Sunday, April 30, 2017

CFPB keeps supervisory eye on servicing

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published its latest Supervisory Highlights detailing consumer issues the bureau has found through its supervisory work. The current report (Issue 15) addresses consumer issues with student loan and mortgage servicing. CFPB examiners have discovered that some student loan and mortgage servicers are violating consumer compliance laws by failing to provide struggling borrowers with legal protections, according to the bureau. The CFPB also reported that non-supervisory bureau actions have led to the recovery of approximately $6.1 million for 16,000 consumers harmed by auto loan originators. Finally, the bureau released its monthly complaint snapshot for the April 2017, with the focus again on student loan servicing.
Referring to the Supervisory Highlights report, CFPB Director Richard Cordray said that the "slipshod practices" of some student loan and mortgage servicers "are putting borrowers at risk of financial failure and we will hold them accountable."
Student loan servicers. The CFPB noted that it is "a Bureau priority to end illegal practices in student loan servicing." The bureau reported that examiners found that student loan servicers:
  •  routinely acted on incorrect information about whether the borrower was enrolled in school; and
  • failed to reverse certain charges, including improper late fees, even after they knew they had wrongly ended a deferment.
Mortgage servicers. CFPB supervision continues to see serious issues for consumers seeking alternatives to foreclosure, or loss mitigation, at certain servicers, according to the report. CFPB examiners found problems with foreclosure protections, premature foreclosure filings, mishandling of escrow accounts, and incomplete periodic statements. Further, examiners found that one or more mortgage servicers:
  • failed to identify the additional documents and information borrowers needed to submit to complete a loss mitigation application to avoid foreclosure, then denied the applications for not including those documents.
  • launched the foreclosure process prematurely after receiving loss mitigation applications from borrowers;
  • used funds from escrow accounts to pay insurance premiums on unrelated loans, creating shortages in the escrow accounts and higher monthly payments for consumers; and
  • issued incomplete periodic statements that used vague language such as "miscellaneous expenses" or just "service charge."

 Additional highlights. Key highlights of the report also include:
  • how CFPB examiners assess compliance with the Ability-to-Repay rule, including requirements on how a lender verifies a consumer’s ability to repay a mortgage loan;
  • alerts sent by examiners to one or more companies that consumer complaints have spiked, prompting remedies;
  • the bureau’s development and implementation of a program to examine key service providers to help reduce risks to consumers when a company outsources activities to those providers;
  • recent enforcement actions resulting from supervisory actions; and
  • information the industry can use to comply with federal consumer compliance laws.
The CFPB noted in the report that when examiners find problems, they alert the company and outline necessary remedial measures, such as paying refunds or restitution or taking actions to stop illegal practices, such as new policies or improved training or monitoring. If appropriate, the CFPB will open investigations for potential enforcement actions.
Complaint snapshot. Both private and federal student loan borrowers continue to report servicing breakdowns hindering repayment, according to the monthly complaint snapshot. The April 2017 snapshot also highlights trends seen in complaints coming from Nevada and the Las Vegas metro area.
"Student loan servicers play an important role in helping millions of people manage the loans they take out to pursue an education," said CFPB Director Richard Cordray. "Unfortunately, borrowers continue to report difficulties and setbacks as they try to work with their servicers to manage their loan debt."
Currently at $1.4 trillion, student loan debt represents the second largest U.S. debt market after mortgages, the bureau reported. As of April 1, 2017, the CFPB had handled approximately 1,163,200 consumer complaints across all products. Approximately 44,400 of those complaints were about student loans. Specifically, consumers complain about:
  • poor information from and "sloppy" practices by loan servicers;
  • difficulty enrolling and staying in income-driven repayment plans; and
  • confusion over the Public Service Loan Forgiveness and other loan forgiveness programs.
The three companies that the CFPB has received the most average monthly student loan complaints about are Navient Solutions, LLC, Fedloan Servicing/AES, and Nelnet.
National overview. The snapshot includes statistics about complaints submitted to the CFPB from across the United States. These statistics include the following:
  • Student loan complaints showed the greatest increase of any product or service in a year-to-year comparison examining the three-month time period of January to March.
  • Debt collection was the most-complained-about financial product or service.
  • The second and third most-complained-about products or services were credit reporting and mortgages.
  • Montana, Georgia, and Wyoming experienced the greatest year-to-year complaint volume increases from January to March 2017, versus the same time period 12 months before.
  • The top three companies that received the most complaints from November 2016 through January 2017 were Navient Solutions, LLC, Equifax, and Experian.

