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New CFPB Rule Prohibits Class Action Waivers

On July 10, 2017, the Consumer Financial Protection Bureau (CFPB) released a rule prohibiting class action waivers in certain pre-dispute arbitration agreements. The rule drastically impacts arbitration clauses currently used by many financial products and services providers in their consumer agreements.

The rule has three main components. First, the rule prohibits providers from using a pre-dispute arbitration agreement to prevent consumers from bringing or participating in class actions in federal and state court. Second, the rule requires that arbitration agreements inform consumers that their right to bring a class action is unrestricted. Third, the rule requires providers to supply certain records and data relating to arbitral proceedings to the CFPB.

The rule is effective 60 days after publication in the Federal Register and generally applies to agreements entered into more than 180 days after the effective date. Congress, however, can use the Congressional Review Act to prevent the rule from taking effect.

What is the effect of the rule?

The new rule prohibits pre-dispute arbitration agreements for certain consumer financial products or services that block consumer class actions in federal and state courts. The rule accomplishes this in two ways:

  1. providers cannot rely on any pre-dispute arbitration agreement entered after the compliance date that restricts or eliminates a consumer’s right to a class action in state or federal court (§ 1040.4(a)(1)); and
  2. providers must include certain specified plain language in arbitration agreements that explicitly disclaims the arbitration agreements applicability to class actions (§ 1040.4(a)(2)).

The rule also requires providers to submit certain records relating to arbitral proceedings to the bureau, including copies of pleadings, the pre-dispute arbitration agreement, and the judgment. (§ 1040(b).)

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The CFPB’s Small Business Lending Data Request

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I discuss the CFPB’s request for comments regarding information about the small business lending market.

Section 1071 of the Dodd-Frank Act amended the Equal Credit Opportunity Act to require financial institutions to compile, maintain and report information concerning credit applications made by women-owned, minority-owned and small businesses.  In connection with this obligation, the Consumer Financial Protection Bureau is now seeking comments to identify, among other things, how to define small business lending, what business lending data is currently easily available, and what kinds of institutions should be obligated to make such reports.

Jonathan and I discuss the need for the depository industry to provide comments in response to this request.

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Trump May Not be the Only Catalyst for Administrative Reform

In the past few months, there has been a lot of speculation regarding the future of many administrative agencies under Trump’s administration. However, two current cases pending in the D.C. Circuit have the potential to have a dramatic impact on administrative agencies and past and present regulatory enforcement actions by such agencies.

In Lucia v. SEC, the SEC brought claims against Lucia for misleading advertising in violation of the Investment Advisers Act of 1940. The enforcement action was initially resolved by an administrative law judge (ALJ); however Luica was later granted a petition for review based on an argument that the administrative hearing was unconstitutional because the ALJ was unconstitutionally appointed. The issue made it up to the U.S. Court of Appeals for the D.C. Circuit who recently held that the ALJ was constitutionally appointed because the judge was an “employee”, not an officer. However, other courts have held just the opposite. In December, the 10th Circuit held in Bandimere v. SEC that ALJs were “inferior officers” and thus must be appointed pursuant to the Appointments Clause. A rehearing en banc has been granted in Lucia to address this issue.

On the heels of Lucia, in PHH v. CFPB, the CFPB brought claims against PHH for violations of the Real Estate Settlement Procedures Act. Similarly, this enforcement proceeding was originally decided by an ALJ. However, PHH appealed the ALJ decision for a multitude of reasons and the appeal has also made it up to the D.C. Circuit where a rehearing en banc was granted last month. In the court’s order granting a rehearing en banc, the court ordered, among other things, that the parties address what the appropriate holding would be in PHH if the court holds in Lucia that the ALJ was unconstitutional.

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CFPB Customer Complaint Data: Seeing What the Plaintiffs’ Bar Sees

CFPB watchers know that since 2013 customer complaints have been solicited and complaint data has been made available on the CFPB website. January is ubiquitous with New Year’s resolutions (perhaps you’ve already broken all of yours, but hopefully not). It is a great time to review the 2016 customer complaint data and see what the Plaintiffs’ Bar sees about your customers and your institution.

Undoubtedly, in due course, the CFPB has contacted your compliance and legal teams directly about these consumer complaints on an individualized basis. And undoubtedly, you have investigated the issue and provided responsive information to the CFPB and the consumer. Hopefully, each individual customer complaint matter is resolved and closed.

