Financial Services Law

FDIC Clarifies Supervision of Bank/Third-Party Payment Processor Relationships

In an effort to rectify “misunderstandings” and get out of the line of political fire, the Federal Deposit Insurance Corporation (FDIC) issued updated guidance to clarify its supervisory approach to institutions establishing account relationships with third-party payment processors.

The misunderstandings in question: Operation Choke Point and attempts by the Department of Justice and the banking agencies to squeeze certain businesses, such as payday lenders, out of the banking system.

FDIC Financial Institutions Letters (FIL) FIL-41-2014 explains that existing guidance and an informational article published by the regulator provided categories of businesses that had been associated by the payments industry with higher-risk activity. The lists – which included debt consolidation, online gambling, credit repair, payday and subprime loans, pornography, pharmaceutical sales, and online firearms and tobacco sales companies – were intended to be illustrative, and not a ban on relationships with such businesses, the FDIC said.

The lists “have led to misunderstandings” regarding the regulator’s supervisory approach, “creating the misperception that the listed examples of merchant categories were prohibited or discouraged,” the FDIC wrote.

In fact, “it is FDIC’s policy that insured institutions that properly manage customer relationships are neither prohibited nor discouraged from providing services to any customer operating in compliance with applicable law.” Instead, the FDIC “encourages depository institutions to serve their communities,” and when “an institution is following the outstanding guidance, it will not be criticized for establishing and maintaining relationships with [third-party payment processors].”

To clarify its guidance, the FDIC removed the lists of merchant categories from prior publications, including FIL-127-2008, Guidance on Payment Processor Relationships; FIL-3-2012, Payment Processor Relationship, Revised Guidance; FIL-43-2013, FDIC Supervisory Approach to Payment Processing Relationships With Merchant Customers That Engage in Higher-Risk Activities; and an article from September 2011, “Managing Risks in Third-Party Payment Processor Relationships.”

For example, the updated FIL-43-2013 emphasizes that the “proper management of relationships with merchant customers engaged in higher-risk activities is essential,” and financial institutions “need to assure themselves that they are not facilitating fraudulent or other illegal activity.”

To achieve compliance with regulatory standards, the FDIC reminded financial institutions “to perform proper risk assessments, conduct due diligence sufficient to ascertain that the merchants are operating in accordance with applicable law, and maintain appropriate systems to monitor these relationships over time.”

FDIC examinations will focus on “whether financial institutions are adequately overseeing activities and transactions they process and appropriately managing and mitigating related risks.”

A lack of adequate oversight or failure to properly manage such relationships could result in financial or legal risk, the FDIC cautioned, but those institutions that operate with appropriate systems and controls “will not be criticized for providing payment processing services to businesses operating in compliance with applicable law.”

To read FIL-41-2014, click here.

Why it matters: Industry and legislative criticism caused the FDIC to choke on its own pronouncements of businesses considered unsavory in banking. However, bankers and their third-party payment processor customers should take no compliance comfort from the FDIC’s delisting of suspect merchants. As the FDIC recoils from its own relationship risk hit, do not expect examiners to back off from looking for fraud in all the bank’s spaces. Bank management will continue to have the burden of proof in examinations that they have adequate monitoring systems and controls in their third-party payment businesses and are not facilitating illegal activities or unauthorized, unfair or deceptive practices resulting in harm to consumers.

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CFPB Opens Door for Prepaid Card, Nonbank Product Complaints

Expanding its collection of consumer complaints, the Consumer Financial Protection Bureau (CFPB) announced that it will now accept complaints regarding prepaid cards – including gift cards, benefit cards, and general purpose reloadable cards – as well as nonbank products, such as debt settlement services, credit repair services, and pawn and title loans.

Since the Bureau began taking complaints about credit cards in July 2011, it has continued to add new categories, including mortgages, bank accounts and services, private student loans, auto and other consumer loans, credit reporting, debt collection, payday loans, and money transfers.

