United States: Financial Services Report – Spring 2015


Building on its remarkable box office success, we are glad to bring you . . . Fifty Shades of Financial Services, Spring 2015 edition. Lots of drama — DOJ is ramping up its FIRREA machine targeting subprime auto lending, the CFPB is teaming up with the Department of Defense on military lending, the Supreme Court ruling on TILA rescission made things clear as mud, and fellow CFPB watchers are eagerly awaiting the publication of the CFPB's report on arbitration. President Obama's also getting into the act, announcing new cybersecurity initiatives.

And have we identified some naughtiness? The CFPB filed actions against student debt relief services companies, a retailer catering to servicemembers, and reverse mortgage originators.

We know, cue the heavy breathing. We've also got more on Beltway, Bureau, Mortgage, and Privacy happenings, plus updates on recent preemption, arbitration, and TCPA cases.

Okay, maybe you don't have to cover this Report with the electronic equivalent of a brown-paper wrapper. But read on for reports that are as sexy as Financial Services gets!


Ain't No Party Like a FIRREA Party

By Joe Rodriguez

Recent SEC filings from a number of financial institutions indicate DOJ is looking to apply FIRREA to the world of automobile lending. According to these recent filings, DOJ is interested in subprime auto lending origination and securitization (sounds eerily familiar to anyone involved in the recent mortgage matters). FIRREA is the current statute of choice for DOJ because it provides for a less stringent burden of proof than traditional fraud and the imposition of significant civil money penalties. It remains to be seen how these investigations will play out and how broadly the DOJ will cast its net.

Not So Fast, Says Elizabeth Warren

By Oliver Ireland

Regulatory relief for banks, particularly community banks, has been a hot topic on Capitol Hill so far this year. On February 10, 2015, the Senate Banking Committee held a hearing in which senators from both parties expressed a desire to help relieve some of the post– financial crisis regulatory pressure on community banks. Senator Elizabeth Warren made it clear that she opposes any regulatory rollback to assist community banks if it would benefit the larger financial institutions as well. Senator Warren also indicated during the hearing that raising the CFPB's supervision threshold was a nonstarter for her.

Fast as Fast Can Be, You'll Never Catch . . . the Fed?

By Obrea Poindexter

The Federal Reserve recently released a paper outlining its thinking regarding next steps in developing an infrastructure to speed up electronic payments and settlements. The Fed plans to launch task forces on faster payments and payment security, which will provide a more formal way to share commentary. Starting this year and continuing into 2016, the faster-payments task force will lay out a policy framework for the new system and identify practical approaches for implementing it. Additionally, the payments-security task force will develop draft security standards and further explore the Fed's antifraud and payments risk management offerings. The Fed indicated that its longer-term goal regarding availability of the National Settlement Service is weekend or 24-hour service, adding that it would promote greater use of same-day ACH and expand its international payment services.


Cramming in UDAAP Actions

By Obrea Poindexter

The CFPB filed a lawsuit against a telecommunications carrier in December, citing the practice of allowing third-party merchants to place unauthorized charges on consumer phone bills. More importantly, this cramming allegation included UDAAP charges, as the CFPB alleged that automatic enrollment, working with certain third-party merchants, and failing to track complaints or catch erroneous charges constituted unfair practices. The Bureau seemed especially interested in the outsourcing of payment processing to billing aggregators. This lawsuit represents the first time the Bureau has asserted its UDAAP authority to pursue an entity for this alleged conduct.

You can read our client alert.

No Relief for Debt Relief

By Nancy Thomas

The Bureau's focus on debt relief has continued, with two new enforcement actions against student debt relief services companies and their owners in December 2014, asking a federal court to enter a proposed consent order that would ban one company and associated individuals from offering debt relief services, and litigating against the other. In the former action, the Bureau alleged the defendants engaged in deceptive and abusive acts or practices and violated the Telemarketing Sales Rule (TSR), including by improperly charging upfront fees, charging customers who could not qualify for many relief options, and misrepresenting that debt consolidation would result in lower payments or quick relief. In the second action, the Bureau alleged a debt relief firm and its owner engaged in deceptive acts or practices and violations of the TSR, including by charging upfront fees, misrepresenting an affiliation with the Department of Education through the use of an official-looking logo, and misrepresenting the fees charged for services.