Nevada spotlight. As of April 1, 2017, consumers in Nevada have submitted 14,600 of the 1,163,200 complaints the CFPB has handled. Of those complaints, 10,800 came from consumers in the Las Vegas metro area. Findings from the Nevada complaints submitted to the CFPB include:
  • Complaints related to debt collection accounted for 29 percent of all complaints submitted by consumers from Nevada, slightly higher than the national rate.
  • Complaints related to mortgages accounted for 23 percent of all complaints from Nevada, a rate that is identical to the national rate of mortgage complaints.
  • Wells Fargo, Experian, and Equifax were the most-complained-about companies from consumers in Nevada.
For more information about CFPB supervision and loan servicing, subscribe to the Banking and Finance Law Daily.

Thursday, April 27, 2017

D.C. Cir.: State regulators’ group sues to block OCC’s planned fintech charter

By Richard A. Roth, J.D.
The Conference of State Bank Supervisors has sued the Office of the Comptroller of the Currency in an effort to block the agency from creating a new special purpose fintech charter. Calling the OCC’s plan "an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks," CSBS says that the OCC only can charter financial institutions that engage in the business of banking. At a minimum, such an institution must accept deposits, but the OCC intends that companies holding the special purpose charters might not accept deposits, meaning they will not be engaged in the business of banking, CSBS charges (Conference of State Bank Supervisors v. OCC ).
According to CSBS President and CEO John W. Ryan, state authorities already supervise tens of thousands of bank and nonbank financial services companies, including more than 75 percent of U.S. banks. This has created "a robust platform for innovation." The OCC’s plan will preempt state consumer protection laws, he added.
CSBS objections. The complaint alleges that the OCC claims the authority to create charters for a broad variety of nonbank financial services providers, regardless of whether they might be thought of as fintech companies. This exceeds the agency’s authority under the National Bank Act.
CSBS complains that the OCC has decided to act simply by publishing a white paper and then asking for public comments on a supplement to its Licensing Manual. The agency should have proposed regulations. In fact, while the white paper sought comments on how the OCC should issue nonbank charters, it did not seek comments on whether the agency had the authority to issue nonbank charters.
The complaint alleges that the OCC intends, as part of the chartering process, to negotiate a secret agreement with each company about which federal banking laws will be applied to it. Also, by virtue of their federal special purpose charters, the companies will be exempt from state banking laws and regulations. This will create significant preemption issues.
OCC chartering authority. According to the CSBS complaint, the OCC has the authority to issue charters to companies to engage in the business of banking and to issue limited special purpose charters. While the NBA does not explicitly define what constitutes the business of banking, law and practice make clear that it must include taking deposits, CSBS asserts.
Previous OCC efforts to issue charters to companies that do not take deposits have been rejected by the courts, according to the complaint. There are three exceptions—Congress has explicitly authorized the agency to charter trust banks, banker’s banks, and credit card banks. The special purpose nonbanks contemplated by the OCC would not fit into any of those categories. Congress has rejected efforts to create other special purpose charters, CSBS notes.
Comptroller of the Currency Thomas J. Curry has said the OCC will issue special purpose charters to companies that engage in at least one of three activities—taking deposits, handling funds transfers such as paying checks, or making loans. While an OCC regulation might permit that broader definition of the business of banking (12 CFR 5.20(e)), the law does not, CSBS argues. In fact, the OCC has pointed only to that regulation, and not to any statute, as its authority.
Moreover, the OCC appears to contemplate allowing special purpose nonbanks to engage in activities that have never been determined to be part of or incidental to banking.
Specific claims for relief. CSBS wants a declaratory judgment preventing the issuance of nonbank special purpose charters for several reasons:
  1.  The OCC does not have the statutory authority to issue special purpose charters to nonbanks.
  2. To the extent that 12 CFR 5.20(e) defines the business of banking in a manner that does not require deposit-taking, its adoption exceeded the OCC’s authority.
  3. To the extent that 12 CFR 5.20(e) defines the business of banking in a manner that does not require deposit-taking, its adoption exceeded the OCC’s authority.
  4. The OCC has not considered the effects of its actions on state regulatory powers, has not carried out a cost-benefit analysis, and has not provided a reasoned explanation, making its actions arbitrary and capricious.
  5. Since Congress has not authorized the OCC to preempt state law in this area, issuing special purpose charters to nonbanks would violate the states’ Tenth Amendment right to regulate the companies.  
The case is No. 1:17-cv-00763.

