CFPB’s proposed small-dollar loan rule lacks ‘product safety,’ Pew article says

By Thomas G. Wolfe, J.D.

In his article for The Pew Charitable Trusts, “The CFPB’s Proposed Payday Loan Regulations Would Leave Consumers Vulnerable,” author Nick Bourke maintains that while the Consumer Financial Protection Bureau’s proposed rule to regulate small-dollar loans provides certain consumer protections, the proposal falls short. In particular, Bourke’s Sept. 7, 2016, article asserts that the CFPB’s draft rule focuses on “the process of issuing a loan rather than on establishing product safety standards.” Moreover, the rule would “discourage banks and credit unions from entering this market and offering lower-cost alternatives,” he contends.

Bourke, the Director of The Pew Charitable Trusts, indicates that the CFPB’s proposal would “accelerate the shift toward installment lending that is already under way in this market.”

Findings, critique. On one hand, the CFPB’s rule would strongly encourage payday and auto title lenders “to give borrowers more time to repay loans in smaller installments, rather than large lump-sum payments,” Bourke points out. On the other hand, the proposal “fails to provide standards for affordable payments or reasonable loan lengths that are sufficiently clear to ensure the safety of this credit for consumers,” he states.

Bourke emphasizes that, under the CFPB’s current proposal:

• the skewed focus on underwriting fails to fully address the harm to consumers of high-cost installment lending because, among other things, “unlike mainstream creditors, payday and auto title lenders have access to borrowers’ checking accounts and car titles to improve their ability to collect” on the loans;

• this power by creditors over “financially fragile consumers” makes the high-cost, small-dollar loans “inherently dangerous;” and

• while the rule’s “conditional exemptions” would allow lenders to use their own methods for evaluating a borrower’s ability to repay a loan, the permitted alternatives are “unlikely to make better credit widely available.”

Recommendations. Based on these findings, the Pew article recommends that the CFPB “take firmer steps” to prevent small-dollar loans from “becoming dangerous or abusive” by:

• limiting the time period in which lenders can retain access to a borrower’s checking account;

• subjecting lenders with high default rates to “greater levels of scrutiny;”

• setting “clear product safety standards”—including a “5 percent payment option;” and

• enabling banks and credit unions to provide “safer, lower-cost small-dollar credit.”

For more information about proposals by the Consumer Financial Protection Bureau, as well as critiques of them, subscribe to the Banking and Finance Law Daily.

Bank to pay over $35 million for luring customers into paying for credit card extras

By Andrew A. Turner, J.D.

The First National Bank of Omaha (FNBO) has agreed to pay over $35 million to settle claims that the bank engaged in deceptive marketing and billing of customers for credit card add-on products. This is the eighth action the Consumer Financial Protection Bureau has taken in coordination with another regulator to address illegal practices with respect to credit card add-on products and the 12th action the CFPB has taken in total to address these practices.

FNBO entered into separate consent orders with the CFPB and the Office of the Comptroller of the Currency. The CFPB ordered the bank to repay $27.75 million to approximately 257,000 consumers and pay a $4.5 million civil penalty to the CFPB’s Civil Penalty Fund. The OCC assessed a $3 million civil penalty against the bank for restitution to customers who were unfairly billed for identity theft protection they did not receive

CFPB Director Richard Cordray commented, “First National Bank of Omaha violated the trust of its customers by illegally signing them up for credit card add-on products. The CFPB's track record, and this result today, shows strong and consistent action against credit card companies that dupe consumers into buying a product they do not want.”

CFPB’s enforcement action. The CFPB alleged that FNBO violated provisions of the Consumer Financial Protection Act governing unfair and deceptive acts or practices by using deceptive marketing tactics to lure consumers into accepting credit card debt-cancellation “add-on” products and by charging consumers for credit monitoring services they never received.

The CFPB’s consent order with FNBO pertains to the bank’s allegedly unfair billing practices from 1997 to 2012 and its allegedly deceptive enrollment practices from 2010 to 2012 until the CFPB’s supervisory exam at that time. Among other things, the CFPB claimed that FNBO:

• disguised the fact that it was selling consumers an add-on product;

• distracted consumers into making the relevant purchases;

• failed to disclose to consumers their “ineligibility” for the add-on products;

• hindered consumers from obtaining the benefits of the debt-cancellation products;

• made the cancellation of the add-on products difficult; and

• billed consumers for credit monitoring services that FNBO did not provide.

