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Promontory Sightlines: Consumer Financial Protection Developments

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April 17, 2014

Dear clients and friends,

Informed consent is at the heart of fair dealing in financial services. Historically, consumers were bound by their decision to use a product or service whenever thorough information about its terms was provided, no matter how dense the information might be.

The Consumer Financial Protection Bureau is shifting its emphasis away from technical legal constructions in favor of communications that clearly convey a product's costs, risks, and benefits. Determining what kind of product information is necessary to meet this higher standard is a matter of keen interest. The costs of falling short can be high: Regulators have cited consumer confusion as a significant aggravating factor in regulatory hot spots ranging from credit card add-on products and debt-settlement plans to arbitration clauses.

Sustained attention to potentially unfair, deceptive, or abusive acts or practices has pressured sellers to look for ways to prove that their efforts to inform the public about various offerings are sufficiently consumer-friendly. Although companies have made substantial investments in sophisticated marketing research and analytics, they may be overlooking a powerful regulatory compliance tool hiding in plain sight: consumer testing.

Qualitative consumer testing is an iterative process that leverages behavioral research, interviews, and graphic design to communicate about products in ways that serve consumers and firms alike. Product and testing experts observe how much consumers take away from the information at hand as they make their decision, and identify where they misinterpret information or draw short-sighted or overnarrow conclusions when they choose products that are inconsistent with their expressed aims.

Well-designed testing efforts can pinpoint what information consumers rely on to make financial decisions and where they struggle with concepts critical to a regulatory-fairness analysis, such as the tradeoff between paying upfront and financing certain costs. Varying the placement, specificity, and context of a disclosure element can be the difference between giving users a sophisticated understanding that lets them apply information to their own financial situation and one that merely quantifies specific pieces of information such as an interest rate.

A powerful hint of the benefits of consumer testing can be found in regulators' reliance on it when developing required disclosures and model forms; the CFPB is not the first agency to look to consumer testing for guidance, but it has expanded its application and intensity. The cornerstone of the bureau's effort to integrate required mortgage disclosures was the almost three years of consumer testing that preceded them. The bureau is now using a similar approach to develop debt-validation notices and prepaid-card disclosures.

Firms can use consumer testing in targeted ways as they launch new offerings, customer platforms, and marketing campaigns. Investing in effective communications in all media can help customers protect themselves from mistakes with serious and long-lasting consequences — and insulate firms from the regulatory scrutiny that increasingly follows when things go wrong. Providing consumer-oriented product information also signals a firm's commitment to sustainable customer relationships and helps strengthen a reputation in the marketplace for trustworthiness and fair dealing.

Yours truly,

Linda Gallagher
Managing Director and Global Head of the Consumer Protection Practice
lgallagher@promontory.com
+1 202 370 0411

Linda Gallagher
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CFPB to Extend Estimates on International Remittances

On April 15, the CFPB proposed to revise its international-remittance rule and extend for five years an exception to the rule's disclosure requirements. The exception — which allows some institutions to estimate fees and exchange rates on money transfers — is now set to expire in July 2020. "If the temporary exception expired in July 2015, some insured institutions have reported that current market conditions would make it impossible to know the exact fees and exchange rates associated with a minority of their remittance transfers," the CFPB said in its press release. "Without the exemption, these insured institutions report that they would be unable to send some transfers to certain parts of the world that they currently serve."

FTC Announces $1 Million Settlement with Payday Lender

The Federal Trade Commission on April 11 announced that a South Dakota-based payday-lending operation agreed to pay nearly $1 million to settle charges that it used unfair and deceptive tactics to collect on payday loans. The defendant, Payday Financial LLC, "illegally tried to garnish consumers' wages without a court order, and sought to manipulate the legal system and force borrowers to appear before the Cheyenne River Sioux Tribal Court in South Dakota, which did not have jurisdiction over their cases," the commission said in its press release. The release included a link to the stipulated order for permanent injunction and civil penalties.

CFPB Again Targets Credit Card Add-Ons

On April 9, the CFPB announced a consent order with Bank of America and FIA Card Services that required the bank to pay $727 million in restitution to consumers allegedly harmed by credit card add-on products, in addition to a $20 million civil money penalty. The OCC announced a related order for unfair billing practices in connection with identity-theft protection products; the OCC ordered restitution to 1.9 million consumer accounts and a $25 million civil money penalty, as well as a new risk management program for add-on products. "Through the five enforcement actions the bureau has taken to date on credit card add-on products, we have now put nearly $1.5 billion back into consumers' pockets," CFPB Director Richard Cordray said in prepared remarks to the media. "We intend to continue cleaning up this market as necessary to ensure that consumers are treated fairly." The CFPB published a consumer-focused explainer on refund eligibility.

Data Brokers Settle with FTC

Data brokers Instant Checkmate and InfoTrack Information Services agreed to settle FTC charges that they violated the Fair Credit Reporting Act "by providing reports about consumers to users such as prospective employers and landlords without taking reasonable steps to make sure that they were accurate, or without making sure their users had a permissible reason to have them," the agency announced on April 9. The settlement includes fines of $1 million for InfoTrack and $525,000 for Instant Checkmate.

