2014 was a defining year for the Consumer Financial Protection Bureau (“CFPB” or “Bureau”). The Bureau solidified its jurisdiction of the 19 enumerated statutes transferred to it by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), and continued making great strides in its regulation of consumer financial products and services. The Bureau also continued to define its approach in policing unfair, deceptive, and abusive acts and practices by the nation’s largest banks and various non-bank entities that offer or provide financial services. All told, in 2014 the CFPB filed or settled more than two dozen individual lawsuits, obtaining more than $1.9 billion in restitution for more than 3.7 million U.S. consumers in 2014. In addition, the Bureau imposed approximately $35 million in civil monetary penalties on companies subject to its jurisdiction.
2015 is expected to be equally as busy for the CFPB. Based on a review of the CFPB supervisory bulletins, enforcement settlements and related Bureau activities in 2014, we have developed considerable insights into the areas the CFPB will likely be focused on this year. The CFPB’s activity last year included the highlights and themes discussed below, many of which are likely to be refined and/or expanded this year.
RECAP OF THE CFPB SUPERVISION AND ENFORCEMENT ACTIVITY
An important aspect of the CFPB’s powers remains the Bureau’s overlapping and exclusive jurisdiction over various consumer financial products and services. The Bureau’s jurisdiction over large banks (assets of $10 billion or more) and certain non-bank entities (collectively, “supervised entities”) in areas such as mortgage lending and servicing, private student loan origination, and payday lending extends the CFPB’s reach significantly beyond that of the federal banking agencies from which it inherited its consumer financial protection rulewriting and related powers. For example, the CFPB’s “larger participants” authority provides the Bureau with jurisdiction over many previously unregulated non-bank financial firms.
While the CFPB’s large bank jurisdiction generally constrains its enforcement authority in the banking context to large banks, the Bureau has considerable enforcement latitude over non-bank financial firms. This broad jurisdiction is certainly an area of future activity for the CFPB, particularly given the Bureau’s often overlooked ability to obtain any legal or equitable relief available in state or federal courts. Similarly overlooked, and also a likely source of future activity, is the federal consumer law enforcement jurisdiction extended to state attorneys general offices, consumer protection offices, and other state regulatory authorities under the Dodd-Frank Act. While state authorities do not have authority to issue civil investigative demands or subpoenas, it seems likely that states will exercise this authority to enforce federal consumer financial protection laws.
Overview of CFPB Supervision Activities
In 2014, the CFPB resolved a number of matters confidentially, i.e., without a public enforcement action. During this time, the Bureau migrated from examining the effectiveness of supervised entities’ compliance management systems (“CMS”) to examining specific consumer protection regulations and using more widely its authority to prohibit unfair, deceptive, and abusive acts and practices (“UDAAP”). Important CMS issues included the adequacy of staff training, the effectiveness of audit programs, and the lack of oversight of third-party vendors and service providers. In addition, fair lending issues became a greater focus of attention with the Bureau undertaking targeted fair lending examinations. While the CFPB indicated that factors examined would vary based on the industry, the only industry specifically mentioned on fair lending issues was auto lending, with over 30 percent of the indirect auto finance market examined for issues relating to “discretionary dealer compensation.” While the Bureau did not attack discretionary dealer compensation arrangements as per se unlawful, fair lending issues were widely identified, particularly at companies lacking a strong CMS.
Another important supervisory issue that emerged in 2014 involves the CFPB’s authority to prohibit UDAAP. Important areas in which the CFPB focused its UDAAP approach involved regulatory-specific violations in credit reporting, debt collection, deposit taking, mortgage servicing, and student loan servicing.
Other areas of supervisory focus during 2014 included the following:
- The Fair Credit Reporting Act’s requirement that furnishers of information conduct investigations of information disputed by consumers;
- The clarification of mortgage lending rules to assist surviving family members;
- A focus on mortgage brokers transitioning to mini-correspondent lenders to avoid regulation;
- The issuance of Bureau guidance for mortgage servicing transfers; and
- A focus on the activities of credit card issuers and service providers regarding how promotional rate offerings are advertised and explained to consumers.
