In Consumer Financial Protection Bureau (CFPB) news, the CFPB published its Summer 2019 supervisory highlights, and focused on auto loan originations, credit card account management, debt collection, credit furnishing and mortgage originations. In this article, we focus on the first two categories (auto and credit card). The CFPB likewise unveiled a new network focused on innovation and finalized its compliance assistance, disclosure sandbox and no-action letter (NAL) policies, issuing its first NAL in the process.
On the enforcement side, the CFPB also launched a new action against a mortgage assistance relief company, its owner and its auditor.
- Supervisory highlights. The Summer 2019 version of CFPB’s supervisory highlights is notable for the continued pragmatic approach of the Kraninger era. In this issue, we look at two aspects of the supervisory highlights (auto finance and credit cards). In the next issue, we will review debt collection and mortgage lending highlights.
On automobile loan origination, the CFPB takes pains to point to the provisions of the Consumer Financial Protection Act (CFPA) prohibiting “abusive” acts or practices, identifying the sale of certain GAP products as a significant area of concern. The CFPB notes that one or more examinations completed in 2018 found instances in which auto lenders sold a GAP product to consumers under circumstances that led to an abusive practice. Specifically, the CFPB claims that examiners observed that lenders sold a GAP product to consumers whose low LTV meant that they would not benefit from the product. By purchasing a product they would not benefit from, consumers demonstrated that they lacked an understanding of a material aspect of the product. The lenders, said the CFPB, had sufficient information to know that these consumers would not benefit from the product. The CFPB notes that these sales demonstrate that the examined lenders took unreasonable advantage of the consumers’ lack of understanding of the material risks, costs or conditions of the product and, as a result of these examinations, have undertaken remedial and corrective actions, including reimbursing consumers for the cost of the product and establishing an LTV minimum for GAP product sales.
On credit card account management, the CFPB focused on four issues: (1) triggered disclosures in online advertising, (2) offset of credit card debt, (3) deceptive marketing of secured credit card accounts, and (4) deceptive threats of repossession or foreclosure.
Regulation Z requires credit card issuers to clearly and conspicuously provide certain disclosures if the advertisements contain certain pricing terms (triggering terms). In one or more examinations, the CFPB found that entities failed to provide required disclosures in a clear and conspicuous fashion, making them available solely by difficult-to-follow hyperlinks or upon completing applications.
On offset of credit card debt, Regulation Z prohibits credit card issuers from offsetting credit card debt with funds the consumer has on deposit with the issuer. However, issuers may obtain or enforce a consensual security interest in such funds where affirmatively agreed to by the consumer and disclosed in the account-opening disclosures. Further, where a security interest is granted, the consumer must be aware that doing so is a condition for the credit card (or for more favorable account terms) and must specifically intend to grant a security interest in the deposit account. One or more examinations found that issuers offset consumers’ credit card debt against funds that the consumers had on deposit with the issuers without sufficient indication of the consumers’ awareness of, and intent to grant, a security interest in those funds.
Under the prohibition against deceptive acts or practices in the CFPA, a practice is deceptive when (1) it misleads or is likely to mislead the consumer, (2) the consumer’s interpretation is reasonable under the circumstances, and (3) the misleading act or practice is material. These provisions were central to two types of issuer conduct: First, in one or more examinations, examiners determined that credit card issuers misled or were likely to mislead consumers by orally representing that secured credit card accounts would automatically graduate (or be upgraded) to unsecured credit card accounts within a specific time frame, such as six or 12 months after origination, so long as cardholders maintained their accounts in good standing. The CFPB concluded that the oral representations misled or were likely to mislead consumers about both the timing and likelihood of upgrade or graduation, and subsequent written disclosures were inadequate to cure the oral representations. In one or more examinations, examiners likewise concluded that credit card issuers misled or were likely to mislead consumers by representing in prescreened offers of credit that secured credit card accounts subject to an annual fee would be “periodically” reviewed for graduation (or upgrade). In fact, the issuers did not review such accounts for a year or more but did not provide additional disclosures to account holders or modify their marketing materials. Second, examiners concluded that one or more credit card issuer(s) misled or were likely to mislead consumer credit card holders by sending collection letters that suggested that the issuer(s) could repossess consumers’ automobiles, or foreclose on homes, securing loans or mortgages owned by the issuer(s). In fact, the issuer(s) did not repossess any vehicles or foreclose on any mortgages in connection with delinquent credit card accounts, and it was against the policies of the issuer(s) to do so.
- Innovation network. Together with the attorneys general of Alabama, Arizona, Georgia, Indiana, South Carolina, Tennessee and Utah, as well as the Florida Office of Financial Regulation, the CFPB announced the launch of the American Consumer Financial Innovation Network (ACFIN).
