Illinois AG Sues To Enforce Dodd-Frank “Abusive” Prohibition

On March 19, Illinois Attorney General (AG) Lisa Madigan announced a suit against a lender for allegedly offering a short-term credit product designed to evade the state’s usury cap. The AG claims the lender offers a revolving line of credit with advertised interest rates of 18 to 24%, and then adds on “account protection fees.” The AG characterizes those fees as interest substantially in excess of the state’s 36% usury cap. According to the AG, after a borrower takes out the short-term loan, the lender allegedly provides a payment schedule and instructs the borrower to make minimum payments, which consumers who filed complaints with the AG’s office believed was a timeline to pay off the full debt. The complaint is the AG’s first under the Dodd-Frank Act and claims that the lender’s practices take unreasonable advantage of consumers and constitute abusive practices. The complaint also alleges violations of the state Consumer Fraud and Deceptive Businesses Practice Act and seeks restitution, civil penalties, disgorgement, and an order nullifying all existing contracts with Illinois consumers and prohibiting the company from selling lines of credit and revolving credit in Illinois.

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CFPB Sues For-Profit Educational Institution Over Private Student Loan Origination Practices

On February 26, the CFPB filed its first enforcement action against a for-profit higher-education company, alleging that the company engaged in unfair and abusive private student loan origination practices.

In a civil complaint filed in the U.S. District Court for the Southern District of Indiana, the CFPB asserts that the company offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The CFPB claims that when the short-term loans came due at the end of the first academic year and borrowers were unable to pay them off, the company forced borrowers into “high-rate, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations. Moreover, the CFPB claims that the company’s business model is dependent on coercing students into “high-rate, high-fee” private loans, despite the low average incomes and credit profiles of the students, and a 64 percent default rate on such loans.

The company issued a statement denying the charges, criticizing the CFPB’s decision to file suit, and challenging the CFPB’s jurisdiction. The statement describes the suit as an “aggressive attempt by the Bureau . . . to extend its jurisdiction into matters well beyond consumer finance” and expresses the company’s intent to “ vigorously contest the Bureau’s theories in court.” Read more…

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CFPB Releases Money Transfer Exam Procedures, Launches New e-Regulations Tool

On October 22, the CFPB released the procedures its examiners will use in assessing financial institutions’ compliance with the remittance transfer requirements of Regulation E. Amendments to those regulations, finalized by the CFPB earlier this year, are set to take effect October 28, 2013. In general, the rule requires remittance transfer providers that offer remittances as part of their “normal course of business” to: (i) provide written pre-payment disclosures of the exchange rates and fees associated with a transfer of funds as well as the amount of funds the recipient will receive; and (ii) investigate consumer disputes and remedy errors. The rule does not apply to financial institutions that consistently provide 100 or fewer remittance transfers each year, or to transactions under $15.

The new examination procedures detail the specific objectives examiners should pursue as part of the examination, including to: (i) assess the quality of the regulated entity’s compliance risk management systems with respect to its remittance transfer business; (ii) identify acts or practices relating to remittance transfers that materially increase the risk of violations of federal consumer financial law and associated harm to consumers; (iii) gather facts that help to determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law; and (iv) determine whether a violation of a federal consumer financial law has occurred and, if so, whether further supervisory or enforcement actions are appropriate. In doing so, CFPB examiners will look not only at potential risks related to the remittance regulations, but also outside the remittance rule to assess “other risks to consumers,” including potential unfair, deceptive, and abusive acts and practices and Gramm-Leach-Bliley Act privacy violations.  Finally, consistent with other examination procedures published by the CFPB, the examiners are instructed to conduct both a management- and policy-level review as well as a transaction-level review to inform the stated examination objectives.

Also on October 22, the CFPB announced a new tool designed to make it easier for the public to navigate the regulations subject to CFPB oversight. To start, the new eRegulations tool includes only Regulation E, which implements the Electronic Funds Transfer Act and includes the remittance requirements discussed above. Noting that federal regulations can be difficult to navigate, the CFPB redesigned the electronic presentation of its regulations, including by (i) defining key terms throughout, (ii) providing official interpretations throughout, (iii) linking certain sections of the “Federal Register preambles” to help explain the background of a particular paragraph, and (iv) providing the ability to see previous, current, and future versions. The CFPB notes that the tool is a work in progress and that suggestions from the public are welcome. Further, the CFPB encourages other agencies, developers, or groups to use and adapt the system.

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CFPB Puts Creditors, Third-Party Collectors on Notice Regarding Unfair, Deceptive, and Abusive Debt Collection Practices

This morning, the CFPB issued new debt collection guidance that, among other things, seeks to hold CFPB-supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive (UDAAP) when collecting their own debts, in much the same way debt collectors are held accountable for violations of the FDCPA. Bulletin 2013-07 reviews the Dodd-Frank Act UDAAP standards, provides a non-exhaustive list of debt collection acts or practices that could constitute UDAAPs, and states that even though creditors generally are not considered debt collectors under the FDCPA, the CFPB intends to supervise their debt collection activities under its UDAAP authority.

Separately, in Bulletin 2013-08, the CFPB provided guidance to creditors, debt buyers, and third-party collectors about compliance with the FDCPA and sections 1031 and 1036 of Dodd-Frank when making representations about the impact that payments on debts in collection may have on credit reports and credit scores. The Bulletin states that potentially deceptive debt collection claims are a matter of “significant concern” to the CFPB and describes the CFPB’s planned supervisory activities and other actions the CFPB may take to ensure that the debt collection market “functions in a fair, transparent, and competitive manner.”

