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Promontory Sightlines: Consumer Financial Protection Developments

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June 2, 2014

The Consumer Financial Protection Bureau's nonbank supervision program took center stage in the Supervisory Highlights bulletin released by the bureau on May 22. The report, which covered recent actions involving deficiencies in debt collection, consumer reporting, and payday lending, also shed light on the CFPB's growing supervisory capacity and examination approach for newly supervised industries.

The CFPB said it conducted more than 100 supervisory activities — ranging from full-scope and targeted review to follow-up exams — in 2013 and expects to conduct roughly 150 in 2014. Its early activities skewed heavily toward depository institutions; only 19 of 82 examinations completed by July 2013 involved nonbanks. But the bureau's nonbank supervisory activity will likely accelerate throughout 2014 as it adds staff to its examination team, defines through rulemakings its nonbank jurisdiction in additional markets, and gains experience in conducting and resolving exams.

The CFPB's supervisory efforts have focused on compliance programs and areas with high risk of consumer harm; its bulletin details "systemic flaws" in compliance management systems (CMS). Noteworthy CMS gaps have included operating without documented policies and procedures or a chief compliance officer, failing to brief the board of directors on consumer protection risks, and limited or nonexistent oversight of third-party activities. The bulletin further notes that weaknesses in defining and implementing compliance procedures have led to inadequate resolution of customer complaints (including disputes about reporting of consumer information) and inappropriate documentation of credit-standard exceptions.

The bulletin explains that CMS gaps in some instances have resulted in harm to consumers. For example, in debt collection, the CFPB cited firms for wide-ranging statutory violations, including unfair, deceptive, or abusive acts or practices. Inadequate reviews of debt buyers' compliance, the sale of debt for which the consumer was no longer liable, misleading statements about collection litigation, and excessive collection calls — including one firm that contacted consumers as often as 20 times in two days — are themes that the CFPB will likely address in forthcoming debt-collection rules. The bureau highlighted payday lending as particularly fraught with such problems.

The CFPB also found problems with how debt collectors and credit-reporting agencies manage credit-information disputes. Reported violations include attempts to limit consumers' ability to file disputes; failure to forward relevant documents to the firm that supplied disputed information; and failure to meaningfully investigate such disputes.

The CMS failures and compliance shortcomings that the CFPB identified resulted in more than $70 million in remediation to more than 775,000 consumers.

The bureau's use of the confidential supervisory process is at odds with common perceptions that the agency reflexively pursues public enforcement when it encounters violations. This provides two important clues about the agency's supervisory approach.

First, to give newly supervised firms the opportunity to develop appropriate compliance programs, the CFPB appears to be following the traditional progression of supervisory remedies, which starts with identification of matters requiring management or board attention, and proceeds through memorandums of understanding before escalating to public action. The bureau's record with banks, however, suggests that public enforcement actions will eventually feature prominently in its nonbank supervision program.

Second, this approach also suggests an important difference between the CFPB and its prudential peers. Whereas the banking agencies can take enforcement action against a supervised firm on the grounds that a serious CMS deficiency constitutes an unsafe and unsound practice, the CFPB can take such an action only when it finds an actual violation of law or regulation. Again, however, this difference provides only limited basis for comfort. Examiners more often than not find violations when they find CMS weaknesses, and ensuing exam cycles almost inevitably bring stringent review of the firm's response to matters previously identified and testing for resultant consumer harms.

Firms navigating a transition to federal supervision can demonstrate commitment to meeting regulatory obligations by investing in their compliance programs. Those wishing to build a successful relationship with the CFPB must show attention to consumer protection fundamentals, calibrate their compliance programs to the nature and complexity of their business, and scrupulously adhere to program requirements across all aspects of their operations. The CFPB's supervisory bulletin provides a useful playbook for firms looking for substantive clues about the agency's policy priorities.

