See our sister blog, Inside Privacy, for a summary of the FAQs published by the New York State Department of Financial Services on its new cybersecurity regulations.
On June 27, 2017, the CFPB released its monthly complaint report. As opposed to its typical monthly complaint reports, which highlight broad trends in complaints and focus on specific products and services as well as regions, this month’s “special edition” report provides overall statistics on complaints the CFPB has received since it began accepting complaints in July 2011. The report provides details on, among other things, the total number of complaints received (1,218,600 as of June 1, 2017), the volume of complaints from servicemembers and older consumers (groups that, as exemplified in the preceding hyperlinks, are of particular interest to the CFPB), the percentage of timely company responses, and the most complained about products and services. The report provides statistics at a national level and for each state and the District of Columbia.
On July 10, 2017, the FDIC published for comment a handbook on deposit insurance applications, Deposit Insurance Applications: Procedures Manual. The manual covers each step in the application process: pre-filing activities, application receipt, review and acceptance, application processing, pre-opening activities and post-opening considerations. The FDIC has two audiences and purposes in issuing the manual. For potential bank organizers, the manual provides greater clarity of the application process. For FDIC staff, the manual sets forth comprehensive guidance on handling applications. The FDIC is seeking input specifically on how well the manual helps bank organizers understand the application process. The release of the manual reflects the FDIC’s renewed interest in de novo banks. In the words of Chairman Gruenberg, the manual “extends the FDIC’s efforts to work with any group interested in organizing a new bank.” On May 1, 2017, the agency released a handbook on deposit insurance for de novo organizers. Whether changes to the de novo bank process may be forthcoming in light of the Treasury Department’s recent report on regulatory reform for the banking industry is uncertain. The report recommended a “critical review” of the capital requirements for de novo banks and “significantly streamlin[ing]” of the application process. The manual does not (and was not designed) to include new rules or policies. When or how the FDIC addresses the Treasury Department’s suggestions remains to be seen. The comment period on the manual ends on September 8, 2017.
On June 27, 2017, the CFPB announced it had filed complaints in the U.S. District Court for the Central District of California against credit repair companies Prime Credit, LLC, IMC Capital, LLC, Commercial Credit Consultants (d/b/a Accurise), Park View Law, Inc., and individuals who are principals of these companies, Blake Johnson, Eric Schlegel, and Arthur Barens. Simultaneously with the filing of the complaints, the CFPB also filed proposed stipulated final orders. The defendants have settled and agreed to pay over $2 million in fines.
The CFPB alleged that the defendants violated the Dodd-Frank Act and the Telemarketing Sales Rule (“TSR”). Specifically, the CFPB alleged that the defendants:
- Charged advance fees: The CFPB alleged that the companies charged a variety of fees for their services before demonstrating that the promised results had been achieved. Charging such fees in advance is a violation of federal law. Specifically, according to the CFPB, the companies charged consumers fees for an initial reviews of a consumers’ credit reports and also allegedly charged set-up fees totaling hundreds of dollars and monthly fees that frequently totaled $89.99 per month.
- Placed undisclosed limits on “money-back guarantees”: According to the complaint, the companies offered a money-back guarantee for certain services. However, they allegedly failed to disclose that the guarantee had limits, including that the consumer must pay for at least six months of the service to be eligible for the guarantee.
- Misled consumers about the benefits of their services: The companies allegedly misrepresented that their credit repair services would result in the removal of negative entries on consumers’ credit reports. The complaints further alleged that the companies represented to customers that their credit repair services would, or likely would, result in a substantial increase to consumers’ credit scores, but lacked a reasonable basis for making these claims.
If the court enters the proposed final judgments, Prime Credit, LLC, IMC Capital, LLC, Commercial Credit Consultants, Blake Johnson, and Eric Schlegel will pay a civil money penalty of $1.53 million, and Park View Law, Inc., and Arthur Barens will pay $500,000 in relinquished funds to the U.S. Treasury. In addition, the defendants will be prohibited from doing business in the credit repair industry for five years.
In a statement, Messrs. Johnson and Schlegel, despite agreeing to the proposed judgments, denied wrongdoing and stated that they had sought and followed advice from the California Department of Justice to ensure their activities complied with the law and with industry best practices. They also stated that they felt “blindsided” by the CFPB’s decision to pursue charges under the TSR, noting that the Credit Repair Organizations Act (“CROA”) is the statute which usually governs the activities of credit repair companies and has different billing requirements than the TSR. The CFPB, however, does not have authority to enforce CROA. Rather, the Federal Trade Commission and State Attorneys General or other State-designated agency or official have the authority to enforce the requirements of CROA. 15 U.S.C. § 1679h. In their statement, Messrs. Johnson and Schlegel urged Congress and the President to consider whether the Bureau’s approach to enforcement strikes an appropriate balance for ensuring consumer access to financial services. In a separate statement, Mr. Barens denied wrongdoing or the existence of a showing of consumer harm and characterized the CFPB’s case as built around a “technical argument.”