Review of CFPB Enforcement Activities
While a small number of enforcement cases (less than 20 percent) came from formal supervision referrals in 2014, these settlements accounted for a substantial majority of the $1.6 billion the CFPB recovered for consumers. Included among these was approximately $1.0 billion in consumer restitution through three settlements with large banks related to activities with ancillary or add-on credit card products (identity theft protection and monitoring, debt cancelation). The enforcement office assessed another $27.5 million through one public settlement with a large mortgage servicing company, and the remainder of the recoveries came from smaller supervisory referrals and independently generated enforcement cases. The main supervision referrals to enforcement related to credit card ancillary products; mortgage servicing; debt collection (payday lending); and specially protected populations (students, elderly Americans, and military members). In all of these settlements, the Bureau referenced UDAAP and other regulatory violations related to specific financial services.
Notably, a majority of CFPB’s enforcement cases focused on non-supervised entities, including the following:
- unlawful debt relief or debt collection services (with three of the eight cases being brought against law firms);
- unlawful real estate origination services—kickbacks and advertising issues (prevailing in one case through administrative adjudication);
- unlawful mortgage origination compensation;
- unlawful mortgage servicing (one from a formal supervision referral related to new servicing rules);
- unlawful offering, servicing, collection of credit card ancillary products;
- unlawful advertising by a non-bank credit card program;
- unlawful small dollar lending or payday lenders (one from a formal supervision referral);
- unlawful auto finance practices (none related to fair lending issues);
- unlawful student lending practices (for-profit colleges);
- unlawful finance practices that specifically harmed active duty military members or veterans; and
- unlawful cramming of charges on mobile devices.
These cases certainly highlight the CFPB’s enforcement reach in consumer financial services markets.
Notably absent in 2014 are enforcement cases related to discrimination in auto financing, data privacy and security, overdrafts, and harm to older Americans or other specially protected consumers under CFPB’s jurisdiction. Similarly, there were only eight RESPA-related cases involving violations of the prohibition on kickbacks or unearned fees pursuant to the RESPA, Regulation X, the Truth In Lending Act, and Regulation Z (related to mortgage loan originator compensation). However, these numbers may begin to increase as the Bureau gains expertise and a resume in pursuing enforcement actions against players in various industry segments.
WHAT’S AHEAD FOR 2015
Reviewing CFPB’s supervision, enforcement and related activities in 2014 provides useful insights into the themes and areas of Bureau focus and activity for the year ahead. Areas that are likely to be active and/or be given a significant Bureau focus include the following:
Prepaid Cards, Mobile, and Emerging Payments Systems:
These market areas are likely to receive extensive scrutiny from the CFPB in 2015. In 2014, the CFPB proposed a regulation targeting for the first time certain prepaid financial products, including general purpose reloadable cards (“GPR cards”), as well as certain digital and mobile wallets. As proposed, the CFPB will have jurisdiction over large bank and non-bank entities that issue and manage prepaid cards. In addition, the Bureau will likely focus on digital and virtual currency-related companies based on a 2014 Government Accountability Office report recommending that the CFPB take steps to identify potential issues and participate in pertinent interagency working groups addressing virtual currencies. The CFPB has already begun accepting consumer complaints about virtual currency companies and issued a consumer alert regarding these products.
Payday Lending / Small Dollar Lending:
The CFPB is also likely to ramp up its oversight of payday lenders and small dollar lending activities this year, including with respect to overdraft activity. Notably, the CFPB is taking the position in its recently proposed rulemaking that bank account overdrafts and payday loans should be treated similarly. Notwithstanding the Bureau’s focus and the growth of online payday lending, a challenge may be whether the CFPB has the resources to focus on this market.
Another type of small dollar lending the CFPB may pursue, notwithstanding the lack of day-to-day supervisory authority, is auto title lending. While the Bureau did not pursue auto title lenders in 2014, the size of the industry and similarity to payday lending suggests that auto title lenders may be on the CFPB’s radar.