In addition to the monetary redress and civil penalty totaling $32.25 million, the CFPB’s consent order prohibits FNBO from marketing any debt-cancellation or credit-monitoring add-on products until the bank submits a compliance plan to the CFPB.

OCC’s enforcement action. The OCC alleged that FNBO violated Section 5 of the Federal Trade Commission Act by billing consumers for identity-theft protection products from December 1997 to July 2013 even though the consumers did not receive the full benefit of these credit monitoring and/or “credit report retrieval services” products.

Under the OCC’s Stipulation and Consent Order, the $3 million civil penalty imposed on FNBO includes restitution to consumers for the full amount that they paid for the identity-theft protection products plus any associated over-limit fees, overdraft fees, or finance charges the consumers incurred on their card accounts.

For more information about illegal credit card practices, subscribe to the Banking and Finance Law Daily.

Financial CHOICE Act ‘major step in the right direction,’ says Heritage Foundation

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

"The Financial CHOICE Act is a major step in the right direction for the U.S. economy," according to a paper written by Norbert J. Michel, at The Heritage Foundation. In his Backgrounder paper—Money and Banking Provisions in the Financial CHOICE Act: A Major Step in the Right Direction—Michel cites as the core component of the proposed reform a regulatory off-ramp, a provision that gives regulatory relief to banks that choose to hold higher equity capital.

This provision exempts banks from "onerous regulations" of the Dodd-Frank Act if they meet a higher capital ratio, says Michel. There is little justification for heavily regulating firms that absorb their own financial risks, he added. Higher capitalized banks do exactly that, Michael said, lowering the likelihood of taxpayer bailouts.

Other key points in the proposal, according to Michel, include: replacing the Dodd–Frank Act’s orderly liquidation authority with an improved bankruptcy process for large financial firms; improving the Federal Reserve Board’s emergency lending authority; and improving the Fed’s regular operating procedures, essentially by adopting the text of the 2015 Fed Oversight Reform and Modernization Act.

A discussion draft of the bill was released in June by House Financial Services Committee Chairman Jeb Hensarling (R-Texas).

For more information about the Dodd-Frank Act, subscribe to the Banking and Finance Law Daily.

Regulators clarify supervisory expectations for correspondent banking

By Lisa M. Goolik, J.D.

The Treasury Department, in coordination with the Federal Reserve Board, Federal Deposit Insurance Corporation, National Credit Union Administration, and Office of the Comptroller of the Currency, has released a joint fact sheet that outlines the regulators’ supervisory expectations and enforcement processes with respect to anti-money laundering and sanctions in the area of correspondent banking. The “Joint Fact Sheet on Foreign Correspondent Banking” describes the expectations of federal regulators, the supervisory examination process, and the use of enforcement actions.

AML requirements. Financial institutions must comply with the AML requirements set forth in the Bank Secrecy Act (BSA), as well as sanctions programs administered by the Office of Foreign Assets Control. Depository institutions that maintain correspondent accounts for foreign financial institutions (FFI) are required to establish “appropriate, specific, and risk-based due diligence policies, procedures, and processes that are reasonably designed to assess and manage the AML risks inherent with these relationships.”

Accordingly, U.S. depository institutions must monitor transactions related to correspondent accounts to detect and report suspicious activities. These policies, procedures, and processes will depend on the level of risk posed by the correspondent FFI.

Clarified expectations. According to the fact sheet, the federal regulators expect U.S. depository institutions to have “robust BSA and OFAC compliance programs that include appropriate customer due diligence so that the institutions have a clear understanding of FFI risk profiles and expected account activity.”

In addition, while there is no general requirement under existing regulations for U.S. depository institutions to conduct due diligence on the individual customers of FFIs, the regulators do expect depository institutions to obtain and review sufficient information about their FFI relationships, including the types of customers the FFI serves and the markets in which the FFI is active.

