CFPB Supervisory Report Highlights Violations in Debt Collection, Consumer Reporting, Mortgage Origination, and Fair Lending

In its Winter 2015 Supervisory Highlights, which covers supervision work generally completed between July and December 2014, the Consumer Financial Protection Bureau highlights legal violations resolved using non-public supervisory actions involving debt collection, consumer reporting, overdraft practices, mortgage origination, and fair lending.

The report indicates that recent supervisory resolutions in the areas of payday lending, mortgage servicing, and mortgage origination resulted in remediation of approximately $19.4 million to more than 92,000 consumers.

This publication is a tremendous tool for companies to learn of non-public supervisory actions taken by the Bureau and to inform ongoing efforts to remain in compliance with federal consumer financial law. As a former examiner-in-charge at the CFPB, I can assure you that highlights such as this distill findings from dozens of exams and can provide significant insight into the priorities and the Bureau’s likely future supervisory focus.

The CFPB’s “supervisory observations” include:

  • Debt collection. “In one or more examinations of debt collectors performing debt collection services of defaulted student loans for the Department of Education,” CFPB examiners identified collection calls, scripts, and letters containing various misrepresentations, such as overstatements regarding the benefits of participating in a federal student loan rehabilitation program (e.g., overstating a program’s impact on credit score) and misrepresentations that consumers could not participate in such a program unless they paid by credit card, debit card, or ACH payment, when, in fact, “no such program requirement existed.” Examiners also found that some collectors created a false impression that if consumers did not make a payment, they would be sued when, in fact, “none of the collection agents knew whether legal action would be taken and did not intend to take legal action.”

CFPB examiners also found “in one or more examinations” of debt collectors that the collectors had “created a risk of deception” by promoting a consumer’s ability to adjust or cancel a recurring ACH payment with only 24 hours’ notice when offering consumers the option to make such payments on delinquent accounts. According to the report, this representation contradicted both an express representation in monthly periodic statements and internal policies and procedures stating that a minimum of 72 hours’ notice was required.

  • Consumer reporting. While CFPB examiners found that “one or more” consumer reporting agencies had “significantly enhanced their dispute handling systems” following prior “CFPB directives,” examiners still “identified several practices that failed to meet dispute handling obligations.” For example, “one or more” consumer reporting agencies failed to comply with FCRA Section 611 obligations to forward “all relevant information” received from consumers in letters and supporting documents to furnishers. And examiners also identified deficiencies in the handling of consumer disputes of public record items in their credit reports that led “to errors in the updating of files after a reinvestigation and in the reporting of dispute results to consumers.”

  • Mortgage origination. “In one or more examinations,” CFPB examiners found that branch managers, who were loan originators and owners of related marketing services entities, were illegally receiving compensation based on the terms of loans they were originating. According to the report, examiners “found instances of improperly allocated expenses on branch income statements which resulted in marketing services entities receiving income based on the profitability of retail loans originated by branch managers. Consequently, branch managers, as owners of the marketing services entities, received compensation based on the terms of transactions originated by the branch managers themselves.” CFPB examiners also found Regulation X and Z violations “at one or more institutions” involving improper use of lender credit absent changed circumstances and failure to provide timely good faith estimates. They also found “in one or more institutions” where “social media advertising was not subject to monitoring or compliance audit” that loan originators were allowed to create their own advertisements that included “triggering terms” (such as the length of payment, amount of payments, numbers of payments, and finance charges) without providing the additional disclosures required by Regulation Z.

CFPB examiners also found that “one or more supervised entities” failed to provide requisite information in adverse action notices as set forth in Regulation B and failed to provide such notices on a timely basis. “These errors were attributed to weaknesses in the [entities’] compliance audit programs and the monitoring and corrective action component of the compliance programs.” More generally, at “one or more institutions, examiners concluded that a weak compliance management system allowed numerous violations of Regulations B, X, and Z to occur.” The report describes various circumstances that created or permitted the compliance weaknesses.

