Post on 26-Jun-2020
© 2013 Winston & Strawn LLP
CFPB Compliance and Risk Assessment:
What You Need to Know
October, 31, 2013
Brought to you by Winston & Strawn’s CFPB Response Team
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Winston & Strawn’s CFPB Response Team
Jack Cobb
Partner, Litigation
Charlotte
jcobb@winston.com
Chris Edwards
Partner, Corporate
Chicago
cedwards@winston.com
Robb Adkins
Partner, Litigation
San Francisco
radkins@winston.com
Tony DiResta
Partner, Litigation
Washington, D.C.
adiresta@winston.com
Jerry Loeser
Of Counsel, Corporate
Chicago
jloeser@winston.com
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Overview and Perspectives:
• Chris Edwards – CFPB emerging as new "Cop on the Beat"
• Jerry Loeser – CFPB Enforcement Trends
• Tony DiResta – CFPB Litigation Focus
• Jack Cobb – Vicarious Liability
• Robb Adkins – Referral to the U. S. Department of Justice
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Roadmap
• Enforcement Actions
• Expanding Enforcement Targets
• Policy by Enforcement and Guidance
• Enforcement vs. Supervision
• Nature of CFPB Enforcement Action
• Insights from Enforcement Actions
• Stages and Strategies in a CFPB Investigation
• Case Study: Debt Collection Industry
• Third Party Services and Indirect Relationships
• Positive News
• Predictions
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Enforcement Actions: Overview – Jerry Loeser
• Add-on Products
• Debt Relief
• Debt Collection
• Home Mortgage Disclosure Act
• Loan Originator Compensation
• Real Estate Settlement Procedures Act
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Expanding Enforcement Targets – Jerry Loeser
• The CFPB has, of course, pursued traditional providers of consumer financial services
– Credit card issuers
– Debt collectors
• However, it has also pursued firms that simply support the provision of consumer services
– Payment processors
– Administrative support for debt relief service providers
• Q: Banks that process payments for card issuers or debt collectors?
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Policy by Enforcement and Guidance Rather than Formal
Rulemaking – Jerry Loeser
• Formal rulemaking provides the public and the industry opportunity for input into policy-making, but it is:
– Time-consuming
– Subject to judicial review
– Subject to cost-benefit analysis, and
– Subject to Financial Services Oversight Council reversal
• This creates an incentive to make policy by other means
– UDAAP Enforcement
– Guidance
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Example of Policy-making by UDAAP Enforcement
• Add-on products
– Five enforcement actions that imposed
• Vendor management requirements
– Due diligence
– Contract provisions
– Vendor controls
– Vendor training
– Bank audit
– Bank right to terminate
• Duty to record telephone calls by which add-on products are sold
– Retention for 25 months
• Duty to record customer complaint calls about add-on products
– Retention for 25 months
• Duty to independently monitor telephone calls
• The CFPB is not alone in this.
– The New York Department of Financial Services has sued insurance companies underwriting force-placed insurance to get consent orders that change long-standing compensation practices, such as producer commissions and affiliate reinsurance arrangements
• Subsequently, it proposed rules
– The Florida Department of Insurance has imposed a similar policy in a consent order that was part of a rate filing adjudication
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Example of Policy-making by Guidance – Jerry Loeser and
Chris Edwards
• Auto lending interest rate reserves and fair lending
– Auto dealer ability to negotiate the buyer’s interest rate (“dealer mark-up”)
– A form of compensation to auto dealers
• Auto dealer may negotiate a higher rate than the lender is willing to charge
• Difference is income to the dealer
– Compensate for arranging financing and preparing paperwork
• Q: Unlawful discriminatory effect?
– Technically not binding
– Industry is treating as binding and therefore changing its practices
• Ironically, auto dealers are exempt from CFPB jurisdiction
• Auto lenders are not exempt
– Bipartisan Policy Center criticism
– Congressional inquiry
• House Financial Services Committee has asked the CFPB to explain its rationale
• No response so far
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In Light of These CFPB Enforcement
Tactics, What Defensive Tactics Should be
Considered?
