United States: Consumer Financial Protection Bureau Alert - March 2015

Last Updated: March 23 2015
Article by Allyson B. Baker, Jonathan L. Pompan and Peter Frechette

CFPB Telegraphs Interest Areas through Arbitration Study, Credit Card RFI, and Supervisory Highlights Report

In This Issue:

CFPB ARBITRATION STUDY MAY CREATE BASIS FOR REGULATION

On March 10, 2015, the Consumer Financial Protection Bureau (CFPB) released its Arbitration Study and Report to Congress (Arbitration Study) based on a review of consumer finance agreements, arbitration disputes, class actions, and small claims filings, and a survey of credit card consumers regarding their knowledge and understanding of arbitration and other dispute resolution mechanisms.

The Arbitration Study found that consumers often do not understand, or are unaware of, the arbitration clauses in their finance agreements. At a field hearing, Director Cordray stated that arbitration clauses are often "take it, or leave it" and do not present consumers an opportunity to opt-out. He further noted that when consumers had opt-out options, they were often unaware of the option. The results of the study likely forecast the CFPB's future position on arbitration clauses in consumer finance agreements.

Arbitration Study Key Findings

  • Few consumers take individual complaints to court or arbitration.
  • The average amount of a consumer dispute is over $1,000. Consumers are unlikely to engage in any legal action (including arbitration) to settle disputes of amounts less than $1,000.
  • On average, 32 million consumers a year claimed refunds, debt relief, or other redress through class actions. However, over 90 percent of the arbitration agreements it studied expressly prohibited consumer class actions in arbitration.
  • In 1,060 cases filed between 2010 and 2012, arbitrators awarded a combined total of less than $400,000 to consumers. In the same period, arbitrators ordered consumers to pay $2.8 million, mostly in disputed debts.
  • Mandatory arbitration may not result in lower prices or expanded access to credit for consumers.
  • Consumers by and large do not understand the ramifications of an arbitration clause compared to class action litigation. Notably, the survey was limited to just over 1,000 credit card consumers.

With the release of the Arbitration Study, Section 1028(b) of the Dodd-Frank Act allows (but does not require) the CFPB to prohibit or condition arbitration clauses in consumer financial agreements, if such regulation is "in the public interest and for the protection of consumers."

CFPB CREDIT CARD MARKET RFI MAY FORECAST NEW RULEMAKING AND ENFORCEMENT ACTIONS

On March 17, 2015, the CFPB issued a Request for Information (RFI) to further understand how the credit card market is working in practice and how credit card protections affect consumers and credit card issuers.

The CFPB is examining the continuing impact of the 2009 Credit Card Accountability, Responsibility, and Disclosure (CARD) Act, as well as gathering information on "specific areas of interest." In addition to the "areas of further interest" from the CFPB's October 2013 CARD Act Report, the CFPB identifies two additional interests for 2015: credit card debt collection and "ability to pay" assessments. The CFPB will use the comments to help inform its future report to Congress on the state of the consumer credit card market. Comments in response to the RFI are due on May 18, 2015.

RFI Topics

  • CARD Act Impact:

    • Credit Card Agreements and Practices: The terms and conditions of agreements and how these may have changed since the CFPB's last review, as well as the pricing, marketing, underwriting, or other practices of credit card issuers.
    • Effectiveness of Disclosures: A cost-benefit analysis of current disclosure requirements.
    • Adequacy of Consumer Protections: Improvements and updates to current consumer protections that are necessary, with a focus on acts, practices, or unlawful discrimination in the credit card market that are unfair to consumers.
  • Prior CFPB "Interest Areas": Credit Card Add-on Products; Fee Harvester Cards; Deferred Interest Products; Rewards Products; Grace Periods; and Online Disclosures.
  • CFPB's New Focus Areas:

    • Debt Collection: Debt collection practices within the credit card industry, including card issuers' use of and relationship with third-party collection agencies.
    • Ability to Pay: Implementation of the "ability to pay" standards, at both the initial extension of credit and any increases in a credit line.

CFPB SHOWCASES DIRECTIONS OF SUPERVISION PROGRAM

On March 11, 2015, the CFPB released its semiannual report on Supervisory Highlights. The report outlines the CFPB's supervisory activities between July 2014 and December 2014.

The Supervisory Highlights report notes the remedial actions taken by the CFPB through its supervision program. The report estimates that recent supervisory resolution pertaining to payday lending, mortgage servicing, and mortgage origination "have resulted in remediation of approximately $19.4 million to more than 92,000 consumers." Supervision by the CFPB can often lead to (or, occasionally, stem from) an enforcement action, and may also result in referrals to other agencies and the Department of Justice.

The CFPB continues to develop and expand its supervision program. The Supervisory Highlights report notes that as of February 6, 2015, CFPB examination staff consisted of approximately 400 examiners supported by both regional management and headquarters staff. Areas included in the report likely forecast directions in which the CFPB will continue to expand its supervisory and enforcement efforts.

Key Supervisory Activities

  • Deceptive student loan debt collection practices: findings of deceptive statements to student loan borrowers that could mislead these consumers about the potential to restore credit and the participation in credit rehabilitation programs.
  • Unfair and deceptive overdraft practices: findings that overdraft fees were assessed or collected in ways that consumers could not understand.
  • Mortgage origination, alleged Regulation Z violations: findings that mortgage originators did not provide required disclosures. Further, the report notes instances when mortgage originators allegedly received compensation based on the terms of the loan.
  • Fair lending, alleged Equal Credit Opportunity Act (ECOA) violations: findings that mortgage applications were rejected because applicants relied on public assistance income; further findings that mortgages were marketed in such a way as to discourage consumers who received public assistance from applying.
  • Mishandling of disputes by consumer reporting agencies: findings that there were inadequate processes that lead to errors in credit files and incorrect dispute investigation outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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