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Consumer financial services at a crossroads

What's inside

Key developments, possible impacts

Overview

During 2017 and early 2018, the consumer financial services (CFS) regulatory landscape has undergone seismic shifts.

As the Trump Administration, Congress and the courts, in varying ways and to various degrees, rethink and reshape the Consumer Financial Protection Bureau’s (CFPB or Bureau) structure, agenda and approach, companies—notwithstanding the overall deregulatory trend of such activity—likely will experience continued uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions navigate today’s rapidly evolving regulatory environment, we present a concise retrospective and guide for what likely lies ahead. Amidst so much change, and in an environment redolent with deregulatory rhetoric, it is important to take an intermediate and even long view toward compliance as the ramifications of many decisions made today might not become apparent for years. Thus, as always, a commitment to best practices, a strong compliance culture, and a firm grasp on enduring requirements will serve CFS market participants well.

The shifting landscape

Despite a contentious legal battle over the CFPB’s leadership, Acting Director Mick Mulvaney has pressed forward with significant changes to the Bureau’s organization and priorities. For the time being, it appears that the Bureau has recused itself from certain aspects of overseeing the CFS industry, a stark departure from former Director Richard Cordray’s approach.

In less than six months, the new leadership has announced several political appointments to key CFPB positions, and issued no fewer than ten requests for information (RFIs), asking the public to weigh in on nearly every aspect of the Bureau—enforcement, supervision, rulemaking, market monitoring and education activities, among others. In addition to a comprehensive review of all CFPB rules, the Bureau has specifically focused on rolling back requirements under its payday, prepaid card and HMDA-related rules. 

Congress too has joined the fray, striking down the CFPB’s arbitration rule in November 2017. Bills have been introduced to subject the Bureau to Congressional appropriations—a proposal the Trump Administration adopted in its 2019 budget, which Acting Director Mulvaney also underscored as part of his proposed reforms. Other proposals would reconstitute the Bureau as a multi-member, bipartisan commission.

Separately, as our collective memory of the financial crisis fades and as they have become more accustomed to the CFPB as litigant, some courts appear to be less deferential to the CFPB’s enforcement efforts. Companies and institutions are increasingly challenging the Bureau’s civil and administrative actions, rather than swiftly settling.

The current CFPB leadership has also signaled a new approach to enforcement that includes the use of more traditional legal theories, de-emphasizing the broad and aggressive use of the Bureau’s UDAAP authority as an enforcement tool. Among other actions, the CFPB’s decision to remove its fair lending unit from the supervision and enforcement division, as well as its call for local enforcement of consumer protection laws likely will cause states to increase their enforcement activities. Indeed, several state attorneys general (AGs) have already signaled that they will use their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many ready to draw on or otherwise forming special consumer units. Beyond enforcement of law, state AGs, regulators and legislators also seem poised to revisit existing laws and regulations and issue guidance, as appropriate—all in the name of filling any void the CFPB might leave in its wake. Multistate coordination among these players remains possible, if not probable, in many instances.

A note on new technologies

Concurrent federal deregulation and increasing state oversight may pose unique challenges for tech, fintech and regtech companies as well as incumbent financial institutions leveraging new technologies. Although the Bureau’s Project Catalyst was designed and has the potential to balance oversight with the need to foster consumer-friendly innovation, the current CFPB leadership has yet to take a position on whether it will revamp this initiative, and if so how—regardless of how it will otherwise address fintech solutions in the CFS market.

Other federal agencies, including the federal banking regulators, have yet to demonstrate how they will strike this balance and manage tech innovation in the CFS sector. States, meanwhile, may seek to clarify and enforce time-tested laws and regulations, while also possibly offering a multiplicity of differing responses. All CFS market participants using or offering innovative approaches and products are thus encouraged to navigate this shifting landscape carefully by ensuring a sound understanding of new technologies, an ability to manage their risks, and an ability to communicate their risk management approach, when and as appropriate, to regulators.

CFPB structural changes

The appointment of Mick Mulvaney as CFPB Acting Director has led to significant changes to the Bureau’s structure and how it operates. 

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Mortgage origination and servicing

In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market.

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Small-dollar loans

The CFPB has historically focused on how to address so-called "debt traps" associated with payday lending.

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Student loans

The CFPB has historically focused on both federal and private student loans, with an increasing focus on loan servicing practices.

