CFPB Seeks Contempt Order against Investigation Target

On June 21, 2017, a federal district court judge referred to a magistrate the Consumer Financial Protection Bureau’s (“CFPB”) first attempt to obtain a contempt finding against a subject who allegedly failed to comply with a civil investigative demand (“CID”).

The matter arrived in district court in November 2016, when the CFPB first sought judicial intervention in the Eastern District of Michigan to compel National Asset Companies (consisting of Harbour Portfolio Advisors, LLC, National Asset Advisors, LLC, and National Asset Mortgage, LLC) to respond to the Bureau’s September 2016 CIDs. In February, the court ordered National Asset Companies to comply with the CIDs within 30 days, a deadline the court later extended by a week. Then, in May, the Bureau filed a new motion to hold National Asset Companies in contempt, asserting that the National Asset Companies had still failed to comply with the CIDs in multiple respects, including by failing to produce available audio files, providing incomplete audio metadata, and other inadequacies. The CFPB is seeking monetary fines of $5,000 per day for each of the companies in question until they comply with the court’s prior orders.

The CFPB’s contempt motion indicates that the agency does not intend to back off of its investigative agenda amidst demonstrated interest by the administration and some members of Congress to significantly curtail its power (which we have previously discussed here and here, among other posts). Instead, the Motion serves as a useful, if extreme, reminder that the CFPB will not let civil investigative demands go unanswered.

CFPB Reports and Acts on Complaints about Student Loan Servicer Handling of Public Service Loan Forgiveness Program

On June 22, 2017, the CFPB announced a series of actions based on consumer complaints it has received about the manner in which student loan servicers handle the Public Service Loan Forgiveness (“PSLF”) program.

PSLF is a federal student loan forgiveness program that provides borrowers in public service jobs, such as teachers, nurses, first responders, military servicemembers, and social workers, with a pathway for fully satisfying their loan obligations based on reduced income-driven repayment (“IDR”) plans over a 10-year period. The program is designed to encourage borrowers to pursue public service careers despite increasing levels of student loan debt, and is administered by the U.S. Department of Education. To qualify for loan forgiveness under the PSLF program, borrowers must: (1) have a qualifying federal Direct Loan; (2) be enrolled in a qualifying repayment plan, meaning an IDR plan; (3) work full-time for a qualified public service employer; and (4) make 120 on-time, qualifying payments.

First, the CFPB issued a report on federal student loan complaints about the PSLF program and related IDR plans. The report identified complaints alleging that student loan servicers:

  • Did not provide borrowers with adequate or accurate information about PSLF qualifications and failed to inform borrowers that only federal Direct Loans are eligible for the PSLF program;
  • Enrolled borrowers in non-qualifying repayment plans, despite borrowers expressing interest in PSLF;
  • Failed to provide assistance in completing annual recertification forms showing continued eligibility based on employment by a qualified public service employer and family size;
  • Increased payments under IDR plans as a result of servicer processing delays; and
  • Did not inform borrowers that payments made toward PSLF would be lost if a Direct Loan is consolidated with other loans.

The report recommended a review process for borrowers who were given inaccurate information by their student loan servicer, early servicer engagement with borrowers about IDR plans and their benefits, protection of borrowers against adverse consequences resulting from servicing delays, timely reminders from servicers about pending deadlines for submitting recertification forms, and enhanced tracking of payments and progress towards PSLF.

Second, the CFPB revised its Education Loan Examination Procedures to address supervisory expectations of student loan servicers regarding their communications and other dealings with borrowers related to loan forgiveness programs, in particular the PSLF program. Issuance of the revised examination procedures strongly suggests that, during the coming year, the CFPB will initiate supervisory and enforcement actions against federal student loan servicers based on activities that adversely impact borrowers’ ability to take full advantage of the PSLF program.

Third, the CFPB launched a consumer education campaign to educate student loan borrowers working in public service about what they need to do to qualify for loan forgiveness under the PSLF program.

Treasury Issues Regulatory Reform Recommendations for Banking Industry

On June 12, 2017, the U.S. Department of the Treasury released the first of a series of reports recommending regulatory reforms to the financial system consistent with President Trump’s Core Principles for Regulating the United States Financial System.  Treasury’s first report focuses on the regulatory framework governing the depository system.  Notably, a substantial portion of the report’s recommendations can be addressed through regulatory action, without legislation. This client alert summarizes the report’s most significant recommendations.

CFPB Proposes Additional Changes to the Prepaid Rule

On June 15, 2017, the CFPB announced that it is proposing for public comment certain modifications to its prepaid rule. The rule, which was issued in final form in October 2016, limits consumers’ losses for lost and stolen prepaid cards, requires financial institutions to investigate errors, and includes enhanced disclosure provisions.

The final rule unexpectedly granted Regulation E error resolution rights to consumers holding unregistered prepaid accounts, a provision that was not part of the CFPB’s original proposal. Financial institutions criticized this aspect of the final rule, arguing that providing error resolution rights to holders of unregistered accounts would invite and open new avenues for fraud. Financial institutions also argued that it would be difficult, if not impossible, to investigate alleged errors if they have little to no information about the purchasing customer. As a result, financial institutions have claimed that, if the CFPB retains error resolution rights for unregistered prepaid accounts, they would no longer provide immediate access to funds on such accounts.

To address these concerns, the current proposal would require consumers to register their prepaid accounts to qualify for Regulation E error resolution rights, including the right to recoup funds for lost or stolen cards. Under the CFPB’s proposal, however, Regulation E error resolution rights would apply to registered accounts even if the card was lost or stolen before the consumer completed the registration process.

