CFPB Spring 2017 Supervisory Highlights Focus on Student Loan and Mortgage Servicers

On April 26, 2017, the Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) released its Supervisory Highlights, Spring 2017. The Supervisory Highlights state that supervisory resolutions in the September-December 2016 period led to approximately $6.1 million in restitution to over 16,000 consumers.

The Supervisory Highlights reflect a continued focus by the CFPB on the mortgage and student loan servicing industries. The CFPB also discusses the application of the mortgage ability-to-repay standards to asset-based lending, rather than income-based lending. Finally, the Supervisory Highlights contains the CFPB’s first public announcement of a new service provider examination program.

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Conference of State Bank Supervisors Sues To Stop OCC Fintech Charters

On April 26, 2017, the Conference of State Bank Supervisors (“CSBS”) filed a complaint against the Office of the Comptroller of the Currency (“OCC”) and Comptroller of the Currency Thomas J. Curry to block the agency from going forward with its proposal to grant special purpose national bank charters to fintech companies. The CSBS filed this lawsuit in the U.S. District Court for the District of Columbia.

In December 2016, Comptroller of the Currency Thomas J. Curry announced that the OCC intended to issue special purpose national bank charters to fintech companies. We discussed this announcement and the accompanying white paper in detail in a client alert. The white paper argued the OCC had authority under the National Bank Act (“NBA”) to grant special purpose charters to companies that make “bank-permissible, technology-based innovations in financial services” and that engage in at least one of three enumerated activities: receiving deposits, paying checks, or lending money. After a round of public comment—which included a critical comment letter from CSBS—the OCC released a draft supplement to its Licensing Manual that explained how it intended to evaluate fintech companies applying for special purpose charters.

The CSBS’s complaint argues that the OCC does not have the authority to grant such charters to fintech companies under federal law and that the proposal would inhibit state regulators’ ability to protect consumers.  In a press release, CSBS President and CEO John Ryan stated, “The OCC’s action is an unprecedented, unlawful expansion of the chartering authority given to it by Congress for national banks.” Mr. Ryan further explained, “To protect consumers and taxpayers, to promote innovation, and to ensure fair and open competition, CSBS was forced to take legal action against the OCC charter.”

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CFPB Monthly Complaint Report Highlights Consumer Complaints Regarding Student Loans

On April 25, 2017, the Consumer Financial Protection Bureau (“CFPB”) released its monthly complaint report.  For the month of March 2017, the products and services generating the most consumer complaints were debt collection, credit reporting, and mortgages, collectively representing approximately 65% of all complaints received.  This continues the trend from February 2017, when the same three products and services generated over 60% of complaints received.  In total, complaints increased 9% in March 2017 compared to February 2017, and the greatest increase in complaints were associated with money transfer products and services, which increased 34% from the prior month.  Conversely, student loan complaints declined by 20% and prepaid complaints declined by 8%.

In a year-to-year comparison covering the three-month periods January to March 2016 and January to March 2017, the total number of complaints increased by more than 19% for the first quarter of 2017. Specifically, student loan complaints increased by 325%, an increase the CFPB attributed, in part, to updating its student loan complaint form in February 2016 to accept complaints about Federal student loan servicing.  The CFPB also indicated that the increase may reflect its initiation of an enforcement action against a large student loan servicer.  For the same year-to-year comparison, bank account or service complaints increased by 25%, consumer loan complaints increased by 25%, credit reporting complaints increased by 23%, credit card complaints increased by 18%, and debt collection complaints increased by 9%.  Prepaid, money transfer, mortgage, payday loan, and “other financial service” complaints decreased.  Payday loan complaints declined by 29%, the greatest percentage decrease of any product category.

Despite the substantial year-to-year increase, student loan complaints actually showed the greatest monthly percentage decrease in March 2017, declining by 20% compared to February 2017. The most common issues identified by consumers in student loan complaints were “problems dealing with their lenders or servicers” (64%) and “being able to repay their loans” (33%).  Complaints about non-federal student loans comprised 64% of the complaints, while federal student loan complaints made up the remaining 36% of complaints.  The CFPB also identified the following issues from student loan complaints:

  • Poor information from and sloppy practices by servicers;
  • Difficulty enrolling and staying in an income-driven repayment plan; and
  • Confusion about consumers’ progress toward Public Service Loan Forgiveness programs.

CHOICE Act 2.0: House Financial Services Committee Revises Regulatory Reform Bill

On April 19, 2017, the House Financial Services Committee released a new discussion draft of the Financial CHOICE Act, its comprehensive regulatory reform bill.  The Committee released the first version of the CHOICE Act in June 2016.  Buoyed by the election of a Republican president, and following several months of public and industry outreach, Committee leadership has made a number of significant changes to the bill.

