Court compels law firm to comply with CFPB's investigation but limits its scope

By Thomas G. Wolfe, J.D.

A California federal trial court has partially granted the Consumer Financial Protection Bureau’s petition to enforce a civil investigative demand (CID) issued to Seila Law, LLC, a law firm that, among other things, provides debt-relief and credit-counseling services to consumers. On one hand, the court rejected three of the firm’s four challenges to the CID and the CFPB’s authority to issue it. On the other hand, the court determined that the CID’s pertinent interrogatories and requests for documents concerning the firm’s “services” could be construed to encompass information about other facets of the firm’s legal practice beyond the reasonable scope of the CID. Accordingly, in its order, the court compelled Seila Law to comply with the Bureau’s CID but limited its scope.

Generally, the CFPB has sought to investigate whether certain companies providing debt-relief and credit-counseling services have violated the Federal Trade Commission’s Telemarketing Sales Rule and/or provisions of the Consumer Financial Protection Act prohibiting unfair, deceptive, or abusive acts or practices. Although the Seila Law firm provided some answers to the seven interrogatories and four document requests set forth in the Bureau's CID, the CFPB considered the firm’s response to be inadequate. As a result, the Bureau filed a lawsuit in the U.S. District Court for the Central District of California (Consumer Financial Protection Bureau v. Seila Law, LLC) to obtain a court order compelling Seila Law to comply with its CID.

CFPB’s constitutionality. Rejecting Seila Law’s contention that the CFPB is unconstitutionally structured, the court noted that the Bureau’s receipt of funding outside of the annual Congressional appropriations process was “no different than several other financial regulators, such as the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation … In fact, unlike these other agencies, the CFPB’s non-appropriated budget is capped by statute.”

In addition, the court determined that even if an independent agency like the CFPB could not be constitutionally headed by a director, “the proper remedy would not be to refuse to enforce the CID.” Moreover, because Congress unquestionably wields subpoena power, the CFPB “may lawfully execute this power as well” to obtain information as part of its investigation, the court stated.

Notification of purpose. The Seila Law firm maintained that the Bureau’s CID failed to provide sufficient notice about the purpose and nature of the CFPB’s investigation. The court disagreed. In reviewing the statutory underpinning for the CID and accompanying case law, the court concluded that the CFPB was not seeking to enforce a generic CID; rather, the CFPB was seeking information “about Seila Law from Seila Law.” Consequently, the law firm’s argument did not prevail.

Practice-of-law exclusion. Next, the court addressed Seila Law’s contention that a “practice of law” exclusion would prevent any enforcement action against the law firm. First, the court emphasized that the Consumer Financial Protection Act (CFPA) empowered the CFPB to issue a CID to enforce the Federal Trade Commission’s Telemarketing Sales Rule because that rule does not contain an exception for those engaged in the practice of law. Second, while Congress included a practice-of-law exclusion in the CFPA “to ensure that the CFPB did not employ its general authority over unfair, deceptive, and abusive practices to regulate the practice of law,” an attorney is not exempt from enforcement by the CFPB “merely because of his or her status as an attorney.”

Overbreadth and vagueness. Seila Law argued that the CID’s request for information about “services” or “other services” could be construed to include information “related to the firm’s immigration, personal injury, criminal defense, and real estate practices” that had nothing to do with the CID’s stated purposes. The court agreed with Seila Law on this point.

The court noted that the Bureau’s CID did not define or describe what these “other services” were. Accordingly, while the court compelled Seila Law to comply with the Bureau’s CID, the court restricted its order to specify that references in the CID to “services” and “other services” were to be construed as meaning “the advertising, marketing, or sale of debt relief services or products, including debt negotiation, debt elimination, debt settlement, and credit counseling.”

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As student debt rises, CFPB looks at employer repayment benefits, older adults

By Andrew A. Turner, J.D.

With nearly half of student loan borrowers leaving school owing at least $20,000, more employers are offering student loan repayment benefits to their employees, according to two new CFPB reports. “The Bureau’s research shows that people are taking on more student debt later in life, and having a tougher time paying it back,” said CFPB Director Richard Cordray, as the CFPB offered recommendations to help companies that manage benefits programs ensure that borrowers receive the maximum value. The CFPB has also provided a look at the increasing number, amounts, and delinquency of student loans by older adults (ages 60 and older).

 

The CFPB Data Point: Student Loan Repayment study found that half of student loan borrowers are older than 34 when they start repayment, 30 percent of borrowers are not paying down their loan balances after five years in repayment, and more than 60 percent of borrowers not reducing their balances are delinquent. Increases in the share of borrowers in delinquency, especially among those with smaller loan amounts, suggest borrowers may not be accessing alternative repayment options—raising questions about the failure to take advantage of debt management options such as income-driven repayment plans.

