CARD Act: ‘gotcha’ fees/costs down, availability up, says CFPB

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published a report on the Credit Card Accountability Responsibility and Disclosure Act (CARD Act)’s effect on the credit card market since it was signed into law in 2009. The bureau reports that the CARD Act helped to reduce the cost of “gotcha” credit card fees by more than $16 billion. Further, total costs to consumers have fallen with the elimination of certain back-end pricing practices such as over-limit fees, according to the bureau.

 

“When these reforms were being debated, many in the credit card industry reacted as if the sky were falling,” CFPB Director Richard Cordray said in prepared remarks before the Consumer Federation of America on Dec. 3, 2015. “They said that restricting back-end pricing would make it harder for consumers to get credit because companies would be forced to issue fewer credit cards at greater cost.” Despite these “fire and brimstone warnings,” Cordray said, the CARD Act has made the credit card market more predictable for consumers without reducing access to credit or hurting the profitability of the credit card companies.

 

Report. The CARD Act requires the CFPB to regularly review the credit card market and the impact of the law’s rules. The current report is the second one issued by the bureau. In general, the CFPB found that consumers are paying less for their credit cards, costs are easier to predict, and credit availability continues to expand. Specific findings include the following:

 

• Consumers have avoided more than $9 billion in over-limit fees and saved more than $7 billion in late fees.
• The total cost of credit is approximately 2 percent lower.
• Available credit has increased by 10 percent since 2012.
• New account volume is growing. More than 100 million credit card accounts were opened in 2014.

 

Risky business. Despite the positive effects of the CARD Act, the CFPB remains concerned over certain “risky practices” that still remain in the marketplace. The bureau especially is concerned about:

• deferred-interest promotions that hit consumers with back-end pricing if their balances are not paid in full by the end of the interest-free period;
• high charges by subprime credit card companies;
• reward programs that have “obscure and incomplete” terms;
• practices by third-party debt collectors hired by banks; and
• long, complex credit card agreements.

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

Hoenig: Small bank relief needs objective criteria; no blanket Volcker Rule exemption

By John M. Pachkowski, J.D.

As Congress begins final consideration of a number of appropriations bills, Thomas M. Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation has written to Sen. Richard Shelby (R-Ala), Chairman of the Senate Banking Committee, and the committee’s Ranking Member Sen. Sherrod Brown (D-Ohio) providing his views on regulatory relief for smaller banks.

A bill introduced by Shelby and approved by the Banking Committee—the Financial Regulatory Improvement Act of 2015—would ease restrictions on mortgage credit, reduce the examination and supervision burdens on smaller institutions, tighten up the Financial Stability Oversight Council’s process for designating systemically important financial institutions, and make technical corrections to the Dodd-Frank Act. It also would initiate an inquiry into reorganizing the Federal Reserve System. A much narrower proposal offered by the Banking Committee Democrats would have focused regulatory relief on small banks, thrifts, and credit unions; and would not provide for any changes to the Financial Stability Oversight Council, systemically important financial institutions, or changes to the Federal Reserve System. 

Although the prospects of Shelby’s bill moving forward in the Senate in the conventional manner seemed challenging, the Banking Committee Chairman was able to add the bill as a rider to an appropriations bill that funds the Treasury Department, the Judiciary, Small Business Administration, Securities and Exchange Commission, Commodity Futures Trading Commission, and several other agencies for Fiscal Year 2016. The FY2016 Financial Services and General Government Appropriations bill was passed by the Senate Appropriations Committee along party lines in a 16-14 vote.

In his letter, Hoenig addressed a blanket exemption from the Volcker Rule for all small banks and provided recommendations on how to provide regulatory relief for traditional banks.

Strongly cautions. At the outset, Hoenig noted, “no question that some classes of banks face significant compliance burdens that are disproportionate to their risk and business model. However, in the effort to cull incommensurate regulations, I strongly caution against easing or repealing rules that are appropriately calibrated to the risk that specific bank practices pose to the financial system and broader economy.”

Volcker Rule. Addressing the compliance burdens experienced by community banks regarding the Volcker Rule, Hoenig pointed out that the “the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule.” He added these banks do not have proprietary trading operations or trading positions of any kind; and they generally do not invest in any private-label securitizations, let alone more complicated hedge funds or private equity funds.

