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Promontory Sightlines: Consumer Financial Protection Developments

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March 21, 2013

Dear Clients and Friends,

Financial companies can put themselves at risk when they fail to protect their customers, but safeguarding customers against financial harm isn’t always easy. Carefully designing products with customer suitability in mind is an obvious first step, but that alone may not prevent instances of indirect harm, in which a company’s inattention enables or contributes to financial harm inflicted by third parties. A broader perspective on risk — one that emphasizes reputation and ethics in addition to compliance — can help keep company and customer interests aligned.

Payday lending is one business in which banks face reputational risk even if they are not directly involved in it. Financial regulators are said to be looking at situations in which payday lenders — particularly online lenders with offshore operations — obtain repayment by debiting customers’ bank accounts. Media reports have noted that arranging withdrawals through the accounts helps payday lenders get around state laws that ban their services.

Banks have also run into trouble acting as intermediaries in other types of transactions. The Department of Justice in November alleged that a bank processed debit transactions for third-party payment processors and fraudulent merchants. DoJ said in a press release announcing the $15 million settlement that the bank “knew — or turned a blind eye to the fact — that consumer authorization for the withdrawals had been obtained by fraud.” And just last week, the Federal Trade Commission announced a $950,000 settlement with a payment-processing company that sought to use remotely created payment orders to debit “millions of dollars from tens of thousands of consumers’ bank accounts without their consent,” according to the commission’s release.

The risk of indirect harm in another banking activity — funding car loans originated by dealers — is apparent in the industry’s shorthand for the activity: indirect auto. The CFPB has communicated its interest in determining whether dealer practices have a disparate impact on certain borrowers. The auto dealers set the final terms that may harm consumers through loan markups, but the institutions that buy those loans, and derive income from the dealer relationship, may also be held responsible.

Handling of defaulted consumer debt is also a potential thicket. Financial companies frequently turn to third parties for this function, either by retaining the debt and outsourcing servicing, or by selling the paper outright. In either case, the methods the third parties use to collect the debts have reputational implications for the originating lender.

Financial institutions may not be the direct cause of harm in most of these circumstances, but they risk reputational damage nonetheless — particularly if they benefit through fee income associated with the harm. Many institutions are tightening scrutiny of their own products and services. Reviews typically include making sure that the amount, frequency, and triggers on fees are appropriately disclosed and reasonable from the perspective of regulators and customers. Measuring consumer complaints can be helpful in flagging potential problems.

But to refine their sense of reputational exposure, most institutions are also becoming better acquainted with the activities of their commercial customers. In addition to the complicated questions raised by payday lending, indirect auto lending, and debt collection, institutions assume risk when they serve clients who sell unsuitable or inappropriate financial products to customers, fail to make appropriate disclosures, or systematically overcharge.

Managing reputational risk requires a different skill set than the quantitative disciplines surrounding the management of traditional financial risks. But given the heightened public and regulatory interest in business conduct, the costs of falling short in managing reputational risk may be just as significant as those that result from weak management of credit or interest rate risks.

Yours truly,

Jeanine Catalano,
Special Adviser

jcatalano@promontory.com
+1 415 321 6408

P-R Stark

Jeanine has more than three decades of financial regulatory risk-management experience, with particular expertise in corporate governance, consumer compliance, and regulatory relations.

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BJ Sanford
Managing Director
email | +1 202 384 1020
 

BJ Sanford

Catherine West
Managing Director
email | +1 202 384 1169
 

Catherine West

Julie Williams
Managing Director and Director of Domestic Advisory Practice
email | +1 202 384 1087

Julie Williams

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Please click here to continue receiving Consumer Financial Protection Developments.

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CFPB to Supervise Student-Loan Servicers; Exploring Ways to Ease Financial Burden on Students

The CFPB on March 14 announced a proposed rule that would bring nonbank student-loan servicers within its regulatory ambit. The bureau would rely upon the authority granted in the Dodd-Frank Act to define “larger participants” in certain markets; student-loan servicing would be the third market designated, after consumer reporting and debt collection. “The student loan market has grown rapidly in the last decade, and servicers are now facing the stress of an increasing number of delinquent borrowers,” said CFPB Director Richard Cordray, in the press release. A fact sheet on the rule is here; full text here. The bureau’s supervision would include all servicers with one million borrower accounts or more. That would cover “the seven largest student loan servicers, which, combined, service the loans of nearly 50 million borrower accounts,” Cordray said in a press call. “The rule would apply to these servicers regardless of whether they handle federal or private student loans.”

