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Promontory Sightlines: Consumer Financial Protection Developments

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December 12, 2014

The convergence of forces that have changed our daily communication and interaction is also reshaping the next generation of consumer finance. Growing reliance on the Internet for financial transactions, unprecedented amounts of consumer data, and growing sophistication in financial modeling are driving innovation throughout retail banking. Innovation has always challenged established businesses and markets, but the shift to technologies that change the way we finance goods, not just how we buy them, is notable for another reason: It is reshaping the highly articulated regulatory framework of the financial services industry, forcing recalibration of basic assumptions and expanding the reach of the existing consumer protection regime.

New Transaction Structures

Peer-to-peer lending platforms offer electronic marketplaces in which lenders can fund all or part of a loan based on information available through the platform. These transactions offer lower interest rates for borrowers, attractive rates of return for lenders, and simple electronic interfaces designed to make transactions efficient and user-friendly.

However, existing banking regulations do not contemplate typical peer-to-peer business models, and the mismatch underscores a key difference between entrepreneurs and regulators: The former see fractionalized lending as a means to expanding access to credit in the mode of microfinance; the latter are accustomed to firms — rather than individuals or disaggregated groups of individuals — making and holding loans.

As a result, consumer protection regulations often don't fit peer-to-peer transactions neatly. For example, in a transaction in which those providing liquidity are not actually lending money to borrowers, it is not entirely clear whether the platform or its investors are the creditor for fair-lending purposes. Similarly, the prospect that loans may be funded for less than the amount for which consumers are approved likely raises concerns about the quality of pre-application disclosures and potential fairness and deception issues.

New Entrants

Smartphone-based payment services are an area of sustained growth and interest among established technology firms, entrepreneurs, and consumers. The firms leading these efforts have long been subject to privacy requirements; but as their products and capabilities evolve, they also increasingly find themselves within the scope of financial services regulators' reach, adding obligations related to anti-money-laundering standards, the alphabet soup of consumer protection requirements, and other regulations they are navigating for the first time.

As this oversight develops, they can expect regulatory efforts to harmonize requirements across platforms and product. For example, mobile wallets, like prepaid cards, are not currently subject to the same requirements as first-party credit or debit transactions. As a result, consumers are dependent on each specific product's terms of service when it comes to error resolution, billing disputes, or protection from unauthorized charges. Firms should not be surprised if regulators tighten consumer protection requirements on these products to bring them more in line with credit and debit cards, as the Consumer Financial Protection Bureau recently proposed with prepaid cards.

New Infrastructure

The emerging digital currency ecosystem — populated by exchanges, wallets, payment processors, and many others — is another area in which the relationship between regulation and innovation is being redrawn. New digital-payments infrastructures promise lower-cost transactions that are less prone to fraud, but widespread adoption hit a speed bump this year when the volatility of digital currency and the collapse of some early digital-currency firms alerted regulators to illegal-conduct and loss-of-value risks. The first wave of regulatory action has been focused on money-transmitter and AML requirements, but recent initiatives point to a broader embrace of consumer protection.

Many firms have supported the emergence of a regulatory framework as a necessary element of a trusted digital-currency marketplace. The ongoing conversation about how regulation of digital currencies can support pro-consumer innovation has highlighted principles broadly applicable to the challenges facing both regulators and innovators in all of these technology-driven areas.

Policymakers must gauge the right moment to respond to changes in the marketplace — acting too soon may stunt promising innovation, while waiting too long may allow preventable harm or create an uneven playing field among firms offering similar products. And when they act, regulators should strive to create a regulatory regime that:

  • Addresses risks of consumer harm
  • Promotes informed consumer choice
  • Is technology-neutral
  • Minimizes barriers to entry
  • Preserves space for innovation
     

For their part, innovators have a rare and valuable opportunity to hardwire regulatory norms — for example, transparency, fairness, and protection of consumer privacy — into their models before facing regulatory scrutiny. Proactive steps to address those norms may be the best way to keep regulators in watch-and-study mode and to preserve space for continued innovation.

