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The CFPB’s Office of Servicemember Affairs has released its annual report on complaints submitted to the Bureau by servicemembers.

The report covers the period April 1, 2017 through August 31, 2018.  During that period, the Bureau received approximately 48,800 complaints from servicemembers, with credit reporting, debt collection, and mortgages, respectively, the first, second, and third most-complained-about financial products or services.  The majority of credit reporting complaints involved perceived inaccuracies on servicemembers’ credit reports.  The most common type of debt collection and mortgage complaints were, respectively, continued attempts to collect a debt that the servicemember believes is not owed and problems servicemembers faced when unable to make payments, such as issues relating to loan modifications or collections.

The report includes a section entitled “How servicemembers interact with financial products” that provides examples of the rates at which servicemembers and veterans use common consumer financial products and services, such as checking accounts, credit cards, and auto loans or leases.

Another section of the report entitled “Emerging issues and continuing trends in the financial marketplace for servicemembers” discusses various issues experienced by servicemembers and the CFPB’s work in response.  These issues include:

  • Heightened concern about inaccuracies on credit reports due to new Department of Defense security clearance rules that include a “continuing monitoring” policy under which servicemembers’ credit histories are checked automatically rather than periodically (e.g. every 5 years).  The Bureau states that it often hears from servicemembers “who are worried that incorrect information on their credit reports will put their security clearance, duty status, potential promotion, or even military career in jeopardy.”
  • Medical debt on credit reports, in part due to greater use by servicemembers of civilian emergency care and outpatient services that require out of pocket payments.
  • Difficulty repaying debts owed to the Department of Veterans Affairs.
  • Vulnerability of servicemembers to telecommunications debt due to frequent moves and the accompanying need to suspend or cancel and re-establish telecommunications services.
  • Confusion resulting from waivers or reductions of annual fees charged to servicemembers in connection with premium credit cards.  (The Bureau indicated that once it identified this trend in credit card complaints, it worked with a particular credit card company whose waiver notice to consumers was found to have created the confusion to craft a clarifying letter to affected consumers.  The Bureau stated that “since collaboratively addressing the problem through education with an industry partner, we have seen a significant decrease in this specific complaint type about this company.”)
  • Student loan servicing problems such as delayed processing of applications for income-driven repayment or misapplied payments and difficulty accessing disability discharge protections.
  • Insufficient understanding of auto add-on products, including not understanding that such products are optional, would be added to the amount financed, and with regard to GAP, that the insurance can be voided if the servicemember’s car is taken overseas.

 

The CFPB announced yesterday that it has transmitted a proposal to Congress that would give it clear authority to conduct supervisory examinations for compliance with the Military Lending Act (MLA).

Last summer, former CFPB Acting Director Mulvaney reportedly announced that he planned to end routine examinations for MLA compliance because the Dodd-Frank Act did not give the CFPB the authority to conduct such examinations.  For the reasons we detailed, we agreed with Acting Director Mulvaney’s reading of Dodd-Frank.  As we observed, while the MLA gives the CFPB authority to enforce the MLA, nothing in the plain language of the MLA or Dodd-Frank currently gives the CFPB authority to conduct MLA examinations.  As might be expected, Mr. Mulvaney’s plan met with strong criticism from Democratic lawmakers and state attorneys general, who asserted that the CFPB did possess the requisite examination authority.

The CFPB’s legislative proposal would amend Sections 1024 and 1025 of Dodd-Frank which establish the CFPB’s supervisory authority as to, respectively, non-banks and banks with more than $10 billion in total assets.  It would add a substantially similar provision to each section that would provide that the CFPB has “nonexclusive authority to require reports and conduct examinations on a periodic basis…for the purposes of—”

  • assessing compliance with the MLA
  • obtaining information about the non-bank or bank’s activities and compliance systems or procedures
  • detecting and assessing risks to consumers and to markets for consumer financial products and services.

The proposal would also add language to Section 1026 of Dodd-Frank which addresses the CFPB’s supervisory authority as to banks with $10 billion or less in total assets to provide that the CFPB (1) can include its examiners in examinations performed by a bank’s prudential regulator to assess not only the bank’s compliance with “Federal consumer financial law” but also MLA compliance, and (2) the requirement for the CFPB to notify a bank’s prudential regulator and recommend appropriate action when it has reason to believe the bank has engaged in potential violations includes not only material violations of a “Federal consumer financial law” but also material violations of the MLA.

