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Promontory Sightlines: Consumer Financial Protection Developments

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September 10, 2013

Dear Clients and Friends,

Small, highly motivated groups of social-media users exert outsize influence on how products are received in the marketplace — in some cases encouraging innovations and forging brand loyalty, while in others creating considerable hurdles to long-term success. Financial services firms are increasingly working to leverage conversations among these “social influencers” to create buzz about their products, demonstrate their responsiveness, and quickly gather intelligence about rave-worthy features and common pain points.

Regulators have not let these conversations pass them by. Indeed, social media takes to a whole new level the concept of using consumer complaints as a radar for regulators — offering as it does an unusually data-rich environment to track consumer issues and determine areas that warrant further investigation. Examiners and enforcement attorneys at the Consumer Financial Protection Bureau routinely monitor message boards and comments on firms’ own websites, as well as a host of third-party outlets, to identify practices that pose consumer harm. Similarly, earlier in the year, the Federal Financial Institutions Examination Council proposed guidance that articulates an expectation that firms will incorporate social-media complaints and inquiries into their complaint-management program.

These expectations present a very real challenge. Firms’ compliance staff may well find itself answering a question from regulators that originated in a comment on Facebook or Twitter. But when virtually every article on the Web provides a forum for commentary, and every mobile application allows users to participate, how can firms find a way to tune out the noise and identify real, actionable consumer-protection and reputation risks?

The key change is to shift from a reactive posture to a proactive one. No longer can financial institutions wait for customers to call them or to have regulators forward complaints. They must be vigilant in reviewing blogs, comments, and tweets that reference billing disputes, contest information on credit reports, or claim unfair treatment. Using software to scour text on popular websites for buzzwords and patterns that indicate potential risk is a critical component of any social-media strategy, but technology isn’t the only answer. Just as with complaints received through traditional channels, firms need informed people to interpret data, respond to consumers, and trigger systemic inquiries where appropriate.

Determining whether to respond to online comments is a delicate matter, and one in which firms are at a clear disadvantage: Customers can complain loudly, but privacy laws usually require a quiet response. If a customer complains in an online forum about not being able to get cash through an ATM, the firm can communicate only with that customer to inform them that the account is overdrawn. The bank should look for other ways to demonstrate responsiveness and commitment to customer service to the broader user community.

Some postings may be anonymous. In these cases, the most a firm may be able to do is to post a public reply acknowledging the seriousness of the issue and inviting the submission of a complaint through formal intake channels. More important, anonymity can prevent a firm from investigating or validating an issue, and that may in turn create a risk that potential systemic implications will seem less important or be entirely overlooked. An uptick in online activity related to an offer not fulfilled as advertised — even when generated by complaints that are anonymous or considered meritless — is no less a signal of potentially confusing or deceptive marketing than more conventional submissions.

As in all aspects of a compliance program, the size and complexity of the effort to monitor social media are dictated by how aggressively the firm creates opportunities for customers to interact. The more online chatter a firm encourages, the greater the expectation will be that it has effective policies, systems, and staffing to sift through those comments to identify potential regulatory risks. As a baseline, all firms should equip themselves with a plan for picking up comments about their offerings on third-party sites, even if it is as simple as assigning responsibility for periodically checking high-traffic websites.

Separating substantive issues from idle talk and balancing privacy and responsiveness are hard enough. But the sheer speed of online commentary makes monitoring even more difficult. A comment asserting discrimination or unfair treatment can catch on in the blogosphere and change how a firm and its products are viewed; a factual, exculpatory rebuttal that comes too late cannot undo the residual reputational effect.

The benefits of using social media are enormous because it opens up new avenues for building and strengthening customer relationships. But embracing social media requires equally active engagement on the compliance front to ensure that firms are capturing the risks that their regulators are looking for online.

Yours truly,

Paul E. Carlisle
Associate
pcarlisle@promontory.com
+1 202 384 1083

Paul E. Carlisle
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FTC Won’t Block Agent Database for Money Transmitters

The Federal Trade Commission’s bureau of competition on Sept. 4 said in an advisory opinion that it “has no present intention of recommending an enforcement action challenging” a trade association’s proposed establishment of an information-exchange database. The Money Services Round Table, which represents six nonbank, licensed national money transmitters, had proposed to put together a database of agents whose relationships were terminated for failure to comply with laws or with a money transmitter’s policies or terms. The commission said the association’s proposed database did not appear to harm competition. “The information exchange is likely to improve the money transmitters’ ability to comply with federal and state laws designed to prevent money laundering, terrorist financing, and other criminal behavior, and enhance consumer welfare by preventing the appointment of fraudulent or criminal money transmitter agents,” the FTC said in a press release. The commission also noted that the database of agents — which are typically neighborhood stores and check-casher services — would be developed and maintained by a third-party vendor.

Court Shuts Payday Loan Broker

The FTC announced Sept. 4 that a U.S. District Court halted a Tampa-based operation (operating under multiple names, including Vantage Funding and Ideal Advance) that allegedly used consumers’ personal financial information to make unauthorized debits from their bank accounts, instead of facilitating the disbursement of payday loans, as they claimed to do. “Repeatedly, we’ve seen situations where consumers provide sensitive financial information when inquiring about a payday loan online, and that information falls into the wrong hands,” said Jessica Rich, director of the FTC’s bureau of consumer protection. “The FTC is committed to shutting down these fraudulent operations.”

Antonakes Named CFPB Deputy Director

On Sept. 4, the CFPB announced that Steven Antonakes was named the deputy director for the bureau; Antonakes had been filling the job in an acting capacity. Antonakes “has adeptly led — and will continue to lead — our supervision, enforcement, and fair lending teams,” said CFPB Director Richard Cordray.