Yours truly,

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

P-R Stark

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CFPB Unveils Medical-Debt Report, New Requirements for Credit Reporters

On Dec. 11, the Consumer Financial Protection Bureau announced the release of a report on the collection and reporting of medical debt, which it said makes up almost half of all collections tradelines. To address the report's findings that "the systems for incurring, collecting, and reporting medical debt can create difficult challenges for consumers," the bureau said it will now require credit reporting companies to provide accuracy reports on consumer disputes to the CFPB as part of ongoing examinations; some of the metrics required in the reports include statistics on the furnishers with the most disputes, industries with the most disputes, and furnishers with unusually high dispute rates. The CFPB also posted a sample accuracy report

New York Issues Debt-Collection Rules

The New York Department of Financial Services announced on Dec. 3 new rules to crack down on abusive debt-collection tactics. Among other things, the rules mandate substantiation of debt owed in response to a consumer's dispute of that debt, require improved disclosures about debts owed, prohibit collections on "zombie debt," and give consumers the right to communicate with collectors via email.

CFPB Unveils Rulemaking Agenda

The CFPB on Nov. 21 published its rulemaking agenda for fall 2014. The bureau said it intends to amend Regulation C, which implements the Home Mortgage Disclosure Act and issue new rules, proposed earlier this month, offering protections to users of prepaid cards. The timetables on rules for payday lending, debt collection, and overdrafts were all delayed from earlier estimates. The agency's updated rule list is here.

Cordray Urges Creation of Faster Payments System

CFPB Director Richard Cordray urged attendees of the Clearing House's annual conference on Nov. 20 to make a faster payments system an "urgent priority." That system "should bring ... faster access to the funds that a consumer deposits," with "real-time access to information about the status of an account as well as protections from hair-trigger assessments of fees," and "robust consumer protections with respect to fraudulent or otherwise unauthorized transactions and erroneous debits," he said.

Education Department Blesses Sale of Corinthian Colleges Campuses

A Nov. 20 press release from the Education Department expressed support for an agreement under which ECMC Group subsidiary Zenith Education Group would purchase 56 for-profit Corinthian Colleges campuses for transition to nonprofit status. ECMC Group is one of the largest student-loan guaranty agencies in the United States. "We are pleased to help students transition from a problematic for-profit company to a nonprofit that is committed to giving students a new start and more opportunities for success," said Undersecretary Ted Mitchell.

CFPB Announces Expanded Foreclosure Protections

On Nov. 20, the CFPB announced that it proposed rules to expand foreclosure protections for certain borrowers, including service members and family members inheriting or receiving property. Among other things, the rules would require mortgage servicers to provide foreclosure protections more than once over the life of a loan, notify borrowers when loss-mitigation applications are complete, and clarify when a borrower becomes delinquent. A summary of the proposal is here.

CFPB Fines Auto Dealer $8 Million

The CFPB announced on Nov. 19 that it assessed an $8 million civil money penalty against "buy here, pay here" auto dealer DriveTime for harassing customers with debt-collection calls and providing inaccurate information to credit-reporting agencies. The bureau also ordered the dealership to rectify debt-collection and credit-reporting issues, implement an audit program for information furnished to reporting agencies, and provide free credit reports to harmed customers.

CFPB Bulletin, HUD Action on Lenders Imposing Illegal Burdens on Disabled

On Nov. 18, the CFPB announced that it issued a bulletin warning lenders not to impose "illegal burdens" on mortgage applicants receiving Social Security disability income. "Some applicants have reported being asked by mortgage lenders or their agents for information about their disabilities or for statements from their physicians about the likely duration of their disabilities," the bulletin said. Separately, the Department of Housing and Urban Development announced a Nov. 3 initial decision and consent order with Rockville, Maryland-based American Bank to resolve charges that the mortgage lender illegally required disabled applicants to provide medical documentation about the nature and extent of their disabilities. Under the order, American Bank will provide additional fair-lending training to employees and hire a third-party administrator to determine which customers will be eligible for compensatory damages.

