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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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Will 2014 be the year of UDAP and UDAAP?

Expect 2014 to be a banner year for enforcement actions under the Unfair or Deceptive Acts or Practices law (UDAP) and the new Unfair, Deceptive or Abusive Acts and Practices law (UDAAP).  While predicting regulatory trends can be difficult, we believe this to be a safe bet in light of the trends in 2013 and early indications in bank examinations already this year.

Below are some of the enforcement trends from last year and tips highlighting what can be done to reduce the risks of UDAP and UDAAP enforcement actions in 2014.

In 2013, the FDIC imposed civil money penalties against banks in 89 instances, 16 of which were for UDAP violations and many of those also required consumer restitution.  The only compliance area triggering more civil money penalties in 2013 was the Flood Disaster Protection Act, accounting for 27 of the 89 cases, which is roughly consistent with the percentages in that area since Katrina.

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CFPB Issues First Enforcement Action

In its first public enforcement action, the Consumer Finance Protection Bureau (CFPB) found that Capital One Bank, (USA) N.A. engaged in deceptive marketing practices, which the CFPB says mislead customers into buying credit card “add-on products.” The large size of the total payment required under this action ($210 million) has raised speculation that the CFPB will be seeking larger penalties than bank regulators in the past, because such previous penalties have not stopped banks from using unfair tactics to seek profits.

The CFPB found through its supervision process that Capital One’s call-center vendors engaged in deceptive tactics to sell its credit card add-on products, which included payment protection plans, debt forgiveness and credit monitoring services. To activate newly issued credit cards, Capital One customers with low credit scores or low credit limits were directed to a third-party call center and subjected to “high-pressure [sales] tactics.” In particular, the CFPB found that Capital One customers were misled about the benefits of the add-on products, deceived about the nature of the products, mislead about eligibility, misinformed about the cost of the products and, in some cases, enrolled without their consent.

The CFPB’s enforcement action requires Capital One to cease all marketing of these products until the Bureau approves a compliance plan to help ensure against future violations; refund to 2 million customers approximately $140 million, which covers the cost of these add-on products as well as a refund of the finance charges associated with fees paid, any over-the-limit fees incurred and interest; pay claims denied based on ineligibility at enrollment; make convenient repayment to consumers; assure compliance with the terms of the consent order through the work of an independent auditor and pay a $25 million civil money penalty into the Bureau’s Civil Penalty Fund.

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Interest Rate and Brokered Deposit Restrictions

On January 27, 2009, the FDIC proposed to amend its regulation relating to interest rate restrictions on institutions that are less than well capitalized.  The proposed regulation would tie the interest rate caps to published national interest rates and eliminate the concept of local deposit market areas.

Section 29 of the Federal Deposit Insurance Act places statutory limitations on the ability of any insured depository institution that is not well capitalized to accept funds obtained by or through any deposit broker.  Because of the statutory definition of a deposit broker, these limitations also limit the interest rates which may be paid by insured depository institutions that are less than well-capitalized. In order to be considered well-capitalized, an institution may not be subject to any written agreement or order issued by its primary federal regulatory which requires the institution to meet and maintain a specific capital level for any capital measure.

Under the existing regulations, any institution that is not well capitalized (including any institution subject to a regulatory enforcement action with capital requirements) may generally not pay interest in excess of 75 basis points over the average interest paid for comparable deposits in the institution’s “normal market area.”

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