On September 5, 2017, the CFPB entered into a consent order with Zero Parallel, LLC (“Zero Parallel”), an online lead aggregator based in Glendale, California. At the same time, it submitted a proposed order in the U.S. District Court for the Central District of California, where it is litigating with Zero Parallel’s CEO, Davit Gasparyan. Zero Parallel and Gasparyan agreed to pay a total of $350,000 in civil money penalties to settle claims brought by the CFPB.

In the two actions, the CFPB claimed that Zero Parallel, with Gasparyan’s substantial assistance, helped provide loans to consumers which would be void under the laws of the states in which the consumers lived. Zero Parallel allegedly facilitated the loans by acting as a lead aggregator. In that role, Zero Parallel collected information that consumers entered into various websites indicating that they were interested in taking out payday or installment loans. Zero Parallel then transmitted consumers’ information to various online lenders which evaluated the consumers’ information. The lenders then decided whether they wished to make the loans. If they did, the lenders purchased the leads from Zero Parallel and interacted directly with consumers to complete the loan transactions. (More on the lead generation process in our previous blog postings.)

In some cases, the lenders who purchased the leads offered loans on terms that were prohibited in the states where the consumers resided. The CFPB claims that such loans were therefore void. Because Zero Parallel allegedly knew that the leads it sold were likely to result in void loans, the CFPB alleged that Zero Parallel engaged in abusive acts and practices. Under the consent order, and the proposed order, if it is entered, Zero Parallel will be prohibited from selling leads that would facilitate such loans. To prevent this from happening, the orders require Zero Parallel to take reasonable steps to filter the leads it receives so as to steer consumers away from these allegedly void loans.

The CFPB also faulted Zero Parallel for failing to ensure that consumers were adequately informed about the lead generation process. This allegedly caused consumers to get bad deals on the loans they took out.

Consistent with our earlier blog posts about regulatory interest in lead generation, we see two takeaways from the Zero Parallel case.  First, the CFPB remains willing to hold service providers liable for the alleged bad acts of financial services companies to which they provide services. This requires service providers to engage in “reverse vendor oversight” to protect themselves from claims like the ones the CFPB made here.  Second, the issue of disclosure on websites used to generate leads remains a topic of heightened regulatory interest. Financial institutions and lead generators alike should remain focused such disclosures.

The recent data breach disclosure by Equifax raised an outcry from consumer advocates trying to link the data breach to the Consumer Financial Protection Bureau’s (CFPB) final arbitration rule.  They are portraying this cybersecurity incident as a prime example of why class actions are needed to protect consumers, hoping to persuade the U.S. Senate not to repeal the rule under the Congressional Review Act.  The CFPB rule bars financial services companies from including class action waivers in consumer arbitration agreements beginning on March 19, 2018.

The Senate should disregard their arguments.  While the CFPB arbitration rule covers some credit reporting company activities, it does not appear to cover data breaches such as this one.  Therefore, the Equifax data breach has nothing to do with the CFPB arbitration rule.  In any event, the issue appears to be moot, since according to published reports Equifax has stated that it will not seek to apply its on-line arbitration clause and class action waiver to claims based on the data breach itself.

Consumer advocates have also criticized Equifax for purportedly requiring consumers who may have been affected by the data breach and who want to sign up for the company’s offer to provide free credit protection services to agree to arbitrate claims from those services (unless they exercise their right to opt out of the arbitration clause), but Equifax has made clear that its arbitration clause and class action waiver will not apply to this cybersecurity event.  But lost in the hubbub is the fact that claims of this nature would appear to be inherently individualized and not susceptible to class action treatment since the facts pertinent to each consumer’s account presumably will be unique.

Ultimately, this incident exemplifies why the Senate should vote to repeal the CFPB arbitration rule.  The CFPB, the Federal Trade Commission and state attorneys general (most notably Attorney General Schneiderman of New York) got involved almost immediately and will advocate on behalf of consumers more efficiently and effectively than class action lawsuits, without siphoning off a hefty attorneys’ fee if they prevail.

