CFPB snapshot tracks complaints from servicemembers

By Stephanie K. Mann, J.D.

The Consumer Financial Protection Bureau reports that it has received more than 2,500 complaints from servicemembers, veterans, and their dependents about high-cost consumer credit as of November 2015. The bureau analyzes these complaints in “A snapshot of servicemember complaints: Products impacted by the new Military Lending Act rule.”

Complaints. Consumers submitted their complaints to the CFPB under two different product categories: under the “payday” loan complaint category, or under the “debt collection” complaint category with the “payday” sub-product. The “payday” loan complaint category currently represents 3 percent of total servicemember complaints, while the “payday” loan sub-product category represents 19 percent of the complaints submitted by military consumers under the “debt collection” complaint category.

“Debt collection” is the largest complaint category for military consumers, as well as for all consumer complaints. Within the “debt collection” category, the number of complaints stemming from the “payday” sub-product is more than auto loans, mortgages, and student loans combined. Recent studies show that military consumers struggle with the repayment of high-cost credit products more than any other type of financial product. However, according to the bureau, recent updates from the Department of Defense to the regulation implementing the Military Lending Act should help servicemembers and their families avoid this type of high-cost debt going forward.

Amendments. The bureau concluded the snapshot by summarizing the changes made under the MLA:

• Lenders will be expected to comply with the new rule on Oct. 3, 2016, for all covered products other than credit cards. The compliance date for credit cards is Oct. 3, 2017.
• For loans covered by the MLA, the all-in cost of credit will be limited to an annual rate of 36 percent (referred to as the Military Annual Percentage Rate or MAPR). Included in the MAPR are costs like finance charges, credit insurance premiums or fees, and additional fees associated with credit such as application or participation fees, with some exceptions.
• The new rule extends the protections of the MLA to a broader range of consumer credit products than previously covered. The MAPR cap and other MLA protections will now apply to all consumer credit subject to disclosure under the Truth in Lending Act, except for certain statutory exceptions. These exceptions include residential mortgages and certain other secured loans for the purchase of personal goods and vehicles.
• For credit cards, there is a limited exclusion for “bona fide fees” when calculating the MAPR. This means that for credit cards some common fees, such as cash advance fees and foreign transaction fees, generally need not be included in the overall price limit.

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Latest Volcker Rule FAQs discusses residual positions and relationships with covered transactions

By John M. Pachkowski, J.D.

The Federal Reserve Board has updated its Frequently Asked Questions regarding the application of section 13 to the Bank Holding Company Act of 1956 (BHC Act), commonly referred to as the Volcker Rule, and regulations adopted by the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission, and Commodity Futures Trading Commission. The Fed noted that while the FAQs apply to banking entities for which the Fed has jurisdiction under section 13 of the BHC Act, they have been developed by staff of all five agencies.

Treatment of residual positions. In FAQ No. 19, the agencies’ staff discussed the situation that may occur if a banking entity exits a permissible market-making business and the banking entity has to sell or unwind its residual market-making positions.

According to the staff, if a banking entity holds residual positions from its prior market-making activity, the banking entity may hold and dispose of these residual market-making positions, provided two conditions are met. First, the banking entity must hedge the risks of its residual positions in accordance with the risk-mitigating hedging exemption found in the implementing regulations. The second condition requires that the banking entity sells or unwinds the residual market-making positions as soon as commercially practicable.

When hedging the risks of the residual market-making positions, the banking entity must comply with the requirements of the risk-mitigating hedging exemption; and the banking entity cannot rely on the market-making exemption to manage the risks of its residual market-making positions. The staff noted that the market-making exemption only permits risk management activity conducted or directed by a trading desk in connection with the desk’s permitted market making-related activities conducted in conformance with all of the requirements of the market-making exemption set forth in the agencies’ regulations.

The staff cautioned that if a banking entity holds residual market-making positions and does not hedge the risks of those residual positions, then the subsequent sales of those residual positions would generally be considered proprietary trading under the regulations implementing the Volcker Rule.

Covered transactions. The second new FAQ examines the application of the Volcker Rule’s conformance period to existing and new “covered transactions” between a banking entity and a covered fund.

Under the Volcker Rule, a banking entity that serves, directly or indirectly, as the investment manager, investment adviser, or sponsor to a hedge fund or private equity fund—a covered fund—or that organizes and offers a covered fund cannot enter into a transaction with the covered fund that would be considered to be a “covered transaction” under section 23A of the Federal Reserve Act. Covered transactions generally are arrangements under which the banking entity would have a credit exposure to the covered fund. They include not only loans, but also other credit exposures such as investments in the covered fund’s securities, guarantying credit extended to the fund by another lender, and securities lending transactions. The restrictions apply equally to affiliates of the banking entity.

The limitation on covered transactions also applies to a banking entity’s affiliates, as well as any covered fund that is controlled by the fund with which the banking entity or its affiliates have a relationship.

The staff noted in FAQ No. 20 that as a general matter, on or after July 21, 2015, a banking entity may not enter into a covered transaction with a covered fund where the banking entity serves as investment manager, investment adviser, or sponsor to the covered fund or relies on the Volcker Rule’s organizing/offering exemption.

The agencies’ staff also believed that restrictions on covered transactions would also apply to any increase in the amount of, extension of the maturity of, or adjustment to the interest-rate or other material term of, an existing extension of credit. The staff noted that a floating-rate loan does not become a new covered transaction whenever the interest rate changes as a result of an increase or decrease in the index rate. If the banking entity and the borrower, however, amend the loan agreement to change the interest rate term, for example, from “LIBOR plus 100 basis points” to “LIBOR plus 150 basis points,” or from reference to the LIBOR index to the banking entity's prime rate, the parties have engaged in a new covered transaction.

Banking entities were also advised, with respect to any existing covered transaction, to evaluate whether the transaction guarantees, assumes or otherwise insures the obligations or performance of the covered fund since these activities are prohibited by the agencies’ implementing regulations.

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Are litigation finance transactions ‘loans’?

By Thomas G. Wolfe, J.D.

Recently, the Supreme Court of Colorado was called upon to review the essential nature of litigation finance transactions in the state. The litigation finance companies in the case argued that the transactions were “asset purchases” or “investments” and were named and structured that way. In contrast, the Colorado Attorney General and the Colorado Uniform Consumer Credit Code Administrator argued that, despite their labels, these transactions were really “loans” that were subject to Colorado’s Uniform Consumer Credit Code (Colo. UCCC). In addition, many friend-of-the-court briefs were presented on the issue by groups representing the respective interests of consumer advocates, trial attorneys, defense attorneys, chambers of commerce, and property casualty insurers, among others.

