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Preparing for a Visit from the CFPB. David Bailey, Kentucky Higher Education Assistance Authority John Culhane, Ballard Spahr Dino Tsibouris, Tsibouris & Associates. CFPB Issues Affecting Loan Servicing. Dino Tsibouris (614) 360-3133 [email protected] Service Providers.

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Preparing for a visit from the cfpb

Preparing for a Visit from the CFPB

David Bailey, Kentucky Higher Education Assistance Authority

John Culhane, Ballard Spahr

Dino Tsibouris, Tsibouris & Associates



Service providers
Service Providers

CFPB Supervision and Examination Manual (October 31, 2012)

Education Loan Examination Procedures (December 17, 2012)

Rule to Supervise Nonbanks (June 26, 2013)

Proposed Rule: Student Loan Servicing “Larger Participants” (March 28, 2013)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers1
Service Providers

CFPB Bulletin 2012-03

“Expects supervised banks and nonbanks to oversee … service providers … in a manner that ensures compliance with Federal consumer financial law”

Supervised nonbanks include any non-bank making “private educational loans”

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers2
Service Providers

  • CFPB Bulletin 2012-03

  • “Supervised service providers” provide services to:

    • Supervised banks and nonbanks

    • Substantial number of small insured depository institutions or small insured credit unions

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb proposed rule nonbank student loan servicers
CFPB Proposed RuleNonbank Student Loan Servicers

Apply to those with more than 1M accounts

Would gather reports and conduct examinations

Focus on federal consumer protection laws

Harmonize legal compliance between bank and nonbank servicers

Federal and private loan servicing

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb proposed rule nonbank student loan servicers1
CFPB Proposed RuleNonbank Student Loan Servicers

  • Response to complaints from Ombudsman’s report

    • “Confusion”

    • “Dead ends”

    • “Runarounds”

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers3
Service Providers

Any person providing a material service to a covered person

Use of service providers is appropriate

Overcome resource constraints

Develop and market new products and services

Obtain expertise

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb supervision and examination manual
CFPB Supervision and Examination Manual

Risk assessment template – compliance tool

Risk of loss or injury from violation of Federal consumer financial law

Measures risk of business or entity and quality of controls

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb supervision and examination manual1
CFPB Supervision and Examination Manual

  • Product risk for UDAAP, discrimination, or other regulatory issues:

    • Bundling products to hide costs

    • Pay fees/lose benefits for termination

    • Charges for customer service or information

    • Inappropriate credit decision discretion

    • Loans not underwritten based upon ability of customer to make loan payments

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb supervision and examination manual2
CFPB Supervision and Examination Manual

  • Product risk for UDAAP, discrimination, or other regulatory issues

  • Profits depend on fees

  • Terms subject to change

  • Pricing structure makes total cost hard to understand

  • Bundling products to hide costs

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Cfpb supervision and examination manual3
CFPB Supervision and Examination Manual

  • Consumers to whom marketed:

    • Students

    • Consumers with limited education

    • Elderly

    • Low-income consumers

    • Limited financial experience

    • Low credit scores

    • Special concern if in multiple categories

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers4
Service Providers

Conduct thorough due diligence

Verify service provider understands and is capable of complying with Federal consumer financial law

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers5
Service Providers

Review compliance policies, procedures, internal controls

Review compliance training materials, oversight of employees

Describe compliance duties of service provider in contract and penalties for violations

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Service providers6
Service Providers

Establish lender internal controls to monitor service provider

Take prompt action to address problems

Terminate agreement where appropriate

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Plan ahead
Plan Ahead

  • Read the CFPB Supervision and Examination Manual

  • Use it as a self-test

  • Address the topics you see, explain why a fee, product, or service is acceptable by identifying a sound and reasonable basis

  • Consider changing if needed

  • Prepare to explain why steps are not taken

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Preparing for CFPB Reviews, Some Lessons from CFPB Exams, and Some Lessons from CFPB Consent Orders and Cases

John L. Culhane, Jr.Partner

Ballard Spahr LLP

Phone: 215.864.8535

Email: [email protected]


Preparing for cfpb reviews
Preparing for CFPBReviews

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Vigorous cfpb activity
Vigorous CFPB Activity

Numerous CFPB examinations of lenders and service providers

Civil Investigative Demands (CIDs) served on debt collectors collecting student loans (federal and private)

CFPB field hearing on student loan debt (the root of all evil?)

Continuing public statements by CFPB regarding student loans (Ombudsman’s Report)

Continued pressure from various consumer groups and oddly, certain trade associations

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Overview of exams
Overview of Exams

As of July 1, CFPB had over 300 examiners, nearly 100 of whom are commissioned, out conducting exams

Exams still follow a more or less standard procedure and the pace seems unchanged

Exams begin with the scoping session, then the first day letter, then the onsite exam

As of November 1, enforcement lawyers will not be present (will anything really change?)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Overview of cids
Overview of CIDs

As of July 1, CFPB had almost 600 employees in Supervision, Fair Lending and Enforcement

CFPB has been using the lawyers on the enforcement staff to conduct quasi-exams

Rather than being targeted to specific practices, CID seeks to assess compliance with specified federal consumer financial law(s) (e.g. FDCPA)

Initial requests for interrogatories and document production with numerous follow-up requests

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Need for formality
Need for Formality