Hoenig further observed that existing bank regulatory agency guidance provides that community banks with less than $10 billion in total assets are already exempt from all of the Volcker Rule compliance requirements if they do not engage in any of the covered activities other than trading in certain government, agency, state, and municipal obligations.

For those banks under $10 billion that do engage in traditional hedging activities, Hoenig noted that “Volcker Rule compliance requirements can be met by simply having clear policies and procedures that place appropriate controls on the activities—and which are required regardless of the Volcker Rule.”

As for the 400 or so, out of approximately 6,400 community banks that engage in less-traditional activities that maybe restricted by the Volcker Rule, Hoenig conceded that there “would be some initial compliance requirements to determine their status,” but added that of these banks “most will find that their trading-like activities are already exempt from the Volcker Rule.

Hoenig concluded, “On balance, therefore, exempting smaller banks from the Volcker Rule should not be considered as regulatory relief or a technical adjustment. Exempting smaller banks from the rule would allow them to engage in risky trading and investment activities financed by taxpayer subsidized funds. And an exemption would not serve any practical or public value, nor would it provide meaningful regulatory relief for the vast majority of traditional community banks because they do not engage in the activities that the Volcker Rule restricts.

Regulatory relief. On the issue of providing regulatory relief for community banks, Hoenig suggested that the focus of that relief should “be directed at bank activity and complexity, and less on bank size.”

Specifically, Hoenig called for statutory relief based on objective set of specific criteria that stresses the importance of strong equity capital and the core commercial banking model. 

Under his plan, a bank would be eligible for regulatory relief if:

• it holds no trading assets or liabilities;
• it holds no derivative positions other than interest rate and foreign exchange derivatives;
• the total notional value of all its derivatives exposures—including cleared and noncleared derivatives—is less than $3 billion; and
• it maintains a ratio of Generally Accepted Accounting Principles equity-to-assets of at least 10 percent.

Hoenig noted these criteria reflect the longstanding business models of traditional commercial banks; and since these are objective, they can be enforced with less of an imposition on the banks through off-site call report monitoring and the regular exam process.

Once well-capitalized banks meet the criteria, regulatory relief can be provided to them, which includes:

• exemption from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations;
• exemption from several entire schedules on the Call Report, including schedules related to trading assets and liabilities, regulatory capital requirement calculations, and derivatives;
• allowing for greater examiner discretion and eliminating requirements to refer “all possible or apparent fair lending violations to Justice” if judged to be minimal or inadvertent;
• establishing further criteria that would exempt eligible banks from appraisal requirements;
• exempting eligible banks, if applicable, from stress testing requirements;
• allowing for an 18-month examination cycle as opposed to the current required 12-month cycle for traditional banks; and
• allowing mortgages that remain in the banks’ portfolio to be considered qualified mortgage loan for purposes of the Dodd-Frank Act.

For more information about regulatory relief or the Volcker Rule, subscribe to the Banking and Finance Law Daily.

Trade, consumer groups spar over spending bill rider seeking new CFPB arbitration study

By Thomas G. Wolfe, J.D.


Recently, banking and business trade groups from the financial services industry and consumer advocacy groups have presented very different opinions about the merits of a proposed spending bill rider seeking a new arbitration study by the Consumer Financial Protection Bureau.

In terms of a backdrop, the Dodd-Frank Act required the CFPB to conduct a study of arbitration clauses in consumer financial contracts before the federal bureau drafts any rules on the subject. Having completed its arbitration study, the CFPB has now begun the process of drafting a rule pertaining to arbitration clauses and has communicated that it is inclined to restrict class action waivers in arbitration clauses.

Consequently, in their Dec. 1, 2015, letter to members of the House and Senate committees on appropriations, a number of banking and business associations and other trade groups have expressed their support for a spending bill rider that would require the CFPB to “conduct a fair, comprehensive study before adopting a rule that would restrict arbitration and open the door widely to abusive class actions that benefit lawyers and harm consumers.” Accordingly, the trade groups’ letter urges support for the Womack-Graves amendment to the Fiscal Year 2016 Financial Services and General Government Appropriations bill (H.R. 2995).

The letter to the congressional committees was sent jointly by the American Bankers Association, American Financial Services Association, Consumer Bankers Association, Consumer Data Industry Association, Consumer Mortgage Coalition, Credit Union National Association, CTIA—The Wireless Association, Electronic Transactions Association, Financial Services Roundtable, National Association of Independent Housing Professionals, Real Estate Services Providers Council, Inc., Small Business & Entrepreneurship Council, U.S. Chamber Institute for Legal Reform, and the U.S. Chamber of Commerce.