Ultimately, in the case of Oasis Legal Finance Group, LLC v. Coffman, the Colorado Supreme Court decided that these litigation finance transactions constitute “loans” that are subject to the Colo. UCCC. More particularly, Colorado’s high court ruled that litigation finance companies that agree to advance money to tort plaintiffs in exchange for future litigation proceeds are making loans under Colorado law, even if the plaintiffs do not have an obligation to repay any deficiency should the litigation proceeds prove to be less than the amount due.

The court sketched the business model for litigation finance companies, relating that the companies typically buy interests in the potential proceeds of various personal injury cases—auto accidents, slip and falls, construction site injuries, and medical malpractice incidents, for example—by executing agreements with the tort plaintiffs. The litigation finance companies provide money, usually less than $1,500, to those tort plaintiffs while their cases are pending. In keeping with the agreement, the money is to be used by the tort plaintiffs to pay their personal expenses while they wait for their lawsuits to settle or go to trial. However, the money cannot be used to prosecute their legal claims.

To provide some background, several national litigation finance companies were involved in the case. Oasis Legal Finance Group, LLC, Oasis Legal Finance, LLC, Oasis Legal Finance Operating Company, LLC (collectively, Oasis), and Plaintiff Funding Holding, Inc. (doing business as LawCash) structured the core features of their litigation finance agreements similarly despite some minor differences.

Under the “Oasis Agreement,” the tort plaintiff was characterized as the “Seller” and the litigation finance company was labeled as the “Purchaser.” The Oasis Agreement specified that the seller-plaintiff would not receive any proceeds until the purchaser-company received the “Oasis ownership amount.” At the same time, the Oasis Agreement prominently stated that if the seller-plaintiff ultimately did not recover anything in the lawsuit, then the purchaser-company would receive nothing as well. Notably, the agreement called for the seller-plaintiff to refer to the litigation finance transaction as a “sale,” not a loan, for all purposes—including tax treatment. In addition, the seller-plaintiff was required to describe the purchased interest as an “asset,” not a debt obligation, in any bankruptcy proceedings.

The LawCash Agreement was first titled as a “Lawsuit Investment Agreement” and then later as a “Funding Agreement.” The underlying transaction was depicted as a “grant of a security interest” and as a “lien” in the proceeds. Further, the LawCash Agreement characterized the litigation finance transaction as “an investment and not a loan.”

After the Colo. UCCC Administrator determined that Oasis and LawCash had made loans in violation of the Colo. UCCC and the Colorado Consumer Protection Act, Oasis and Law Cash declined the Administrator’s offer to settle the matter through an “Assurance of Discontinuance and Final Agency Order.” Instead, the litigation finance companies filed a lawsuit against the Colo. UCCC Administrator and the Colo. Attorney General, “seeking a declaratory judgment that funding agreements of this type are not loans.”

Oasis and LawCash contended that they were involved in “asset purchases” and “investments” because, among other things, they took on the “risk of complete loss.” Oasis and LawCash maintained they had purposely structured their agreements “as sales and assignments of assets” and the agreements explicitly stated that the litigation finance transactions were not to be considered loans. Ultimately, however, the companies’ arguments did not prevail.

The Colorado Supreme Court emphasized that whether litigation finance transactions are or are not “good for consumers” was a question “better suited to the legislature.” Turning its attention to the definition of a “loan” under the Colo. UCCC, the court determined that the statutory provision made it clear that the presence of a “debt is a necessary, if not completely sufficient characteristic of the consumer transaction the Code seeks to regulate.” However, the court decided that an “unconditional” obligation to repay is not required.

From the court’s perspective, litigation finance agreements create debt because “they create repayment obligations, notwithstanding the finance companies’ “embrace of risks that, from time to time, require them to adjust or cancel some plaintiffs’ obligations. Most of the time, plaintiffs repay the full amount borrowed—and more.” Moreover, the court found it “significant that the obligation increases with the passage of time, another characteristic of a loan.”


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Green light for banks providing services for payday lenders

By Andrew A. Turner, J.D.

The Federal Deposit Insurance Corporation has updated previous guidance on payday lending by banks to make clear that it does not apply when banks are providing services to payday lenders. Banks that can effectively manage the resulting risks are not discouraged from offering services to any business that operates legally. 

“Financial institutions that can properly manage customer relationships and effectively mitigate risks are neither prohibited nor discouraged from providing services to any category of business customers or individual customers operating in compliance with applicable state and federal laws,” the FDIC said (FIL-52-2015, Nov. 16, 2015).

Payday loans are small-dollar, unsecured, short-term advances that have high fees relative to the size of the loan. When used frequently or for long periods, the total costs can rapidly exceed the amount borrowed. The payday loan guidance warned of risks from making high-cost, short-term loans on a recurring basis to customers with long-term credit needs.

The guidance, as clarified, is to be applied to banks with payday lending programs for consumers that the bank administers directly or that are administered by a third party contractor. It does not apply to banks offering products and services, such as deposit accounts and extensions of credit, to non-bank payday lenders.

The FDIC action comes amidst a swirl of controversy and activity regarding payday lending regulation.

CFPB payday loan plan. The Consumer Financial Protection Bureau is considering proposals that would require lenders to make certain that consumers can repay their loans while also restricting lenders from attempting to collect payments from consumers’ bank accounts in ways that tend to rack up excessive fees. The proposals are intended to stop the “debt traps” caused by payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.

Operation Choke Point. Charging that the federal banking regulatory agencies are “engaged in a concerted campaign to drive them out of business by exerting back-room pressure on banks,” an association representing the payday lending industry and the association’s largest member have joined in a suit that attempts to put an end to what has become known as “Operation Choke Point.” The suit principally targets what it characterizes as efforts by the Federal Reserve Board, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation to pressure banks to end banking relationships with payday lenders due to risk to the banks’ reputations.

Most recently, the U.S. District Court for the District of Columbia dismissed the counts of the complaint pertaining to alleged violations of the federal Administrative Procedure Act (APA) 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 (Community Financial Services Association of America, Ltd. v. FDIC, Sept. 25, 2015, Kessler, G.).

Meanwhile, the FDIC’s Office of Inspector General found the agency’s involvement in Operation Choke Point “inconsequential to the overall direction and outcome of the initiative.” More specifically, the IG audit report said that the FDIC’s supervisory approach was within its “broad authorities,” and there was no evidence that the FDIC used the high-risk list to target financial institutions. At the same time, however, the manner in which the FDIC’s supervisory approach was executed was not always consistent with written policy and guidance; moreover, in some instances, the FDIC “created the perception” that it discouraged institutions from conducting business with certain merchants, particularly payday lenders, the report found.