Examination process. The regulators believe that the examination process “is integral to the process of ensuring compliance with the BSA and OFAC sanctions programs.” To that end, the regulators employ a risk-based approach to supervision that guides the scoping, planning, and transaction testing portions of federal depository institutions’ BSA and OFAC examinations. The approach allows the regulators to appropriately allocate supervisory resources based on money laundering and terrorist financing risks.

Notably, the supervisory process is not one of “zero tolerance”—95 percent of BSA/AML deficiencies found in the examination process are resolved through the supervisory process. Most deficiencies are resolved after they are brought to the attention of a depository institution’s management through the issuance of confidential reports of examination and supervisory letters that contain specific language communicating supervisory findings to the institution.

Enforcement actions. Enforcement actions are “an extension of the supervisory process and are used to address more serious deficiencies, or situations where deficiencies have not been corrected in the course of the supervisory process,” states the fact sheet. Enforcement tools include: informal memoranda of understanding, or formal, public, written agreements, and cease-and-desist orders. The regulators are required to use their cease-and-desist authority when an institution fails to establish or maintain a BSA compliance program or fails to correct any problem with the program previously reported to the institution.

In addition, when institutions fail to take corrective action within a reasonable amount of time or when serious violations or unsafe or unsound practices or breaches of fiduciary duty have been identified, the regulators may also assess civil money penalties.

For more information about the Bank Secrecy Act, subscribe to the Banking and Finance Law Daily.

Cheetah reinvents the legal research process: interview with Wolters Kluwer's Dean Sonderegger

In the September/October issue of AALL Spectrum, Wolters Kluwer's Vice President of Legal Markets & Innovation, Dean Sonderegger, discusses the capabilities of the new Cheetah research platform and how Wolters Kluwer is reinventing the legal research process.

"The new platform came out of the mouths of customers," Sonderegger says. "The secret sauce is that our editorial team will organize the content and highlight the essential pieces . . . The result is that practitioners are able to move through primary content more efficiently."

Read the full interview with Dean here.

CFPB snapshot: Consumers unhappy with ‘cornerstone financial tool’

By Katalina M. Bianco, J.D.

Deposit accounts are a "cornerstone financial tool," and the Consumer Financial Protection Bureau has highlighted consumer complaints about deposit accounts and services in its monthly complaint snapshot. The August 2016 report (Vol. 14) indicates that consumers continue to experience problems managing their accounts. It also spotlights complaints coming from the state of Ohio.

 

"Deposit accounts are an essential component of millions of consumers’ financial lives," said CFPB Director Richard Cordray. "Consumers who are eligible for a deposit account should be able to get one and use it effectively."

 

The CFPB publishes a monthly complaint report that spotlights complaints received by the bureau. Considering that the CFPB draws from consumer complaints when targeting areas for rulemaking, the complaint reports can be an indication of the bureau's future focus.

 

Spotlight category. Complaints submitted to the CFPB under the spotlight category of bank accounts and services cover deposit account products and services offered by banks, credit unions, and nonbank companies. There are more than 200 million deposit accounts open nationwide, and as of Aug. 1, 2016, the CFPB had handled approximately 94,200 bank account or service complaints. According to the bureau’s report, consumers complain about:

• difficulties opening accounts, including reporting data being used for screening new accounts;
• overdraft fees stemming from confusion about the availability of funds deposited; and
• financial institutions’ error resolution procedures, particularly prolonged response times and lack of provisional credit when reporting unauthorized transactions.

National overview. As of Aug. 1, 2016, the CFPB has handled approximately 954,400 complaints nationally. Highlights from the monthly snapshot include the following.

 

• For July 2016, debt collection was the most-complained-about financial product or service, followed by credit reporting and mortgages. 
• In a year-to-year comparison examining the three-month time period of May to July, student loan complaints showed the greatest increase—64 percent—of any product or service.
• Alaska, Wyoming, and Colorado experienced the greatest year-to-year complaint volume increases from May to July 2016 period versus the same previous time period 12 months earlier.
•  The three companies that received the most complaints from March through May 2016 were credit reporting companies Equifax, Experian, and TransUnion.