In contrast, the Americans for Financial Reform, National Association of Consumer Advocates, National Consumer Law Center, and Public Citizen are jointly urging Congress to “resist the temptation to give in to powerful corporate lobbyists that seek to use the budget process” to obstruct or discard the rulemaking efforts of the CFPB in connection with arbitration reforms. Accordingly, in their Dec. 2, 2015, release, the consumer advocacy groups caution legislators that the industry trade groups have been encouraging members of Congress to “add a harmful rider to the contentious spending bills that would disregard the CFPB’s multi-year, data-driven study and analysis on the use of forced arbitration clauses in the fine print of financial contracts.”

What are the core concerns of the respective groups? On one hand, the industry trade groups state in their joint letter that more than 80 members of Congress previously sent a letter to the CFPB contending that the CFPB’s arbitration study process was “opaque, incomplete, and unfair.” According to the trade groups, the CFPB’s arbitration study “failed to address the most important question—how consumers would be able to resolve disputes cheaply and speedily if arbitration is limited and consumers are left to the mercy of the plaintiffs’ class action trial lawyers and the increasingly overcrowded and complex judicial system.”

Consequently, the trade groups assert that the Womack-Graves amendment “would require the CFPB to go back, before enacting any rule, and undertake the kind of study it should have undertaken in the first place.” The letter notes that, upon completion of the proposed new CFPB study, the Womack-Graves amendment would authorize the CFPB to regulate arbitration clauses “as long as it demonstrates, based on empirical evidence, that the benefits to consumers would not be outweighed by the costs to consumers.”

On the other hand, the consumer advocacy groups offer a starkly different perspective. Outlining their concerns in the Dec. 2 release, the consumer groups contend that an “industry-favored rider” would obstruct the CFPB’s efforts, “forcing the CFPB to re-do the [arbitration] study, wasting valuable taxpayer funds, and denying much-needed consumer protections from being implemented.” Further, the groups maintain that an industry-favored rider promoting forced arbitration clauses would harm consumers, shield financial institutions from accountability for their misconduct, and encourage Wall Street to engage in exploitive, unfair practices.

For more information about the CFPB's arbitration study, subscribe to the Banking and Finance Law Daily.

Fla. Dist. App.: No free ride after wrongful repossession

By Lisa M. Goolik, J.D.

A Florida appellate court has held that a debtor’s action against a repossession company and its employee was not extinguished under the initial and subsequent tortfeasor doctrine by the release of the debtor’s action against the creditor that hired the repossession company. The court concluded that even if the doctrine applied, there was no earlier injury by the creditor that could have been aggravated by the employee’s subsequent repossession attempt. As a result, the repossession company and its employee may be liable for violating the repossession requirements of Article 9 of the Florida Uniform Commercial Code (Daniel v. Morris, Dec. 4, 2015, Berger, J.).

The debtor owned and operated a limousine company with her business partner. BankFirst held a purchase-money security interest in a bus owned by the company from a loan it made to the debtor’s partner. After her partner’s death, the limousine company defaulted. Thereafter, BankFirst obtained a judgment against her partner’s estate and hired Associated Investigators to repossess the bus. 

After an initial attempt at repossession was unsuccessful, an employee of Associated Investigators made a second attempt on March 6, 2012. When he entered the company’s premises, he allegedly ignored the debtor’s request to leave, forced his way onto the bus, and pushed the debtor from the bus, violating Section 9-609 of the Florida UCC.

The section provides that a secured party may take possession of its collateral with or without judicial process if it can be done without a breach of the peace. Creditors electing peaceful repossession are liable for any negligence during the repossession. 

The debtor filed an action against BankFirst, Associated Investigators, and the employee, alleging negligence and a trespass to land and chattels stemming from the March 6, 2012, repossession attempt.

After the debtor agreed to settle and release her claim against the bank, Associated Investigators and its employee filed a motion for summary judgment, arguing that when the debtor released her claims against BankFirst, she failed to preserve her claims against them. They asserted that Associated Investigators and its employee were subsequent tortfeasors of BankFirst because the repossession aggravated an earlier trespass during the initial repossession attempt. Thus, they contended, under the initial and subsequent tortfeasor doctrine, the release of BankFirst discharged them from liability.