In July, the CFPB issued its Final Arbitration Rule on the use of arbitration provisions in consumer financial services products and services.  I will be participating in two upcoming programs related to the Rule.

PLI Webinar on CFPB Arbitration Rule

On September 13, 2017 at 2:00pm ET, Practicing Law Institute (PLI) will host a teleconference on the CFPB’s Arbitration Rule.

A link to register for the program is here.

ABA Program on The CFPB’s Final Arbitration Rule: Everything You Need to Know

In conjunction with the ABA Business Law Section Annual Meeting being held in Chicago on September 14-16, 2017, a panel discussion entitled: The CFPB’s Final Arbitration Rule: Everything You Need to Know will be held on September 14 from 2:30-3:30pm CT.

The Electronic Transactions Association (ETA) will hold its Annual FinTech Policy Forum on September 14, 2017 at Google’s DC offices.  The event will include commentary from industry leaders, Members of Congress, and regulators who will discuss the intersection of technology and public policy on such topics as privacy, data protection, Internet of Things (IoT), mobile technology, online small business lending, the continuing convergence of traditional and new players and helping the underserved.

On September 12, 2018 at 10:00am EDT, The Senate Committee on Banking, Housing, and Urban Affairs will hold an open session hearing entitled “Examining the Fintech Landscape.”  Witnesses will be: Mr. Lawrance Evans, Director, Financial Markets, U.S. Government Accountability Office; Mr. Eric Turner, Research Analyst, S&P Global Market Intelligence; and Mr. Frank Pasquale, Professor of Law, University of Maryland Francis King Carey School of Law.  The hearing will likely focus on a number of high-level topics including online lending issuance models, the push for federal charters, FinTech’s impact on credit availability, and the state licensure process.

The National Association of Federally-Insured Credit Unions (NAFCU) is hosting its annual conference in Washington, D.C. today through September 13.  Speakers will include opinion-leaders from Congress, NCUA, additional government agencies and the media, and will include HUD Secretary Ben Carson, SBA Administrator Linda McMahon, Vice President Pence’s Chief Economist, Mark Calabria (long-time housing reform advocate and former director of financial regulation studies at the Cato Institute) and House Committee on Financial Services Chair, Jeb Hensarling.  The conference will focus on data security, housing finance reform, repeal of the Durbin Amendment and, as expected, regulatory relief.

Earlier this week, the Federal Reserve issued a paper entitled “Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the Payments Improvement Journey”.  The paper is intended to provide payment industry stakeholders an update on the Fed’s efforts in the last couple years to help improve the speed, safety and efficiency of the U.S. payment system.

The paper supplements the Fed’s 2015 paper entitled “Strategies for Improving the U.S. Payment System”, which outlined the Fed’s overall strategic vision and plan for improving the U.S. payment system.  The 2015 paper called upon payment system stakeholders to collaborate with the Fed on how best to achieve the Fed’s desired outcomes for improving the U.S. Payment System in the following five areas:  (1) speed, (2) security, (3) efficiency, (4) international payments and (5) collaboration.

The paper published yesterday describes efforts made by the Fed and participating payment system stakeholders since 2015 with respect to each of these 5 goals, along with new tactics the Fed plans to employ in furtherance of these goals.  Progress has been made in several areas to identify industry needs, challenges and potential solutions.  In a nutshell, the U.S. payments industry is in need of interoperable, easily accessible, secure, efficient, cost-effective and compliant solutions that will enable domestic and cross-border payments to be completed and settled in real time, on a 24x7x365 basis.  Finding solutions that address this need to the satisfaction of all payment industry stakeholders undoubtedly presents an extremely challenging task for the Fed.  The Fed’s Faster Payment Task Force has analyzed over 20 proposals for potential payment solutions in the last 2 years, including solutions that rely on application programming interface (API), digital currency and blockchain (distributed ledger technologies).  However, the Fed and participating stakeholders are still navigating their way through a host of complex challenges that will need to be resolved in order to achieve the Fed’s desired outcomes by their stated goal of 2020.