At the end of last week, the Federal Trade Commission (FTC) and the Department of Veterans Affairs (VA) announced that they have entered into a Memorandum of Agreement (MOA) “to provide mutual assistance in the oversight and enforcement of laws pertaining to the advertising, sales, and enrollment practices of institutions of higher learning and other establishments that offer training for military education benefits recipients.”

Pursuant to 38 U.S.C. section 3696, the Secretary of Veterans Affairs is prohibited from approving the enrollment of a veteran eligible for military education benefits “in any course offered by an institution which utilizes advertising, sales, or enrollment practices of any type which are erroneous, deceptive, or misleading either by actual statement, omission, or intimation.”  Section 3696 also requires the VA Secretary to enter into an agreement with the FTC “to utilize, where appropriate, its services and facilities, consistent with its available resources, in carrying out investigations and making the Secretary’s determinations [whether an institution has used erroneous, deceptive or misleading practices.]”  The agreement must provide for referrals to the FTC where the VA believes an institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices and the FTC “in its discretion will conduct an investigation and make preliminary findings.”

The MOA is intended to implement the requirements of Section 3696.  It provides that the VA can request that the FTC investigate an institution approved for the enrollment of veterans eligible for military education benefits and that, when making a referral, the VA’s Director of Education Services must “provide a written explanation of the basis for his or her belief that the institution subject to the referral is utilizing or has utilized, advertising, sales, or enrollment practices of any type that are deceptive.  Upon receiving a referral, the FTC’s Director of the Bureau of Consumer Protection (Director) must evaluate the information provided by the VA and “in his or her discretion, determine whether acceptance of the referral is consistent with the Commission’s existing investigative, enforcement, and resource priorities.”  The MOA lists factors the Director can consider in determining whether to accept a referral, such as “whether the violations allegedly occurred on a regular and ongoing basis” and “the nature and amount of consumer injury at issue and the number of consumers affected.”

The MOA also provides that:

  • The FTC’s acceptance or rejection of a referral is not to be construed as a decision by the FTC on the merits of the referral and a rejection of a referral may not be the sole basis on which the VA determines whether an institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices.
  • If the FTC accepts a referral, the Director must direct the FTC staff to conduct an investigation and prepare preliminary findings.  For purposes of the MOA, “preliminary findings” means “either a nonpublic analysis prepared by FTC staff or an administrative or federal district court complaint approved by the Commission and which contains the FTC’s allegations regarded the referred institution’s practices.”
  • The FTC’s preliminary findings are intended to be used by the VA in deciding whether or not to approve an eligible veteran’s enrollment in an institution because the institution is engaging in erroneous, deceptive or misleading advertising, sales, or enrollment practices.  However, the MOA provides that the FTC’s preliminary findings “are not a determination by the Commission as to whether the institution has been or is violating Section 5 of the FTC Act, an order finalized thereunder, or any other laws enforced by the FTC.”
  • The MOA does not require the FTC, or limit the FTC’s authority, to investigate whether educational institutions or others have violated [Section 5 of the FTC Act] by committing unfair or deceptive sales, advertising, or enrollment practices, or any other laws enforced by the FTC” and the FTC can use materials obtained pursuant to the MOA when carrying out investigations under the FTC Act and other laws.

Tomorrow, December 18, from 12 p.m. to 1 p.m. ET, Ballard attorneys will hold a webinar focusing on the FTC: “New Enforcement Actions by the Old Sheriff in Town: Recent Developments at the Federal Trade Commission.”  For more information and to register, click here.

 

Twenty-three Democratic members of the House Financial Services Committee have sent a letter to Kathy Kraninger, the CFPB’s new Director, urging the Bureau to resume examining its supervised entities for compliance with the Military Lending Act (MLA).  The Democrats signing the letter include Maxine Waters, currently the Ranking Member, who is expected to become Committee Chairman next month.

The letter cites reports that former Acting Director Mick Mulvaney was planning to eliminate routine supervisory examinations of creditors for MLA violations because the CFPB lacks statutory authority to conduct such examinations.  Thirty state attorneys general, joined by the AGs of the District of Columbia, Puerto Rico, and the Virgin Islands, and all 49 Democratic Senators had previously sent letters to Mr. Mulvaney urging him to reconsider his plans to eliminate MLA examinations.  As did the AGs and Senators, the House Members take the position that the CFPB has statutory authority to conduct such examinations.  For the reasons set forth in our prior blog posts, we think this position is based on a misreading of the Bureau’s supervisory authority under the CFPA.

