Regulations and Guidance Update

Consumer Financial Protection Bureau Asserts Authority over Credit Reporting Firms

On July 16, the CFPB issued a final rule defining large credit reporting agencies as entities subject to its supervision. Under the Dodd-Frank Act, the CFPB was authorized to supervise both large banks and nonbanks for compliance with consumer rules. The nonbank supervision authority grants the Bureau express powers over certain types of institutions, and also allows the CFPB to identify other industries to subject to its examinations. The new regulation establishes credit reporting as the first industry that the Bureau will supervise under these special powers to examine larger nonbank firms that reside outside the direct lending sphere. CFPB Director Richard Cordray explained that the new regulation “affords an opportunity to gain a more thorough understanding of their business models and their business practices.”

Starting September 30, the date the rule goes into effect, credit reporting agencies with over $7 million in annual receipts will enter the CFPB’s nonbank supervision program. This accounts for 94 percent of the credit reporting industry, including the three biggest crediting reporting agencies, Experian, Equifax, and TransUnion. Each of the three major credit reporting agencies maintain files on more than 200 million Americans and issue more than three billion consumer reports a year. The CFPB said it plans to conduct examinations of these agencies, but will publish additional examination guidance before doing so. The CFPB is also planning to release a consumer advisory regarding credit reports and a series of frequently asked questions and answers about the sector as part of its “Ask CFPB” database.

The CFPB’s assertion of supervision authority over credit reporting agencies comes as no surprise. In February, the CFPB listed consumer reporting agencies, along with debt collectors, as sectors it would monitor under its Dodd-Frank authority. The integrity of the credit reporting industry is important because low credit scores or credit histories can mean higher interest rates or rejected applications, affecting consumers’ ability to get a credit card, home loan, apartment, or even a job. Further, there have been thousands of complaints about credit reports from consumers claiming difficulties in getting credit reporting agencies to correct inaccurate information.

This marks the first time that a single government agency will take an active role in policing credit reporting agencies, though the Fair Credit Reporting Act (FCRA) requires credit reporting agencies to maintain accurate information about consumers. Pamela Banks of Consumers Union, the policy arm of Consumer Reports, called the new rule “a wonderful thing for the American public.” Banks further remarked that she expects that credit bureaus will now act more quickly to address consumers’ problems regarding the accuracy of information on their credit reports. Jon Ulzheimer, president of consumer education at SmartCredit.com said that the rule may cause the CFPB to clarify what the FCRA requires of credit reporting agencies, especially with regard to what constitutes a “reasonable investigation,” a constant source of debate in the consumer credit world. Gerry Tschopp, a spokesman for Experian, said that he had “no concerns” about the CFPB’s oversight, noting that the government already oversees the industry under the FCRA. A statement from Experian said the company and the CFPB share the goals of helping consumers get “access to fair and affordable credit.”

The Bureau indicated that the larger-participant authority could also eventually extend to companies such as money transmitters, prepaid-card issuers, debt-relief services, and other kinds of consumer lenders.

CFPB Issues Guidance on the Marketing of Credit Card Add-On Products

On July 18, 2012, the same day the CFPB announced its joint enforcement action against Capital One, the Bureau also issued a compliance bulletin for credit card issuers on marketing add-on products. (Bulletin 2012-06). The bulletin outlines the Bureau's expectations that "institutions under its supervision and their service providers offer such products in compliance with Federal consumer financial law" and its intent to "take all necessary steps to ensure that consumers are protected from deceptive sales and marketing practices."

The Bureau expressed its concern over deceptive marketing and sales practices, including the failure to adequately disclose key terms and conditions, the enrollment of consumers without their consent, and the imposition of charges for services not provided. It also warned institutions  about related violations of Federal consumer financial laws, including TILA, ECOA, and the Dodd-Frank Act prohibition against deceptive practices.

The CFPB included a list of steps that card issuers and their service providers should take to ensure compliance with applicable law and avoid harming consumers. These steps include that:

• Marketing materials, including direct mail promotions, telemarketing scripts, internet and print ads, radio recordings, and television commercials, reflect the actual terms and conditions of the product and are not deceptive or misleading to consumers;
• Employee incentive or compensation programs tied to the sale and marketing of add-on products require adherence to institution-specific program guidelines and do not create incentives for employees to provide inaccurate information about the products;
• Scripts and manuals used by the institution’s telemarketing and customer service centers:
• • Direct the telemarketers and customer service representatives to accurately state the terms and conditions of the various products, including material limitations on eligibility for benefits;
  • Prohibit enrolling consumers in programs without clear affirmative consent to purchase the add-on product, obtained after the consumer has been informed of the terms and conditions;
  • Provide clear guidance as to the wording and appropriate use of rebuttal language and any limits on the number of times that the telemarketer or customer service representative may attempt to rebut the consumer’s request for additional information or to decline the product; and
  • Where applicable, make clear to consumers that the purchase of add-on products is not required as a condition of obtaining credit, unless there is such a requirement. 
• To the maximum extent practicable, telemarketers and customer service representatives do not deviate from approved scripts;
• Applicants are not required on a prohibited basis to purchase add-on products as a condition of obtaining credit; and
• Cancellation requests are handled in a manner that is consistent with the product’s actual terms and conditions and that does not mislead the consumer.

