Alston & Bird Consumer Finance Blog

Unfair, Deceptive and Abusive Acts or Practices (UDAAP)

CFPB Publishes Fall 2022 Supervisory Highlights

By ,

A&B ABstract:

On November 16, 2022, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) released its Fall 2022 Supervisory Highlights (Issue 28) (the “Supervisory Highlights”), which, among other things, announces the creation of a Repeat Offender Unit and highlights supervisory observations from examinations conducted by the Bureau in the first half of 2022.  Below we discuss some of the key takeaways from the Supervisory Highlights.

The Supervisory Highlights

CFPB’s New Repeat Offender Unit

The CFPB announced the creation a Repeat Offender Unit (“ROU”) to focus its supervision on repeat offenders with the intent to recommend specific corrective actions to stop recidivist behavior. The ROU intends to engage in closer scrutiny of repeat offenders’ compliance with certain orders, along with the following activities:

  • Reviewing and monitoring the activities of repeat offenders;
  • Identifying the root cause of recurring violations;
  • Pursuing and recommending solutions and remedies that hold entities accountable for failing to consistently comply with federal consumer financial law; and
  • Designing a model for review of orders and monitoring that reduces the occurrences of repeat offenders.

The creation of the ROU is not surprising given Director Chopra’s prior statements signaling that the Bureau would focus its efforts on reining in corporate recidivism in the financial services industry. For example, in March 2022, Director Chopra delivered a speech to the University of Pennsylvania Law School, entitled Reining in Repeat Offenders, in which the Director noted that “[a]t the CFPB, we have plans to establish dedicated units in our supervision and enforcement divisions to enhance the detection of repeat offenses and corporate recidivists and to better hold them accountable…[and that] for serial offenders of federal law, the CFPB will be looking at remedies that are more structural in nature, with lower enforcement and monitoring costs…[including] seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Supervisory Observations

The Supervisory Highlights identifies numerous supervisory observations pertaining to consumer reporting, debt collection, mortgage origination, mortgage servicing, and payday lending, among other topics. We discuss several of the Bureau’s notable observations below.

Consumer Reporting

With respect to credit reporting, the CFPB found violations of the Fair Credit Reporting Act and/or Regulation V involving the following issues:

  • Certain nationwide consumer reporting agencies failed to provide reports to the CFPB regarding consumer complaints received from consumers that the Bureau transmits to the credit reporting agency if those complaints are about “incomplete or inaccurate information” that a consumer “appears to have disputed” with the agency;
  • Some furnishers, including third-party debt collection furnishers, continue to: (1) inaccurately report information despite actual knowledge of errors; (2) fail to correct and update furnished information after determining such information is not complete or accurate; and (3) fail to establish and follow reasonable procedures to report the appropriate date of first delinquency on applicable accounts; and
  • Some furnishers also continue to fail to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information, such as by verifying random samples of furnished information, and fail to conduct reasonable investigations of direct disputes by neglecting to review relevant information and documentation.

Debt Collection

In recent examination activity, the CFPB has identified certain violations of the Fair Debt Collection Practices Act, such as:

  • Examiners found that certain larger participant debt collectors engaged in conduct intended to harass, oppress, or abuse consumers during telephone calls by continuing to engage in conversation even after consumers stated that the communication was causing them to feel annoyed, harassed, or abused.
  • Examiners found that debt collectors engaged in improper communication with third parties about a consumer’s debt when communicating with a person who had a similar or identical name to the consumer.

Mortgage Origination

Regarding mortgage origination, the CFPB found violations of Regulation Z and deceptive acts or practices prohibited by the Consumer Financial Protection Act (“CFPA”), such as:

  • Examiners found that certain entities improperly reduced loan origination compensation based on a term of a transaction by failing to use actual costs and fee amounts that were accurate and known to loan originators at the time initial disclosures were provided to consumers. Subsequently at closing, consumers were provided a lender credit when the actual costs of certain fees exceeded the applicable tolerance thresholds, which led entities to reduce loan originator compensation after loan consummation by the amount provided in order to cure the tolerance violation. Notably, the Bureau found that in each instance, the settlement service had been performed and the loan originator knew the actual costs of those services. The loan originators, however, entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. Thus, examiners found that the unforeseen increase exception permitted by Regulation Z did not apply to these situations.
  • Examiners also identified a waiver provision in a loan security agreement, which was used by certain entities in one state, that was determined to be deceptive in violation of the CFPA. The waiver provided that borrowers who signed the agreement waived their right to initiate or participate in a class action. The language was found to be misleading because a reasonable consumer could understand the provision to waive their right to bring a class action on any claim, including federal claims, in federal court, which is expressly prohibited by Regulation Z.