Given the current level of outstanding student loan balances, the Bureau is expected to be very active in the student lending market. An important consideration is the CFPB’s Student Loan Ombudsman charged with monitoring student loan complaints and having considerable additional authority, including providing Congressional testimony. The Bureau’s actions against for-profit colleges in 2014 suggest a significant likelihood of more and bigger things to come.
Credit Card Products:
It is also reasonable to expect that the CFPB will continue to pursue enforcement actions involving credit card ancillary products. It remains to be seen, however, at what level such enforcement activity will continue, particularly given the activism of the prudential bank regulators in this area. While the credit card market, with aggregate consumer debt of approximately $800 billion, is generally smaller than the mortgage, auto finance, and student lending markets, it continues to attract regulatory scrutiny of add-on products involving debt protection, credit insurance, and identity theft protection. These were areas of considerable enforcement activity for the CFPB in 2012, 2013, and 2014. While consumer credit card complaints are likely to continue, it is likely the CFPB will be less active in this area, as many issuers have either stopped offering these products or significantly modified how these products are marketed.
While Bureau activity related to add-on products may begin to abate, CFPB scrutiny of issuer promotional offers should continue. As previewed in a September 2014 CFPB bulletin, the agency will be reviewing whether issuers are engaging in UDAAP violations based on how their products are offered. Notably, as referenced in the bulletin, the CFPB is closely reviewing how and to what extent it is willing to use its authority to prevent “abusive” activities with regard to credit card marketing practices.
The CFPB is expected to continue to be active in the mortgage servicing market this year, largely because of the size of the housing market and the level of consumer complaints received by the CFPB in this area. Another key consideration is that the CFPB’s mortgage servicing rules took effect in January 2014, and the Bureau continues actively to implement, review, and amend these rules. In addition, the Bureau has been actively enforcing these rules, collecting more than $1.6 billion in restitution in 2014, along with significant civil money penalties and non-monetary injunctive relief. Key areas of the Bureau’s focus include mortgage modifications, foreclosure issues, escrow accounts, transfers among servicers, and error resolution issues resulting in significant consumer harm. It is also important to recall that CFPB Director Cordray actively pursued enforcement activities involving mortgage servicing when he was the Ohio Attorney General. It appears highly likely that the Bureau will continue its supervisory and enforcement efforts in mortgage servicing this year and expand its focus to include UDAAP issues.
As with mortgage servicing, the CFPB is expected to continue its robust enforcement and supervision of mortgage origination activities, including on RESPA issues. The CFPB continues to review existing regulations in this area, including its rules governing “qualified mortgages,” loan originator compensation, clarified successor-in-interest issues, and the integration of loan origination forms (expected in 2015). The sheer size of this market, coupled with the CFPB’s efforts directed at large banks and non-banks involved in mortgage origination activities strongly suggests that mortgage origination is a continued area of Bureau focus.
Another area in which the CFPB is likely to be active involves the CFPB’s “larger participants” jurisdiction of credit reporting agencies, accounting for over 94 percent of the market. The CFPB is currently examining supervised entities’ compliance management systems, dispute resolution policies and procedures, third-party service provider relationships, and general responsiveness to consumer complaints. An open issue is whether the CFPB will pursue credit reporting agencies in the same way it did credit card companies for violations arising from the use of ancillary product offerings.
An interesting topic is whether the CFPB will continue its fair lending initiatives against discretionary dealer compensation. Aside from this area, it is unclear how active—if at all—the CFPB will be is the auto finance market. While the volume of auto lending debt remains significant, auto delinquencies (90 days +) decreased toward the end of last year. In 2014, the CFPB issued a number of supervisory highlights covering auto finance and fair lending issues and a formal bulletin and research paper directly addressing discretionary dealer compensation and fair lending risk. In addition, the Bureau issued a proposed rule seeking to supervise certain nonbank auto finance companies. However, until the rule takes effect, it is likely the Bureau will focus its resources on large bank auto finance activities and buy-here-pay-here dealers. It is clear the CFPB’s efforts to address dealer discretionary (auto finance) compensation abuses will continue, but the overall level of focus on this area is uncertain. Regarding buy-here-pay-here dealers, based on its 2014 activity, it appears the Bureau will focus on debt collection issues, credit reporting, and ancillary products offered in connection with auto financing (warranties, force-placed insurance, etc.). Thus, notwithstanding the CFPB’s limited jurisdiction in the auto dealer market, it is likely the Bureau will continue to focus resources in this market.