In addition, institutions that offer credit card add-on products should employ compliance management programs that include:

• Written policies and procedures governing credit card add-on products designed to ensure compliance with prohibitions against deceptive acts and practices, TILA, ECOA, and any other applicable Federal and state consumer financial protection laws and regulations;
• A system of periodic Quality Assurance reviews, the scope of which includes, but is not limited to, reviews of training materials and scripts, as well as real-time monitoring and recording of telemarketing and customer service calls in their entirety, consistent with applicable laws;
• Independent audits of the credit card add-on programs, which address the items listed above and consider whether these programs present elevated risk of harming consumers;
• Oversight of any affiliates or third-party service providers that perform marketing or other functions related to credit card add-on product so that these third-parties are held to the same standard, including audits, quality assurance reviews, training, and compensation structure;
• An appropriate channel for receiving, investigating, and properly resolving consumer complaints related to add-on products; and
• A comprehensive training program for employees involved in the marketing, sale, and operation of credit card add-on products.

The CFPB has indicated that it will continue to closely monitor its supervised institutions and their service providers for deceptive activities in connection with the marketing and sales of add-on products, and will take whatever supervisory and enforcement action is warranted. Although the bulletin solely addresses card products, the CFPB has advised all institutions to consider the guidance when offering similar products for other credit and deposit services. 

Examinations/Enforcement Here and Now

The CFPB’s Enforcement Action Against Capital One: A Harbinger Of Things To Come?

For those of you wondering why financial institutions have been so worried about the enforcement powers of the CFPB, you now have your answer. The CFPB recently celebrated its one-year anniversary by announcing its first enforcement action. The $210 million dollar action against Capital One was not only meant to punish Capital One for what the CFPB believes were "deceptive practices," but was also meant to send a message to financial institutions that: (i) the CFPB intends to use enforcement actions aggressively to discourage conduct that it deems to “deceptive practices;” and (ii) more actions are coming.

The action against Capital One Bank alleges that the bank's third-party vendors marketed various credit card related services deceptively. To settle these charges, Capital One has agreed to pay a total of $210 million to reimburse customers ($150 million) and as fines for the alleged deceptive practices ($25 million to the CFPB and $35 million to the Office of the Comptroller of the Currency (OCC)). In addition to being the CFPB’s first, this enforcement action is significant for several reasons—each of which carries important lessons and warnings for financial institutions.

Third Party Liability: The CFPB’s enforcement action put financial institutions on notice that it intends to hold them strictly accountable for the conduct of their third-party vendors. The action against Capital One is not based on Capital One’s marketing tactics, but those of its third-party vendors. In a press release, the CFPB explained that the enforcement action “results from a CFPB examination that identified deceptive marketing tactics used by Capital One’s vendors.” Capital One, which has denied any liability, appears to have had little at all to do with the alleged deceptive practices. Instead, Capital One contends that the alleged conduct was the result of a third-party vendor that failed to adhere to Capital One’s own sales scripts. Since its inception, the CFPB has warned financial institutions of their obligations to oversee their third-party service vendors and the CFPB’s intention to hold the institutions accountable for the actions of these vendors (see CFPB Bulletin 2012-03 (April 13, 2012) discussed in CFPB Alert, V. 2, No. 7). The enforcement action not only reaffirms the CFPB’s intentions, but also emphasizes the Bureau’s position in the Bulletin that, according to the CFPB, “establishes that institutions will be held responsible for the actions of their third-party vendors.”   

Fines As A Deterrent: The $210 million fine is not only significant because it dwarfs fines issued by other government regulators (the Federal Trade Commission’s largest fine against a single entity is $22.5 million), but it also suggests that the CFPB intends to continue issuing significant fines to deter other banks from engaging in similar conduct. Industry insiders believe that the CFPB is upping the ante when it comes to fines because it believes that past penalties were viewed by financial institutions as nothing more than the cost of doing business. Significant fines will be more problematic for smaller institutions that lack the resources of larger financial institutions. 

Airing of Dirty Laundry: In connection with the enforcement action, the CFPB publicly issued a consent order that described in painstaking detail the violations that formed the basis of the CFPB’s action. Institutions should not only be concerned that the CFPB will use enforcement actions to publicly detail their practices and procedures, but that they will also be subjected to thorough examinations and required to produce sensitive documents that may be turned over to other regulators and state law enforcement officials.

