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The Consumer Financial Protection Bureau (CFPB) recently celebrated its second birthday. During its first two years of existence, the CFPB has shown itself to be an aggressive consumer-protection …

The Consumer Financial Protection Bureau (CFPB) recently celebrated its second birthday. During its first two years of existence, the CFPB has shown itself to be an aggressive consumer-protection agency. It is particularly noteworthy because its broad jurisdictional mandate could impact virtually any business that makes a loan to any consumer. Consumer lenders need to be alert to the sweeping implications this agency will have for their future business activities.

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  • 1. Client Alert: CFPB Introduction The Consumer Financial Protection Bureau (CFPB) recently celebrated its second birthday. During its first two years of existence, the CFPB has shown itself to be an aggressive consumer- protection agency. It is particularly noteworthy because its broad jurisdictional mandate could impact virtually any business that makes a loan to any consumer. Consumer lenders need to be alert to the sweeping implications this agency will have for their future business activities. What is the CFPB? The CFPB was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). In January 2012, President Obama appointed Richard Cordray as the Bureau’s first director. The stated purpose of the CFPB is to “. . . seek to implement and, where applicable, enforce Federal consumer financial law consistently for the purpose of ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.”[1] The CFPB is tasked with implementing, examining compliance with, and enforcing Federal consumer financial laws. Those laws include the Dodd-Frank Act, which prohibits unfair, deceptive, or abusive acts and practices in connection with consumer financial products and services, as well as a host of enumerated consumer laws and certain consumer protection rules issued by the Federal Trade Commission (FTC).[2] The CFPB states that it is driven by three main principles: (1) a focus on an institution’s policies and practices and the risks they impose on consumers; (2) the analysis of available data from a wide range of sources in carrying out its supervisor function; and 3) fulfilling its statutory mandate to consistently enforce federal consumer financial law. To this end, the CFPB strives to educate consumers, enforce the law and gather and analyze available information to better understand consumers, financial service providers, and consumer financial markets. Through its supervision program, the Bureau has the sweeping authority to examine a broad range of consumer lenders: • banks with over $10 billion in assets, and their affiliates; • nonbanks of all sizes that offer or provide mortgages and related services, private education loans, and payday loans; • larger participants in other markets (currently consumer reporting agencies and debt collectors); • and other nonbanks the Bureau finds are engaged in conduct that poses risks to consumers. • The CFPB’s authority extends to depositories with less than $10 billion in assets, but these institutions will continue to be supervised by their prudential regulators (Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Association and Office of the Comptroller of the Currency). The CFPB, however, can participate in these examinations “on a sampling basis,” can refer enforcement actions against these institutions, and will have access to and may even require reports directly from these institutions. • What does the CFPB Do? In connection with its supervision and examination authority, the Bureau undertakes a consumer risk assessment to evaluate the extent of risk to consumers arising from the activities of a particular
  • 2. supervised entity and to identify the sources of that risk. Examinations will be scheduled based in part upon the risk assessment. Some factors the CFPB considers in assessing risk are: • whether a product’s profitability is dependent upon penalty fees; • whether the terms of the product are subject to change at the entity’s discretion; • whether the pricing structure, features and terms are combined in such a way to make the total costs hard to understand; • whether bundled products obscure costs; • and whether consumers are required to pay penalties to terminate a relationship. • The CFPB will also assess risk based on how a product is marketed to particular populations - students or the elderly, for example. The Bureau will examine how the entity’s employees are incentivized or compensated and whether the entity is committed to accountability and compliance. These risk factors are not exhaustive, but merely illustrative. The CFPB’s examination procedures are similar to those of the prudential regulators and some State regulators. One striking difference, however, is that the CFPB routinely sends enforcement attorneys on its examinations. For this reason, cautious lenders would be wise to consider having counsel on hand during examinations. In addition to regularly scheduled examinations, the CFPB intends to conduct Target and Horizontal reviews. Target Reviews generally involve a single