The CFPB s First Anniversary: A Look Back at What is has Accomplished and Where it is Headed December 13, 2012

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1 The CFPB s First Anniversary: A Look Back at What is has Accomplished and Where it is Headed December 13, 2012 Alan S. Kaplinsky, Practice Leader Consumer Financial Services Group Ballard Spahr LLP 1735 Market Street, 51 st Floor Philadelphia, PA kaplinsky@ballardspahr.com (215) Visit our blog, CFPB Monitor, at

2 Alan S. Kaplinsky Practice Leader of the Consumer Financial Services Group at Ballard Spahr Devotes his practice to counseling financial institutions with respect to bank regulatory and transactional matters and defending them in individual and class action lawsuits (including CFPB investigations and government enforcement matters) First President of the American College of Consumer Financial Services Lawyers Former Chair of the American Bar Association Committee on Consumer Financial Services of the Business Law Section Co-Chair of the Practicing Law Institute s Annual Consumer Financial Services Institute, now on its 18th year Has been named as a tier one banking and consumer financial services lawyer in the 2006 through 2012 editions of Chambers USA Has been named in The Best Lawyers in America under financial services regulation law and banking and finance litigation from 2007 to 2013 Recently named the 2012 Philadelphia Lawyer of the Year for Litigation-Banking & Finance 2

3 A Bit of History Dodd-Frank Wall Street Reform and Consumer Protection Act enacted on July 21, 2012 Title X Consumer Finance Protection Act of 2010 created Consumer Financial Protection Bureau Designated Transfer Date of July 21, 2011 Richard Cordray s appointment as Director on January 4, 2012 Pending court challenges to the legality of President Obama s recess appointments 3

4 The Three-Headed Monster Regulation Supervision Enforcement 4

5 Regulations Inherited rule-making under the enumerated consumer laws and regulations prescribed under Section 1002 of Dodd-Frank - Alternative Mortgage Transaction Parity Act of Consumer Leasing Act - Electronic Fund Transfer Act (except Section 920) - Fair Credit Billing Act - Fair Credit Reporting Act (except Sections 615(e) and 628) 5

6 Regulations (continued) - Home Owners Protection Act - Fair Debt Collection Practices Act - Section 43(b)-(f) of Federal Deposit Insurance Act - Sections of Gramm-Leach-Bliley Act - Home Mortgage Disclosure Act of Home Ownership and Equity Protection Act of Real Estate Settlement Procedures Act of S.A.F.E. Mortgage Licensing Act of

7 Regulations (continued) - Truth in Lending Act - Truth in Savings Act - Section 626 of Omnibus Appropriations Act - Interstate Land Sales Full Disclosure Act Rule-making under Titles X and XIV of Dodd-Frank 7

8 Mortgage-Related Rulemaking January 21, 2013 deadline for many mortgage rules to be effective to avoid Dodd-Frank provision becoming effective on that date Timeframes regarding major rule-making are as follows: Ability to Repay; Qualified Mortgage Appraisals Final Rules: Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by CFPB Higher-Risk Mortgages Comments Due: October 15, 2012 Final Rules Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by agencies Appraisal Copy Comments Due: October 15, 2012 Final Rules: Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, although the CFPB seeks comment, particularly on proposal to implement disclosure requirement in conjunction with TILA/RESPA integration 8

9 Mortgage-Related Rulemaking (continued) AMCs & AVMs Dodd-Frank TILA/RESPA Disclosures Temporary Exemption Proposal Expected: No estimate Final Rules Adopted: By January 21, 2013 unless the CFPB takes other action to prevent Dodd-Frank requirements from becoming effective on that date Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by agencies Comments Due: September 7, 2012 Final Rules Adopted: By January 21, 2013 Final Rules Effective: By January 21, 2013 (to avoid the need to revise existing disclosures to include the requirements) Escrow Final Rules Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by the CFPB Expanded Finance Charge Comments Due: November 6, 2012 (comment deadline extended from September 7, 2012) Final Rules Adopted: No deadline. The proposal is not required by Dodd-Frank, but the CFPB is considering adoption along with HOEPA rule (although it is contained in the Integrated Disclosures proposal) HOEPA Comments Due: September 7, 2012 Final Rules Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by CFPB 9

10 Mortgage-Related Rulemaking (continued) Integrated Disclosures Comments Due: November 6, 2012 Final Rules Adopted: No deadline. CFPB targeting 2013 Final Rules Effective: No deadline. The CFPB is requesting comment on mandatory compliance date based on extent of changes required Loan Originator Compensation and Qualifications Loan Originator Anti- Steering and Related Prohibitions Comments Due: October 16, 2012 Final Rules Adopted: By January 21, 2013 Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by the CFPB Proposal Expected: No estimate Final Rules Adopted: By January 21, 2013 unless the CFPB takes other action to prevent Dodd-Frank requirements from becoming effective on that date Final Rules Effective: On or before one-year anniversary of final rules, unless delayed by the CFPB Servicing Comments Due: October 9, 2012 Final Rules Adopted: By January 21, 2013 Final Rules Effective: On or before one year anniversary of final rules, unless delayed by the CFPB 10

