District of Columbia adopts student loan borrower bill of rights

By Richard Roth, J.D.

The District of Columbia has established a student loan borrower bill of rights that is intended to set basic principles and ensure protections for borrowers. The five articles of the bill of rights address loan pricing and terms, abusive loan products, underwriting, collection practices, and customer service, according to the D.C. Department of Insurance, Securities and Banking.

Terms and price. The bill of rights generally calls on lenders to comply with the Truth in Lending Act and Reg. Z—Truth in Lending (12 CFR Part 1026). Specific requirements include the use of plain English and the disclosure of loan pricing and terms in ways that will facilitate comparison shopping.

No abusive products. Lenders should offer only loans that match the borrower’s intended use. New credit should not be offered to borrowers who cannot repay previous loans—in other words, there should be no “debt traps.” The bill of rights also says that when a fixed-fee loan is refinanced or modified, additional fees should not be charged based on the outstanding principal unless the borrower receives a “tangible cost benefit.”

Underwriting. Four underwriting principles are spelled out:

1. Credit should be offered only if there is “high confidence” that the borrower will be able to repay the loan without defaulting or re-borrowing.
2. Loans a borrower cannot truly afford should not be made, even if the lender in fact can find a way to secure payment. Also, servicers should not derive unreasonable fees from late fees or comparable charges.
3. Loans should be made to meet the borrower’s need, not to generate more revenue for the lender, even if the borrower could qualify for a larger loan.
4. Lenders should check credit reports before they extend loans, and they should report the borrower’s performance to credit bureaus.

Collections. Lenders and servicers should treat borrowers in accordance with the Fair Debt Collection Practices Act. They should carefully watch over third-party debt collectors, and all companies involved in collections should keep complete and accurate account information.

Customer service. Lenders and servicers should acknowledge customer complaints promptly, preferably within five days, and all complaints should be resolved in a timely manner. Borrowers should be informed of any changes in information such as the servicer’s address or the sale of the loan. The bill of rights also includes a broad anti-discrimination policy that extends to sexual orientation and sexual identity.

For more information about education loans, subscribe to the Banking and Finance Law Daily.

Legislators react to Senate vote to overrule CFPB arbitration rule

By Stephanie K. Mann, J.D.

Following the Senate’s passage of a Congressional Review Act Resolution (H.J. Res. 111) to overrule the Consumer Financial Protection Bureau’s arbitration rule, multiple legislators have voiced their support and opposition for the action. Once signed by President Trump, the rule will be prevented from taking effect, and will also bar any federal agencies from enacting similar rules without congressional action.

The arbitration rule, which was released on July 10, 2017, bans pre-dispute arbitration clauses in consumer financial product contracts if those clauses prevent class actions. Under the rule, arbitration clauses would only be allowed if their application is restricted to individual claims.

Victory for consumers. Commending the Senate for joining the House in “fighting for consumers and for draining the bureaucratic swamp of yet another political regulation,” House Financial Services Committee Chairman Jeb Hensarling (R-Texas) called the vote a victory for consumers and a “rejection of the unchecked, unconstitutional and unaccountable CFPB.” The legislator stressed that laws and regulations should be written by elected representatives, rather than “unelected and unaccountable bureaucrats.”

Believing that a ban on arbitration clauses would result in lower reward payments for wronged customers and higher credit costs, Sen. Tom Cotton (R-Ark) argued that there is little evidence to demonstrate that class action suits stop the behavior that they intend to punish. The arbitration rule “was wrong on the merits and, worse, an abuse of authority by the CFPB,” said Cotton.

Customers end up paying. According to Sen. Sherrod Brown (D-Ohio), legislators have a duty to “look out for the people we serve—not Wall Street banks and corporations trying to scam consumers.” However, forced arbitration takes this power away from ordinary people, and gives it to big banks and Wall Street companies that already have an unfair advantage.

Brown highlighted an Economic Policy Institute study that people who went into arbitration with Wells Fargo, and found that, on average, they ended having to pay the bank almost $11,000. Additional studies show that Wall Street and other big companies win 93 percent of the time in arbitration. Regular people don’t stand a chance against those numbers.

Siding with banks. Arguing in favor of the arbitration rule on the floor of the Senate, Sen. Elizabeth Warren (D-Mass) reminded the legislators about recent history in which Wells Fargo creates 3.5 million fake accounts, charging customers fees and ruining credit scores and Equifax lets hackers steal personal information on 145 million Americans, putting nearly 60 percent of American adults at risk of identity theft. However, because millions of consumer financial contracts include a forced arbitration clause, all consumers are forced to go to arbitration by themselves, rather than joining with other customers in court.