CFPB expects a great deal of formality

Robust compliance management system is essential

Written policies and procedures are likewise crucial

Regular monitoring and auditing for compliance is also necessary

Preference for system controls versus reliance on individuals

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Need for adequate staffing
Need for Adequate Staffing

CFPB expects to see a robust compliance management system with a CCO or equivalent

CFPB likewise expects to see adequate staffing at all significant contact points

Inadequate staffing is viewed as an unfair, deceptive or abusive practice

Notion is that inadequate staffing is intended to discourage or otherwise hinder complaints

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Anticipate privilege issues
Anticipate Privilege Issues

Privilege issues will come up in examinations (although not with CIDs)

Industry-supported legislation approved December 20, 2012 (P.L. 112-215)

Added CFPB to list of agencies that may receive information and share it with other federal regulators without loss of privilege

Still leaves a number of open questions as to CFPB authority and best practices

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Some lessons from cfpb exams
Some Lessons from CFPB Exams

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Marketing issues
Marketing Issues

CFPB reviews both consumer marketing and, in the case of service providers, commercial marketing to prospective clients

Recurring issues with TILA trigger terms, particularly with online advertisements and now with text messages

Employee compensation issues still linger particularly with marketing practices related to for-profit schools

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Application processing issues
Application Processing Issues

Failure to comply with the provision, content, and timing requirements for adverse action notices is a recurring theme

Substantive compliance then is taken as an indication that the compliance management system is deficient since it apparently lacks controls to detect and prevent problems

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Private education loan disclosure issues
Private Education Loan Disclosure Issues

Examination for technical compliance with timing and substantive requirements for the three private education loan disclosures

Regular scrutiny of practices that are part of the private education loan disclosure regimen that can help prevent over-borrowing (school certification, reduction in loan amount, right to cancel loan)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Credit reporting issues
Credit Reporting Issues

CFPB always looks very carefully at credit reporting issues (report as gateway to credit)

Emphasis on steps taken to ensure accuracy and integrity of reporting

Emphasis on responses to disputes (e-Oscar and direct disputes) and on adequacy of investigations (records and other material)

Emerging emphasis on the permissible purpose for obtaining the report (account reviews)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Payment processing issues
Payment Processing Issues

CFPB seems to believe that the industry goes out of its way to disadvantage borrowers

Concerns continue to linger about prompt crediting (why?)

Heightened emphasis on application of partial prepayments to loan principal

Equally strong emphasis on allowing borrower to allocate payments or prepayments between multiple loans

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Loss mitigation issues
Loss Mitigation Issues

Continued emphasis on providing adverse action notices when denying applications for assistance or benefits of any kind

Heightened scrutiny for unfair, deceptive or abusive practices in connection with descriptions of options and with fulfillment of options

Developing notion that the lack of comprehensive loss mitigation procedures is somehow itself an unfair, deceptive or abusive practice (?)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Some lessons from cfpb consent orders and cases
Some Lessons from CFPB Consent Orders and Cases

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Referrals
Referrals

Focus on illegal referral fees paid by bank and non-bank lenders (no CFPB student loan order yet)

In the Matter of Paul Taylor, Paul Taylor Homes Limited, and Paul Taylor Corp., File No. 2013-CFPB-0001

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Kickbacks
Kickbacks

Focus on illegal kickbacks paid by companies in exchange for business (no CFPB student loan order yet)

Consumer Financial Protection Bureau v. Genworth Mortgage Insurance Corporation, Case No. 1:13-cv-21183-JLK (S.D. Fla. Consent Order dated April 5, 2013) (similar cases against three other insurance companies)

Consumer Financial Protection Bureau v. Borders & Borders, PLC, Case No. 3:13-mc-99999 (W.D. Ky. Filed Oct. 24, 2013)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Fee revenue
Fee Revenue

Focus on illegal or non-traditional sources of fee revenue (no CFPB student loan order yet)

Consumer Financial Protection Agency v. Mission Settlement Agency, et al., Case No. 1:13-cv-3064 (E.D.N.Y. filed May 7, 2013)

Consumer Financial Protection Bureau v. Morgan Drexen, Inc., Case No. SACV13-01267 JST (JEMx) (C.D. Cal. Filed Aug. 20, 2013)

Consumer Financial Protection Bureau v. Meracord LLC and Linda Remsberg, Case No. 3:13-cv-05871 (W.D. Wash. Filed Oct. 3, 2013)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Ancillary products
Ancillary Products

Focus has been on ancillary products (fraud prevention, credit report monitoring, and credit insurance) as a waste of money and thus ripe for unfair, deceptive or abusive practices

CFPB has taken a very close look at the marketing of these products and has not only entered into several consent orders with major credit card issuers, it has suggested it will do the same in the student loan industry

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Treatment of servicemembers
Treatment of Servicemembers

Focus on deceptive marketing and lending practices (no CFPB student loan order yet)

State AGs Settlement with QuinStreet, Inc. resulting from CFPB website review

In the Matter of U.S. Bank National Association, File No. 2013-CFPB-003

In the Matter of Dealers Financial Services, LLC, File No. 2013-CFPB-0004

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Vendor oversight
Vendor Oversight

Many consent orders (and some cases) involve at least an element of failed vendor oversight, particularly the ancillary product actions

Issues included failure to monitor marketing of benefits and failure to monitor delivery of benefits

Consent orders required companies to strengthen management of third party providers (internal audit program with expanded auditing when potential violations are noted)

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


Questions
Questions?

2013 Knowledge Symposium

November 5-7, 2013 ● St. Pete, Florida


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