Deputy Comptroller Describes OCC’s SCRA, Consumer Compliance Focus

On August 18, in a speech to the Association of Military Banks of America, Deputy Comptroller for Compliance Policy Grovetta Gardineer described the OCC’s increasing supervisory and enforcement focus on SCRA compliance. Ms. Gardineer explained that given the significant risks presented by a bank’s failure to comply with the SCRA, the OCC has “stepped up its focus on compliance” and “now requires . . . examiners to include evaluation of SCRA compliance during every supervisory cycle”—even though this closer scrutiny is not required by statute. Ms. Gardineer also highlighted the OCC’s concern regarding potential unfair and deceptive practices associated with overdraft and other administrative fees, especially when “poorly worded disclosures about fees” are contained in “page after page of legal notices and disclaimers.” And while Ms. Gardineer stated that the OCC itself is willing to take enforcement actions where necessary, she also stressed the importance of coordination between regulators to more effectively implement rules and help create a “culture that encourages . . . financial readiness” among servicemembers.

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CFPB Enforcement Action Targets Auto Finance Company’s Credit Reporting Practices

On August 20, the CFPB announced a consent order with a Texas-based auto finance company to address alleged deficiencies in the finance company’s credit reporting practices. The company offers both direct and indirect financing of consumer auto purchases, and, according to the CFPB, specializes in lending to consumers with impaired credit profiles. In general, the CFPB took issue with the finance company’s alleged failure to implement policies and procedures regarding the accuracy and integrity of information furnished to consumer credit reporting agencies (CRAs) and alleged deceptive acts in the finance company’s representations regarding the accuracy of furnished information.

The CFPB’s action specifically alleged that the finance company violated the Fair Credit Reporting Act (FCRA) by providing inaccurate information to credit reporting agencies regarding how its borrowers were performing on their accounts, including by: (i) reporting inaccurate information about how much consumers were paying toward their debts; (ii) reporting inaccurate “dates of first delinquency,” which is the date on which a consumer first became late in paying back the loan; (iii) substantially inflating the number of delinquencies for some borrowers when it reported borrowers’ last 24 months of consecutive payment activity; (iv) informing CRAs that some of its borrowers had their vehicles repossessed, when in fact those individuals had voluntarily surrendered their vehicles back to the lienholder. The CFPB claims this activity took place over a three-year period, even after the company was made aware of the issue. The CFPB believes the company furnished incorrect information to the CRAs on as many as 118,855 accounts.

The consent order requires the company to pay a $2.75 million penalty to the CFPB. In addition, the finance company must: (i) review all previously reported accounts for inaccuracies and correct those accounts or delete the tradeline; (ii) arrange for consumers to obtain a free credit report; and (iii) inform all affected consumers of the inaccuracies, their right to a free consumer report, and how consumers may dispute inaccuracies. The order also directs the company to sufficiently provide the staffing, facilities, systems, and information necessary to timely and completely respond to consumer disputes in compliance with the FCRA.

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CFPB Adjusts CARD Act, HOEPA, And Ability To Repay Thresholds

On August 14, the CFPB issued a final rule to re-calculate certain threshold amounts under Regulation Z. With respect to certain amounts under the CARD Act, effective January 1, 2015, the minimum interest charge disclosure thresholds will remain unchanged, while the permissible penalty fees safe harbor will increase to $27 for a first late payment and $38 for each subsequent violation in the following six months. With respect to HOEPA loans, effective January 1, 2015, the adjusted total loan amount threshold will be $20,391, and the adjusted statutory fee trigger will be $1,020. Also effective January 1, 2015, for the purpose of a creditor’s determination of a consumer’s ability to repay a transaction secured by a dwelling, a covered transaction will not be a qualified mortgage unless the transaction’s total points and fees do not exceed: (i) 3% of the total loan amount for a loan greater than or equal to $101,953; (ii) $3,059 for a loan amount greater than or equal to $61,172 but less than $101,953; (iii) 5% of the total loan amount for a loan greater than or equal to $20,391 but less than $61,172; (iv) $1,020 for a loan amount greater than or equal to $12,744 but less than $20,391; and (v) 8% of the total loan amount for a loan amount less than $12,744.

