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.
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.
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.
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.
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.
"The [Education] Department takes exception to the CFPB unilaterally expanding its oversight role . . . [t]he Department has full oversight responsibility for federal student loans.1"
US Department of Education
Supervision
The CFPB has historically focused on both federal and private student loans, with an increasing focus on loan servicing practices.
In part due to its change in leadership, in 2017, the CFPB shifted noticeably toward providing the student lending and servicing markets more pro-active guidance and away from the enforcement-oriented approach that had been predominant for some time. Still, we do not view this shift as a harbinger of more CFPB regulation. To the contrary, we anticipate the Bureau's Acting Director, guided by Trump Administration priorities, will continue to cede oversight of the federal student lending and servicing markets to the US Department of Education (ED). Additionally, we expect the Bureau's new leadership to seize on the low number of student loan-related complaints the CFPB receives relative to other areas as reason to focus attention on other market segments or narrow its efforts on specific activities within the student lending and servicing markets (e.g., collections). As in other areas, states may seek to fill any perceived voids left by the CFPB; however, in the student loan market in particular, ED preemption issues loom large and may limit the effectiveness of such efforts.
Federal student loans
The CFPB has previously focused on closing the gap between federal student loan borrowers' rights and the servicing practices that delay or deter borrowers' access to federal protections (e.g., federal loan forgiveness, income-driven repayment (IDR) plans). The CFPB updated its education loan examination procedures in June 2017 to indicate that the Bureau will evaluate whether loan servicers clearly describe loan forgiveness programs and conditions for participation in them, and accurately evaluate borrowers' eligibility and progress toward loan forgiveness.3 This follows a 2016 update to the CFPB's examination procedures to include an evaluation of IDR application processing.4
The Bureau's supervisory efforts in 2017 also highlighted an issue that arises from loan servicers' reliance on third-party enrollment reporting companies. When these companies relay erroneous information concerning student enrollment status, it can cause loan servicers to terminate deferments automatically and prematurely, while a borrower is still in school. Although such erroneous termination may be corrected, some loan servicers did not reverse the late fees (charged for non-payment during periods when the borrower should have been in deferment) and interest capitalization that resulted.5 The CFPB had previously found that data errors caused borrowers' next-to-last payment to be significantly smaller, leading to longer repayment plans, and thus increased the total amount of interest that accrued.6
It's important for New York to step up. When a student loan company breaks the law and misleads thousands of students into taking on loans they can't afford, that company should be held accountable. In the months ahead, I will continue doing exactly that.2
NY State Attorney General Eric T. Schneiderman
Private student loans
CFPB supervision has also extended to the practices of private student loan lenders and servicers. In 2017, the CFPB noted that some servicers do not allocate payments for multiple private student loans according to borrower instructions.7 Previously, the CFPB also targeted the limited options (e.g., forbearance) for borrowers experiencing financial hardship or severe disabilities, as well as difficulty accessing advertised loan benefits and protections.8
4.2%
Overall consumer complaints that were student loan-related (since CFPB’s creation)
Enforcement
Two notable pending enforcement actions in 2018 concern alleged improper student loan servicing and collection practices: The Bureau took action against the largest US student loan servicer for failing to provide routine servicing functions, including by preventing borrowers from enrolling in IDRs, misallocating payments and failing to ensure accurate credit reporting. 9 The Bureau also targeted a conglomerate of private student loan trusts, among others, that misplaced loan documentation and initiated illegal lawsuits by filing false affidavits through third-party debt collectors. A proposed consent order was filed,10 but it is unclear how the new CFPB leadership will proceed in light of its ongoing review of pending enforcement actions, which may alter how it moves them forward, if at all.11
In 2017, the Bureau's enforcement efforts focused on illegal servicing practices, including the charging of late fees and added interest, deferment irregularities, preventing borrowers from seeking important tax benefits (e.g., deduction of interest), as well as credit reporting violations involving borrowers' cosigners. The Bureau also targeted debt collection and debt relief issues, including a failure to prove that student debt was owed or within the applicable statute of limitations, filing false or misleading legal documents, and falsely implying an affiliation or endorsement by the federal government. Student loan debt relief scams were also the subject of a coordinated federal-state law enforcement initiative—Operation Game of Loans—led by the FTC in which it joined 11 states to bring 36 enforcement cases.12
$1.4 trillion
in outstanding loan balances spread across
40
million consumers
8 million
of whom are in default
Fintech outlook and student loans
New products and services, especially by fintech-driven market entrants and more established market participants with tech-forward approaches, may raise novel fair lending issues this year, notably:
New technology, including online platforms and the development of underwriting models using non-traditional sources of data (e.g., education and career details, income and cash flow, social media)13
New arrangements such as “Income-Share Agreements,” whereby students receive a fixed amount to pay for tuition and, in exchange, agree to pay back a fixed percentage of future income for a fixed number of years, in lieu of traditional student loans14
These have not been fully tested yet, and it is not clear how the new CFPB's leadership will approach these issues, or if it will defer to ED or the states.
State spotlight
New state laws. Various states have introduced new legislation or proposed bills to protect student borrowers, a trend that shows no signs of waning. California, Connecticut, the District of Columbia, Illinois and Washington have already enacted such laws,15 while Missouri, New Jersey, New York, Ohio and Virginia have proposed bills.16
ED may challenge new state laws. Despite these state initiatives, ED has published an interpretation that outlines why it believes states are preempted from regulating federal student loan servicing under the Higher Education Act (HEA),17 including state laws that prohibit the misrepresentation or omission of material information, unfair or deceptive acts or practices in so much as the laws “proscribe conduct Federal law requires” or “require conduct Federal law prohibits.” ED also states that the HEA specifically preempts state disclosure requirements for federal student loans.18
ED's interpretation extends this preemption to “informal or non-written communications to borrowers as well as reporting to third parties such as credit reporting bureaus.”19 ED also believes that “to the extent that it undermines uniform administration of the program,” preemption applies to state regulation for the servicing of private loans guaranteed by the federal government through the discontinued Federal Family Education Loan (FFEL) Program.20
Parallel state enforcement. The AGs of Pennsylvania, Washington and Illinois,21 have brought parallel suits to one notable CFPB enforcement action involving alleged unfair practices, including steering borrowers toward short-term forbearances and engaging in misleading collection tactics, among others.22 Even assuming a willing CFPB, these pending state actions, and others that may still follow, will complicate a global resolution.
Independent state enforcement. Other state AGs have also targeted violations of applicable laws covering a range of actors operating in this market segment. Although ED's preemption interpretation could limit the states in some respects, activities that are clearly within the states' purview will likely be subject to heightened enforcement scrutiny, including licensing violations (e.g., collections or debt adjustment), and enforcement of state laws against unfair or deceptive acts or practices that protect borrowers. State AGs may also seek to raise their constituents' awareness regarding federal student loan programs (e.g., the North Carolina College Tour),23 as well as advocate for the creation of simpler federal repayment plans. In 2017, AGs in New Jersey, Massachusetts, North Carolina and Florida brought or settled such student loan related-suits.24
