Preparing for a Visit from the CFPB

Preparing for a Visit from the CFPB

David Bailey, Kentucky Higher Education Assistance Authority

John Culhane, Ballard SpahrDino Tsibouris, Tsibouris &

Associates

Dino Tsibouris

(614) 360-3133

[email protected]

CFPB Issues Affecting Loan Servicing

mailto:[email protected]

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Service Providers

• CFPB Supervision and Examination Manual (October 31, 2012)

• Education Loan Examination Procedures (December 17, 2012)

• Rule to Supervise Nonbanks (June 26, 2013)

• Proposed Rule: Student Loan Servicing “Larger Participants” (March 28, 2013)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida

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Service Providers

• CFPB Bulletin 2012-03• “Expects supervised banks and

nonbanks to oversee … service providers … in a manner that ensures compliance with Federal consumer financial law”

• Supervised nonbanks include any non-bank making “private educational loans”



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Service Providers

• CFPB Bulletin 2012-03• “Supervised service providers”

provide services to:–Supervised banks and

nonbanks–Substantial number of small

insured depository institutions or small insured credit unions



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CFPB Proposed RuleNonbank Student Loan Servicers

• Apply to those with more than 1M accounts

• Would gather reports and conduct examinations

• Focus on federal consumer protection laws

• Harmonize legal compliance between bank and nonbank servicers

• Federal and private loan servicing2013 Knowledge

SymposiumNovember 5-7, 2013 ● St. Pete,

Florida

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CFPB Proposed RuleNonbank Student Loan Servicers

• Response to complaints from Ombudsman’s report– “Confusion”– “Dead ends”– “Runarounds”



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Service Providers

• Any person providing a material service to a covered person

• Use of service providers is appropriate

• Overcome resource constraints• Develop and market new products

and services• Obtain expertise



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CFPB Supervision and Examination Manual

• Risk assessment template – compliance tool

• Risk of loss or injury from violation of Federal consumer financial law

• Measures risk of business or entity and quality of controls



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• Product risk for UDAAP, discrimination, or other regulatory issues:– Bundling products to hide costs– Pay fees/lose benefits for termination– Charges for customer service or

information– Inappropriate credit decision

discretion– Loans not underwritten based upon

ability of customer to make loan payments



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• Product risk for UDAAP, discrimination, or other regulatory issues

• Profits depend on fees• Terms subject to change• Pricing structure makes total cost

hard to understand• Bundling products to hide costs



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• Consumers to whom marketed:– Students– Consumers with limited education– Elderly– Low-income consumers– Limited financial experience– Low credit scores– Special concern if in multiple

categories



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Service Providers

• Conduct thorough due diligence• Verify service provider

understands and is capable of complying with Federal consumer financial law



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Service Providers

• Review compliance policies, procedures, internal controls

• Review compliance training materials, oversight of employees

• Describe compliance duties of service provider in contract and penalties for violations



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Service Providers

• Establish lender internal controls to monitor service provider

• Take prompt action to address problems

• Terminate agreement where appropriate



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Plan Ahead

• Read the CFPB Supervision and Examination Manual

• Use it as a self-test• Address the topics you see,

explain why a fee, product, or service is acceptable by identifying a sound and reasonable basis

• Consider changing if needed• Prepare to explain why steps are

not taken



Preparing for CFPB Reviews, Some Lessons from CFPB

Exams, and Some Lessons from CFPB Consent Orders and Cases

John L. Culhane, Jr.Partner

Ballard Spahr LLPPhone: 215.864.8535

Email: [email protected]

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Preparing for CFPB Reviews



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Vigorous CFPB Activity• Numerous CFPB examinations of lenders and

service providers• Civil Investigative Demands (CIDs) served on

debt collectors collecting student loans (federal and private)

• CFPB field hearing on student loan debt (the root of all evil?)

• Continuing public statements by CFPB regarding student loans (Ombudsman’s Report)

• Continued pressure from various consumer groups and oddly, certain trade associations



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Overview of Exams• As of July 1, CFPB had over 300 examiners,

nearly 100 of whom are commissioned, out conducting exams

• Exams still follow a more or less standard procedure and the pace seems unchanged

• Exams begin with the scoping session, then the first day letter, then the onsite exam

• As of November 1, enforcement lawyers will not be present (will anything really change?)