Earlier this week, the Consumer Financial Protection Bureau published a final rule substantially curtailing the ability of financial services providers and consumers to enter into voluntary pre-dispute arbitration clauses. The final rule, like the proposed rule that preceded it, would i) prevent financial services providers from including arbitration clauses in consumer contracts unless those arbitration clauses expressly permit class actions to proceed in court; and ii) require financial services providers to provide copies of consumer arbitration agreements, claims and decisions to the Bureau for possible publication. The final rule will become effective 60 days after its publication in the Federal Register, but apply only 180 days after its effective date.
See our client alert for additional information on the Bureau’s final rule.
On July 7, 2017, the Consumer Financial Protection Agency (“CFPB”) announced final amendments to its “Know Before You Owe” (“KBYO”) mortgage disclosure rule to memorialize informal guidance regarding the rule, clarify certain aspects of the rule, and provide implementation guidance to industry. The CFPB also issued a proposed rule regarding when a creditor may compare charges paid or imposed upon a consumer to amounts on a Closing Disclosure, rather than on a Loan Estimate, to determine if an estimated closing cost was disclosed in good faith.
Prior to implementation of the KBYO Rule in October 2015, lenders were required to issue overlapping disclosures to consumers applying for a mortgage. The KBYO Rule—established and implemented by the CFPB pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Real Estate Settlement Procedures Act (“RESPA” or Regulation X) and the Truth in Lending Act (“TILA” or Regulation Z)—requires the provision of streamlined, integrated mortgage disclosures to consumers. Key amendments in the revised rule include the following clarifications and technical corrections:
- Create Accuracy Tolerances for the Total of Payments: Prior to the implementation of the KBYO Rule, creditors were required to include in a Closing Disclosure the “total of payments,” which was calculated as and considered to be accurate if it reflected the sum of the amount financed and the finance charge. The KBYO Rule revised the “total of payments” disclosure so that it is accurate if it reflects the sum of principal, interest, mortgage insurance, and loan costs. In other words, the rule does not require the specific use of a finance charge as a component of the calculation in order for the disclosure to be considered accurate. To improve consumer understanding and facilitate compliance, the amendments apply the same tolerances for accuracy to the “total of payments” disclosure that already apply to the finance charge and other disclosures affected by the finance charge.
- Adjust a Partial Exemption Mainly Affecting Housing Finance Agencies: The KBYO Rule created a partial exemption from the integrated disclosure requirements for certain housing assistance loans to facilitate low cost lending. To qualify for the partial exemption, the total costs of the loan payable by the consumer at consummation, including transfer taxes and recording fees, could not exceed 1 percent of the total amount of credit extended. The applicability of the exemption had been limited, however, because increases in transfer taxes and recording fees, in combination with the low dollar figure of the loans, resulted in many of the loans exceeding the 1-percent threshold for upfront costs. The amendments expand the scope of the partial exemption by clarifying that transfer taxes charged in connection with those loans are permissible costs and that recording fees and transfer taxes do not count toward the 1-percent threshold.
- Provide a Uniform Rule Regarding Cooperative Units: Prior to the amendments, State law determined whether or not cooperative units were covered by the KBYO Rule. In the event State law classified a cooperative unit as personal property rather than real property, the KBYO Rule did not apply to loans for such personal property. The amendments require provision of the integrated disclosures in all transactions involving cooperative units, regardless of whether classified under State law as real or personal property. This revision simplifies application of the rule and ensures that more consumers receive the disclosures.
- Provide Guidance on Sharing Disclosures with Parties in the Mortgage Origination Process: In response to questions about, and privacy concerns regarding, the sharing of disclosures to consumers with third parties to the transaction, the amendments incorporate and expand upon previous CFPB guidance. For example, TILA requires creditors to use the Closing Disclosure to provide certain disclosures about the transaction to consumers, and requires the settlement agent to provide a copy of the Closing Disclosure to the seller. In addition, the creditor or settlement agent is permitted to provide a separate Closing Disclosure to the seller that contains limited consumer information. The amendments clarify that a creditor, at its discretion, may modify the Closing Disclosure form to accommodate the provision of separate Closing Disclosure forms to the consumer and the seller, and provides examples of when a creditor may provide the separate forms to the consumer and seller.
Proposed Rule and Request for Public Comment
Under TILA and RESPA, creditors must provide certain disclosures to consumers in two integrated forms, a Loan Estimate and a Closing Disclosure. Creditors must deliver or place in the mail the Loan Estimate no later than three business days after a consumer submits a loan application. A Closing Disclosure must be received by a consumer at least three business days prior to consummation.