Enforcement Targets Retailer Catering to Servicemembers

By Jessica Kaufman

It's not just student borrowers who are on the Bureau's radar— servicemembers are continuing to get their share of attention, too. In December, the Bureau and state attorneys general sought entry of a consent order of claims against Freedom Stores, Inc., a furniture and electronics retailer that caters to U.S. military members with stores located near military bases nationwide, its affiliated financing entity, and its owners. The Bureau alleged the defendants engaged in illegal debt collection practices against servicemembers, including filing illegal lawsuits, debiting consumers' accounts without authorization, and contacting servicemembers' commanding officers. The proposed consent order would require the defendants and their owners to pay $2.5 million in consumer redress and impose a $100,000 civil monetary penalty.

CFPB Joins the Army (in Calling for More Limits on Military Lending)

By Leonard Chanin

The Bureau released a report and a comment letter in December highlighting its view that the scope of the Department of Defense rules implementing the Military Lending Act (MLA) should be expanded. The MLA establishes protections, including maximum "military" APR on "consumer credit" transactions, to ensure that covered borrowers are not subjected to "predatory" lending practices. The report, the CFPB said in a press release, identified "gaps" in the MLA that "have allowed companies to offer high-cost loans to military families." The report, however, is based largely on anecdotal evidence from servicemembers rather than statistical analysis. It provides examples of MLA circumvention based on lenders modifying loan amounts and duration, but doesn't offer support for the proposition that credit card products are being used to circumvent the MLA's limitations. Nonetheless, in its comment letter, the Bureau expressed support for the Department of Defense's recent proposal to expand the MLA by applying it to new types of creditors and credit products, including open-end credit, with special rules for credit cards.

You can read our client alert.

Keep the "Confidential" in "Confidential Supervisory Information"

By Don Lampe

In January, the CFPB issued a Compliance Bulletin reminding supervised financial institutions of the regulatory requirement to keep Confidential Supervisory Information (CSI) confidential. In the Bulletin, the CFPB offers examples of what constitutes CSI, including: (1) CFPB examination reports and supervisory letters; (2) information related to an institution's supervisory rating, information, and communications; (3) communications between the supervised institution and the CFPB related to the CFPB's supervisory activities; and (4) information created by the CFPB in the exercise of its supervisory authority.

You can read our client alert.

CFPB to Study How to Promote Savings; Needs Better Names for Special Projects

By Obrea Poindexter

The CFPB views consumer financial empowerment as part of its Dodd-Frank mandate, and in December, the Bureau launched a research initiative called Project Catalyst to analyze the effectiveness of practices designed to promote saving habits, particularly among low- and moderate-income prepaid card users. As part of Project Catalyst, American Express has agreed to share insights from its own efforts to evaluate the effectiveness of a product feature that allows prepaid card users to set money aside in a savings "wallet" that is separate from funds used for regular transactions. Project Catalyst joins the CFPB's more jazzily named consumer initiatives, Ready? Set. Save! and Your Money, Your Goals.

Rx for Medical Debt

By David Fioccola

Forty-three million Americans have overdue medical debt on their credit reports, and 52 percent of all debt on credit reports is from medical expenses, according to a CFPB report issued in December. The report and an accompanying consumer advisory took these and other findings to suggest that the medical debt system is "not working for consumers," and focused on unique aspects of medical debt that may, in the Bureau's view, be part of the problem. Among the particular complexities surrounding medical debt noted in the report are the complex billing system for medical expenses, inconsistent collection and credit reporting practices, and the frequent "parking" of medical debts on credit reports as a collection strategy. Medical debt was also a key topic at the Bureau's Winter 2015 Consumer Advisory Board Meeting.

To read this Report in full, please click here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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