The CFPB said in a Feb. 21 blog posting that it was exploring ways to ease the financial burden of private student loans; it posted the related notice and request for information here. According to the Household Debt and Credit Report released Feb. 28 by the New York Fed, the proportion of under-30 borrowers at least 90 days delinquent on student-loan payments soared last year to 35%. The full report is here.

Cordray, Antonakes Talk QM and Ability-to-Repay Requirements

The CFPB posted a transcript of Director Richard Cordray’s March 13 remarks at the Independent Community Bankers of America’s annual convention, at which he discussed the bureau’s recent mortgage rulemakings and sought to assuage community bankers’ fears over the qualified-mortgage rule: “We understand that some of you may be initially inclined to lend conservatively in light of the Qualified Mortgage rule, maybe out of caution about how the regulators would react,” he said. “But you should have confidence in your sound lending practices, and you should not be holding back.”

The day before, CFPB Acting Deputy Director Steve Antonakes addressed the Consumer Bankers Association and said “consumer protection is not in conflict with safety and soundness.” He said the ability-to-repay rule was good not only for consumers, but also for lenders, as it “builds into the law common-sense underwriting processes and considerations.” He made a similar point about the qualified-mortgage rule, noting that lenders that underwrite qualified mortgages will be given legal protections. “In the end, our new regulation represents nothing but a return to common-sense underwriting,” he said. He said the bureau plans to help financial institutions comply with the new mortgage rules by giving banks “plain-language” rule summaries and other instructional materials.

The CFPB’s blog on March 12 noted the June 1, 2013, effective date of its new escrow requirements under the Truth in Lending Act, “which require certain creditors to create escrow accounts for a minimum of 5 years for higher-priced mortgage loans.” The rule exempts higher-priced mortgage loans made by certain creditors operating in rural or underserved counties. 

Cordray Nomination Battle Continues

CFPB Director Richard Cordray vowed in prepared comments at his March 12 nomination hearing before the Senate Banking Committee to continue pursuing policies to protect consumers. Sen. Bob Corker (R-TN) said in a press release on Feb. 25 that “the ball is entirely in the White House’s court” to propose necessary changes to the CFPB to garner enough Republican support to confirm a director. “By making some modest and reasonable changes to the structure of the CFPB, I think we could have a strong Senate vote confirming Cordray as leader of the organization,” Corker said. Meanwhile, 54 senators in the Democratic caucus signed a letter sent to President Obama on Feb. 14 standing behind Richard Cordray’s renomination as CFPB director — and against structural changes at the bureau. “It is important to remember that most of the significant checks and balances embodied in the agency’s structure reflect bipartisan ideas agreed to by a supermajority of the Senate when the Dodd-Frank Wall Street Reform and Consumer Protection Act was approved two and a half years ago, and there is absolutely no evidence that the agency’s structure requires change,” they wrote.

FTC Settles with Payment Processor; Freezes Operations of Ideal Financial

The FTC on March 13 announced a settlement agreement with Automated Electronic Checking Inc., which will pay $950,000 to resolve allegations that it debited or tried to debit millions of dollars from tens of thousands of consumer bank accounts without their consent. Under the terms of the agreement, the payment processor and two of its principals are also banned from processing electronic payments in the future. 

The commission said Feb. 20 that, at its request, a federal court froze an operation by Ideal Financial Solutions that allegedly debited consumers’ bank accounts and credit cards over $25 million without consent. Customers “who disputed the charges were told they had purchased something, such as financial counseling or loan matching services, or assistance in completing a payday loan application,” the press release said. It is unclear how the defendants got consumers’ financial information.

Banking Agencies Propose Revisions to CRA Q&A

The Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. proposed revisions to their interagency Q&A on the Community Reinvestment Act. The changes would “focus primarily on community development,” the agencies said in a joint release. One of the proposed revisions would clarify the benefit of community-development initiatives in statewide or regional areas.

FTC Penalizes Mortgage Scammers; Sends Refunds in Separate Case

The FTC announced on March 7 that nine defendants behind an alleged mortgage debt-relief scam have agreed to settle the agency’s charges for monetary penalties and bans from marketing similar services in the future. Separately, the commission announced March 6 that it has mailed out more than 17,000 refund checks totaling more than $1 million to consumers deceived by bogus mortgage-assistance provider Residential Relief Foundation.