Mortgage Lender to Pay $730K for Steering Mortgage Customers

On Nov. 13, the CFPB announced that it ordered mortgage lender Franklin Loan Corp. to pay $730,000 in restitution to consumers illegally steered into higher-interest loans. The bureau's order also requires the firm to end the illegal bonus-compensation system that it said incentivized the behavior.

CFPB Proposes Prepaid-Card Protections

On Nov. 13, the CFPB proposed new rules and model forms for prepaid cards. "The proposal would require prepaid companies to limit consumers' losses when funds are stolen or cards are lost, investigate and resolve errors, provide easy and free access to account information, and adhere to credit card protections if a credit product is offered in connection with a prepaid account," the bureau said in its press release. "By bringing prepaid accounts under the Electronic Fund Transfer Act, we are proposing to give consumers the basic protections — including safety of the funds — they have come to expect when they pull a debit card out of their wallet or shop online with it," said Director Cordray at a Nov. 13 field hearing on prepaid products.

FTC Orders Debt Brokers to Notify Customers

At the request of the Federal Trade Commission, a federal court ordered two debt brokers — Riverside, California-based Cornerstone and Co. and St. Petersburg, Florida-based Bayview Solutions — that allegedly posted online sensitive personal information on over 70,000 consumers to notify them and provide education on protecting themselves from identity theft. The commission said in its Nov. 12 release that the companies posted Excel spreadsheets with the information on a website that "caters to the debt collection industry but was open to public viewing." It also said the portfolios have been accessed more than 500 times.

CFPB Report on Older Americans' Debt-Collection Complaints

The CFPB's office for older Americans announced Nov. 5 that it released a report highlighting older Americans' debt-collection complaints — which made up one-third of all their submitted complaints — from July 2013 to September 2014. The most frequent complaint was demands for payment of debts not owed (48%), followed by abusive communication tactics (24%). The bureau also put up a blog post outlining four ways that older Americans can deal with debt collectors.

FDIC Releases Survey of Unbanked and Underbanked Households

On Oct. 29, the Federal Deposit Insurance Corp. released the 2013 results of its biennial National Survey of Unbanked and Underbanked Households. "The survey indicates that the proportion of unbanked households declined from 8.2 percent in 2011 to 7.7 percent in 2013, while the share of underbanked households remained essentially unchanged at 20.0 percent," said the FDIC's press release. "The decrease in the proportion of the unbanked can be explained by improving economic conditions and the changing demographic composition of households."

CFPB Releases Latest Supervisory Highlights Report

The CFPB released its fifth supervisory highlights report on Oct. 28, and the bureau's accompanying press release was particularly critical of mortgage and student-loan servicers. "All borrowers should be treated fairly by loan servicers, and through our supervision program, we intend to hold them accountable for how they treat borrowers," said Director Cordray.

CFPB Launches Campaign to Raise Awareness of Money-Transfer Protections

On Oct. 28, the CFPB announced that it is launching a nationwide multimedia campaign to raise awareness of newly promulgated protections for consumers sending money internationally. The campaign includes a consumer-targeted blog post with fact sheets and model forms reflecting the new provisions.

CFPB Updates List of Rural and Underserved Counties

On Oct. 27, the CFPB released its final list of rural or underserved counties that it will use for 2015.

FTC Settles Charges of Deception with Card Processor

The FTC announced on Oct. 27 that it reached a $175,000 settlement agreement with card-payment processor Merchant Services Direct to resolve charges that it used "deception and unsubstantiated claims" to sign up small-business customers. It said methods included falsely telling the prospective customers that their terminals were out of date or tricking them into signing binding contracts that were purportedly applications for price quotes.

FTC Charges Lead to $515,000 Penalty for Bogus Debt-Relief Companies

An Oct. 24 press release from the FTC announced a $515,000 judgment against the proprietor of two companies that the agency charged with making deceptive mortgage- and debt-relief pitches.