According to Warren, anyone who votes to reverse the arbitration rule, “is saying loud and clear that they side with banks over their constituents—because bank lobbyists are the only people asking Congress to reverse the rule.” The Military Coalition, which represents more than 5.5 million veterans and servicemembers, supports the arbitration rule because "forced arbitration is an un-American system wherein service members' claims against a corporation are funneled into a rigged, secretive system in which all the rules, including the choice of the arbitrator, are picked by the corporation," and warns that "the catastrophic consequences" these forced arbitration clauses “pose for our all-voluntary military fighting force's morale and our national security are vital reasons” to preserve the rule.

In addition, Warren points to the AARP, which represents nearly 40 million American seniors, who believes that the CFPB rule should be preserved because it “is a critical step in restoring consumers' access to legal remedies that have been undermined by the widespread use of forced arbitration for many years.” Older consumers are at increased risk of financial scams so the “AARP supports the availability of a full range of enforcement tools, including the right to class action litigation to prevent harm to the financial security of older people posed by unfair and illegal practices.”
For more information about CFPB activity, subscribe to the Banking and Finance Law Daily.

Senate votes 'yea' to arbitration rule repeal

By Katalina M. Bianco, J.D.

A narrow Senate vote on Oct. 24, 2017, leaves the Consumer Financial Protection Bureau rule on mandatory forced arbitration agreements only a presidential signature away from near-permanent repeal. The measure narrowly passed along largely partisan lines in the Senate with a vote of 50-50 plus Vice President Mike Pence's tiebreaking "yea" vote.

The House and Senate passed the vote under the Congressional Review Act. Under CRA rules, President Trump's signature not only will halt the rule from going into effect but will also bar any federal agencies from enacting similar rules without congressional action.

Final rule. The forced arbitration rule became effective in September but would have applied to arbitration clauses beginning March 19, 2018. It was intended to limit terms in consumer banking and other financial agreements that force consumers to settle disagreements through arbitration. Proponents of the rule, such as Center for Responsible Lending’s Senior Policy Counsel, Melissa Stegman, argued that the arbitration process is often a "rigged system," with no opportunity for appeal and with the arbitrator beholden to the banks for repeat business.

"These rip-off clauses deny Americans the freedom to seek justice through our court system—a right embodied by the Constitution's Seventh Amendment," Stegman said in a statement following the vote.

CFPB study. Critics of the rule, however, cited a CFPB study in arguing that arbitration awards were, on average, higher than court awards for consumers, and that arbitration settlements occurred faster than court settlements.

According to the CFPB’s 2015 study, arbitration awards generally were received within five months compared to the median of roughly 18 months for court cases; however, only a third of arbitration claims during the study period resulted in a decision, and of those that the CFPB could determine an outcome, only about 10 percent—roughly 32 cases—resulted in "affirmative relief." Meanwhile, the courts approved an average of 85 class settlements per year, amounting to an average annual relief amount of $540 million per year.

OCC comments. The Office of the Comptroller of the Currency also weighed in, heralding the vote as a move to avoid what it said "would have likely increased the cost of credit for hardworking Americans." The OCC had used the CFPB’s data to determine impact to credit costs. "The action by Congress is a victory for consumers and small banks across the country," said Acting Comptroller of the Currency Keith A. Noreika.

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

Treasury report: CFPB’s arbitration rule limits consumer choice, expands costly litigation

By Thomas G. Wolfe, J.D.

In conducting an analysis of the Consumer Financial Protection Bureau’s arbitration rule, particularly the prohibition against pre-dispute mandatory arbitration clauses in consumer financial contracts, the U.S. Treasury Department has issued a report concluding that the rule limits consumer choice and expands costly litigation. According to the Oct. 23, 2017, report, the CFPB’s underlying data for its arbitration study “were limited in ways that raise serious questions about its conclusions and undermine the foundation of the Rule itself.” The Treasury report further asserts that the CFPB’s study and rule “do not show that the Bureau’s prohibition on arbitration will efficiently improve compliance with the federal consumer financial laws or serve public and consumer interests as the Dodd-Frank Act commands.”

As observed by the Treasury in a release accompanying the report, the CFPB also “failed to consider less onerous alternatives to its ban on mandatory arbitration clauses across market sectors.”

