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  • Debt Collection and Beyond in 2015

    Consumer Finance

    Aaron-Mahler Walt-Zalenski

     

    In 2015, the CFPB further expanded its reach into debt collection through a number of enforcement actions. The CFPB also continues to conduct research on a potential rulemaking regarding debt collection activities, which may address information accuracy concerns involving debt sales and other collection activity, as well as many other issues regarding how creditors collect their own debts and oversee collectors working on their behalf. In addition to CFPB activity, this year’s Madden v. Midland Funding, LLC decision has important implications beyond the debt collection industry. Finally, developments regarding the Telephone Consumer Protection Act (TCPA) and collections will likely be of interest to regulatory agencies in the new year.

    Debt Sale Consent Orders and Regulatory Guidance

    Among the CFPB enforcement actions relevant to debt collection in 2015 were two consent orders with large debt buyers. These orders resolved allegations that the debt buyers, among other things, engaged in robo-signing, sued (or threatened to sue) on stale debt, made inaccurate statements to consumers, and engaged in other allegedly illegal collection practices. In particular, the CFPB criticized the practice of purchasing debts without obtaining supporting documentation or information, or taking sufficient steps to verify the accuracy of the amounts claimed due before commencing collection activities. Under the consent orders, one company agreed to provide up to $42 million in consumer refunds, pay a $10 million civil money penalty, and cease collecting on a portfolio of consumer debt with a face value of over $125 million. The second company agreed to provide $19 million in restitution, pay an $8 million civil money penalty, and cease collecting on a consumer debt portfolio with a face value of more than $3 million. In addition, both companies agreed to refrain from reselling consumer debt more generally.

    The Office of the Comptroller of the Currency’s (OCC) has also been active in issues affecting debt sales, issuing Bulletin 2014-37.  The Bulletin provides guidance requiring national banks to provide the consumer with notice that a debt has been sold, the dollar amount of the debt transferred, and the name and address of the debt buyer; perform due diligence on the debt buyer; provide the debt buyer with the signed debt contract and a detailed payment history; and take other measures designed to ensure that debt buyers fairly and appropriately collect debts that they purchase.

    Madden v. Midland Funding, LLC

    The Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC carries potentially far-reaching ramifications for the secondary market for credit. In this case, the court held that non- bank assignees of credit obligations originated by national banks are not entitled to rely on National Bank Act preemption from state-law usury claims.  In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle which provides a loan that is not usurious when made does not become usurious when assigned to another party.  Since buyers of defaulted debt, securitization vehicles, hedge funds, and other purchasers of whole loans are often non-bank entities, this decision could create a heightened risk environment for those in the secondary credit market, particularly those who purchase loans originated by banks pursuant to private-label arrangements and other bank relationships, such as those common to the peer-to-peer and marketplace lending industries and various types of on-line consumer credit. The Second Circuit decided not to rehear Madden and the defendants have filed a writ of certiorari to the Supreme Court. Bank sellers of loans and related assets and non-bank assignees of bank-originated credit obligations would be prudent to consider the risks that Madden poses to their business, investments, and operations and whether there are risk mitigation measures that may be available.

    Telephone Consumer Protection Act

    Recent declaratory rulings by the Federal Communications Commission regarding the TCPA included clarifying the ability of consumers to revoke their consent to receive autodialed calls and requiring callers making autodialed calls to stop calling a number after one call when it has been reassigned to a new subscriber.  Debt collectors and others should take note of these issues, as TCPA compliance will likely continue to be an area of interest for regulators moving forward.

    TCPA Debt Collection John Redding Aaron Mahler Walter Zalenski Madden

  • Year in Review: Auto Finance and the CFPB in 2015

    Consumer Finance

    Amanda Raines Lawrence caption John Redding captionThe auto finance industry gained a new regulator in 2015 with the publication of the CFPB’s larger participant rule, which, for the first time, allows the Bureau to supervise larger non-bank auto finance companies. In this new compliance environment, larger participants would be prudent to examine past bulletins and consent orders executed by the CFPB to proactively prepare for examinations and enforcements in the coming year.

    Regulation by Bulletins and Consent Orders

    CPFB Bulletin 2013-02, which set forth the CFPB’s initial views regarding the risk under the Equal Credit Opportunity Act associated with “allowing” dealers the discretion to “mark up” the rates of customers’ retail installment sale contracts, provided a basis for two 2015 consent orders. Broadly speaking, the Bulletin noted two possible ways auto finance creditors could mitigate their risk – eliminating dealer discretion or monitoring for disparities in dealer discretion and then providing customer remediation for such disparities.

    Since 2013 there have been three public CFPB consent orders regarding dealer pricing discretion. The first order, executed with a large bank holding company and its subsidiary bank in 2013, required the respondents to pay remediation for past transactions within the order’s scope, pay a $18 million civil money penalty, and establish a program to monitor and remediate disparities going forward. This contrasts with the two public consent orders that were issued afterwards. Those subsequent orders, entered into with a captive finance company and a large regional bank in the summer and fall of 2015, respectively, provided the respondents with the option of reducing the range of acceptable “markup” (i.e., the difference between the rate of the installment contract and the institution’s buy rate) to 125 basis points for contracts with a term of 60 months or less and 100 basis points for contracts with a term of more than 60 months. If a respondent selected this option, then monitoring for compliance with these markup limits is required, but monitoring and remediating disparities in dealer markup is not required. Both orders also included other options involving reduced dealer discretion, but did not include an option to monitor and remediate disparities without any change in the permitted dealer discretion.