Spotlight Ohio. The monthly CFPB snapshot highlights Ohio and the Columbus metro area. According to the bureau’s report, as of Aug. 1, 2016, consumers in Ohio have submitted 29,400 of the 954,400 complaints the CFPB has handled, with 6,500 of them coming from the Columbus metro area. In this geographical area:

 

• debt collection is the most complained about product or service;
• complaints relating to mortgages are lower than the national rate; and
• the three most complained about companies by consumers from Ohio were Equifax, TransUnion and Experian.

 For more information about the CFPB's monthly complaint snapshots, subscribe to the Banking and Finance Law Daily.

Law firm subject to state’s credit services law for its loan negotiations

By Thomas G. Wolfe, J.D.

Recently, the Maryland Court of Appeals—the state’s highest court—addressed the Maryland Commissioner of Financial Regulation’s claim that a law firm and its managing partner violated the Maryland Credit Services Businesses Act (MCSBA). The court determined that the law firm’s mortgage-loan renegotiation activities on behalf of homeowners facing foreclosure fell within the scope of the MCSBA’s “credit services business” definition. Moreover, the firm and its managing partner were subject to the MCSBA because they did not qualify for an “attorney exemption” under the state law, the court ruled.

According to the court’s opinion in Commissioner of Financial Regulation v. Brown, Brown & Brown, P.C., a small Virginia law firm “consulted with hundreds of Maryland homeowners facing foreclosure, and entered into more than 50 agreements with homeowners over a nine-month period in 2008 and 2009.” The firm’s managing partner oversaw this facet of the firm’s business and signed many of the agreements.

Under the pertinent agreements, in return for the homeowners' advance payments, the firm promised to “attempt to renegotiate” their respective mortgage loans so that the homeowners could avoid foreclosure. However, the firm did not obtain loan modifications for any of the homeowners, the court related.

Commissioner’s action. On behalf of certain homeowners who complained about the Virginia firm’s practice, the Maryland Commissioner of Financial Regulation initiated administrative proceedings. Ultimately, after an evidentiary hearing, the Commissioner accepted the recommendation of an administrative law judge to issue injunctive relief, a civil monetary penalty, and the payment of “treble damages” by the firm and its managing partner to the Maryland homeowners who had agreements with the firm.

Later, the firm and partner obtained judicial review of the agency’s decision. The state trial court ruled in their favor, finding that the agreements with the Maryland homeowners were for “legal services rather than credit services” and that the MCSBA did not apply. When the Maryland intermediate appellate court affirmed that decision, the Commissioner appealed to the Maryland Court of Appeals.

Credit services business. First, the Maryland Court of Appeals determined that there was substantial evidence in the administrative record showing that the law firm’s and partner’s activities in connection with the Maryland homeowner agreements came within the scope of the “credit services business” definition in the MCSBA.

Reviewing the MCSBA's text and legislative history, the court emphasized that a person who offers to renegotiate a mortgage loan for a homeowner facing foreclosure “is offering to assist a consumer in obtaining an extension of credit” under the state law. Further, if the person “does so in return for the payment of money by the consumer,” then that person falls within the MCSBA’s definition of a “credit services business.”

No attorney exemption. Next, the court determined that there was substantial evidence in the administrative record indicating that the law firm and partner did not qualify for an attorney exemption under the MCSBA.

Under the MCSBA provision providing an attorney exemption, the individual: (i) must be admitted to the Maryland Bar; (ii) must render the pertinent services within the course and scope of his or her practice as a lawyer; and (iii) must not engage in the credit services business “on a regular and continuing basis.”

The court acknowledged that a Maryland attorney who counsels an individual client facing foreclosure and attempts to negotiate a mortgage loan modification typically would be exempt from the MCSBA. However, the court agreed with the administrative law judge that “when a small out-of-state law firm has 57 cases with Maryland consumers in nine months, it constitutes offering the particular services on a regular and continuing basis.” Consequently, the firm and managing partner were not entitled to the MCSBA’s attorney exemption.

Final disposition. While the court reversed the respective decisions of the intermediate appellate court and trial court, the matter was remanded to the trial court to address the unresolved issue of whether any of the law firm’s or partner’s alleged MCSBA violations rose to a level of “willfulness.”

For more information about consumer credit issues impacting the financial services industry, subscribe to the Banking and Finance Law Daily.