11 Remittances Regulation Section 1073 of Dodd-Frank creates comprehensive new system of consumer protection for remittance transfers sent by consumers in the U.S. to individuals and businesses in foreign countries CFPB issued final rule on February 7, 2012 CFPB issued technical correction to the final rule on July 10, 2012 CFPB issued final rule on August 20, 2012 with effective date of February 7,

12 Remittances Regulation (continued) CFPB issued Bulletin on November 27, 2012 in which it announced that in December it will propose to refine three elements of the rule - Error resolution procedures. Will propose that if a remittance transfer provider can show that the transfer was deposited into a wrong account because the consumer provided incorrect information, the provider would be required to try to recover the funds but would not be liable if those efforts were unsuccessful - Disclosure of third party fees and foreign taxes. Will propose added flexibility for making these disclosures - Disclosure of regional and local taxes assessed in foreign countries. Will propose that a provider s obligation to disclose foreign taxes imposed on remittance transfers is limited to taxes imposed at the national level 12

13 What s Happened and What s Coming Next in the Enforcement Area Enforcement Related Rulemaking CID Activity So Far Problem Areas with CIDs The CFPB s First Three Consent Orders 13

14 Enforcement-Related Rulemaking June 2012: CFPB finalized two sets of procedural rules relating to enforcement: - Rules relating to investigations (CIDs) (12 C.F.R. part 1080) - Rules relating to administrative enforcement proceedings (12 C.F.R. part 1081) Both sets of rules largely unchanged from interim versions released in 2011 Administrative enforcement proceedings remain very one-sided and expedited 14

15 CID Activity So Far The CFPB does not publicly announce CIDs, but targets have occasionally announced them in securities filings We are aware of CIDs in the following sectors of the industry: - Credit card payment protection / add-on products - Private student lending - Subprime auto finance - Debt collectors/buyers - Captive reinsurance of PMI - Payday lending 15

16 Problem Areas with CIDs Very overbroad requests Reluctance to grant extensions of deadline to file Petition to Set Aside or Modify Tight deadlines for production demanded Very general and broad descriptions of the nature of the conduct constituting the alleged violation All decisions on compromises made by the Deputy Director, who does not participate in meet and confer discussions Petitions decided by the Director, with judicial review unspecified in terms of availability and standard of review 16

17 Analysis of 3 CFPB Consent Orders Capital One Bank on July 16, 2012 Discover Bank on September 24, 2012 American Express on October 1, 2012 All consent orders were issued by the CFPB in conjunction with other prudential regulators, including FDIC, OCC and/or FRB 17

18 Capital One Bank Consent Order Found that it engaged in certain sales practices that were unfair, deceptive, or abusive in violation of 1036 of Dodd-Frank Act Practices related to Capital One s sale of credit card payment protection and identity theft protection products that were added on to credit and deposit products Ordered to refund $140 million (total fees plus interest) to approximately 2 million customers from August 1, 2010 January 17, 2012 Fine of $25 million 18

19 Discover Bank Consent Order Found that it engaged in sales practices that were unfair, deceptive or abusive in violation of 1036 relating to certain credit card add-on products Ordered to refund $200 million (total fees and interest) to approximately 3.5 million customers from December 1, 2007 August 31, 2011 Fine of $14 million 19

20 American Express Consent Order Found that it engaged in deceptive and unfair sales practices relating to credit card enrollment Also found that it engaged in deceptive debt collection practices, age discrimination in violation of ECOA, failing to report customer credit report disputes in violation of FCRA and charging unlawful late fees in violation of TILA Ordered to refund $85 million to approximately 250,000 customers Fine of $27.5 million 20

21 Analysis Deceptive Advertising Implied false claims that a product is free - Capital One marketed payment protection products as a special tool or as a feature of credit card accounts Consumer confusion about what is a credit score and what affects credit scores - Capital One allegedly claimed that credit monitoring products could improve credit scores and lead to an increased credit limit 21

22 Analysis Deceptive Advertising (continued) Using statistics in advertising can be red flags for regulatory scrutiny because they lend themselves to objective evaluation - In marketing identity theft protection products, Capital One stated that identity theft is the number one crime Express claims must be accurate - AMEX stated that new cardholders would receive rewards points plus $300 but cardholders never received $300 22

