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Promontory Sightlines: Consumer Financial Protection Developments

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August 15, 2013

Dear Clients and Friends,

Many financial companies have worked hard in recent years to build compliance functions that provide effective oversight of operations, usually demanding the sharpest scrutiny of businesses that serve retail consumers. Increasingly, however, companies are facing the logical consequence of stronger policing: What’s the right course to follow when misdeeds are discovered?

The strategic calculus of what — and when — to tell regulators has never been simple, but finding the right path forward seems more fraught than ever. Firms still sizing up the country’s newest financial services regulator received a noteworthy overture in the form of the Consumer Financial Protection Bureau’s recent bulletin on responsible banking conduct. The bulletin formalizes the bureau’s endorsement of corporate behavior that government officials have long advocated: proactive self-identification of issues, acceptance of responsibility, and cooperation with agency requests. Government agencies of all kinds have traditionally rewarded such conduct by imposing less severe sanctions.

Nevertheless, firms determining when and how to approach the CFPB about violations and potential violations may find the bulletin creates as many questions as it answers.

The CFPB stressed that it had “no formula” for granting lenience to firms that self-identify and report issues. While the bulletin recognized a wide range of benefits that might be conferred, it gave no practical indication of how much weight the bureau would give different types of favorable conduct, nor did it say what was necessary to obtain the most significant benefits, such as avoidance of a public order. The lack of specificity stands apart from the approach of the prudential regulators, whose reliance on a matrix for civil money penalties at least provides bare-boned information about the relative benefits of responsible conduct.

The guidance also does not go much beyond articulating basic standards for four areas in which favorable conduct might be rewarded: self-policing potential violations; proactively reporting any potential violations; comprehensively remediating consumer harm; and cooperating with the bureau during investigations.

Two of these areas warrant further scrutiny. The CFPB’s standard for rewarding cooperation requires “substantial and material steps above and beyond what the law requires” in interactions with the bureau. In this regard, the CFPB may well have undercut its stated aim of fostering more self-reporting, especially with respect to violations that are not clear-cut, such as unfair, deceptive, or abusive acts or practices. By emphasizing the need to go beyond legal requirements, the bureau narrowed the incentives for bringing complex issues forward for clarification, input, and early resolution. Reluctance may be especially pronounced at firms investigating novel applications of UDAAP or issues that the firm otherwise believes are justified, in whole or in part. In these instances, wariness about triggering a broad-based supervisory inquiry is likely to trump the open dialogue between firms and regulators that the bank supervision model is fundamentally designed to promote.

Similarly, the bulletin’s discussion of remediation may understate the bureau’s real expectations. According to the bulletin, conduct worthy of recognition as responsible requires “full redress” of affected customers and corrective action that is both swift and sustainable. But little real guidance is provided about what those terms will mean. For example, the bureau did not articulate its views about what constitutes “full redress” or by what standards plans to compensate customers will be assessed, even though its public orders to date point to an approach that is more expansive than the traditional practice of the prudential regulators. The bureau also suggests that in certain circumstances, the compensation component of a remediation plan needs to address harm “beyond the amounts the victims may have paid” to the company, but makes no attempt to specify what kinds of harm it contemplates or how to render those into implementable form.

In this regard, the bureau’s suggestion that it will look favorably upon decisions to remediate “potential rather than an actual violation” is also noteworthy. By contrast, including potential violations in the context of the bulletin’s discussion of self-policing is less discordant, since identifying areas of highest risk of consumer-protection violations is a natural part of that activity. At a minimum, this suggests that regulators would look favorably upon aggressive reform of products and processes in the absence of documented violations, even without granting consumer refunds. But the text also supports a much more stringent interpretation: Firms in consumer-finance markets are expected to adhere not just to the letter of the law, but also to broader fairness principles that could compel them to resolve close or contested issues in their customers’ favor — and to report resolutions proactively to the CFPB.

Notwithstanding these open questions, the CFPB clearly is making an effort to tell firms within its jurisdiction that it values responsible conduct much in the same way as other regulatory and law-enforcement agencies. Here, as in all things, the bureau’s actions will speak more loudly than its words as new regulatory relationships mature. The bureau’s announcement the day after issuing the responsible-conduct bulletin may be more telling: A CFPB consent order refrained from fining a national bank and its nonbank partner for various consumer protection violations because those institutions proactively remedied the problems and provided refunds to affected customers. Whether the CFPB will be able to nudge firms to self-report issues is likely to depend on whether it establishes a consistent record of rewarding such conduct.

Yours truly,

Linda Gallagher
Managing Director
lgallagher@promontory.com
+1 202 370 0411

P-R Stark
Senior Principal
prstark@promontory.com
+1 202 370 0392

P-R Stark

P-R Stark
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Online Lenders in New York’s Sights

New York Attorney General Eric Schneiderman announced Aug. 12 that he had filed suit against online lenders Western Sky Financial LLC, CashCall Inc., WS Funding LLC, and their owners Martin Webb and J. Paul Reddam for “violations of New York’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet.” Schneiderman said the loans carried annual interest rates from 89% to more than 355%.

On Aug. 5, New York Superintendent of Financial Services Benjamin Lawsky sent letters to 35 online lenders ordering them to cease and desist from offering loans with interest rates that exceed the state’s 25% cap. Lawsky also wrote 117 banks, asking them to “work with us to create a new set of model safeguards and procedures to choke off ACH access to the 35 illegal lenders DFS’s investigation has identified to date, as well as the broader payday lending industry.”