 

An accompanying CFPB blog post, too many student loan borrowers struggling, not enough benefiting from affordable repayment options, observed that the benefits of affordable payment options remain largely untapped for borrowers “with lower balances, likely including many who have not completed their degree or certificate.” This finding supports a need for further efforts to provide access to payment relief.

 

Employer repayment benefits. The report titled Innovation highlights: Emerging student loan repayment assistance programs finds:

• growing number of employers offer repayment assistance to employees with student debt;
• student loan repayment assistance can save some borrowers hundreds or thousands of dollars, but borrowers in default may not have access to benefits offered under a typical employer program;
• servicing problems can create roadblocks to providing and improving student loan repayment benefits; and
• employers and benefits administrators can tailor programs to better meet employees’ needs.

According to the CFPB, “the challenges that consumers, third-party repayment assistance program providers, and program administrators face when initiating, transmitting, and processing third-party payments could reduce benefits intended for borrowers, potentially causing borrowers to miss out on the maximum value of such programs.” The report concludes with a series of recommendations to student loan servicers, policymakers, and administrators of student loan repayment programs to address these concerns.

  

Older Americans. New data published by the Consumer Financial Protection Bureau demonstrates that older Americans are taking on more student loan debt and are struggling to repay those loans. In January 2017, the Bureau released a snapshot of older Americans and student loan debt, which showed that in the last decade, the number of older student loan borrowers has quadrupled and the amount of debt per older borrower has roughly doubled, as many borrowers take out loans for children or grandchildren. The current report provides additional data on the scope and growth of student debt in each of the 50 states, Puerto Rico, and the District of Columbia.

 

According to the Bureau, this new data further demonstrates the “significant growth of student debt among the older populations in each state, Puerto Rico, and the District of Columbia, and the proportion of older borrowers struggling to make their payments.” The new state-level data show the changes between 2012 and 2017 in the number of older borrowers, the median amount owed, and the proportion and number of older borrowers in delinquency.

 

Highlights from the report, older consumers and student loan debt by state, include:

• The number of older borrowers increased by at least 20 percent in every state, including the District of Columbia and Puerto Rico, and the number of older borrowers increased by 46 percent or more in half of all states.
• In more than three-quarters of states, the median student loan balance of older borrowers increased by more than $1,000, and the total outstanding student debt held by borrowers over age 60 increased by more than 50 percent.
• In all but five states, the proportion of older borrowers in delinquency increased.

To the CFPB, this data demonstrates a continued cause for concern as an increasing number of older adults are asked to shoulder student debt. Consumer complaints show that older borrowers who are repaying loans for their own education, co-signing loans for someone else’s education, or borrowing on their children’s behalf, may struggle to repay these loans while living on fixed incomes during retirement.

 

Resources. A related CFPB blog post, A nationwide look at how student debt impacts older adults, provides resources to help older student loan borrowers navigate problems with their student loans, including the Repay Student Debt tool. This interactive resource offers a step-by-step guide to show borrowers their repayment options, especially when facing default.

 

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Failure to ensure accurate consumer information created standing to sue

By Richard Roth

A consumer who claimed that an Internet company failed to assure the maximum possible accuracy of personal information the company provided about him described a concrete injury that gave him constitutional standing to sue for a Fair Credit Reporting Act violation, the U.S. Court of Appeals for the Ninth Circuit has decided. Resolving an issue put to it by the Supreme Court, the appellate court said the FCRA created a concrete, as opposed to a merely procedural, interest in accurate consumer reports and that the inaccurate information described by the consumer could have posed a real harm to his employment prospects (Robins v. Spokeo, Inc., (9th Cir.)).

Spokeo, Inc., operates what it calls a “people search engine” that provides information to users about other individuals. The consumer complained that Spokeo had provided a great deal of inaccurate information about his age, marital status, financial condition, education, and profession, finishing with a photograph of someone else. Claiming that the inaccuracies were interfering with his ability to find a job and causing him emotional distress, he sued Spokeo for violating the FCRA.

The U.S. district court judge dismissed the suit after deciding that the consumer had not described an injury-in-fact that would give him standing to sue. The Ninth Circuit reversed that decision, saying that the consumer had described a particularized and concrete injury.

The Supreme Court agreed to review that decision, but in the end decided not to make a decision. Dissatisfied with the Ninth Circuit’s analysis, the Court remanded the suit with instructions to consider specifically whether the injury was concrete, as opposed to being a “bare procedural violation” of the act that did not at least threaten concrete harm (Spokeo, Inc. v. Robins, (U.S.)).