23 Analysis Inadequate Disclosures CFPB found fault with certain disclosures in terms of what they said, when and how they were presented to customers - Capital One and Discover allegedly failed to state key eligibility information for products - Discover allegedly asked customers to enroll in products before disclosing material terms after customer made first payment 23

24 Analysis Improper Sales Methods Sales personnel not following telemarketing scripts - Discover telemarketers allegedly downplayed disclosures before reading them or read them too quickly - Telemarketers for Capital One and Discover allegedly never obtained clear, affirmative consent to enroll customers in add-on products because they either didn t give disclosures at right time, they distracted the customer from the disclosures, or engaged in high pressure sales tactics or played upon the customer s fears 24

25 Analysis Customer Service Interaction Relates to alleged problems after customer enrolls Customers calling to cancel products who end up retaining products after call ends Service calls or courtesy calls to customers that lead to sales pitch without clearly informing customer that they are about to hear a solicitation 25

26 Analysis Deceptive Practices in Debt Collection AMEX stated that repaid debts would be reported to consumer reporting agencies and would result in improved credit scores when AMEX allegedly didn t report certain repaid debts and in many cases the debts were so old that they likely would not have impacted a customer s credit report anyway AMEX dunning letters stated that if customer repaid a portion of debt, then the balance of debt would be waived or forgiven. However, other language in the letters indicated that AMEX required that the full debt would have to be repaid before customer would be eligible for a new financial product from AMEX, such as a credit card 26

27 Analysis Deceptive Practices in Debt Collection (continued) AMEX not reporting amounts as disputed to consumer reporting agencies if it conducted an investigation and determined that the dispute was invalid 27

28 Analysis ECOA and Differential Treatment AMEX used a different approval process for applicants under and over 35 years of age which led to higher rates for the latter 28

29 Robust Compliance Programs Management designated by Board of Directors who are responsible for the compliance program and for establishing clear lines of authority and communication for elevating compliance reports and issues Regular training programs for all employees having responsibility for formulating or implementing policies around unfair, deceptive or abusive sales practices and other applicable legal obligations Regular training, monitoring and auditing programs for third-party vendors involved in marketing, credit reporting or customer services 29

30 Robust Compliance Programs (continued) Procedures for managing the quick and complete resolution of customer complaints Procedures for ensuring that compliance personnel are sufficiently experienced and that the compliance staff is sufficiently resourced Policies ensuring that bonuses or other incentive compensation is appropriate and does not skew employee decision-making toward engaging in unfair or deceptive practices Procedures for evaluating and reporting performance relating to the compliance program policies, procedures and objectives (including an effective independent audit process) 30

31 Supervision Update Whom can CFPB supervise? Observations on the Supervisory Process Service Providers Update on the Privilege Issue 31

32 Whom Can CFPB Supervise? Banks, thrifts and credit unions with more than $10 billion in assets ( large banks ) as of July 21, 2011 Mortgage originators, brokers, or servicers as of January 4, 2012 Payday lenders as of January 4, 2012 Private education lenders as of January 4,

33 Whom Can CFPB Supervise? (continued) Larger participants of market for other consumer financial products or services - On February 16, 2012, CFPB issued a proposed rule covering companies with more than $10 million in annual receipts from debt collection activities and companies with more than $7 million in annual receipts from consumer reporting activities - On July 16, 2012, CFPB issued a final rule (effective September 30, 2012) covering companies with more than $7 million in annual receipts from consumer reporting activities - On October 24, 2012, CFPB issued a final rule (effective January 2, 2012) covering companies with more than $10 million in annual receipts from debt collection activities - Expected to further broaden the definition of larger participants to include auto finance companies, prepaid cards, all other non-bank lenders, money transmitters, and check cashers 33

34 Whom Can CFPB Supervise? (continued) Those covered persons (regardless of size) determined by CFPB order, after notice and opportunity to respond, to be engaged in conduct that poses risks to consumers based on complaints and other information. CFPB recently issued proposed regulation to codify this authority (77 Fed. Red ) (May 25, 2012). CFPB also has supervision and enforcement authority as to service providers (regardless of the service provider s size) to large banks, mortgage originators, brokers and servicers, payday lenders and private education lenders, larger participants. 34

35 Observations on Supervisory Process Who are the CFPB examiners? Process being followed Enforcement lawyers in attendance Differences between CFPB exams and exams of federal and state prudential regulators How to prepare for first CFPB exam 35

36 Service Providers OCC/FRB/OTS Consent Agreements, April 2011 National Mortgage Servicing Settlement, March 2012 CFPB Bulletin , April 12, Applies to both banks and non-banks within CFPB supervision and enforcement authority. - Supervision and enforcement authority extends to service providers. - Initial and ongoing due diligence reviews of service providers. - Contract provides for compliance, with consequences for noncompliance. 36

