Thursday, December 1, 2016

CFPB asks: How much control do consumers have over financial records?

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has asked consumers for their input on difficulties accessing, using, and securely sharing their financial records. The bureau also wants to know how much choice consumers have over the use of their records, how secure it is for them to share their records, and the amount of control they have over their records.

The CFPB said its goal is to foster an environment where competing providers can securely obtain, with the consumer’s permission, the information needed to deliver innovative products and services that will benefit consumers.

“The technology around digital financial records continues to develop, and so far there are many unanswered questions about how the information is being shared, by and to whom, and how safely,” CFPB Director Richard Cordray said in prepared remarks for a field hearing on consumer access to financial records. “As with any emerging industry, we are hearing about some bumps in the road. Both FinTech companies and financial institutions, as well as consumer groups, are describing to us the various challenges, risks, and technological obstacles to further progress in this area.”

Request for information. The bureau is seeking public comment through a Request for Information to better understand the consumer benefits and risks associated with market developments that rely on access to consumer financial account and account-related information. Specifically, the CFPB is seeking information from consumers on:

  • whether consumers are being given appropriate opportunities to access and allow others to securely access their personal financial records and what business burdens must be addressed to facilitate access and use of financial records;
  • what options consumers are given for ensuring that financial records are securely obtained, stored, and used; and
  • what information consumers are given about how their records will be accessed and used and to what extent consumers are able to control how the information will be used by companies. 

Blog post. In a post to its blog, the bureau asked consumers to share their stories on difficulties they face when accessing and sharing their financial records with other financial companies. If consumers are using products or services that access their financial records stored by another company, the CFPB wants to know about their experiences. Consumers can comment on Facebook or Twitter, but those who want to provide more details can share their stories via the bureau’s website.

For more information about consumer access to financial records, subscribe to the Banking and Finance Law Daily.

Wednesday, November 30, 2016

Payday lenders move to throttle 'Operation Choke Point'

Two payday lenders have filed an emergency request for preliminary injunctive relief with a federal district court to stop "Operation Choke Point," the program created by the Department of Justice to "choke out" companies that were seen as posing a high risk of payment fraud, money laundering, or other abuses by denying them access to the banking and payments system. The lenders, the Community Financial Services Association of America (CFSA) and Advance America, are co-plaintiffs in a case, CFSA et al. v. Federal Deposit Insurance Corp. et al., that is pending discovery before the U.S. District Court for the District of Columbia.
CFSA’s press release states that the emergency filing results from a "stepped up government campaign of strong-arm tactics against banks forcing them to end business relationships with payday lenders." CFSA’s memorandum in support of its motion and proposed order says the effects of Operation Choke Point "are now reaching crisis stage as banks have continued terminating their relationships with payday lenders."
"The need for immediate relief is more urgent than ever," said CFSA CEO Dennis Shaul. "Our largest member very recently had its final national banking relationship terminated. This effectively cuts off our member’s access to basic banking services for more than 1,200 of its stores and affects even its ability to pay employees and vendors."
Court ruling. On Sept. 15, 2015, the D.C. District Court ruled that it has jurisdiction to entertain the suit brought by the lenders. The court dismissed the counts of the complaint pertaining to alleged violations of the federal Administrative Procedure Act but refused to dismiss the counts pertaining solely to the regulators’ alleged violations of the payday lenders’ procedural due process rights under the Fifth Amendment to the U.S. Constitution. Since the initial ruling, the parties in the case have been awaiting further ruling from the Court before discovery proceedings may ensue.
OIG report. According to CFSA, a September 2015 audit by the FDIC’s Office of Inspector General confirms that "FDIC officials had used their regulatory leverage to coerce banks to close the accounts of law-abiding companies—specifically short-term lenders." The OIG reported that, although there was no evidence that the FDIC used the high risk list to target financial institutions, the agency "created the perception" that it discouraged institutions from conducting business with certain merchants, particularly payday lenders.
For more information about the DOJ's Operation Choke Point, subscribe to the Banking and Finance Law Daily.