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Senator Cautions Education Department On Student Aid Disbursement Products Rulemaking

On August 12, Senate Banking Committee ranking member Mike Crapo (R-ID) sent a letter to Education Secretary Arne Duncan to express concern that an ongoing Education Department rulemaking regarding student loan disbursement products could force financial institutions to exit campus markets. At issue is the scope of the rulemaking, which could potentially regulate traditional banking products unrelated to the Title IV disbursement products. The Senator’s letter is the latest in a series of letters from Capitol Hill raising concerns about the scope of the rulemaking and calling for the Education Department to reevaluate the proposal. In his letter, Senator Crapo questions the Education Department for moving forward with the rulemaking without having consulted with any of the prudential banking regulators. The letter also requests an extension of the timeline for the rulemaking so that the public has sufficient time to provide comments.

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Manhattan District Attorney Indicts Payday Lenders

On August 12, Manhattan District Attorney (DA) Cyrus Vance, Jr. announced the indictment of twelve payday lending companies and related individuals for allegedly engaging in criminal usury by making high interest payday loans to Manhattan residents. According to the DA’s press release, between 2001 and 2013, one of the indicted individuals allegedly created multiple companies, including establishing one as a website and offshore corporation, to accept and process online applications for payday loans. The DA also indicted the payday lending business’ chief operating officer and legal counsel. The DA charged the defendants with 38 counts of felony first degree criminal usury and one count of conspiracy in the fourth degree. The defendants are also accused of continuing to extend such loans to New York residents for years, even after, according to the DA, they had been repeatedly warned by New York State officials of the loans’ illegality.

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Federal Reserve Bank Paper Analyzes Credit Card Fair Lending Issues

The Federal Reserve Bank of Philadelphia recently published a discussion paper on credit card fair lending risks. The paper reviews qualitative fair lending risk assessment methods and potential quantitative analysis that may be performed to assess fair lending risk exposure in each of the following areas: (i) marketing; (ii) underwriting; (iii) credit line assignment; (iv) pricing; (v) servicing and collection; (vi) secured cards; and (vii) affinity partners. The authors note that the methods discussed are also applicable to other consumer credit products that utilize credit scoring models. The paper states that although statistical testing can be an important component of fair lending compliance management for credit card lending, “statistical analysis approaches in this area—and particularly disparate impact testing approaches—are not well established, and there are no formal regulatory guidelines for conducting such analysis.” With regard to quantitative risk assessments, the authors discuss the utility of proxy testing and explain the likelihood of false positives and false negatives as well as unassigned consumers. The authors state that “these limitations suggest that results derived from a proxy-based analysis should be treated with an appropriate degree of caution.”

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CFPB Pressures Banks To Disclose Campus Marketing Agreements

On August 6, the CFPB’s Student Loan Ombudsman, Rohit Chopra, published a blog post addressing the financial arrangements between financial institutions and institutions of higher education that market financial products to students. Last year, the CFPB urged banks to disclose any agreements with colleges and universities to market debit, prepaid, and other products to students and warned that “[t]he CFPB prioritizes its supervisory examinations based on the risks posed to consumers” and “[failing to make] college financial product arrangements transparent to students and their families . . . increase[s] such risks.” In this latest review, the CFPB assessed the  Big Ten schools and found that at least 11 have established banking partners to market financial products to students. Of those 11, the CFPB found only four contracts on the bank websites, and it characterized three of those four contracts as “partial”—i.e. in the CFPB’s view, the disclosed agreements “did not contain important information, such as how much they pay schools to gain access to students in order to market and sell them financial products and services.” Concurrent with the blog post, the CFPB sent letters to schools asserting that “their bank partner has not yet committed to transparency when it comes to student financial products.”