  • Fair lending. Bureau examiners found “one or more violations of the ECOA and Regulation B related to the treatment of protected forms of income,” such as income derived from a public assistance program or retirement benefits. Examiners found that applicants had been “automatically declined” if they were relying on income from a non-employment source, such as Social Security income or retirement benefits, to repay a loan. Examiners also found that marketing materials may have unlawfully “discouraged applicants who received public assistance or other protected sources of income from applying for credit.”
  • Supervision program developments. The Bureau also highlighted recent developments, such as the publication of new Credit Card Account Management examination procedures, the issuance of a bulletin providing guidance to help lenders avoid prohibited discrimination against consumers receiving Social Security disability income (Rich Andreano previously wrote a blog post about this bulletin), and the launch of the CFPB’s Examiner Commissioning Program.
- Bo Ranney

U.S. Supreme Court Weighs in on Labor Department’s Interpretation of Overtime Rules for Mortgage Loan Officers

We know that many of you are aware of the U.S. Supreme Court's decision in Perez v. Mortgage Bankers Association. The Court held that the U.S. Department of Labor was not required to follow notice and comment procedures in reversing its interpretation of whether mortgage loan officers are exempt employees under the administrative employee exemption of the Fair Labor Standards Act (FLSA).

That ruling does not necessarily mean, however, that mortgage loan officers may not be exempt from the overtime pay provisions of the FLSA in other circumstances. Indeed, several recent federal court cases in Virginia outline a different exemption that may be available.

We address the Perez decision and the potential applicability of the outside sales exception to the mortgage loan officer position here.

Constantinos G. Panagopoulos and Brian D. Pedrow

Director Cordray Appears Before House Financial Services Committee

CFPB Director Richard Cordray recently appeared before the House Financial Services Committee to answer questions regarding the Bureau’s Semi-Annual Report to Congress and the President, which it published on December 4, 2014. As we anticipated shortly before Director Cordray’s testimony, the report merely provided a backdrop for the hearing, which, in reality, served as a forum for committee members to question the Director on a range of issues significant to their respective constituents. Much like the report itself, Director Cordray’s testimony largely rehashed information with which we were already familiar, much of which we have covered on this blog. Among the talking points we expected, however, a few newsworthy points emerged:

  • The Bureau plans to use its five-year review of the ability-to-repay (ATR) rule, mandated by section 1022(d) of the Dodd-Frank Act, to assess whether to extend, modify, or make permanent the temporary provisions that currently exempt loans backed by Fannie Mae and Freddie Mac from critical portions of the rule’s rigorous underwriting requirements. In response to questions from the committee’s chairman, Rep. Jeb Hensarling, Director Cordray indicated that the Bureau installed the sunset provision at least in part to give Congress time to undertake substantial reform of Fannie Mae and Freddie Mac. Director Cordray acknowledged, however, that in light of Congress’s inaction on GSE reform, industry uncertainty tied to the pending sunset of the exemption constitutes a “legitimate concern.”
  • Director Cordray indicated that the Bureau continues to be interested in learning more about, and potentially crafting responses to, unintended consequences of its various mortgage rules, particularly consequences tied to specific products tailored to and offered in limited geographical areas. Rep. Michael Capuano, who represents a large swath of the Boston metro area, raised a concern that loans for the purchase of so-called “triple-deckers” (i.e., the three-floor, three-unit dwellings that line many of Boston’s streets) cannot feasibly satisfy the definition of a single-family property under the ATR rule. Likewise, Rep. David Schweikert, who represents much of Phoenix, expressed concern over the rules’ implications for seller financing arrangements and contracts for land sales, which are popular, relationship-based transaction mechanisms in deed-of-trust states. Director Cordray invited both members to engage in further discussions at the staff level in an effort to better understand the issues.
  • The Bureau has no plans to push forward the August 1, 2015, effective date for the TILA/RESPA integrated disclosures rule. Director Cordray indicated that CFPB examiners had no intention of “bringing the hammer down on the first day,” but he repeatedly emphasized that institutions will have had 21 months from the date of the rule’s publication to prepare.
  • For better or worse, the Bureau’s much-discussed “Rate Checker” tool appears here to stay. The tool, which allows consumers to view mortgage rates being offered to borrowers in their area, has been the subject of sharp criticism. Citing concerns over the tool’s accuracy, among other things, the American Bankers Association called for the CFPB to remove the tool from its website altogether. Facing questions from the committee about the tool’s accuracy, Director Cordray said only that the tool is “quite accurate,” and he encouraged committee members to direct their constituents to the tool for help in shopping for their next mortgage.