Pencil Erasers

Auto finance

The CFPB has previously targeted the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

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Marketplace lending

The CFPB has traditionally not prioritized  marketplace lenders in its supervisory and enforcement efforts. The new CFPB leadership is expected to maintain the status quo and rely on state attorneys general to oversee industry participants.

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Payment processing

The CFPB finalized its Prepaid Card rule in October 2017. It remains unclear, however, whether the CFPB’s new leadership will leave the rule intact, or instead seek to further delay or alter the rule’s requirements as part of the Bureau’s ongoing review of CFPB regulations.

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Auto finance

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Supervision

The CFPB has previously targeted the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.

“Delinquency rates among auto finance lenders are considerably higher and rising, especially for subprime borrowers, in part reflecting differences in underwriting standards.”

Wilbert van der Klaauw, Senior Vice President, Federal Reserve Bank of New York1

Notably, the CFPB issued rules for large nonbank auto finance companies, as well as amended its Supervision and Examination Manual to cover fair marketing and disclosure of financing terms, accurate credit reporting and fair collection efforts. Going forward, the CFPB is expected to shift its focus away from fair lending issues involving indirect auto lending,4 concentrating principally on illegal vehicle repossessions,5 protecting service members and possibly, origination of subprime debt. 

 

Origination

CFPB examinations concerning automobile loan origination revealed deceptive advertising practices used by auto lenders, particularly for add-on gap coverage products and disclosure of payment deferral terms.6 The Bureau further highlighted CMS weaknesses that result in deficient board of director oversight, as well as failure to follow policies and procedures, track employee training, and adequately follow up on consumer complaints.7 

 

Servicing

The Bureau’s supervisory efforts addressed automobile loan servicing deficiencies by focusing on illegal repossessions and inaccurate credit reporting activities. Specifically, the CFPB focused on unfair or abusive practices used by servicers to wrongfully repossess consumers’ vehicles, charge repossession and storing fees, as well as servicers’ retention of consumers’ personal property to leverage payment.8 In addition, the Bureau noted instances of inaccurate credit reporting activities in violation of FCRA.9

In December 2017, the Government Accountability Office (GAO) nullified a previous CFPB Compliance Bulletin 2013-02, deeming it a rule that should have been submitted for Congressional review. The bulletin targeted dealer markups using disparate impact discrimination theories under ECOA.10 The Senate recently passed a measure to repeal the CFPB’s auto lending bulletin under the Congressional Review Act (CRA). The Senate’s vote is expected to be followed by the House, but the effect of such repeal remains unclear considering that the CRA does not limit the CFPB’s enforcement authority. Whether the new CFPB leadership will revise or resubmit the rule for Congressional review also remains an open question.

“I do not doubt the sincerity of the good actors that may be trying to navigate difficulty the Madden ruling potentially caused [but the CHOICE Act] will go much further to allow other parties . . . to evade or outright disregard state-level laws.”

House Financial Services Committee, Ranking Member, Rep. Maxine Waters (D-CA)2 

 

Enforcement

The CFPB previously brought enforcement actions against auto lenders for UDAAP, ECOA and FCRA violations, frequently through joint actions with the DOJ. Notable violations included discriminatory auto loan pricing due to pricing and compensation system flaws,11 as well as abusive financing practices, such as hiding finance charges and misleading consumers about APR rates.12 In 2018, in a joint enforcement action with the OCC, the Bureau also notably reached an unprecedented US$1 billion settlement with a major financial institution for auto loan servicing abuses that include forcing consumers to buy mandatory auto loan insurance coverage.  The FTC also sued one automotive group for enticing consumers, particularly non-English speakers and individuals with poor credit, into its dealerships with misleading advertisements, credit offers, and add-on products.13

In addition, DOJ investigations resulted in a US$907,000 redress against a major auto lender for illegal repossession of servicemembers’ vehicles without court orders in violation of the SCRA,14 as well as a US$760,000 settlement with two affiliated Auto finance companies on similar grounds.15 The DOJ has also filed at least one other similar lawsuit against a subprime indirect auto lender.16

Given the new CFPB leadership’s decreased focus on UDAAP as an enforcement tool, and the reassignment of the CFPB’s fair lending office to educational activities,17 we anticipate a decline in CFPB enforcement actions against the auto lending industry.