Tuesday, November 29, 2016

Absence of concrete injury helps doom TILA class action

By Richard Roth

Two of the four Truth in Lending Act disclosure claims raised in a class action failed because the consumer who filed the suit would not have suffered any concrete injury from a TILA violation, the U.S. Court of Appeals for the Second Circuit has decided. The consumer’s other two claims failed to describe a TILA violation, the court said in affirming a pretrial judgment in favor of a credit-card issuing bank (Strubel v. Comenity Bank, Nov. 23, 2016, Raggi, R.).

The consumer was complaining about disclosures provided to her by Comenity Bank when she opened a Victoria’s Secret-branded credit card. According to the consumer, the bank violated 15 U.S.C. §1637(a)(7) because its disclosures were not substantially similar to those specified by Model Form G-3(A). Specifically, she asserted the bank did not clearly disclose that:

  • cardholders who wanted to stop payment under an automatic plan needed to satisfy certain obligations;
  • the bank was obligated, as part of the error resolution process, to advise the consumer of any corrections made during the 30-day acknowledgment term;
  • some consumer rights applied only to disputed purchases for which full payment had not been made and did not apply to cash advances or checks that drew against the credit card account; and
  • consumers who were not satisfied with a purchase paid for using the card had to contact the bank either in writing or electronically. 

Injury and standing. The bank raised the issue of the consumer’s constitutional standing to sue for the first time as part of defending against her appeal. Since constitutional standing is an aspect of a federal court’s subject matter jurisdiction, the appellate court was required to consider it. The consumer did not have constitutional standing to raise two of her claims, the court decided.

Article III of the Constitution gives federal courts jurisdiction over cases and controversies, and showing a case or controversy requires a person to demonstrate an injury in fact that arises from the challenged conduct. An essential part of a consumer’s injury in fact is a concrete or particularized injury, the court said. The need for an injury that is both concrete and particularized was emphasized in the Supreme Court’s recent Spokeo, Inc. v. Robins decision.

No concrete injury. The consumer could not demonstrate even a risk of a concrete injury arising from two of the violations she claimed, the court said. That meant the court had no jurisdiction over them.

The consumer had not enrolled in any automatic payment plan—in fact, Comenity had not offered such a plan while she held the credit card, the court pointed out. That being the case, an inadequate disclosure about such a plan could not have given rise to any risk arising from the consumer’s uninformed use of credit, the harm that TILA was intended to address.

Any failure by the bank to disclose clearly its obligation to describe corrections made shortly after a claim of error was made would have been a “bare procedural violation” that did not show the material risk of harm to the consumer that could be a concrete injury, the court continued. The consumer had never made any error claims, so her ability to deal with an error could not have been affected. If there were an error, it would not have affected the consumer’s use of credit.

Injury could exist. On the other hand, the other two claimed violations would have posed a risk of concrete injury, according to the court. Inadequate disclosures that some rights applied only to disputed purchases for which full payment had not been made and that a consumer who was dissatisfied with a purchase paid for using the card had to contact the bank either in writing or electronically related to the consumer’s ability to make informed decisions on how to use credit.

A consumer who was not notified of these obligations might be less likely to satisfy them, the court explained. That could cause the consumer to lose rights that TILA was intended to protect.

No violation described. After rejecting the bank’s argument that consumers have no right to statutory damages for violations of Reg. Z—Truth in Lending (12 CFR Part 1026)—as opposed to violations of TILA—the court decided that the claims which survived the standing challenge failed to describe violations.

According to the consumer, Comenity omitted from its disclosures about unsatisfactory purchases two paragraphs that were included in Model Form G-3(A). These paragraphs limited a consumer’s protections to purchases made using the credit card and to any unpaid amounts. However, any variation was small enough that the bank’s disclosures remained substantially similar to the model form, the court said. A creditor that provided disclosures that met the “substantially similar” standard was protected by Reg. Z’s model form safe harbor.