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Overview of CIDs• As of July 1, CFPB had almost 600 employees

in Supervision, Fair Lending and Enforcement• CFPB has been using the lawyers on the

enforcement staff to conduct quasi-exams• Rather than being targeted to specific

practices, CID seeks to assess compliance with specified federal consumer financial law(s) (e.g. FDCPA)

• Initial requests for interrogatories and document production with numerous follow-up requests



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Need for Formality

• CFPB expects a great deal of formality• Robust compliance management

system is essential• Written policies and procedures are

likewise crucial • Regular monitoring and auditing for

compliance is also necessary• Preference for system controls versus

reliance on individuals



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Need for Adequate Staffing

• CFPB expects to see a robust compliance management system with a CCO or equivalent

• CFPB likewise expects to see adequate staffing at all significant contact points

• Inadequate staffing is viewed as an unfair, deceptive or abusive practice

• Notion is that inadequate staffing is intended to discourage or otherwise hinder complaints



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Anticipate Privilege Issues• Privilege issues will come up in

examinations (although not with CIDs)• Industry-supported legislation approved

December 20, 2012 (P.L. 112-215)• Added CFPB to list of agencies that may

receive information and share it with other federal regulators without loss of privilege

• Still leaves a number of open questions as to CFPB authority and best practices



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Some Lessons from CFPB Exams



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Marketing Issues

• CFPB reviews both consumer marketing and, in the case of service providers, commercial marketing to prospective clients

• Recurring issues with TILA trigger terms, particularly with online advertisements and now with text messages

• Employee compensation issues still linger particularly with marketing practices related to for-profit schools



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Application Processing Issues

• Failure to comply with the provision, content, and timing requirements for adverse action notices is a recurring theme

• Substantive compliance then is taken as an indication that the compliance management system is deficient since it apparently lacks controls to detect and prevent problems2013 Knowledge

SymposiumNovember 5-7, 2013 ● St. Pete,

Florida

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Private Education Loan Disclosure Issues

• Examination for technical compliance with timing and substantive requirements for the three private education loan disclosures

• Regular scrutiny of practices that are part of the private education loan disclosure regimen that can help prevent over-borrowing (school certification, reduction in loan amount, right to cancel loan)



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Credit Reporting Issues• CFPB always looks very carefully at credit

reporting issues (report as gateway to credit)

• Emphasis on steps taken to ensure accuracy and integrity of reporting

• Emphasis on responses to disputes (e-Oscar and direct disputes) and on adequacy of investigations (records and other material)

• Emerging emphasis on the permissible purpose for obtaining the report (account reviews)



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Payment Processing Issues

• CFPB seems to believe that the industry goes out of its way to disadvantage borrowers

• Concerns continue to linger about prompt crediting (why?)

• Heightened emphasis on application of partial prepayments to loan principal

• Equally strong emphasis on allowing borrower to allocate payments or prepayments between multiple loans



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Loss Mitigation Issues

• Continued emphasis on providing adverse action notices when denying applications for assistance or benefits of any kind

• Heightened scrutiny for unfair, deceptive or abusive practices in connection with descriptions of options and with fulfillment of options

• Developing notion that the lack of comprehensive loss mitigation procedures is somehow itself an unfair, deceptive or abusive practice (?)



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Some Lessons from CFPB Consent Orders and Cases



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Referrals

• Focus on illegal referral fees paid by bank and non-bank lenders (no CFPB student loan order yet)

• In the Matter of Paul Taylor, Paul Taylor Homes Limited, and Paul Taylor Corp., File No. 2013-CFPB-0001



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Kickbacks

• Focus on illegal kickbacks paid by companies in exchange for business (no CFPB student loan order yet)

• Consumer Financial Protection Bureau v. Genworth Mortgage Insurance Corporation, Case No. 1:13-cv-21183-JLK (S.D. Fla. Consent Order dated April 5, 2013) (similar cases against three other insurance companies)

• Consumer Financial Protection Bureau v. Borders & Borders, PLC, Case No. 3:13-mc-99999 (W.D. Ky. Filed Oct. 24, 2013)



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Fee Revenue• Focus on illegal or non-traditional sources of

fee revenue (no CFPB student loan order yet)• Consumer Financial Protection Agency v.

Mission Settlement Agency, et al., Case No. 1:13-cv-3064 (E.D.N.Y. filed May 7, 2013)

• Consumer Financial Protection Bureau v. Morgan Drexen, Inc., Case No. SACV13-01267 JST (JEMx) (C.D. Cal. Filed Aug. 20, 2013)

• Consumer Financial Protection Bureau v. Meracord LLC and Linda Remsberg, Case No. 3:13-cv-05871 (W.D. Wash. Filed Oct. 3, 2013)



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Ancillary Products

• Focus has been on ancillary products (fraud prevention, credit report monitoring, and credit insurance) as a waste of money and thus ripe for unfair, deceptive or abusive practices

• CFPB has taken a very close look at the marketing of these products and has not only entered into several consent orders with major credit card issuers, it has suggested it will do the same in the student loan industry



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Treatment of Servicemembers

• Focus on deceptive marketing and lending practices (no CFPB student loan order yet)

• State AGs Settlement with QuinStreet, Inc. resulting from CFPB website review

• In the Matter of U.S. Bank National Association, File No. 2013-CFPB-003

• In the Matter of Dealers Financial Services, LLC, File No. 2013-CFPB-0004



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Vendor Oversight

• Many consent orders (and some cases) involve at least an element of failed vendor oversight, particularly the ancillary product actions

• Issues included failure to monitor marketing of benefits and failure to monitor delivery of benefits

• Consent orders required companies to strengthen management of third party providers (internal audit program with expanded auditing when potential violations are noted)



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Questions?



Preparing for a Visit from the CFPB

Documents

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