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Bitcoin–related businesses’ BSA/AML risks examined in Atlanta Fed paper

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

A working paper examining the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) risks for Bitcoin-related businesses has been published by the Federal Reserve Bank of Atlanta. The paper states that by making a commitment to BSA/AML compliance, Bitcoin-related businesses can both better position Bitcoin as a mainstream payment system and enhance the ability of financial institutions to successfully bank them.

Growing Bitcoin use and risk. In a Retail Payments Risk Forum Working Paper titled “Banking Bitcoin-Related Businesses: A Primer for ManagingBSA/AML Risks,” Douglas King states that Bitcoin is a fast, low-cost, and secure payment solution that can be used for many legitimate purposes. As investment and interest in the Bitcoin ecosystem have grown since its 2009 start, new businesses have emerged seeking to advance Bitcoin as a mainstream payment solution. However, he notes that the pseudonymous nature of Bitcoin transactions heightens BSA/AML compliance risks, making it especially challenging for these new businesses to establish banking relationships.

Mitigate risks. King examines the current regulatory environment for Bitcoin-related businesses as well as measures these businesses can adopt to mitigate the BSA/AML risks inherent in the use of Bitcoin. He also presents a framework for financial institutions to consider for managing the risks associated with banking these companies.

Because of BSA/AML-related risks and others associated with Bitcoin transactions and its “highly publicized history of facilitating payments for illegal transactions,” getting involved with bitcoins is considered high risk by many regulatory agencies and financial institutions. King states that, with some financial institutions in a risk-reduction mode, many are opting to avoid this industry as a whole.

Legitimate uses. However, within this high-risk category, he finds many legitimate uses for bitcoin and businesses that facilitate these legitimate transactions. King points to reports in early 2015 that approximately 100,000 merchants worldwide accept bitcoins. Also, Bitcoin investors obtain bitcoins for speculative purposes. These users do not intend to spend their bitcoins. Rather, they intend to buy and sell them much like a traditional investor trades in company stocks or commodities.

Banking due diligence. Financial institutions interested in banking Bitcoin-related businesses should have a full understanding of the Bitcoin ecosystem, the role of the different participants, and the unique BSA/AML circumstances involving this ecosystem, King advises. “A robust BSA/AML enhanced due diligence process is necessary when evaluating Bitcoin-based businesses,” he says.

Business practices. Beyond regulatory requirements, King writes, Bitcoin-related businesses can adopt certain processes and practices that have the ability to further legitimize the Bitcoin transactions that they are enabling. By focusing on a commitment to BSA/AML compliance through a robust compliance program, Bitcoin-related businesses can better position themselves for banking relationships with financial institutions. In return, he concludes, this dedication to compliance ultimately places financial institutions in a better position to successfully bank them.

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Debt collector appeals loss of interest rate preemption protection

By Richard Roth

A debt collector is asking the Supreme Court to review whether the National Bank Act’s preemption of state law interest rates continued after a credit card account was charged off and transferred to the debt collector for collection. According to the U.S. Court of Appeals for the Second Circuit, the state law usury limit no longer was preempted because after the transfer the national bank had no interest in the account. The state law would no longer interfere with the national bank’s exercise of powers granted by federal law (Madden v. Midland Funding, LLC). The petition was filed as Midland Funding, LLC, v. Madden, No. 15-610.

According to the Second Circuit, the suit over whether the debt collector could rely on the NBA preemption provision turned on conflict preemption—whether allowing the consumer to sue the debt collector for attempting to collect illegal interest under the Fair Debt Collection Practices Act would interfere with a national bank’s exercise of powers granted by federal law.

Preemption for nonbanks. It was true that NBA preemption extended to nonbanks in some situations, the appellate court said. However, that only happened when preemption of a state law was needed to prevent significant interference with a national bank’s exercise of its federally granted powers. A national bank’s operating subsidiaries could benefit from preemption, as could a bank’s agents, the court agreed. However, Midland, as a third-party debt buyer, was neither an operating subsidiary nor an agent. Midland was acting solely on its own behalf.

Neither of the Midland companies was a national bank, neither was a subsidiary or agent of a national bank, and neither was acting on behalf of a national bank, the appellate court said. That meant the application of New York’s usury law would not interfere with any national bank’s exercise of powers granted by federal law. New York’s usury law only would affect Midland’s activities. There was no reason for the state law to be preempted, the court decided.

Debt collector’s argument. In its petition for certiorari, Midland argues that denying it the protection of the NBA’s interest rate preemption would effectively allow a state to regulate national bank interest rates by “imposing interest rate limitations that are triggered as soon as a loan is sold or otherwise assigned.” The Second Circuit decision also ignored “a cardinal rule of usury, dating back centuries, that a loan which is valid when made cannot become usurious by virtue of a subsequent transaction.”

The petition points out that the Second Circuit decision threatens to have unusually significant effect because the circuit, which includes New York, is the home of much of the nation’s financial services industry. It also notes that the decision conflicts with a decision by the Eighth Circuit, Krispin v. May Department Stores, Inc., 218 F.3d 919 (2000), and a decision of the Fifth Circuit, FDIC v. Lattimore Land Corp., 656 F.2d 139 (1981).

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On Veteran's Day, agencies work to protect servicemembers, veterans

By Stephanie K. Mann, J.D.

As the nation celebrated Veteran’s Day on November 11, multiple government agencies have taken step to protect military servicemembers and veterans.

Increased protection from financial scams. The Department of Justice has announced that it has submitted a legislative package to Congress including amendments to existing laws that are intended to protect military servicemembers and veterans. The proposed amendment package, The Servicemembers and Veterans Initiative is intended to “drive enforcement, outreach and training efforts on behalf of servicemembers, veterans and their families,” according to a blog post by Acting Associate Attorney General Stuart F. Delery. Delery stated that “It is our responsibility to protect these individuals from financial scams, to preserve their right to return to their civilian employment after active duty and to strengthen their ability to cast a ballot when they are overseas.”

Amendments to current laws. The legislative package includes amendments to the following existing laws:

• the Uniformed Services Employment and Reemployment Rights Act (USERRA);
• the Servicemembers Civil Relief Act (SCRA);
• the Military Lending Act (MLA); and
• the Uniformed and Overseas Citizens Absentee Voting Act (UOCAVA).

The changes are intended to make it more difficult for “unscrupulous creditors to take advantage of servicemembers on active duty,” according to Delery. The proposed amendments seek to protect military families by affording dependent family members the same state residency rights as the servicemember, as well as requiring states to recognize a servicemember spouse’s professional licensures from other states.