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OCC Issues New Debt Sale Guidance

On August 4, the OCC issued Bulletin 2014-37, which provides new guidance on the application of consumer protection requirements and safe and sound banking practices to consumer debt-sale arrangements with third parties—e.g. debt buyers—that intend to pursue collection of the underlying obligations. The guidance goes well beyond the set of “best practices” the OCC provided last summer as an attachment to written testimony submitted to a U.S. Senate committee. For example, the new guidance establishes requirements to: (i) notify the consumer that a debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer; (ii) perform due diligence on the debt buyer down to the consumer complaint level; and (iii) provide the debt buyer with the signed debt contract and a detailed payment history. The bulletin also requires sale contracts to include limitations on the debt buyer’s ability to litigate on an account and “minimum-service-level agreements” that apply whether or not debt buyers conduct the collection activities or employ other collection agents. The Bulletin specifies that certain types of debt are “not appropriate for sale,” such as: (i) debt of borrowers who have sought or are seeking bankruptcy protection; (ii) accounts eligible for Servicemembers Civil Relief Act protections; (iii) accounts in disaster areas; and (iv) accounts close to the statute of limitations.

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Ninth Circuit Holds State AG Credit Card Add-On Suits Belong In State Court

On August 1, the U.S. Court of Appeals for the Ninth Circuit held that neither the federal question statute nor the Class Action Fairness Act provide a federal district court with subject matter jurisdiction over the Hawaii Attorney General’s (AG) suit against credit card issuers over allegedly deceptive marketing of add-on products. Hawaii v. HSBC Bank Nev., N.A., No. 12-263, 2014 WL 3765697 (9th Cir. Aug. 1, 2014). The Hawaii AG filed suits in state court against several credit card issuers asserting three state law causes of action based on allegations that the issuers deceptively marketed and enrolled Hawaii cardholders in various debt protection products. After the issuers removed the cases to federal court, the district court refused to remand, holding that at least one claim in each case was preempted by the National Bank Act. The court reasoned that the AG implicitly challenged the “rate of interest” on outstanding credit card balances by alleging the issuers charged “significant fees” for “minimal benefits” and had “increased profits by substantial sums,” and explained that the National Bank Act completely preempts state laws regulating the interest rates charged by nationally chartered banks. The appeals court disagreed, concluding—as the Fifth Circuit did last year in a similar case—that regardless of how state law labels the claims, the AG’s complaints did not challenge the “rate of interest” that issuers charged and are not preempted. Further, the court held that CAFA does not provide an alternative basis for federal jurisdiction because the AG’s suits are common law parens patriae suits that specifically disclaimed class status, and, as such, they are not class actions.

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Republican Committee Leaders Question CFPB On Recess Appointment Activities

On July 29, House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Senate Banking Committee Ranking Member Mike Crapo (R-ID) sent a letter to CFPB Director Richard Cordray questioning the CFPB’s authority to take certain actions during the period of Mr. Cordray’s recess appointment—January 4, 2012 through July 16, 2013—which was made in the same manner and on the same day as other appointments that were subsequently invalidated by the Supreme Court. Citing the Dodd-Frank Act, the letter asserts that new CFPB authorities created by the Act—as opposed to those transferred from another agency—could only be exercised by a Senate-confirmed director. The lawmakers state that as a result of the Supreme Court’s decision on recess appointments, two primary legal questions now exist regarding the CFPB’s authority during the relevant time: (i) whether the Director had authority to exercise CFPB powers as a recess appointee; and (ii) whether the Director’s ratification of actions taken during his recess appointment is valid. The letter asks the CFPB to produce by September 1, 2014: (i) “a full accounting of all CFPB actions taken” during the recess appointment period that were not derived from transferred authorities; (ii) all documents related to the validity or standing of CFPB actions taken during the recess appointment period that were not derivative of the transferred powers; (iii) all documents justifying the CFPB’s authority and the Director’s standing to ratify past actions; and (iv) all documents related to the impact of the Supreme Court’s recess appointment decision. The requests include internal documents and those involving outside counsel.

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CFPB Extends Deadline To Comment On Complaint Narrative Proposal

On July 29, the CFPB announced that it extended 30 days to September 22, 2014 the deadline for submitting comments on its proposal to publish consumer complaint narratives. In doing so, the CFPB again defended the proposal as consistent with practices at other government agencies and as an extension of its efforts to give voice to consumers’ concerns. The extension followed a request from a group of industry trade associations that noted the numerous legal and practical issues raised by the proposal.