Mortgage Servicing

The Bureau indicated that its mortgage servicing examinations focused on servicers’ actions as consumers experienced financial distress related to COVID-19. Mortgage servicing findings by the CFPB included the following:

  • Servicers engaged in abusive acts or practices by charging sizable phone payments fees when consumers were unaware of the fees’ existence and, if disclosures were provided, providing general disclosures indicating that consumers “may” incur a fee did not sufficiently inform consumers of the material costs;
  • Servicers engaged in unfair acts or practices by:
    • charging consumers fees during a CARES Act forbearance plan, in violation of the CARES Act’s prohibition on the imposition of “fees, penalties, or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the terms of the mortgage contract”; and
    • failing to timely honor requests for forbearance from consumers;
  • Servicers engaged in deceptive acts or practices by misrepresenting that certain payment amounts were sufficient for consumers to accept a deferral offer at the end of their forbearance period, when in fact, they were not due to updated escrow payments; and
  • Servicers violated Regulation X by failing to maintain policies and procedures reasonably designed to:
    • inform consumers of all available loss mitigation options, which resulted in some consumers not receiving information about options, such as deferral, when exiting forbearances; and
    • properly evaluate consumers for all available loss mitigation options, resulting in improper denial of deferral options.

Payday Lending

Regarding payday lending, examiners found that some lenders failed to maintain records of call recordings that were necessary to demonstrate compliance with certain conduct provisions in consent orders, e.g., prohibiting certain misrepresentations. The consent order provisions required creation and retention of all documents and records necessary to demonstrate full compliance with all provisions of the consent orders. The Bureau determined that the failure to maintain the call recordings violated the consent orders and federal consumer financial law.

Although this finding was specific to payday lenders, it may have broader implications for entities subject to an active CFPB consent order, as the provision relied upon by the Bureau in making its finding is routinely found in CFPB orders.

Takeaway

The compliance issues noted in the Supervisory Highlights emphasize the importance of maintaining a strong and continually updated compliance management system. Entities should review the Bureau’s supervisory observations against their current policies, procedures, and processes to ensure consistency with the Bureau’s compliance expectations, and to determine whether enhancements and/or proactive consumer remediation may be appropriate. Finally, entities subject to active CFPB consent orders should pay particular attention to whether their current policies, procedures, and processes are sufficient to ensure compliance with applicable law and the terms of the consent order, in order to mitigate against the risk of being deemed a repeat offender and potentially subject to increased penalties or broader structural remedies such as “seek[ing] ‘limits on the activities or functions’ of a firm for violations of laws, regulations, and orders.”

Joint Trade Associations Reject the CFPB’s “Discrimination-Unfairness” Theory

By

In a June 28 letter to Director Chopra and accompanying White Paper and press release, the ABA, CBA, ICBA, and the U.S. Chamber of Commerce have called on the Consumer Financial Protection Bureau (CFPB or Bureau) to rescind recent revisions made to its UDAAP examination manual that had effectuated the CFPB’s controversial theory that alleged discriminatory conduct occurring outside the offering or provision of credit could be addressed using “unfairness” authority. The White Paper characterized the primary legal flaws in the CFPB’s action as follows:

