New Year, New CFPB? Kraninger Memo Sparks Debate

Financial Services Law

Perhaps setting the tone at the Bureau of Consumer Financial Protection (CFPB or Bureau), new Director Kathy Kraninger urged Bureau employees to “vigorously enforce the law” but refrain from presuming guilt about industry participants. And the new director is already facing a firestorm in connection with CFPB supervision of military lending and debt collection, while the Bureau continues to resolve holdover enforcement matters.

What happened

Staff Memo—As Kathy Kraninger began her term as the new director of the CFPB, speculation ran rampant about the direction in which she might take the Bureau: What role will CFPB supervisory guidance play in the Kraninger era? Will she carry the mantle of both Congress and former Acting Director Mick Mulvaney by dismantling much of such guidance completely? In what ways will she hold regulated entities accountable?

While the jury is still out on these questions, an internal staff memo dated January 2, 2019, sent by Kraninger to employees of the CFPB, may offer some indication of the direction she wishes her supervisory and enforcement personnel to take.

Said Kraninger, “We must do our work with an open mind and without presumptions of guilt, and to always carefully weigh the costs and benefits to consumers of our enforcement activities and regulatory rulemakings,” according to the email, obtained by American Banker. “On my watch as [d]irector, the CFPB will vigorously enforce the law. I also want the Bureau to respect the rights of all we serve and interact with, to safeguard their personal information and to be transparent in its operations.”

The memo—which, according to the article, also emphasized a “team” approach—suggests that Kraninger may be moving away from Mulvaney’s more antagonistic methods while stopping well short of Richard Cordray’s consumer-friendly approach. Put simply, regulated entities are not presumptively guilty of wrongful acts and should not be treated as the enemy.

Kraninger’s email may also provide insight into her interpretation of the oft-debated CFPB power to take action against “abusive” acts and practices conferred by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The email implies a move away from finding a practice “abusive” simply because the Bureau does not approve of a business activity, and toward taking action only against acts that explicitly violate the law.

Military Lending Act (MLA) Supervision—The start of Kraninger’s tenure also brought requests from various groups. A coalition of 23 Democrats sent the new director a letter urging the Bureau to resume examinations of supervised entities regarding compliance with the MLA, a practice suspended by Mulvaney.

“We believe servicemembers and their families deserve to have their rights under federal law fully upheld through strong supervision and enforcement by federal regulators, including the Consumer Bureau,” the members of the House Financial Services Committee wrote. “For this reason, Congress granted the Consumer Bureau broad supervisory authority to oversee a wide range of regulated entities, required the Consumer Bureau to establish an Office of Servicemember Affairs and, in 2013, amended the MLA to give the Consumer Bureau, along with other federal agencies that oversee other financial institutions, the authority to enforce the MLA.”

Servicemembers and their families are a popular target for unscrupulous actors, the legislators added, with a 47 percent increase in complaints filed by servicemembers, veterans and their families from 2016 to 2017.

“The Consumer Bureau must ensure that the MLA and all other consumer protections are fully enforced,” the lawmakers said.

As one of the signatories of the letter is Rep. Maxine Waters (D-Calif.), the new chair of the House Financial Services Committee, the issue does not appear likely to go away.

Debt Collection—Also reaching out to Kraninger were 74 consumer, community, civil rights, faith, labor and legal services groups, asking the Bureau “to focus on protecting consumers from abusive debt collection practices” in the ongoing proposed rule-making on debt collection. Approximately 71 million adults in the United States had debt in collections in 2017, the groups told Kraninger, expressing concern about “widespread” and “pervasive” debt collection abuses.

The groups—including Consumer Action, the NAACP and Public Citizen—focused on three requested changes: preventing harassment, prohibiting collection of time-barred debt, and improving the accuracy and clarity of debt collection notices.