The amendments would include the following changes.

1. The proposed amendments require parties seeking default judgments against servicemembers to check Department of Defense records to determine duty status.
2. The amendments also increase penalties that employers, as well as lending and rental businesses, will face for violating laws designed to protect servicemembers. 
3. The legislative proposals expand the number and types of cases the United States can bring in defense of servicemembers attempting to return to their civilian employment upon completion of their military service, and the available remedies for violations of the voting rights of servicemembers and their families while they are overseas.

Delery stated that the Justice Department “hopes these changes will enhance the department’s ability to bring enforcement actions, and allow these men and women to assert their rights on their own.”

Memorandum of Agreement. The Federal Trade Commission and the Veterans Administration have signed a Memorandum of Agreement to further their ongoing efforts to stop fraudulent and deceptive practices targeted at service members, veterans, and dependents who use military education benefits. Under the Memorandum of Agreement, the Deputy Undersecretary for Economic Opportunity, Veterans Benefits Administration, Department of Veterans Affairs, and the Director, Bureau of Consumer Protection, Federal Trade Commission, agree to provide mutual assistance in the oversight and enforcement of laws pertaining to the advertising, sales, and enrollment practices of institutions of higher learning and other establishments that offer training for military education benefits recipients.

The agreement is designed to enhance cooperation between the FTC and the VA in investigating and taking action against institutions that target service members with unfair or deceptive advertising or enrollment practices. It outlines terms under which the VA can refer potential violations to the FTC.

The FTC advises service members to watch out for any for-profit schools that may stretch the truth to encourage enrollment by exerting pressure on service members either to sign up for unnecessary courses or to take out loans that might be a challenge to pay off. The FTC encourages students interested in pursuing a higher education to check out its updated guidance, Choosing a College: Questions to Ask.

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Attorney could not secure fees with lien on debtor’s property

By Lisa M. Goolik, J.D.

An attorney was not permitted to take a security interest in a debtor’s property prior to the debtor’s filing for bankruptcy protection to secure both pre- and postpetition professional fees. The U.S. Bankruptcy Court for the Western District of North Carolina determined that because the attorney failed to comply with the applicable state rules of professional conduct, he could not retain a security interest in his debtor’s property to secure fees incurred pre-petition, and as for post-petition fees or fees unearned at the time of filing, the debtor’s legal and equitable interests in the property became property of the bankruptcy estate at filing (In re Pace, Nov. 2, 2015, Whitley, C.).

Background. The debtor met with the attorney to obtain information and to explore whether filing bankruptcy would be beneficial. Sometime after initially consulting with his attorney, but before deciding to file bankruptcy, the debtor experienced several hardships that further strained his financial situation. It became apparent that the debtor did not have the ability to pay the estimated $6,500 to file his case. The attorney then suggested that the debtor grant him a lien on the debtor’s motorcycle and boat to secure the attorney’s fees. The debtor executed a promissory note on June 26, 2015, for $6500 and signed a security agreement granting a security interest in the boat and motorcycle to the attorney. The debtor signed the lien recording application for the motorcycle on June 30, 2015. That same day, the attorney filed the debtor’s Chapter 7 bankruptcy case. The attorney filed a UCC financing statement to perfect his lien on the boat approximately two weeks later.

Ethical issues. While the court did not doubt the attorney’s claims that but for the promissory note and lien, the debtor could not afford to file bankruptcy, it could not agree that such transactions are permissible.

“For obvious ethical and practical reasons, an attorney taking a lien on his debtor’s property is not common. It takes little imagination to hypothesize how the interests of counsel and client could collide. For instance, what would happen if a debtor failed to satisfy the terms of an applicable promissory note? Would the attorney be able to foreclose on the encumbered property? Would the attorney need to move for relief from stay? If so, who would represent the debtor in a defense of the motion?, " questioned the court.

Accordingly, North Carolina’s Rule of Professional Conduct permits an attorney to take such a lien but establishes safeguards to protect against exploitation. The rule provides in relevant part: “(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest directly adverse to a client unless: . . . (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; . . . "

It was undisputed that the attorney did not comply with the rule—he failed to notify the debtor in writing of the desirability of seeking independent legal counsel on the transaction. As a result, the court ordered the attorney to release his secured interests for pre-petition fees.

Moreover, after filing bankruptcy, a debtor is no longer able to transfer or encumber property of the bankruptcy estate absent court approval. As a result, there was no property interest in the boat and motorcycle outside the bankruptcy estate remaining to secure the attorney’s post-petition fees.


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Put off collecting Social Security? CFPB says you just may benefit

By Katalina M. Bianco, J.D.

The timing of when you begin collecting Social Security benefits can affect how much your payments are, according to the Consumer Financial Protection Bureau. The CFPB is advising consumers to consider waiting to collect Social Security retirement benefits. More than one-third of consumers begin collecting benefits at age 62. However, according to the bureau, monthly payments can increase up to 75 percent if consumers wait until the age of 70 to collect.

Online tool. The bureau developed a nifty new tool to help consumers decide when to begin collecting Social Security. The online interactive “Planning for Retirement” tool allows consumers to estimate how much money they can expect to receive at different ages and provides tips to help consumers evaluate the trade-offs. The tool also helps consumers consider the relationship between claiming age and other related factors, such as marital status, other expected sources of income, plans for working after age 60, and general expectations of longevity.

In prepared remarks for an appearance at the Brookings Institution, CFPB Director Richard Cordray said that the CFPB worked closely with the Social Security Administration to develop the retirement tool. When designing the tool, the CFPB looked at changing trends and how different consumers access information. Cordray said the tool is optimized for mobile use. There is a Spanish version of the tool because Spanish speakers are expected to be one of the fastest-growing segments of the population that will be making the claiming decision by 2050.

Social Security benefits. Americans are eligible to claim Social Security retirement benefits without any reduction at their “full retirement age,” according to the Social Security Administration. For people born after 1942, full retirement age ranges from 66 to 67, depending on the year the person was born. Consumers also can claim their benefits several years before, agreeing to take less money each month, or they can claim several years after, and get bigger monthly checks. Generally, the amount a consumer receives from Social Security is a one-time choice, the CFPB said. The only changes to the payments are annual cost-of-living adjustments. This is why, the bureau said, choosing when to begin collecting should be a carefully made decision.

Issue brief. An issue brief by the CFPB on the link between claiming age and retirement security indicates that many consumers may not be taking advantage of their option to receive higher Social Security income. According to the brief, many Americans are collecting earlier but are living longer. In 2013, nearly 46 percent of claims were submitted at age 62. But, on average, Americans reaching age 65 today will live to age 85. Consumers will need sufficient income and savings to cover 20 years or more in retirement.