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Texas District Court Rules that Notification of Purpose in CFPB CID Provides Fair Notice

On January 5, 2017, the Consumer Financial Protection Bureau (the “CFPB”) issued a civil investigative demand (“CID”) to The Source for Public Data, L.P. (“Public Data”), a company that collects personal information about consumers. The CID requested information to determine whether consumer reporting agencies, persons using consumer reports, or other persons have engaged or are engaging in unlawful acts and practices in connection with the provision or use of public records information in violation of the Fair Credit Reporting Act. The CID implied that Public Data is a consumer reporting agency, a characterization Public Data has rejected.

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CFPB Enters Consent Order with Mortgage Servicer Fay Servicing

On June 7, 2017, the Consumer Financial Protection Bureau announced entry of a consent order against mortgage servicer Fay Servicing, LLC for alleged violations of the Bureau’s 2014 mortgage servicing rules.

The CFPB alleged that Fay Servicing failed to provide timely notices to delinquent borrowers acknowledging that their loss mitigation applications were complete or incomplete, and failed to provide timely notices to delinquent borrowers of the foreclosure mitigation options available to them. The CFPB further alleged that Fay Servicing proceeded with foreclosure actions against borrowers who had applied for loss mitigation options while their applications were under consideration. According to the Bureau, these issues constituted violations of multiple rules under the 2014 mortgage servicing rules.

The order requires Fay Servicing to set aside $1.15 million for the purpose of providing redress to affected borrowers. The company must provide affected customers with notice of the funds and with certain protections from foreclosure actions during the company’s redress efforts. The CFPB will collect any unclaimed redress payments and may at its discretion use the remainder to provide additional redress or may deposit the remaining funds in the U.S. Treasury as disgorgement. The order also requires Fay Servicing to implement compliance policies and procedures and to comply with federal law.

In a press release, Fay Servicing stated that “any instance in which it did not comply with a regulatory requirement” relates to a “small fraction” of the company’s borrowers and that affected borrowers were assisted by the company’s loss mitigation process.

CFTC Acting Chairman Makes Budget Request

On June 8, 2017, Acting Chair J. Christopher Giancarlo of the Commodity Futures Trading Commission (“CFTC”) made his request for the CFTC’s budget for fiscal year 2018 (“FY 2018”) to the House Appropriations Committee Subcommittee on Agriculture, Rural Development and Related Agencies (“Subcommittee”).  Acting Chair Giancarlo is seeking an increase in the CFTC’s budget from $250 million in FY 2017 to $281.5 million in FY 2018.

According to Acting Chair Giancarlo, the budget request is based on his experience “as a former senior executive as a publicly traded company.”  To that end, Acting Chair Giancarlo assured the Subcommittee that, in crafting the budget, he did not simply “take last year’s budget and add a percentage increase.”  Rather, he emphasized that the budget baseline was zero, and it was built from the ground up to ensure that “each requested dollar…serve a purpose.”

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Trump To Nominate Former OneWest CEO To Head the OCC; Reportedly Makes Picks for Fed Nominees

The OCC

On June 5, 2017, the White House announced that Donald Trump will nominate Joseph Otting to succeed Thomas J. Curry as Comptroller of the Currency.  Otting is the former CEO of OneWest Bank, where he worked for current Treasury Secretary Steve Mnuchin.

Otting is a longtime financial services executive who worked at U.S. Bancorp before moving to OneWest.  As CEO of OneWest, he led a bank that was regulated by the Office of the Comptroller of the Currency (“OCC”).

The OCC is currently being led by former Covington and Simpson Thacher & Bartlett LLP lawyer Keith Noreika, who is serving as Acting Comptroller.

The Fed

The New York Times and Wall Street Journal also reported on Friday, June 2, that President Trump has made his selections for nominees to two of the three open positions on the Federal Reserve Board of Governors.

President Trump has reportedly chosen Randal K. Quarles, a Treasury Department official from the George W. Bush Administration and former financial industry lawyer, to serve as Vice Chair for Supervision.  In practice, he would be succeeding Daniel Tarullo, who was never formally appointed to the position but in practice served as the Fed’s point person for bank supervision.  Quarles is generally regarded as favoring less restrictive regulation of financial institutions as compared to Tarullo.

Marvin Goodfriend, a former economist at the Federal Reserve Bank of Richmond who now teaches economics at Carnegie Mellon University, will also reportedly be nominated to the Board.  Goodfriend is a monetary policy scholar who has advocated that the Fed adopt simpler, more mechanical rules for determining monetary policy.

Kokesh v. SEC and Implications for Consumer and Financial Regulatory Agencies

In its decision in Kokesh v. SEC, issued on Monday, June 5, 2017, the Supreme Court unanimously ruled that “disgorgement” of ill-gotten gains by the Securities and Exchange Commission (“SEC”) is a “penalty” within the meaning of 28 U.S.C. § 2462.  As a result, disgorgement is unavailable to the SEC in judicial proceedings involving conduct that took  place more than five years before the filing of the government’s complaint.  As explained below, because Section 2462 is a statute of general application (i.e., not specific to the SEC), the Court’s ruling could have implications for judicial civil penalty proceedings brought by the Consumer Financial Protection Bureau (“CFPB”), the Federal Trade Commission (“FTC”), the Commodity Futures Trading Commission (“CFTC”), and other financial and consumer regulators.

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