On May 5, the Consumer Financial Protection Bureau (CFPB) released its long-awaited proposed rule (Proposed Rule) on the use of arbitration clauses by consumer financial services companies in their customer contracts that restrict a customer’s ability to file or join a class action lawsuit. The Proposed Rule will be open for comment for 90 days after the date it is published in the Federal Register.

Section 1028(a) of the Dodd-Frank Act required the CFPB to study the use of the mandatory arbitration clauses in consumer financial markets. The CFPB released its study early last year and later introduced an outline of proposed restrictions on mandatory arbitration. The study’s results and the outline left little doubt that the CFPB intended to act aggressively to limit the use of arbitration clauses with class action waivers in financial consumer agreements, and in that respect, the Proposed Rule does not disappoint.

The Proposed Rule would enact the following:

  • Prohibit providers of “covered consumer financial products and services,” such as credit cards, deposit accounts, other consumer loans, and automobile loans from using an agreement with a consumer that provides for arbitration of any future dispute between the parties and bars the consumer from filing or participating in a class action. Excluded are transactions subject to FINRA arbitration.
  • Require providers that participate in predispute arbitration to submit certain records to the CFPB (including the arbitrator’s judgment or award) so the CFPB can monitor arbitration proceedings and determine if further rulemaking is required.

The Proposed Rule would apply prospectively to agreements entered into 211 days after the final rules’ publication in the Federal Register.

In a clear and concise decision, the US District Court for the District of Columbia has ruled that the Consumer Financial Protection Bureau (CFPB) lacked the statutory authority to issue a Civil Investigative Demand (CID) to the Accrediting Council for Independent Colleges and Schools (ACICS), an accreditor of for-profit colleges. In Judge Richard Leon’s opinion in Consumer Financial Protection Bureau vs. Accrediting Council for Independent Colleges and Schools, he termed the CFPB’s action “a bridge too far.”

In August 2015, the CFPB issued a CID to ACICS with the stated purpose of determining whether ACICS had engaged in “unfair, deceptive or abusive acts and practices” (UDAAP). However, the CFPB’s supervisory and enforcement authority with respect to UDAAP is limited by statute to a “covered person or service provider” and only in connection with a transaction with a consumer for “consumer financial products or services.”

Because ACICS does not meet the definition of a “covered person,” the CFPB argued that the CFPB’s authority to investigate the consumer lending practices of schools accredited by ACICS grants it the necessarily authority to investigate whether ACICS has engaged in violations of the law in accrediting those schools.

This, the district court held, was “a bridge too far.” In addition, Judge Leon looked to the demands made in the CID and noted that the information sought far exceeded what could reasonably be required for the CFPB to determine whether ACICS’s conduct furthered or otherwise assisted and facilitated the schools’ conduct. Accordingly, he denied the CFPB’s motion to enforce its CID and dismissed the action.

In a spirited oral argument on April 12, a panel of the US Court of Appeals for the DC Circuit questioned the constitutionality of the Consumer Financial Protection Bureau’s (CFPB’s) governance structure. Specifically, the court is examining the decision by the US Congress to concentrate the power of this independent federal agency in a single director—and then largely insulate that director not only from the checks and balances of Congress and the courts, but also in large part from review and control by the President.

The oral argument was made in a case brought by mortgage lender PHH Corp., appealing a CFPB administrative order that charged it with alleged illegal kickbacks under the Real Estate Settlement Procedures Act (RESPA). An administrative law judge appointed by CFPB Director Richard Cordray had initially imposed a penalty of $6.4 million. When both PHH and the CFPB staff appealed, Director Cordray sat as the appellate officer and increased the penalty by over 1,600% to $109 million.

PHH then filed an appeal of Director Cordray’s order with the US Court of Appeals, as was its right under the Dodd-Frank Act. It marked the first challenge to a CFPB administrative action since the agency’s creation in 2011.

Wasting no time after returning from a two-week recess, the US Senate Committee on Banking, Housing, and Urban Affairs (the Committee) is holding two full committee hearings this week to discuss consumer financial services and the Consumer Financial Protection Bureau (CFPB).

