Resources

Consumer Financial Protection Bureau Alert—Vol. 2, No. 3

By the Authors of PLI's Consumer Financial Services Answer Book 2011 and Edited by Arthur B. Axelson

February 14, 2012

Regulations and Guidance Update

Consumer Financial Protection Bureau Shares Feedback on Student Loans Disclosures Project

As a part of its Know Before You Owe: Student Loans project, the Consumer Financial Protection Bureau (CFPB) released a prototype in October of the “financial aid shopping sheet” that a college would provide to prospective students about loan payments and financial aid. The prototype shopping sheet, intended as a “thought starter,” provides a breakdown of a student’s actual yearly costs, cost comparisons, as well as an explanation of how much the student’s monthly loan payments will be after graduation. The Bureau asked students, parents, and educators for feedback on the prototype. Over twenty thousand people visited the CFPB website and looked at the prototype.

In late January, the CFPB released a memorandum summarizing the feedback it received. A majority of those who commented said that a standardized way of receiving financial information is needed. Chief among students’ concerns were how much total debt they will have at graduation and how much they will owe in loan payments each month after graduation. Students also found important features showing their likely ability to repay loans, a breakdown of cost at school by category, and the track record at their school of financial aid recipients being able to repay their loans.

Further, commenters requested an additional section in which to review key terms and a way to understand how certain numbers were calculated. Commenters also expressed interest in interactive features, including videos to help explain different components of the form and a web-based, interactive version of the shopping sheet.

The CFPB shared the comments it received with the Department of Education so that the Department can use the feedback to develop a model financial aid form that schools can use to communicate financial aid information. The Bureau is now seeking additional feedback to help improve the shopping sheet and is asking consumers to rank items in the disclosure according to usefulness.

Examinations/Enforcement Here and Now

CFPB and FTC Enter Into Memorandum of Understanding Regarding Regulation and Enforcement

On January 20, 2012, the CFPB entered into a Memorandum of Understanding (MOU) with the Federal Trade Commission (FTC) “to prevent duplication of efforts, provide consistency and ensure a vibrant marketplace for consumer financial products and services.” The MOU acknowledges that the CFPB’s and the FTC’s regulatory authority overlaps; and, in turn, sets forth a framework to facilitate cooperation between the CFPB and FTC to avoid duplicative and/or conflicting regulatory efforts. In particular, the MOU requires that the CFPB and FTC:

  • coordinate their law enforcement activities and jointly conduct training;
  • coordinate regarding potential court actions and administrative proceedings;
  • consult with each other regarding rulemaking under their respective statutory authorities;
  • provide 60 days notice before publishing proposed rulemaking or final rules;
  • consult promptly on formal comprehensive agency guidance documents that address unfair, deceptive, or abusive acts or practices regarding consumer financial products or services;
  • cooperate in the receipt and handling of consumer complaints, as well as share such complaints with each other; and
  • develop methods and procedures for guiding consumers to the agency best suited to assist them with their issues, complaints, or needs.

In addition, the MOU instructs that if the CFPB or FTC wishes to pursue action against an entity that has already been subject to an investigation and judgment by the other, the CFPB and FTC must articulate why they believe that a new investigation is needed. Notably, this provision of the MOU anticipates that an entity that has been previously sanctioned by the FTC may nonetheless be subject to further investigation and regulatory action by the CFPB if the CFPB deems that further action is necessary.

To facilitate coordination efforts, the agencies are charged with developing a searchable database that will list each agency’s investigations, actions, and orders. In addition, each agency must provide 5 business-days notice to the other, containing the identity of the person to be investigated and the intended scope of the investigation, before commencing an investigation. If the other agency has investigated or litigated against that target, the agencies must consult in order to reduce the risk of inefficient, duplicative, or conflicting law enforcement activities.

With respect to enforcement proceedings, the agencies must provide each other with 10 business days notice prior to filing a complaint, a consent decree, consent order, or settlement agreement. The MOU also ensures that regulated entities cannot be sued by both agencies independently, though the agencies can elect to proceed jointly. Each agency may also intervene in any court action initiated by the other, provided that it gives 20 days notice.

Finally, the CFPB agrees to share confidential information it obtains in the course of its examinations with the FTC upon request. The MOU requires the protection of privileges and confidentiality and also provides exceptions to CFPB’s obligation to provide the FTC with the requested material.