Whether the Bureau should resume MLA examinations is among the many decisions that Ms. Kraninger will face early in her tenure as Director.  With Democrats assuming control of the House next month, the pressure on her to do so is likely to intensify.

 

 

In this week’s episode, we discuss recent state legislative and enforcement developments involving state analogues to the federal Servicemembers Civil Relief Act.  We review state efforts to increase the duration of federal protections, expand the groups entitled to them, and extend similar protections to additional products and services.

To listen and subscribe to the podcast, click here.

 

 

In this week’s episode, we discuss recent enforcement activity under the Military Lending Act and the Servicemembers Civil Relief Act, as well as takeaways about compliance.  We also review the CFPB’s controversial decision to no longer conduct exams for MLA compliance, look at the legal basis for the decision, and analyze the arguments made by critics.

To listen and subscribe to the podcast, click here.

The Department of Justice recently entered into a settlement with Hudson Valley Federal Credit Union to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without first obtaining the required court orders.  The settlement agreement  requires Hudson Valley to pay $65,000 to compensate seven servicemembers whose vehicles were alleged to have been unlawfully repossessed and to pay a $30,000 civil penalty to the United States.  The DOJ’s press release describes Hudson Valley as one of the largest credit unions in the country and the DOJ alleged in the complaint that as of year-end 2016, Hudson Valley had total assets of $4.445 billion, total deposits of $3.99 billion, and more than 275,000 individual and business members.

The SCRA, in 50 U.S.C. § 3952(a)(1), generally requires a court order to be obtained before the vehicle of an active duty servicemember can be repossessed based on a default under a retail installment sales contract for the vehicle’s purchase as to which the servicemember made at least one deposit or installment payment before being called to active duty.

The DOJ’s complaint alleged that it launched an investigation into Hudson Valley’s repossession practices after learning of two private lawsuits filed in the Southern District of New York by servicemembers who claimed that Hudson Valley repossessed their vehicles in violation of the SCRA.  The investigation revealed seven additional SCRA violations by Hudson Valley resulting from repossessions and that, prior to August 2014, Hudson Valley did not have any written policies or procedures that addressed the SCRA’s requirements for vehicle repossessions.

The settlement agreement describes updates made by Hudson Valley in February 2018 to its collection guidelines to address such requirements and prohibits Hudson Valley from making any material changes to those guidelines without providing a copy of the proposed changes to the DOJ and giving the DOJ an opportunity to object.  It also requires Hudson Valley to provide SCRA compliance training to all of its collections and lending employees.

Based on the DOJ’s determination that seven of Hudson Valley’s vehicle repossessions between 2008 and 2014 did not comply with the SCRA, the settlement agreement requires Hudson Valley to pay $10,000 in compensation to each of six servicemembers, plus any lost equity in their vehicles with interest.  Hudson Valley must also pay $5,000 to a seventh servicemember  whose vehicle was repossessed but returned within 24 hours.  It also agrees not to pursue or assign any deficiencies associated with the repossessions and must refund any amounts paid by the servicemember or a co-borrower toward any deficiency that was remaining after a repossession.

The settlement with Hudson Valley follows several other lawsuits filed by the DOJ earlier this year and in 2017 alleging SCRA violations related to vehicle repossession and disposition.

 

 

The New York Attorney General has filed a lawsuit against a group of commonly owned and managed companies headquartered in New York that include companies operating retail jewelry stores in numerous states under the name Harris Jewelry and another company providing financing for sales made at such stores under the name Consumer Adjustment Corp.  One of such stores is located in New York near a military base, as are the defendants’ stores located in other states.  The stores sell lines of military-themed jewelry and other commemorative items.  The defendants also include individuals alleged to have substantial involvement in the companies’ operations.