 

Litigation

Unlike the CFPB, the states have not signaled such a shift in focus, and will likely rely on state prohibitions on unfair and deceptive acts or practices to protect consumers in this market segment. In 2017, states mainly targeted indirect auto lenders and successfully reached settlements with industry participants, notably:

  •  Massachusetts: The Massachusetts AG has been particularly active in this market segment. One complaint filed in September 2017 alleges that a used car dealer engaged in predatory sales and loan practices by routinely trapping consumers in an unsustainable and unfavorable sales package that included the sale of defective vehicles through high interest-rate loans and a mandatory subscription to the dealer’s car service center.18 The AG also successfully imposed civil penalties and a permanent injunction against an unlicensed online auto title lender that made and collected on loans with undisclosed, unfair and deceptive terms, including illegally high interest rates and abusive interest-only payment schedules.19 A similar suit was also filed by North Carolina’s AG. In addition, a joint investigation between the Massachusetts AG and the Delaware AG resulted in a settlement with a large, global bank for originating unfair and usurious subprime automobile loans20 The Massachusetts Commissioner of Banks also entered into a consent order with a motor vehicle sales finance company to cease illegal sales financing and collections activities, and to maintain an effective compliance management system that includes furnishing monthly reports to the Commissioner21 
  • New York: The AG settled with two automobile dealer groups for deceptive practices that resulted in inflated car prices through the unlawful sale of “after-sale” credit repair and identity theft protection services that often added thousands of dollars to the purchase price of vehicles22 
  • Florida: The AG settled with a car dealership over business practices, including the use of devices to track vehicles without customer knowledge or consent, and wrongful repossession of those vehicles23 

Going forward, increased state involvement may also lead to increased class action litigation targeting the auto lending industry.

 

Fintech outlook and auto finance

Fintechs in this space generally focus on pairing consumers with financing offers (both for vehicle purchases and leases) by either establishing a partnership with an auto finance company,24 or by allowing consumers to compare different financing options online.25 While such new tech-focused methods—as seen in the residential mortgage space—do not appear to show any sign of subsiding, we note that there remains fair lending risk in this area, especially for new market entrants who may not be as familiar or experienced with applicable laws and regulations. Even if the CFPB does not prioritize federal fair lending enforcement, state fair lending laws will still apply and state-level scrutiny of fair lending issues is likely to increase.

 

State spotlight

In addition to enforcement and litigation efforts conducted in the states, we also note the following developments:

  • Increased cooperation: State AGs are considering the creation of a multistate task force to target the auto finance industry and, more specifically, the subprime segment.26 Cooperation efforts have resulted in joint investigations and settlements. Additional multistate investigations can reasonably be expected in 2018
  • Rulemaking: GAO’s decision to invalidate the CFPB’s 2013 Indirect Auto Lending Bulletin may incentivize state AGs to issue similar rules or guidance to replace the bulletin

    
    

 

