CFPB’s Civil Penalty Fund victim identification process generally effective, can be enhanced

By Stephanie K. Mann, J.D.

An audit conducted by the Office of Inspector General for the Consumer Financial Protection Bureau found that the bureau’s Civil Penalty Fund victim identification process is generally effective and efficient, but there is room for improvement. The audit was conducted in order to assess the efficiency and effectiveness of the CFPB’s process for identifying victims eligible to receive compensation from the Consumer Financial CPF.

In the context of the audit, efficiency refers to the resources used in the victim identification process and effectiveness refers to correctly identifying eligible victims. The scope of the audit included three cases in which identified eligible victims received fund distributions as of Dec. 31, 2014. 

Remedying the harm. Under the Dodd-Frank Act, the bureau can bring enforcement actions against those who violate the law. The CFPB or a court may then require a defendant who has violated the law to remedy the harm caused to consumers paying its victims for the harm it caused and, if applicable, by also paying a civil penalty. The bureau is then required to establish a CPF and to deposit civil penalties that it collects into this fund. These civil penalty funds can be used for payments to any eligible victims who do not receive full compensation for their harm from defendants who harmed them.

The victim identification process includes collecting victim-related data, sorting and validating victim-related data, and developing the final list of eligible victims. In some cases, the Office of Technology and Innovation (T&I) is involved in managing victim-related data.

Enhanced responsibilities. In examining the CPF, the OIG found that the Office of the Chief Financial Officer (OCFO) has established internal controls to facilitate the victim identification process and has implemented the procedures and guidelines set forth in the May 2013 Civil Penalty Fund Rule. While this has led to the victim identification process being generally effective and efficient, the OIG did note an opportunity to enhance the process.

The OIG discovered that the OCFO has not documented the roles and responsibilities of the T&I in the victim identification process. The process is data dependent and in some instances, requires the involvement of T&I to produce preliminary lists of eligible victims. By clearly documenting the roles and responsibilities of all parties involved in the victim identification process, said the OIG, the preliminary lists of victims can be properly maintained and all parties involved in the process can be accountable.

The OIG has therefore suggested that the Chief Financial Officer, in coordination with T&I, update the OCFO’s procedures to document the roles and responsibilities of T&I in the victim identification process. The CFO has concurred with this suggestion.

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FDIC interim rule would allow ‘well-managed’ small banks to use 18-month cycle

By Colleen M. Svelnis, J.D.

The Federal Deposit Insurance Corporation took two actions at its Jan. 21, 2016, meeting of its board of directors, adopting an interim rule that would allow “well-managed” community banks and thrifts with less than $1 billion in assets to qualify for the 18-month exam cycle, and issuing a revised Notice of Proposed Rulemaking on small bank deposit insurance assessments.

Meaningful regulatory relief. Along with the FDIC, the Federal Reserve Board and Office of the Comptroller of the Currency now plan to allow well-managed community banks and thrifts with less than $1 billion in assets to qualify for the 18-month exam cycle. The interim final rule follows authority granted by Congress in December 2015. The 18-month exam cycle has previously been limited to institutions with less than $500 million in assets. In his remarks before the board, Thomas J. Curry, the Comptroller of the Currency, stated that he hopes the change will “offer meaningful regulatory relief to a large group of community banks and thrifts with very little safety and soundness risk.”

Curry also announced that he had approved an identical interim final rule for institutions supervised by the Office of the Comptroller of the Currency. Curry expects that the 18-month cycle will reduce the burden on well-managed community banks and thrifts as well as allow the banking agencies to focus supervisory resources on institutions that “present capital, managerial, or other issues of significant supervisory concern.”

Revised assessments for small banks. The FDIC is seeking comments on its proposal that would amend the way small banks are assessed for deposit insurance. According to the FDIC release, the proposal would revise the methodology that the FDIC uses to determine risk-based assessments for small banks (those with less than $10 billion in assets) to help ensure that banks that take on greater risks pay more for deposit insurance than their less risky counterparts. The agency issued an initial proposal on this issue in June 2015 (see Banking and Finance Law Daily, June 16, 2015). The updated proposal reflects comments received last year on topics including the calculation of asset growth and the treatment of reciprocal deposits and Federal Home Loan Bank advances. Comments must be received by 30 days following publication of the notice in the Federal Register.