For more information about the OCC and fintech charters, subscribe to the Banking and Finance Law Daily.

Thursday, April 20, 2017

CFPB moves to ease HMDA reporting

By Andrew A. Turner, J.D.
The Consumer Financial Protection Bureau is proposing changes to Reg. C—Home Mortgage Disclosure (12 CFR Part 1003) that are intended to ease lenders’ compliance with its 2015 HMDA rule amendments. According to the bureau, it intends to establish transition rules that will excuse reporting of two data points for loans that were purchased before the 2015 rules took effect. The proposal would:
  • clarify key terms, such as “temporary financing” and “automated underwriting system;
  • create an exemption for some New York-based transactions; and
  • provide a geocoding tool lenders could rely on to determine the census tract of property that secures a loan.
“The Home Mortgage Disclosure Act shines a much-needed spotlight on the mortgage market, which is the largest consumer financial market in the world,” said CFPB Director Richard Cordray. “Today’s proposal reflects the Bureau’s ongoing and substantive engagement with stakeholders in the marketplace, and will help industry meet its new reporting obligations.”
Monitoring mortgages. The HMDA requires many lenders to report information about the home loans in which they receive applications or that they originate or purchase. The regulators use the information to monitor whether financial institutions are serving the housing needs of their communities, assist in distributing public-sector investment, and to identify possible discriminatory lending patterns.
Following the passage of the Dodd-Frank Act, the CFPB updated the HMDA regulation to improve the quality and type of data reported by financial institutions. These amended requirements take effect in January 2018, although public outreach by the CFPB demonstrated that the financial industry would benefit from further clarification. 

For more information about mortgage loan reporting, subscribe to the Banking and Finance Law Daily.

Wednesday, April 19, 2017

OCC fintech charter proposal gets industry pushback

By J. Preston Carter, J.D., LL.M.

The Office of the Comptroller of the Currency received several negative comment letters on the proposed supplement to its Licensing Manual addressing the granting of special purpose national bank charters to financial technology companies. The proposed supplement, which follows the OCC’s publication of guiding principles and a discussion paper, details how a fintech company’s compliance with safety and soundness and fairness standards will be determined.
Chartering authority doubted. In its letter representing a number of consumer, civil rights, small business, and community groups, the Center for Responsible Lending argued that "the OCC does not have the legal authority to charter nondepositories." The letter also stated that a national bank charter for non-depository fintech institutions would harm consumers through the preemption of strong state laws. The signors expressed concern that, in its approval process, the OCC "has completely failed to address critical consumer and small business protection requirements." The letter adds that the chartering process, as it now exists, "seems more designed to pick winners and losers and grant special privileges to established players in the industry than to facilitate innovation."
Consumer protections needed. Although the Mercatus Center at George Mason University believes that the OCC’s current proposal "shows some improvement over its previous statements, it remains overly focused on the survival of the entity instead of the protection of customers." According to Brian R. Knight, Senior Research Fellow at the Mercatus Center, the proposal imposes requirements and conditions on special purpose national banks (SPNBs) "that many will find impossible to meet—without a sufficient countervailing benefit."
Knight recommends that the OCC: reorient charter requirements away from insisting that SPNBs demonstrate survivability and toward ensuring that they can fail in an orderly manner that protects their customers; and clarify the requirements for SPNBs to obtain and maintain a charter consistent with the rights and responsibilities of national banks under relevant law.
More study required. Finally, the Consumer Bankers Association contends that the OCC "has not provided a clear rationale or justification for offering a national bank charter to fintech companies, and the standards and conditions for granting these charters have yet to be fully developed." It urges the OCC to conduct an in-depth study of the fintech sector. After such study, if the OCC still concludes that the public would benefit from a fintech charter, the CBA says it will ask the agency to issue a formal charter proposal for public notice and comment.
For more information about the regulation of financial technology companies, subscribe to the Banking and Finance Law Daily.

Tuesday, April 18, 2017

Safe harbor protected debt collectors that demanded prejudgment interest

By Richard Roth, J.D.