Violation of statute as injury. According to the appellate court, the consumer argued that he did not need to claim any harm beyond Spokeo’s violation of the duty to assure the maximum possible accuracy of the information it reported about him. The FCRA “exists specifically to protect consumers’ concrete interest in credit-reporting accuracy.” If the FCRA violation harmed that interest, it gave him standing to sue, he asserted.

The court agreed that the FCRA seemed to say a consumer can sue for a violation without describing any harm that resulted from the violation. “But the mere fact that Congress said a consumer like Robins may bring such a suit does not mean that a federal court necessarily has the power to hear it,” the court pointed out. In the absence of a concrete injury, there would be no case or controversy over which a federal court could exercise jurisdiction.

On the other hand, an intangible harm can constitute a concrete injury, the court continued. Thus, some statutory injuries would suffice. History and Congress’s judgment were to be considered to decide whether that was the case.

Concrete interests. To decide whether the consumer had described a concrete injury, the court looked first at whether the FCRA provision on information accuracy had been created to protect consumers’ concrete interests rather than to establish purely procedural rights. The court said the act did protect concrete interests.

The FCRA had been enacted to see that consumer report information was accurate and that consumers’ privacy was protected, the court said. The act’s procedural requirements advanced those purposes, the court said; they were not “purely legal creations.”

Consumer reports affected credit and employment prospects, the court noted, and the very existence of inaccurate information could cause harm. It was reasonable that Congress would choose to protect consumers from that harm without requiring possibly difficult proof of a specific injury. Some libelous statements are actionable without proof of specific harm, the court pointed out.

Material risk of harm. However, not every bit of inaccurate information would allow a consumer to sue, the court conceded. The consumer would have to show more than just that Spokeo did not follow FCRA-required policies; he had to show that the failure to follow the FCRA at least threatened a material risk of harm to his concrete interest in the accuracy of the information. In other words, returning to the Supreme Court’s example of an incorrect zip code, the appellate court said that a minor inaccuracy that did not present a material risk of real harm would not create standing.

This required a look at the nature of the specific inaccuracies the consumer claimed, the court then said. However, while the Supreme Court had given little instruction other than the zip code example on what errors should be considered harmless, the appellate court said it was clear that the inaccuracies claimed by the consumer would not be harmless.

“It does not take much imagination to understand how inaccurate reports on such a broad range of material facts about Robins’s life could be deemed a real harm,” the court said. Information about age, marital status, education, and employment history would be of interest to prospective employers. Ensuring the accuracy of such information “seems directly and substantially related to FCRA’s goals,” according to the court.

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CFPB sues lending conduit for aiding Corinthian Colleges' predatory lending

By John M. Pachkowski, J.D.

The Consumer Financial Protection Bureau filed a complaint and proposed settlement in an Oregon federal court, against Aequitas Capital Management, Inc. and related entities, for aiding the Corinthian Colleges’ predatory lending scheme.

Aequitas Capital Management, Inc. was a private equity firm that purchased or funded about $230 million in Corinthian Colleges’ private loans, branded by the school as “Genesis loans.” On March 10, 2016, the Securities and Exchange Commission took action against Aequitas, alleging Aequitas, and related entities, had defrauded more than 1,500 investors. A receiver was appointed to wind down Aequitas and distribute its remaining assets.

Abusive acts and practices. The Bureau’s complaint alleged that Aequitas violated the Dodd-Frank Act’s prohibitions against abusive acts and practices by funding and supporting Corinthian’s predatory Genesis loan program. Specifically, the CFPB claimed that Aequitas and Corinthian plotted to make it seem as if the school was getting outside revenue in the form of the Genesis loans, when in reality Corinthian was paying Aequitas to support the loan program. Corinthian and Aequitas engaged in this arrangement to satisfy Corinthian’s obligations under the 90/10 rule, a federal law requiring for-profit schools to obtain at least 10 percent of their revenue from other sources in order to get federal loan dollars.

Loan forgiveness and reduction. Under a settlement agreement, that the federal court approved, Aequitas and related entities would be required to:

·        forgive Genesis loans in connection with certain closed schools;

·        forgive Genesis loans in default; and

·        reduce all other Genesis loans by more than half.

By the settlement’s terms, about 41,000 Corinthian students could be eligible for approximately $183.3 million in loan forgiveness and reduction.

Another step. Commenting on the Bureau’s action, CFPB Director Richard Cordray said, “Tens of thousands of Corinthian students were harmed by the predatory lending scheme funded by Aequitas, turning dreams of higher education into a nightmare.” He added, “Today’s action marks another step by the Bureau to bring justice and relief to the borrowers still saddled with expensive student loan debt. We will continue to address the illegal lending practices of for-profit colleges and those who enable them.”

In September 2014, the CFPB filed a lawsuit against Corinthian Colleges, Inc., alleging that it used fraudulent statistics and false promises to enroll students, induced students to take out predatory loans to pay inflated tuition, and then used illegal tactics to collect the loans.