37 Update on the Privilege Issue Still not resolved in the underlying statutes 12 U.S.C. 1828(x) and 1821(t) still not applicable to the CFPB Partial legislative fix passed the House (HR 4014), but stalled in the Senate Now new Senate legislation introduced (S.3394) that combines identical provisions of HR 4014 with ATM fee placard issue Reports that AFSA has proposed legislation that would go further than HR 4014 in protecting privilege in situations where CFPB shares info with state banking regulators Legislative uncertainty did not delay the CFPB in finalizing its privilege waiver rule announced final rule on June 28,

38 Deceptive Standard Dodd-Frank does not articulate the standard for deceptive. - In contrast, it does articulate standards for unfair and abusive. The CFPB has relied upon prior FTC guidance on the deceptive standard - See CFPB Supervision and Examination Manual, Unfair, Deceptive, or Abusive Acts or Practices (Oct. 2011) - See FTC Policy Statement on Deception (Oct. 1983) 38

39 CFPB Guidance on Deceptive Deceptive standard in the CFPB s Examination Manual is: - The representation, omission, act, or practice misleads or is likely to mislead the consumer, - The consumer s interpretation of the representation, omission, act, or practice is reasonable under the circumstances, and - The misleading representation, omission, act, or practice is material. Examples in the CFPB Examination Manual: - Inadequate disclosure of material lease terms in TV advertising - Misrepresentation about loan terms 39

40 Unfair Standard CFPB shall have no authority to declare an act or practice... unlawful on the grounds that such act or practice is unfair unless the CFPB has a reasonable basis to conclude that - (A) the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers ; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition. 12 U.S.C. 5531(c). 40

41 Unfair Standard (continued) Consideration of public policies, 12 U.S.C. 5531(c)(2) - In determining whether an act or practice is unfair, the CFPB may consider established public policies as evidence to be considered with all other evidence. - Such public policy considerations may not serve as a primary basis for such determination. 41

42 CFPB Guidance Nuanced Approach suggested in the Examination Manual: - Actual injury is not required in every case -- a significant risk of concrete harm is also sufficient. - Trivial impact or pure emotional harm likely will not suffice. - A key question is not whether a consumer could have made a better choice. Rather, the question is whether an act or practice hinders a consumer s decision-making. - Public policy: including whether conduct is legally permitted under another federal statute or conversely whether the practice is prohibited by state law. - Costs for alternatives may include institution s preventative costs and those of society as a whole. 42

43 Specific Examples of Unfair Acts Refusing to release lien after consumer makes final payment on a mortgage - City Capital Mortgage 2005 (FTC enforcement action) Dishonoring credit card convenience checks without notice - American Express Bank, FSB 2009 (OTS and FDIC enforcement action) Processing payments for companies engaged in fraudulent activities - Wachovia Bank, NA 2008 (OCC enforcement action) 43

44 Abusive Standard The CFPB shall have no authority... to declare an act or practice abusive... unless the act or practice (1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (2) 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. 12 U.S.C. 5531(d). 44

45 Abusive Novel Concept No similar state law standard. No similar federal standard. CFPB s Examination Manual: An unfair, deceptive, or abusive act or practice may also violate other federal or state laws. For example, pursuant to the TILA, creditors must clearly and conspicuously disclose the costs and terms of credit. An act or practice that does not comply with these provisions of TILA may also be unfair, deceptive, or abusive. 45

46 CFPB Guidance re: Abusive An Introduction to the Abusive standard in the CFPB s Examination Manual: As examiners review products or services, such as deposit products or lending activities, they generally should identify the risks of harm to consumers that are particular to those activities. Examiners also should review products that combine features and terms in a manner that can increase the difficulty of consumer understanding of the overall costs or risks of the product and the potential harm to the consumer associated with the product. 46

47 CFPB Guidance re: Abusive (continued) An abusive act or practice: Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service or Takes unreasonable advantage of - A lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; - The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or - The reasonable reliance by the consumer on a covered person to act in the interests of the consumer. Although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive each are separate. CFPB s Examination Manual 47

48 Consumer Complaints Key Consumer complaints play a key role in the detection of unfair, deceptive, or abusive practices. Patterns in complaints involving particular products or services May provide a window into the perspective of the reasonable consumer. Absence of complaints not dispositive. CFPB Examination Manual 48

49 Questions/Resources If you have any questions, please contact: Alan S. Kaplinsky, Practice Leader Consumer Financial Services Group Visit our blog, CFPB Monitor, at Subscribe to our e-alerts at (click subscribe ) 49