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Court Holds Payday Lender Violated EFTA By Requiring Preauthorization For Electronic Repayment

On July 30, the U.S. District Court for the Northern District of California held that a payday lender whose loan agreements requiredborrowers to consent to electronic withdrawals of their scheduled loan payments violated the federal Electronic Fund Transfer Act’s prohibition on the conditioning of credit on a borrower preauthorizing electronic fund transfers (EFTs) for repayments. De La Torre v. CashCall, Inc., No. 8-3174, 2014 WL 3752796 (N.D. Cal. Jul. 30, 2014). The court previously certified a class seeking to recover actual and statutory damages under the EFTA. The class borrowers claim that the lender required borrowers to agree to electronic transfers of scheduled payments as a condition to obtaining their loans. The borrowers alleged those EFTs caused borrowers to incur insufficient fund fees on the accounts from which the loan payments were withdrawn. On summary judgment, the court rejected the lender’s argument that its promissory notes authorized, but did not require, payment by EFT, and that the EFTA only prohibits the conditioning of the extension of credit upon a requirement to make all loan payments by EFT. The court held that the plain meaning of the statute dictates that a violation of the EFTA occurs “at the moment of conditioning—that is, the moment the creditor requires a consumer to authorize EFT as a condition of extending credit to the consumer.” The court held that by extension, the borrowers also established that the lender violated the Unfair Competition Law. The court granted summary judgment in favor of the borrowers on both their EFTA and UCL claims. However, the court held that whether the EFTA violation caused borrowers to incur the insufficient fund fees is a disputed fact, which should be decided after liability is determined and with the borrowers’ claims for statutory damages and restitution.

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Delaware Enacts State SCRA Law

On July 23, Delaware Governor Jack Markell signed SB 206, which incorporates federal protections for servicemembers under the Servicemembers Civil Relief Act into state law, extends those protections to members of the Delaware National Guard who are called into active military service for the State of Delaware for a period of more than 30 consecutive days, and gives the state attorney general authority to enforce the new protections. The bill took effect immediately upon enactment.

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House Passes Nonbank Examination Bill; House Committee Approves Mortgage-Related Bills

On July 29, the U.S. House of Representatives passed by voice voteH.R. 5062, a bipartisan bill that would amend the Consumer Financial Protection Act with respect to the supervision of nondepository institutions, to require the CFPB to coordinate its supervisory activities with state regulatory agencies that license, supervise, or examine the offering of consumer financial products or services. The bill declares that the sharing of information with such state entities does not waive any privilege claimed by nondepository institutions under federal or state law regarding such information as to any person or entity other than the CFPB or the state agency. The following day, the House Financial Services Committee approved numerous bills, including two mortgage-related bills. The first, H.R. 4042, would require the Federal Reserve Board, the OCC, and the FDIC to conduct a study to determine the appropriate capital requirements for mortgage servicing assets for any banking institution other than an institution identified by the Financial Stability Board as a global systemically important bank. The bill also would prohibit the implementation of Basel III capital requirements related to mortgage servicing assets for non-systemic banking institutions from taking effect until three months after a report on the study. A second bill, H.R. 5148, would exempt creditors offering mortgages of $250,000 or below from certain property appraisal requirements established by the Dodd-Frank Act.

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CFPB, State AGs Announce Joint Enforcement Action Against Military Consumer Lender

On July 29, the CFPB and 13 state AGs announced a consent order that requires a consumer lender currently in Chapter 7 bankruptcy to provide $92 million in debt relief for about 17,000 U.S. servicemembers and other consumers harmed by the company’s alleged predatory lending scheme. The lender offered credit to consumers purchasing computers, videogame consoles, televisions, or other products, which typically were purchased at mall kiosks near military bases. In some cases the lender was the initial creditor, and in other cases, the lender provided indirect financing by agreeing to buy the financing contracts from merchants who sold the goods. Read more…

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