The brief also states that many Americans are unprepared financially for retirement, even those nearing the retirement age. According to the CFPB, four in 10 Americans aged 51 – 59 are reaching retirement with little or no savings. Retirees rely on Social Security benefits with the decline in coverage from traditional pension plans. Approximately two thirds of the nearly 40 million Americans aged 65 and older who receive Social Security benefits depend on them for 50 percent or more of their retirement income.

For more information about the CFPB and retirement issues, subscribe to the Banking and Finance Law Daily.

TLAC bankruptcy buffers to cost banks $1.2 trillion

By John M. Pachkowski

Recent action by the Federal Reserve Board and the Financial Stability Board to cushion any blows to the global financial system from the failure of a global systemically important bank or G-SIB could require those banks to raise up to $1.2 trillion in new capital.

Fed TLAC proposal. At its Oct. 30, 2015, open meeting, the Fed released a proposed rule that require eight domestic G-SIBs to establish an external long-term debt requirement—external LTD requirement, an external total loss-absorbing capacity requirement—external TLAC requirement, and a related external TLAC buffer. The eight G-SIBs that would be affected by the proposed rule are: Citigroup Inc., JP Morgan Chase & Co., Bank of America Corporation, The Bank of New York Mellon Corporation, Goldman Sachs Group, Inc., Morgan Stanley, State Street Corporation, and Wells Fargo & Company.

To meet the external TLAC requirement, covered BHCs would be required to maintain outstanding eligible external TLAC equal to the greater of: 18 percent of risk-weighted assets (RWAs) and 9.5 percent of total leverage exposure.

The external LTD requirement would be met if a covered BHC maintains outstanding eligible external LTD equal to the greater of: 6 percent of RWAs, plus the applicable GSIB capital surcharge, and 4.5 percent of total leverage exposure.

Finally, the external TLAC buffer would equal the sum of 2.5 percent, any applicable countercyclical capital buffer, and the GSIB surcharge applicable under method 1 of the Fed’s GSIB surcharge rule.

FSB TLAC Principles. On Nov. 9, 2015, the FSB finalized its TLAC standards that were first proposed in November 2014. The TLAC Principles and Term Sheet define a minimum requirement for the instruments and liabilities that should be readily available for bail-in within resolution at G-SIBs but do not limit authorities’ powers under the applicable resolution law to expose other liabilities to loss through bail-in or the application of other resolution tools.

The final TLAC Principles also will require G-SIBs to meet a minimum TLAC requirement of at least 16 percent of the resolution group’s risk-weighted assets—TLAC RWA Minimum—beginning on Jan. 1, 2019, and at least 18 percent beginning on Jan. 1, 2022. In addition, G-SIBs will be required to ensure that the Minimum TLAC will be at least 6 percent of the Basel III leverage ratio denominator—TLAC Leverage Ratio Exposure (LRE) Minimum—beginning on Jan. 1, 2019. The LRE Minimum TLAC is increased to 6.75 percent beginning on Jan. 1, 2022.

G-SIBs headquartered in emerging market economies will be required to meet the 16 percent RWA and 6 percent LRE Minimum TLAC requirement no later than Jan. 1, 2025, and the 18 percent RWA and 6.75 percent LRE Minimum TLAC requirement no later than Jan. 1, 2028. The FSB noted that this conformance period will be accelerated if, in the next five years, corporate debt markets in these economies reach 55 percent of the emerging market economy’s GDP. The FSB will monitor implementation of the TLAC standard and will undertake a review of the technical implementation by the end of 2019.

Impact on banks. Regarding the Fed proposal, an agency staff memorandum noted that six of the eight covered BHCs would currently have external TLAC shortfalls. The memorandum added that the aggregate external TLAC shortfall of the covered BHCs would be approximately $102 billion, the aggregate external LTD shortfall would be approximately $90 billion, and the aggregate shortfall for the external LTD and TLAC requirements together would be approximately $120 billion. The Fed staff estimated that the aggregate increased funding cost for the covered BHCs would range from approximately $680 million to $1.5 billion annually.

To quantify the costs of the FSB’s TLAC requirements, the Basel Committee on Banking Supervision, FSB, and Bank for International Settlements conducted a number of impact assessment studies.

Overall, the impact assessment studies found that the microeconomic and macroeconomic costs of TLAC are relatively contained. The estimated costs for G-SIBs of meeting the minimum TLAC requirement are found to translate into increases in lending rates for the average borrower that range from 2.2 to 3.2 basis points, while the median long-run annual output costs are estimated at 2 to 2.8 basis points of gross domestic product. The impact assessment studies also noted that the benefits of TLAC arise from the reduced likelihood and cost of crises and exceed these costs, with even the most conservative assumptions yielding estimated benefits of between 15 and 20 basis points of annual GDP.

An Analyst Blog from Zacks Investment Research noted that Wells Fargo & Company would need to issue around $40 to $60 billion in debt. This assessment was based on an announcement was made by Chief Financial Officer John Shrewsberry at a Nov. 6, 2015, investor conference.

Stephen Gandel, a senior editor at Fortune.com, noted banks will need to raise that $1.2 trillion in TLAC-eligible instruments. This figure is based on the report entitled Assessing the economic costs and benefits of TLAC implementation which put the average annual microeconomic costs to the G-SIBs ranging from between €400 to €950 million.

Writing for Reuters, Michelle Price and Lawrence White reported that China’s four biggest banks may have to raise up to $400 billion to meet the FSB’s TLAC requirements. Their report noted that James Antos, an analyst at Mizuho Securities in Hong Kong, said China’s banks would suffer the “greatest burden” in meeting the requirements because they currently held minimal senior debt.

For more information about financial stability and G-SIB resolutions, subscribe to the Banking and Finance Law Daily.

Florida law banning credit card surcharges unconstitutionally restricts free speech

By Thomas G. Wolfe, J.D.

In reviewing Florida’s credit card “no surcharge” law, the U.S. Court of Appeals for the Eleventh Circuit struck down the state law as an unconstitutional abridgement of free speech under the First Amendment to the U.S. Constitution. The federal appellate court determined that, under the Florida law prohibiting credit card surcharges, a merchant who offers the same product at a lower price for customers paying cash and at a higher price for customers using a credit card “is allowed to offer a discount for cash while a simple slip of the tongue calling the same price difference a surcharge runs the risk of being fined and imprisoned.”