The new additions are “another important step to expand” the CFPB’s efforts, director Richard Cordray said in a statement. “By accepting consumer complaints about prepaid products and certain other services we will be giving people a greater voice in these markets and a place to turn to when they encounter problems.”

Under the rubric of prepaid cards, the Bureau will accept complaints about gift cards, general purpose reloadable cards (which will be the subject of a proposed rule from the CFPB in coming months), and benefit cards. Complaints can be submitted about problems managing, opening, or closing an account; overdraft issues and incorrect or unexpected fees; frauds, scams, or unauthorized transactions; advertising, disclosures, and marketing practices; and adding money and savings or rewards features.

For debt settlement and credit repair services, the CFPB said complaints about excessive or unexpected fees; advertising, disclosures, and marketing practices; customer service issues; and frauds or scams are all reportable.

Pawn and title loan companies may face complaints to the Bureau about unexpected charges or interest fees; loan application issues; problems with the lender correctly charging and credit payments; issues with the lender repossessing, selling, or damaging the consumer’s property or vehicle; and the inability to contact a lender.

When a complaint is made to the Bureau, it requests that companies respond within 15 days with a description of the steps they have taken, or plan to take. With the exception of the most complicated complaints, the CFPB said it expects companies to close complaints within 60 days.

To read the CFPB’s press release, click here.

Why it matters: The creation of additional categories of complaints comes on the heels of the CFPB’s proposal to include consumer narratives as part of the Consumer Complaint Database, accompanied by any response to the complaint supplied by the identified financial institution. Calling the move a “natural extension” of its complaint process, the Bureau said it will spur competition among businesses for consumer satisfaction, increase the use of the complaint database generally, and enhance the agency’s consumer response function. In addition to privacy concerns, industry has expressed displeasure with the disclosure of complaints that are totally unverified and that the risk of reputational damage is not mitigated simply by the ability to post a response.

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Feds, States Sweep Country for Mortgage Relief Scams

In an enforcement sweep dubbed “Operation Mis-Modification,” the Federal Trade Commission (FTC), Consumer Financial Protection Bureau (CFPB), and 15 state Attorneys General have targeted “foreclosure relief scammers that have undertaken marketing tactics to rip off distressed homeowners across the country.”

Nine lawsuits were filed at the time of the announcement with more to come.

Each entity filed its own actions. In three federal complaints, the CFPB claimed that the defendants accepted more than $25 million in illegal advance fees before obtaining a loan modification. The defendants inflated success rates and the likelihood of obtaining a modification, the Bureau said, promising that consumers could be saved substantial sums in mortgage payments.

Consumers were misled to think they were eligible for a loan modification – or would receive relief in the near future – when the defendants had not contacted the lenders or obtained any meaningful relief, the CFPB said.

Because the defendants are law firms or associated with law firms, they also tricked borrowers into believing they would receive legal representation, the CFPB alleged. Most borrowers never spoke with an attorney or even had their files reviewed by a lawyer. For example, the Florida-based Hoffman Law Group recruited consumers to join class actions to receive loan modifications or foreclosure relief, charging an up-front fee of $6,000 with a $495 monthly maintenance fee, according to the CFPB’s complaint.

The Bureau’s suits – filed in California, Florida, and Wisconsin – allege violations of the Consumer Financial Protection Act of 2010 and/or Regulation O (formerly known as the Mortgage Assistance Relief Services Rule), which prohibits mortgage foreclosure rescue and loan modification services from collecting a fee until a homeowner has a written offer in hand from their lender or servicer that they are willing to accept. The CFPB seeks injunctions, civil fines, restitution and disgorgement of alleged ill-gotten revenues.

The FTC filed six lawsuits, charging defendants with violations of the Federal Trade Commission Act and Regulation O.

