CFPB Compliance and Risk Assessment: What You Need to Know · Telemarketing Sales Rule by debt...

© 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

© 2013 Winston & Strawn LLP 2

Winston & Strawn’s CFPB Response Team

Jack Cobb

Partner, Litigation

Charlotte

[email protected]

Chris Edwards

Partner, Corporate

Chicago

[email protected]

Robb Adkins

Partner, Litigation

San Francisco

[email protected]

Tony DiResta

Partner, Litigation

Washington, D.C.

[email protected]

Jerry Loeser

Of Counsel, Corporate

Chicago

[email protected]


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


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


Enforcement Actions: Overview – Jerry Loeser

• Add-on Products

• Debt Relief

• Debt Collection

• Home Mortgage Disclosure Act

• Loan Originator Compensation

• Real Estate Settlement Procedures Act


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?


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


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


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


In Light of These CFPB Enforcement

Tactics, What Defensive Tactics Should be

Considered?

Anthony DiResta


Preliminary Distinction:

Enforcement vs. Supervision

• Goals of a CFPB supervisory examination

• Goals of a law enforcement investigation

• Use of “warning letters” by CFPB


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


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


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


CASE STUDY:

The CFPB and the Debt Collection Industry

Jack Cobb


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


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


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.


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


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?

21


Questions?


Thank You.

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