.
  • Montana, Georgia, Missouri, and South Carolina experienced the greatest complaint volume increases from the same time last year  (December 2015 to February 2016 compared with December 2016 to February 2017) with increases of, respectively, 53, 53, 39, and 39 percent.
  • West Virginia, Kansas, and New Hampshire experienced the greatest complaint volume decreases from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017) with decreases of, respectively, 6,  3, and 3 percent.

Findings regarding credit card complaints include the following:

  • The CFPB has handled approximately 116,200 credit card complaints since July 21, 2011, making credit cards the fourth-most-complained-about product, representing 10 percent of all complaints.
  • The most common issues identified in complaints involved billing disputes, particularly disputes involving fraudulent charges.  Consumers complained about the receipt of confusing guidance when notifying their credit card company of such charges and difficulty in having the charges removed even after receiving notice from the credit card company that the dispute was resolved favorably.
  • Consumers complained about problems with rewards programs, such as being unable to take advantage of benefits after meeting program requirements for such benefits and online information that contradicted information received from customer representatives.
  • Consumers complained about the terms of deferred-interest programs, including confusion as to how payments were applied to multiple balances.  Deferred-interest and rewards programs are among the topics on which the CFPB is seeking information in the RFI about the credit card market that it issued last month.
  • Consumers reported issues related to card issuance, such as unsolicited credit cards and problems arising in portfolio conversions from one lender to another.

Findings regarding complaints from Massachusetts consumers include the following:

  • As of March 1, 2017, approximately 20,600 complaints were submitted by Massachusetts consumers of which approximately 15,400 were from Boston consumers.
  • Mortgages was the most-complained-about product, representing 26 percent of all complaints submitted by Massachusetts consumers, which was higher than the national average rate of 24 percent of all complaints submitted by consumers.
  • Average monthly complaints received from Massachusetts consumers increased 19 percent from the same time last year (December 2015 to February 2016 compared with December 2016 to February 2017), lower than the increase of 22 percent nationally.