Debt collectors that followed a procedure offered by Wisconsin state law to obtain a review of their practices could demand that consumers pay interest on debts without a court judgment, according to the U.S. Court of Appeals for the Seventh Circuit. The debt collectors adequately stated the amount of the debt, as required by the Fair Debt Collection Practices Act, by stating a principal amount and interest rate (Aker v. Americollect, Inc., April 13, 2017).

The court’s opinion stated the facts simply, saying that the consumers had failed to pay for medical services, and the debt collectors hired by the service providers demanded interest at a 5-percent rate. The consumers claimed that Wisconsin law allows interest only if a contract permitted interest or a judgment has been entered by a court. Since neither was the case, the interest demand was illegal.

The debt collectors offered a different interpretation of the state law. They asserted that the 5-percent interest rate is automatic under state law and that a judgment “just memorializes what law requires.” The appellate court, however, preferred to base its decision on the companies’ second argument.

Safe harbor. Wisconsin law allows financial service providers to request approval of their practices from the state’s Department of Financial Institutions. If the department gives its express approval, or simply fails to disapprove within 60 days, the company can implement its desired practices and be deemed to be in compliance with relevant state laws.

The debt collectors had followed this procedure, submitting all of the required information to the department and receiving no objection to their intent to demand interest. That meant that they could demand the 5 percent interest and be deemed to have complied with state law.

No preemption. The FDCPA did not preempt Wisconsin’s law, the court explained, because state law determines when interest can be charged on a debt owed under state law. The obligation to pay for medical services arose under Wisconsin contract law, so Wisconsin law specified whether interest was due. Under the safe harbor, the debt collectors were deemed to have complied with the state’s law.

Another theory? The opinion explicitly analyzed only whether the debt collectors’ dunning letters properly stated the amount of the debt as required by 15 U.S.C. §1692g(a). The court’s analysis seems to have been more appropriate to whether the interest demand violated the 15 U.S.C. §1692f(1) ban on attempting to collect interest that was not permitted by law or contract. That section was not mentioned, although the court observed in passing that the safe harbor meant the debt collectors had not misrepresented the amount of the debt in violation of 15 U.S.C. §1692e.

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Monday, April 17, 2017

Hensarling: Financial CHOICE Act protects Americans against CFPB ‘defective design’

By Katalina M. Bianco, J.D.

House Financial Services Chair Jeb Hensarling (R-Texas), joined by Rep. Roger Williams (R-Texas), stated in an op-ed that the House Financial CHOICE Act is the way to protect Americans from “the most powerful and least accountable Washington bureaucracy in history”—the Consumer Financial Protection Bureau. The post comes on the heels of reports that an updated version of the Financial CHOICE Act soon will be unveiled.

Hensarling and Williams note that the CFPB’s “bizarre, unique and defective design” is the reason behind the ruling by a panel of judges that the bureau is unconstitutionally structured. The Financial CHOICE Act would change the bureau “from an unconstitutional agency of unelected bureaucrats into a constitutional and accountable civil enforcement agency that enforces consumer protection laws written by Congress” and “truly make the CFPB the ‘cop on the beat’ its supporters claim they want.”

Cordray. The legislators also targeted CFPB Director Richard Cordray, charging that the director “recklessly ignores the due process protections that have been deeply rooted in our American legal system for centuries.” Hensarling and Williams noted that although the Dodd-Frank Act grants Cordray “incredibly broad powers to regulate consumer credit products,” the CFPB chief still chooses to “ignore the law and the intent of Congress.”

Hensarling and Williams cited the CFPB’s UDAAP authority as another example of the agency’s “violation of due process,” because the “largely undefined” UDAAP leaves “plenty of wiggle room for the director to decide what the law says and means.”

Waters rebuts claims.
Representative Maxine Waters (D-Calif), Ranking Member of the Financial Services Committee, fired back, stating, “The so-called Financial Choice Act is a piece of legislation that will essentially kill the most important aspects of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was designed to prevent another financial crisis.” The lawmaker said that the Republicans and President Donald Trump are prioritizing Wall Street over hard-working Americans and putting the nation’s economic security at risk.

