Update on CFPB Enforcement Actions; UDAAP and Third-Party Lending

Transcription

1 Update on CFPB Enforcement Actions; UDAAP and Third-Party Lending Presented to Pennsylvania Association of Community Bankers Quarterly Compliance Seminar Series 2016 October 19, Kilpatrick Townsend

2 I. Recent CFPB Enforcement Actions 2

3 Overview In the past two years, the CFPB has utilized the enforcement process as a means of guiding industry practices without providing notice and comment as is done in the typical rulemaking process. This practice is not without precedent as the SEC and the FTC have a history of using enforcement actions to guide industry practice. The CFPB includes detailed accounts of alleged wrongdoing in consent orders as a means of providing industry participants with a guide to view their own policies and practices for compliance with applicable laws and regulations. 3

4 CFPB Enforcement Authority Authority to conduct administrative adjudication proceeding with respect to any person to enforce compliance with: the consumer protection provisions of Dodd-Frank (including any rules issued by the CFPB); and any other federal law that the CFPB is authorized to enforce and any regulations or orders issued thereunder, unless such federal law limits the CFPB from conducting such an adjudication. Authority to commence a civil action in a US District Court or in any state court of competent jurisdiction against any person who violates a federal consumer financial law, to impose a civil financial penalty and to obtain other legal and equitable relief. 4

5 CFPB Enforcement Authority Exclusions from CFPB Authority: Depository institutions with less than $10 Billion in assets Nonfinancial businesses, except to the extent they offer a consumer financial product or service Real estate brokers Auto dealers Persons subject to the authority of securities, insurance or commodities regulation CFPB enforcement may involve bank regulators, other government agencies, state attorneys general and DOJ 5

6 Recent Decision on CFPB Authority On October 11,2016 the United States Court of Appeals for the District of Columbia Circuit issued a highly-anticipated decision in PHH Corporation, et al., v. Consumer Financial Protection Bureau which involved a RESPA interpretation and the statute of limitations applicable to a RESPA action. In the PHH Corporation matter, the CFPB had taken the position that under the Dodd-Frank Act, there is no statute of limitations to enforce any consumer protection law. The Court disagreed and found that the Dodd-Frank Act incorporates the statute of limitations in the underlying statutes enforced the CFPB. As a result, the CFPB is barred from pursuing alleged violations that occurred outside the applicable statute of limitations window in the applicable statute. 6

7 Recent Decision on CFPB Authority The Court also held that the CFPB is unconstitutionally structured in its current form. Decision was based in part on the fact that the CFPB is an independent agency headed by a single Director and not be a multi-member commission and that the Director is only removable by the President for cause. The Court severed the for cause removal provision which now means that the President can remove the Director at any time, with or without cause. The CFPB has not yet indicated if it intends to appeal the decision. 7

8 Recent CFPB Enforcement Actions 2014 CFPB Enforcement Actions: Areas of Focus 8

9 Recent CFPB Enforcement Actions 2015 CFPB Enforcement Actions: Areas of Focus 9

10 Recent CFPB Enforcement Actions 2016 CFPB Enforcement Actions: Areas of Focus 10

11 CFPB Enforcement Actions Credit Cards Credit Cards Add on Products Bank of America, N.A. (2014) allegedly charging consumers for credit monitoring and credit reporting services that the customers did not receive and engaging in deceptive marketing tactics associated with the products. Total Reimbursement and Penalties - $772 million Synchrony Bank (2014) alleged misleading marketing of debt collection add-on products; misrepresentation of cost of products; exclusion of certain borrowers based on ethnicity. Total Reimbursement and Penalties - $225 million Citibank, N.A. (2015) alleged unfair billing and deceptive marketing and collection practices related to add-on products and services. Total Reimbursement and Penalties - $735 million JP Morgan Chase & Co. (2015) debt collection practices on defaulted credit card debts. Total Reimbursement and Penalties - $216 million Wells Fargo, N.A. (2016) opening unauthorized deposit and credit card accounts. Total Restitution and Penalties - $185 million 11

12 CFPB Enforcement Actions - Mortgages Mortgages Mortgage servicing SunTrust Mortgage (2014) allegedly failed to apply borrower payments promptly and accurately; charging unauthorized fees for default-related services; failing to provide accurate information about loan modification and loss mitigation services. Total Reimbursement and Penalties: - almost $1 billion Green Tree Servicing, LLC (2015) alleged failure to honor loan modifications; use of illegal practices in making false threat and harassing consumers. Total Reimbursement and Penalties: $53 million 12