CFPB Warns Furnishers; FTC Settles with Data Broker

The CFPB warned in a Sept. 4 press release that it intends to scrutinize the customer dispute-resolution procedures of “furnishers” that exchange information with consumer-reporting agencies. The bureau also released a bulletin detailing its expectations of how furnishers should comply with the requirements of the Fair Credit Reporting Act. The CFPB said it is working to expand the capacity of the “e-OSCAR” electronic dispute-reporting system, which now is able to forward dispute documents sent by consumers to furnishers. The bulletin spelled out furnishers’ legal obligations on:

  • Receiving information and investigating disputes
  • Providing investigation results
  • Correcting inaccurate information

The warning followed the FTC’s Aug. 15 announcement of a $3.5 million agreement with Certegy Check Services to settle alleged violations of the Fair Credit Reporting Act and Furnisher Rule. The FTC’s complaint alleged “that Certegy failed to follow reasonable procedures to assure maximum possible accuracy of the information it provided to its merchant clients, as required by the FCRA.” The penalty is the second-largest in an FCRA matter. “This case is part of a broader initiative to target the practices of data brokers, which often compile, maintain, and sell sensitive consumer information,” the FTC said in the release. In addition to the monetary penalty, the settlement also requires Certegy to make improvements in the deficient areas.

Cordray Ratifies Past Actions as Recess Appointee

Director Cordray moved to affirm and ratify all the actions he took as a recess appointee, according to an Aug. 30 Federal Register notice. “I believe that the actions I took during the period I was serving as a recess appointee were legally authorized and entirely proper,” Cordray said in the notice. “To avoid any possible uncertainty, however, I hereby affirm and ratify any and all actions I took during that period.”

CFPB Online Toolkit for Student-Loan Repayment

On Aug. 28, the CFPB announced the launch of an online toolkit for public-service employers to assist their employees with student-loan repayment. The CFPB also posted remarks from Director Cordray: “Special programs exist to help our public servants pay back the college loans they needed to qualify for their jobs serving children, the disadvantaged, and the general public,” he said. “But not everyone knows about these options.”

Additions to CFPB Leadership Team

The CFPB announced several new additions to its leadership team on Aug. 26: Cheryl Parker Rose has joined the bureau as assistant director for the office of intergovernmental affairs. She was most recently deputy director of U.S. government relations for the Bill and Melinda Gates Foundation. Christopher Carroll, a professor of economics at Johns Hopkins University, will take a leave of absence to serve as assistant director and chief economist for the office of research. Kathleen Ryan, former senior regulatory counsel for JPMorgan Chase, is the new deputy assistant director for the office of regulations. Elizabeth Ellis will serve as deputy assistant director for the office of financial institutions. Ellis was previously a financial analyst at the Congressional Oversight Panel.

CFPB’s Supervisory Highlights Focus on Mortgage Servicing

On Aug. 23, the CFPB released a Supervisory Highlights report that shared information about nonpublic supervisory actions. This edition detailed examiners’ findings of mortgage-servicing problems at banks and nonbanks, including sloppy account transfers, poor payment processing, and loss-mitigation mistakes. “The CFPB has also directed servicers to engage in specific corrective actions appropriate to the circumstances, such as: reviewing loss mitigation decisions and related fees or charges to borrowers to determine whether any reimbursement was appropriate; conducting periodic testing to monitor areas of concern; and providing reports to the CFPB on their progress completing the corrective actions,” the bureau said in its press release. The report also found that many nonbanks lack robust compliance-management systems, including missing comprehensive consumer-compliance programs, nonexistent formal policies and procedures, and a lack of independent consumer-compliance audits.

CFPB Sues Morgan Drexen; Morgan Drexen Seeks to Enjoin that Action

The CFPB said in an Aug. 20 press release that it sued debt-relief service provider Morgan Drexen Inc. in California federal district court for allegedly charging illegal upfront fees and deceiving more than 22,000 clients, in violation of the Telemarketing Sales Rule and the Dodd-Frank Act. The company was specifically charged with two allegedly misleading claims: that consumers would not pay any upfront fees for debt-relief services, when they actually paid hundreds to thousands of dollars in such fees; and that consumers would be debt-free in “months,” when only a “tiny fraction” of consumers actually became debt-free. As part of pre-existing litigation challenging the bureau’s authority, Morgan Drexen then moved to enjoin the CFPB’s enforcement action.

CFPB Releases Second Update to Mortgage Exam Procedures

The CFPB announced Aug. 15 that it has released a second update to its exam procedures pursuant to mortgage reforms issued this past January. The updates cover the ability-to-repay requirements, qualified mortgage loans, high-cost mortgages and their appraisals, and amendments related to the escrows rule. The Real Estate Settlement Procedures Act exam procedures are here; the Truth in Lending Act exam procedures here.

Democratic Lawmakers Urge Hagel to Tighten Servicemember Protections

Twenty-three Senate Democrats wrote an Aug. 14 letter to Defense Secretary Chuck Hagel asking him to “close loopholes that leave service members vulnerable to ... predatory practices.” The letter said that a narrow definition of consumer credit had allowed some lenders to make loans “at exorbitant triple digit effective interest rates” using products that “do not include the additional protections envisioned by the law.”

CFPB Updates Small Entity Compliance Guide

The CFPB said Aug. 14 that it has updated the Small Entity Compliance Guide for the ability-to-repay and qualified-mortgage rules, incorporating clarifications and amendments issued on May 29 and July 10.

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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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