entity due to a particular situation – increased consumer complaints, for example. Horizontal Reviews look across multiple entities to focus on issues arising from particular products or practices in a market sector. The CFPB will address negative findings as called for by the individual facts and circumstances at issue ranging from informal supervisory measures to formal enforcement action. The CFPB has the authority to conduct investigations by using subpoenas and by demanding testimony, responses to written questions, and documents or other materials. The CFPB may bring administrative enforcement proceedings or civil actions in Federal district court. Further, while the CFPB has no criminal enforcement authority, it is required to refer findings that suggest criminal conduct to the Department of Justice for further review and action. CFPB Initiatives Since Cordray’s appointment, the Bureau has routinely publicized its initiatives. It regularly issues press releases and bulletins on its website to inform consumers and entities about the initiatives on which it is focused. The following are a few of the more note-worthy initiatives: Anti-Discrimination In April 2012, the CFPB promised to use all available legal avenues, including disparate impact, to pursue lenders whose practices discriminate against consumers. Practices that unlawfully price out or cut off segments of the population from the credit market – whether intentional or not – are discriminatory. For example, in March, the Bureau announced that it will hold lenders that offer loans through car dealerships responsible for unlawful, discriminatory pricing that often results from the discretionary dealer mark up on interest rates. Mortgage Industry
  • 3. In fall 2012, the CFPB in partnership with the Federal Trade Commission warned mortgage lenders and brokers to clean up potentially misleading advertisements, particularly those targeted towards veterans and older Americans. They identified the following potential problems: • misrepresentations about government affiliation; • inaccurate information about interest rates; • misleading statements concerning the costs of reverse mortgages; • and misrepresentations about the amount of cash or credit available to a consumer. The CFPB recently adopted new mortgage rules that take effect in January 2014. The highlights of those rules include: • Ability to Repay Rule – requiring lenders to make a reasonable, good-faith determination that prospective borrowers have the ability to repay their mortgage. The rule also protects against risky lending practices including underwriting loans based only on low introductory “teaser” interest rates. • Mortgage Servicing Rules – restricting the practice of “dual-tracking” and prohibiting the first notice/filing for foreclosure process until the mortgage loan account is more than 120 days delinquent. For a defaulting homeowner, the rules require notice of foreclosure alternatives, as well as direct and ongoing access to servicing personnel, a fair review process, and the consideration of all other foreclosure alternatives prior to a foreclosure sale. • The Rules also address appraisals, escrow accounts, protections for high-cost mortgages and the compensation and qualifications for loan originators. The CFPB also warned mortgage servicers and subservicers that CFPB examiners will be carefully reviewing their compliance with applicable federal laws. The CFPB has particular concerns arising from consumer complaints related to servicing transfers including service interruptions and failures by the transferees to honor terms of trial loan modifications provided by predecessor servicers. Bank Overdraft Charges In June 2013, the Bureau announced its findings from its Study of Overdraft Programs. It found that overdraft and NSF fees composed 37% of the study banks’ total deposit service charges. Furthermore, a recent trade association survey found that overdraft and NSF fees make up an even larger share – over 60% - of total deposit service charges among community banks. And the factors influencing the number of overdraft or NSF fees a consumer is charged are frequently not disclosed to consumers or are disclosed in a technical manner that may not be readily understandable. The Bureau concluded that the findings regarding consumers who are incurring heavy overdraft fees or involuntary account closures and the wide variations across institutions “indicate that certain practices and procedures merit further analysis to determine whether they are causing the kind of consumer harm that the federal consumer protection laws are designed to prevent.” Enforcement Authority The CFPB is authorized to enforce 18 federal consumer laws transferred to the CFPB, along with Title X of the Dodd-Frank Act and Bureau rules. The Bureau can bring civil enforcement actions in federal district court to enforce violations of federal consumer financial protection laws. It can also institute administrative proceedings, including enforcement actions against covered persons and their service providers, in order to obtain cease-and-desist orders and civil penalties. Additionally, if the Bureau obtains evidence that any