The CFPB is expected to be active in addressing debt collection issues consistent with the Bureau’s “larger participants” rulemaking. Last year, the Bureau issued bulletins addressing UDAAP violations involving debt collection activities and representations in debt collection regarding credit reports. The Bureau also issued templates for consumer letters that can be used when interacting with debt collectors. Given the volume of debt sold by banks to debt buyers and debt collection firms, debt collection will be an area of increased scrutiny for the CFPB, including enforcement actions and ongoing litigation against various debt relief and collection law firms.
Specially Protected Populations:
The CFPB is also expected to be active this year through its offices tailored to address specialized student lending activities, issues involving Service members and older Americans, and fair lending issues. Particular areas of focus include discriminatory lending and similar practices, e.g., public assistance, disabilities, etc., and making Home Mortgage Disclosure Act data more accessible, suggesting the strong possibility of enforcement-related activity.
In 2013, the CFPB issued a bulletin detailing what it deems to be “responsible conduct” for entities subject to the CFPB’s jurisdiction. In 2014, the CFPB touted at least two examples of how “responsible conduct” resulted in the CFPB assessing reduced civil money penalties. Considering the CFPB’s limited resources and the benefit to the Bureau and consumers of having entities self-police, self-report, and remediate consumer harm in cooperation with the CFPB, enforcement actions in 2015 will likely continue to demonstrate that entities that comply with the Bureau’s “responsible conduct” bulletin will be subject to lower penalties than entities that do not comply with the Bureau’s stated expected “responsible conduct.” Fully understanding the implications of the Bureau’s responsible conduct bulletin and how to work productively with the CFPB will result in tangible benefits to entities facing a CFPB enforcement action.
ACTION ITEMS BASED ON CFPB EXPECTATIONS FOR 2015
Based upon the CFPB’s recent actions, there are a number of action items that banks and non-bank financial firms subject to the CFPB’s jurisdiction should consider. As a threshold matter, these include the following:
- Determine if your business offers financial products or services subject to the CFPB’s jurisdiction that are likely to be a subject of CFPB focus in 2015;
- If you are a supervised entity—large bank or non-bank—review your compliance management system, generally, as well as how it monitors your products and services offered to any specially protected population;
- If you are a supervised entity—large bank or non-bank—lacking or with a deficient compliance management system, you should develop a robust compliance management system that addresses the specific CFPB risks and concerns raised by your products or services;
- If you are an entity not supervised by the CFPB, but that falls under the CFPB’s enforcement authority, review your financial products and services to determine whether your firm is adhering to all relevant federal consumer financial protection laws enforced by the CFPB (19 federal laws plus the Dodd-Frank Act’s prohibition against UDAAP);
- Consider initiating an independent third-party CFPB compliance review conducted by an outside law firm or consulting firm;
- If you receive voluntary information requests from the CFPB, e.g., an informal inquiry rather than a formal subpoena or civil investigative demand, consider whether it may be appropriate to respond to the CFPB and, if so, understand that anything you provide to the Bureau may be forwarded to the CFPB’s supervision and enforcement offices;
- If you receive a mandatory information request—such as a civil investigative demand or supervisory request letter—immediately consult with experienced counsel to determine how to appropriately respond to the CFPB; and
- Consistent with the CFPB’s responsible conduct bulletin and your fiduciary duties, work constructively with the CFPB to resolve issues, particularly in the context of matters that may be first-time issues, involve areas in which there are clear violations of law, and/or there may be opportunities for a proactive solution or resolution of pending issues.