Financial Services Law

CFPB Roundup: Monthly Complaint Snapshot, Supervisory Highlights, and Complaints About Online Marketplace Lenders

The Consumer Financial Protection Bureau (CFPB) has had a busy few weeks, releasing the latest monthly snapshot of consumer complaints, publishing its Supervisory Highlights newsletter to reveal the Bureau has recovered $14.3 million for consumers, and announcing that it will begin to accept complaints about online marketplace lenders.

What happened

In the latest edition of the CFPB's monthly snapshot, the Bureau highlighted consumer complaints about prepaid products and focused its geographical attention on Texas and the Houston metro area.

Consumer complaints about prepaid products—one of the fastest-growing types of consumer financial products in the country—"spiked" in recent months, the Bureau reported, with consumers griping about being frozen out of an account, including a "large number" related to an incident with market leader RushCard.

Other problems relayed to the CFPB by consumers were concerns with managing, opening or closing an account (the most common issue, constituting 33 percent of the complaints), unauthorized transactions or other transaction issues (with 29 percent of the complaints), and account access problems when disputing particular charges. Consumers said that when they contacted the company about an issue, the entire balance on their card would be frozen while the claim was under review. A variety of fees related to prepaid cards were also the subject of complaints, from monthly and inactivity fees to balance inquiry and overdraft fees, the CFPB said.

As of February 1, 2016, the CFPB has handled roughly 4,300 prepaid product complaints since the Bureau began accepting complaints about the product in July 2014, or 0.5 percent of the total complaints received.

Turning its geographic spotlight on Texas and the Houston metro area, the Bureau reported that Texas consumers have submitted 63,200 of the 811,700 total complaints received, with the Houston metro area contributing 15,700 of those complaints. In the region, debt collection is the most complained-about financial area (with a slightly higher rate of complaints compared to the national numbers) while the state has a lower-than-national-average rate of complaints related to mortgages (just 16 percent in Texas, down from the 26 percent national rate).

Reviewing the complaints on a national basis, debt collection maintained its hold on the first-place position as the most popular financial product to complain about, according to the CFPB, followed by mortgages and credit reporting. The top three products account for two-thirds of the complaints submitted.

The Bureau also published its quarterly Supervisory Highlights this month, announcing that nonpublic supervisory actions of covered entities resulted in the remediation of $14.3 million to approximately 228,000 consumers.

Covering the last few months of 2015, the report touched upon violations found by the CFPB in the student loan market, international money transfer companies not following the new remittance rules, banks providing inaccurate information to credit reporting companies about customer checking accounts, and illegal contact of consumers by debt collectors.

The 10th edition of Supervisory Highlights was the first to report on exams of banks and nonbanks in the remittance market. Overall, examiners found that remittance transfer providers have made the necessary changes to achieve compliance with the CFPB's rule, the Bureau said, but did find some problems. At least one provider gave incomplete and sometimes inaccurate disclosures to consumers while another failed to cancel transactions within the required time frame and at least one provider failed to promptly credit consumers' accounts when errors occurred.

Also highlighted in the CFPB's report: illegal inaccuracies with deposit account information provided to credit reporting companies. Some banks or credit unions failed to update the change in a consumer's status when he or she paid charged-off accounts in full and provide that information to the credit reporting companies. Not updating an account to "paid in full" status "could negatively affect a consumer's attempt to open a new checking account," the CFPB said.

The Bureau reported at least one debt collector that failed to comply with the Fair Debt Collection Practices Act (FDCPA) requirement to stop contact with a consumer who provides a written request to cease communications. The failure resulted from system errors, the CFPB said.

Finally, the Bureau continued to expand its complaint database, announcing that it will accept consumer complaints related to online marketplace lenders. The relatively new kind of lending channel involves a lender or platform using an online interface to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan, the CFPB explained.

"All lenders, from online startups to large banks, must follow consumer financial protection laws," Bureau Director Richard Cordray said. "By accepting these consumer complaints, we are giving people a greater voice in these markets and a place to turn to when they encounter problems."

The Bureau now accepts complaints on a broad spectrum of consumer financial products, including mortgages, bank accounts and services, credit cards, student loans, auto and other consumer loans, credit reporting, debt collection, and payday loans. Because marketplace lenders offer several types of consumer loans, a consumer submitting a complaint will select between different categories for the product that best applies to his or her situation, the CFPB said, such as "mortgage" or "student loan."