Bank Concerns Remain Over Confidentiality and Waiver of Privilege in Connection with Information and Documents Provided to the Bureau

Amidst growing concerns over the protection of privileged information released to the CFPB, Richard Cordray appeased the bank industry in early February when he announced the Bureau will support legislation to protect data that institutions provide during exams. House Financial Services Committee Chairman Spencer Bachus and Rep. Shelley Moore Capito called on the CFPB to stop requesting privileged information from banks until the panel holds a hearing on the issue and until legislation is passed to ensure protection. However, many banks have already provided the CFPB with privileged information and, until a legislative fix is in place, there is concern plaintiffs could argue a bank waived its attorney-client privilege when turning over information.

The CFPB previously took the position that it falls under the same umbrella as other bank regulators. When a bank turns over privileged information to the Federal Deposit Insurance Corp. or other Federal agency, it is not considered a waiver of privilege, and the CFPB asserts the same is true when information is turned over to the Bureau. However, when the CFPB was created by the Dodd-Frank Act legislators failed to add it to the list of banking regulators for which privilege is exempted. Cordray has repeatedly indicated the CFPB will support an amendment to fix this oversight and allay banking industry concerns.

Until such legislation is passed, the CFPB has pledged to take "all reasonable and appropriate actions to rebut" claims of waiver if a supervised institution were faced with one. In the CFPB's view, provision of such information is required and not voluntary so there is no waiver of privilege. Further, in a recent CFPB Bulletin, the Bureau emphatically stated that supervised institutions may not selectively withhold documents based on their own judgment. The CFPB also stated it will not consider valid any attempt by an institution to withhold requested supervisory information based on a waiver of privilege concern.

"The supervisory process is based on the supervisor's full and unfettered access to information, and the supervisor is entitled—indeed duty bound—to ensure that it thoroughly understands the institution in question and has access to all information that, in its independent judgment, may bear on its supervisory responsibilities. Failure to provide information required by the bureau is a violation of law for which the bureau will pursue all available remedies."

Some in the banking industry viewed the CFPB's statement as overreaching given that its jurisdiction extends only to consumer financial services and products. Additionally, there is concern the Bureau could share information with other law enforcement officials—specifically state attorneys general - in the course of investigations.

Why all the fuss? A privileged communication generally includes information from a bank's lawyers regarding best legal arguments in support of the bank, and the best argument against it. If this information is not closely guarded, third-parties may gain access and use the legal weaknesses outlined by the bank's own attorneys to mount a case against the bank. Moreover, if a lawyer thinks this information may be viewed by others, weaknesses in the bank's legal position could be eliminated from written communications to the bank's detriment. The privilege exists to encourage open communications and candor between attorneys and clients in order to obtain accurate risk assessments.

Until a legislative fix is in place and the banking industry is confident information released to the CFPB will be kept private, precautionary measures should be taken in response to CFPB requests for information as part of its supervisory process. Such measures should include: (i) a request that the CFPB limit the form and scope of any supervisory request for privileged information; and (ii) explicitly noting any claim to privileged information in a response to the CFPB.

CFPB Establishes the Repeat Offenders Against Military Database

On January 25, 2012, the CFPB announced that it would join efforts with the state Attorneys General and the Department of Defense to track companies and individuals who repeatedly target the military community and to crack down on financial scams directed at military service members, veterans and their families. This joint endeavor has been named the Repeat Offenders Military Database (ROAM).

Under ROAM, prosecutors, local officials and Judge Advocates can enter formal actions taken against financial scammers that target current and former members of the armed services into a central database. This database will allow local law enforcement agents to track--and hopefully prevent--financial scams in their respective jurisdictions. The ROAM database will be composed of formal actions, both civil and criminal, that have been instituted in courts and administrative forums against those who take advantage of servicemembers and their families. New York Attorney General and original sponsor of ROAM, Eric Schneiderman, applauded the joint effort as “a great success in government.”

This new measure was sparked by recent events like the SmartBuy scandal that induced Fort Drum servicemen to purchase computers at inflated prices and high interest rates. According to CFPB chairman, Richard Cordray, “Fraud on this scale demonstrates the need for a database like ROAM.” Now that ROAM is in place, Schneiderman predicts that law enforcement will be able to predict “what kind of scam might be coming.” Currently, anyone can send information about formal actions taken against financial scammers that target the military community to ROAMDatabase@cfpb.org.

News from the Bureau

Six-Month Report to Congress Demonstrates Progress, Maps Direction of Bureau

On January 30, 2012, the CFPB issued its first semi-annual report (the "Report”) to Congress. The Report summarizes the CFPB's activities from the designated transfer date of July 21, 2011 through December 31, 2011 and provides insight on the Bureau’s priorities in the coming months. The Report was presented by Bureau Director Richard Cordray to the Senate Banking Committee.

Because the Bureau became operational in 2011, there was a significant and necessary focus in 2011 on building the Bureau. The Report details the offices that have been established within the CFPB, as well as the divisions within those offices, and discusses the functions of each.