13 CFPB Enforcement Actions - Mortgages Mortgages Loan originator compensation Franklin Loan Corporation (2014) allegedly gave bonuses to employee for steering customers into loans with higher interest rates. Required to pay compensation to all borrowers (more than 1,400) affected RPM Mortgage, Inc. (and its CEO) (2015) allegedly paid bonuses and higher commissions to loan originators as incentives for steering consumers into mortgages with higher interest rates. Total Reimbursement and Penalties: $19 million (plus the CEO paid $1 million in CMPs) Fair Lending Hudson City Savings Bank (2015) alleged redlining in the way it structured its residential lending business. Total Reimbursement and Penalties: $32 million 13

14 CFPB Enforcement Actions Payday Lending Payday Lending ACE Cash Express (2014) allegedly used illegal debt collection tactics (harassment and false threats of lawsuits) to pressure past due borrowers into taking out additional loans that they could not afford. Total Reimbursement and Penalties - $10 million NDG Financial Corporation (2015) small dollar loans made by NDG to consumers allegedly violated state usury laws (APRs up to almost 600%) and NDG failed to register to be a licensed lender under state law. Flurish, Inc., d/b/a LendUp (2016) allegedly failed to provide the benefits it promised to consumers opportunity to build credit and provide access to cheaper loans. Total Reimbursement and Penalties - $3.63 million 14

15 CFPB Enforcement Actions Auto Lending Auto Lending American Honda Finance Corporation (2015) alleged that company s policies resulted in minority borrowers paying higher dealer markups in violation of ECOA based on disparate impact theory. Total Reimbursement - $24 million Toyota Motor Credit Corporation (2016) alleged that the company s pricing and compensation system was designed to provide financial incentives that resulted in minority borrowers paying higher dealer markups. Total Reimbursement - $21.9 million 15

16 CFPB Enforcement Actions Debt Collection Debt Collection DriveTime Automotive Group (2014) debt collectors called consumers at work, without authorization and called third party references in attempt to collect debt. Total Penalties - $8 million Encore Capital Group (2015) allegedly bought debts that lacked documentation or were unenforceable and then without verifying debt collected the debt by pressuring consumers and filing lawsuits using robo-signed court documents. Total Reimbursement and Penalties: $52 million and ceasing collection of more than $125 million of debt Citibank N. A. (2016) illegal debt sales and debt collection practices. Total Reimbursement and Penalties: $8 million 16

17 CFPB Enforcement Actions Student Loans Student Loans ITT Educational Services, Inc. (2014) CFPB filed a lawsuit against ITT alleging it encouraged students to enter into high cost loans and engaged in unfair, deceptive or abusive practices. In 2015, the court ruled partially in favor of ITT but also ruled in favor of the CFPB with respect to certain TILA violations. In September 2016, ITT declared bankruptcy. Corinthian Colleges, Inc. (2015) alleged that Corinthian used false job prospects and career counseling to entice students to take out high-cost loans. The court ruled in favor of the CFPB, but the company had declared bankruptcy and dissolved. The new owner of many of the Corinthian schools reached an agreement with the US Department of Education in 2015 and as part of that agreement agreed to forgive approximately $480 million in loan forgiveness. Student Aid Institute, Inc. (2016) alleged student loan debt relief scam that illegally tricked borrowers into paying fees for federal loans benefits and misrepresented affiliation with the Dept. of Education. The company and its CEO paid CMPs, debt relief services were halted; affected consumer were no longer charged the fees; and the company and the CEO were barred from the debt relief industry. 17

18 CFPB Enforcement Actions - Other Other Areas of Focus Data Security Dwolla, Inc. (2016) alleged online payment platform allegedly provided inadequate customer data security; basis for action was UDAAP. Fine: $100,000. Cellular Billing Verizon Wireless/Sprint (2015) alleged these companies unfairly charged their customers by creating a billing and payment processing system that gave third parties unfettered access to their customers accounts; basis was UDAAO. Reimbursement/Fines: Verizon up to $70 million/sprint up to $50 million and both agreed to pay $38 million in federal and state fines. Overdraft Services Santander Bank, N. A. (2016) alleged the Bank s third party vendor deceptively marketed the Bank s overdraft services and signed certain Bank customers up for the service without their consent. Fine: $10 million 18

19 II. Unfair, Deceptive, or Abusive Acts or Practices 19

20 UDAAP Definition Unfair an act or practice that causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers Deceptive an act or admission is deceptive when (1) The representation, omission, act, or practice misleads or is likely to mislead the consumer; (2) The consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and (3) The misleading representation, omission, act, or practice is material. Abusive an act or practice that materially interferes with the ability of a consumer to understand a term or condition of a financial product or service, or takes unreasonable advantage of (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; (b)the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or (c)the reasonable reliance by the consumer on a covered person to act in the interests of the consumer. (See 12 U.S.C. 5531, 5536) 20