Being Told How To Conduct Business: In connection with the enforcement action, the CFPB also issued Compliance Bulletin 2012-06 that outlines the steps that the CFPB believes that financial institutions “should take . . . to ensure that they market and sell credit card add-on products in a manner that limits the potential for statutory or regulatory violations.” (See article above.) In other words, the CFPB is setting the standard for how financial institutions should conduct their business. With each new enforcement action, it is anticipated that the CFPB will issue additional Compliance Bulletins that further proscribe how financial institutions may conduct their business.

No One Is Safe From the CFPB:  By targeting Capital One—one of the nation’s largest and most well-known banks—the CFPB demonstrated that no financial institution, large or small, is safe from scrutiny.

More Enforcement Actions Are Coming: In announcing the enforcement action, the CFPB was not shy in warning financial institutions that this was only the beginning. CFPB Director Cordray warned “We expect announcements about other institutions as our work continues to unfold.” Cordray also forewarned that the CFPB knows the alleged deceptive market practices “are not unique to a single institution,” and that the “compliance bulletin puts all financial institutions on notice about these prohibited practices and reinforces that they must make sure their service providers are complying with the law.”

With the first enforcement action under its belt, it is not clear what institution or issue the CFPB will target next, but two things are certain: (i) concern over the CFPB’s enforcement powers was well founded; and (ii) CFPB does not intend to slow down any time soon; America’s financial institutions (and their customers) will undoubtedly pay the price.

News from the Bureau

CFPB and Department of Education Target Private Student Loans

The Bureau and the Department of Education released a joint report last week stating that many student borrowers are struggling under the weight of private student loans, which surpassed $20 billion at their peak in 2008. The report indicates that lenders generally bundled and sold the loans quickly, and did little to ensure that the student loans could be paid back. CFPB director Richard Cordray stated the report shows “students were yet another group of consumers that were hurt by the boom and bust of the financial crisis.” According to Education Secretary Arne Duncan, “[s]ubprime-style lending went to college, and now students are paying the price.”

Private lending representatives have pushed back, stating that many of these problems have been addressed by recent regulations. For example, all federal loans have been issued only by the federal government since July 2010. In addition, more than 90 percent of private student loans were co-signed by a creditworthy individual, as compared to just 67 percent of those loans in 2006. School officials now review more than 90 percent of private loans to ensure that the aid matches the students’ needs. These recent improvements have made private lenders “quite concerned by the unfair implications that this segment of the consumer lending market ‘operates in the shadows,’” according to Tom Deutsch, Executive Director of the American Securitization Forum.

The CFPB/Department of Education report recommends that lawmakers consider ways to enable student borrowers to restructure loan debt in bankruptcy. The report further suggests that colleges be required to certify that the money a student borrows does not exceed his or her need. In addition, the report recommends that schools be required to determine whether a student has exhausted all federal aid before allowing a private loan to be made.

Last week the Bureau and Department of Education also presented a new financial aid form, called the Financial Aid Shopping Sheet. Noting that “[t]oo often students receive financial aid award letters that are laden with jargon, use inconsistent terms and calculations, and make it unnecessarily difficult to compare different financial awards side by side,” Cordray believes “[t]he form can help students understand how much debt they have after graduation and what their monthly payment could look like.”

“We still have some work to do to ensure that students who take out private loans have the same kinds of protections offered by federal loans,” acknowledged Secretary Duncan. “In the meantime, if you have to take out a loan to pay for college, federal student aid should be your first option.”

Miscellany

Senate Republican Drops Opposition to Confidentiality Bill

As previously reported in CFPB Alert Vol. 2, No. 6, a bipartisan bill that would ensure that regulated entities would maintain privilege when handing over documents to the Bureau, was stalled in the Senate due to concerns of some Republicans that the privilege language should be included as part of a legislative overhaul of the Dodd-Frank Act. On July 18, 2012, Senator Bob Corker (R-Tenn.) announced that he was dropping his opposition to the privilege bill on the basis that discussions for legislative changes to the Dodd-Frank Act were unlikely to occur prior to the election and he did not “want to interfere with any firm’s ability to adequately protect their customers’ privileged information.”

The privilege bill (S.2099) is being combined with the ATM sign bill (S.3394), which would remove the requirement that entities post physical signs on the machines advising consumers of ATM fees. Advocates of the ATM sign bill argue that people are stealing the signs and then filing frivolous lawsuits against ATM owners for failure to post the fees. The bill would require that ATM owners still notify consumers of fees via on-screen notice.

The companion privilege bill (H.R.4014) passed in the House of Representatives by voice vote in late March. Assuming the Senate approves the combined privilege and ATM sign bill, the legislation will require additional consideration by the House, but reports suggest that there is little opposition to either element of the bill on the House side, and it is expected that such a measure would pass quickly.