Notably, the majority’s decision to strike down Florida’s credit card “no surcharge” law in Dana’s Railroad Supply v. Attorney General, State of Florida now places the Eleventh Circuit in direct conflict with the Second Circuit’s decision in Expressions Hair Design v. Schneiderman—upholding the constitutionality of New York’s credit card “no surcharge” law (see Banking and Finance Law Daily, Sept. 30, 2015).

By way of background, four small businesses in Florida charged their customers lower prices for using cash and higher prices for using a credit card. According to the court’s opinion, each of the businesses communicated the price difference to their customers as an additional amount for credit-card use rather than as a lesser amount for paying in cash. Eventually, the Florida Attorney General sent them “cease-and-desist letters.”

Although the businesses believed that it was “more effective, transparent, and accurate” to call the price difference a credit-card surcharge rather than a cash discount, the Florida AG demanded that the businesses refrain from “running afoul” of Florida’s credit card no-surcharge law.

Consequently, the four businesses and their principals filed a lawsuit against the Florida AG, alleging that the Florida’s no-surcharge law constituted an unjustified restriction on speech in violation of the First Amendment. The businesses further alleged that because the Florida law provided “insufficient guidance on how to comply with its mandates,” it was void for vagueness as well.

Florida’s credit card no-surcharge law (Fla. Stat. §501.0117) provides that a “seller or lessor in a sales or lease transaction may not impose a surcharge on the buyer or lessee for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller or lessor accepts payment by credit card.” The state law further provides that the law does not pertain to “the offering of a discount for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, if the discount is offered to all prospective customers.”

In addition, as underscored by the Eleventh Circuit, a violator of Florida’s no-surcharge law “is guilty of a misdemeanor of the second degree.” As a result, a violator could face the possibility of a $500 fine and 60 days of imprisonment.

The federal trial court had construed Florida’s no-surcharge law as primarily regulating “economic conduct” and, accordingly, conducted a “rational-basis” review of the law. In contrast, while the Eleventh Circuit recognized that “Florida’s no-surcharge law proves difficult to categorize, skirting the line between targeting commercial speech and restricting speech writ large,” the court determined that the statute “ultimately falls because it collapses under any level of heightened scrutiny.”

Employing a four-part test set forth by the U.S. Supreme Court for commercial speech, the Eleventh Circuit: (i) rejected “any notion that merely because some modicum of economic conduct is implicated therefore a law cannot also unconstitutionally restrict speech”; (ii) maintained that the Florida no-surcharge law did not regulate false or misleading speech; (iii) struggled to identify “a plausible governmental interest that would be served” by the law; and (iv) asserted that the law “neither directly advances any potentially substantial state interest nor is it narrowly tailored.”

For more information about significant court decisions affecting state laws covering credit, debit and gift cards, subscribe to the Banking and Finance Law Daily.

Deutsche Bank to pay $258M for concealing sanctioned transactions

By Lisa M. Goolik, J.D.

Deutsche Bank AG will pay $258 million to settle charges brought by the New York State Department of Financial Services (NYDFS) and the Federal Reserve Board that the bank violated federal and state banking laws in connection with concealing $11 billion in transactions on behalf of countries and entities subject to U.S. sanctions, including Iran, Libya, Syria, Burma, and Sudan. Deutsche Bank also agreed to develop a compliance program, employ an independent monitor, and terminate six employees that were involved in the scheme but remained employed by the bank.

Stripped or concealed information. A joint investigation by the NYDFS and the Fed found that, from at least November 2001 to January 2006, overseas offices of Deutsche Bank, in Eschborn, Germany, and Bangalore, India, developed a practice for processing funds transfers through Deutsche Bank’s New York office, as well as other unaffiliated U.S. financial institutions, to conduct more than 27,200 U.S. dollar clearing transactions—valued at almost $11 billion—on behalf of Iranian, Libyan, Syrian, Burmese, and Sudanese financial institutions and other entities subject to U.S. economic sanctions by the Treasury Department’s Office of Foreign Asset Control (OFAC).

Bank staff in overseas offices used wire stripping, or alteration of the information included on the payment message, to remove information indicating a connection to a sanctioned entity before the payment was passed along to the correspondent bank in the United States. Employees also used non-transparent cover payments to split an incoming payment message into two message streams: one which included all details, sent directly to the beneficiary’s bank, and one which did not include details about the underlying parties to the transaction, sent to Deutsche Bank New York or another correspondent clearing bank. As a result, the payment message would not raise red flags or trigger any additional scrutiny that it otherwise would have merited if the details were included.

According to the NYDFS, bank relationship managers and other employees worked with sanctioned customers in the process of concealing the details about their payments. Bank employees instructed clients to include special notes or code words in their payment messages that would trigger special handling by the bank before the payment was sent to the United States. Sanctioned customers were told “it is essential for you to continue to include [the note] ‘Do not mention our bank’s name…’ in MT103 payments that may involve the USA. [That note] ensures that the payments are reviewed prior to sending. Otherwise it is possible that the [payment] instruction would be sent immediately to the USA with your full details. . . . [This process] is a direct result of the US sanctions.”

Moreover, the investigation found that the bank promoted its “OFAC-safe” handling processes and its experience in handling sanctions-related payments when soliciting new business from customers subject to U.S. sanctions. At the same time, employees recognized the legal and reputational concerns and acted to keep the payment handling methods—and the bank’s business dealings with sanctioned entities in general—on a “need-to-know basis.”

Consent orders. The $258 million penalty will be divided between the agencies. The NYDFS consent order requires that Deutsche Bank pay a $200 million penalty and install an independent monitor to ensure compliance with New York banking laws. In addition the NYDFS ordered the bank to terminate six employees who remain employed by the bank: a managing director in Global Transactions Banking; a managing director in Operations; a director in Operations; a director in Corporate Banking and Securities; a vice president in Global Transactions Banking; and a vice president/relationship-manager. Three other Deutsche Bank employees will be banned from holding any duties, responsibilities, or activities involving compliance, U.S. dollar payments, or any matter relating to U.S. operations.

The Fed’s consent order assesses a civil money penalty of $58 million and requires that Deutsche Bank implement an enhanced program to ensure global compliance with OFAC sanctions. The order also prohibits Deutsche Bank from re-employing the individuals involved in the past actions or retaining them as consultants or contractors.

This story previously appeared in the Banking and Finance Law Daily.

CFPB Supervisory Highlights spotlights enforcement activity, revised exam appeals process

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published the ninth edition of its Supervisory Highlights, a report that details supervisory actions taken by the bureau. The current report covers the period from May 2015 through August 2015.The CFPB said that during this period, it has found violations in the student loan servicing, mortgage origination and servicing, consumer reporting, debt collection markets, and fair lending, leading to CFPB supervisory actions that resulted in $107 million in relief to more than 238,000 consumers. Other actions have included, among other things, correction of information submitted to consumer reporting agencies, creation and implementation of new policies and procedures, and the cessation of deceptive practices.