Harassing communications from debt collectors can violate consumers’ privacy and cause serious harm to individuals and their families, the groups wrote, urging the CFPB to limit collectors to one live conversation per week, with up to three attempted calls. Text and email communications should be allowed only if a consumer agrees to communicate with the debt collector electronically, the groups proposed, and consent should be limited to the current creditor. Calls and emails to a work phone number and email address should be expressly prohibited.

Debt collectors should be banned from attempting to collect any debt that is beyond the statute of limitations, the groups said, and the Bureau should create a model validation notice and statement of rights that—after testing and validation—debt collectors should be required to use.

Enforcement—The CFPB likewise announced two new matters:

First, resolving a matter that appears to date back to the Cordray era, the CFPB announced a settlement with the prominent bank arm of a major insurance company. According to the consent order, the Texas-based federally chartered savings association ran afoul of the Electronic Fund Transfer Act (EFTA) and Regulation E by failing to properly honor consumers’ stop payment requests on preauthorized electronic fund transfers and neglecting to initiate and complete reasonable error resolution investigations.

On “numerous” occasions prior to 2015, the bank either refused to stop payment upon a consumer request or required the consumer to contact the merchant as a prerequisite; both acts are in violation of the EFTA. The bank also allegedly failed to properly initiate error resolution investigations. For example, through at least 2013, the bank had a separate procedure for consumers who notified it of a suspected error concerning a payday loan.

As a matter of policy, bank representatives warned consumers (many of them active servicemembers) about potential legal and financial consequences of proceeding with an investigation, including the following statement: “If we determine that the ACH debit in question was authorized, you will be putting your [corporate] membership at risk. What this means to you is that you may become ineligible to purchase additional [corporate entity] products and that existing [bank] accounts may be closed. Also, please understand that it is a federal crime to make a false statement to a bank and this is punishable by a fine of up to one million dollars or imprisonment for up to 30 years, or both.” (Although omitted from the consent order, the script could very well have been prompted by customer abuse of the stop payment process.)

In addition, the bank allegedly violated the Consumer Financial Protection Act (CFPA) by reopening, without seeking authorization, deposit accounts that consumers had closed, the Bureau said, providing creditors with the opportunity to initiate debits and draw down the funds; some account balances became negative and were subject to various bank fees. Over a five-year period, the bank allegedly reopened almost 17,000 closed accounts without authorization, with fees incurred of more than $269,000.

The consent order requires the bank to halt its violations of the EFTA, Regulation E and the CFPA going forward; adopt a comprehensive plan to ensure compliance; pay approximately $12.3 million in redress to consumers; and pay the Bureau a civil money penalty of $3.5 million.

Second, the CFPB announced a joint settlement with the New York attorney general after a “parallel investigation” concluded that a major Ohio-based jewelry store operator violated the Consumer Financial Protection Act by allegedly (1) opening store credit card accounts without customer consent, (2) enrolling customers in payment-protection insurance without their consent and (3) misrepresenting to consumers the financing terms associated with the credit card accounts. The CFPB further found that the company violated the Truth in Lending Act by signing customers up for credit card accounts without having received an oral or written request or application from them. Separately, New York concluded that these actions violated New York law. The jeweler agreed to pay a $10 million civil money penalty to the CFPB plus a further $1 million civil money penalty to New York, and likewise agreed to numerous changes to its practices.

To read the letter about MLA examinations, click here.

To read the letter about debt collection rule-making, click here.

To read the CFPB’s EFTA-related consent order, click here.

To read the CFPB and New York consent order with the jewelry chain, click here.

Why it matters

Members of the financial services industry trying to define the intentions and agenda of new CFPB Director Kathy Kraninger found much to work with in her email to Bureau employees. Time will tell about the direction of her leadership, but the statements about enforcing the law indicate a move away from finding that an act is “abusive” absent an explicit violation of law—still an industry-friendly approach, but less hostile to consumer groups than her predecessor’s. With respect to MLA and debt collection, these two issues may help the industry and consumers understand whether Director Kraninger is sufficiently savvy to avoid some political minefields.