As a class action litigator, however, it is important to highlight that there is more here than just each individual complaint. We are living in an age of big data. The CFPB knows it. Your institution knows it. And, guess what, the Plaintiffs’ Bar knows it. The individual complaints posted to the CFPB database may be only the tip of the iceberg, or the issues may not have been fully resolved.

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The OCC Rises, the FSOC Dies, and Other Regulatory Predictions

Eight bold regulatory predictions on the direction of U.S. Banking and Fintech regulation in light of the election results.

1.   The era of “outside the law” Federal regulation is over. Critics of the CFPB (exclusively Republicans) have criticized and challenged the agency’s structure and tactics.  These challenges include criticism of the agency’s broad jurisdiction and rulemaking power as an unconstitutional delegation by Congress of its legislative power.  Members of Congress and private litigants have assailed the CFPB’s reliance on enforcement actions instead of true rulemaking as undercutting due process and basic fairness.  Republicans have been united in believing that the agency’s existence and actions violated the Constitution, the agency’s grant of power under Dodd-Frank and the Administrative Procedures Act.  Increasingly, the courts have dealt the agency significant setbacks.  This author believes that Director Cordray only persisted in his aggressive pursuit of policy goals because he believed that pursuit was blessed by the Obama Administration and the Democratic Party.  Whatever one thinks of President-Elect Trump and his incoming administration, we can be certain that it will not support or defend an aggressive pursuit of policy goals even when that pursuit is perceived to exceed the scope of the law.  If a CFPB official decides to pursue such an enforcement action will be doing so without political cover.  As a result, I believe the CFPB will not bring enforcement actions unless the law and the facts clearly support that decision.  This is a major change of direction for the agency.  Once the agency is limited to strictly enforcing the law and promulgating only regulations that comply with the Administrative Procedures Act, it will be able to obtain many fewer settlements (and for much lower amounts) than it was able to do before when it enforced standards that it essentially made up on the spot.

2.  Director Cordray will either resign or be fired by the President. The extent of the anger and resentment towards Director Cordray by Republicans in Congress cannot be overstated.  I suspect President Trump does not have a strong personal opinion on the matter, but his advisors are close to Congressional leaders and I think there is zero chance that Republicans will not give the Director what they see as his long-overdue comeuppance.  A recent District Court opinion supports the Constitutional authority of the President to fire the Director, but I think President Trump will not hesitate to articulate a “for cause” basis to fire the Director under Dodd-Frank if the Director were to contest the President’s power to fire him at will.

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Federal Rules Target Student Bank Accounts

As previously discussed on BankBryanCave.com, new Department of Education regulations will impact the terms and conditions of bank accounts that institutions of higher education and postsecondary vocational institutions may offer to students to receive disbursements of Title IV Higher Education Act funds. While the regulations apply directly to colleges, many banks and third-party servicers will need to change their products, services and practices if they want to contract with colleges to offer accounts to students.

The DOE rules require covered colleges to ensure that student account terms are in the best financial interest of students, present Title IV fund disbursement and account options to the student in a fact-based and neutral manner, and ensure that students have access to an appropriate number of surcharge-free ATMs. The rules also prohibit many account fees and impose ongoing monitoring obligations on colleges to ensure that student accounts meet all requirements of the rules.

The CFPB’s new prepaid account rules will further regulate accounts offered to students by imposing Regulation E protections on those prepaid accounts, limiting overdrafts, and highly regulating other credit features on student prepaid accounts. CFPB enforcement actions against colleges relating to consumer financial products and services remind us that even colleges can be subject to their jurisdiction and enforcement efforts.

On November 18, 2016 at 1:00pm EST, Bryan Cave LLP partner, John ReVeal, will be conducting a webinar with Lorman Education Services to summarize the new DOE rules and the key CFPB prepaid account rules as they relate to student accounts.  With John as a faculty member, we are able to offer a 50% discount on the registration fee.  Click here for more information, here for the brochure of the webinar, and here to register.

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3 Takeaways (a Litigator’s Perspective) from CFPB Supervisory Highlights

The CFPB recently issued its newest edition of Supervisory Highlights Mortgage Serving Special Edition, Issue 11 (June 2016).

