Federal Appellate Court Deems CFPB ‘Unconstitutionally Structured’ and Overturns PHH Penalty

gavelOn Oct. 11, the U.S. Court of Appeals for the D.C. Circuit deemed the Consumer Financial Protection Bureau (CFPB) “unconstitutionally structured” and overturned its enforcement action, including a $109 million penalty, against PHH Corp., a New Jersey-based mortgage lender. Despite its rulings, the D.C. Circuit made clear that the CFPB will continue to operate and perform its duties.

The CFPB originally fined PHH for an alleged kickback scheme whereby PHH referred customers to insurers who then purchased reinsurance from a PHH subsidiary. In seeking to vacate the enforcement order, PHH made both constitutional and statutory arguments.

Constitutional Arguments

PHH argued that the CFPB’s status as an independent agency headed by a single director violates Article II of the U.S. Constitution. To analyze this issue, the D.C. Circuit employed a “history-focused approach” focusing on separation of powers decisions from the Supreme Court.

The D.C. Circuit observed that “[t]he CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decisionmaking and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” The D.C. Circuit added that the CFPB’s structure lacks critical checks and constitutional protections, despite the agency wielding vast power over the U.S. economy. Continue Reading

CFPB Finalizes New Rules Governing Prepaid Card Products

On Oct. 5, 2016, Consumer Financial Protection Bureau (CFPB) Director Richard Cordray announced a final rule governing the burgeoning consumer prepaid card industry. The CFPB estimates that the amount of money consumers load onto “general purpose reloadable” prepaid cards increased from less than $1 billion in 2003 to nearly $65 billion in 2012. The scope of the new rule reaches not only traditional prepaid cards, but also mobile wallets, person-to-person payment products and other electronic accounts that store funds (e.g., PayPal). The rules will go into effect Oct. 1, 2017, creating uniform standards across the industry.

In general, the new prepaid card rules impose three requirements: First, they limit consumer losses when funds are stolen or cards are lost; second, they require institutions to investigate and resolve errors; and third, they must give consumers “easy and free access” to their account information. The CFPB also finalized “Know Before You Owe” disclosures for prepaid accounts, with short-form declarations available on the packaging of prepaid products and longer declarations available online. Continue Reading

CFPB Fines TMX Finance LLC $9 Million for Unfair and Abusive Practices

On September 26, 2016, the Consumer Financial Protection Bureau (CFPB) entered into a consent order with one of the country’s largest auto title lenders, TMX Finance LLC, the parent company of TitleMax. The CFPB took action against TMX Finance for engaging in unfair, deceptive, and abusive lending acts and practices, and for engaging in unfair and illegal debt collection tactics, in violation of the Consumer Financial Protection Act of 2010 (CFPA), 12 U.S.C. §§ 5531 & 5536(a)(1)(B).

TMX Finance, based in Georgia, offers title and personal loans to consumers in 18 states through state subsidiaries including TitleMax, TitleBucks and InstaLoan. These companies offered consumers single-payment auto title loans of $100 up to $10,000, usually 30 days in length, on lien-free vehicles with their title as collateral. These loans carried high interest rates, as high as 300 percent APR. Continue Reading

California District Court Delivers Payday Lending Usury Victory to the CFPB with Important Consequences for On-Line Lenders


On August 31, Judge Walter of the Central District of California entered summary judgment in favor of the Consumer Finance Protection Bureau (“CFPB”) on its claims against CashCall, Inc. arising out of allegedly unfair and deceptive loan practices. The CFPB had sued payday lender CashCall and various affiliates for violations of the Consumer Financial Protection Act of 2010 (“CFPA”), based on CashCall’s alleged scheme to avoid state usury laws through the use of an online lender formed under a tribal jurisdiction. The decision has implications for the emerging online lending industry, which often relies on one jurisdiction’s usury laws to establish loan terms.

CashCall was found to have originated loans via an organization, Western Sky Financial, that it caused to be created under the laws of the Cheyenne River Sioux Tribe (“CRST”), which does not have usury laws. Western Sky marketed payday and other consumer loans to consumers under contracts containing choice-of-law provisions stating that CRST law governed. Western Sky ultimately provided loans to consumers in 16 states, but after originating the loans, it sold them all to CashCall within about three days of origination and paid CashCall an additional 2.02 percent of the face value of each loan. CashCall did not reject any of the loans Western Sky presented to it for purchase. After the sale, CashCall maintained all rights to the loans and serviced them, although it represented to consumers that it was merely servicing on Western Sky’s behalf. The CFPB alleged that using Western Sky to originate the loans under CRST law allowed CashCall to create loans with interest rates of up to 318.52%, well in excess of the usury caps in the 16 states. Continue Reading

Florida to Streamline Testing Requirements for Mortgage Loan Originator Licensure

On August 16, Florida announced via the National Mortgage Licensing System (NMLS) Resource Center that it was adopting the Uniform State Test (UST) for mortgage loan originators. With this announcement, the Florida Office of Financial Regulation became the 53rd state agency to no longer require a second state-specific test component for mortgage originators seeking licensure.

Although not mentioned in the announcement, BakerHostetler’s Financial Services Team has confirmed that, beginning in January 2017, Florida will require two hours of Florida-specific pre-licensing education covering Florida statutes, rules and regulations. Florida will then also require mortgage originators to complete one hour of Florida-specific continuing education annually.