CFPB Updates Small Business Guide to Remittance Rule

The CFPB on Aug. 9 released an update to its small business guide for its international remittance rule, along with a video “that gives an overview of the rule, the recent changes, and … responses to questions raised regarding interpretation and implementation of the rule.” The bureau said most businesses that qualify as remittance transfer providers would “have to make some changes to their processes, software, contracts, or other aspects of their practices” to comply with the rule. Among the links on the Web page announcing the update was an unofficial version of the complete rule and its official interpretations. Matters covered include transfer definitions, disclosures, estimates, error resolution, and cancellations and refunds.

FHFA Outlines Opposition to Eminent Domain

The Federal Housing Finance Agency posted an Aug. 7 memo from its general counsel addressing public comments and putting forth its legal analysis on the use of eminent domain to restructure mortgages. The agency had solicited comment a year ago, when it said in a notice published in the Federal Register that it had concerns about eminent-domain seizures. It said at the time that, in the case of loans guaranteed by government-sponsored enterprises, related losses “would represent a cost ultimately borne by taxpayers.” The memo released last week, which the agency said was not a formal legal opinion, concluded that the use of eminent domain to restructure underwater mortgages “presents a clear threat to the safe and sound operations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.” FHFA on Aug. 8 put out a press release and statement summarizing the memo.

CFPB Crunches Numbers on Student Loans

The CFPB on Aug. 5 posted on its blog a breakdown of the repayment status of the $1.2 trillion worth of federal and private student loans: More than seven million borrowers are in default on a student loan, and roughly a third of Federal Direct Loan Program Borrowers have chosen alternative repayment plans. The bureau’s analysis included a breakdown on repayment plans extended to borrowers, as well as a discussion of the options available.

The bureau on Aug. 1, through a blog posting, released a midyear update analyzing complaints from private student-loan borrowers.

CFPB Filings on Information Collections

The CFPB filed an Aug. 1 Federal Register proposal for a new generic information-collection clearance for its consumer-complaint system, as well as a separate proposed information collection to assess “whether bundled products and services that are designed to build savings and credit for economically vulnerable consumers have an impact on assets building and financial capability.”

Federal Judge Dismisses Lawsuit Challenging Constitutionality of CFPB

U.S. District Judge Ellen Segal Huvelle on Friday dismissed a lawsuit brought by 11 states and the State National Bank of Big Spring, Texas, claiming that the Dodd-Frank Act’s establishment of the CFPB was unconstitutional. State National had said it exited the mortgage business due to the CFPB. Huvelle said in her 62-page opinion that the bank lacked standing. “The bank left the mortgage market three months after the law was enacted and long before the adoption of any rule governing residential mortgages so one can only infer that the bank’s generalized fear (or dislike) of the law, and not the mere possibility of increased costs associated with the rules governing mortgages, provides the primary motivation for the Bank to stay out of this business,” she wrote.

Judge Upholds Individual Liability in FTC UDAP Case

The Federal Trade Commission said on Aug. 1 that a federal judge ruled in its favor in a case against an online operation, including Direct Benefits Group LLC and Voice Net Global LLC, which was accused of debiting payday-loan applicants’ bank accounts without consent. The FTC said it will seek a court order to require the defendants to return over $9.5 million to consumers. The FTC’s Web page devoted to the case included a link to the July opinion by U.S. District Judge John Antoon II, which held that individuals may be liable if they participate in or have authority to control company activities that are unfair or deceptive.

FTC Settlement with Telemarketer

The FTC announced on Aug. 1 a settlement that bans Jeremy R. Nelson and companies he controls from selling debt-relief services, telemarketing, and making robocalls, in addition to levying a $4.6 million judgment. The agency alleged that he “violated federal law by making false claims, causing unauthorized debits from consumers’ bank accounts, and illegally charging advance fees.”

Silberman Testifies on Small-Dollar Loan Products

David Silberman, the CFPB’s associate director for research, markets, and regulation, testified July 24 before the Senate Special Committee on Aging, on small-dollar loan products. “The bureau intends to continue its study of small dollar loan products to better understand why some consumers are able to use these products in a light to moderate way, while others seem to get trapped in a prolonged borrowing cycle,” he said. “The bureau would also like to better understand the effectiveness of limitations that have been put into place by state laws, trade associations, and institutions to curb the sustained use that can lead to adverse financial consequences for consumers.”

CFPB Charges Mortgage Company with Illegal Steering Bonuses

On July 23 the CFPB announced that it has filed a federal complaint against Utah-based mortgage company Castle & Cooke Mortgage LLC and two of its officers for “illegally giving bonuses to loan officers who steered consumers into mortgages with higher interest rates.” The full complaint is here.

Petraeus Testifies on Servicemember Education

On July 23, Holly Petraeus, CFPB’s assistant director for the Office of Servicemember Affairs, testified before the Senate Committee on Homeland Security and Government Affairs, on the issue of servicemember education. “The VA, DoD, and ED are poised to launch a centralized complaint system for students receiving military tuition assistance and GI Bill benefits, so they can register complaints about educational institutions that fail to follow the [Executive Order 13607].”

 

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Promontory's Consumer Protection Team includes:

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P-R Stark
 

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

P-R Stark

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

P-R Stark

Linda Gallagher
Managing Director and Global Head
of the Consumer Protection Practice

lgallagher@promontory.com
+1 202 370 0411

P-R Stark

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

P-R Stark

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

P-R Stark Julie Williams
Managing Director and
Director of Domestic Advisory Practice

juwilliams@promontory.com
+1 202 384 1087
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Promontory Sightlines Consumer Financial Protection Developments

 
EDITOR IN CHIEF

P-R Stark

GLOBAL HEAD OF THE
CONSUMER PROTECTION PRACTICE

Linda Gallagher

FOUNDER AND CEO
Eugene A. Ludwig

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