From a litigator’s perspective, the Supervisory Highlights do more than summarize recent supervisory findings, they also shine a light on future examination and putative class action risks that are emerging. The CFPB is providing key insights into what it believes should be industry standards. Banks and mortgage servicers should read carefully both the specific findings summarized and slightly more subtle clues to evolving future CFPB requirements.  Here are three takeaways on the Highlights from a financial services class action litigator’s perspective:

  1. ECOA & Special Servicing Populations Continue to be a Strong CFPB focus.

In section 2, “Our approach to mortgage servicing examinations,” the CFPB uses a fair amount of real estate to highlight ECOA requirements. In fact, the report states clearly “…Supervision will be conducting more comprehensive ECOA Targeted Reviews of mortgage servicers in 2016.” (See Supervisory Highlights, p.5).  The report specifically indicates that the ECOA Baseline Modules in the CFPB Supervision and Examination Manual will be a tool used by CFPB examination teams. Banks and servicers would do well, if you are not already, to consider the modules and how your data may be viewed. The CFPB specifically flags Module IV fair lending risks related to servicing including staff training, monitoring and “servicing those customers with Limited English Proficiency.” (See Supervisory Highlights, p.5, and ECOA Examination Modules). Among the module’s areas of inquiry are: whether personnel who are available for limited English speaking customers receive the same training and have the same authority as do other personnel, and the level(s) of discretion that servicing personnel may have in making loss mitigation decisions and referrals for customers with limited English (including controls to monitor such discretion usage).  The Highlights appear to signal that the CFPB will increase focus on these areas in the coming months. Banks and servicers may wish to re-evaluate their progress and operations capabilities in these areas. As always, the plaintiff’s consumer bar may be watching CFPB pronouncements and enforcement, and may initiate consumer class action(s) asserting such claims.

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The CFPB Proposes Ambitious Payday Lending Regulations

On June 2, 2016, the CFPB released its long-awaited proposed regulations for payday loans, vehicle title and certain high-cost installment loans.  Comments on the proposed rules must be received on or before September 14, 2016.

While most payday lenders would need to make significant changes to their products and practices under the proposed rules, the final rules could well be delayed though legal challenges in court.  The scope of the proposal is extraordinary, even requiring a new credit reporting system, that would need to be built, to facilitate the ability-to-repay requirements of the proposal.  The CFPB is relying on its authority under the Dodd-Frank UDAAP provisions to issue the rules, which is admittedly very broad, but even that might not be enough to support this ambitious proposal.

Nevertheless, because we cannot predict how courts would ultimately rule on the CFPB’s authority, it’s important to understand the proposed rules, prepare comments, and consider what business model changes might be needed.   This article therefore summarizes the key provisions of the proposal.

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CFPB Guidance On Recurring Electronic Debits

On November 23, 2015, the CFPB issued a Bulletin alerting companies that they must obtain proper authorization from consumers before automatically debiting their accounts. The Bulletin relates to the Electronic Fund Transfer Act requirements for “preauthorized electronic fund transfers,” which are EFTs scheduled in advance to recur at substantially regular intervals. The preauthorized EFTs in the CFPB’s spotlight are those that debit a consumer’s account.

Regulation E of the EFTA provides that preauthorized EFTs from a consumer’s account must be authorized by a “writing signed or similarly authenticated by the consumer.” The authorization must be readily identifiable as such and have clear terms, and the person obtaining that authorization must provide a copy to the consumer. It’s important to keep in mind that these are two separate requirements. The Bulletin clarifies how a company can obtain the consumer’s authorization, and describes the critical elements of that authorization, but leaves unanswered certain questions about delivering a copy of the authorization to the consumer when it is obtained by telephone.

Content of the Authorization

As noted above, the consumer’s authorization must be readily identifiable as such and must have clear terms. The Bulletin states that companies sometimes provide consumers with notices of terms for preauthorized EFTs that fail to disclose “critical information.” The CFPB explains that the authorization must be clear as to the recurring nature of the transfers and the amount and timing of the payments agreed to. Of course the authorization also needs to identify the consumer and the account to be charged. Regardless of how the consumer’s authorization is obtained, which is discussed below, all of this information needs to be in the authorization and in the copy provided to the consumer.

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CFPB Denied

CFPB Denied

November 11, 2015

Authored by: Robert Klingler

Invoking memories of Apple’s famed 1984 Superbowl commercial, a group called the American Action Network aired an anti-CFPB spot during last night’s Republican presidential debate. If nothing else, the spot should encourage further discussion of the role and impact of the Consumer Financial Protection Bureau.

The spot certainly portrays the CFPB in an evil light that is sure to please many in the banking industry, but its broader impact is less certain. A well-written piece by the American Banker offers several reasons why the ad could backfire, not the least of which is the hyperbolic nature of (and shortcuts taken by) the spot.

And former FDIC Chair Sheila Bair seems to agree.

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