Preparing for a Visit from the CFPB
David Bailey, Kentucky Higher Education Assistance Authority
John Culhane, Ballard Spahr
Dino Tsibouris, Tsibouris & Associates
CFPB Issues Affecting Loan
Servicing
Dino Tsibouris
(614) 360-3133
dino@tsibouris.com
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”
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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CFPB Proposed Rule
Nonbank 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 servicing
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2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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CFPB Proposed Rule
Nonbank Student Loan Servicers
• Response to complaints from Ombudsman’s report
– “Confusion”
– “Dead ends”
– “Runarounds”
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Service Providers
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•
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•
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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CFPB Supervision and
Examination Manual
• 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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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CFPB Supervision and
Examination Manual
• 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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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CFPB Supervision and
Examination Manual
• 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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Service Providers
• Conduct thorough due diligence
• Verify service provider understands and is capable of
complying with Federal consumer financial law
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Service Providers
• Establish lender internal controls to monitor service provider
• Take prompt action to address problems
• Terminate agreement where appropriate
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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 LLP
Phone: 215.864.8535
Email: culhane@ballardspahr.com
Preparing for CFPB Reviews
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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?)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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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•
•
•
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Some Lessons from CFPB Exams
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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 problems
2013 Knowledge Symposium
November 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 overborrowing (school certification, reduction in loan amount, right
to cancel loan)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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 (?)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Some Lessons from CFPB Consent Orders and
Cases
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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. 2013CFPB-0004
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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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)
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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Questions?
2013 Knowledge Symposium
November 5-7, 2013 ● St. Pete, Florida
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