  

Consumer reporting. CFPB examiners conducted one or more reviews of compliance with furnisher obligations under the Fair Credit Reporting Act and Regulation V at depository institutions. The reviews focused on furnishing activities to consumer reporting agencies that specialize in reporting on consumers’ deposit account information. Examiners found that one or more entities failed to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of information furnished to CRAs, as required by Regulation V. Examiners found that while one or more entities had policies and procedures addressing accuracy and integrity with respect to their furnishing of information to CRAs on credit accounts, they failed to have policies and procedures addressing accuracy and integrity with respect to their furnishing information on deposit accounts as required by Regulation V. Examiners also found other violations of the FCRA as described in the report.

  

Debt collection. The Fair Debt Collection Practices Act requires debt collectors to make certain disclosures in their first communication with a consumer. In subsequent communications, among other things, they must state that the communication is from a debt collector. According to the CFPB’s report, during the examination of one or more debt collectors, examiners determined that the collectors’ employees did not always state during subsequent phone calls that the calls were from debt collectors. The bureau’s Office of Supervision directed the debt collectors to improve training with regard to the FDCPA’s requirement to provide these disclosures.

  

In addition, during examinations, the CFPB found that debt collectors had inadequate systems in place to comply with FDCPA requirements that debt collectors limit their communications with consumers in certain ways, e.g., the law generally prohibits a debt collector from contacting a consumer the debt collector knows is represented by an attorney and prohibits a debt collector from contacting a consumer at his or her place of employment if the debt collector “knows or has reason to know that the consumer’s employer prohibits the consumer from receiving such communication.”

  

Further, examiners found that one or more servicers violated the FDCPA when they sent debt validation letters listing debt amounts that the servicer could not verify as accurate and when they failed to send debt validation letters to borrowers within five days after the initial communication about the debt, where the borrowers’ loans were in default when servicing rights were obtained.

 

Mortgage origination. In mortgage origination examinations, CFPB examiners found violations of disclosure requirements pursuant to the Real Estate Settlement Procedures Act and Regulation X; the Truth in Lending Act and Regulation Z; and consumer financial privacy rules, implemented by Regulation P. The report details the specific findings of the examiners as to the violations, including:

 

• failure to comply with the requirement that settlement charges not exceed amounts on the good faith estimate by more than specified tolerances;
• non-compliance with requirements for completion of HUD-1 settlement statements;
• failure to comply with the requirement to provide the homeownership counseling disclosure and an accurate loan servicing disclosure statement; and
• non-compliance with consumer financial privacy requirements.

 

Mortgage servicing. The CFPB reports that one or more mortgage servicers “have made significant improvements in the last several years.” Further, one or more servicers conducted formal reviews of information technology structures and identified the inadequacies causing earlier problems, including system outages. The bureau continues to see that the inadequacies of outdated or deficient systems pose considerable compliance risk for mortgage servicers, and that improvements and investments in these systems can be essential to achieving an adequate compliance position.

 

However, CFPB examiners found that one or more servicers violated Regulation X because their policies and procedures were not reasonably designed to achieve certain objectives. Examiners directed servicers to implement policies, procedures, and requirements compliant with Regulation X.

 

Student loan servicing. The report indicates that the CFPB continues to examine federal and private student loan servicing activities, mainly to determine whether entities have engaged in unfair, deceptive, or abusive acts or practices. The bureau also reviews student loan servicers’ practices related to furnishing of consumer information to CRAs for compliance with the FCRA and Regulation V. In the CFPB’s student loan servicing examinations, examiners have identified several unfair or deceptive acts or practices, as well as FCRA and Regulation V violations.

 

Supervision program developments. The report also lists new developments within the supervision program, including: new auto finance examination procedures; updated mortgage origination exam procedures; and fair lending potential action and request for response.

 

Appeals process. The CFPB has revised its appeals process as of Nov, 3, 2015. The revised process implements changes to the CFPB’s Supervisory appeal process as originally published in CFPB Bulletin 2012-07. The amended process:

 

• allows members of the Supervision, Enforcement, and Fair Lending Associate Director’s staff to participate on the appeal committee, replacing the existing requirement that an Assistant Director serve on the committee;
• permits an odd number of appeal committee members in order to facilitate resolution of appeals;
• limits oral presentations to issues raised in the written appeal;
• provides additional information on how appeals will be decided;
• prevents an institution from appealing adverse findings or an unsatisfactory rating related to a recommended or pending investigation or public enforcement action until the enforcement investigation or action has been resolved; and 
• changes the expected time to issue a written decision on appeals from 45 to 60 days.

The revised policy will apply to appeals of any report of exam emailed on or after Sept. 21, 2015.

 

For more information about the bureau's Supervisory Highlights, subscribe to the Banking and Finance Law Daily.

CFPB coming after financial aid companies exploiting confusion over student loans

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau has made a concerted effort to help borrowers with student loan issues. The latest point of emphasis is an operation that allegedly “ripped off students and families applying for college financial aid.” The CFPB contends that Global Financial Support, Inc., and its owner, Armond Aria, exploited uncertainty over how to use free federal financial aid resources.

The company, operating under the names of College Financial Advisory and Student Financial Resource Center, is accused of running a nationwide student financial aid scam with false promises to match students and families with targeted financial aid assistance programs for a fee. The CFPB is seeking a halt to the unlawful practices alleged in the complaint, penalties for their illegal conduct, and restitution to harmed consumers.

The Consumer Financial Protection Bureau charges that the company tricked consumers into thinking they were applying for financial aid services, falsely represented an affiliation with the government or academic institutions, and pressured consumers with threats of losing financial aid opportunities. “Students and families were looking for information on how to pay for college, instead they were illegally charged millions of dollars for sham financial services, said CFPB Director Richard Cordray.

The business ran a deceptive scheme to persuade high school seniors, enrolled college students, and their families to pay a fee to participate in a student financial aid “program,” according to the CFPB. Through the use of an official-looking seal, artificial filing deadlines, references to students’ universities, a “Student Aid Profile Form,” and a strategically worded letter, the CFPB says they exploit consumers’ unfamiliarity, anxiety, and confusion about the Free Application for Federal Student Aid (FAFSA) and the student financial aid process generally.

Services. The letters allegedly instruct students to fill out and return an application and a fee—ranging from $59 to $78—to apply for the maximum merit- and need-based financial aid programs. In reality, the complaint claims, consumers either receive nothing in exchange for sending in their application and fee, or they get a generic booklet that fails to provide individualized advice.