1 Fred O. Williams, NY Fed: Credit Card Delinquencies Continue To Rise, Nasdaq (Nov. 14, 2017), https://www.nasdaq.com/article/ny-fed-credit-card-delinquencies-continue-to-rise-cm877445.
2 12 CFR 1090.108. See also https://files.consumerfinance.gov/f/201506_cfpb_defining-larger-participants-of-the-automobile-financing-market-and-defining-certain-automobile-leasing-activity-as-a-financial-product-or-service.pdf. The new rule went into effect on August 31, 2015. 
3 CFPB, Automobile Finance Examination Procedures (Jun. 10, 2015), https://www.consumerfinance.gov/policy-compliance/guidance/supervision-examinations/automobile-finance-examination-procedures
4 See CFPB Supervisory Highlights, Issue 13 (Fall 2016), at 5: http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf.
5 CFPB Supervisory Highlights, Issue 16 (Summer 2017), at 5-6: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
6 CFPB Supervisory Highlights, Issue 12 (Summer 2016), at 4-6: https://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_12.pdf.
7 CFPB Supervisory Highlights, Issue 13 (Fall 2016), at 3-4: http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf.
8 CFPB Supervisory Highlights, Issue 13 (Fall 2016), at 5-6: http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf; CFPB Supervisory Highlights, Issue 16 (Summer 2017), at 5-6: https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf.
9 CFPB Supervisory Highlights, Issue 13 (Fall 2016), at 5: http://files.consumerfinance.gov/f/documents/Supervisory_Highlights_Issue_13__Final_10.31.16.pdf.
10 Under Compliance Bulletin 2013-02, CFPB sought to tackle target dealer markups, a practice where an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer’s retail installment sales contract. Dealers were thereby allowed by indirect lenders to exercise significant pricing discretion, opening the door to discrimination. Many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. See https://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf. See also https://www.gao.gov/assets/690/688763.pdf.
11 Consumer Fin. Prot. Bureau v. Toyota Motor Credit Corp., 2016-CFPB-0002 (Feb. 2, 2016). 
12 Consumer Fin. Prot. Bureau v. Y King S Corp., 2016-CFPB-0001 (Jan. 21, 2016).
13 FTC, Los Angeles-Based Sage Auto Group Will Pay $3.6 Million to Settle FTC Charges (Mar. 14, 2017), https://www.ftc.gov/news-events/press-releases/2017/03/los-angeles-based-sage-auto-group-will-pay-36-million-settle-ftc.Consumer.  
14 Dep’t of Justice, Justice Department Secures $907,000 from Citifinancial for Illegally Repossessing Active Duty Servicemembers’ Vehicles (Sept. 18, 2017), https://www.justice.gov/opa/pr/justice-department-secures-907000-citifinancial-illegally-repossessing-active-duty.
15 United States v. Westlake Srvs., LLC, et al., case no. 2:17-cv-07125 (C.D. Cal. Sept. 27, 2017).
16 Dep’t of Justice, Justice Department Sues Subprime Auto Lender in Orange County, California, for Illegally Repossessing Servicemembers’ Cars (Mar. 28, 2018), https://www.justice.gov/opa/pr/justice-department-sues-subprime-auto-lender-orange-county-california-illegally-repossessing
17 Kate Berry, CFPB’s Mulvaney Strips His Fair-Lending Office Of Enforcement Powers, American Banker (Feb. 1, 2018), https://www.americanbanker.com/news/cfpbs-mulvaney-strips-his-fair-lending-office-of-enforcement-powers.
18 Mass. Attorney Gen. Office, AG Healey Sues Auto Dealer JD Byrider for Predatory Sales and Loan Practices (Sept. 26, 2017), http://www.mass.gov/ago/news-and-updates/press-releases/2017/2017-09-26-jd-byrider-lawsuit.html
19 Mass. Attorney Gen. Office, AG Obtains Judgment Voiding Hundreds of Illegal Loans to Massachusetts Consumers in Case Against Online Auto Title Lender (May 25, 2017), http://www.mass.gov/ago/news-and-updates/press-releases/2017/2017-05-25-voiding-hundreds-of-illegal-loans.html.
20 Mass. Attorney Gen. Office, AG Healey Secures $22 Million From Santander in First-in-the-nation Settlement Involving Subprime Auto Loans (Mar. 29, 2017), http://www.mass.gov/ago/news-and-updates/press-releases/2017/santander-subprime-auto-loans.html.
21 Mass. Div. of Banks v. New City Funding Corp., 2016-009 (Mar. 24, 2017), https://www.mass.gov/consent-order/new-city-funding-corp.
22 NY Attorney Gen. Office, A.G. Schneiderman Announces Over $1 Million In Settlements With Two Auto Dealer Groups For Deceptive Practices That Resulted In Inflated Car Prices (Oct. 11, 2017), https://ag.ny.gov/press-release/ag-schneiderman-announces-over-1-million-settlements-two-auto-dealer-groups-deceptive.
23 Fla. Attorney Gen. Office v. Beach Blvd, Automotive, Inc., et al., case no. 16-2010-CA-10947 (May 2, 2017), http://financialserviceslawmonitor.lexblogplatformthree.com/wp-content/uploads/sites/260/2017/06/Beach-Blvd-Consent-Order.pdf.
24 AutoFi has partnered with Ford Motor Credit to connect dealers to lenders so customers can finance and purchase vehicles online in minutes. See, e.g., AutoGravity, Blinker, and Honker.
25 Alan Wingfield, Brooke Conkle, Amir Shachmurove, Ashley L. Taylor Jr., Federal Deregulation Opens the Door for State-Level Threats to Auto finance, Business Law Today (Jan. 16, 2018), https://businesslawtoday.org/2018/01/federal-deregulation-opens-the-door-for-state-level-threats-to-auto-finance.
26 Alan Wingfield, Brooke Conkle, Amir Shachmurove, Ashley L. Taylor Jr., Federal Deregulation Opens the Door for State-Level Threats to Auto Finance, Business Law Today (Jan. 16, 2018), https://businesslawtoday.org/2018/01/federal-deregulation-opens-the-door-for-state-level-threats-to-auto-finance

 

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