For payment system stakeholders, many questions remain unanswered, including:

  1. What role will the Fed play in bringing a solution to market? In the latest paper, the Fed indicated that they intend to actively engage with industry stakeholders to determine how best to enhance Federal Reserve settlement services to support real-time settlement of payment transactions on a 24x7x365 basis.  The Fed also intends, before year end, to explore and assess the need, if any, for the Federal Reserve to act as a service provider in supporting faster payments, beyond its current role as a provider of settlement services.  Although the Fed is arguably best positioned to act as the primary operator of this solution, to date, the Fed has not made any sort of commitment to serve in this capacity.
  2. What sort of payment rules and standards will apply? Payments in the U.S. are already subject to a cumbersome patchwork of various rules and regulations depending on the payment type.  Nevertheless, in July 2015, the Consumer Financial Protection Bureau issued some guiding principles to ensure that any new faster payment systems are secure, transparent, accessible and affordable to consumers and provide robust protections with respect to fraud and error resolution.  It remains to be seen whether the CFPB or the Fed will impose an additional subset of requirements for faster payments, but imposing an additional layer of rules and regulations to support faster payments will no doubt impede adoption and increase service costs.
  3. What will a faster payment solution cost? For faster payment solutions to succeed, adoption by both providers and end users is critical.  Obviously, the cost for accessing a faster payment solution is a key consideration for both providers and end users and it remains to be seen whether a faster payment solution can be offered in a cost-effective manner.
  4. Who will benefit from the solution and who will be left behind?  Interoperability of competing payments solutions will also be critical for broad adoption of a faster payments solution.  This appears to be top of mind for the Fed, but it remains to be seen whether certain payment providers will be disadvantaged or replaced by a faster payments solution.

The Fed and participating stakeholders have made progress on several fronts to assist in bringing a faster payments solution to the U.S. by 2020, but several looming challenges remain.  Nevertheless, the Fed appears to be pushing forward with several new tactics to assist in addressing these challenges so hopefully the Fed and participating stakeholders will be able to stay on pace for their 2020 goal.

Earlier this week, our Firm announced that, effective January 1, 2018, our Firm would merge with the law firm of Lindquist & Vennum.  Although this merger will benefit many practice groups at our Firm, I am particularly excited about the fact that Lindquist & Vennum has several lawyers who focus on consumer financial services (most importantly, payment systems) and bank regulation.  Although the merger will not be effective until the beginning of next year, I have invited the Lindquist lawyers who practice in those areas to write guest blogs between now and the end of this year on important developments of interest to our readers.  To that end, I am very pleased that Amy Lauck has accepted my invitation and has written her first guest blog on a very important paper issued by the Federal Reserve earlier this week pertaining to payment system improvements.  Several of us have known Amy for many years and have greatly admired the work that she has done in the consumer financial services area, particularly with respect to prepaid cards, mobile banking and payment systems.

The CFPB recently submitted a proposed stipulated final order that would shut down a credit repair service and permanently enjoin it from “[a]dvertising, marketing, promoting, providing, offering for sale, selling, assisting in the sale of, or administering Credit Repair Services.” The proposed order would also enjoin the credit repair service from “[r]eceiving any remuneration or other consideration from, holding any ownership interest in, providing services to, or working in any capacity for any person engaged in or assisting in advertising, marketing, promoting, offering for sale, or selling Credit Repair Services.” It includes a $150,000 civil monetary penalty, but does not include any reimbursement to consumers.