Failing to disclose that consumers who were not satisfied with a purchase paid for using the card had to contact the bank either in writing or electronically was not a violation, the court said, because neither TILA nor Reg. Z imposed that requirement. Moreover, even if Model Form G-3(A) added a restriction about the type of communication, that particular disclosure was among those described as optional. Failing to give an optional disclosure cannot amount to a violation, the court said.

For more information about constitutional standing issues, subscribe to the Banking and Finance Law Daily.

Monday, November 28, 2016

Ally to pay $52 million to settle issuance of mortgage-backed securities claims

By Stephanie K. Mann, J.D.

A settlement agreement has been reached between Ally Financial Inc. and the Office of the Special Inspector General for the Troubled Asset Relief Program for Ally’s allegedly improper subprime residential mortgage-backed securities (RMBS) in 2006 and 2007. Ally has agreed to pay $52 million in relation to 10 subprime RMBS, and the settlement resolves an investigation into alleged violations of the Financial Institutions Reform Recovery and Enforcement Act, specifically conduct related to the packaging, securitization, marketing, sale, and issuance of the RMBS.

“Ally received substantial TARP bailout funds. With this agreement, Ally acknowledges that the underwriting and diligence process was deficient in connection with the securitization of 40,000 toxic subprime mortgage loans by its subsidiaries—exactly the type of abuse that contributed to the financial crisis,” said Christy Goldsmith Romero, the Special Inspector General for the Troubled Asset Relief Program.

Penalties. Under the settlement agreement, Ally is required to pay a $52 million civil penalty and to immediately discontinue operations of its registered broker-dealer, Ally Securities, LLC, which served as the lead underwriter on the subprime RMBS at issue. The broker-dealer served as the lead underwriter on the 10 subprime RMBS offerings issued in the RASC-EMX series between 2006 and 2007. Ally Securities dedicated a specialized marketing effort to create the RASC-EMX brand, securing investors for the RMBS offerings, and directing third-party due diligence on samples of the mortgage loan pools underlying the RMBS to test whether the loans comply with disclosures made to investors in the public offering documents.

As the lead underwriter, Ally Securities recognized in 2006 and 2007 that there was a consistent trend of deterioration in the quality of the mortgage loan pools underlying the RASC-EMX Securities that stemmed from deficiencies in the subprime mortgage loan underwriting guidelines, and diligence applied to the collateral prior to securitization. All RASC-EMX Securities sustained losses as a result of underlying mortgage loans falling delinquent.

Ally response. Following the settlement announcement, Ally Financial reaffirmed its commitment to remain focused on its strategic plan to build on its strengths in digital financial services, further grow its customer and deposit bases, and continue to deliver strong earnings growth.

For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.

Wednesday, November 23, 2016

‘One size fits all’ NY cybersecurity reg opposed by industry groups

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

"We strongly disagree with the ‘one size fits all’ approach" taken by a proposed regulation that would require institutions regulated by the New York State Department of Financial Services to establish and maintain a cybersecurity program, states a letter from the Independent Bankers Association of New York State and the Independent Community Bankers of America. Their letter to the DFS stresses that limited resources are a concern for community banks. The organizations contend that the DFS proposal does not reflect that those banks set their risk parameters and determine how best to allocate resources to combat cyber threats in accordance with their own risk assessment.
DFS proposal. The proposed regulation would require New York banks, insurance companies, and other financial services institutions regulated by the State Department of Financial Services to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of the state’s financial services industry.  In a press release announcing the proposal, Governor Andrew M Cuomo called it a "first-in-the-nation" regulation that would protect New York State from the ever-growing threat of cyber-attacks.
Groups' response. The organizations object to the proposal’s application of a "uniform and unequal application of risk mitigation tactics" to community banks, some of which "may go beyond the risk profile of the institutions." They urge the DFS to allow community banks to adopt a reasonable risk assessment tool that would be used by the DFS in conducting an examination for compliance with the cybersecurity regulations.
In addition, the letter states, the DFS proposal does not recognize that community banks may participate in shared resource arrangements to achieve compliance and economies of scale. The organizations believe that the DFS should encourage information sharing through the existing channels, such as those promoted by the federal Cybersecurity Information Sharing Act of 2015, rather than mandating excessive reporting requirements.
The groups conclude by requesting that the DFS not issue a final rule but, instead, issue a revised proposal incorporating their comments and requesting additional comments from the industry.
For more information about cybersecurity for financial institutions, subscribe to the Banking and Finance Law Daily.

