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  • OIG Recommends CFPB Improve Enforcement Data Security

    Consumer Finance

    On May 15, the Office of Inspector General for the Consumer Financial Protection Bureau issued findings in a report entitled The CFPB Can Improve Its Practices to Safeguard the Office of Enforcement’s Confidential Investigative Information (the Report), stemming from an evaluation to determine whether the Bureau has effective controls to manage and safeguard access to Confidential Investigative Information (CII). The Report found that the Bureau’s practices could be improved. According to the findings, the Bureau’s Office of Enforcement (Office) allowed 113 unique users to have access to databases in which there was CII—which may include personally identifiable information—about companies that were subject to reviews by enforcement staff. Of those 113 users, 72 were still employed by the CFPB but did not have a need for access to that information, the report said.

    Specifically, the OIG determined users continued to have access to at least one electronic application when it was no longer relevant to the performance of the users’ assigned duties. The OIG also cited instances of improper handling and safeguarding of sensitive information and inconsistent naming conventions for matters across its four electronic applications and two internal drives, which impeded the Office’s ability to verify, maintain, and terminate access to files. The OIG noted in the report that during its assessment the Office took several steps to correct these issues.

    The OIG presented the following recommendations: (i) enhance practices for managing access rights to matter folders; (ii) improve the handling of printed sensitive information; and (iii)establish a standard naming convention for electronically stored information.

    Consumer Finance CFPB Federal Reserve OIG

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  • House Democrats Seek Full Review of Financial CHOICE Act by Appropriate Committees; Investor Group Claims Act Will Undercut Shareholder Rights

    Federal Issues

    As previously covered in InfoBytes, on May 4 the House Financial Services Committee approved the revised Financial CHOICE Act of 2017, H.R. 10, in a party-line vote, 34-26. Earlier this month the Ranking Members of two House committees sent letters to their respective Chairmen, urging their committees to not waive their jurisdiction over H.R. 10 and allow their respective committees to debate and vote on the legislation given its wide ranging effects on the U.S. economy. Ranking Member Bobby Scott (D-Va.) of the House Committee on Education and the Workforce stated in his letter that Democrats on the Education and the Workforce Committee “have expressed great concern over the attempts to weaken oversight and enforcement power of the [CFPB] and the important role it plays regarding the integrity of student loan finance services.” Ranking Member John Conyers Jr. (D-Mich.) of the House Committee on the Judiciary urged the Chairman in his letter that “[i]t is particularly critical that our Committee examine and vote on this legislation given numerous provisions squarely within our Rule X jurisdiction that will prevent government agencies from protecting the rights of consumers and hold the financial marketplace more accountable.” As reported previously in InfoBytes, Rep. Elijah Cummings (D-Md.) also called for the House Oversight and Government Reform Committee to assert jurisdiction over H.R. 10.

    Additionally, on May 17, an advocacy group of institutional investors called upon the House of Representatives to oppose H.R. 10, saying the bill will undercut shareholder rights. The Council of Institutional Investors (CII) submitted a letter to all members of the House, urging them to oppose the bill. It was signed by CII and 53 institutional investors that collectively hold more than $4 trillion in assets, including representatives from the California Public Employees’ Retirement System, Colorado Public Employees’ Retirement Association, and New York State Teachers’ Retirement System. The letter said the bill would rollback curbs on “abusive” executive pay practices, restrict shareholder rights in board elections, and raise the cost of proxy advisers. The letter also cautioned that the bill would impede the SEC’s oversight of financial markets by requiring “excessive cost-benefit analysis” and including “unwise limits on enforcement.”