Please see our client alert for a summary of the new draft of the CHOICE Act, with an emphasis on the differences from the first draft of the bill.

Trump Directs Treasury to Review Dodd-Frank Orderly Liquidation Authority and FSOC Processes

On Friday, April 21, President Donald Trump signed two presidential memoranda, directing the Secretary of the Treasury (the “Secretary”), Steve Mnuchin, to review two major provisions of the Dodd-Frank Act: orderly liquidation authority (“OLA”) for financial companies under Title II, and the decision-making processes of the Financial Stability Oversight Council (“FSOC”). Consistent with the Trump Administration’s February Executive Order ordering the Secretary to review financial regulations—which we discussed in a client alert—these memoranda highlight the Administration’s concerns with certain provisions of Dodd-Frank but will not effect major changes on their own.

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D.C. Circuit Panel Rules that CFPB Civil Investigative Demand is Overly Broad and Unenforceable

On April 21, 2017, a panel of the U.S. Court of Appeals for the District of Columbia Circuit ruled that a civil investigative demand (“CID”) issued by the Consumer Financial Protection Bureau against the Accrediting Council for Independent Colleges and Schools (“ACICS”) was overly broad and unenforceable.  The D.C. Circuit’s decision sets an important precedent for entities subject to Bureau investigations.

The CFPB issued the CID against the accrediting organization in August 2015, at a time of intense public scrutiny of for-profit colleges and ACICS’s accreditation of for-profit colleges that eventually resulted in the U.S. Department of Education withdrawing the organization’s status as a recognized accreditor. The CID’s stated purpose, set forth in its “Notification of Purpose,” was to investigate whether “any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges” in violation of “any” federal consumer financial protection law.  At the time, commentators speculated as to whether the CFPB was exploring taking action against ACICS—which is not a consumer lender—directly or by arguing that the accreditor was an affiliate of or engaged in aiding and abetting a college or lender more clearly within the Bureau’s jurisdiction.

In 2016, a federal district court denied a petition by the Bureau to enforce the CID, finding that the CFPB lacked the statutory authority to issue the CID because it “target[ed] the accreditation process” despite the agency having a mandate from Congress that did not seek to “address, regulate, or even tangentially implicate the accrediting process of for-profit colleges.”

In its April 21 decision, the D.C. Circuit panel upheld the district court on the narrower grounds that the CID was impermissibly vague and provided insufficient notice under a statutory requirement that Bureau CIDs “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” The court found that the CID did not meet this standard because it provided “no description whatsoever of the conduct” under investigation and failed to explain the meaning of “the broad and non-specific term ‘unlawful acts and practices’” in the context of the particular investigation.

Notably, the panel’s opinion explicitly stated that invalidating the specific CID made it unnecessary for the panel to rule on whether Congress granted the Bureau the authority to take action against an accreditor. However, during the contentious oral argument for the case in February 2017, one of the panel’s judges directly asserted that the CFPB lacks the authority to take action against a non-lender accreditor like ACICS directly.  In response, the CFPB took the position that even if ACICS is outside of the Bureau’s enforcement jurisdiction—preventing direct action against it—the CFPB still has the authority to demand information related to investigations of entities within the agency’s jurisdiction “from those who have it.”

A CFPB spokesperson declined to state whether the Bureau would appeal the decision, issue a narrower and more specific CID, or end its investigation.

This decision—the first of its kind relating to the CFPB—may lead other CID recipients to challenge the typically broad, open-ended Notifications of Purpose found in Bureau CIDs. Alternatively, the CFPB may revise its CID practices and become more specific in identifying the conduct and statutes relevant to its investigations.

CFPB Extends Effective Date for Prepaid Accounts Rule

On April 20, 2017, the CFPB released a final rule to delay the effective date for certain provisions of the prepaid accounts final rule, from October 1, 2017, to April 1, 2018. We discussed the CFPB’s proposal to delay the effective date of the prepaid accounts final rule in a prior post.

In the final rule, the CFPB also indicated that it will revisit at least two substantive issues and will issue a separate proposal for notice and comment on these substantive issues in the coming weeks. Specifically, the CFPB will further consider: (i) “the linking of credit cards to digital wallets that are capable of storing funds”; and (ii) “error resolution and limitations on liability for prepaid accounts that cannot be registered, have not yet been registered, or for which consumers have attempted but have not successfully completed the registration process.” The CFPB also indicated that it will continue to evaluate other concerns related to the prepaid accounts rule and may address additional topics in the forthcoming proposed rule.