Yours truly,

Mike O'Connell
Principal
moconnell@promontory.com
+1 212 542 6822

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

Mike O'Connell P-R Stark
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Auto Lender to Pay $5.5 Million for Collection Tactics

The Federal Trade Commission said Consumer Portfolio Services of Irvine, Calif. will pay $5.5 million to resolve charges that the subprime auto lender used illegal collection tactics. The FTC said the tactics included "collecting money consumers did not owe, harassing consumers and third parties, and disclosing debts to friends, family, and employers." The FTC released the complaint detailing the charges and a consent order requiring CPS to change its business practices. CPS will "establish and maintain a comprehensive data integrity program to ensure the accuracy, integrity and completeness of its loan servicing processes, and the data and other information it services, collects or sells," the order said. CPS will also have to provide the FTC independent assessments of the program for 10 years.

CFPB Penalizes Alabama Firm for RESPA Violations

The CFPB announced in a May 28 press release that it ordered Alabama's largest real estate firm, RealtySouth, to pay $500,000 for "inadequate disclosures that could leave consumers unaware of their rights to choose service providers during the home-buying process." The bureau charged RealtySouth with violating the Real Estate Settlement Procedures Act's prohibition on kickbacks based on its practice of offering homebuyers preprinted form purchase contracts that explicitly directed that its affiliate TitleSouth LLC conduct title and closing services. The consent order is here.

FTC Calls for Legislation for Data Brokers

The FTC on May 27 released a 110-page report that called on Congress for legislation that would require data brokers to operate with more transparency and allow customers to exercise greater control over their personal information. "The extent of consumer profiling today means that data brokers often know as much — or even more — about us than our family and friends, including our online and in-store purchases, our political and religious affiliations, our income and socioeconomic status, and more," said FTC Chairwoman Edith Ramirez in a press release.

CFPB Pushes Back Overdraft and Payday Rules

The CFPB's May 23 blog post highlighted the bureau's semiannual rulemaking agenda; notably, it has pushed back its timeline for proposed rules on overdraft fees and payday loans. The rules, previously expected in July, now are slated for February 2015. The post also announced the agency's intention to define its supervisory jurisdiction with respect to the auto lending market in a follow-on larger-participants rule.

FTC Shuts Down Debt Collectors

The FTC announced a May 21 settlement with Asset Capital and Management Group, a debt-collection firm in Southern California that the FTC said extorted payments from consumers using false threats through "a sprawling network of intertwined companies and dozens of fictitious names," and sometimes even posed as process servers. The operation will surrender more than $4 million for consumer redress and permanently exit the debt-collection industry.

On May 19, the FTC announced the shutdown of Houston-based debt-collection operation Goldman Schwartz Inc., which it said "used insults, lies, and false threats of imprisonment to collect on payday loans," in violation of the Federal Trade Commission Act and the Fair Debt Collection Practices Act. The injunction further orders restitution to consumers charged unauthorized fees. 

FTC Sets Terms of CoreLogic's DataQuick Acquisition

On May 21, the FTC approved a final order settling charges that CoreLogic Inc.'s $661 million acquisition of DataQuick Information Systems was likely to harm competition in the national-assessor and recorder-bulk-data markets. The order requires CoreLogic to license data sets to Renwood RealtyTrac LLC.

CFPB Highlights Consumer Harm from Medical Debt

The CFPB on May 20 announced the release of a study that found "consumers' credit scores may be overly penalized for medical debt that goes into collections and shows up on their credit report." The bureau said the scores can underestimate the creditworthiness of consumers who owe medical debts in collections, and that some scoring models do not appropriately credit repayments of medical debt in collections. "In short, scores could be more predictive if they treat medical debt and non-medical debt differently," agency head Richard Cordray said in a press call on the study. "Careful and accurate treatment of medical debt is deserving of greater attention."

Latest OMSO Report Shows Most Servicers Passing

The Office of Mortgage Settlement Oversight on May 14 released the latest reports on compliance with the National Mortgage Settlement; all the servicers monitored passed all compliance tests during the third and fourth quarters of 2013, with the exception of Green Tree Servicing, which failed eight of the 29 metrics on loans acquired from ResCap.

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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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