On April 5, the Committee is holding the hearing “Assessing the Effects of Consumer Finance Regulations.” Based on available submitted testimony, the hearing will focus on the CFPB and the impact of its regulations and enforcement actions on consumer protection and the availability and cost of consumer financial products. The submitted testimony ranges from very supportive of the CFPB to highly critical.

Two days later, on April 7, CFPB Director Richard Cordray will be the sole witness for “The Consumer Financial Protection Bureau’s Semi-Annual Report to Congress.” The semi-annual report is always interesting and often contentious, as support and criticism of the CFPB and its performance continues to be a divisive issue on Capitol Hill. For those watching at home, keep an eye out in this hearing for Committee members referencing parts of the testimony given in the April 5 hearing.

Although committee hearings tend to produce interesting testimony from witnesses and some newsworthy sound bites from members of Congress, no consumer financial services legislation has been reported out of the Committee for consideration by the full Senate, and the Committee currently has no scheduled legislation markups.

On March 22, the Consumer Financial Protection Bureau (CFPB) announced on its website that it has issued its annual summary and analysis of the 19,000 complaints it received from servicemembers last year, titled “Servicemembers 2015: A Year in Review.” The CFPB’s report provides aggregate statistics concerning the sources, subject matters, resolutions, and financial products involved in those complaints.

Several issues identified in the report relate to the unique circumstances of servicemembers:

  • The availability of home mortgage loss mitigation options for servicemembers who receive permanent change of station (PCS) orders remains the subject of a significant number of complaints. Federal law does not impose any general affirmative obligation to offer specific loss mitigation options for private mortgages, but CFPB regulations require servicers to accurately and promptly evaluate loss mitigation applications for all options that the servicer and investors make available.
  • A specific complaint claiming that the terms of automobile loans prevented servicemembers from shipping their cars outside the country even when traveling on PCS orders. The report implies a potential interest in evaluating this issue from an unfair, deceptive, or abusive acts or practices (UDAAP) perspective, noting that servicemembers “were often completely unaware of this restriction when they took out the loan.”
  • A number of servicemembers complained about creditors’ and reporting agencies’ handling of identity theft while on active duty. By contrast to the other issues, the report implied that this problem could be addressed through consumer education: servicemembers already have the right to place an “active duty” alert on their accounts to help protect against identity theft in this scenario.

The Consumer Financial Protection Bureau (CFPB) has taken two notable steps that signal a new interest in regulating marketplace, or “peer-to-peer,” lending. The CFPB announced that it will expand its consumer complaint portal to accept complaints about marketplace lenders. Simultaneously, the CFPB released a consumer bulletin containing information and tips for consumers considering taking out a loan with a marketplace lender.

Marketplace lending now joins mortgages, student loans, auto loans or leases, payday loans, bank accounts and services, credit cards, prepaid cards, credit reporting, debt collection, money transfer or virtual currency, and payday loans as categories of financial services for which the CFPB accepts complaints. The consumer complaint portal has been and continues to be controversial in the financial services industry. The complaints are publicly available and not vetted or filtered by the CFPB for accuracy or veracity, although it scrubs personal information from the narrative and takes steps to confirm a commercial relationship between a consumer and a company. The financial services provider receiving a complaint is expected to submit an answer within 15 days if possible, and no later than 60 days.

In the spirit of the new year, we decided to take our Ouija board out of the attic and venture a few predictions for 2016 in financial services regulation. The financial regulatory agencies have been relatively quiet for the last few weeks, but we expect to see significant regulatory activity in 2016. So, we have consulted the spirit of FinReg Nostradamus and assembled a list of some of the regulatory actions that we expect to see this year.