21 UDAAP In 2015, approximately 80% of the enforcement actions brought by the CFPB included at least one UDAAP claim. More than half of such actions were based on deceptive claims. Only 8 of 70 UDAAP claims alleged by the CFPB were based on abusive claims. In 2014, approximately 72% of the enforcement actions brought by the CFPB alleged at least one UDAAP claim. 21

22 UDAAP Unfair Acts and Practices Mortgage Servicing - failure to honor loan modifications after transfer of servicing and requiring borrowers to waive defenses top foreclosures as condition to receiving a payment plan Debt Collection excessive number of calls to borrowers at inconvenient times, calling place of work without authorization, failing to disclose multiple ACH withdrawals after initial failure and requiring borrowers to list references without disclosing that such references would be contacted for collection purposes. Deposit Accounts failure to resolve discrepancies between deposit slip amounts and actual deposits and crediting for deposit slip amount rather than actual amount Small Dollar Loans contract provision that allowed lender to create remote checks if ACH authorization was withdrawn; calculating finance charge disclosures on unrealistic assumptions that consumer would repay loan in one payment 22

23 UDAAP Deceptive Acts and Practices Deferred Interest Products Marketing of Add-On Products Student Loan Services Debt Collection Credit Reporting 23

24 UDAAP Abusive Acts and Practices Debt Collection Lead Aggregators Pension Advance Loans to Military Veterans 24

25 III. FDIC Proposed Guidance on Third- Party Lending 25

26 Overview In July 2016, the Federal Deposit Insurance Corp. (FDIC) issued proposed guidance for third-party lending that is intended to supplement the FDIC s current guidance for managing third-party risk will affect the relationships between banks and marketplace lenders and similar companies at a time when both industries are becoming more interconnected continues the emphasis by the bank regulators on expressly holding boards of directors and senior management responsible for arrangements between banks and third parties While the proposed guidance would not apply to banks and thrifts regulated by the other federal banking agencies, such regulators could also, independently or collectively, clarify and expand their existing third-party risk management guidance 26

27 Third-Party Lending The FDIC proposed guidance would apply to any FDICsupervised institution that engages in third-party lending for example, a lending arrangement that relies on a third party to perform a significant aspect of the lending process, such as marketing, credit underwriting, customer service, regulatory compliance or debt collection, among other things: third-party lending arrangements would include institutions originating loans for third parties, institutions originating loans through third-party lenders or jointly with them, and institutions originating loans using third-party platforms. 27

28 Third-Party Lending Under the proposed guidance an institution must: take into account the risks associated with third-party lending, including strategic risk, operational risk, credit risk and compliance risk establish and have the board approve a third-party lending risk management program and related policies before it enters into a significant third-party lending relationship. For purposes of the guidance, a significant third-party lending relationship is one that: could have a material impact on revenues, expenses or capital, involve multiple third parties, involve lending volumes that are large in relation to the institution s balance sheet, or present material risk of consumer harm. 28

29 Third-Party Lending The third-party lending program would have to include, among other things: limits as a percentage of total capital for each third-party arrangement and for the entire lending program that takes into account origination volumes, credit exposure and growth monitoring of third parties and the institution s overall lending activity to identify and assess risks, including fair lending. The guidance also sets forth specific terms that should be included in written agreements governing third-party lending arrangements, in addition to those terms that are required under the FDIC s current guidance for all thirdparty relationships. 29

30 Third-Party Lending The guidance discusses certain supervisory considerations that institutions should take into account if it is a party to a third-party lending arrangement, including: credit underwriting and administration capital adequacy Liquidity Profitability data security compliance with consumer regulations BSA/AML 30

31 Third-Party Lending Institutions that have significant third-party lending relationships will be subject to examination (risk management and consumer compliance) by the FDIC at least every 12 months could also be subject to interim visits if the agency identifies significant risk in the lending program relationships FDIC examiners may also conduct targeted exams of significant third-party lending arrangements, and many also conduct targeted exams of other third parties where authorized 31

32 Christina M. Gattuso ATLANTA AUGUSTA CHARLOTTE DALLAS DENVER LOS ANGELES NEW YORK RALEIGH SAN DIEGO SAN FRANCISCO SEATTLE SHANGHAI SILICON VALLEY STOCKHOLM TOKYO WALNUT CREEK WASHINGTON D.C. WINSTON-SALEM Stephen F. Donahoe