Tuesday, November 22, 2016

Fifth Third Bank commits to $30 billion community development plan with NCRC

By Thomas G. Wolfe, J.D.

As part of a collaborative effort with the National Community Reinvestment Coalition (NCRC), Fifth Third Bank is committing $30 billion in lending and investments to low-and moderate-income borrowers and communities over a five-year period—from 2016 to 2020. According to Fifth Third’s Nov. 18, 2016, release, the bank’s recently enhanced community development plan includes mortgage, small business, and community development lending as well as investing, philanthropy, and financial services for low- and moderate-income communities.

Plan highlights. According to the NCRC’s “Summary of the Community Action Plan” between the coalition group and Fifth Third, the bank’s $30 billion commitment represents 21 percent of Fifth Third’s assets, or 29 percent of its deposits. Fifth Third’s commitment covers locations in 10 states where the bank has branches: Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, North Carolina, Ohio, Pennsylvania, and Tennessee. Approximately 145 community-based organizations of the NCRC’s membership in these states provided input before the agreement between the NCRC and Fifth Third was finalized.

Among other things, the community development plan is designed to fund:
  • $11 billion in mortgage lending to low- to moderate-income individuals and communities;
  • $10 billion in small business lending in all markets and communities to businesses with gross annual revenue below $1 million;
  • $9 billion in “Community Reinvestment Act” community development loans and investments, including support for affordable housing, revolving loan funds, Community Development Corporations, Community Development Financial Institutions, community pre-development resources, housing rehab loan pools, and community land trusts and land banks; and
  • $93 million in philanthropic work to “ensure adequate access to bank branches in LMI communities and communities of color, including opening at least 10 new branches.”
For more information about financial institutions' community development plans or compliance with the Community Reinvestment Act, subscribe to the Banking and Finance Law Daily.

Thursday, November 17, 2016

CFPB charges pawnbroker misled consumers with low rate

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has filed an enforcement action in federal court against B&B Pawnbrokers, Inc. for deceiving consumers about the cost of its pawn and auto title loans because it did not include storage fees or processing fees in the finance charge. The CFPB’s lawsuit seeks to end B&B Pawnbrokers' illegal practices, obtain restitution for victims, and impose penalties.
“When consumers take out a loan, the lender by law must tell them the terms, including the actual annual cost of the loan,” said CFPB Director Richard Cordray. “B&B Pawnbrokers deceived consumers about what that true cost was.”

The CFPB alleges that Virginia based B&B Pawnbrokers misled its customers about the cost of its loans in more than 2,400 contracts. Specifically, the CFPB alleges that B&B Pawnbrokers unlawfully disclosed a misleadingly low annual percentage rate that did not reflect all of the fees and charges tacked on to the loan, which grossly understated the cost to consumers.
For example, when B&B Pawnbrokers made a $200 loan due in a month, it charged the consumer a $10 finance charge, a $10 storage fee, and a $20 processing fee. Each fee is a finance charge that must be included in calculating the annual percentage rate. The sum of these fees, $40, yields an annual percentage rate of 240 percent. B&B Pawnbrokers disclosed an annual percentage rate of only 120 percent.

The bureau’s complaint alleges that B&B Pawnbrokers' actions violated the Truth in Lending Act and Consumer Financial Protection Act and seeks monetary relief, injunctive relief, and penalties.
Virginia has a pending action against B&B Pawnbrokers for violations of the Virginia Consumer Protection Act, and the CFPB coordinated with Virginia in its investigation.

For more information about CFPB enforcement actions, subscribe to the Banking and Finance Law Daily.