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.”
On November 13, the CFPB held a field hearing in Delaware to discuss its proposed rule regarding prepaid products. The proposal, which would amend Regulation E and Regulation Z, requires prepaid companies to provide certain protections under federal law.
In his opening remarks, Director Cordray noted that the many prepaid card consumers are some of the most economically vulnerable among us and that such cards have few, if any, protections under federal consumer financial law. Cordray outlined the reasons the Bureau’s proposed rule would “fill key gaps” for consumers. First, the proposed rule would provide consumers free and easy access to account information. Second, the proposed rule would mandate that financial institutions work with consumers to investigate any errors on registered cards. Third, the proposed rule would protect consumers against fraud and theft. Fourth, the rule includes “Know Before You Owe” prepaid disclosures, which would highlight key costs associated with the cards. Fifth, where prepaid card providers also extend credit to consumers such offers would be treated the same as credit cards under the law.
Recently, the Federal Reserve Board released two payments-related reports: (i) a report to Congress on government-administered general use prepaid cards; and (ii) a detailed report on the Federal Reserve’s 2013 payments study. The report on government-administered prepaid cards analyzes the $502 million in fee revenue collected by issuers in 2013, a majority of which was attributable to interchange fees. For consumer-related fees, the report indicates such fees derived primarily from ATM-related charges. The second report details findings from the 2013 Federal Reserve Payments Study, the fifth in a series of triennial studies conducted by the Federal Reserve System to comprehensively estimate and study aggregate trends in noncash payments in the United States. The paper expands on the 2013 summary findings originally published last December, and includes, among many other things, the following new findings: (i) credit cards are more prevalent than other general-purpose card types; (ii) among general-purpose cards with purchase activity in 2012, consumers preferred debit cards, with an average use of 23 payments per month, compared with an average of 11 payments per month for general-purpose credit cards and 10 payments per month for general-purpose prepaid cards; (iii) although the number of ATM cash withdrawals using debit cards and general-purpose prepaid cards dropped slightly, growth in the value of ATM withdrawals continued to exceed inflation; (iv) the number of online bill payments reported by major processors, which included those initiated through online banking websites and directly through billers and settled over ACH, exceeded three billion in 2012; and (v) there were more than 250 million mobile payments made using a mobile wallet application, and at least 205 million person-to-person or money transfer payments.
CFPB Expands Complaint Collection To Include Prepaid Cards, Additional Nonbank Products And Services
On July 21, the CFPB announced that it is now accepting consumer complaints regarding (i) prepaid products, including gift cards, benefit cards, and general purpose reloadable cards; (ii) credit repair services and debt settlement services; and (iii) pawn and title loans. The CFPB’s decision to field prepaid card complaints comes as the agency prepares a proposed rule related to those products. The press release states that the CFPB is planning to initiate the prepaid card rulemaking “in the coming months.” Director Cordray recently stated the rule would be proposed at the “end of the summer.”
The CFPB provides the following options for consumers to identify the nature of their complaints:
- Prepaid Cards – (i) managing, opening, or closing your account; (ii) fees; (iii) unauthorized transactions or other transaction issues; (iv) advertising, marketing or disclosures; (v) adding money; (vi) overdraft, savings or rewards features; or (vii) fraud or scam.
- Credit Repair and Debt Settlement – (i) advertising and marketing; (ii) customer service/customer relations; (iii) disclosures; (iv) excessive fees; (v) unexpected/other fees; (vi) incorrect exchange rate; (vii) lost or stolen money order; (viii) lost or stolen check; or (ix) fraud or scam.
- Pawn and Title Loans – (i) charged fees or interest I didn’t expect; (ii) can’t stop lender from charging my bank account; (iii) received a loan I didn’t apply for; (iv) applied for a loan, but didn’t receive money; (v) lender charged my bank account on wrong day or for wrong amount; (vi) lender didn’t credit payment to my account; (vii) can’t contact lender; (viii) lender sold the property / repossessed or sold the vehicle; or (ix) lender damaged or destroyed property / vehicle.
As with all of the CFPB’s complaint categories, consumers also have an opportunity to describe their complaints regarding these new products and services in narrative form. Last week, the CFPB proposed a policy change under which it would publish those consumer complaint narratives, a move it hopes will increase the number of complaints the CFPB fields. At the same time the CFPB released its latest “snapshot” of consumer complaints, which provides an overview of the complaint process and summary analyses of complaints handled by the CFPB since July 21, 2011.