  • 4. person has engaged in conduct that may constitute a violation of federal criminal law, it is required to transmit that evidence to the Attorney General. Enforcement Actions Since early 2012, the Bureau has been aggressively pursuing enforcement actions. Thus far, the enforcement actions range in size from enormous - $25 billion dollars – to quite small at $100,000. The following are summaries of the enforcement actions, all of which have been resolved in the CFPB’s favor: In February 2012, the Bureau entered into a settlement agreement with the five largest mortgage servicers as a result of mortgage servicing and foreclosure abuses. The CFPB noted that families who should have qualified for loan modifications instead faced foreclosure due to lost paperwork, unanswered phone calls, unresolved errors, and even falsified documents. The servicers were required to pay $25 billion that went toward financial relief to distressed homeowners and the development of new servicer standards of conduct. In July 2012, a large national bank was required to refund its customers approximately $140 million and pay a $25 million penalty. These remedies were required due to deceptive marketing tactics that pressured or misled customers into paying for “add-on products” such as payment protection and credit monitoring. Then, in September 2012, a well-known credit-card company was ordered to refund its customers $200 million and was fined $14 million for similar deceptive marketing practices. In October 2012, the CFPB found that another brand-name credit-card company violated consumer protection laws at every stage in its process from marketing to enrollment to payment to debt collection. The CFPB determined that the credit-card company deceived consumers who signed up for a certain credit card program, charged unlawful late fees,unlawfully discriminated against new applicants based on age; failed to report consumer disputes to consumer reporting agencies, and misled consumers about debt collection. The credit-card company was ordered to refund $85 million and pay a penalty of $27.5 million across multiple federal agencies. In December 2012, the CFPB shut down two operations because of their false promises to prevent foreclosures and renegotiate troubled mortgages. That same month, the CFPB in connection with five states successfully obtained civil relief from a federal district court in Miami, Florida against a debt-relief services company that was unlawfully charging advance fees for debt-settlement services. The debt-relief services company was ordered to refund up to $100,000 to consumers who were unlawfully charged the advance fees. Last month, the CFPB filed suit in New York against two debt-relief service providers for the same reasons. In April 2013, the CFPB filed complaints against four mortgage insurers seeking $15 million in penalties for providing kickbacks to mortgage lenders in exchange for business. Specifically, the mortgage insurers paid kickbacks to mortgage lenders by purchasing captive reinsurance that was essentially worthless, but profit generating for the lenders. Reinsurance is insurance for insurance companies. By passing these costs along to the consumer, they increased the cost of mortgages. In May 2013, the CFPB made a Texas home builder surrender $100,000 he received in kickbacks for referring origination business to two financial institutions. The CFPB also prohibited the home builder from participating in future real estate settlement services, including mortgage origination. And in June 2013, the CFPB brought an enforcement action against certain auto lenders for deceptive marketing and lending practices targeting active-duty military. A sizeable bank and its nonbank partner were made to return $6.5 million to service members for failing to disclose all fees charged in certain auto loan programs and for misrepresenting the true cost and coverage of “add-on products.” Conclusion In just two short years the CFPB has proven itself to be a motivated, aggressive agency. Its authority is far-reaching and indeed virtually unbridled in the consumer finance world. All banks; nonbanks offering or providing mortgages and related services, private education loans, and payday loans;consumer reporting agencies; debt collectors and debt relief service providers need be diligent in their self-auditing and
  • 5. compliance measures. In fact, the CFPB stated in a bulletin last month that “a party may proactively self- police for potential violations, promptly self-report to the Bureau when it identifies potential violations, quickly and completely remediate the harm resulting from violations, and affirmatively cooperate with any Bureau investigation above and beyond what is required.” The Bureau further stated that such “responsible conduct…may favorably affect the ultimate resolution of a Bureau enforcement investigation.” And given that the CFPB routinely sends enforcement attorneys on its examinations, consumer lenders would be wise to consider retaining counsel while being examined. Disclaimer: The information contained in this article is presented solely for educational and informational purposes, and is not intended to constitute legal advice. You should contact your attorney in order to obtain legal advice with respect to your specific legal questions.