CFPB Sues Ocwen for Alleged Violations of Consumer Financial Laws

On April 20, 2017, the CFPB sued nonbank mortgage loan servicer Ocwen Financial Corporation and its subsidiaries (collectively, “Ocwen”) in the U.S. District Court for the Southern District of Florida. The Bureau’s complaint alleges violations of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, the Truth in Lending Act, and the Homeowners Protection Act of 1998.

In a strongly worded press release, the CFPB alleged that Ocwen engaged in “significant and systemic misconduct at nearly every stage of the mortgage servicing process.”  CFPB Director Richard Cordray stated that “Ocwen has repeatedly made mistakes and taken shortcuts at every stage of the mortgage servicing process, costing some consumers money and others their homes.”  In its own statement, Ocwen vigorously denied any wrongdoing and accused the CFPB of bringing a “politically-motivated” lawsuit in an attempt to divert attention from mounting public criticism of the Bureau.

The CFPB’s new complaint was accompanied by a separate case brought by the State of Florida against Ocwen for similar allegations.  In addition, 20 states filed cease-and-desist orders alleging escrow management issues and seeking to prohibit Ocwen from originating or acquiring any new loans.

Notably, Ocwen is already subject to a $2.1 billion settlement approved in 2014 for similar allegations in a case brought by the CFPB, 49 states, and the District of Columbia.  The Bureau’s allegations largely relate to Ocwen’s conduct since January 2014 when the CFPB’s mortgage servicing and other mortgage rules became effective, although the Bureau’s allegations relating to Ocwen’s marketing and billing of add-on products date to July 2011.

The Bureau’s allegations, which Ocwen has vigorously denied, are summarized below.

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CFPB Sues Debt Collection Law Firm for Allegedly Misleading Communications

On April 17, 2017, the Consumer Financial Protection Bureau filed suit in the Northern District of Ohio against Weltman, Weinberg & Reis Co., L.P.A. (“Weltman”), a debt collection law firm.  The CFPB’s complaint alleges that the firm misrepresented the level of attorney involvement in its collection efforts in violation of the Fair Debt Collection Practices Act and the Dodd–Frank Wall Street Reform and Consumer Protection Act.

The CFPB alleges that Weltman sent demand letters and made collection phone calls that implied that the firm’s attorneys had reviewed consumer-specific information when that usually was not the case. According to the CFPB’s allegations, the firm’s attorneys usually did not review individual account information to verify a debt’s accuracy or to determine the appropriateness of litigation before Weltman sent demand letters or made collection calls.  The CFPB also alleges that Weltman’s demand letters falsely implied that the letters were from attorneys.

In a statement, CFPB Director Richard Cordray said that the firm’s communications created a false impression of a “level of authority and professional judgment” that is inconsistent with the level of review provided to each consumer’s file. Weltman responded in a statement that the firm was “truthful” and “factually accurate” in its debt collection communications, and charged that the CFPB’s actions were in response to Weltman’s refusal to be “strong-armed” into a consent order.

This is the second action the Bureau has brought against debt collection law firms this year. Earlier this year, the agency entered into a consent order with Works and Lentz, Inc., and Works and Lentz of Tulsa, Inc., alleging similar conduct.

CFPB Announces Fair Lending Priorities in Fifth Annual Fair Lending Report

On April 15, 2017, the CFPB issued its fifth annual Fair Lending Report (“Report”). The Report describes the CFPB’s 2016 fair lending supervisory, enforcement, and rulemaking activities, interagency collaboration, and outreach to stakeholders.

Most importantly, the Report outlines the CFPB’s fair lending priorities for 2017, indicating that the CFPB will increase its focus on redlining, mortgage and student loan servicing, and small business lending. The Report suggests that the CFPB’s focus is shifting its attention away from indirect auto lending.

Student loan servicing and small business lending are two areas, like indirect auto lending, where creditors are prohibited from collecting applicant characteristic data. To determine race and ethnicity in indirect auto lending actions, the CFPB has used the controversial Bayesian Improved Surname Geocoding (“BISG”) proxy methodology, which combines geography-based and surname-based information into a single proxy probability for race and ethnicity. The Report gives no indication whether the CFPB would rely on the same BISG proxy methodology in any future supervisory or enforcement actions against student loan servicers or small business lenders. Any effort by the CFPB to extend this proxy methodology to these areas, particularly small business lending, could ignite further controversy because Section 1071 of the Dodd-Frank Act requires the CFPB to promulgate a data collection rule for small business lending, a rule the CFPB has yet to propose.

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