InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
States endorse CFPB’s policy statement on abusive conduct
On July 6, the California attorney announced that he had joined a coalition of state attorneys general in submitting a comment letter endorsing the CFPB’s recently issued policy statement on abusive conduct in consumer financial markets. The multi-state coalition comprises Arizona, California, Colorado, Connecticut, the District of Columbia, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Vermont, and Wisconsin. In April, the Bureau issued a policy statement containing an “analytical framework” for identifying abusive conduct prohibited under the Consumer Financial Protection Act, in which it broadly defined abusive conduct as anything that obscures, withholds, de-emphasizes, renders confusing, or hides information about the key features of a product or service. (Covered by InfoBytes here.)
In their letter, the state attorneys general emphasized the importance of preventing abusive conduct in consumer financial markets and highlighted the partnership between states and the Bureau in achieving this goal. The states also commended the Bureau for providing a clear, analytical framework for what constitutes abusive acts or practices and expressed appreciation for the agency’s use of real enforcement actions as examples of illegal abusive conduct. The multi-state coalition applauded the flexibility and guidance provided by the policy statement and complimented the Bureau for acknowledging the realities of modern consumer markets by clarifying that both acts and omissions can hinder consumers’ understanding of terms and conditions, including the use of fine print or complex language that limits comprehension.
District Court orders individual to pay $148 million in student debt-relief scam
On July 7, the U.S. District Court for the Central District of California entered a final judgment and order against an individual defendant accused of operating and controlling a deceptive student loan debt relief operation. As previously covered by InfoBytes, in 2019, the CFPB, along with the Minnesota and North Carolina attorneys general and the Los Angeles City Attorney (together, the “states”), announced an action against the student loan debt relief operation for allegedly deceiving thousands of student loan borrowers. The Bureau and the states alleged that since at least 2015, the debt relief operation violated the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), FDCPA, and various state laws by charging and collecting over $95 million in illegal advance fees from student loan borrowers. In addition, the Bureau and the states claimed that the debt relief operation engaged in deceptive practices by misrepresenting the purpose and application of the fees they charged and the nature and benefits of their services. Specifically, the debt relief operation allegedly failed to inform borrowers that, among other things, (i) they would request that the loans be placed in forbearance and interest would continue to accrue during the forbearance period, thereby increasing the borrowers’ overall loan balances; and (ii) it was their practice to submit false information about the borrowers to student loan servicers to try to qualify borrowers for lower monthly payments. The individual defendant was accused of owning, controlling, and managing the student loan debt relief operation, materially participating in the operation’s affairs, and providing substantial assistance or support while knowing or consciously avoiding knowledge that the operation was engaging in illegal conduct.
The individual defendant was held liable, jointly and severally, in the amount of approximately $95,057,757, for the purpose of providing redress to affected borrowers. Because the individual defendant was found to have recklessly violated the TSR and the CFPA, the court also imposed second-tier civil monetary penalties of $147,985,000 to the Bureau, of which $5,000 will be paid to each state. The final judgment also imposes various forms of injunctive relief, including permanent bans on engaging in consumer financial products or services and violating the TSR, CFPA, and similar laws in Minnesota, North Carolina, and California. The individual defendant is also prohibited from disclosing, using, or benefiting from customer information obtained in connection with the offering or providing of the debt relief services, and may not “attempt to collect, sell, assign, or otherwise transfer any right to collect payment from any consumer who purchased or agreed to purchase” a debt relief service from any of the defendants.
Fed vice chair calls for higher capital for large banks
On July 10, Federal Reserve Board Vice Chair for Supervision Michael S. Barr delivered remarks at the Bipartisan Policy Center outlining proposed updates to capital standards. As part of his holistic review of capital standards for large banks, Barr concluded that the existing approach to capital requirements—including risk-based requirements, stress testing, risk-based capital buffers, and leverage requirements and buffers—was sound. He stated that the changes he proposes are intended to build on the existing foundation. Barr’s proposed updates include: (i) updating risk-based requirement standards to better reflect credit, trading, and operational risk, consistent with international standards adopted by the Basel Committee; (ii) evolving the stress test to capture a wider range of risks; and (iii) improving the measurement of systemic indicators under the global systemically important bank surcharge. Barr stated that at this time he was not recommending changes to the enhanced supplementary leverage ratio.
Barr also proposed implementing changes to the risk-based capital requirements, referred to as the “Basel III endgame,” which are intended to ensure that the U.S. minimum capital requirements require banks to hold adequate capital against their risk-taking. These proposed changes include: (i) with respect to a firm’s lending activities, the proposed rules would terminate the practice of relying on banks’ own individual estimates of their own risk and would instead adopt a more transparent and consistent approach; (ii) regarding a firm’s trading activities, the proposed rules would adjust the way that the firm measures market risk, better aligning market risk capital requirements with market risk exposure and providing supervisors with improved tools; and (iii) for operational losses, such as trading losses or litigation expenses, the proposed rules would replace an internal modeled operational risk requirement with a standardized measure.