Fed Releases Debit Card Report

On March 5, the Federal Reserve Board announced that it “does not plan to propose revisions to the Regulation II interchange fee standard or the fraud-prevention adjustment” based on survey data in a report issued that day. The report, which contained data on volume, interchange fee revenue, and issuer costs, estimated debit-card fraud losses at $1.38 billion, an average loss of 8 basis points per transaction.

Foreclosure Settlements and Updates

The Federal Reserve and the OCC on Feb. 28 released the details of the $9.3 billion settlement of foreclosure-abuse allegations that ended the independent foreclosure reviews of 13 mortgage servicers. The amended consent orders mandate $3.6 billion in cash payments and $5.7 billion in other assistance to borrowers, to be completed in two years. The servicers must also submit regular progress reports to regulators.

The week before the settlement, the Office of Mortgage Settlement Oversight released its third progress report on the other major mortgage agreement: the multistate national servicing settlement. It said the top five mortgage servicers have provided $45.8 billion in consumer relief, such as modifications, forgiveness, and short sales.

Meanwhile, the DoJ announced Feb. 15 that Lender Processing Services agreed to pay $35 million to settle federal allegations of “robo-signing” foreclosure fraud. The agreement follows a $127 million settlement with 46 state attorneys general to resolve similar charges.

FTC Releases Consumer Sentinel Network Data Book

The FTC on Feb. 26 put out its annual Consumer Sentinel Network Data Book of consumer-complaint data, as well as a press release highlighting the agency’s top 10 complaint categories for 2012. “Debt collection” topped the list, with “banks and lenders” following directly behind.

First Consumer Advisory Board Meeting of 2013

The CFPB hosted the year’s first Consumer Advisory Board meeting on Feb. 20, and the bureau posted a transcript of Director Richard Cordray’s opening remarks. He outlined four classes of problems the bureau will focus on: deceptive and misleading marketing of financial products, debt traps, lack of consumer choice, and discrimination.

Texas Champion Bank Settles Fair-Lending Charges

The DoJ said in a Feb. 19 press release that it reached a settlement with $341 million-asset Texas Champion Bank resolving allegations that the bank charged Hispanic borrowers higher interest rates on unsecured consumer loans than other borrowers. “Under the settlement, Texas Champion will pay $700,000 to approximately 2,000 Hispanic victims of discrimination, monitor its loans for potential disparities based on national origin, and provide equal credit opportunity training to its employees,” it said.

Warner and Warren on Better Credit Reporting; Landrieu, Hagan, and Isakson on Looser QRM

In response to the FTC’s latest report on consumer credit reporting, Sens. Mark Warner (D-VA) and Elizabeth Warren (D-MA) sent a Feb. 15 letter to the CFPB and FTC urging the agencies to “take the information compiled in these reports and work with us to take further action to improve consumer credit reporting,” beginning with “a report on whether the current legal framework regulating the credit reporting industry and protecting consumers is sufficient, or if additional oversight or legislation in this area would be beneficial.”

Meanwhile, Sens. Mary Landrieu (D-LA), Kay Hagan (D-NC), and Johnny Isakson (R-GA) on Feb. 13 sent a letter to prudential regulators asking them to adopt a looser standard for the QRM rule. “As sponsors of the QRM exemption from risk retention in Dodd-Frank Act, we intentionally omitted a specific down payment requirement and never contemplated the rigid 20% or 10% as discussed in the March 2011 Notice of Proposed Rulemaking,” they wrote.

NY State Warns Debt Collectors on Payday Loans

The New York Department of Financial Services sent a Feb. 22 letter to debt collectors warning them not to collect debts from payday loans, which are illegal in New York state. The regulator’s press release includes the full text of the letter, which defines payday loans as “loans or forbearances under $250,000, made by non-bank lenders or New York chartered- banks, with an interest rate of 16 percent per annum or greater.” The letter also says that high-interest loans made over the Internet, phone, or mail — channels payday lenders have recently used to try to skirt the state’s anti-usury laws — are also considered payday loans and are illegal. “No matter what method is used to make the loan, usurious and illegal payday loans are not valid debts and cannot lawfully be collected on,” the press release said.

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Promontory's Consumer Protection Team 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

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

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

Austin Hong, Director
ahong@promontory.com
+1 202 384 1030

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

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

Matthew Ondus, Director
mondus@promontory.com
+1 202 370 0395

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

David Stein, Director
dstein@promontory.com
+1 202 384 1183

Catherine West, Managing Director
cwest@promontory.com
+1 202 384 1169

Julie Williams, Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087

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Promontory Financial Group, L.L.C.
801 17th Street, N.W.
Suite 1100
Washington, DC 20006

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