FCC Fines Carriers for Failing to Secure PII

The Federal Communications Commission announced on Oct. 24 that it fined phone carriers TerraCom Inc. and YourTel America Inc. $10 million for failing to protect the privacy of customers' personal information. "TerraCom and YourTel apparently stored Social Security numbers, names, addresses, driver's licenses, and other sensitive information belonging to their customers on unprotected Internet servers that anyone in the world could access," said the agency's press release.

CFPB Finalizes Data-Sharing Rule

On Oct. 20, the CFPB announced that it finalized a rule (first proposed in May) to allow companies that meet certain data-sharing requirements to post their annual privacy notices online, rather than delivering them individually.

Cummings, Warren Ask GAO to Study Nonbank Mortgage Servicers

Rep. Elijah Cummings (D-MD) and Sen. Elizabeth Warren (D-MA) asked the Government Accountability Office to investigate the financial stability of nonbank mortgage servicers and its implications for borrowers, in an Oct. 20 letter to U.S. Comptroller General Gene Dodaro. Specifically, the lawmakers requested that the GAO examine the general risk to consumers stemming from the growth in nonbank servicers, and the effect on consumers and the specialty servicing industry should a large nonbank servicer fail.

Obama Executive Order Directs Transition to More Secure Payments

On Oct. 17, President Obama signed an executive order directing government departments and agencies to transition payment-processing terminals and payment cards to employ enhanced security features, including chip-and-PIN technology; reduce the burden on consumers who have been victims of identity theft; and implement additional security measures in agencies' citizen-facing digital applications. An accompanying fact sheet positioned the order within the government's broader BuySecure Initiative, intended to "provide consumers with more tools to secure their financial future by assisting victims of identity theft," improve the government's "payment security as a customer and a provider," and accelerate "the transition to stronger security technologies and the development of next-generation payment security tools." FTC Chairwoman Edith Ramirez put out a statement the same day: "I welcome the opportunity for the Federal Trade Commission to participate in this new initiative advancing efforts to address this insidious problem on behalf of consumers."

CFPB Student Loan Ombudsman Report Highlights Private-Loan Complaints

On Oct. 16, the CFPB's student loan ombudsman released its annual report, which focused on private-student-loan complaints. "Distressed borrowers report that they receive very little information or help when they get in trouble, that there are no affordable loan modification options available, and that the alternatives to default are temporary at best," said the bureau's press release.

CFPB Revises Policy on No-Action Letters

On Oct. 10, the CFPB unveiled a proposed policy to alter the administration of no-action letters. According to a bureau blog post, under the policy, the no-action letter would not be an available tool unless a potential product promises substantial consumer benefit; applicants thoroughly demonstrate the characteristics of the proposed product, including how it works and what consumer risks are involved; and applicants explain the exact regulatory uncertainty that interferes with the development of the product.

Lower Court Strikes Down Disparate Impact as SCOTUS Prepares Another Review

The U.S. Supreme Court on Oct. 2 granted certiorari in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, marking the third time the high court has granted review to decide on the cognizability of disparate-impact claims under the Fair Housing Act. On Nov. 3, District Judge Richard Leon struck down the use of disparate-impact analyses in discrimination cases under the Fair Housing Act, ruling that "the FHA unambiguously prohibits only intentional discrimination," and the disparate-impact rule "exceeds HUD's 'statutory jurisdiction, authority, or limitations.'"

Bank Settles Charges of Unfair and Deceptive Practices

Utah-based Merrick Bank agreed to pay a $1.1 million civil money penalty and $15 million in consumer restitution to settle FDIC charges that the bank engaged in unfair and deceptive practices in its sales and servicing of payment-protection add-on products for credit cards, the agency announced on Sept. 29. The consent order is here.

Defense Department Proposes to Extend MLA Protections to More Loan Types

On Sept. 26, the Defense Department proposed changes to the Military Lending Act that would extend the legislation's protections to "all forms of payday loans, vehicle title loans, refund anticipation loans, deposit advance loans, installment loans, unsecured open-end lines of credit, and credit cards." A separate CFPB statement applauding the proposal clarified that "the proposed regulation would continue to exclude residential mortgages and credit extended to finance the purchase of, and secured by, personal property, such as vehicle purchase loans."

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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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