Barr recommended that these enhanced capital rules apply only to banks and bank holding companies with $100 billion or more in assets. He emphasized that the proposed changes would not be fully effective for some years due to the notice and comment rulemaking process, and that any final rule would provide for an appropriate transition.
FHFA proposes amendments to strengthen Suspended Counterparty Program
On July 7, the FHFA issued a notice of proposed rulemaking and announced that it is seeking feedback on a proposed rule to amend the Suspended Counterparty Program (SCP) regulation. The SCP regulation currently requires FHFA-regulated entities to report to FHFA if they became aware of certain forms of misconduct committed within the past three years by individuals or institutions they do business with. The SCP regulation also grants FHFA the authority to issue orders directing the regulated entities to cease or refrain from doing business with certain counterparties.
According to FHFA Director Sandra L. Thompson, the proposed rule aims to strengthen FHFA’s ability to protect its regulated entities from business risks associated with misconduct, enabling them to continue serving as reliable sources of liquidity. The proposed rule would specifically authorize the suspension of business between regulated entities and counterparties who are found to have committed misconduct in the context of civil enforcement actions in connection with the management or ownership of real property. Furthermore, the proposed rule would allow FHFA to immediately suspend business without prior notice when misconduct has resulted in debarment, suspension, or limited denial of participation imposed by a federal agency. Comments on the proposed rule are due within 60 days of publication in the Federal Register.
CFPB launches medical-debt inquiry with HHS and Treasury
On July 7, the CFPB, Department of Health and Human Services, and the Treasury Department announced they are looking into high-cost specialty financial products such as medical credit cards and installment loans used by patients to pay for health care. These products, the agencies explained, were once primarily used to pay for medical treatments not traditionally covered by health insurance but may now be more widely used even when medical care may be covered by insurance or financial assistance. The agencies released a request for information (RFI) seeking feedback on a range of topics, including costs associated with medical payment products, how prevalent the products are, health care providers’ incentives to offer these products to patients, and whether patients fully understand the risks and consequences associated with medical payment products.
Specifically, the agencies are soliciting comments “on whether these products may allow health care providers to operate outside of a broad range of patient and consumer protections.” Feedback is also requested on whether use of these products is contributing to health care cost inflation, displacing hospitals’ provision of financial assistance, causing patients to pay inaccurate or inflated medical bills, increasing the amount patients must pay due to financing costs, or otherwise contributing to consumer harm, including through downstream credit reporting and debt collection practices. The agencies also want to know if using these products is creating disparities across different demographic groups, as well as policy options to protect consumers from harm.
The agencies commented that the RFI will assist in their understanding of consumer harms and financial challenges caused by specialty medical payment products and will serve to guide next steps, including future Bureau actions focusing on credit origination, debt collection, and credit reporting practices of the financial companies that originate and service these products.
Comments on the RFI are due within 60 days of publication in the Federal Register.
Additionally, the Bureau is hosting a hearing on July 11 to address medical billing and collection concerns with a focus on medical payment products.
FTC proposal would ban deceptive reviews
On June 30, the FTC introduced a proposed rule to combat deceptive review practices and ensure consumer protection in light of the impact and progression of technology and artificial intelligence. The rule seeks to prohibit the creation and sale of fake consumer reviews, prevent review hijacking, and restrict the manipulation of reviews through incentives. Under the proposed rule, businesses would be prohibited from creating or selling reviews by individuals who do not exist or lack real experience with the product or service. Additionally, the proposed rule prohibits businesses from providing compensation or incentives in exchange for consumer reviews expressing specific sentiments, whether positive or negative. To enhance transparency and integrity, the proposed rule also includes provisions related to insider reviews and testimonials. It also emphasizes the importance of transparency by requiring disclosure of relationships in insider reviews and testimonials. Under these provisions, officers and managers of companies would be required to disclose their relationships when writing reviews or testimonials about their products or services. Businesses would also be obligated to disclose relationships in testimonials written by insiders. Moreover, the FTC's proposed rule targets businesses that create or control websites claiming to provide impartial opinions about a particular category of products or services, including their offerings. Further, it prohibits businesses from using unjustified legal threats, intimidation, or false accusations to prevent or remove negative consumer reviews. This provision aims to preserve the independence and authenticity of consumer reviews, preventing businesses from manipulating public perception through controlled review websites. Considering the widespread influence of social media, the rule would prohibit businesses from selling or buying fake followers or views.