On July 1, the Federal Reserve Board announced a joint enforcement action with the Illinois Department of Financial and Professional Regulation against a state bank that allegedly failed to properly oversee a nonbank third-party provider of financial aid refund disbursement services. The consent order states that from May 2012 to August 2013, the bank opened over 430,000 deposit accounts in connection with the vendor’s debit card product for disbursement of financial aid to students. The agencies claim that during that time, the vendor misled students about the product, including by (i) omitting material information about how students could get their financial aid refund without having to open an account; (ii) omitting material information about the fees, features, and limitations of the product; (iii) omitting material information about the locations of ATMs where students could access their account without cost and the hours of availability of those ATMs; and (iv) prominently displaying the school logo, which may have erroneously implied that the school endorsed the product. The regulators ordered the bank to pay a total of $4.1 million in civil money penalties. In addition, the Federal Reserve is seeking restitution from the vendor, and, pursuant to the order against the bank, may require the bank to pay any amounts the vendor cannot pay in restitution to eligible students up to the lesser of $30 million or the total amount of restitution based on fees the vendor collected from May 2012 through June 2014. The consent order also requires the bank to submit for Federal Reserve approval a compliance risk management program in advance of entering into an agreement with a third party to solicit, market, or service a consumer deposit product on behalf of the bank.
On June 5, the FDIC and a Delaware bank entered a consent order that prohibits the bank from entering into any new relationships with third-party prepaid card processors or prepaid card program managers until the FDIC approves a written report from the bank that details the steps taken by the bank to (i) implement new BSA compliance policies and procedures; (ii) improve staff training; (iii) implement controls sufficient to mitigate BSA and safety and soundness risk associated with prepaid card, credit card merchant acquiring, and ACH activities; and (iv) perform a BSA risk assessment. The order similarly restricts the bank’s activities related to credit card merchant acquiring and ACH merchant payment processing. The order does not prohibit the bank from issuing prepaid cards through existing distribution channels under existing contracts with third-parties, but does restrict certain activities related to existing credit card and ACH processing activities. In addition, the bank must (i) retain and designate BSA and OFAC officers; (ii) conduct a suspicious activity reporting look-back review; and (iii) submit periodic progress reports. Finally, the order requires increased board supervision of the bank’s BSA compliance program and mandates the creation of a board-level BSA committee.
On June 10, CFPB Director Richard Cordray testified before the Senate Banking Committee in connection with the CFPB’s recently released Semiannual Report to Congress. The hearing covered a broad range of topics, including, among several others, prepaid cards, student loans, small dollar loans, and arbitration clauses.
Director Cordray advised in response to an inquiry from Senator Menendez (D-NJ) that the CFPB’s prepaid card proposed rule, which the CFPB recently indicated could be released this month, likely will not come until the end of the summer. He reassured the Senator that the delay does not indicate any particular problem about the rulemaking, only that certain of the issues raised have been “hard to work through.” Read more…
On June 3, Visa announced that it teamed with Pew Charitable Trusts to develop voluntary prepaid card standards and a designation for cards that meet those standards. To qualify for the designation, which Visa believes “will signify a new level of simplicity, protection and opportunity,” a prepaid card must have the following features: (i) flat monthly fee covering all basic activities; (ii) no additional charges for declined transactions, customer service, in-network ATM withdrawal or balance inquiries, PIN or signature transactions, cash back at point of sale, or overdrafts; (iii) “consumer friendly” communication of fees—e.g. fee box and disclosures; and (iv) “quick-use guide” for using the card at the lowest cost. In addition, issuers seeking the designation must provide the following consumer protections: (i) individual FDIC/NCUA insurance; (ii) Regulation E dispute resolution rights; (iii) coverage under Visa’s zero liability policy; and (iv) access to Visa’s Prepaid Clearinghouse Service to assist with fraud prevention.
Updated CFPB Rulemaking Agenda Adds Auto Finance Larger Participant Rule, Updates Timelines For Other Rules
The CFPB recently released its latest rulemaking agenda, which lists for the first time a larger participant rule that would define the size of nonbank auto finance companies subject to the CFPB’s supervisory authority. The CFPB anticipates proposing a rule no sooner than August 2014. Stakeholders will have an opportunity to comment, and a final rule likely would not be issued until sometime in 2015. The CFPB anticipates finalizing its rule for larger participants in the international money transfer market in September 2014. In addition, the agenda pushes back the timeline for the anticipated prepaid card proposed rule from May 2014 to June 2014. The CFPB has been testing potential prepaid card disclosures.