  • The CFPB’s conflation of unfairness and discrimination ignores the text, structure, and legislative history of the Dodd-Frank Act. For example, the Dodd-Frank Act discusses “unfairness” and “discrimination” as two separate concepts and defines “unfairness” without mentioning discrimination. The Act’s legislative history refers to the Bureau’s antidiscrimination authority in the context of ECOA and HMDA, while referring to the Bureau’s UDAAP authority separately.
  • The CFPB’s view of “unfairness” is inconsistent with decades of understanding and usage of that term in the Federal Trade Commission Act and with the enactment of ECOA. Congress gave the CFPB the same “unfairness” authority that it gave to the Federal Trade Commission in 1938, which has never included discrimination. It makes no sense that Congress would have enacted ECOA in 1974 to address discrimination in credit transactions if it had already prohibited discrimination through the FTC’s unfairness authority. For the same reason, Congress could not have intended in 1938 for unfairness to “fill gaps” in civil rights laws that did not exist.
  • The CFPB’s view is contrary to Supreme Court precedent regarding disparate impact liability. The CFPB’s actions and statements indicate it conflates unfairness with disparate impact, or unintentional discrimination. The Supreme Court has recognized disparate impact as a theory of liability only when Congress uses certain “results-oriented” language in antidiscrimination laws, e.g., the Fair Housing Act. The Dodd Frank Act neither contains the requisite language, nor is it an antidiscrimination law.
  • The CFPB’s action is subject to review by courts because it constitutes final agency action – a legislative rule – that is invalid, both substantively and procedurally. The CFPB’s action carries the force and effect of law and imposes new substantive duties on supervised institutions. However, the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking. Additionally, the CFPB’s interpretation is not in accordance with law and exceeds the CFPB’s statutory authority. The CFPB’s action should be held unlawful and set aside.
  • The CFPB’s action is subject to Congressional disapproval under the Congressional Review Act. A Member of Congress can request a GAO opinion on whether the CFPB’s actions are a rule, which can ultimately trigger Congressional review using the procedures established in the Congressional Review Act.

The White Paper concludes:

“Such sweeping changes that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to ‘fill gaps’ it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps. If the CFPB believes it requires additional authority to address alleged discriminatory conduct, it must obtain that authority from Congress, not take the law into its own hands. The associations and our members stand ready to work with Congress and the CFPB to ensure the just administration of the law.”

Take-away:

The position taken in the White Paper that the CFPB’s actions were contrary to law may be an indication that the trade groups intend to mount an APA legal challenge. Alternatively, the arguments made could in theory form a defense to any CFPB supervisory or enforcement action premised upon its new “discrimination-unfairness” theory. Financial institutions subject to CFPB examination would be well-advised to consider the arguments raised by the groups.

CFPB Issues Bulletin About Auto Repossession, Congressional Republicans Respond

By ,

A&B Abstract: The Consumer Financial Protection Bureau (“CFPB” or the “Bureau”) recently released a Bulletin addressing the repossession of vehicles and alerting market participants to what it views as those market participants’ legal obligations under federal law governing unfair, deceptive, or abusive acts or practices (“UDAAP”).  That same day, the CFPB also published an inflammatory Press Release, claiming creditors were engaged in activities causing consumers to “wake up to see their car stolen.”  Shortly thereafter, a number of Republican Congressmembers responded to the Bulletin and Press Release with a Letter expressing concern that the Bureau’s post mischaracterized the activities of vehicle finance companies.  The Letter requested information and data supporting the CFPB’s contentions that the identified issues are occurring in the current marketplace.

Discussion of Bulletin:

On February 28, 2022, the CFPB published a compliance Bulletin and issued a Press Release expressing concerns over certain auto repossession activities.  While the Bulletin was generally neutral in tone, the Press Release accused creditors and servicers of stealing consumer’s vehicles.  Interestingly, both the Bulletin and Press Release also incorrectly stated that the collection of personal property storage fees by repossession agents was “illegal.”  While the CFPB has certainly taken the position that doing so constitutes an unfair practice under its UDAAP authority, the charging of such fees and the amounts allowed to be charged are expressly authorized under applicable state law where such activities have historically occurred.

Regardless of how one may feel about repossessions, the references in both documents various publications and findings dating back to 2016 provide insight into how the Bureau approached repossession investigations and examinations in the past, which is useful for industry to take into account.  The CFPB begins the Bulletin by noting the “extremely strong demand” and rising prices for used automobiles.  The Bureau then expresses concern that these market conditions could create incentives for more risky auto repossession practices which may violate the law.  By way of example, the Bulletin addresses findings from prior – and one might suggest quite dated – examinations and enforcement actions, where servicers are alleged to have acted improperly.