Aimed at facilitating financial innovation through “greater competition, consumer access or financial inclusion in markets for consumer products and services,” the members of the network will engage in cross-jurisdictional coordination and information sharing, the CFPB said. The network also seeks to ensure that market innovations are free from fraud, discrimination and deceptive practices.
“Federal and state coordination promotes consistency in the regulation of consumer financial products and services while facilitating consumer-beneficial innovation,” CFPB Director Kathleen L. Kraninger said in a statement. “ACFIN will provide a platform for Federal and State regulators to coordinate with each other as they develop new rules of the road and apply existing ones.”
The CFPB noted that it had invited all state regulators to join the network.
- New innovation policies. Initially proposed in 2018, the CFPB finalized three new policies aimed at promoting innovation and facilitating compliance: the NAL policy, the Trial Disclosure Program (TDP) policy and the Compliance Assistance Sandbox (CAS) policy.
As compared with its predecessor, the new NAL policy offers a more streamlined review process focusing on the consumer benefits and risks of the product or service in question, the CFPB said, and recipients are provided reassurance that the CFPB will not bring a supervisory or enforcement action against the company under the covered facts and circumstances.
Requests for a NAL will be granted or denied within 60 days, and the letters will be posted on the CFPB’s website. Some denials may also be made public, along with an explanation of the reasons for the denial.
The first NAL responded to a request from the Department of Housing and Urban Development (HUD) on behalf of more than 1,600 housing counseling agencies (HCAs) wondering about the application of the Real Estate Settlement Procedures Act (RESPA) to their counseling services.
According to the letter, the CFPB will not take supervisory or enforcement action under RESPA against HUD-certified HCAs that have entered into certain fee-for-service arrangements with lenders for pre-purchase housing counseling services, providing a template for lenders to request a NAL for such arrangements.
Under the TDP policy, the CFPB created a “Disclosure Sandbox” where entities seeking to improve consumer disclosures will be permitted to conduct in-market testing of alternative disclosures for a limited time once permission has been granted by the CFPB.
Testing will occur over a two-year time frame, with procedures in place to permit companies to continue to use disclosures that test successfully.
Finally, the CFPB put in place the CAS policy, which enables testing of a financial product or service where regulatory uncertainty exists. The CFPB will evaluate a product or service for compliance with relevant law and establish a “safe harbor” from liability for specified conduct during the testing period if the applicant complies in good faith with the terms of the approval.
Approvals under the new policy will provide protection from liability under federal statutes such as the Truth in Lending Act, Electronic Fund Transfer Act and Equal Credit Opportunity Act, the CFPB said.
“The three policies we are announcing today are common sense policies that will foster innovation that ultimately benefits consumers,” Kraninger said.
- Enforcement action. In a new complaint filed in California federal court, the CFPB asserted that a company that sold financial advisory and mortgage assistance relief services, its president/owner, and the company’s sole auditor violated the CFPA and Regulation O.
The company and its owner engaged in deceptive and abusive acts and practices by charging unlawful advance fees in connection with its audit services, which it falsely represented as able to “prevent foreclosure,” “a powerful and successful legal means of bringing suit against your mortgage lender,” and tailored to each consumer, the CFPB alleged.
In reality, the auditor prepared the documents from pre-drafted templates and didn’t always read them in full before completing them, the CFPB said, accusing him of providing substantial assistance to the other defendants in violation of the CFPA.
According to the complaint, the company and its owner charged $1,495 for the audits, selling more than 2,000 since 2014.
While the litigation continues against the company and its owner, the auditor agreed to a stipulated final judgment and order, neither admitting nor denying the allegations. The order includes a permanent ban on offering or providing mortgage assistance relief services and consumer financial products or services. A $493,000 civil money penalty will be suspended following a $5,000 payment.
To read the Summer 2019 Supervisory Highlights, click here.
To read the ACFIN Charter, click here.
To read the NAL policy, click here.
To read the HUD NAL, click here.
To read the TDP policy, click here.
To read the CAS policy, click here.
To read the complaint, click here.
To read the stipulated judgment and order, click here.
Why it matters
The latest edition of CFPB’s supervisory highlights is educational in two ways. First, it continues to inform regulated entities, generally, on the current and future examination trends. Second, it is revealing of the CFPB’s current pragmatic approach, as certain of the enumerated activities might have resulted in consent orders during the Cordray era.
The new network and finalized policies continue the CFPB’s push for innovation. Consumer advocates continue to view some “innovation” as circumvention of federal law, but the current CFPB has moved the pendulum toward broader and more creative availability of credit. And that is likely good news for industry and consumers alike.