Waters took aim at the new version of the legislation, calling it the “Wrong Choice Act” and claiming the measure:
  • “bows down shamefully to Wall Street’s worse impulses”; 
  • would “completely gut and functionally terminate the “highly successful” CFPB; and 
  • encourages “a race to the bottom of Wall Street by removing financial stability safeguards.” 
The measure also would provide a two-year “escape hatch for Trump-appointed regulators to administratively roll back regulations before making it easier for industry to litigate and block any future effort by regulators to restore or strengthen consumer and investor protections,” Waters added. 

AFR on revised bill. The Americans for Financial Reform expressed its opposition to the revision of the Financial CHOICE Act, stating that the new version would:
  • make a “disastrous bill” even worse; 
  • eliminate the CFPB’s ability to stop abuse and deception; and 
  • render regulators weaker than before the financial crisis. 
NCRC statement. The National Community Reinvestment Coalition released a statement in response to news of the revised legislation. “If made law, the Financial CHOICE Act would pull the rug out from under our system of protecting consumers from abuse by financial institutions.” The NCRC added, “Backers of this bill have failed to learn their lessons from the Great Recession.”

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Thursday, April 13, 2017

CFPB back in court on PHH, Sprint

By Katalina M. Bianco

The case of PHH v. CFPB continued this week when PHH Corporation asked the U.S. Court of Appeals for the District of Columbia Circuit to reverse a $109 million Consumer Financial Protection Bureau administrative disgorgement order without remanding the appeal for further action by the bureau. According to the company and its affiliates, the appellate court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and the only remedy is the complete invalidation of the bureau. The companies’ reply brief also argues that the CFPB has offered no real support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

Constitutionality arguments. PHH Corp. focuses much of its reply brief on arguments that the CFPB’s single-director, removal-for-cause structure is an unconstitutional intrusion on the president’s powers by Congress. If the CFPB is constitutional, there is no logical curb on Congress’s ability to create independent agencies, the brief asserts. The bureau’s broad powers and ability to fund itself by drawing on the Federal Reserve Board’s assessments exacerbate the problem.

The brief paints a picture of the bureau as having an essentially unrestrained ability to act as the director chooses.

Severing the removal-for-cause provision from the remainder of the Dodd-Frank Act will not solve the problem, the brief claims. Congress intended to create what amounts to a wholly unconstitutional agency, and that agency must be wholly restructured.

PHH Corp. also argues that the enforcement action cannot be remanded to an unconstitutional agency. The appellate court must decide the constitutional issue. The brief notes as well that all of the parties agree the question should be decided.

RESPA arguments. The three-judge panel unanimously rejected the bureau’s new interpretation of RESPA and its claim not to be restricted by a statute of limitations, and it was right to do so, the reply brief contends. The use of captive reinsurance companies did not amount to a prohibited kickback because the companies actually rendered a service in exchange for reasonable payments.

Applying a reinterpretation of the law to completed conduct that was deemed legal when it occurred offends fundamental fair notice principles, the PHH Corp. brief continues. The entire industry relied on the Department of Housing and Urban Development’s prior regulatory interpretation. The bureau can change an interpretation, or even decline to offer an interpretation, the brief concedes, but it cannot punish a company for relying on guidance it actually has issued.

Sprint. Noting that "the siren song of $15.14 million in unexpended funds lured some new sailors into the shoals of this litigation," a federal trial judge has ordered the CFPB and Justice Department to supply their respective positions regarding a proposed modification of a 2015 consent order between the CFPB and Sprint Corporation.

The 2015 consent order was intended to settle a lawsuit brought by the bureau against Sprint, in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.

The court’s latest Memorandum and Order was the result of a Jan. 3, 2017, "Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order" filed by the Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont. The state AGs sought to intervene in the case to ensure that the approximately $14 million of Sprint’s remaining, unused "consumer redress funds" are used for "consumer protection purposes." 

It should be noted that during 2015, Sprint entered into separate multi-million dollar settlements, totaling $18 million, with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices.

The court ordered the CFPB and DOJ to provide their positions on the proposed modification of the consent order since that modification would "alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury." The court added that the proposed modification "may raise an issue implicating the Miscellaneous Receipts Act, which provides that Government officials ‘receiving money for the Government from any source shall deposit that money with the Treasury.’"

To comply with the court’s order, the CFPB and DOJ must file their respective memoranda by May 10, 2017. The state AGs and Sprint may file responsive memoranda by May 24, 2017. As part of its memorandum, the CFPB also is requested to "advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application."

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