The agenda does not provide timelines for proposed rules related to payday lending, debt collection, or overdraft products, but the CFPB states that additional prerule activities for each of those topics will continue through September 2014, December 2014, and February 2015, respectively. The CFPB substantially extended the timeline for overdraft products; it previously anticipated continuing prerule activities through July 2014. While “prerule activities” is not a defined term, it could include conducting a small business review panel for some or all of those topics. Such panels focus on the impact of anticipated regulations on small entities, but the CFPB typically makes the small business panel materials public, which provides an advance look at the potential direction for a proposed rule.
The agenda does not include a rulemaking implementing the small business fair lending data reporting requirements in the Dodd-Frank Act, though the CFPB previously has indicated it could consider those issues in connection with its HMDA rulemaking. Prerule activities related to the HMDA rule are ongoing.
On March 18, the CFPB announced that it has begun testing two potential model prepaid card disclosures. After holding field tests last month in Baltimore and this week in Los Angeles, the CFPB plans a final field test next month at a location to be determined. The model forms would provide a standard format for disclosing certain fees, including, among others, monthly, reload, per purchase, ATM withdrawal, and inactivity fees. The two models primarily differ in design—the fees included on the two test models are identical, but for a “decline” fee, which appears only on one of the models.
The field testing follows the CFPB’s May 2012 advance notice of proposed rulemaking soliciting comments to evaluate prepaid cards. The CFPB received hundreds of comments in response to that initial inquiry, and since that time, advocacy groups and members of Congress have continued to pressure the CFPB to take action on prepaid cards. For example, in the last several months, Senate Democrats introduced two prepaid card bills that would establish certain disclosure requirements, and the PEW Charitable Trusts released a paper outlining its latest position and model disclosures.
Finally, in addition to the field testing, the CFPB is seeking comments on the model disclosures through its blog, Twitter, Facebook, or email “from anyone who is interested in making prepaid card disclosures better.” Following completion of the testing, the CFPB expects to propose a rule “later this spring.” That timeline matches one laid out in the CFPB’s most recent rulemaking agenda, in which the Bureau anticipated a proposed rule in May 2014.
On February 25, the Massachusetts Office of Consumer Affairs and Business Regulation (OCABR) published the results of its survey of prepaid cards. The OCBAR examined 16 different purchasing and use-related fees for 11 randomly-selected prepaid cards, using the fee schedule from each card’s website, which the OCABR stated “were not always easy to find and were quite confusing at times.” The survey identified as the most common fees charged by the prepaid cards surveyed as (i) monthly fees, (ii) ATM withdrawal fees, and (iii) balance inquiry fees, which were each charged by nine of the 11 cards surveyed. The OCABR researchers claim to have discovered “additional types of fees associated with the products”, including fees associated with alternative card payment plans. The OCABR believes such alternative options make it more difficult for consumers to anticipate the cost of having and using a prepaid card.
CFPB Student Loan Ombudsman Questions Marketing Of Student Financial Products; GAO Recommends More Transparency
On February 13, CFPB Student Loan Ombudsman Rohit Chopra published on the CFPB’s blog an update on the CFPB’s review of student financial products and raised concerns about certain marketing arrangements between financial institutions and colleges and universities, and the level of transparency associated with those agreements and the products marketed under them. He specifically questioned financial institutions that “generate a significant amount of their revenue on these products while students are currently in school.” On the same day, the GAO published a report on student debit and prepaid cards and marketing agreements, which recommends that Congress take steps to increase transparency. Read more…
On January 28, the House Financial Services Committee held a lengthy hearing with CFPB Director Richard Cordray in connection with the CFPB’s November 2013 Semi-Annual Report to Congress, which covers the period April 1, 2013 through September 30, 2013. The hearing came a day after the Committee launched a CFPB-like “Tell Your Story” feature through which it is seeking information from consumers and business owners about how the CFPB has impacted them or their customers. The Committee has provided an online submission form and also will take stories by telephone. Mr. Cordray’s prepared statement provided a general recap of the CFPB’s recent activities and focused on the mortgage rules and their implementation. It also specifically highlighted the CFPB’s concerns with the student loan servicing market.
The question and answer session centered on the implementation and impact of the CFPB’s mortgage rules, as well as the CFPB’s activities with regard to auto finance, HMDA, credit reporting, student lending, and other topics. Committee members also questioned Mr. Cordray on the CFPB’s collection and use of consumer data, particularly credit card account data, and the costs of the CFPB’s building construction/rehabilitation.