Following the Corinthian Colleges lawsuit, Zenith Education Group and its parent, ECMC Group, Inc., reached a settlement with the Bureau and Department of Education that released the two companies from any possible liability for the actions of Corinthian Colleges, Inc., a for-profit education company from which they purchased a number of schools. As part of the settlement, Zenith and ECMC were to provide more than $480 million in loan forgiveness to Corinthian’s borrowers.

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Dodd-Frank Act does not displace right to access judicial records

By Thomas G. Wolfe, J.D.

 

The Dodd-Frank Act does not displace the common-law right of public access to judicial records, the U.S. Court of Appeals for the District of Columbia Circuit has decided in MetLife, Inc. v. Financial Stability Oversight Council. While the common-law right is not absolute, there is “a strong presumption in its favor,” and there is “nothing in the language of Dodd-Frank to suggest that Congress intended to displace the long-standing balancing test that courts apply when ruling on motions to seal or unseal judicial records,” the court determined. Consequently, the federal trial court should not have categorically prevented disclosure of the redacted—and sealed—briefs and joint appendix in the case without having conducted an analysis under the balancing test.

 

The D.C. Circuit’s recent decision stems from MetLife, Inc.’s underlying lawsuit challenging the Financial Stability Oversight Council’s designation of the insurer as a nonbank systemically important financial institution (SIFI) under the Dodd-Frank Act. The federal trial court decided to rescind MetLife’s SIFI designation as arbitrary and capricious and eventually unsealed its court opinion. However, the court did not unseal other judicial records in the case.

 

Dodd-Frank Act. Under the Dodd-Frank Act, when the FSOC considers a SIFI designation, the FSOC may require nonbank financial companies to submit financial data and information. At the same time, the FSOC must “maintain the confidentiality of any data, information, and reports” that a company submits.

 

Request to unseal records. While Better Markets, Inc., was permitted to intervene in the action, the trial court denied Better Markets’ request to unseal pertinent briefs and the joint appendix in the case. As relayed by the federal appellate court’s opinion, the lower court concluded that “Dodd-Frank’s confidentiality provision … required that relevant portions of the briefs and joint appendix remain sealed because they included data, information, and reports MetLife submitted to the FSOC.”

 

Agreeing with the positions taken by MetLife and the FSOC, the trial court: (i) questioned whether the applicable briefs and appendix material qualified as “judicial records” subject to the common-law right of public access; and (ii) determined that Dodd-Frank’s confidentiality provision superseded the traditional balancing test on motions to unseal judicial records under United States v. Hubbard, 650 F.2d 293 (D.C. Cir. 1980). However, on appeal, the D.C. Circuit disagreed.

 

Balancing test. The D.C. Circuit asserted that the common-law right to inspect and copy public records and documents, including judicial records and documents, is “fundamental to a democratic state.” While there is a strong presumption in favor of public access to judicial proceedings, that presumption may be outweighed in certain cases by competing interests, the court explained. Accordingly, as enunciated in Hubbard, when presented with a motion to seal or unseal, a court should weigh the traditional six-factor test to balance the interests:

• the need for public access to the documents at issue;
• the extent of previous public access to the documents;
• the fact that someone has objected to disclosure, and the identity of that person;
• the strength of any property and privacy interests asserted;
• the possibility of prejudice to those opposing disclosure; and
• the purposes for which the documents were introduced during the judicial proceedings. 

Are briefs, appendix ‘judicial records’? Next, the court was called to determine whether the briefs and joint appendix could be considered “judicial records” subject to the Hubbard balancing test. The court noted that not all documents filed with a court are judicial records; whether an item is deemed a judicial record depends on “the role it plays in the adjudicatory process.”

 

On appeal, MetLife contended that the redacted—and sealed—portions of the briefs and appendix “did not play a sufficient role in the adjudicatory process” to qualify as judicial records because the publicly available opinion by the district court “did not quote or cite any of those sealed (redacted) parts.” 

 

Rejecting MetLife’s argument, the court stressed that any portion of a brief or an appendix can affect a court’s decision-making process even if the court never quotes or cites it. By their very nature, the briefs and appendix played a substantial role in the adjudicatory process. MetLife’s argument, if adopted, would undermine the common-law right of access and would bypass a Hubbard analysis. The sealed briefs and appendix constituted judicial records. 

 

Does Dodd-Frank supersede common-law right? Next, the court addressed whether the Dodd-Frank Act superseded the common-law right of access to the sealed judicial records in the case. “Although it is true that the Hubbard inquiry must yield to a statute ‘when Congress has spoken directly to the issue at hand,’ … the Dodd-Frank Act is not such a statute,” the court stated. 