The hearing failed to provide any news of note on other significant issues, including the evolution, if any, of the Bureau’s rulemakings on home mortgage disclosure, or the progress of pre-rulemaking activities on debt collection.

The Director has yet to appear before the Senate Banking Committee, as he typically does following circulation of the Semi-Annual Report. To date, Senate Banking has not published any schedule for a pending appearance.

FTC Issues 2014 Complaints Report

The Federal Trade Commission received more than 2.5 million consumer complaints in 2014, according to its newly released Consumer Sentinel Network Data Book. The annual report provides national and state-by-state data on consumer complaints received by the FTC; the total number of complaints (excluding do-not-call) reflected a nearly 19 percent increase from 2013.

The top five complaint categories consisted of identity theft (332,646 complaints, or about 13 percent of the total), debt collection (280,998, or about 11 percent), imposter scams (276,622, or about 11 percent), telephone and mobile services (171,809 or about 7 percent), and banks and lenders (128,107, or about 5 percent). It is noteworthy that identity theft and bank and lender complaints accounted for a smaller percentage of all complaints than in 2013, when those categories represented, respectively, 14 and 7 percent of total complaints.

For military consumers, identity theft was the top complaint category in 2014 and education complaints ranked seventh highest. In contrast, education complaints ranked as the 27th-highest category for consumers overall in 2014.

The Consumer Sentinel Network is an online database of consumer complaints maintained by the FTC. Other federal and state law enforcement agencies contribute to the database, including the Consumer Financial Protection Bureau and the offices of 14 state attorneys general. Private-sector organizations contributing data include the Council of Better Business Bureaus, which consists of all North American Better Business Bureaus.

Any federal, state, or local law enforcement agency can obtain access to the database by entering into a confidentiality and data security agreement with the FTC. Certain international law enforcement authorities are allowed access as well.

While the data only reflect “unverified complaints reported by consumers," regardless of merit, the report nevertheless could significantly affect the industries targeted by the complaints. The FTC and state attorneys general have long used consumer complaints to identify victims and potential targets for investigations, and the CFPB similarly considers complaints in prioritizing which entities to investigate.

Because industries receiving a large number of complaints are more likely to draw a regulator's attention, minimizing the number of consumers who complain to the FTC, CFPB, or other consumer watchdogs is an essential first step to reducing potential exposure. To accomplish this, it is important for companies to establish their own systems to track and resolve complaints. In its examination procedures, the CFPB specifically instructs its examiners to assess the quality of a company's complaints system.

- Barbara S. Mishkin

President Obama Proposes Consumer Privacy Bill of Rights

President Obama has finally revealed the text of draft legislation that would establish “baseline protections” for consumers under a proposed Consumer Privacy Bill of Rights. The bill would impose new legal requirements on any company that engages in interstate commerce, subject to certain important exceptions discussed below. Some of these requirements include:

  • Transparency (providing consumers with a privacy policy)
  • Control (establishing a reasonable mechanism for consumers to grant and withdraw consent)
  • Use Limitation (minimize privacy risk through data collection /retention policies)
  • Security (identification, establishment, and assessment of reasonable safeguards)
  • Access/Accuracy (mechanism for consumers to review and correct any personal data)
  • Accountability (privacy training, privacy audits, Privacy by Design, third-party vendor privacy oversight)

Additionally, companies within an industry have the option to develop codes of conduct that would provide a safe harbor from enforcement under the Consumer Privacy Bill of Rights. The codes of conduct would need to provide equal or greater protections for personal data and would have to be approved by the U.S. Department of Commerce or the Federal Trade Commission.