The FTC is currently seeking public comments on the proposed rule.
Highlights from the CFPB’s 2022 fair lending report
On June 29, the CFPB issued its annual fair lending report to Congress which outlines the Bureau’s efforts in 2022 to fulfill its fair lending mandate. Much of the Bureau’s work in 2022 was directed towards unlawful discrimination in the home appraisal industry and addressing redlining. According to the report, the CFPB also honed its efforts on factors that influence fair access to credit which included insight into factors affecting consumers’ credit profiles. The report highlights one fair lending enforcement action from 2022, where the CFPB and DOJ filed a joint complaint and proposed consent order against a company for allegedly violating ECOA, Regulation B, and the CFPA by discouraging prospective applicants from applying for credit. Notably, the Bureau notes that under section 704 of ECOA, it must refer any cases with instances of a creditor being believed to have engaged in a “pattern or practice of lending discrimination” to the DOJ. According to the report, the FDIC, NCUA, Federal Reserve Board, and CFPB collectively made 23 such referrals to the DOJ in 2022, a 91 percent increase from 2020. Five of the 23 matters were sent by the CFPB, four of which involved alleged racial discrimination in redlining, and one involving alleged discrimination in underwriting based on receipt of public assistance income. The report also discusses the CFPB’s risk-based prioritization process that resulted in initiatives concerning small business lending, policies and procedures on exclusions in underwriting, and the use of artificial intelligence. Moving forward, the Bureau will continue its collaborative approach with other agencies and prioritize areas such as combating bias in home appraisals, redlining, and the use of advanced technologies in financial services. Additionally, the report states that by focusing on restorative outcomes, comprehensive remedies, and equal economic opportunities, the CFPB aims to create a fair, equitable, and nondiscriminatory credit market for consumers.
FDIC releases May enforcement actions
On June 30, the FDIC released a list of administrative enforcement actions taken against banks and individuals in May. The FDIC made public four orders including “two orders of prohibition, one consent order and combined personal consent order, and one to order to pay a civil money penalty.” Included is a cease and desist/consent order against a New York-based bank related to alleged deficiencies and weaknesses in the bank’s anti-money laundering/countering the financing of terrorism program (AML/CFT Program), among other things. Also, among other things, the FDIC required that the bank must ensure it has designated individual(s) with qualifications, who can ensure the bank’s compliance with the AML/CFT Program.
Mortgage lender to pay $23.7 million to settle FCA allegations
On June 29, the DOJ announced a $23.75 million settlement with a South Carolina-based mortgage lender to resolve alleged False Claims Act (FCA) violations related to its origination and underwriting of mortgages insured by the Federal Housing Administration (FHA). According to the DOJ, two former employees filed a lawsuit under the FCA’s whistleblower provisions alleging the lender failed to maintain quality control programs for preventing and correcting underwriting deficiencies. As part of the settlement, the lender admitted that it certified loans that did not meet the applicable requirements for FHA mortgage insurance and VA home loan guarantees. The lender also acknowledged that these loans would not have been insured or guaranteed by the agencies were it not for the submission of false certificates. While the conduct began in July 2008, the DOJ recognized that the lender has taken significant measures to stop the violations, both before and after being told of the investigation, and gave the lender credit for doing so. Under the terms of the settlement, the lender will pay $23.75 million to the U.S., with the whistleblowers receiving a total of $4.04 million of the settlement proceeds.
NCUA annual report to Congress covers cybersecurity
On June 28, the NCUA released its annual report on cybersecurity and credit union system resilience to the House and Senate banking committees. The report outlines measures the agency has taken to strengthen cybersecurity within the credit union system, outlines significant risks and challenges facing the financial system due to the NCUA’s lack of authority over third-party vendors, and addresses current and emerging threats. Explaining that cybersecurity is one of the NCUA’s top supervisory priorities with cyberattacks being a top-tier risk under the agency’s enterprise risk management program, the report discusses ways the NCUA continues to enhance the cybersecurity resilience of federally insured credit unions (FICUs). Measures include continually improving the agency’s examination program, providing training and support, and implementing a final rule in February, which requires FICUs to report any cyberattacks that disrupt its business operations, vital member services, or a member information system as soon as possible (and no later than 72 hours) after the FICU’s “reasonable belief that it has experienced a cyberattack.” The final rule takes effect September 1. (Covered by InfoBytes here.) The report also raises concerns regarding the NCUA’s lack of authority over third-party vendors that provide services to FICUs. Calling this a “regulatory blind spot” with the potential to create significant risks and challenges, the agency stresses that one of its top requests to Congress is to restore the authority that permits the agency to examine third-party vendors.