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CFPB, South Carolina, and Arkansas file charges in pension-advance scheme
On February 20, the CFPB, the South Carolina Department of Consumer Affairs, and the Arkansas attorney general filed a complaint in the U.S. District Court for the District of South Carolina against a South Carolina-based company and two of its managing partners (defendants) for allegedly violating the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by working with a series of broker companies that brokered contracts offering high-interest credit to disabled veterans and other consumers in exchange for the assignment of some of the consumers’ unpaid earnings, monthly pensions, or disability payments. Under federal law, agreements under which a person acquires the right to receive a veteran’s pension or disability payment are void, and South Carolina law—which governs these contracts—“prohibits sales of unpaid earnings and prohibits assignments of pensions as security on payment of a debt.”
The complaint alleges that the defendants substantially assisted broker companies that allegedly engaged in deceptive and unfair acts or practices through the marketing and administration of high-interest credit. (Covered by InfoBytes here.) The defendants’ alleged actions include: (i) “developing a pre-approval or risk-assessment process for the contracts and conducting underwriting”; (ii) “approving or denying consumers’ applications to enter into the transactions”; (iii) “directing and administering the execution of the contracts”; (iv) “serving as the payment processor for the initial lump-sum payment and fees”; and (v) “continuing to serve as the transactions’ payment processor, tracking and controlling the collection and distribution of consumers’ payments on the contracts.” In addition, the Bureau alleges, among other things, that the defendants provided substantial assistance to the broker companies’ deceptive misrepresentations that consumers could be subjected to criminal prosecution if they breached their contracts. In addition, the defendants also allegedly collected on contracts brokered by the broker companies that were void from inception “by initiating ACH debts to take payments from consumers’ bank accounts,” demanding payments through letters and other communications, and filing suit against consumers who failed to make payments.
The complaint seeks injunctive relief, restitution, damages, disgorgement, and civil money penalties.
U.S. Solicitor General: Supreme Court can decide on severability clause without deciding CFPB's future
On February 14, U.S. Solicitor General Noel J. Francisco filed a reply brief for the CFPB in Seila Law LLC v. CFPB, arguing that the U.S. Supreme Court could decide whether the CFPB’s single-director structure violates the Constitution’s separation of powers under Article II without deciding whether the Bureau as a whole should survive. “Although the removal restriction is unconstitutional, Congress has expressly provided that the rest of the Dodd-Frank Act shall be unaffected,” Francisco said, replying in part to arguments made by Paul D. Clement, the lawyer selected by the Court to defend the leadership structure of the Bureau. As previously covered by InfoBytes, Clement argued, among other things, that Seila Law’s constitutionality arguments are “remarkably weak” and that “a contested removal is the proper context to address a dispute over the President’s removal authority.” Clement also contended that “there is no ‘removal clause’ in the Constitution,” and that because the “constitutional text is simply silent on the removal of executive officers” it does not mean there is a “promising basis for invalidating an Act of Congress.” According to Francisco, Seila Law’s arguments for invalidating the entirety of Title X of Dodd-Frank “are insufficient to overcome the severability clause’s plain text,” and its “arguments for ignoring the severability questions altogether are both procedurally and substantively wrong.” Francisco further emphasized that “refusing to apply the severability provision . . .would be severely disruptive” because the Bureau is the only federal agency dedicated solely to consumer financial protection.
Seila Law also filed a reply brief the same day, countering that Clement offered “no valid justification” for the Court to rule on the severability question separately, and arguing that a “civil investigative demand issued and enforced by an unaccountable director is void, and the only appropriate resolution is to order the denial of the CFPB’s petition for enforcement.” Seila Law further contended that the Court should reverse the U.S. Court of Appeals for the Ninth Circuit’s decision from last May—which deemed the CFPB to be constitutionally structured and upheld a district court’s ruling enforcing Seila Law’s obligation to comply with a 2017 civil investigative demand—and “leave to Congress the quintessentially legislative decision of how the CFPB should function going forward.”