Other provisions of the bill that may be of particular interest include: 

  • Federal Trade Commission: The bill would finally grant the FTC express rulemaking and enforcement authority over company privacy practices.
  • Legal Standard: The bill would establish a “reasonableness” standard to determine what policies and practices are appropriate given the context of a particular company’s privacy risk.
  • Disparate Impact: The bill would require companies to conduct a disparate impact analysis to ensure they are avoiding discriminatory privacy practices.
  • Personal Devices/Vehicles: The bill would expand the definition of personal data beyond traditional forms of personally identifiable information and include unique identifiers of personal devices, as well as unique vehicle identifiers.
  • Small Businesses: The bill contains a number of exemptions for small businesses, including businesses that collect, create, process, use, retain, or disclose the personal data of fewer than 10,000 individuals or devices in a 12-month period; or businesses with fewer than 25 employees.
  • Preemption: Although the bill would preempt certain state laws that address “personal data processing,” the bill fails to preempt the patchwork of state laws imposing breach notification requirements on companies.
  • No Private Right of Action: The bill does not provide consumers with a private right of action.
  • Exemptions: The bill exempts an array of companies that are already subject to federal privacy laws, such as the Fair Credit Reporting Act and the Gramm-Leach-Bliley Act, and the Health Insurance Portability and Accountability Act.

The newly released draft bill text closely follows a number of other privacy initiatives that the President announced earlier this year (more details available in our prior alert). Consumer advocates such as the Center for Democracy and Technology have already begun to criticize the bill and call for stronger privacy protections for consumers. 

Given the heightened federal attention to threats against consumers’ personal and financial information, companies should be monitoring any federal developments and be prepared to enhance their existing privacy and data security policies and procedures to address new statutory or regulatory requirements.

- Philip N. Yannella, Daniel JT McKenna, and Kim Phan

Montana Amends Mortgage Licensing Provisions

  • Montana has revised the Montana Mortgage Act to amend numerous licensing requirements. The modifications include:
  • Clarifying licensing requirements
  • Removing exempt company registration
  • Clarifying certain education and experience requirements
  • Clarifying control persons who must meet licensing requirements
  • Clarifying the responsibilities of designated managers
  • Allowing reports and notices to be filed and delivered through the NMLS
  • Adopting NMLS forms and policies

Notably, among the state mortgage law changes made, the terms "mortgage lender," "mortgage broker," "mortgage servicer," and "mortgage loan originator" were amended to include entities that hold themselves out to the public as being able to perform their respective services. In addition, the term “responsible individual” was defined to mean a Montana-licensed mortgage loan originator with at least 1½ years of experience as a mortgage loan originator or registered mortgage loan originator who is designated by an independent contractor entity (i.e., an entity that offers or provides clerical or support duties for another person) as the individual responsible for the operation of a particular location that is under the responsible individual’s full management, supervision, and control.

The new provisions are effective on October 1, 2015.

Nebraska Amends Mortgage Banker License Application Procedures

Nebraska has amended provisions relating to the Residential Mortgage Licensing Act related to the issuance of a mortgage banker license and duties of licensees. The revised Act now states that if an applicant does not complete a license application and fails to respond to a notice from the Department of Banking and Finance to correct any deficiencies within 120 days, the Department will deem the application abandoned and issue a notice of abandonment to the applicant instead of denying the application.

The amendment is effective on September 5, 2015 (or three months following adjournment of the legislative session).

- Marc D. Patterson

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.

This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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