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Promontory Financial Group: Consumer Financial Protection Developments

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From the editors of Sightlines
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March 29, 2012

Dear Friends,

CFPB Director Richard Cordray has had a busy couple of weeks. Between March 14 and March 21, he delivered four speeches, each carefully tailored to its audience but all articulating shared themes about the bureau and its mandate. A clear message in the speeches is Cordray’s assessment that the financial crisis was primarily due to nonbanks that fostered a “race to the bottom” in consumer financial markets. Traditional banks and credit unions, he suggested, were to some extent victims of this trend, as they lost market share to firms that did not adhere to appropriate standards.

He told community bankers on March 14 that they are “among those most harmed” by the mortgage bubble and ensuing collapse. On March 19, he told credit unions that he needs their help in leveling the playing field against nonbank competitors. And on March 21, he told a gathering of the Consumer Bankers Association that the race to the bottom “came significantly at your expense.”

These supportive comments are not intended to excuse banks from the oversight the bureau will offer going forward. “No one should hide fees,” he told the CBA. “No one should pull bait-and-switch schemes on customers – the products advertised should be the products delivered. No one should advertise high loan amounts or low interest rates when few people actually qualify for such terms.” He did not need to say explicitly that any of these behaviors can lead to allegations of unfair, deceptive, or abusive acts and practices.

Banks with private student loan portfolios should take note of Cordray’s speech on March 16 before the Society of American Business Editors and Writers, which focused on student lending, credit cards, and mortgages. He said the CFPB had begun to take consumer complaints on private student loans, and warned that “if something is not right, we are here to help solve the problem.” As our takeaways below suggest, student lending has emerged as a particularly sensitive issue for regulators and legislators.

Cordray’s speeches seem carefully calibrated to stake out appropriate standards for all companies offering financial products to consumers, while at the same time enlisting banks as allies in upholding those standards. Bankers may regard his frequent speeches as meaningful outreach from a new regulator, but they will also be keenly interested in his enforcement agenda. If his words this March are an accurate guide, the first company to face a public enforcement order from the CFPB may not be a traditional bank.

Yours truly,

Ann Jaedicke, Managing Director
ajaedicke@promontory.com
+1 202 384 1150

Ann Jaedicke

BJ Sanford, Managing Director
bsanford@promontory.com
+1 202 384 1020

BJ Sanford
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1. Reaching a Trillion

The CFPB continues to demonstrate its interest in student loans, most recently in a March 21 blog post by student loan ombudsman Rohit Chopra that previewed the “sobering” findings of a student loan study the bureau will release this summer. Reliable data on student lending is hard to come by, but Chopra said outstanding student debt reached $1 trillion several months ago and “unlike other consumer credit products ... keeps growing at a steady clip.” Some of this growth, he noted, is not from new originations, but from borrowers’ inability to make interest payments on existing loans. Chopra also mentioned the “rapidly rising defaults in the for-profit college sector” and warned that “if current trends continue, there will be consequences not just for young people, but for all of us.” The Department of Education’s 2011 Annual Report on federal student aid is here.

2. Senate Hearing on Student Lending

The CFPB isn’t the only one focusing on student lending. The Senate Judiciary Committee’s Subcommittee on Administrative Oversight and the Courts held a March 20 hearing on “The Looming Student Debt Crisis: Providing Fairness for Struggling Students.” The hearing focused on whether the U.S. Bankruptcy Code should be amended to discharge private student loans.  Witnesses included Illinois Attorney General Lisa Madigan and Kentucky Attorney General Jack Conway, who advocated in favor of such an amendment, as well as Stanford Law Professor G. Marcus Cole, who said it would increase students’ borrowing costs. Two bills allowing the discharge of private student loans in bankruptcy, H.R. 2028 and S. 1102, are currently under consideration in Congress.

3. Debt Collection Report

The CFPB on March 20 submitted its first annual report to Congress on the Fair Debt Collection Practices Act – a report previously prepared by the Federal Trade Commission. The Dodd-Frank Act gave the bureau the primary responsibility for administering the FDCPA, though it shares enforcement authority under the act with the FTC and other federal agencies. According to the report, “the FTC continues to receive more complaints about the debt collection industry than any other specific industry.” Aggregate complaints about third-party and in-house collectors were 142,743 in 2011 – slightly more than a quarter of all consumer complaints fielded by the FTC. The 44-page report also details enforcement actions, research and policy initiatives, and coordination efforts between the CFPB and FTC. The CFPB recently proposed to include large debt collectors within its supervision. Comments on the proposed rule are due by April 17.