As required by Dodd-Frank, the Report provides “a list of significant rules and orders” the CFPB has adopted in the preceding year, as well as a “plan…for rules, orders or other initiatives to be undertaken during the upcoming period.” Some of the accomplishments in 2011 include the issuance of interim final rules on the Alternative Mortgage Transaction Parity Act, the TILA—RESPA single integrated disclosure (SID) project, issuance of the Supervision and Examination Manual, issuance of a notice and request for comment regarding the definition of “larger participants in certain markets and publication of interim final rules restating (and renumbering) the regulations inherited from other agencies. Among the items on the agenda for 2012, the Bureau intends to publish a final “ability to repay” mortgage rule (including protection from liability for “qualified mortgages’), issue a proposed SID and proposed rules to implement the Dodd-Frank changes to laws governing the mortgage industry (including origination and servicing practices, loan originator compensation, high-cost loan restrictions and escrow account maintenance, among others), propose rules to define the scope of the CFPB’s nonbank supervision program and expand capacity to handle consumer complaints with respect to all products and services within the Bureau’s authority.

The Report highlights the CFPB’s activities related to its “Know Before You Owe” campaign with respect to mortgage loans, credit cards and student loans. Additionally, the Report indicates that since it began fielding consumer complaints related to credit card accounts and mortgages, the CFPB received over 13,000 complaints through December 31, 2011 and had facilitated company response to over 88 percent of the submitted complaints.

In the enforcement arena, the Bureau has commenced investigations identified by Bureau staff or transferred from prudential regulators and HUD. In December 2011, the Bureau partnered with the Office of the Special Inspector General for the Troubled Asset Relief Program and the U.S. Department of the Treasury to create a joint task force to target scams aimed at consumers seeking mortgage modifications through the Home Affordable Modification Program. The CFPB has also set up a whistleblower hotline for the public, including current or former employees, contractors, vendors and competitor companies, to submit tips regarding potential violations of federal consumer protection laws.

For more information on the Bureau’s activities in all of its areas of interest, please see the Semi-Annual Report of The Consumer Financial Protection Bureau, available at http://www.consumerfinance.gov/report/semi-annual-report-of-the-consumer-financial-protection-bureau/.

Cordray Testimony Sheds Light on Bureau’s Activity and Objectives

On January 24, 2012, newly appointed Director of the Consumer Financial Protection Bureau, Richard Cordray, appeared before a House panel led by Republicans. Representative Patrick McHenry (R-NC) opened the hearing by saying, “despite an appointment that is constitutionally questionable” Cordray should explain how he will implement and enforce the broad powers of the CFPB. Cordray responded by promising that irrespective of the on-going dispute regarding his appointment, the CFPB will proceed to enforce the law because to do otherwise would be a dereliction of his duties. He further indicated that his vision for the CFPB is that “it will work to make consumer financial markets operate fairly in order to protect consumers, support honest businesses and play a crucial role in helping to safeguard the overall economy.” He also casted doubt on skepticism that the CFPB is on an witch hunt, stating “[i]t is not our point to try to revolutionize existing law and go off in some wild, unexpected direction,” rather he plans to follow case law and long-standing interpretations of the Federal Reserve Board and the Federal Trade Commission. He noted that the Bureau is not looking at “banning products, but at unfair practices.” Cordray also announced that the Bureau is working closely with other federal agencies to craft its first independent rule-making, and that he plans to create a small business review panel and advisory council to incorporate the input of credit unions and community banks into the Bureau’s actions.

A few days later in similar testimony before the Senate Banking Committee, Cordray said that he was honored to be the first director of the CFPB, and that he is energized and driven by the challenges and responsibilities of the Bureau’s mission. He explained that one of the Bureau’s primary objectives is to make sure businesses are upfront with, and provide straightforward information to, consumers. Another key objective for the Bureau, according to Cordray, is ensuring that both banks and their nonbank competitors are on a level playing field and promote a fair and open market. Overall, Cordray emphasized his excitement about working together with members of Congress and the financial industry to find solutions to consumer abuse in the financial sector.

Bureau to Quickly Focus on Mortgage Servicing Issues; Issues Billing Statement Prototype

Noting that the recent settlement with the five largest mortgage servicers only addressed some servicing issues, Richard Cordray emphasized the magnitude of servicing problems and the need for quick action to address them and help struggling homeowners. The CFPB plans to focus on loan servicers and their responsiveness to borrowers through regulation and by close supervision.

Having issued its examination and servicing guidelines, the CFPB intends to examine servicers owned by large banks with more than $10 billion in assets and all non-bank servicers, the entities over which it has supervisory authority. With large bank examinations already underway, the Bureau examiners plan on starting their first non-bank examinations in March.