Notably, Francisco disagreed with Seila Law’s argument that the 9th Circuit’s judgment should be reversed outright, stating that to do so “would deprive the Bureau of ratification arguments” that the 9th Circuit chose not to address by instead upholding the removal restriction’s constitutionality. The Bureau’s ratification arguments at the time, Francisco stated, contended that even if the removal restriction was found to be unconstitutional, “the CID could still be enforced because the Bureau’s former Acting Director—who was removable at will—had ratified it.” As such, Francisco recommended that the Court “confirm that the severability clause means what it says and remand the case to the [9th Circuit] to resolve any remaining case-specific ratification questions.”
The same day, the Court approved Seila Law’s motion for enlargement of time for oral argument and for divided argument. The time will be divided as follows: 20 minutes for Seila Law, 20 minutes for the solicitor general, 20 minutes for the court-appointed amicus curiae, and 10 minutes for the House of Representatives.
Find continuing InfoBytes coverage on Seila here.
CFPB issues Winter 2020 Supervisory Highlights
On February 14, the CFPB released its winter 2020 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of student loan servicing, payday lending, debt collection, and mortgage servicing. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between April and August of 2019. Highlights of the examination findings include:
- Debt collection. The Bureau cited violations of the FDCPA’s requirement that debt collectors must, after the initial written communication, disclose that their communications are from a debt collector. The report also included the failure of some debt collectors to provide a written validation notice to consumers within five days after the debt collector initially contacts the consumer regarding the collection of a debt.
- Payday lending. The Bureau found violations of the CFPA, including among other things, lenders failing to apply consumer payments to their loan balances and treating the accounts as delinquent. The Bureau also found weaknesses in employee training that resulted in providing consumers with inaccurate annual percentage rates in violation of Regulation Z.
- Mortgage servicing. The Bureau pointed out that servicers had violated Regulation X by failing to provide written acknowledgement of receipt of consumer loss mitigation applications, including whether the applications were complete or incomplete, within five days of receipt. Servicers also failed to provide in writing a list of loss mitigation options for which the consumer was eligible within 30 days of receiving a complete loss mitigation application.
- Student loan servicing. The Bureau noted that after loans were transferred, some servicers billed incorrect monthly amounts to the consumers.
The report notes that in response to most examination findings, the companies have taken or are taking remedial and corrective actions, including by identifying and compensating impacted consumers and updating their policies and procedures to prevent future violations. Lastly, the report also highlights the Bureau’s recently issued rules and guidance.
CFPB updates FCRA exam procedures
On February 11, the CFPB issued updates to its Supervision and Examination Manual to include requirements of the FCRA created by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The updates apply to the examination procedures covering consumer reporting, larger participants, and education loans, and aim to reduce instances of consumer compliance law violations by companies that provide consumer financial products and services. According to the CFPB, the larger participants examination procedures provide guidance to examiners covering a number of areas including, among other things, (i) “accuracy of information and furnisher relations”; (ii) “contents of consumer reports”; (iii) “consumer inquiries, complaints, and disputes and the reinvestigation process”; (vi) “consumer alerts and identity theft provisions”; and (v) “other products and services and risks to consumers.” The Bureau’s guidance to examiners on education loan exam procedures concentrates on servicing and origination. Some of the topics included are: (i) “advertising, marketing, and lead generation”; (ii) “customer application, qualification, loan origination, and disbursement”; (iii) “student loan servicing”; (iv) “borrower inquiries and complaints”; and (v) “information sharing and privacy.”