While the Florida education requirements are not intended to increase the number of education hours required, many mortgage originators licensed in multiple states will find that to be the exact effect. These requirements will not impact those originators currently licensed and renewing their license for 2017. However, prior to renewing for 2018, originators must meet the new continuing education requirements. Continue Reading

CFPB Releases Proposed Amendments to Truth In Lending Disclosure Rules

Today, the CFPB released its proposed amendments to disclosure requirements under RESPA and TILA. These disclosure requirements are also known as the “Know Before You Owe” rule (the Rule). The amendments propose several notable changes:

  1. The CFPB proposes to change the way loan tolerances are calculated. Tolerance calculations will now include finance charges “and disclosures affected by the finance charge.” This amendment would effectively bring loan tolerance calculations back to what they were before the Rule originally took effect.
  2. For loans originated by housing finance agencies, recording fees and transfer taxes would now be chargeable to the borrower. Prior to the proposed amendment, there existed some confusion over whether charging recording fees and transfer taxes would cause the housing finance agencies to lose their partial exemptions. The CFPB hopes that the amendment will grant the partial exemption to more finance agencies, which in turn “should encourage lenders to partner with” such agencies.
  3. The Rule will now expressly apply to housing cooperatives. The CFPB’s goal is to “simplify compliance” given that prior to the amendment cooperatives were inconsistently treated by the states as personal or real property, which meant the necessity of complying with the Rule varied by state.

The proposed amendments also invite commentary as to how creditors can provide sellers and real estate brokers with mortgage disclosures without violating the consumer/buyer’s financial privacy.

The full proposed amendment may be found here. The CFPB’s press release summarizing the amendments may be found here.

The CFPB has asked that comments on the proposed amendments be provided by Oct. 18, 2016.

Consumer Financial Protection Bureau Announces Proposal to Overhaul the Debt Collection Market at Hearing in California

On July 28, 2016, the Consumer Financial Protection Bureau (“CFPB”) and Director Richard Cordray announced at a field hearing in Sacramento, California the CFPB’s proposals to overhaul the $13.7 billion dollar debt collection market, affecting about 70 million consumers nationwide.

The CFPB will be proposing new regulations for third-party debt collectors and others covered by the Fair Debt Collection Practices Act (“FDCPA”), including many debt buyers. It published a 117-page outline discussing its research process and the proposals under consideration. With these proposals, the CFPB’s goal is “cleaning up the integrity” of the debt collection process. As such, these proposals target all aspects of the debt collection lifecycle, focusing on accuracy in debt collection, and limiting permissible contact by the debt collectors to the consumer. Specifically, the CFPB made proposals to the following areas for which it will propose new regulations: Continue Reading

CFPB Releases Latest Supervisory Highlights Focused on Mortgage Servicing

bigstock-Show-me-money-26933555The Consumer Financial Protection Bureau released their 11th edition of Supervisory highlights, a special edition with a direct warning to mortgage servicers.  The report typically shares findings and examination observations in various areas of oversight like student loan servicing, mortgage origination and debt collection.  However this edition focuses on mortgage servicing technology; loss mitigation acknowledgement notices; loss mitigation offers; loan modification denial notices; policies and procedures; and servicing transfers. The warning is specific to failed technology that continues to be used by some mortgage servicers that has already harmed consumers placing a servicer in violation of CFPB’s servicing rules. Richard Cordray is quoted in the release with this stern warning, “There are no excuses for not following federal rules.”

The full release is available here

Regulating the Unknown: The FTC Seeks to Understand the Past, Present and Future of Financial Technology

finance iStock_000019092935_LargeOver the past 10 years, advances in technology have changed the way people live their lives. No longer must a person leave her home to purchase clothing, groceries or even a car. The marketplace for retail goods has migrated online, and, it appears, the financial industry is not far behind.

Recently, many companies have emerged that strive to efficiently and effectively utilize technology to provide consumers with capital that has historically been unavailable. And with a 100 percent increase between 2014 and 2015 in the amount of unsecured consumer credit originated by just the top two of these “online marketplace lenders,” they appear to be succeeding.

This success, however, has triggered the scrutiny of regulatory agencies, including the U.S. Department of Treasury and the Federal Trade Commission (“FTC”). To better understand how online marketplace lenders operate, what efforts online marketplace lenders are taking to protect their customers and how existing regulations impact the overall online marketplace lending industry, the FTC has initiated a series of forums focused on financial technology, the first of which was held on June 9, 2016. Continue Reading

CFPB Announces Dollar Threshold Adjustments to the Truth in Lending Act

bigstock-Show-me-money-26933555The Consumer Financial Protection Bureau (CFPB) recently released a final rule amending the dollar thresholds in Regulation Z, which implements the Truth in Lending Act (TILA). The CFPB’s final rule has two primary effects. First, the final rule adjusts select dollar amounts in accordance with the annual change reflected in the Consumer Price Index – a 1.1 percent increase, effective June 1, 2016. These changes simply apply the method formerly established in Regulation Z for determining adjustments to select threshold dollar amounts. Second, the final rule corrects a calculation error in the previous rule with respect to the safe harbor in the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) for a subsequent violation penalty fee.

Adjustments to threshold amounts impact several provisions that amend TILA, including the CARD Act, the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).

For open-end consumer credit plans under the CARD Act, no changes occur with respect to the threshold that triggers the requirements to disclose minimum interest charges for the first violation penalty fee. The safe harbor remains $27. The subsequent violation penalty fee, however, is increased by $1 and is now $38. This change is made to correct a miscalculation in the previous rule, and, unlike the other amendments, takes effect immediately. Continue Reading