In the lawsuit, which we previously blogged about here, the CFPB alleged that the credit repair service violated the Telemarketing Sales Rule and Dodd-Frank’s UDAAP Provision by: 1) charging illegal advance fees; 2) misleading consumers about the benefits of the services it provided; 3) misrepresenting the actual costs of the service; and 4) misrepresenting the numerous conditions and limitations on its “money-back guarantee.” The court originally dismissed the complaint without prejudice after it found that the CFPB failed to satisfy Federal Rule of Civil Procedure 9(b)’s heightened pleading standard. Following this order, the CFPB submitted a second amended complaint, and ultimately submitted the proposed stipulated final order.

The proposed stipulated final order follows similar consent orders against credit repair companies issued by the CFPB in June 2017. The CFPB’s website also contains warnings to consumers about credit repair services and debt settlement companies.

Credit repair services cause significant headache for the financial services industry. As the CFPB’s website acknowledges, many will promise to remove even accurate information from a consumer’s credit report. They attempt to do this by disputing credit reporting data the consumer knows to be accurate and submitting large numbers of such disputes – including multiple disputes for the same consumer – to furnishers to overwhelm the furnisher’s ability to investigate the disputes. This practice harms consumers with legitimate disputes by burying furnishers in a large volume of meritless disputes, and in our view, is one of the largest current flaws in the credit reporting dispute system.  Although the CFPB’s enforcement actions against credit repair agencies are a positive step, we would like to see official guidance from the Bureau aimed at alleviating the burden that furnishers face to investigate and respond to the tidal wave of meritless FCRA disputes that are currently flooding into furnishers’ offices.

Members of Ballard Spahr’s consumer financial services group will hold a webinar on strategies for dealing with debt settlement companies at 12:00 PM ET on October 4, 2017. To register for this event, access the following link: https://response.ballardspahr.com/116/3145/landing-pages/registration-form-(blank).asp

Congress is back in session and this Thursday, September 7, the House Subcommittee on Financial Institutions and Consumer Credit will hold a one-panel hearing entitled “Legislative Proposals for a More Efficient Federal Financial Regulatory Regime.”  The hearing will take place at 10:00 a.m. in room 2128 of the Rayburn House Office Building, and will involve the following witnesses:

  • Anne Fortney, Partner Emerita, Hudson Cook LLP
  • Charles Tuggle, Executive Vice President and General Counsel, First Horizon National Corporation
  • Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce
  • Chi Chi Wu, Staff Attorney, National Consumer Law Center

The witnesses will testify on the following six bills:

H.R. 1849 (Rep. Trott), the “Practice of Law Technical Clarification Act of 2017

This bill seeks to protect attorney debt collectors by amending the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Act of 2010.  A “debt collector” is currently defined under the FDCPA as “any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.”  Courts have interpreted this definition to cover attorneys who collect debts as a matter of course for their clients, or who collect debts as a principal part of their law practice.  Moreover, some courts have held that representations made by an attorney in court filings during the course of debt-collection litigation are actionable under the FDCPA, even when they are addressed to a consumer’s attorney and not the consumer himself.  Under the proposal, the FDCPA’s definition of “debt collector” would exclude law firms and licensed attorneys who (1) serve, file, or convey formal legal pleadings, discovery requests, or other documents pursuant to the applicable rules of civil procedure; or who (2) communicate in, or at the direction of, a court of law or in depositions or settlement conferences, in connection with a pending legal action to collect a debt on behalf of a client.

The bill would also provide that the Consumer Financial Protections Bureau (CFPB) cannot exercise supervisory or enforcement authority over attorneys engaged in the practice of law who do not offer or provide consumer financial products or services.  The CFPB has brought a number of enforcement actions against attorneys and law firms engaged in allegedly illegal debt collection practices.

H.R. 2359 (Rep. Loudermilk), the “FCRA Liability Harmonization Act

This bill would amend the Fair Credit Reporting Act (FCRA) to limit statutory damages in FCRA class actions to the lesser of $500,000 or one percent of the net worth of the defendant. This proposal would also eliminate punitive damages that can be awarded under the FCRA.  The FCRA currently permits an award of punitive damages, and has no cap on statutory damages for individual or class actions.