FFIEC releases 2020 HMDA reporting guide
On February 13, the FDIC issued FIL-9-2020 announcing the Federal Financial Institutions Examinations Council’s issuance of the 2020 edition of the “Guide to HMDA Reporting: Getting It Right!” The guide applies to HMDA data collected in 2020 that will be reported to supervisory agencies by March 1, 2021, and includes, (i) a summary of responsibilities and requirements; (ii) directions for assembling the necessary tools; and (iii) instructions for reporting HMDA data. According to the announcement, the 2020 edition provides information to assist HMDA compliance in the event of a merger or acquisition, as well as updates to the appendices to reflect amendments to Regulation C made by the CFPB that took effect January 1. As previously covered by InfoBytes, the amendments extend the current temporary threshold of 500 open-end lines of credit under HMDA rules for reporting data to January 1, 2022.
CFPB denies debt collector’s request to set aside CID
On February 6, the CFPB released a Decision and Order denying a debt collection company’s (petitioner) request to set aside or modify a third-party Civil Investigative Demand (CID) issued by the Bureau, and directing the petitioner to provide all information required by the CID. The CID in dispute was issued to the petitioner by the CFPB in November and seeks documents and written responses pertaining to the petitioner’s business practices and its relationship with a New York-based debt collection law firm. The CID requests information regarding whether “debt collectors, furnishers, or associated persons” had, among other things, (i) violated the Consumer Financial Protection Act by ignoring warnings regarding debts resulting from identity theft “in a manner that was unfair, deceptive or abusive”; (ii) violated the FDCPA by disregarding cease-and-desist requests or by failing to provide required notices or making false or misleading statements; or (iii) violated the FCRA by “fail[ing] to correct and update furnished information, or fail[ing] to maintain reasonable policies and procedures.”
In its petition to set aside or modify the CID, the petitioner set out four primary arguments: (i) the structure of the CFPB is unconstitutional, and it therefore “lacks authority to proceed with enforcement activity”; (ii) the CID improperly seeks attorney-client privileged information; (iii) the CID is “overly broad,” does not apply to the petitioner, and does not sufficiently provide the “nature of the conduct under investigation and the applicable provisions of law”; and (iv) the CID improperly seeks information beyond the applicable statute of limitations.
The Bureau’s denial of the petitioner’s request addresses each of the petitioner’s arguments. Regarding the constitutionality of the CFPB’s structure, the order asserts that “the administrative process set out in the [B]ureau’s statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the [B]ureau’s statute.” In response to the petitioner’s attorney-client privilege argument, the order states that the petitioner “does not ask…to modify the CID to avoid seeking privileged information—it only asks that the CID be quashed in its entirety.” The Bureau states that because the petitioner makes a “blanket assertion” of attorney-client privilege rather than providing the required privilege log in order to properly claim privilege over materials requested in the CID before filing its petition, the petitioner’s argument is “procedurally improper” and does not show that the “CID should be set aside on these grounds.” To the petitioner’s lack of specificity argument, the order states that the CID “sets forth in detail both the conduct under investigation and applicable laws,” adding that there is no requirement that the Bureau disclose the targets of its “ongoing and confidential law-enforcement investigations.” The order also rejects the petitioner’s statute of limitations argument, explaining that the Bureau is not limited to the three years preceding the CID, but “instead what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.”
Kraninger testifies at House hearing; final payday rule expected in April
On February 6, CFPB Director Kathy Kraninger testified at a House Financial Services Committee hearing on the CFPB’s Semi-Annual Report to Congress. (Covered by InfoBytes here.) The hearing covered the semi-annual report to Congress on the Bureau’s work from April 1, 2019, through September 30, 2019. In her opening remarks, Committee Chairwoman Maxine Waters argued, among other things, that the Bureau’s recent policy statement on the “abusiveness” standard in supervision and enforcement matters “undercuts” Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Waters also challenged Kraninger on her support for the joint notice of proposed rulemaking issued by the OCC and FDIC to strengthen and modernize Community Reinvestment Act regulations (covered by a Buckley Special Alert), arguing that the proposal would lead to disinvestment in communities, while emphasizing that Kraninger’s actions have not demonstrated the Bureau’s responsibility to meaningfully protect consumers. However, in her opening statement and written testimony, Kraninger highlighted several actions recently taken by the Bureau to protect consumers, and emphasized the Bureau’s commitment to preventing harm by “building a culture of compliance throughout the financial system while supporting free and competitive markets that provide for informed consumer choice.”