Affiliations. According to the CFPB, the company uses logos and seals to make consumers think that its materials are sent or endorsed by the government. The company includes the name of the student’s university to give the impression that the letter is endorsed by the student’s university.

Deadlines. The company allegedly tells consumers that unless they send their application and pay a fee by a specified deadline, consumers will lose their opportunity to receive student financial aid, when in reality their deadlines are meaningless.

Other recent CFPB action. In July, in another matter raising similar issues, the CFPB filed a complaint against Student Financial Aid Services, Inc. (SFAS) for alleged illegal sales and billing practices. The CFPB alleged unfair and deceptive acts or practices on the part of the company for luring in consumers with misleading information about the total cost of its subscription financial services and then charging them with undisclosed and unauthorized automatic recurring charges.

SFAS operated websites, including FAFSA.com and SFAS.com, and related call centers, where it offers fee-based assistance to consumers filling out the federal government’s Free Application for Federal Student Aid. These websites were not at that time affiliated with the federal government’s FAFSA program. Under the proposed settlement, the company agreed to pay $5.2 million to the CFPB for distribution to harmed consumers.



For more information about CFPB actions involving student financial aid issues, subscribe to the Banking and Finance Law Daily.

Mortgage payoff letter must include insurance proceeds held by lender

By Richard A. Roth

When a creditor provides a payoff statement for a homeowner’s mortgage loan, the Truth in Lending Act requires the creditor to account for insurance claim proceeds it is holding, a federal district court judge has decided. Noting that the appellate court has not considered the issue, the judge determined that under TILA, funds that could be applied to the loan balance must be credited in the payoff statement (McLaughlin v. Wells Fargo Bank, NA, Oct. 26, 2015, Alsup, W.).

The homeowner received an insurance payment of more than $16,000 due to flood damages and, as required, tendered that amount to her creditor, Wells Fargo Bank. When she later asked for a payoff statement, Wells Fargo did not account for that money even though the bank still held the funds.

Accounting for funds. The judge noted that the loan documents gave the bank two options for handling insurance claim proceeds. Payments either could be credited to what was owed under the loan or they could be used to repair the property. Either way, the $16,000 had to be credited to the account in some way. After all, if the homeowner paid off the loan balance, the money would not be used for repairs, the judge pointed out.

Under Reg. Z—Truth in Lending, a payoff statement must be accurate “based on the best information available” (12 CFR 1026.36(c)(3)). In these circumstances, the payoff statement should have deducted the insurance proceeds from the loan balance due and added that the amount was available for repairs if the loan was not paid off, according to the judge. As a result, he denied the bank’s request for dismissal of the homeowner’s suit over the payoff letter.

Judicial skepticism. The judge’s concern that the misleading payoff statement could cause future difficulties for the homeowner seems to have influenced his decision. “Overly-cautious and under-informed bank employees would forever resort to the payoff statement’s bottom line and inflate the true amount needed to pay off the loan,” he worried. The homeowner’s claims about the insurance payment “would fall on deaf ears.” “Plaintiff would get a run-around and forever be fighting with low-level bank staff insisting that the bank already had other funds available for a credit while the staff shrugged their shoulders and pointed to the misleading payoff statement,” the judge predicted.

For more information about the Truth in Lending Act and Reg. Z, subscribe to the Banking and Finance Law Daily.

CFPB provides insight into empowering consumer, improving financial literacy

By Stephanie K. Mann, J.D.

From its start date in July 2011, the Consumer Financial Protection Bureau has made it clear that one of its most vital missions is to empower consumers to take control of their financial lives. At the core of this mission is the bureau’s belief that financial education is the key to a better understanding of financial products and markets and, in turn, to better financial decision-making. In its latest Financial Literacy Annual Report, the CFPB discusses the strategy it employs to achieve its financial literacy goals, the initiatives built on that strategy, and the bureau’s progress in fulfilling its mission.

Overview of strategy. The Dodd-Frank Act mandates that the CFPB strive to improve the financial literacy of American consumers. In answer to that mandate, the bureau developed a strategy and a number of broad initiatives intended to help consumers make informed financial decisions. In general, the bureau’s strategy acknowledges that financial literacy requires more than providing information to consumers. Informed financial decision-making requires not only knowledge but also the building of skills and the taking of proactive steps.

The CFPB’s strategy comprises main components:

1. providing assistance to consumers at specific, important points in their financial lives via the bureau itself and by partnering with others; 
2. targeting “direct-to-consumer” educational tools and resources to consumers facing large life decisions, such as going to college, buying a home, or retiring, as well as smaller decisions that can have large consequences, such as starting savings and managing debt; and
3. engaging in ongoing dialogue with consumers and other stakeholders to share information. 

The bureau says that its strategy focuses on identifying when to engage consumers about their financial decisions and providing the information and tools to help with those decisions. The CFPB said it is addressing consumers in general as well as specific subsets of the population—servicemembers, older Americans, students, and consumers who have low incomes or are otherwise economically vulnerable.

Initiatives. The report outlines education initiatives the bureau has undertaken to promote financial literacy in the period from June 2013 through May 2014.

The CFPB developed a number of online tools to support financial education. These tools include:

• Ask CFPB: an interactive online tool that provides consumers with “real time” answers to more than 1,000 questions about financial products and services; 
• Paying for College: a set of online tools for students considering college and their parents that helps them comparison shop for financial aid; learn about costs, loans, and repayment; and evaluate their options; 
• Owning a Home: a set of online tools for consumers to use as they begin and pursue the process of finding a home mortgage product that fits their needs and their budget; and 
• CFPB en Español: a central point of access for Spanish-speacking consumers to the bureau’s most-used consumer resources. 

The CFPB also highlights initiatives that involve interaction with community institutions:

• an early financial education initiative that works with schools to introduce key money and finance-related concepts early and builds on that foundation throughout the K – 12 school years; 
• a program that pairs the bureau with employers to boost workplace financial education; 
• partnerships with community organizations, such as libraries, to raise awareness of the availability of financial education resources and train personnel to be more effective in providing those resources; and 
• collaboration with other federal agencies to integrate financial education into existing service programs or consumer relationships. 

Cordray message. CFPB Director Richard Cordray summed up the bureau’s quest for financial literacy by stating that, “Money decisions should support the hopes, dreams, and life goals of individuals and families. It takes both a financially capable populace and a well-policed marketplace to achieve that end.”

For more information about the bureau's financial literacy program, subscribe to the Banking and Finance Law Daily.