H.R. 3312 (Rep. Luetkemeyer), the “Systemic Risk Designation Improvement Act of 2017

This bill seeks to amend the definition of “systemically important financial institutions” that are subject to enhanced regulatory standards under Title I of The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).  Currently, Dodd-Frank requires each bank holding company deemed “too big to fail” by virtue of total consolidated assets of $50 billion or more to, among other things, prepare and provide to the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve a resolution plan, or “living will,” for its rapid and orderly resolution under the U.S. bankruptcy code. The bill would remove the $50 billion asset threshold from Dodd-Frank and instead add a measurement approach based on “systemic indicator scores.”  Under this approach, only bank holding companies that are identified as global systemically important banks (G-SIB) would be subject to the Federal Reserve Board’s enhanced supervision and prudential standards.

H.R. ____ (Rep. Royce), the “Facilitating Access to Credit Act

This proposal seeks to exempt an Authorized Credit Services Provider (ACSP) from the Credit Repair Organizations Act (CROA) to the extent it provides credit and identity protection or credit education services, as defined in the bill.  The CROA currently covers a “credit repair organization,” which is defined to include anyone who provides a service, “in return for the payment of money or other valuable consideration, for the express or implied purpose of— (i) improving any consumer’s credit record, credit history, or credit rating; or (ii) providing advice or assistance to any consumer with regard to any activity or service described in clause (i).” While originally aimed at credit repair scams, this broad definition has been read to cover credit monitoring products offered by consumer reporting agencies.

The bill seeks to narrow this definition by setting forth a process to apply to become an ACSP with the Federal Trade Commission (FTC), which if approved by the FTC, would allow the ACSP to provide the defined services without being subject to the CROA and without being subject to state laws and regulations concerning a credit repair organization.  State laws and regulations related to unfair or deceptive acts or practices in marketing products or services would still apply.  ACSPs that violate any of the eligibility criteria provided in the bill would be subject to retroactive revocation of status to the time of the conduct, thereby allowing the FTC to then enforce violations of the CROA.

H.R. ____ (Rep. Tenney), the “Community Institution Mortgage Relief Act of 2017

This bill would amend the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act of 1974 (RESPA) and would direct the CFPB to reduce loan servicing and escrow account administration requirements imposed on certain loan servicers.  First, the proposal would require the CFPB to exempt from certain escrow or impound requirements a loan that is secured by a first lien on a consumer’s principal dwelling if the loan is held by a creditor with assets of $50 billion or less.  The statute does not currently provide an exemption for “smaller creditors” based on asset size.  Second, the CFPB would need to provide either exemptions to, or adjustments from, certain RESPA requirements for servicers of 30,000 or fewer mortgage loans.  The current statute provides no such threshold or exemption for “small servicers of mortgage loans.”

H.R. ____ (Rep. Hill), the “TRID Improvement Act of 2017

This bill would expand the period under RESPA and TILA in which a creditor is allowed to cure a good-faith violation on a loan estimate or closing disclosure from 60 to 210 days after consummation.  The proposal would also amend RESPA to allow for the calculation of a simultaneous issue discount when disclosing title insurance premiums.  Presently under RESPA, a lender may disclose a simultaneous issue discount by disclosing the full premium rate and by taking the full owner’s title insurance premium, adding the simultaneous issuance premium for the lender’s coverage, and then deducting the full premium for lender’s coverage.  This calculation method renders inaccurate disclosures of the lender’s and owner’s individual title insurance premiums even though the sum will equal the amount actually charged to the consumer when paying for both policies.

Congress is also currently considering government funding legislation, raising the debt ceiling, and tax reform so these bills may not receive close attention.  We will report back on the hearing and provide updates.