The complaint alleges that:

  • Harris Jewelry marks up its merchandise between 600 and 1,000% over the wholesale price (comparing that to the standard industry jewelry markup of 200 to 300%) and the “excess purchase price,” together with warranties and protection plans offered by Consumer Adjustment as well as other fees and charges, constitutes disguised interest which is added to the financing agreement’s stated 14.99% interest rate.
  • Consumer Adjustment finances more than 90% of Harris Jewelry’s sales and the relationship between the companies is never disclosed to consumers.
  • Harris Jewelry “professes to accept credit card or cash sales, sales are almost never made in this way.”  Instead, nearly all sales are financed by Consumer Adjustment.
  • Servicemembers are enticed to enter the defendants’ stores through the use of a purported charitable program in which Harris Jewelry sells teddy bears in military uniforms with promises of charitable donations and once in a store, tells servicemembers that Harris Jewelry can provide them with an opportunity to build or improve their credit scores through the “Harris Program,” the name given to the financing provided by Consumer Adjustment.  Only after a servicemember agrees to participate in the ”Harris Program” does Harris Jewelry begin to discuss its merchandise with the servicemember in an effort to maximize the amount of credit extended to him or her.

The complaint includes additional allegations regarding the defendants’ practice of advertising an item’s retail price with its “per payday” payment amount.  The AG alleges that the two amounts “bear little resemblance to the total amount paid by a consumer at the end of the financing contract” and thereby prevents a servicemember from calculating the total cost of a purchase.

Based on these allegations and other conduct by the defendants alleged in the complaint, the NY AG makes the following claims:

  • The “inflated retail prices and add-ons included in the ‘principal’ amount of the loan” result in an effective rate that violates New York’s civil and criminal usury laws
  • The interest charged by the defendants violates the 36% rate limit New York’s General Military Law
  •  Defendants’ business practices constitute fraudulent conduct under New York’s Executive Law (which defines “fraud” or “fraudulent”  to include any device, scheme, or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, or unconscionable contract provisions.)  Their business practices also constitute common law fraud because they involved intentional fraudulent conduct by the defendants.
  • Defendants’ business practices constitute deceptive acts or practices under New York’s General Business Law (GBL)
  • Defendants’ business practices caused the defendants to be a “credit services business” under the GBL and constitute deceptive acts under the GBL provisions that regulate such  businesses.
  • Defendants’ practices in connection with the purported charitable program violated provisions of New York’s Executive Law relating to for-profit companies that partner with a charity to sell products for the charity’s benefit.

 

 

 

 

Thirty state attorneys general, joined by the AGs of the District of Columbia, Puerto Rico, and the Virgin Islands, have sent a letter to CFPB Acting Director Mulvaney “to express our concern about recent reports that the [Bureau] will no longer ensure that lenders are complying with the Military Lending Act (MLA) as part of its regular, statutorily mandated supervisory examinations.” Such recent reports included one from the New York Times published in August 2018 indicating that Mr. Mulvaney was planning to eliminate routine supervisory examinations of creditors for MLA violations because the CFPB lacks statutory authority to conduct such examinations.

In addition to describing the benefits that the MLA provides to servicemembers, the AGs assert that the Bureau “would be failing to abide by its statutorily mandated duty to enforce the MLA by restrictively interpreting its examination authority to preclude lenders’ compliance with the MLA.” They cite to the MLA provision (10 U.S.C. Section 987(f)(6)) that states the MLA “shall be enforced by the agencies specified in section 108 of the Truth in Lending Act (15 U.S.C. 1607) in the manner set forth in that section or under any other applicable authorities available to such agencies by law.” Such agencies include the CFPB. The AGs argue that this language allows the CFPB to examine for MLA compliance because “Congress has explicitly provided [in the Consumer Financial Protection Act (CFPA)] that one ‘applicable authority’ available to the CFPB is examination of lenders in order to ‘detect[] and assess[] risks to consumers and to markets for consumer financial products and services.’”

The AGs appear to be arguing that the MLA allows the CFPB to use its supervisory authority to “enforce” the MLA. We believe this interpretation is incorrect for at least two reasons. First, TILA Section 108 specifies not only the agencies that can enforce TILA but also the laws they can use to exercise such enforcement authority. For the CFPB, Section 108 specifies that it can enforce TILA under subtitle E of the CFPA, the subtitle that sets forth the CFPB’s enforcement powers. Thus, it is apparent from a plain language reading that the phrase “any other applicable authorities” in the MLA refers to any laws that give the CFPB enforcement powers beyond those it can exercise under subtitle E. The CFPB’s supervisory authority (which is separately provided in subtitle B of the CFPA) is not a source of additional enforcement powers.

Second, the AGs’ argument ignores the CFPA provisions that set forth the scope of the Bureau’s supervisory authority. CFPA Sections 1024(b)(1)(A) and 1025(b)(1)(A) provide that the CFPB shall conduct examinations of covered persons to assess compliance with the requirements of “Federal consumer financial laws.” Section 1002(14) of the CFPA defines the term “Federal consumer financial law” to mean generally the provisions of the CFPA and the “enumerated consumer laws.” Section 1002(12) lists the “enumerated consumer laws.” There are 18 federal statutes listed in Section 1002(12). Noticeably absent is the MLA.

