United States: Payment Processing Continued Target Of CFPB And Litigation

The Consumer Financial Protection Bureau ("CFPB" or "Bureau") yesterday announced a $4.1 million settlement with Wells Fargo Bank for allegedly illegal student loan servicing practices. While the press release emphasized student loans and general servicing practices as regulatory priorities, this enforcement action also demonstrated the CFPB's continuing focus on payment processing as a target for supervision and enforcement activity – including, specifically, the payment ordering and other processing issues that have been the target of class action litigation.

The CFPB's press release alleged general breakdown in Wells Fargo's servicing process and stressed the Bureau's drive to address widespread servicing failures. The complaint pointed to instances when Wells Fargo (i) allegedly charged certain customers late fees even though they had made timely payments on the last day of their grace period or through a series of partial payments that the bank's manual process did not aggregate and record appropriately, and (ii) allegedly failed to update and correct inaccurate information to credit reporting agencies.

Another major focus of the enforcement action, however, was on allegations that the bank had processed loan payments to maximize late fees. The CFPB asserted that, when a borrower who had multiple loans made a partial payment and did not designate its allocation, the bank would divide that payment among all of the outstanding loans rather than satisfying payment for one or more of the loans, thus resulting in late fees for all loans. The complaint alleged that the bank had engaged in unfair and deceptive acts and practices by (a) failing to disclose to customers how it allocated payments across multiple loans; (b) failing to inform customers that they have the ability to specify the allocation of their payments; and (c) telling customers that paying less than the full amount due in a billing cycle would not satisfy their obligations, even though the partial payment might have satisfied at least one loan payment in an account.

Wells Fargo agreed to pay a $3.6 million penalty on top of $410,000 in refunds to customers who were affected during the period from 2010-12. The size of the penalty is markedly large compared to the modest redress amount, especially given the bank's statement that it had self-reported on the payment aggregation and allocation issues in 2011 and 2012 and revised its practices before a supervisory exam. The settlement also required Wells Fargo to change the practices outlined above, including allocating partial payments to satisfy the amount due for as many loans as possible unless the borrower directed otherwise. Notably, the CFPB cited – not to any regulatory or statutory payment allocation or disclosure requirements in existence during the 2010-12 period – but to new policy guidance released only last month by the Department of Education in consultation with the CFPB, calling for servicers to implement a similar standard for handling partial payments. In sum, while the Wells Fargo enforcement action relates to multiple CFPB regulatory priorities – including student loans, servicing, and credit reporting – its harsh treatment of the bank's payment allocation practices and related disclosures, unlinked to any specific statutory or regulatory requirements, highlights the risks presented by payment processing practices that already have been the subject of heavy litigation.

We have seen these same issues surface in litigations involving consumer and business bank accounts. For instance, and much as the CFPB did here, private plaintiffs in various class actions around the country have alleged that the order of payment allocations by financial institutions violated their customer rights, either because of inadequate disclosures or unfair trade practices, or both. These litigations often have focused on the specific terms and conditions contained in the disclosure documentation provided to customers, as well as expert testimony regarding the advantages and alleged disadvantages of different payment allocation procedures (e.g., why a customer might prefer one allocation method over another even if it results in the payment of a fee). Federal preemption issues also have been implicated, given the state law nature of many of the causes of action alleged. In addition, complex data gathering from the financial records of the financial institutions, coupled with expert analysis of various "what if" scenarios when the payment allocation methods are altered, has been a core part of these litigations in the restitution or damages phase. As the relatively smaller restitution amount in the CFPB settlement with Wells Fargo reflects, sorting through that data, though time consuming, is a critical part of these civil litigations as well. The foregoing litigation and CFPB activities demonstrate the importance of reviewing payment processing practices and crafting defensive strategies with care to reduce institutions' liability exposure.

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