Although the court noted that the initial and subsequent tortfeasor doctrine can apply outside the context of medical malpractice, the court found that the doctrine did not apply to the instant case. Notably, the court determined that BankFirst was not an initial tortfeasor because it had no fault and would have been permitted to seek indemnification against Associated Investigators and its employee. As a result, BankFirst and, collectively, Associated Investigators and its employee, were not initial and subsequent tortfeasors.

Even if the doctrine applied, the court concluded that their theory failed because the facts provided in the complaint did not allege a breach of the peace before March 6, 2012, as the repossession attempt stopped when the debtor refused entrance. Thus, there was no injury to aggravate on the second repossession attempt.

As a result, the debtor’s release of BankFirst did not operate to release the debtor’s action against Associated Investigators and its employee.

The case is No. 5D14-1658.

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CFPB peek into the future includes student loan servicing, credit reporting standards

By Andrew A. Turner, J.D.

The Consumer Financial Protection Bureau’s latest update to its rulemaking agenda adds credit reporting and student loan servicing as long-term initiatives (beyond Nov. 2016). Upcoming in 2016, rulemaking proposals are expected on arbitration, payday lending, overdraft programs on checking accounts, and debt collection, while final rules are anticipated on prepaid cards and mortgage servicing.

Long-term actions. Intending to provide a framework to improve student loan servicing, the CFPB will be consider proposing rules for specific acts or practices and consumer disclosures. For credit reporting, the CFPB will consider rulemaking on the accuracy of credit reports, including the processes for resolving consumer disputes.

Arbitration. The CFPB is beginning a process to propose rules to prevent companies from using arbitration agreements for credit cards, deposit accounts, and payday loans to bar class actions lawsuits. The CFPB is also considering requirements to monitor the fairness of arbitration proceedings.

Payday lending. Proposed rulemaking is expected in first quarter 2016 to address concerns that payday and auto title lending products are being offered without assessment of the consumer’s ability to repay. Payment collection practices are another area of concern.

Prepaid accounts. A final rule instituting consumer protections for prepaid accounts similar to those that exist for debit and payroll cards is expected in spring 2016.

Overdraft. As part of the process of preparing a proposed rulemaking for overdraft programs on checking accounts, the CFPB is conducting additional research and has begun consumer testing initiatives related to the opt-in process.

Debt collection. While conducting research for a rulemaking proposal on debt collection activities, the CFPB is running consumer testing initiatives to determine what information would be useful for consumers to have about debt collection and their debts and how that information should be provided.

Larger participants and non-depository lender registration. The CFPB expects to begin development of rules to define larger participants in markets for consumer installment loans and vehicle title loans. In addition, consideration will be given to requiring registration of lenders in these markets or other non-depository lenders.

Women owned, minority-owned, and small businesses data collection. Initial steps are planned towards development of rules for requiring financial institutions to report information about lending to women-owned, minority-owned, and small businesses.

Mortgage servicing. A final rule is expected in mid-2016 on mortgage servicing rules for enhanced loss mitigation requirements.

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

FDIC takes multimedia approach to cybersecurity awareness

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

As part of its Community Banking Initiative, the Federal Deposit Insurance Corporation is adding to its cybersecurity awareness resources for financial institutions. The additions include a Cybersecurity Awareness video and three new video vignettes for the Cyber Challenge, which consists of exercises that are intended to encourage discussions of operational risk issues and the potential impact of information technology disruptions on common banking functions.

Operational risks. In a letter to its supervised institutions (FIL-55-2015), the FDIC noted that community financial institutions may be exposed to operational risks through internal or external events ranging from cyber attacks to natural disasters. Operational risks, it said, can threaten an institution's ability to conduct basic business operations, impact its customer service, and tarnish its reputation.

Resource Center. To help community financial institutions assess and prepare for these risks, the FDIC is incorporating new tools in its Directors' Resource Center. This part of the FDIC's website is dedicated to providing useful information and resources for directors and officers of FDIC-insured institutions. The content of this page focuses on guidance and other information that address current issues faced by the banking industry.