Fuchs Testifies Before House Committee

CFPB General Counsel Meredith Fuchs appeared before the House Financial Services Committee on April 8 to discuss the impact of regulation on financial markets and institutions. Among the CFPB's efforts to reduce regulatory burden, she mentioned the Project Catalyst trial disclosure program: "Companies can design an innovative disclosure or way of delivering a disclosure that is not permissible under existing regulations," she said. "Where appropriate, we will grant a waiver from compliance with the existing regulations, with safeguards in place to protect against consumer harm, so that the company can try out its idea and measure how well it works." 

Debt Collectors Banned

Two principal owners of Rincon Debt Management will surrender more than $3 million in assets and be permanently banned from the debt-collection business for abusive tactics, said an April 3 FTC press release. According to the FTC's complaint, the defendants called "consumers and their employers, family, friends, and neighbors, posing as process servers seeking to deliver legal papers that purportedly related to a lawsuit" and "threatened that consumers would be arrested if they did not respond to the calls." 

Cordray Discusses CFPB Rulemaking

CFPB Director Cordray delivered an April 2 speech to the American Bar Association outlining the bureau's feedback-based rulemaking and implementation processes. "Industry representatives often seek a long implementation period, but they rarely provide any persuasive data to explain exactly why the estimated period is actually justified," he said.

Antonakes: CFPB Looking for Proactive Compliance Efforts

CFPB Deputy Director Steve Antonakes told an audience at an April 2 Consumer Bankers Association event that the CFPB's "goal is not simply to identify violations of the law through our own work. We are also seeking to incentivize conduct that leads to greater levels of compliance on the part of the financial institutions themselves. In our 'responsible conduct' policy, we are quite willing to take into account proactive compliance efforts by institutions that take the initiative to identify and correct problems without having to be prompted."

Consumer Complaints Nearly Doubled in 2013

On March 31, the CFPB announced the release of the 2013 Consumer Response Annual Report, which recorded a near doubling of consumer complaints from 2012 — to 163,700 from 91,000. According to the report, the top three complaint categories were mortgages (37% of complaints), debt collection (19%), and credit reporting (15%).

Fandango, Credit Karma Settle FTC Data-Security Charges

The FTC said on March 28 that Fandango and Credit Karma agreed to settle the agency's charges that they misrepresented to customers the security of their mobile apps, leaving sensitive personal and financial information at risk. The FTC's complaint charged the two companies with failing to properly implement SSL encryption in their software. The settlements require the companies to establish new security programs and undergo biennial independent security assessments for the next 20 years.

Fed OIG Releases CFPB Audit

The Federal Reserve's office of inspector general released a March 27 report assessing the operational efficiency and effectiveness of the CFPB's supervision program. The report highlighted eight areas of concern, including timeliness of examination reports and inconsistent use of standard compliance rating definitions.

CFPB Finds Four of Five Payday Loans Rolled Over or Renewed

On March 25, the CFPB announced it had issued a report on payday lending, which found that four out of five payday loans are rolled over or renewed — and three out of five payday loans are made to borrowers whose fee expenses exceed the amount borrowed. "From this finding, one could readily conclude that the business model of the payday industry depends on people becoming stuck in these loans for the long term, since almost half their business comes from people who are basically paying high-cost rent on the amount of their original loan," said Director Cordray at a payday-loan field hearing. "I will frankly say that we are now in the late stages of our considerations about how we can formulate new rules to bring needed reforms to this market."

FTC Puts Conditions on CoreLogic's DataQuick Acquisition

On March 24, the FTC announced conditions on CoreLogic's proposed $661 million acquisition of DataQuick Information Systems that are designed to preserve competition in the market for national assessor and recorder bulk data. Under the settlement, CoreLogic will license its national assessor and recorder bulk data to RealtyTrac in a move that the FTC said would make RealtyTrac an "effective competitor in the market."

Agencies Propose Requirements for Appraisal Management Companies

On March 24, six agencies issued a proposed rule to implement minimum requirements for state registration and supervision of appraisal management companies. "The proposed rule would not compel a state to establish an AMC registration and supervision program, and there is no penalty imposed on a state that does not establish a regulatory structure for AMCs," said the interagency press release. "However, an AMC is barred … from providing appraisal management services for federally related transactions in a state that has not established such a regulatory structure." The Federal Register notice is here.

Consumers' Top Debt-Collection Complaint: Pursuit of Debts Not Owed

The CFPB issued a report on March 20 on the more than 30,000 consumer complaints it has received on the debt-collection market. The bureau's accompanying press release listed the top three complaint categories related to debt collection: collectors pursuing debts not owed, aggressive communication tactics, and taking or threatening illegal actions.

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Promontory's Consumer Protection Team includes:

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Konrad Alt

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

Michael Dawson

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

Linda Gallagher

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

lgallagher@promontory.com
+1 202 370 0411

Stuart King

Stuart King
Managing Director
sking@promontory.com
+44 207 997 3402

Simon McDougall

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

BJ Sanford

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

Julie Williams 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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