 

In reaching its decision, the court underscored that the applicable Dodd-Frank Act confidentiality provision (§5322(d)(5)(A)) required the FSOC, Office of Financial Research, and other member agencies to keep the materials confidential. However, the provision “imposes no such obligation on—and does not even mention—the courts.” In addition, the provision was not meant to categorically bar disclosure by the courts because nearby provisions (§5322(d)(5)(B) and §5322(d)(5)(C)) take into account privileges that litigants may have and requests for disclosures under the Freedom of Information Act. 

 

Further, the court noted that a party would not necessarily surrender the confidentiality of its information by seeking judicial review because the Hubbard test takes into account the importance of confidentiality and the fact that a party has objected to disclosure. “Non-categorical balancing tests analytically similar to Hubbard’s are the standard for ruling on motions to seal or unseal judicial records in every Circuit,” the court emphasized. 

  

Final disposition. Because the federal trial court did not apply the Hubbard balancing test to the request to unseal the court records at issue in the case, but instead ruled that they were “categorically exempt from disclosure,” the federal appellate court vacated the lower court’s judgment and remanded the case for the court to apply the Hubbard balancing test.

 

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Fed unveils corporate governance, ratings system proposals for large financial institutions

By Andrew A. Turner, J.D.

The Federal Reserve Board has requested public comment on a corporate governance proposal to enhance the effectiveness of boards of directors by refocusing the Fed's supervisory expectations for the largest firms' boards of directors on their core responsibilities, to promote the safety and soundness of the firms. The proposed board effectiveness guidance would be used in connection with the supervisory assessment of board effectiveness under the proposed Large Financial Institution rating system, which the Federal Reserve issued for public comment concurrently.

For the largest domestic bank and savings and loan holding companies and systemically important nonbank financial companies, the proposal would establish principles for effective boards of directors. The proposal would also better distinguish between the roles and responsibilities of an institution’s board of directors and those of senior management. The comment period expires on October 10, 2017.

The corporate governance proposal is made up of three parts. First, it identifies the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm as a whole, supporting independent risk management, and holding the management of the firm accountable. For the largest institutions, Fed supervisors would use these attributes to inform their evaluation of a firm's governance and controls. Second, it clarifies that supervised firms must submit their findings to the firm's senior management for corrective action, rather than to its board of directors. And third, the proposal identifies existing supervisory expectations for boards of directors that could be eliminated or revised.

Rating system. The Fed is also requesting public comment on a proposal to better align the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms.

The current supervisory program for the largest firms sets higher standards to lower the probability of a firm’s failure or material distress, and also reduce risks to financial stability. The proposed changes would incorporate the regulatory and supervisory changes made by the Fed since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations. Supervisors would assess and assign confidential ratings in each of these categories.

The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate

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Severe stress test results for Fannie, Freddie point to $100B bailout

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

The Federal Housing Finance Agency released results of annual stress tests conducted by Fannie Mae and Freddie Mac (the Enterprises), showing that under the Severely Adverse scenario, Treasury Department draws are projected to range between $34.8 billion and $99.6 billion, depending on the treatment of deferred tax assets. Last year’s projection was between $49.2 billion and $125.8 billion.

The Dodd-Frank Act requires financial institutions with more than $10 billion in assets to conduct annual stress tests to determine whether they can absorb losses as a result of adverse economic conditions. The FHFA report, Dodd-Frank Act Stress Tests (DFAST)—Severely Adverse Scenario, provides updated information on possible ranges of future financial results of Fannie Mae and Freddie Mac under severely adverse economic conditions. The 2017 test is the fourth implementation of these tests for the Enterprises.

Severely Adverse scenario. The Severely Adverse scenario is based upon a severe global recession which is accompanied by a period of elevated stress in corporate financial and commercial real estate markets. It includes large reductions in asset prices, significant widening of corporate bond spreads, and strained market liquidity conditions.

In the 2017 DFAST Severely Adverse scenario, U.S. real GDP begins to decline immediately and reaches a trough in the second quarter of 2018 after a decline of 6.50 percent from the pre-recession peak. The rate of unemployment increases from 4.7 percent at the beginning of the planning horizon to a peak of 10.0 percent in the third quarter of 2018. The annualized consumer price inflation rate initially declines to about 1.25 percent by the second quarter of 2017 and then rises to approximately 1.75 percent by the middle of 2018.

Enterprise releases. The Enterprises also released results of their stress tests, as required by Dodd-Frank. Fannie Mae published its 2017 Annual Stress Testing Disclosure, and Freddie Mac published its 2017 Dodd-Frank Act Stress Test Severely Adverse Scenario Results.