    Federal Issues Financial CHOICE Act House Financial Services Committee CFPB

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  • Legislation Reintroduced to Make CFPB Spending Accountable to Congress

    Federal Issues

    On May 19, Rep. Andy Barr, (R-Ky.) reintroduced legislation that would amend the Consumer Financial Protection Act of 2010 to make the CFPB’s budget subject to congressional appropriations. As set forth in a press release issued by Rep. Barr’s office, the Taking Account of Bureaucrats’ Spending Act (H.R. 1486), first introduced in March 2015 to the House and referred to the House Financial Services Committee, would give Congress power over what Rep. Burr terms an “unaccountable agency.” “I am reintroducing the TABS Act because the Bureau deserves the same scrutiny and the same checks and balances as any other federal agency,” said Rep. Barr. “Congressional oversight and accountability will ensure that the Bureau stays true to its mission of consumer protection, and avoids politically motivated overreaches, wasteful spending, and unnecessary regulations.” Currently, the CFPB is funded directly by the Federal Reserve. As previously covered in InfoBytes, House Republicans are also trying to overhaul existing financial regulations with the approval of the Financial CHOICE Act (H.R. 10) by the House Financial Services Committee, which would subject the Bureau to greater congressional oversight and tighter budgetary control.

    Federal Issues CFPB House Financial Services Committee Financial CHOICE Act

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  • CFPB Issues Report Finding That 90 Percent of Student Borrowers Are Not Enrolled in Income Driven Repayment Plans

    Lending

    On May 16, the CFPB published analysis of a student loan industry data sample, which indicates that nine out of ten of the highest-risk borrowers are not enrolled in federal affordable repayment plans. The report, entitled Update from the CFPB Student Loan Ombudsman, is based on data the Bureau received in response to a voluntary request (Appendix C) for information it sent to several student loan servicers seeking information regarding practices used on borrowers transitioning from default to income-driven repayment plans (IDR). As previously reported in InfoBytes, the 2016 report highlighted the fact that “the majority of borrowers who cure a default and seek to enroll in IDR do so by first rehabilitating their defaulted debt. However, these borrowers describe a range of communication, paperwork processing, and customer service breakdowns at every stage of the default-to-IDR transition.” The Bureau found that data provided in response to its request support the following preliminary observations:

    • More than 90 percent of borrowers who rehabilitated one or more defaulted loans were not enrolled and making IDR payments within the first nine months after “curing” a default.
    • Borrowers were five times more likely to default for a second time if they did not enroll in an IDR.
    • As previously projected in 2016,  nearly 30 percent of borrowers who exited default through rehabilitation defaulted for a second time within 24 months and more than 40 percent of borrowers re-defaulted within three years.
    • More than 75 percent of borrowers who default for a second time did not successfully pay a single bill to their student loan servicers. The CFPB estimates that “as many as four out of every five borrowers who rehabilitate a student loan could be eligible for a zero dollar ‘payment’ under an IDR plan, suggesting many of these defaults were preventable, even for the most economically vulnerable consumers.”
    • Borrowers who used the consolidation option, which requires borrowers to enroll in an IDR plan (except in rare circumstances) to resolve their student loan defaults, are more likely to immediately begin to repay their debts successfully.

    According to the CFPB, the data reinforce the Bureau’s concern that “hundreds of thousands of borrowers who recently cured their default through rehabilitation are unable to successfully access a stable and affordable repayment plan and soon end up back in default.” Further, the Bureau found support for its position that “borrowers who cure default through consolidation appear to fare much better, particularly in the first months after exiting default.”

    Lending CFPB Student Lending

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  • PHH v. CFPB Update: D.C. Circuit Hears Oral Arguments Before En Banc Court

    Courts

    On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.

    Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”

    In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.

    At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)

    A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.

    Courts Consumer Finance CFPB RESPA PHH v CFPB

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  • Company Accused of Bilking 9/11 First Responders Out of Millions of Dollars Says CFPB Action Unlawful

    Courts

    On May 15, a New Jersey-based finance company and its affiliated parties filed a motion to dismiss allegations that it scammed first responders to the World Trade Center attack and NFL retirees with high-cost loans. As previously covered in InfoBytes, the CFPB and the New York Attorney General’s office (NYAG) claimed the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. The defendants’ motion to dismiss was prompted, in part, by the recent PHH v. CFPB decision in which the court held that the CFPB’s single director leadership structure is unconstitutional and, thus, that the agency must operate as an executive agency supervised by the President. Here, the defendants argue, the complaint issued against them is a “prime example of how the unchecked authority granted to the CFPB leads to administrative overreach that has a profound effect on the businesses and individuals the agency targets.”