Citing the various mandates of the Dodd-Frank Act, Cordray listed anticipated Bureau action, including issuing a rule requiring mortgage servicers to provide consumers with better information in their billing statements as required under section 1420 of the Dodd-Frank Act. These disclosures will include the principal amount, the current interest rate, the next date on which the interest rate may change, a description of late payment fees and a telephone number and email address that may be used to contact the servicer. Similar to its “Know Before You Owe” campaign, the Bureau released a prototype of such a billing statement for public and industry comment on February 13, 2012. The prototype has already been through one round of consumer testing and two other rounds are scheduled.

Other forthcoming servicing regulations include new consumer protections in regard to force-placed insurance and new disclosures for more complicated loans such as hybrid adjustable rate mortgages.

Finally, Mr. Cordray emphasized the Bureau’s enforcement powers and noted that “we have the full authority to address mortgage servicing problem.” If necessary, the Bureau can sue servicers or take other enforcement action for violations of the federal consumer protection laws.

Miscellany

GOP Senate Opposition to Cordray Appointment Continues

Republicans did not hold their fire as Richard Cordray appeared before the U.S. Senate Banking Committee, facing senators for the first time since his appointment as head of the Bureau last month. Sen. Mike Johanns (R-NE) asserted that the Senate’s “ability to offer advice and consent basically disappears” if Cordray’s appointment is deemed valid. Sen. Richard Shelby (R-AL) added that he believes “that the Supreme Court will ultimately decide the constitutionality of the President’s action.” Four Republican members of the Committee—Sens. Jim DeMint (R-SC), Pat Toomey (R-PA), David Vitter (R-LA), and Roger Wicker (R-MS) – refused to attend the hearing in protest.

Cordray responded by stating that he had been appointed Director, and that “I now have legal obligations I’m supposed to carry out for this Bureau. I’m going to do that.” He further stated that General Accounting Office recently provided the Bureau with “a clean audit and a strong audit.” Cordray further noted that “The accountability here lies in our Bureau to Congress. You are the ones that pass the laws that give us the law, the only authority we have to do anything. We are responsible to you.”

Thirty-nine Republican senators have also signaled their intent to file an amicus brief in support of one of the court challenges to President Obama’s recess appointments to the Bureau and National Labor Relations Board. One such lawsuit was recently filed by the National Federation for Independent Business and the National Right to Work Legal Defense Foundation. Thirty-four of those senators have also written to Senate Majority Leader Harry Reid (D-NV) to seek clarification regarding his position on recess appointments.

Democratic Sen. Sherrod Brown (D-OH) rejected Republican criticism by stating, “I just simply can’t believe we’re still having this debate.” “We know the other side is simply doing the bidding of Wall Street; that’s what they’ve always done,” Brown continued. Democratic senators have also been quick to respond that Republican senators did not object to Cordray’s qualifications, but instead blocked his appointment out of a desire to prevent the Bureau from ever beginning its work.

Republican members of the House of Representatives gave Cordray a somewhat warmer reception at a recent hearing of a subcommittee of the House Oversight and Governmental Reform Committee, but still addressed the uncertainty surrounding his appointment. Responding to Rep. Darrel Issa’s (R-CA) question about what will happen if Cordray’s appointment is invalidated, Cordray stated, “It’s a good question and it’s a bit of a dilemma,” but “it would be a dereliction of duty...for me to say we’re not going to go forward and do the things the law of the land now tells us to do because I’m going to somehow act as though I was not appointed. I just think that’s not tenable.”

Cordray has indicated that “over the next six months, the pace of the Bureau’s efforts to make consumer financial markets work better will intensify.” The Bureau recently released its first semi-annual report to Congress. The report outlines the Bureau’s major achievements, including launching its website, addressing consumer complaints about mortgages and credit cards, and implementing a supervision program that will encourage compliance with consumer protection laws.

Regulatory Scorecard

Please click here to access a printable version of the Dykema Regulatory Scorecard, our up-to-date chart of pending and final regulatory activities and proceedings at the CFPB.

Contacts and Caveats  

For more information about Dykema’s Financial Services Regulatory and Compliance practice, please contact group leader, Don Lampe at 704-335-2736, or any of the listed attorneys.


As part of our service to you, we regularly compile short reports on new and interesting developments regarding the Consumer Financial Protection Bureau. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Readers should seek specific legal advice before acting with regard to the subjects mentioned here. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments on this Alert, or any Dykema publication, are always welcome. ©2012 Dykema Gossett PLLC.

As part of our service to you, we regularly compile short reports on new and interesting developments and the issues the developments raise. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation. Your comments are always welcome. © 2018 Dykema Gossett PLLC.