Survey Finds Americans Support Bureau

The Dodd-Frank Act is celebrating its two-year anniversary and a recent survey found that the vast majority of Americans support the Act and the creation of the Consumer Financial Protection Bureau.  The survey was commissioned by The Center for Responsible Lending, Americans for Financial Reform, the AARP and the National Council of La Raza.

The survey found that 73 percent of voters, regardless of political affiliation, support the Dodd-Frank Act and 66 percent of voters favor the creation of the Consumer Financial Protection Bureau. The survey also showed strong support for the rights of individual States to pass and enforce consumer protection laws and prevent federal law from overriding them, with two thirds of voters supporting State regulation.  The survey also made it clear that a majority of voters, a whopping 92 percent, favor simpler disclosures for mortgages, credit cards, cars and other products. Voters also strongly support s searchable complaints database for consumers to report unfair financial practices.

Senate Banking Committee Chairman Tim Johnson noted that the survey "provides us more evidence that Americans continue to support strong, effective financial oversight laws and an independent consumer financial watchdog." 

Update on QM Rule

The CFPB continues to focus upon defining the term Qualified Mortgage (QM), while the consumer and industry groups attempt to influence the outcome. As discussed in earlier issues of the CFPB Alert, the QM rule will set forth criteria to determine whether a potential borrower can afford a mortgage.

The hotly debated issue at the moment is whether the QM rule will impose a “bright-line” test. The banking industry strongly advocates for a bright-line rule because it will minimize confusion as to what is and what is not a QM. The Clearing House Association (the CHA) stated that without a bright-line test, banks will face significant loan repurchase requests from Fannie Mae and Freddie Mac as well as rescissions in coverage by mortgage insurers. The repurchase requests will not be limited to loans that are found to violate ability to repay requirements, but will also encompass loans that are delinquent, even if those loans have not been challenged for violating the ability to repay requirements. The CHA cautioned that given these risks, the banking industry will impose even stricter standards for lending and, thus, make it difficult for otherwise qualified borrowers to obtain mortgages. 

Another issue of debate surrounding the QM rule is whether the rule will include a safe harbor or rebuttable presumption provision. A significant class of the banking industry is adamant that a safe harbor provision, as opposed to a rebuttable presumption, is an absolute must. That subset of the banking industry avers that a rebuttable presumption will leave lenders vulnerable to costly litigation and settlements despite the fact that they satisfied QM underwriting standards.

The CHA, which represents 18 of the nation’s largest banks, however, does not believe that a safe harbor provision is critical. Rather, the CHA has proposed a 43 percent debt-to-income ratio (DTI) test for the QM rule. The 43 percent DTI would include a “waterfall” of compensating factors (such as liquid reserves, payment history and residual income) to cover borrowers with higher DTIs. The American Bankers Association (ABA) strongly disagrees with the CHA’s DTI proposal. First, the ABA stands firm that the lack of a safe harbor is fatal. Second, the ABA takes the position that for its members “a 43% DTI is a bad test.” The ABA explained that a 43 percent DTI is too low because it cuts off 15 percent of the loans currently being originated. In fact, ABA director Bob Davis noted that an ABA survey revealed that 10 percent of banks showed that a 43 percent DTI would cut off 30 percent of their loans.

The House of Representatives agrees with the ABA. On July 12, 2012, 106 members of the House of Representatives wrote to the CFPB urging it to adopt a safe harbor provision. The House members stated that Congress did not intend to impose additional legal liability on lenders that comply with underwriting requirements. The July 12, 2012 letter advised that a rebuttable presumption would “weigh down” properly originated loans and provide “little certainty for the creditor, and thus little incentive to make a qualified mortgage, which limits loan fees and features.”

The CFPB is required to craft the final rule defining a QM by January 21, 2013. The National Association of Mortgage Brokers requested that Congress extend the deadlines for finalizing the QM rule. The House of Representative’s Financial Services chairman, Shelley Capito, (R-W.Va.), however, has urged the CFPB to meet the deadline. Ms. Capito reasoned that “[w]hile we want to make sure CFPB produces a workable rule, we also want to see that they do so in a timely fashion[.]” 

Regulatory Scorecard

Please click here access a printable version of the Dykema Regulatory Scorecard, our up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.

Contacts and Caveats

For more information about Dykema’s Financial Services Regulatory and Compliance practice, please contact group leader, Don Lampe at 704-335-2736, Arthur B. Axelson at 202-906-8607, or any of the listed attorneys.

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_{As part of our service to you, we regularly compile short reports on new and interesting developments in our business services program. Please recognize that these reports do not constitute legal advice and that we do not attempt t cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this newsletter, or any Dykema publication, are always welcome. © 2012 Dykema Gossett PLLC.}