    In response to the claims that they mischaracterized credit, the defendants assert that the complaint is “based on the erroneous theory that—despite clear contractual terms and the weight of legal authority to the contrary—these transactions are not true sales, but instead are ‘extensions of credit’ under the Consumer Financial Protection Act [(CFPA)], and therefore the [defendants] deceived consumers by labeling the agreements as sales.” The CFPA defines an extension of “credit” as “the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment.” In this instance, the defendants contend, there is no debt, no repayment obligation, and no “right granted to defer payment of a debt” because the consumers are the sellers of the asset.

    The defendants argue that (i)“the CFPB’s unprecedented structure violates fundamental constitutional principles of separation of powers, and the CFPB should be struck down as an unconstitutional administrative agency”; (ii) because these transactions do not fall into the CFPA’s definition of credit, the case lacks a federal cause of action; and (iii) “each cause of action in the [c]omplaint individually fails to state a claim for relief, including because the Government is flat out wrong in its contention that the underlying settlement proceeds are not assignable.”

    Courts Consumer Finance CFPB Enforcement State AG PHH v CFPB UDAAP

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  • CFPB, DOJ Argue Against State AGs Request to Redirect Unused Consumer Redress Funds

    Courts

    On May 10, the CFPB filed a brief and the DOJ filed a separate “Statement of Interest of the United States of America” opposing a request by the Attorneys General of Connecticut, Indiana, Kansas, and Vermont (State AGs) to intervene in a CFPB lawsuit to address the distribution of unclaimed settlement funds.

    As previously reported in InfoBytes, in December 2014 the CFPB sued a telecommunications company over allegations that it violated Dodd-Frank and the Consumer Financial Protection Act by knowingly allowing third-party aggregators to bill unauthorized charges to its wireless telephone customers and failing to respond to consumer complaints for nearly a decade. Under the terms of the 2015 Stipulated Final Judgment and Order, the company was required to set aside $50 million for consumer redress. The consumer claims period expired with approximately $15 million remaining unclaimed, and the State AGs sought to have those funds deposited with the National Association of Attorneys General to be used for “consumer protection purposes.” Specifically, in their  January 3 Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order, the State AGs asked that, “[a]ny funds not used for such equitable relief will be deposited . . . with the National Association of Attorneys General”—instead of being deposited in the Treasury as disgorgement—to be used to “train, support and improve the coordination of the state consumer protection attorneys charged with enforcement of the laws prohibiting the type of unfair and deceptive practices alleged by the CFPB in this [a]ction.”

    In its memorandum opposing the joint request to intervene, the CFPB countered that although the redress plan provides that the Bureau may, in consultation with certain states and the FCC, apply unused redress funds to “other equitable relief reasonably related to the Complaint’s allegations,” it has not proposed doing so and any undistributed amounts are to be directed to the Treasury. The DOJ supported the CFPB’s position, arguing that the State AGs’ motion is untimely because that the States were “well aware of this action” over 18 months before filing their motion. The DOJ further asserted that “beyond being consulted by the CFPB if remaining funds were to be devoted to further equitable relief, the Consent Order afforded the States no role with respect to distribution of the remaining Redress Amount funds.”

    Courts Consumer Finance CFPB DOJ State AG

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  • CFPB Issues Request for Information on Small Business Lending; Prepares to Implement Section 1071 of Dodd Frank Act

    Agency Rule-Making & Guidance

    On May 10, the CFPB announced the issuance of a Request for Information on various aspects of the market for small business loans as the Bureau prepares to implement Section 1071 of the Dodd-Frank Act, which amends the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and report information concerning credit applications made by women-owned, minority-owned, and small businesses. The Request includes questions grouped in five categories: (i) defining what constitutes a small business; (ii) data points the Bureau will require to be submitted and collected; (iii) types of lenders involved in small business lending and the appropriate institutional coverage for the data collection requirements; (iv) types of financial products offered to small businesses generally, and those owned by women and minorities in particular; and (v) privacy concerns related to the data collection.

    The CFPB also released Director Cordray’s prepared remarks in advance of a field hearing on small business lending where he introduced the Request for Information and issued a related press release. Comments are due 60 days after the Request for Information is published in the Federal Register. The Bureau also released a report, entitled “Key Dimensions of the Small Business Lending Landscape,” which presents the CFPB's perspective on the market for lending to small, minority-owned and woman-owned firms and gaps in its understanding.