Additional highlights of Kraninger’s testimony include:
- Memoranda of Understanding (MOU) with the Department of Education (Department). Kraninger discussed the recently announced information sharing agreement (covered by InfoBytes here) between the Bureau and the Department, intended to protect student borrowers by clarifying the roles and responsibilities for each agency and permitting the sharing of student loan complaint data analysis, recommendations, and data analytic tools. Kraninger stated that the MOU will give the Department the same near real-time access to the Bureau’s complaint database enjoyed by other government partners, and also told the Committee that the Bureau and Department are currently discussing a second supervisory MOU.
- Payday, Vehicle Title, and Certain High-Cost Installment Loans. Kraninger told the Committee that a rewrite of the payday lending rule—which will eliminate requirements for lenders to assess a borrower’s ability to repay loans—is expected in April. (Covered by InfoBytes here.) Kraninger noted that the Bureau is currently reviewing an “extensive number of comments” and plans to address a petition on the rule’s payments provision. “[F]inancial institutions have argued that there were some products pulled into that that were, you know, unintended,” she stated. “[W]orking through all of that and. . .moving forward in a way that is transparent in. . .April is what I am planning to do.”
- Ability-to-Repay and Qualified Mortgages (QM). Kraninger discussed the Bureau’s advanced notice of proposed rulemaking that would modify the QM Rule by moving away from the 43 percent debt to income ratio requirement and adopt an alternative such as a pricing threshold to ensure responsible, affordable mortgage credit is available to consumers. (Covered by InfoBytes here.) She stated that the Bureau would welcome legislation from Congress in this area.
- Supervision and Enforcement. Kraninger repeatedly emphasized that supervision is an important tool for the Bureau, and stated in her written testimony that during the reporting period discussed, “the Bureau’s Fair Lending Supervision program initiated 16 supervisory events at financial services institutions under the Bureau’s jurisdiction to determine compliance with federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities, including the Equal Credit Opportunity Act [] and HMDA.” In addition to discussing recent enforcement actions, Kraninger also highlighted three innovation policies: the Trial Disclosure Program Policy, No-Action Letter Policy, and the Compliance Assistance Sandbox Policy. (Covered by InfoBytes here.)
- Military Lending Act (MLA). Kraninger reiterated her position that she does not believe Dodd-Frank gives the Bureau the authority to supervise financial institutions for military lending compliance, and repeated her request for Congress to grant the Bureau clear authority to do so. (Covered by InfoBytes here.) Congressman Barr (R-KY) noted that while he introduced H.R. 442 last month in response to Kraninger’s request, the majority has denied the mark up.
- UDAAP. Kraninger fielded a number of questions on the Bureau’s recent abusiveness policy statement. (Covered by InfoBytes here.) Several Democrats told Kraninger the new policy will put unnecessary constraints on the Bureau’s enforcement powers, while some Republicans said the policy fails to define what constitutes an abusive act or practice. Kraninger informed the Committee that the policy statement is intended to “clarify abusiveness and separate it from deceptive and unfairness because Congress explicitly gave us those three authorities.” Kraninger reiterated that the Bureau will seek monetary relief only when the entity has failed to make a good faith effort to comply, and that “[r]estitution for consumers will be the priority in these cases.” She further emphasized that “in no way should that policy be read to say that we would not bring abusiveness claims.” Congresswoman Maloney (D-NY) argued, however, that a 2016 fine issued against a national bank for allegedly unfair and abusive conduct tied to the bank’s incentive compensation sales practices “would have been substantially lower if the [B]ureau hadn’t charged [the bank] with abus[ive] conduct also.” Kraninger replied that the Bureau could have gotten “the same amount of restitution and other penalties associated with unfairness alone.”