Anthony DiResta
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Preliminary Distinction:
Enforcement vs. Supervision
• Goals of a CFPB supervisory examination
• Goals of a law enforcement investigation
• Use of “warning letters” by CFPB
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Nature of CFPB Enforcement Action
• CFPB internal operating procedures are identical to those used by FTC
• Civil investigative demands
• Investigational hearings
• Joint investigations
• Sharing of confidential information
• Electronically stored information
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Insights Gained from Enforcement Actions by CFPB and Other
Agencies
• Unique advocacy involved in governmental investigations
• The meaning of “deception,” “unfairness,” and “abusive”
• Individual liability
• Restitution and disgorgement as theories
• Policies and practices demonstrating a “culture of compliance”
• Mitigating factors
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Stages and Strategies Involved in a CFPB Investigation
• Analyze CID or inquiry – comprehensively
• Communicate with staff – effectively
• Develop an offensive, long-term strategy for production and advocacy – avoid “document dumps”
• Create plan for locating, reviewing, and producing information and documents
• Be an advocate: submit compelling “cover letters” and “position papers” during process, and engage staff
• Consider prior CFPB enforcement actions and conform your conduct
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CASE STUDY:
The CFPB and the Debt Collection Industry
Jack Cobb
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An Industry Under the Microscope
• CFPB-FTC Workshop on June 6, 2013: “Life of a Debt: Debt Integrity in Debt Collection”
• Challenges presented to industry – it’s a new regulatory paradigm
• Industry subject to supervisory examinations by CFPB and law enforcement investigations by CFPB, FTC, and state attorneys general
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Key Issues Presented to Industry
• Lessons learned from CFPB supervisory examinations of industry and from CFPB and FTC law enforcement actions
• Developing – and demonstrating – a “culture of compliance:” the requirement for industry to create a Compliance Management System
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Third-Party Services and Indirect Relationships –
Jack Cobb, Jerry Loeser, Chris Edwards
• CFPB has signaled that it will scrutinize third-party service providers and indirect lenders, not just “primary” actors.
• CFPB v. Meracord LLC (W.D. Wash. Oct. 2013): Enforcement action brought against payment processor (and its owner/CEO) for facilitating violations of the Telemarketing Sales Rule by debt settlement companies. Consent order resulted in $1.4 million CMP and three-year monitoring agreement.
• Debt Sales: CFPB and OCC have informed consumer debt issuers that they must have policies/procedures regarding debt sales to ensure debt buyers treat customers fairly. OCC best practices guidance (July 2013) specifies due diligence/oversight measures expected of original issuers with respect to their debt buyers.
• Indirect Auto Lending (CFPB Bulletin 2013-02): Indirect auto lenders face liability under the Equal Credit Opportunity Act if their policies regarding mark-ups and compensation (reserves) result in a disparate impact on protected classes of borrowers, even if the lender had no direct contact with the borrower and no direct role in negotiating loan pricing.
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Positive News – Jerry Loeser
• Enforcement attorneys will no longer attend examinations, effective November 1, 2013
– “Exams 2.0”
– To promote efficiency
– They will still support the examiners
– They will not be present by conference call either
– They will funnel tips to examiners
– This may help the CFPB issue examination reports more quickly
• Responsible Conduct Bulletin (2013-06)(June 25, 2013)
– Self-policing, self-reporting, quick and complete remediation, and extra cooperation may be recognized and rewarded
• “Substantially exceed” what is required by law
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Predictions – Jerry Loeser, Chris Edwards, Tony DiResta
• Continued crackdown on add-on products
• Increased enforcement and supervision of debt collectors
• Effort to impose mortgage servicing-type duties on student loan servicers
• Crack-down on consumer firms as to which consumers have no choice
– Servicers
– Debt collectors
– Credit reporting agencies
• Crackdown on transmission of inaccurate information
• Enforcement for technical errors, e.g. HMDA
• Crackdown on deferred interest credit cards
– E.g., no payments for six months and no interest charged unless payment is not paid in full then
• Large retroactive interest charge if payment is short by any small amount
• Widespread practice with private-label cards
– October 2 Report on the CARD Act
– EBay CID
• Crackdown on medical and dental credit cards
– October 13, 2013 New York Times article
– October 22, 2013 letter from Senator Markey
• Q: Eventual crackdown on clarity of card rewards disclosures?
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Questions?
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Thank You.