Use of stress tests. In its Summary Instructions and Guidance document, the FHFA explains that its rule on Stress Testing of Regulated Entities (12 CFR Part 1238) requires each regulated entity to take the results of the annual stress test into account in making any changes to its capital structure (including the level and composition of capital); its exposures, concentrations, and risk positions; any plans for recovery and resolution; and to improve overall risk management. For regulated entities under FHFA conservatorship, any post-assessment actions would require FHFA’s prior approval.

Results for deferred tax assets. In its Frequently Asked Questions, the FHFA explained that in 2008 the Enterprises established a valuation allowance on DTAs, which significantly reduced their capital positions. The disclosure of results with and without the establishment of a DTA allowance eliminates the need to assess the recoverability of deferred tax assets in the Severely Adverse scenario and is provided for comparative purposes and transparency.

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CFPB enforcement action survives multiple attacks by student loan servicer

By Richard Roth

A Consumer Financial Protection Bureau suit claiming that Navient Corporation and its subsidiaries violated federal fair debt collection laws and the Dodd-Frank Act will not be dismissed based on challenges to the Bureau’s authority. According to a U.S. District Judge for the Middle District of Pennsylvania, the Bureau could act against the companies without first adopting rules that defined the specific practices as unfair, deceptive, or abusive, and the organization of the Bureau as an independent agency with a director who could be removed only for cause did not violate the Constitution (CFPB v. Navient Corp., Aug. 4, 2017, Mariani, R.)

The Bureau describes Navient and its subsidiaries as specializing in the management and servicing of student loans and the collection of delinquent loans. It works for both the Department of Education and private lenders. Navient Solutions is the organization’s servicing arm, while Pioneer Credit Recovery handles collections.

Alleged illegal activities. Both of the subsidiaries engage in practices that violate federal laws when dealing with borrowers, the CFPB claims. The Bureau says that Navient Solutions steered troubled borrowers into loan forbearance rather than more favorable income-based repayment plans. Income-based repayment plans usually are a better option for borrowers, according to the Bureau, but they take more time and effort for company employees and thus are disfavored by Navient Solutions. The company also did not give borrowers in these plans adequate notice of what was required to certify their continuing eligibility each year, which caused many of the borrowers to fall out of compliance at significant financial cost.

Navient Solutions also misallocated the payments of borrowers who had more than one outstanding loan, resulting in improper fees being charged and negative entries on the borrowers’ credit reports being made. The company’s practices made it difficult for borrowers to correct the misallocations, resulting in “the same processing errors month after month.”

Pioneer Credit Recovery had the ability to enroll troubled borrowers in federal loan rehabilitation plans. However, the company’s customer service representatives routinely exaggerated the benefits of these plans, the CFPB alleges.

Bureau authority. Navient argued that the CFPB did not have the statutory authority to act against the servicing processes because it had never adopted a regulation defining what practices would be considered to be unfair, deceptive, or abusive. The judge rejected that argument.

According to the judge, the Dodd-Frank Act provision allowing the Bureau to take action against practices that had been identified as unfair, deceptive, or abusive does not require the practices in question to have been declared as violations by law or regulation. There was no reason the Bureau could not use litigation to declare what practices are prohibited if it chose.

The Dodd-Frank Act language was permissive, the judge pointed out. It spoke of what the Bureau “may” do, not what it was required to do.

Neither was Navient being treated unfairly because it did not have notice of what the CFPB said was required, the judge said. In litigation, the court would decide whether Navient’s practices violated the UDAAP ban. Navient might have argued that the Dodd-Frank Act had not given fair notice, but it had not done so.

Constitutionality. The judge began his analysis of the attack on the CFPB’s structure by closely analyzing precedents, including cases that considered general principles and those that applied those principles to the Bureau. He concluded that the CFPB’s organization neither violated the Constitution’s separation of powers principles nor interfered with the President’s ability to ensure that the laws “be faithfully executed.”

Navient argued that the Bureau was unconstitutional because of a combination of three factors:

1. The Bureau is headed by a single director who holds “executive power.”
2. The director is removable only for cause.
3. The Bureau is funded by drawing on the Federal Reserve Board’s assessments, not through appropriations.

Navient conceded that none of the three factors alone would be enough to make the CFPB’s structure impermissible; rather, the company claimed that the three in combination violated the Constitution.

From a presidential powers perspective, the judge first noted that the Dodd-Frank Act removal for cause restriction was essentially the same as the provision that protects members of the Federal Trade Commission, and that provision was expressly permitted by the Supreme Court in Humphrey’s Executor v. U.S., 295 U.S. 602, 55 S. Ct. 869 (1935). The FTC and CFPB have comparable functions and comparable authority, he continued.