In addition, the CFPB announced that it will begin accepting consumer complaints related to debt collection, and published five “action letters” that consumers can use to correspond with debt collectors. The letters address the situations when the consumer: (i) needs more information on the debt; (ii) wants to dispute the debt and for the debt collector to prove responsibility or stop communication; (iii) wants to restrict how and when a debt collector can contact them; (iv) has hired a lawyer; (v) wants the debt collector to stop any and all contact.

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Spotlight on Student Lending (Part 1 of 2): Facing Increased Regulatory Scrutiny, Student Loan Lenders Prepare for CFPB Examinations

Currently, total outstanding student debt (both federal loans and private loans) has risen to roughly $1.1 trillion dollars. That figure represents an over 50% increase since 2008 and makes student loans the largest source of unsecured consumer debt – surpassing credit cards. At the same time, at least with respect to federal student loans, delinquencies have risen sharply during the same time period and, with unemployment rates for recent graduates still high by historic standards, the risk of continued high delinquency rates remains significant. Complicating matters is that student loan servicers, and servicers of private student loans in particular, have limited ability vis-à-vis a mortgage lender to modify those loans for borrowers in default.

Not surprisingly, given this backdrop, borrowers have lodged complaints with the Consumer Financial Protection Bureau (CFPB or Bureau) focused on their inability to obtain loan modifications, concerns about improper payment processing, and concerns about servicers’ debt collection practices. All of these factors have prompted the Bureau to draw comparisons to the recent mortgage servicing crisis and to increase focus and attention on the student lending and servicing industry in an effort to stave off a problem of those proportions. Read more…

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CFPB Seeks Injunction Against Debt Relief Firm’s “Abusive” Practices

On May 30, the CFPB filed a complaint in federal district court against a Florida debt-relief company the CFPB alleges violated the FTC’s Telemarketing Sales Rule and the Dodd-Frank Act by promising certain debt relief services in exchange for upfront payment and then failing to provide the promised services. The complaint alleges publicly for the first time violations of the “abusive” standard established in the Dodd-Frank Act. The CFPB claims the company and its owner (i) misled consumers by falsely promising them it would begin to settle their debts within three to six months and then failed to provide the services within the promised time frame, if at all; (ii) enrolled consumers despite knowing that their income level made it highly unlikely that they could complete the debt-relief programs; and (iii) collected upfront “enrollment” fees from consumers even though the company knew that the consumers could not afford the monthly payments required by these debt-relief programs. Because these practices took “unreasonable advantage” of consumers, the CFPB charges they are abusive. The CFPB announced that it plans to file a proposed order that, if approved, would (i) require the company to pay a $15,000 penalty; (ii) permanently enjoin the company from advertising, marketing, promoting, offering for sale, or selling any debt-relief product or service; and (iii) establish a two-year compliance monitoring and reporting period for the company.

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POSTED IN: Federal Issues, Mortgages

CFPB Director Testifies Before House Committee, Promises CARD Act Ability to Repay Rule

On September 20, CFPB Director Richard Cordray appeared before the House Financial Services Committee in connection with the CFPB’s Semiannual Report issued July 30, 2012. During the House hearing the Director faced questions on topics covered during prior committee hearings, including (i) the status and potential impact of the CFPB’s qualified mortgage/ability to repay (QM) rule, (ii) whether that rule will provide a safe harbor or a rebuttable presumption, (iii) whether the CFPB will commit to a definition of “abusive” practices, and (iv) whether the CFPB will raise the threshold for banks exempt from compliance with new CFPB remittance rules. Mr. Cordray reiterated that the QM rule will be finalized before the end of 2012, and that while the final regulations are still under consideration, the CFPB intends to provide bright line standards to help limit litigation risk. He continued to avoid offering a definition or description of abusive practices and did not express a willingness to revisit the remittance standards. Mr. Cordray also revealed that the CFPB has determined that it cannot resolve through the issuance of guidance a problem with the application of the Federal Reserve Board’s credit card ability to repay rule that is restricting access to credit for stay-at-home spouses. Mr. Cordray committed to releasing a proposed rule to remedy the problem prior to Congress’ return following the November elections.

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House Subcommittee Holds Hearing on CFPB Under Director Cordray

On January 24, the House Oversight Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs held a hearing to receive testimony from newly appointed CFPB Director Richard Cordray. Committee members (i) sought the Director’s interpretation of the term “abusive” as it is used in the Dodd-Frank Act, (ii) requested more transparency into the CFPB’s planned regulatory actions, and (iii) requested CFPB action to mitigate the impacts of its regulations on small and community institutions. Mr. Cordray declined to offer a definition of “abusive”, relying instead on the statutory language. The Director did state that abusive practices that are not also either “unfair or deceptive”, likely would be addressed on a “facts and circumstances” basis rather than through an “abstract” regulatory definition. He did not rule out using “abusive practices” as the basis of an enforcement action prior to issuing any further guidance or rulemaking. The Director committed to consider following the SEC’s model of periodically publishing a regulatory agenda. He also explained that the CFPB will consider and address impacts of its regulatory actions on community banks and financial institutions with under $10 billion in assets.

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POSTED IN: Consumer Finance, Federal Issues