4. CFPB Amicus Brief on TILA Rescission Rights

The CFPB said March 27 that it filed an amicus brief in Rosenfield v. HSBC Bank, USA, a Truth in Lending Act case in the Tenth Circuit in Denver. A lower federal court held that a borrower seeking a loan rescission due to the lender’s failure to provide required TILA disclosures must sue their lender within the law’s three-year rescission period. The CFPB argued that a debtor need only notify their lender of rescission within the three-year period. “Requiring consumers to file suit within the three-year timeframe disregards the statutory and regulatory text, forces potentially unnecessary litigation on lenders, and wastes valuable judicial resources,” the bureau said in its brief. The CFPB plans to file amicus briefs in at least three other appellate cases considering the same question.

5. Consumer Privacy Framework

The FTC on March 26 issued its final report outlining best practices for protecting consumer privacy. The document, “Protecting Consumer Privacy in an Era of Rapid Change: A Proposed Framework for Businesses and Policymakers,” followed a preliminary December 2010 report. The agency said the report sets forth “best practices for businesses to protect the privacy of American consumers and give them greater control over the collection and use of their personal data.” Revisions to the initial framework limited the scope of the guidance’s coverage, simplified how to give consumers privacy choices, and asked for legislation to provide greater transparency for – and control over – the practices of information brokers. Commissioner J. Thomas Rosch dissented from the report’s issuance; as spelled out in an appendix to the report, one of his four objections was that “opt-in” would be “selected as the de facto method of consumer choice for a wide swath of entities.”

6. Houses Passes Privilege Law

The House on March 26 passed by unanimous consent legislation clarifying that financial institutions submitting privileged information to the CFPB does not constitute a waiver of attorney-client privilege. The legislation, H.R. 4014, would make treatment of information submitted to the bureau consistent with information submitted to the federal banking agencies.

7. Ask CFPB

The CFPB on March 22 unveiled the consumer-focused “Ask CFPB” interactive online tool, a searchable database of more than 350 commonly asked questions and answers about credit cards and mortgages, organized into three categories: definitions, explanations, and situations. The bureau said the database will soon expand into a broader range of financial product and service topics. Users may submit unanswered questions for consideration.

8. Sharing Complaints through Consumer Sentinel

The CFPB said March 14 that it has begun sharing consumer complaints with Consumer Sentinel, an online law-enforcement database administered by the Federal Trade Commission. The Dodd-Frank Act compelled the bureau to share the complaints, and it joins the FBI, U.S. Postal Inspection Service, and several state attorneys general that submit information to the database.

9. CFPB Office of Older Americans in Illinois

Skip Humphrey, the head of CFPB’s Office of Older Americans, posted a blog entry describing his team’s visit to Chicago to learn about Illinois’ efforts to protect seniors from financial abuse. The state recently concluded that almost 60% of elder abuse in Illinois was financial exploitation. The state “recently passed a law requiring that employees of state banks and other state financial institutions receive training on how to recognize signs of senior financial exploitation,” Humphrey wrote. He praised the state’s attorney general, Lisa Madigan, as well as its Department of Financial and Professional Regulation, Department of Aging, and the Chicago Police Department. Humphrey has also met with state agencies, law enforcement, and nonprofit groups in California, Florida and Maine to raise awareness of elder abuse.

10. Advisory Board Reminder

Nominations are due this Friday, March 30, for the CFPB’s Consumer Advisory Board. The 20-person board will meet with CFPB officials twice a year to “discuss, advise, and consult with the Bureau on emerging consumer financial issues.” Nomination letters and resumes can be submitted to CABnominations@cfpb.gov.

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Promontory's Consumer Protection Group includes:

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Konrad Alt, Managing Director
kalt@promontory.com
+1 415 986 4160

Jeff Brown, Managing Director
jbrown@promontory.com
+1 202 384 1040

Jeanine Catalano, Special Adviser
jcatalano@promontory.com
+1 415 321 6408

Michael Dawson, Managing Director
mdawson@promontory.com
+1 202 384 1080

Susan Eckert, Director
seckert@promontory.com
+1 202 384 1125

Jennifer Faulkner, Director
jfaulkner@promontory.com
+1 202 384 1126

Amy Friend, Managing Director
afriend@promontory.com
+1 202 384 1056

David Gibbons, Managing Director
dgibbons@promontory.com
+1 847 615 1728

Jonathan Gould, Director
jgould@promontory.com
+1 202 384 1018

Ann Jaedicke, Managing Director
ajaedicke@promontory.com
+1 202 384 1150

Chris Lewis, Director
clewis@promontory.com
+1 415 321 6406

Simon McDougall, Managing Director
smcdougall@promontory.com
+44 207 377 2367

BJ Sanford, Managing Director
bsanford@promontory.com
+1 202 384 1020

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801 17th Street, N.W.
Suite 1100
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Copyright © 2012 Promontory Financial Group. All rights reserved.

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