Video. The two-part Cybersecurity Awareness Directors’ College video series provides an overview of the threat environment and steps community financial institutions can take to be better prepared should a cyber attack occur. It is designed to assist bank directors with understanding cybersecurity risks and related risk management programs, and to “elevate cybersecurity discussions from the server room to the board room.” The two parts are:

• Evolution of Data Security, Cybersecurity, and Threat Environment; and
• Information Security Programs Refocused, Cybersecurity Assessment Tool, and Additional Resources.

 

Cyber Challenge. Cyber Challenge facilitates discussion between financial institution management and staff about operational risk issues. The exercises are designed to provide valuable information about an institution’s current state of preparedness and identify opportunities to strengthen resilience to operational risk.

Using seven video scenarios, the Cyber Challenge helps start an important dialogue among bank management and staff about ways they address operational risk today and techniques they can use to mitigate this risk in the future. The Cyber Challenge is not a regulatory requirement; it is a technical assistance tool designed to help assess operational readiness.

The first four Cyber Challenge videos and supporting discussion materials were released in early 2014. Now numbering seven, each video vignette depicts a unique scenario. The challenge questions for each vignette are designed to help bank management and staff think about how they would respond to the scenarios. Also included are lists of reference materials participants can turn to for more information. The seven scenarios are:

1. Item Processing Failure: A new item processing service provider cannot process the volume of transactions generated by the bank.
2. Customer Account Takeover: Unauthorized withdrawals are detected in a corporate customer’s account.
3. Phishing and Malware Problem: Phishing email is opened by a bank employee, and the bank’s network is infected with malware.
4. Technology Service Provider Problem: Problems occur after the financial institution’s service provider performs an update.
5. Ransomware: A cyber-attack has taken place. Word processing files are being held for ransom.
6. ATM Malware: An ATM virus reveals deficiencies in a bank’s service provider contract.
7. DDoS as a Smokescreen: While the IT manager investigates a possible DDoS attack, a second attack exfiltrates data from the institution.

For more information about cybersecurity awareness for financial insstitutions, subscribe to the Banking and Finance Law Daily.

Swearing to affidavit without personal knowledge not debt collection act violation

By Richard A. Roth, J.D.

A law firm that supported a rent collection complaint with an affidavit signed by an attorney but based only on information supplied by a client did not violate the Fair Debt Collection Practices Act. Swearing to the truth of the affidavit without personal knowledge of the facts was neither a misrepresentation nor an unfair collection practice, according to the U.S. Court of Appeals for the Eighth Circuit (Janson v. Kathryn B. Davis, LLC).

The underlying suit claimed about $5,000 in unpaid rent and other charges. One of the attorneys at the landlord’s law firm verified the complaint by an affidavit, which Missouri state law requires. The attorney was required to testify at the trial, and he conceded that he had no personal knowledge about the facts included in the affidavit and that filing affidavits based on client information was the firm’s routine practice.

At the conclusion of the trial, the court awarded the landlord a total of $7,000 in damages and attorney fees.

FDCPA suit. Eleven months later, the tenant filed an attempted class action against the law firm in federal court, claiming FDCPA violations based on the affidavit. The district court judge dismissed the case after finding that the affidavit’s claim that the tenant owed unpaid rent was not false, misleading, or unfair.

Jurisdiction. On appeal, the law firm first attacked the appellate court’s jurisdiction, claiming that the Rooker-Feldman doctrine prevented federal courts from considering the consumer’s suit. The court rejected the challenge.

The Rooker-Feldman doctrine essentially prevents a person who loses a suit in state court from using a federal court as a court of review. It did not apply here, the court said. The tenant claimed that the law firm violated the FDCPA by having an attorney swear to an affidavit without knowing whether the contents were true; however, he did not claim that the contents were, in fact, false. As a result, the tenant's FDCPA suit did not challenge the state court judgment that he owed rent, the appellate court reasoned.

No violation. The FDCPA bans debt collectors from making “a false, deceptive or misleading representation” in connection with collecting a debt and from using an “unfair or unconscionable means to collect or attempt to collect any debt.” The tenant claimed that both provisions had been violated by the affidavit. The court disagreed.

First, the tenant did not claim that the attorney swore to statements known to be false or that he did not owe rent, the court pointed out. Even if the rent claims were false, the tenant had not plausibly claimed that anybody had been misled, so there could have been no misrepresentation.

Second, the judgment for unpaid rent was rendered after a trial at which evidence was submitted and considered. In such a case, swearing to an affidavit without personal knowledge would not be unfair or unconscionable, the appellate court decided.
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