In a statement, Chairman Martin J. Gruenberg said that the agency received almost 500 comments on the proposed rule. According to Gruenberg, the revised proposal “would allow assessments to better differentiate riskier banks from safer banks just as well as last year's proposal, and would allocate the costs of maintaining a strong Deposit Insurance Fund accordingly.” Gruenberg stated that the revised proposal is revenue neutral.

Along with the revised proposal, the FDIC is also publishing an online assessment calculator that will allow institutions to estimate their assessment rates under the revised proposal.

Changes from 2015 proposal. According to the FDIC’s Financial Institution Letter, FIL-7-2016, the new proposal would:

• revise the previously proposed one-year asset growth measure;
• use a brokered deposit ratio; consistent with a number of comments, this ratio would treat reciprocal deposits and Federal Home Loan Bank advances the same way the current system does––rather than the previously proposed core deposit ratio––as a measure in the financial ratios method for calculating assessment rates for all established small banks;
• remove the existing brokered deposit adjustment for established small banks, which currently applies to banks outside Risk Category I; and
• revise the weights assigned to the proposed measures in the financial ratios method based upon a re-estimation of the underlying statistical model.

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

"Subprime, buy-here, pay-here dealer" settles CFPB charges

By Katalina M. Bianco, J.D.

A Greeley, Colo., used car dealer has agreed to settle Consumer Financial Protection Bureau charges relating to its financing activities by paying $700,000 in consumer redress to its customers. Y King S Corp., which does business as Herbies Auto Sales, also agreed to a $100,000 civil penalty, but the penalty will be suspended if the agreed-on redress payments are made.

 

Herbies Auto Sales is described by the CFPB as a “subprime, buy-here, pay-here dealer,” meaning that the company both sells and finances cars without selling the loans to a third party. The bureau charges that the dealer misrepresented the annual percentage rate that borrowers would pay by not disclosing some finance charges. Herbies has agreed to the entry of a consent order in an administrative proceeding but has not admitted any wrongdoing.

 

Violations charged. According to the consent order, Herbies advertised a 9.9-percent APR. However, customers who financed their car purchases actually paid a higher APR because the company did not disclose:

 

• the cost of a required repair warranty as a finance charge;
• the cost of a required GPS payment reminder device as a finance charge; and
• the fact that customers who paid cash could negotiate lower purchase prices.

These practices not only violated Truth in Lending Act disclosure requirements, they also were abusive practices under the Dodd-Frank Act, the CFPB says.

 

In addition to paying redress, Herbies will have to modify its sales and financing practices. The purchase price of all cars must be clearly posted when financing is offered, and future misrepresentations are barred. Herbies also must give consumers complete information on the car price, APR, finance charges, and loan terms when a loan is offered, and the company must have consumers acknowledge in writing that they received the information no later than when credit is offered.

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Will Metlife’s retail split shed SIFI label?

By John M. Pachkowski, J.D.

Recently, MetLife, Inc. announced that it was considering separating a substantial portion of its U.S. retail segment and currently evaluating structural alternatives for such a separation, including a public offering of shares in an independent, publicly traded company, a spin-off, or a sale. In a press release, the company also noted that it was undertaking preparations to complete the required financial statements and disclosures that would be required for a public offering or spin-off, and that the completion of a transaction taking the U.S. retail segment public would depend on, among other things, the Securities and Exchange Commission filing and review process as well as market conditions.

Once the separation transaction is completed, the new business is to be led by MetLife Executive Vice President Eric Steigerwalt, and the following entities will be included: MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company, and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA.

Commenting on the separation plans, Steven A. Kandarian, MetLife chairman, president and CEO, said “This separation would also bring significant benefits to MetLife as we continue to execute our strategy to focus on businesses that have lower capital requirements and greater cash generation potential. In the U.S., it would allow us to focus even more intently on our group business, where we have long been the market leader. Globally, we will continue to do business in a mix of mature and emerging markets to drive growth and generate attractive returns.”

Metlife’s separation plans come roughly 13 months after the company was formally designated a nonbank systemically important financial institution (SIFI) by the Financial Stability Oversight Council in December 2014, and about a year since the insurance company filed a federal lawsuit, in January 2015, seeking to have the SIFI label removed.

The announcement of the separation plans is similar to efforts, announced by General Electric Company in April 2015, to sell its subsidiary General Electric Capital Corporation as a means to shed the SIFI designation that FSOC placed on GE Capital in July 2013.

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Auto finance company enjoys Maryland’s ‘safe harbor’ by correcting interest rate

By Thomas G. Wolfe, J.D.