Report highlights. Among other things, the Treasury’s report, titled “Limiting Consumer Choice, Expanding Costly Litigation: An Analysis of the CFPB Arbitration Rule,” maintains that:

• the Arbitration Rule will impose extraordinary costs—based on the Bureau’s own incomplete estimates;
• the vast majority of consumer class actions provide “zero relief to the putative members of the class;”
• for the small percentage of class actions that generate class-wide relief, “few affected consumers demonstrate interest in recovery;”
• the Arbitration Rule will “effect a large wealth transfer to plaintiffs’ attorneys;”
• the CFPB did not reasonably consider whether improved disclosures regarding arbitration would “serve consumer interests better than its regulatory ban;”
• the Bureau did not adequately evaluate “the share of class actions that are without merit;”
• the CFPB “offered no foundation” for its assumption that the Arbitration Rule will improve compliance with federal consumer financial laws;
• the Arbitration Rule fails to account for the “major costs” and “inefficiencies” of class action litigation, and did not attempt a “meaningful cost-benefit analysis;” and
• the Arbitration Rule does not address the “important benefits” of arbitration.

For more information about the CFPB's Arbitration Rule and various critiques of it, subscribe to the Banking and Finance Law Daily.

OCC and CFPB disagree over arbitration rule

By Andrew A. Turner, J.D.

The Office of the Comptroller of the Currency has reviewed a working paper that the Consumer Financial Protection Bureau relied on in formulating its final rule prohibiting mandatory arbitration agreements and concluded that the arbitration rule will increase costs of credit cards. Meanwhile, CFPB Director Richard Cordray has responded to criticism questioning the impact of the rule on consumers and financial institutions.

The working paper by Alexei Alexandrov, “Making firms liable for consumers' mistaken beliefs: theoretical model and empirical applications to the U.S. mortgage and credit card markets,” finds a strong probability of a significant increase in the cost of credit cards as a result of eliminating mandatory arbitration clauses.

Final rule. The Bureau issued a final rule prohibiting mandatory arbitration agreements for credit cards and certain other financial products with the stated rational being that eliminating mandatory arbitration clauses in contracts for certain financial products introduces a financial liability for financial service providers in the form of a potential increase in class action lawsuits. According to the CFPB, this additional financial liability may lead to greater compliance by financial institutions and make consumers more likely to obtain relief in the event of a dispute.

As part of its arbitration study, the CFPB reported that it did not find any statistically significant evidence of increases in the cost of credit to consumers associated with banning mandatory arbitration in credit card markets.

Working paper. Alexandrov constructed a model to show circumstances in which introducing a financial liability on firms can improve social welfare and consumer surplus. He then conducted statistical analysis of credit card data to estimate price increases. While he found the results of his analysis were statistically insignificant and he could not reject the hypothesis that there were no costs to consumers, Alexandrov was careful to point out that he could not rule out economically significant costs.

OCC findings. The OCC has analyzed and verified the Alexandrov results that were summarized by the CFPB in their arbitration study and discuss potential increased costs to consumers from eliminating mandatory arbitrage clauses. Given the substantial costs to financial firms estimated by the CFPB, one would expect some of these costs to be passed on to consumers or the availability of certain financial services products to decline where costs could not be recouped. The OCC has confirmed Alexandrov’s results using his assumptions and specification and elaborated on his comments about the economic significance of introducing additional financial liability in credit card markets. Consumers face significant risk of a substantial rise in the cost of credit.

According to Alexandrov, the CFPB, and OCC, the magnitude of the effect on pricing is uncertain, but there is a high likelihood that the total cost of credit will increase. However, this analysis does not explore the potential effect on consumer payments, their ability to pay the higher cost, and the potential for an increase in delinquencies, or changes in the availability of certain financial products intended to meet the financial needs of consumers.

 

CFPB defense of arbitration rule. The CFPB argues that it issued a rule that prevents financial companies from using arbitration clauses to deny groups of consumers the ability to pursue their legal rights in court after conducting a comprehensive study that found that arbitration clauses were effectively blocking billions of dollars of relief for millions of harmed consumers. Cordray authored a column, The truth about the arbitration rule is it protects American consumers, in The Hill on October 16, responding to Noreika's October 13 column, Senate should vacate the harmful consumer banking arbitration rule.

Cordray also defended the rule in a letter to U.S. Senator Sherrod Brown (D-Ohio), which included a review by the CFPB's Office of Research.

For more information about the CFPB's rule on mandatory arbitration clauses, subscribe to the Banking and Finance Law Daily.