Creditors must provide good faith estimates of loan terms and closing costs on the Loan Estimate. An estimated closing cost is disclosed in good faith pursuant to TILA if the charge paid by the consumer does not exceed the amount originally disclosed, with certain enumerated exceptions in 12 C.F.R. § 1026.19(e)(3)(ii) through (iv). In certain circumstances, a creditor is permitted to use revised estimates, as opposed to the estimate originally disclosed to the consumer, to compare to the charges actually paid by the consumer for purposes of determining whether an estimated closing charge was disclosed in good faith. The CFPB refers to this practice as “resetting tolerances.” If a creditor uses a revised estimate to reset tolerances, then the creditor must provide a Loan Estimate reflecting the revised estimate within three days of the creditor receiving information sufficient to constitute a permissible reason for the revised estimate. TILA imposes time restrictions on the provision of a revised Loan Estimate: (i) a consumer must receive any revised Loan Estimate no later than four business days prior to consummation; and (ii) the creditor cannot provide a revised Loan Estimate on or after the date the Closing Disclosure is provided to the consumer. However, if there are less than four days between the time the revised version of estimates is required to be disclosed (i.e., within three days of the creditor’s receipt of the qualifying information) and consummation, the creditor can provide the revised estimates to reset tolerances on the Closing Disclosure. The CFPB refers to this window for providing the revised estimates as the “four-business day limit.”
The CFPB’s proposal seeks to address confusion in the marketplace regarding these timing requirements and the use of Closing Disclosures for resetting tolerances. Accordingly, in the current proposal, the CFPB requests comment on whether to remove this four-business day limit for resetting tolerances and determining whether an estimated closing cost was disclosed in good faith. The CFPB proposes that creditors may use either initial or corrected Closing Disclosures to reflect changes in costs for purposes of determining whether an estimated closing cost was disclosed in good faith, regardless of how close to consummation the Closing Disclosure is provided.
Comments are due 60 days after the proposed rule’s publication in the Federal Register.
On July 6, 2017, the Commodity Futures Trading Commission (“CFTC”) announced that it had granted LedgerX registration as a swap execution facility (“SEF”). LedgerX is a platform that will trade and clear options on bitcoin. LedgerX has also applied to become a derivatives clearing organization. If approved, LedgerX “would be the first federally regulated bitcoin options exchange and clearing house to list and clear fully-collateralized, physically-settled bitcoin options for the institutional market.” Bitcoin is a cryptocurrency whose creation and distribution is governed by an open source program, and whose exchange is governed by distributed ledger technology (“DLT”). A distributed ledger, as we have previously explained, “is a type of database in which identical copies of information are distributed and maintained among multiple parties or multiple nodes in a computer network.” In May 2016, the CFTC granted SEF registration to TeraExchange, LLC, which offers a U.S. Dollar/bitcoin swap.
The willingness of the CFTC to grant SEF registration to exchanges whose products will be based on innovative technology such as DLT is consistent with Acting Chair J. Christopher Giancarlo’s forward-thinking approach to FinTech. Indeed, Acting Chair Giancarlo has specifically “called for regulators to embrace distributed ledger technology.” He also often cites the potential of DLT when discussing the optimal regulatory approach to FinTech. In a May 2016 speech, Acting Chair Giancarlo argued that DLT “could be the biggest technological innovation in the financial services industry and financial market regulation in a generation or more,” and he specifically outlined the parameters of a “do no harm” regulatory approach that would enable regulators to “promote DLT and other financial technology.” These parameters for regulators include using “dedicated, technology savvy teams to work collaboratively with FinTech companies” and giving FinTech companies “breathing room” to pursue innovation without fear of enforcement action. Acting Chair Giancarlo has since repeatedly urged regulators to adopt his “do no harm” approach.
On June 29, 2017, the Division of Corporate Finance of the Securities and Exchange Commission announced that it will permit all companies to submit drafts of certain registration statements to the Division on a confidential basis, expanding a popular privilege that was made available to emerging growth companies under the Jumpstart Our Business Startups Act (known as the JOBS Act) in 2012.
The availability of non-public draft filings will be of particular interest to financial institutions that plan to file or underwrite initial public offerings. Please see our client alert for a summary of the new policy.
On June 27, 2017, the Board of Governors of the Federal Reserve System, Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, the “Agencies”) proposed revisions to their Call Report forms for insured depository institutions. The proposed changes are intended to align Call Reports with a recent accounting change and industry reporting practices, and to reduce certain reporting burdens. Notably, streamlining Call Reports was one of the U.S. Department of the Treasury’s recommendations for financial regulatory reform in its June 12, 2017 report.
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.