Recently, the U.S. Court of Appeals for the Fourth Circuit reviewed a borrower’s claims against a finance company for alleged violations of the Maryland Credit Grantor Closed End Credit Provisions (CLEC) stemming from the borrower’s purchase of a car. In rejecting the consumer’s CLEC claims, the Fourth Circuit decided that the finance company was entitled to the protection of CLEC’s applicable “safe harbor” provision.

According to the court’s Jan. 11, 2016, opinion in Askew v. HRFC, LLC, the retail installment sales contract for the car purchase contained a 26.99 percent interest-rate provision. Since the maximum allowable rate of interest under CLEC was 24 percent, the stated rate in the contract exceeded the maximum rate by nearly 3 percent. However, the finance company, HRFC, LLC—doing business as Hampton Roads Finance Company—later recognized the discrepancy. About a month after discovering the discrepancy, HRFC sent a letter to the borrower acknowledging that the interest rate applied by the company “was not correct.” Further, HRFC made the necessary credits and adjustments outlined in its letter, and indicated that it would compute interest at a new rate of 23.99 percent.

Under CLEC, “credit grantors” are afforded an opportunity to avoid liability through self-correction. Accordingly, under the safe-harbor provision (§12-1020) a “credit grantor is not liable for any failure to comply with [CLEC] if, within 60 days after discovering an error and prior to institution of an action under [CLEC] or the receipt of written notice from the borrower, the credit grantor notifies the borrower of the error and makes whatever adjustments are necessary to correct the error.”

In support of his claims that HRFC violated CLEC and was not entitled to any protection afforded by the safe-harbor provision, the borrower contended that HRFC was strictly liable for failing to expressly disclose an interest rate below the 24 percent statutory maximum. Rejecting the borrower’s argument, the Fourth Circuit determined that CLEC only mandated that the interest rate be expressed as “a simple interest rate” but did not impose strict liability for an interest rate erroneously expressed in a written contract at a rate higher than 24 percent.

Next, the borrower argued that the “discovery rule”—derived from a statute-of-limitations context—should apply to the pertinent CLEC safe-harbor provision. Noting that the meaning of the term “discovering” in the statutory provision (§12-1020) was “a question of first impression,” the Fourth Circuit again rejected the borrower’s stance.

The court maintained that if the “discovery rule” were to be applied to the CLEC safe-harbor provision, “HRFC would have had little reason to inform [the borrower] of its error, lower his interest rate, and provide a refund. Instead, HRFC might well have chosen to do nothing, leaving it to [the borrower] to discover the error.” Accordingly, the Fourth Circuit asserted that “interpreting the term ‘discovering an error’ in section 12-1020 to mean actually uncovering a mistake constituting a violation of the statute better comports with CLEC’s text, public policy, and the statute’s purpose.”

The borrower further contended that HRFC’s letter to him about the interest-rate error was so vague that it failed to satisfy the safe-harbor provision of CLEC. While the court acknowledged that HRFC’s letter was a bit cryptic, the court concluded that the letter provided adequate notice.

Moreover, despite the borrower’s argument that HRFC should have refunded to him far more than $845 and should not have collected any interest on the car loan, the Fourth Circuit maintained that the borrower was not entitled “to a windfall upon the credit grantor’s cure of an error” and that the “section 12-1020 safe harbor is intended to encourage credit grantors to self-correct, which they would have little incentive to do if forced to refund all interest collected.”

Consequently, the Fourth Circuit upheld the federal trial court’s summary judgment for HRFC on the borrower’s CLEC claims and separate breach-of-contract claims. Because the court also decided that unresolved factual issues remained in the case on the borrower's claims against HRFC under the Maryland Consumer Debt Collection Act, the court remanded the matter for consideration of those claims.

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Sixth Circuit decodes claims to encryption technology

By Lisa M. Goolik, J.D.

In an unpublished opinion, the U.S. Court of Appeals for the Sixth Circuit has held that a debtor’s microchip encryption technology was subject to a security agreement that defined the collateral so as to include the debtor’s intellectual property. Although the debtor subsequently licensed the technology, the licensee’s “exclusive license” was subject to the security interest. As a result, the secured lender, Pro Marketing Sales, Inc., had a superior claim and was entitled to the technology after the debtor filed for Chapter 7 bankruptcy protection (Cyber Solutions International, LLC v. Pro Marketing Sales, Inc., Jan. 11, 2016, Gilman, R.).