The types of activities identified by the CFPB, both in the Bulletin and Press Release as problematic were characterized as illegally seizing cars, sloppy record keeping, unreliable balance inquiries, and “ransoming” a consumer’s personal property that was in the vehicle at the time of repossession.    Conduct cited by the CPFB as improper includes the charging of fees before and after repossession, and specifically the collection of allegedly “illegal” personal property storage fees demanded by repossession agents before they would return that personal property to the borrower.  Noteworthy is the fact that this allegedly “illegal” conduct is expressly permitted under many state’s laws, though the amount that may be charged is typically limited by those same state laws.  The Bureau also raised the issue of conducting vehicle repossessions despite the presence of a bankruptcy stay and misrepresentations of the amount owed by the borrower leading to an underpayment and subsequent repossession.

In addressing issues of sloppy recordkeeping uncovered in examinations, the Bulletin focused on servicers who incorrectly coded consumers as delinquent leading to undue repossessions, referring back to certain 2017 and 2018 Supervisory Highlights – items published approximately 5 and 4 years ago respectively.  In other  instances cited in the Bulletin, servicers allegedly failed to cancel repossession orders for consumers that made payments to bring their account current, and repossession agents failed to confirm that a repossession order was still active prior to repossessing a vehicle.  Finally, the CFPB noted that it had found instances in which a borrower’s payments were not applied to the outstanding debt in the manner represented to consumers by the servicers, thereby causing some borrowers to be deemed further delinquent.

To avoid UDAAP violations, the Bulletin suggests that market participants should (1) review their policies regarding repossession, (2) communicate promptly with repossession service providers when a repossession is cancelled and monitor compliance with those orders, (3) exercise routine oversite by monitoring undue repossessions and auditing portfolios, and (4) act swiftly to correct any undue repossessions and reimburse consumers for associated costs.  The Bulletin also recommends entities should ensure consumers are not charged for unnecessary force-placed insurance.

Response from Congressional Republicans:

On March 10, 2022, eleven Republican members of the House Financial Services Committee sent a Letter to CFPB Director Rohit Chopra expressing their concerns with the inflammatory comments made in the Press Release and the dated nature of the information contained within the Bulletin.  The Letter starts by questioning the CFPB’s rhetoric, stating that it was a “gross mischaracterization” for the Bureau to equate repossession of a vehicle with theft.  Then the Letter points out that “there are over 2.2 million car repossessions” annually in the United States, and argues that the examples raised by the CFPB were not representative of the entire industry.  Next, the Letter requested that the Bureau provide data to support the contention that “high car prices increase risk of improper repossession by lenders, servicers, and investors.”  Lastly, the members of Congress touted the essential role that auto financing companies play in helping Americans get to or complete their work.

Guidance to Businesses:

The issuance of such a Bulletin, and even the Press Release itself, suggests the CFPB will be heavily scrutinizing repossession activity during future examinations.  These documents further suggest the potential for future enforcement actions where servicers have failed to meet the standards expected of them by the CFPB.  Auto loan servicers should review their policies and procedures to ensure repossession practices comply with all applicable laws and that procedures are in place to identify and prevent unwarranted repossessions.

CFPB Issues Warning to Mortgage Servicing Industry

By ,

A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.

CFPB Brings Action Against Connecticut Mortgage Lender

By

The number of enforcement actions by the Consumer Financial Protection Bureau (CFPB) more than doubled from 2019 to 2020. The CFPB made clear that cracking down on deceptive and unfair acts and practices under the Consumer Financial Protection Act of 2010 (CFPA) remains a core focus, with 11 of the 15 complaints it filed last year alleging such violations.

Earlier this month, the CFPB filed another lawsuit alleging unfair and deceptive acts or practices in violation of the CFPA. At the dawn of a new year and a new Administration, this litigation may be the proverbial canary in the coalmine for others in the financial services industry. As the case proceeds and briefing is filed, the tone and focus of the new Administration may be brought to light.

In a Client Advisory, our Financial Services Litigation Team examines the latest effort by the CFPB to crack down on deceptive and unfair acts and practices.