The Bureau’s funding method and single director structure also have parallels in other federal agencies, the judge pointed out. Congress has the ability to allow agencies to fund themselves and has the ability to change its mind if it chooses. In any event, the funding argument method might impinge on congressional authority, but it did not affect presidential authority.

It was reasonable to believe that the single director structure actually increased the President’s ability to exert control over the CFPB, according to the judge. The President retained the power to remove the Bureau’s director for cause, and the CFPB could be remade by replacing a single individual. To affect the FTC, it might be necessary to replace several of the five commissioners.

Navient’s separation of powers arguments failed as well, the judge decided. Neither the legislative nor judicial branches of the government had usurped the powers of the President, and the Bureau’s structure simply did not interfere with the President’s authority under the Constitution.

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CFPB unveils new ‘Know Before You Owe’ overdraft disclosure forms

By Stephanie K. Mann, J.D.

In a new Know Before You Owe disclosure, the Consumer Financial Protection Bureau unveiled new overdraft disclosure prototypes to improve the model form that financial institutions provide to consumers weighing overdraft coverage. Aimed at making the costs and risks of overdraft protection easier to understand, the CFPB is testing four prototypes that each contains a simple, one-page design to help consumers understand the costs of opting in and evaluate the risks and benefits.

“Whether to opt in to overdraft is an important decision for consumers,” said CFPB Director Richard Cordray in prepared remarks at a press call. “They need their bank or credit union to describe the service fully and accurately while giving them a reasonable chance to consent. They need to know before they owe. We are working to develop disclosures that can help make this process easier for consumers and industry alike. If debit card and ATM overdraft is indeed a service that consumers want and value, then they will make an informed choice and opt to have it.”

Prototype disclosures. According to the press release, the decision of whether to opt into debit card and ATM overdraft services is especially important for consumers, considering the possibility of racking up fees and overall financial stability. Therefore, federal regulations already require financial institutions to give consumers information, provided in a model form. Developed following interviews with consumers, the new prototypes are designed to give consumers more clarity about a key financial decision.

If adopted, the CFPB believes that the prototypes could also make the disclosure forms more accessible for consumers by providing the forms on their website. Institutions would then be able to plug their specific program information into the online form and then download it for free, making it seamless for banks and credit unions to use a new form within their existing compliance systems.

Frequent overdrafters. A new CFPB study has shown that consumers who frequently attempt to overdraw their checking accounts often pay almost $450 more in in fees than those consumers who do not opt into debit card and ATM overdraft coverage. In addition, these consumers often have lower daily balances, lower credit scores, and use their debit card more frequently, making them more financially vulnerable.

According to the CFPB, it is important for consumers to understand overdraft because those who opt into overdraft typically pay substantially more in fees. The study spotlights frequent overdrafters—consumers who attempted to overdraw their accounts more than 10 times in a 12-month period. The study found that 9 percent of accounts are frequent overdrafters and they incurred 79 percent of overdraft fees.

“Our study shows that financially vulnerable consumers who opt in to overdraft risk incurring a rash of fees when using their debit card or an ATM,” said Cordray. “Our new Know Before You Owe overdraft disclosure prototypes are designed to help consumers better understand the consequences of the opt-in decision.”

Blog post. In a related blog post, the CFPB is seeking comments on the new prototypes. Specifically, the Bureau is asking consumers to answer the following questions:

• Do these form designs do a better job of giving you the information you need before making your decision about overdraft service? 
• Do you understand the fees for each option and what transactions might cause an overdraft fee? 
• How do you think the updated forms compare to the current form? Do you think they are easier to use and understand?
• Which of the layouts do you prefer? 

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

CFPB compliance bulletin targets phone pay fees

By Katalina M. Bianco, J.D.

 

The Consumer Financial Protection Bureau has identified conduct that the Bureau believes may violate the Consumer Financial Protection Act's prohibition against unfair, deceptive, or abusive acts or practices, commonly known as UDAAP. Compliance Bulletin 2017-01 provides guidance for companies on practices the Bureau considers UDAAP violations. Guidance also is provided for debt collectors about compliance with the Fair Debt Collection Practices Act when assessing phone pay fees. 

 

"The Bureau is warning companies about tricking consumers into more expensive fees when they pay bills by phone," said CFPB Director Richard Cordray. "We are concerned that companies are misleading consumers about pay-by-phone fees or keeping them in the dark about much cheaper or no-cost payment options."

 

In the course of its supervision and enforcement activities, the CFPB identified conduct that may risk violating federal consumer financial laws. The Bureau listed phone pay fee practices that will draw its close attention:

 

• failing to disclose the prices of all available phone pay fees when different phone pay options carry materially different fees;
• misrepresenting the available payments options or that a fee is required to pay by phone;
• failing to disclose that a phone pay fee would be added to a consumer’s payment, which could create the misimpression that there was no service fee; and
• lack of employee monitoring or service provider oversight that may lead to misrepresentations or failure to disclose available options and fees.