Consumers were duped by an alleged success rate of 90 percent advertised by Utah firm Danielson Law Group while CD Capital Investments reeled in consumers by claiming affiliation with the Obama Administration’s “Making Home Affordable Program” or other government entities, the FTC charged in two of its complaints. In each case, the agency requested an asset freeze and halt to the defendants’ operations; three judges have already granted such orders.

The state AGs promised to catch up to the feds with an additional 32 actions set to be filed across the country.

To read the CFPB’s press release and complaints, click here.

To read the FTC’s press release and complaints, click here.

Why it matters: As evidenced by the number of regulators involved and lawsuits filed, foreclosure relief and mortgage assistance scams are being closely monitored. In its release, the FTC noted that the six new cases bring its total to 48 actions since 2008. In addition, it will be interesting to see whether any of the state Attorneys General lawsuits will rely upon Section 1042 of Dodd-Frank, which allows a state AG to bring a civil action for violation of Dodd-Frank’s prohibition on unfair, deceptive or abusive acts or practices (UDAAP).

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CFPB Report: Overdraft Fees “Impose Heavy Costs” on Consumers

Expressing concern about the cost to consumers of opting in to receive overdraft protection, the Consumer Financial Protection Bureau (CFPB) released a new report furthering speculation about regulatory action.

According to the Bureau, the majority of debit card overdraft fees are incurred on transactions of $24 or less and repaid within three days. “Put in lending terms, if a consumer borrowed $24 for three days and paid the median overdraft fee of $34, such a loan would carry a 17,000 percent APR,” the CFPB said.

In its report “Data Point: Checking account overdraft,” the CFPB gives a summary of the data it reviewed from a set of large banks under its supervision, which it said reflected “a significant portion of U.S. consumer checking accounts.” The report focuses on accounts that have affirmatively opted in to overdraft protection on ATM and onetime debit card transactions pursuant to the 2010 revisions to 2010’s Regulation E.

“Today’s study raises concerns that despite these recent changes, a small number of consumers are paying large amounts for overdraft, often for advances of small amounts of money for short periods of time,” the Bureau said. “Today’s report finds that among the banks in the study, overdraft and NSF [non-sufficient fund] fees represent more than half of the fee income on consumer checking accounts.”

The Bureau noted that the increased use of debit cards plays an important factor when considering overdrafts, as it is the most common way consumers access money in their accounts. The study found that consumers use their debit cards for purchases about 17 times each month, while consumer checkwriting and automatic bill payments each average only about 3 times per month. The wide use of debit cards can mean more fees for those who opt in for overdraft service.

Other findings from the report include that the majority of overdraft fees (almost 75 percent) are paid by around just 8 percent of customers. Consumers who opt in for overdraft fee service are paying significantly more for their checking accounts than non-opted-in accounts. On average, opted-in accounts pay almost $260 per year in overdrafts and NSF fees compared to just over $35 for non-opted-in accounts.

Transactions triggering overdraft fees are generally “quite small,” the CFPB wrote. For all types of transactions, the median amount leading to an overdraft fee is $50; for overdrafts created by debit cards, that amount is reduced to just $24. Seventy-six percent of consumers bring their accounts positive within one week, the report found, with more than half becoming positive within three days.

The Bureau said the propensity to overdraft generally declines with age and that consumers who opt in for overdraft protection are three times more likely to have more than 10 overdrafts per year than accounts that have not opted in, noting that “disentangling the causal nature” of the relationship between opt-in status and overdrafting requires further analysis.

To read the report, click here.

Why it matters: Could banks be facing additional regulation for overdrafts created by ATM and onetime debit card transactions? In its 2014 rulemaking agenda issued earlier this year, the CFPB targeted February 2015 for “prerule activities” relating to overdrafts. The new report, combined with a report last year, seems to indicate that additional regulation is a strong possibility. Further studies “on how overdraft works and how it is affecting consumers” are planned, the Bureau said, adding that it is “weighing what consumer protections are necessary for overdraft and related services.”

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