In a significant decision, on August 31, the US District Court for the Central District of California held that a tribal bank originating loans for a non-bank lender was not the “true lender”—making the loans subject to state usury limits.

Background

In December 2013, the Consumer Financial Protection Bureau (CFPB) commenced litigation against CashCall (a payday lender in a partnership with a tribal bank) and other defendants, claiming that they had violated the federal law prohibition on unfair, deceptive, or abusive acts or practices (UDAAP) for financial services providers by servicing and collecting on loans that were wholly or partially void or uncollectible under state law.

On August 1, the Consumer Financial Protection Bureau (CFPB) published a Notice in the Federal Register seeking comment on a proposal to expand the information it gathers for its consumer complaint database to include complaint disposition information from consumers. This new information would include a 1–5 rating by the consumer as well as a narrative block. The proposal, however, does not include a data field for businesses to describe the relief provided, if any, or to otherwise respond to a consumer’s statements.

The CFPB characterizes this new information as a tool to permit the CFPB and other enforcement and regulatory agencies to assess efforts to remediate consumer complaints. Financial institutions and other businesses that may come within the ambit of this database, however, should be concerned that a one-sided consumer comment opportunity creates a cost-free, sortable, and mineable trove of possible cases for other regulatory and law enforcement agencies, including the Federal Trade Commission and state attorneys general, as well as plaintiffs’ lawyers seeking class action plaintiffs.

On July 28, the Consumer Financial Protection Bureau (CFPB) released a detailed summary of regulations it is considering imposing on third-party debt collectors. These proposals, once finalized, stand to potentially form the basis of significant “unfair, deceptive, or abusive acts or practices” (UDAAP) enforcement and regulatory actions against large bank and non-bank financial institutions that use third-party debt collectors to collect debts on their behalf or sell charged-off debt to third-party debt collectors.

Read our LawFlash for further information on the CFPB’s action.

On July 6, North Carolina Governor Pat McCrory signed into law legislation to bring certain virtual currency businesses expressly within the existing money transfer business regulatory scheme by repealing and replacing the current law with a new article.

The new law explicitly captures virtual currency with new definitions. Under the prior law, virtual currency intermediaries were not expressly covered, although the broad definitions of “money transmission” and “monetary value” (“[a] medium of exchange, whether or not redeemable in money”) prior to the new law’s adoption likely captured virtual currency. Coinbase Inc. and Circle Internet Financial Inc. are already licensed as money transmitters. The new law provides greater legal certainty, however, by explicitly providing that money transmission “includes maintaining control of virtual currency on behalf of others.”

The Consumer Financial Protection Bureau (CFPB) today proposed rules (Payday, Vehicle Title, and Certain High-Cost Installment Loans) pursuant to its authority under 12 U.S.C. §§1022, 1024, 1031, and 1032 (Dodd-Frank) that will severely restrict what is generally referred to as the “payday lending” industry (Proposed Rules).

The Proposed Rules merit careful review by all financial services providers; in addition to true “payday lenders,” they create substantial risk for banks and other traditional financial institutions that offer short-term or high-interest loan products—and risk making such credit effectively unavailable in the marketplace. The rules also create a serious risk of secondary “assisting and facilitating” liability for all financial institutions that provide banking services (in particular, access to the ACH payments system) to lenders that the rules directly cover.

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.