  • Incentive Compensation Rules: The financial agencies’ 2011 proposed rules regarding incentive compensation were never finalized, and the agencies are reportedly engaged in discussions regarding the framework of the incentive compensation rules and intend to release a new proposed rule this year. Key issues that the new proposed rule will likely address include triggers for required clawback of compensation and the scope of clawback powers, mandatory compensation deferral requirements and time periods, and application of the rules to alternative compensation arrangements, such as carried interest.
  • Net Stable Funding Ratio: Although the Basel Committee on Banking Supervision (Basel Committee) finalized the net stable funding ratio (NSFR) standards of Basel III at the end of 2014, proposed regulations that implement the NSFR have yet to be issued by the US federal banking agencies. The agencies and industry representatives have been engaged in ongoing discussions with respect to the NSFR regulations. Considering the NSFR standards are required under Basel III to be fully implemented by January 2018, barring any unexpected delays, we should see proposed NSFR regulations in the first half of 2016.
  • Consumer Financial Protection Bureau (CFPB): A number of rulemakings from the CFPB are expected this year, including long-awaited rulemakings on debt collection and prepaid accounts. We also expect proposed rules on mortgage servicing and on short-term lending (e.g., payday and auto title loans) based on the framework that the CFPB released in 2015. Also on the CFPB’s regulatory agenda for 2016 are mandatory arbitration clauses, checking account overdraft programs, and larger participants in the consumer installment loan and title loan markets.

As the Consumer Financial Protection Bureau (CFPB) completes its fifth year as a fully operating entity in 2016, distinct enforcement patterns have emerged that can assist businesses and individuals that have or may become targets of the agency in assessing penalties and their impact should they elect to settle with the CFPB.

The CFPB’s Settlement Precondition Provisions

Key provisions required by the CFPB as a precondition for settlement deeply impact the bottom line result of a settlement and are different in material respects from those typically required by other federal and state financial services enforcement agencies. These key provisions include the following:

  • Prohibitions on the settling party (Respondent) claiming favorable tax treatment for monetary penalties
  • Prohibitions on the Respondent claiming any part of the monetary penalties against available insurance
  • Prohibitions against the Respondent asserting a setoff for payments made to the CFPB against any judgment in a related private action or, in the alternative, the payment of any such setoff to the US Treasury

The specific language is comprehensive, but will vary somewhat depending on whether the matter is a resolution in US District Court or in an administrative proceeding, as well as if the matter involves entities, individuals, or both.

The California Department of Business Oversight (DBO) has launched an inquiry into the increasingly popular marketplace lending industry. The stated purpose of the inquiry is “to assess the effectiveness and proper scope of [the DBO’s] licensing and regulatory structure as it relates to [marketplace] lenders.”

The DBO sent its online survey to 14 marketplace lenders and requested a variety of information, including the volume of business, types of loans, APR, delinquency rates, and investor funding or sale data. The survey requests data from January 1, 2010 through June 30, 2015. Responses to the survey are due by March 9, 2016. Although the DBO has not identified the 14 marketplace lenders that received the survey, reports confirm that the inquiry includes both consumer lenders and commercial and small business lenders.

The DBO’s inquiry follows the Department of the Treasury’s request for information earlier this year seeking public comments on marketplace lending. Given the growing popularity of marketplace lending platforms among consumers and small businesses, further regulatory interest and possible future regulatory action are likely.

Not every significant action taken by the federal banking agencies is accompanied by great fanfare. In this spirit, the FDIC has quietly issued a Financial Institutions Letter (FIL-59-2015) announcing revisions to its Compliance Examination Manual (Manual). The changes in question reflect FDIC and interagency supervisory guidance issued primarily over the past year.

Among the changes incorporated into the updated Manual are the following:

  • New guidance about the Matters Requiring Board Attention (MRBA) section of the Report of Examination (ROE)
  • Guidance on evaluating the impact of consumer harm on examination and supervisory activities, and a new "Assessment of Risk of Consumer Harm" (ARCH) that provides pre-examination planning and scoping guidance to FDIC examination staff
  • New and detailed guidance on retail sales of nondeposit investment and insurance products
  • Revised interagency examination procedures for the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) rule
  • Revised guidance on unfair and deceptive practices under the Federal Trade Commission Act
  • Updated templates providing examples of a consumer compliance ROE and a Community Reinvestment Act (CRA) Performance Evaluation for a hypothetical, FDIC-supervised bank

Although the Manual is published as guidance for the FDIC’s compliance examiner staff, it provides important information and insights to FDIC-supervised banks (state nonmember banks) on the FDIC’s current examination activities, priorities, and expectations regarding financial consumer protection compliance issues. Therefore, the revisions to the Manual should be required reading for these banks.