Mortgage Rule Implementation / Impact
Generally, Director Cordray pushed back against charges that the mortgage rules, in particular the ATR/QM rule, are inflexible and will limit credit availability. He urged members to wait for data before judging the impacts, and he suggested that much of the concerns being raised are “unreasoned and irrational,” resulting from smaller institutions that are unaware of the CFPB’s adjustments to the QM rule. He stated that he has personally called many small banks and has learned they are just not aware of the rule’s flexibility. He repeatedly stated that the rules can be amended, and that the CFPB will be closely monitoring market data.
The impact of the mortgage rules on the availability of credit for manufactured homes was a major topic throughout the hearing, On the substance of the issue, which was raised by Reps. Pearce (R-NM), Fincher (R-TN), Clay (D-MO), Sewell (D-AL), and others, Director Cordray explained that in his understanding, the concerns from the manufactured housing industry began with earlier changes in the HOEPA rule that resulted in a retreat from manufacture home lending. He stated that industry overreacted and now lenders are coming back into the market. Mr. Cordray has met personally with many lenders on this issue and will continue to do so while monitoring the market for actual impacts, as opposed to the “doomsday scenarios that are easy to speculate on in a room like this.” Still, he committed to work on this issue with manufacturers and lenders, as well as committee members. Read more…
On January 9, Senator Mark Warner (D-VA), released the Prepaid Card Disclosure Act of 2014. The bill would amend the Electronic Fund Transfer Act to require any person that offers certain prepaid card accounts to offer with any application a table of fees that (i) can be “easily understood”; (ii) is “clearly and conspicuously” displayed; and (iii) includes, at a minimum, the amount and description of each fee that may be charged in connection with the account. In addition, a toll-free number and website at which the consumer can access the fee disclosure would have to be included on the card or other means of account access. The bill would require the CFPB to establish by rulemaking a format for the fee table and would allow the CFPB to require the placement of a QR code or similar technology on any packaging, card, or other object associated with the account to provide an electronic link to the disclosures. The bill follows the December 2013 introduction of the Prepaid Card Consumer Protection Act, sponsored by Senators Robert Menendez (D-NJ) and Richard Blumenthal (D-CT). The bill includes disclosure requirements similar to the Warner bill, plus a “wallet sized” fee disclosure requirement. In addition, Senator Menendez’s bill would, among other things, prohibit numerous fees and most credit features, and would require that financial institutions and account providers close accounts and refund the balance after 12 months of inactivity or other term of inactivity established by the CFPB, and upon request of the consumer.
On December 12, the CFPB published the preliminary results of its ongoing study of arbitration agreements in consumer finance contracts. Section 1028(a) of the Dodd-Frank Act directs the CFPB to study the use of pre-dispute arbitration contract provisions, and preconditions the CFPB’s exercise of rulemaking authority regarding arbitration agreements on a finding that the regulation is “in the public interest and for the protection of consumers.” The CFPB commenced its arbitration study in early 2012, and expanded its review this year with a proposal to survey credit card holders, and by exercising its authority under Dodd-Frank Act Section 1022 to order some companies to provide template consumer credit agreements, as Director Cordray indicated during a September House Financial Services hearing.
The CFPB reports the following preliminary results, among others:
- Larger banks are more likely to include arbitration clauses in their credit card contracts and checking account contracts than smaller banks and credit unions.
- Just over 50% of credit card loans outstanding are subject to arbitration clauses, while 8% of banks, covering 44% of insured deposits, include arbitration clauses in their checking account contracts.
- Arbitration clauses are prevalent across the general purpose reloadable (GPR) prepaid card market, with arbitration clauses appearing in the cardholder contracts for 81% of GPR prepaid cards studied by the CFPB.
- Class action waivers are ubiquitous, appearing in approximately 90% of arbitration provisions.
- A minuscule number of consumers exercise contract carve-outs permitting disputes to be pursued in small claims courts, while credit card issuers are “significantly more likely” to sue consumers in small claims court.
The CFPB did not consider specific policy options at this stage. However, the report outlines numerous additional steps the CFPB plans to take as part of its arbitration study, which may expand to include other financial product markets. For example, in response to stakeholder comments, the CFPB is revising a prior proposal to conduct a survey of consumers that addresses consumer awareness of arbitration clauses and consumer perceptions of and expectations about formal dispute resolution. The CFPB also intends to assess the possible impact of arbitration clauses on the price of consumer financial products. Finally, the CFPB is examining the interrelationship between public enforcement and private aggregate enforcement (i.e., class actions) by conducting an empirical analysis of the types of cases brought by public and private actors, and the relationship between any actions against the same defendants or challenging similar conduct. The report does not provide anticipated timelines for these or any of the other future steps the Bureau describes.