    A couple of industry groups have already weighed in regarding expected difficulties with the application of Section 1071. In a letter sent Tuesday in advance of the field hearing, the National Association of Federally-Insured Credit Unions (NAFCU) urged the CFPB to exempt its members from any rulemaking that compels disclosure of business loan information. NAFCU Regulatory Affairs Counsel Andrew Morris cites the unique characteristics of credit unions, and that such data collection “may yield confusing information about credit unions and further restrict lending activity as a result of increased compliance costs.” The letter notes that “[c]redit unions serve distinct fields of membership, and as a result, institution-level data related to women-owned, minority-owned and small business lending substantially differs in relation to other lenders.”

    And, in a white paper provided to the Treasury Department, the American Bankers Association criticizes what amounts to Section 1071’s conflation of consumer and commercial lending, “recommend[ing] the elimination of any vestige of Bureau regulatory, supervisory, or enforcement authority over commercial credit or other commercial account and financial services.”

    Agency Rulemaking & Guidance CFPB Small Business Lending Dodd-Frank ECOA NAFCU ABA Treasury Department

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  • D.C. Circuit Holds CID Unenforceable Due to “Perfunctory” Notification of Purpose

    Courts

    On April 21, the U.S. Court of Appeals for the D.C. Circuit held that a civil investigative demand (“CID”) did not advise a non-profit organization that accredits for-profit colleges of “’the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.’ 12 U.S.C. § 5562(c)(2).” See CFPB v. Accrediting Council for Indep. Colls.& Schs., [Order] No. 16-5174 (D.C. Cir. Apr. 21, 2017). The CID described “the nature of the conduct” as simply “unlawful acts and practices in connection with accrediting for-profit colleges.” Because this “broad and non-specific” language did not describe the purpose of the CFPB’s investigation, the Court determined that it could not ascertain whether the information sought was reasonably relevant or “the link between the relevant conduct and the alleged violation.” The Court also found that the description of the laws applicable to the violation was inadequate. The CID identified 12 U.S.C. §§ 5531 and 5536 and “any other Federal consumer financial protection law,” but the Court concluded that the citations “tell … nothing about the statutory basis for the Bureau’s investigation” considering the CFPB’s failure to identify “the specific conduct under investigation.” Notably the Court explicitly limited its ruling to the particular CID at issue and declined to address the broader question of whether the CFPB may investigate accreditation of for-profit schools.

    Courts Consumer Finance Agency Rulemaking & Guidance CFPB

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  • Oklahoma Governor Vetoes Legislation Expanding High-Cost Payday Lending

    Consumer Finance

    On May 5, Oklahoma Governor Mary Fallin vetoed legislation that would have expanded consumer payday lending in the state. Oklahoma House Bill 1913—known as the “Oklahoma Small Loan Act”—would have allowed lenders to offer installment loans with terms no longer than 12 months and interest rates up to 17 percent per month. Fallin’s veto message to the House expressed concerns about adding another high interest loan product without eliminating or restricting existing payday loan products: “House Bill 1913 adds yet another level of high interest borrowing (over 200% APR) without terminating or restricting access to existing payday loan products.” Fallin further asserted that “some of the loans created by this bill would be more expensive than the current loan options.” Four years prior, Fallin vetoed Senate Bill 817 “due to [her] concerns with the frequency [with which] low-income families in Oklahoma were using these lending options, and the resulting high cost of repayment to those families.” In the veto message, Fallin requested that the state legislature seek advice from her office as well as consumer advocates and mainstream financial institutions if it decides to revisit these issues. Under Section 11 of Article 6 of the Oklahoma Constitution, the legislation can still be enacted if two-thirds of the members of both legislative chambers vote to override the veto. In earlier votes, the legislation fell short of the two-thirds threshold, passing the Oklahoma House 59-31 and the Senate by a 28-16 margin.

    Notably, last year, the CFPB published proposed rules in the Federal Register affecting payday, title, and certain other high-cost installment loans (see previously posted Special Alert).

    Consumer Finance State Issues Payday Lending CFPB

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