Another letter urging Mr. Mulvaney to reconsider his plans to eliminate MLA examinations was sent by all 49 Democratic Senators who also take the position that the CFPB has statutory authority to conduct such examinations. As discussed in our blog post, we think the Senators’ interpretation is based on a misreading of the Bureau’s supervisory authority under the CFPA.

On September 19, 2018, California enacted AB-3212.  The Bill amends the California Military and Veterans Code to expand the protections offered to qualifying servicemembers under state law and to impose new criminal penalties for certain violations of its provisions.  Some of the key changes, which go into effect January 1, 2019, are as follows:

Expanded Protections

  • Extends most protections to 120 days after military service ends (prior provision extended protections for 60 days after the end of military service).
  • Expands the 6% interest rate cap to include student loans, with the 6% rate to remain in effect for one year after the period of military service ends.
  • Extends the ability to defer payments on certain obligations to include student loans.
  • Clarifies that interest in excess of 6 percent per year that would otherwise be incurred but for the interest rate cap is “forgiven” and periodic payments “shall be reduced by the amount of interest forgiven”.
  • Extends the right to terminate leases after entry into military service to include vehicle leases.
  • Clarifies that penalties may not be imposed on the nonpayment of principal or interest during the period in which payments are deferred on an obligation pursuant to a court order.

Written Response Required

  • Requires a person receiving a request for relief from a servicemember to respond within 30 days acknowledging the request, setting forth any reasons the person believes the request is incomplete or the servicemember is not entitled to the relief requested, specifying the specific information or materials that are missing from the request, and providing contact information the servicemember can use to contact the person regarding the request. If after receiving a request from the servicemember, the recipient does not respond within 30 days, the recipient waives any objection to the request and the servicemember is automatically entitled to the relief sought.

Prohibitions on Sales, Foreclosures, and Seizures of Property

  • Extends the bar on sale, foreclosure, or seizure of property for non-payment to the period of military service plus one year (prior provision was for the period of nine months after the end of military service).
  • Extends the bar on enforcing storage liens during the period of military service and for 120 days thereafter (prior provision was until three months after the end of military service).
  • Requires a sworn statement of compliance by any person who files or completes a notice, application or certification of lien sale or certificate of repossession.

Protections Related to Court Proceedings

  • Extends the ability of courts to stay proceedings involving servicemembers as a plaintiff or defendant to 120 days after the end of the military service (prior provision was until 60 days after the end of military service).
  • Permits a service member who is granted an initial stay to apply for an additional stay by showing there is a “continuing military effect” on the servicemember’s ability to appear. If the court refuses to grant an additional stay, the court shall appoint counsel to represent the servicemember in the proceeding.
  • Requires courts to stay for a minimum period of 90 days any proceedings in which (a) there may be a defense to the action that cannot be presented without the presence of the servicemember defendant; or (b) counsel cannot after due diligence contact the servicemember defendant to determine if a meritorious defense exists.
  • Limits the ability of a court-appointed attorney to waive defenses that a servicemember may have or to otherwise bind the servicemember whenever the attorney cannot locate the servicemember through a new statutory provision.

Credit Reporting

  • Prohibits a creditor or consumer reporting agency from making an annotation in the servicemember’s record that the person is on active duty status. A violation of this provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Debt Collections

  • Prevents a debt collector from falsely claiming to be a member of the military in attempting to collect any obligation. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.
  • Expressly prohibits a debt collector from contacting the servicemember’s military unit or chain of command in connection with the collection of any obligation unless the debt collector obtains written consent from the servicemember after the obligation becomes due and payable. A violation of this new provision is a misdemeanor, punishable by imprisonment of not more than one year or a fine not to exceed one thousand dollars, or both.

Scope of Coverage

These provisions in the California Military and Veterans Code apply broadly to members of the Armed Forces (Army, Navy, Air Force, Marine Corps, and Coast Guard) who are on active duty as well as any member of the state militia (defined as the National Guard, State Military Reserve and the Naval Militia) who are on full-time active state service or full-time active federal service.  Creditors are advised to consult with counsel to determine whether these new provisions will apply to specific servicemember borrowers who have contacts with California.