    Larger Participant Rule for Auto Finance

    The CFPB’s larger participant rule for auto finance, which became effective on August 31, 2015, extended the CFPB’s supervisory authority to nonbank auto finance companies that have at least “10,000 annual originations.”

    • “Originations” in this case includes credit for the purpose of purchasing an automobile, leases of automobiles, refinancings of such transactions, and purchases of such transactions.
    • The rule excludes title lending and securitization transactions.
    • “Automobile” includes any self-propelled vehicle primarily used for personal, family, or household purposes for onroad transportation except for motor homes, RVs, golf carts, and motor scooters.

    Now that the rule is in effect, CFPB examinations of non-bank auto finance companies are expected to follow. In light of this new rule, companies should examine other areas where the CFPB has been active in connection with other consumer financial products, in the event the Bureau extends such initiatives into auto finance. Those areas include:

    • Fair lending
    • Credit reporting
    • Debt collection
    • Treatment of servicemembers
    • Ancillary products
    • Vendor management

    CFPB Auto Finance John Redding Amanda Raines Lawrence

  • Spotlight on Auto Finance (Part 3 of 3): Expanded Coverage for Vehicle and Consumer Loans

    Consumer Finance

    Consumers have a larger platform to submit complaints against vehicle and consumer finance companies directly to regulators. The CFPB has set up an online database that allows the CFPB to receive consumers' complaints against their lenders and take action or transfer those complaints to another, appropriate regulator. "We are advising our clients to be aware of this increased focus on individual complaints," says John Redding, Counsel in BuckleySandler's Southern California office. "Because of this new database, companies need to be aware of their customer service response times and make each customer complaint a top priority." He suggests:

    1. Provide prompt responses to consumer complaints
    2. Work with consumers to resolve issues before they become complaints to the CFPB or other regulatory agencies
    3. Monitor social media outlets, but don't overreact to comments or complaints and use care when considering any type of response

    "Companies need to recognize that consumers have been given a new outlet that they have not had before," says Redding. "Consumers now have a greater voice with the regulatory agencies and, as a result, lenders have to be aware of all issues raised by their customers." Regulators have made it clear that  they are closely reviewing  consumer complaints and that they are likely to have a  strong impact on regulatory actions. "The CFPB is likely to focus on standards, like fairness and risk to consumers, as well as specific rules" says Redding. "The regulators are looking to address practices that may cause harm to consumers."

    CFPB Auto Finance John Redding

  • Spotlight on Auto Finance (Part 2 of 3): New Database to Combat Fraud Against Military and Veterans

    Consumer Finance

    The federal government is increasing scrutiny of financial services companies’ practices affecting active military members, veterans and their families. Earlier this year, the CFPB along with the FTC, the Department of Defense and the New York Attorney General announced the launch of the Repeat Offenders Against Military (ROAM) database, which will track enforcement actions against companies and individuals who repeatedly scam military personnel, veterans and their families. According to John Redding, Counsel in BuckleySandler’s Southern California office, this new effort is an important development that the financial services industry needs to be aware of. He says the firm has been advising clients on how to refine their policies and procedures for doing business with servicemembers and their families. "We are suggesting they be aware of the increased focus on SCRA [Servicemembers Civil Relief Act] issues and, in part because of the new database and other efforts surrounding increased protections, need to review their practices to ensure continued compliance." According to the CFPB, law enforcement officials across the country, including state attorneys general, US attorneys, and judge advocates from all five branches of the armed forces, will be able to search the ROAM database for information about completed civil and criminal actions against businesses that have scammed military personnel, veterans, and their families.

    CFPB Auto Finance John Redding SCRA

  • Spotlight on Auto Finance (Part One of Three): A New Road for Auto Finance Companies

    Consumer Finance

    Auto Finance Attorney John Redding

    Traditionally, non-bank lenders looked to the states and the FTC for industry regulations. But, this has changed with the introduction of the CFPB. Recent reports show that the federal government is stepping up efforts to regulate and review auto finance companies, many of whom have never been subject to bank-style examinations.

    “The CFPB has created a new layer of regulation,” according to John Redding, Counsel in the Southern California office of BuckleySandler. “Auto lenders have to be alert and aware of their fair and responsible lending risks.”

    Redding says one of the ways to minimize these risks is to be proactive when reviewing a company’s policies, procedures, discretionary underwriting and pricing practices.  The CFPB is likely to conduct statistical reviews for loans that the company has made or purchased to ensure there is no unexplained or improper disparity between protected and non-protected classes , so companies should consider performing such analyses in advance of the regulator conducting such an analysis.

    “This will help mitigate risks for the companies by identifying areas that may present risk and allowing them to proactively take steps to modify policies and practices. When the regulators are conducting an exam, companies will have to explain why the business is conducted as it is, including steps taken to ensure fair and responsible lending to all consumers, regardless of status, and address any issues that may arise,” says Redding.

    The bottom line: Recognize that there are new regulators and more scrutiny on the industry and begin taking steps to perform these important reviews now.

    Redding suggests the following steps auto finance companies can take to prepare for the CFPB:

    • Evaluate the institution’s risk profile and prepare an operations and compliance strategy
    • Update policies and procedures (review CFPB exam guidelines)
    • Monitor, address, and retain records regarding consumer complaints
    • Monitor third-party sources of complaints
    • Appoint an ombudsman
    • Conduct internal audits
    • Consider patterns and practices that emerge regarding operations
    • Focus on areas that may lead to consumer harm, as well as technical violations
    • Include the compliance team to monitor, analyze and advise on specific proposals

    CFPB Auto Finance John Redding

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