- Constitutionality Challenge. Kraninger reiterated that while she agrees with Seila Law on the Bureau’s single-director leadership structure, she differs on how the matter should be resolved. “Congress obviously provided a clear mission for this agency but there are some questions around. . .this and I want the uncertainty to be resolved,” Kraninger testified. “Congress will have the opportunity to make any changes or respond to that and I think that’s appropriate,” she continued. “I would very much like to see a resolution on this question because it has hampered the CFPB’s ability to carry out its mission, virtually since its inception.” (Continuing InfoBytes coverage on Seila Law LLC v. CFPB here.)
CFPB settles UDAAP allegations with Texas payday lender
On February 5, the CFPB announced a settlement with a Texas-based payday lender and six subsidiaries (defendants) for allegedly assisting in the collection of online installment loans and online lines of credit that consumers were not legally obligated to pay based on certain states’ usury laws or licensing requirements. As previously covered by InfoBytes, the Bureau filed a complaint in 2017—amended in 2018—against the defendants for allegedly violating the CFPA’s prohibitions on unfair, deceptive, and abusive acts and practices by, among other things, making deceptive demands and originating debit entries from consumers’ bank accounts for loans that the defendants knew were either partially or completely void because the loans were void under state licensing or usury laws. The defendants—who operated in conjunction with three tribal lenders engaged in the business of extending and collecting the online installment loans and lines of credit—also allegedly provided material services and substantial assistance to two debt collection companies that were also involved in the collection of these loans.
Under the stipulated final consent order, the defendants are prohibited from (i) extending, servicing, or collecting on loans made to consumers in any of the identified 17 states if the loans violate state usury limits or licensing requirements; and (ii) assisting others engaged in this type of conduct. Additionally, the settlement imposes a $1 civil money penalty against each of the seven defendants. The Bureau’s press release notes that the order “is a component of the global resolution of the [defendants’] bankruptcy proceeding in the Bankruptcy Court for the Northern District of Texas, which includes settlements with the Pennsylvania Attorney General’s Office and private litigants in a nationwide consumer class action.” The press release also states that “[c]onsumer redress will be disbursed from a fund created as part of the global resolution, which is anticipated to have over $39 million for distribution to consumers and may increase over time as a result of ongoing, related litigation and settlements.”
CFPB, DOE sign MOU on student loan complaint data
On February 3, the CFPB and the Department of Education (Department) announced a new agreement to share student loan complaint data. (See press releases here and here.) The newly signed Memorandum of Understanding (MOU) is the first information sharing agreement between the agencies since the Department terminated two MOUs in 2017. As previously covered by InfoBytes, the Department cancelled the “Memorandum of Understanding Between the Bureau of Consumer Financial Protection and the U.S. Department of Education Concerning the Sharing of Information” and the “Memorandum of Understanding Concerning Supervisory and Oversight Cooperation and Related Information Sharing Between the U.S. Department of Education and the Consumer Financial Protection Bureau,” and at the time rebuked the Bureau for overreaching and undermining the Department’s mission to serve students and borrowers.
The new MOU clarifies the roles and responsibilities for each agency and permits the sharing of student loan complaint data analysis and other information and recommendations. Among other responsibilities, the Department will direct complaints related to private loans governed by TILA to the Bureau, and both agencies will discuss complaints regarding federal student loans with program issues that may have an impact on federal consumer financial laws. The agencies will also conduct quarterly meetings to discuss complaint observations and borrower characteristics, as well as complaint resolution information when available. Additionally, the MOU addresses permissible uses and confidentiality of exchanged information and the development of tools for sharing data analytics.
The MOU was released a few days after Senators Sherrod Brown (D-Ohio) and Robert Menendez (D-NJ) sent a letter to CFPB Director Kathy Kraninger expressing frustration with the Bureau’s oversight of federal student loan servicers and delay in reestablishing an MOU with the Department that would allow the Bureau to resume examining federal student loan servicers.
CFPB issues semi-annual report to Congress
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.