 

Bureau concerns. The CFPB is concerned about companies misrepresenting the purpose and amount of pay-by-phone fees, which can result in consumers incurring charges for services they don’t need. In addition, some companies do not disclose their fees in writing upfront to consumers. If phone representatives fail to disclose charges, consumers may wind up paying expensive fees because they are not informed that significantly cheaper options are available.

 

Debt collection. The CFPB has identified instances of FDCPA violations by mortgage servicers when they charged fees for taking mortgage payments over the phone to borrowers whose mortgage instruments did not expressly authorize collecting such fees and who reside in states where applicable law does not expressly permit collecting such fees.

 

CFPB expectations. While the CFPB does not mandate any particular method for informing consumers about the available phone pay options and fees, entities should consider potential risks of committing UDAAPs or violating the FDCPA. Among other things, the CFPB suggests a review of:

 

• internal and service providers’ policies and procedures on phone pay fees, including call scripts and employee training materials, revising policies and procedures to address any concerns identified during the review, as appropriate;
• whether information on phone pay fees is shared in account disclosures, loan agreements, periodic statements, payment coupon books, on the company’s website, over the phone, or through other mechanisms; and
• service provider practices.

The CFPB also suggests giving consideration to employee and service provider production incentive programs to see if there are incentives to steer borrowers to certain payment types or to avoid disclosures. In the context of phone pay fees, the CFPB warns, production incentives may enhance the potential risk of entities engaging in UDAAPs.

 

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

Fed guides banks seeking to conform ‘seeding’ investments to Volcker Rule

By Thomas G. Wolfe, J.D.

 

The Federal Reserve Board has adopted guidelines for banks seeking an extension to conform certain “seeding” investments in hedge funds or private equity funds (covered funds) to the requirements of the Volcker Rule. The Fed’s guidelines provide that firms seeking a seeding period extension should submit information “including the reasons for the extension and an explanation of the entity’s plan to conform the investment ... to the requirements of the Dodd-Frank Act.”

 

As observed by the Fed, a “seeding” refers to the period during which a banking entity provides a new fund with initial equity to permit the fund to attract investors. While there are some exemptions and limitations, the Volcker Rule generally prohibits insured depository institutions and their affiliates from engaging in proprietary trading and from owning, sponsoring, or having certain relationships with a covered fund. Accordingly, the Dodd-Frank Act permits the Fed to review an application from a bank to provide additional time—up to two additional years—for the bank to conform its seeding investments in covered funds to the Volcker Rule if the Fed finds that the extension “would be consistent with safety and soundness and in the public interest.”

 

Fed guidelines. In its letter to all banking entities holding $10 billion or less in consolidated assets and subject to section 13 of the Bank Holding Company Act—the Volcker Rule—the Fed sets forth the guidelines for submitting requests for an extension of the seeding period.

 

Under the guidelines, titled “Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund (SR 17-5),” a bank must explain its plan for reducing the permitted investment in each covered fund through redemption, sale, dilution, or other methods, to the per-fund limitation by the end of the extended seeding period. Further, the bank is to submit, in writing, its request for an extension of the seeding period to the “Applications Unit of the Federal Reserve Bank in the district where the top-tier banking entity is headquartered.” Notably, the bank’s request should be submitted “at least 90 days prior to the expiration of the applicable time period.”

 

In reviewing whether a bank’s application meets all of the pertinent requirements under the laws and regulations covering the Volcker Rule, the Fed will consider the “facts and circumstances related to the permitted investment in a covered fund,” including, among other things:

• whether the investment would result, directly or indirectly, in a material exposure by the bank to high-risk assets or high-risk trading strategies;
• the contractual terms governing the bank’s interest in the covered fund;
• the date on which the covered fund is expected to have attracted sufficient investments from investors unaffiliated with the bank to enable the bank to comply with the limitations in the rule;
• the total exposure of the covered bank to the investment and the risks that disposing of, or maintaining, the investment in the covered fund may pose to the bank and to the financial stability of the nation;
• the cost to the bank of divesting or disposing of the investment within the applicable period;
• whether the investment, divestiture, or conformance of the investment would involve, or result in, a material conflict of interest between the bank and unaffiliated parties—including clients, customers, or counterparties to whom the bank owes a duty;
• the bank’s prior efforts to reduce through redemption, sale, dilution, or other methods its ownership interests in the covered fund—including the marketing of interests in the fund;
• the conditions of the market; and
• any other factor the Fed deems appropriate. 

For more information about the Volcker Rule's impact on the financial services industry, subscribe to the Banking and Finance Law Daily.