Bureau charges debt assistance companies ‘lied to line their pockets’

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has filed suit against two companies, Federal Debt Assistance Association, LLC, and Financial Document Assistance Administration, Inc., both companies operating as FDAA; their stated parent company and service provider Clear Solutions, Inc.; and their owners for deceiving consumers and violating the Consumer Financial Protection Act (12 U.S.C. §§ 5531(a), 5536(a)), and the Telemarketing Sales Rule (16 CFR Part 310). According to the Bureau’s complaint, FDAA falsely represented the company as being affiliated with the federal government and falsely promised to eliminate consumers’ debts and improve their credit scores for thousands of dollars in advance fees.

"FDAA and its owners lied to financially vulnerable consumers to line their pockets with cash," said CFPB Director Richard Cordray. "Today’s lawsuit seeks to stop these deceptive practices, impose civil money penalties, and return to cheated consumers the fees they paid to these companies."

FDCPA. According to the complaint, FDAA promised to eliminate consumers’ unsecured debts and improve their credit scores, primarily by using the debt-verification process set out in the Fair Debt Collection Practices Act. However, the companies’ debt validation programs "were merely debt-management programs that misled consumers about the results that could be achieved under the FDCPA’s debt-verification process."

Failure to disclose. The complaint alleges that FDAA failed to make proper disclosures about not paying debts. FDAA instructed consumers to stop making payments on the debts enrolled in their program. However, they failed to disclose that not making payments may result in the consumer being sued by creditors or debt collectors and may increase the amount of money the consumer owes due to the accrual of fees and interest, according to the complaint.

Advance fees. The CFPB charged that FDAA took illegal advances for debt-relief and credit-repair services without achieving certain results, a violation under the TSR. It is a violation of the TSR for any seller or telemarketer to request or receive payment of any fee or consideration for goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating until and unless:

• the time frame in which the seller has represented all of the goods or services will be provided to that person has expired; and
• the seller has provided the person with documentation in the form of a consumer report from a consumer-reporting agency demonstrating that the promised results have been achieved.

Relief. The CFPB’s complaint seeks monetary relief, injunctive relief, and civil money penalties.

 

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

CFPB kicks rulemaking into high gear

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has released a flurry of rulemaking in the past few weeks. The Bureau adopted the much-anticipated short-term, small-dollar loan regulation this month. The focus of the rule is loans that require full or nearly full repayment at one time, such as payday loans, vehicle title loans, and deposit advance products, although some longer-term loans that have balloon payment features also are covered under the rule. Most of the rule, which is based on last year’s proposal, will take effect 21 months after it is published in the Federal Register.

According to the Bureau, the rule:

• establishes a full-payment test for installment loans to ensure that consumers can afford their payments and still meet their basic living expenses and major financial obligations;
• limits to three the number of loans that can be made in close succession (while a prior loan is outstanding or within 30 days after a prior loan is repaid);
• creates an exception to the full-payment test for very small loans if the lender offers a way the consumer can get out of debt more gradually;
• creates a separate exemption for loans that pose less risk for consumers; and
• prevents lenders that make short-term loans, balloon-payment loans, and longer-term loans with an annual percentage rate of more than 36 percent from continuing to attempt to debit consumer accounts for payments after two consecutive failures.

The Bureau provided a factsheet that summarizes the rule.

 

Mortgage servicers. The CFPB has issued an interim final rule intended to provide mortgage servicers with clearer and more flexible standards for providing modified written early intervention notices to borrowers who have invoked their cease communication rights under the Fair Debt Collection Practices Act, with rule amendments that become effective on Oct. 19, 2017.

 

The Bureau also has proposed amendments to clarify timing requirements for servicers to transition to providing modified or unmodified periodic statements and coupon books to consumers in connection with their bankruptcy case.

 

ECOA rulemaking. Late last month, the CFPB modified Equal Credit Opportunity Act regulations in order to provide greater clarity for mortgage lenders regarding their obligations in collecting consumer ethnicity and race information, while promoting compliance with rules intended to ensure consumers are treated fairly.

 

The Bureau’s amendments would allow mortgage lenders to adopt application forms that include expanded requests for information regarding a consumer’s ethnicity and race as they will no longer be required to maintain different practices depending on their loan volume or other characteristics.

The Bureau also finalized additional amendments to facilitate compliance with Reg. B’s requirements for the collection and retention of information about the ethnicity, race, and sex of applicants seeking certain types of mortgage loans.

 

The rule amendments are effective on Jan. 1, 2018, except that the amendment to Appendix B removing the existing “Uniform Residential Loan Application” form in amendatory instruction 6 is effective Jan. 1, 2022.

 

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