At issue was microchip encryption technology developed by Pro Marketing and the licensee's mutual borrower, Priva Technologies, Inc. Pro Marketing based its claim on a 2009 security agreement with Priva, whereas the licensee, Cyber Solutions International, LLC, based its competing claim on its 2012 license agreement with Priva.

The security agreement granted Pro Marketing a first-position lien on all of Priva’s assets. The agreement described the collateral to include Priva’s “Intellectual Property,” which was defined as “all rights, priorities and privileges relating to intellectual property . . . , including without limitation the Copyrights, the Copyright Licenses . . . , and all Goodwill associated with or arising in connection with any of the foregoing.” The agreement also limited Priva’s rights with respect to the collateral, providing that Priva could not “sell, transfer, assign, convey or otherwise dispose of, or extend, amend, terminate or otherwise modify any term or provision of any license of [Priva’s] Intellectual Property …without the prior written consent of [Pro Marketing]…”

The license agreement granted Cyber Solutions an exclusive license to the technology and, in return for the second payment, certain rights in future technologies that Priva developed. The agreement established that all “updates, modifications, or improvements” to the technology that Priva developed with Cyber Solution’s funding would be assigned to and owned by Cyber Solution; however, it also expressly acknowledged Pro Marketing’s preexisting security interest in the technology.

Priva subsequently began developing a second-generation technology product at the behest of Cyber Solutions. These efforts resulted in the completion of a new product known as Tamper Reactive Secure Storage (TRSS). Cyber Solutions argued that as the TRSS was completed, it immediately became the property of Cyber Solutions, free of Pre Marketing's security interest.

The Sixth Circuit determined that upon completion of the TRSS technology, Priva—however briefly—acquired the rights to that modification prior to its assignment. As a result, the TRSS became “items of personal property owned . . . or acquired” by Priva, and those rights were included in the security agreement’s definition of “collateral.” Thus, Pro Marketing acquired a security interest in the TRSS technology that was superior to Cyber Solution’s claim to the technology.

Moreover, the court noted that the license agreement itself acknowledged the existence of Pro Marketing’s security interest, and Cyber Solutions was “assuming the risk” that its rights under the license agreement “might be disrupted” by Pro Marketing’s security agreement.

For more information about Cyber Solutions International, LLC v. Pro Marketing Sales, Inc. (6th Cir.), subscribe to the Banking and Finance Law Daily.

FTC provides consumers with payback for payday lending deception

By Andrew A. Turner, J.D.

Deceptive practices by payday lenders continues to be a point of emphasis by federal regulators as the Federal Trade Commission has entered into settlement agreements with two online payday lenders resolving allegations that consumers were charged with undisclosed and inflated fees. For example, a contract used by the companies stated that a $300 loan would cost $390 to repay, but consumers were actually charged $975, according to the FTC.

Under the agreements, the lenders, Red Cedar Services Inc. and SFS Inc., will each pay $2.2 million and collectively waive an additional $68 million in fees to consumers that were assessed but not collected. The agreements, combined with previous settlements in the case against Red Cedar, SFS, AMG Services, Inc., and MNE Services, Inc, represent the largest FTC recovery in a payday lending case, with litigation still continuing against other lenders. In total, the FTC has recovered $25.5 million and secured $353 million in waived debt.

“Payday lenders need to be honest about the terms of the loans they offer,” said Jessica Rich, Director of the Bureau of Consumer Protection. “These lenders charged borrowers more than they said they would. As a result of the FTC’s case, they are paying a steep price for their deception.”

FTC allegations. The settlements stem from FTC charges initially filed in April 2012 alleging that the lenders and others violated the Federal Trade Commission Act by misrepresenting the cost of loans to consumers. The FTC also charged that the lenders violated the Truth in Lending Act by failing to accurately disclose the annual percentage rate and other terms of the loans, and made preauthorized debits from consumers’ bank accounts a condition of the loans, in violation of the Electronic Fund Transfer Act.

Settlement orders. In addition to the monetary judgments and extinguishment of debt, the final settlement orders prohibit Red Cedar and SFS from misrepresenting the terms of any loan product, including the payment schedule and interest rate, the total amount the consumer will owe, annual percentage rates or finance charges, and any other material facts. The orders also permanently enjoin the lenders from conditioning the extension of credit on preauthorized electronic fund transfers, and from engaging in deceptive collection practices.

In a prior settlement in the same case, AMG Services, Inc. and MNE Services, Inc. agreed to pay $21 million and waive an additional $285 million in charges that were assessed but not collected.

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