Why it matters

Prepaid products have been on the CFPB's radar for some time, with the Bureau proposing rules to regulate the industry in November 2014. "Prepaid products provide a crucial financial lifeline to many unbanked and under-banked households," CFPB Director Richard Cordray said in a statement about the monthly snapshot report. "It is important that consumers who rely on this important financial product can do so safely and efficiently, without undue hassles and runarounds." Final rules on prepaid products are expected to be published later this year. As for the addition of online marketplace lending to the CFPB's complaint roster, the announcement serves as a notice that the Bureau is now paying attention to the industry, which has only recently begun to draw regulatory attention.

To read the CFPB's Monthly Complaint Report, click here.

To read the Supervisory Highlights report, click here.

To read the Bureau's press release regarding accepting complaints about online marketplace lenders, click here.

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Study: TRID Rules Have Increased Costs, Decreased Product Offerings

What kind of impact have the Truth in Lending Act/Real Estate Settlement Procedures Act Integrated Disclosure (TRID) requirements had on banks? According to a new study conducted by the American Bankers Association (ABA), the new rules promulgated by the Consumer Financial Protection Bureau (CFPB) have caused closing delays, a decrease in the variety of products offered by financial institutions, and increased processing times, with an estimate of up to $1,000 in additional costs per transaction, with an average of $300 in additional costs, and 1 to 20 additional days needed to close a loan, with an average of 8 additional days.

What happened

Over a two-week period in February, the ABA reached out to 548 banks with a range of asset sizes across a large geographic area to gauge the impact of the TRID requirements to date. The survey results demonstrated that TRID rule compliance "1) is still a relevant problem; 2) continues to impose a heavy compliance burden; and 3) causes customer dissatisfaction through delayed closings and increased fees and costs," the ABA summarized.

The majority of respondents—457 and 470—said extra staff training and additional hours to achieve compliance were necessary because of the new requirements, with half the banks stating they either have already hired or plan to hire additional staff. One respondent told the ABA the financial institution decided not to issue loans that must be TRID-compliant while another reported a restructuring of loan staff to create dedicated loan originators and processors who only handle TRID. "For a small community bank, this isn't the best use of our staffing," that bank told the ABA.

Sixty-seven percent of the respondents experienced increased legal and regulatory costs, and 77 percent reported increased delays in closings, anywhere from 1 to 20 days, with an average of 8 days. Loan processing times have also increased, banks reported, with the majority estimating another one to two hours are required per loan.

Of the banks polled, 75 percent said they have eliminated certain products—such as construction loans, home equity loans, and ARMs—out of concern that the TRID rule lacks adequate compliance direction.

Since October 3, 2015, only four of the banks surveyed have not made any updates or upgrades to their loan origination systems. Ten to 25 updates have occurred for 144 of the banks while 245 said they have needed 1 to 10 updates since the date of enactment. Those numbers are certainly not final, however, as 72 percent of the financial institutions told the ABA they are still waiting for updates.

Respondents gave mixed answers to the question of whether the total cost to the consumer to obtain a loan has changed. Forty percent of banks said the costs remain unchanged, with 35 percent reporting they could not determine if a difference existed. The remaining 25 percent answered in the affirmative, with a range of increase from 1 percent to 75 percent.

While 247 respondents are not charging higher mortgage loan fees because of the TRID requirements, the remainder said fee hikes were necessary for such items as attorneys' fees, origination fees, lock fees, and closing/settlement fees.

Almost all of the banks—94 percent—answered affirmatively that they would like the CFPB's recognition of "good faith efforts" to be extended.

Why it matters

The study results document that many of the concerns expressed by financial institutions when the TRID rules were first released—increased costs, delays in the applications process, a decrease in product offerings for consumers, and the need for extra staff—proved to be true. The magnitude of these effects varied widely. Many seem to have been felt due to the implementation process itself, and in some cases, the systems providers' timetables for transmission. That is part of why continued use of the "good faith" standard by examiners was urged by many surveyed banks.

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FINRA Reports on Robo-Advisors

What is the appropriate level of regulatory oversight for a robo-advisor? As federal agencies struggle with the question, the Financial Industry Regulatory Authority (FINRA) published a new report reminding companies offering digital investment advice that the agency's rules still apply to new technology.

What happened

Technology has been a driving force in financial services innovation, FINRA recognized, with digital investment advice tools a growing product in the industry. Leveraging regulatory experience and discussions with a range of financial services firms, the regulator published a Report on Digital Investment Advice to guide companies using the new technology.

"As these services develop, firms need to ensure that the core principles of investor protection—such as understanding and responding to customers' needs and objectives—serve as the foundation of these new tools as well," Richard Ketchum, Chairman and CEO of FINRA, said in a statement. "We trust that the report will provide information and guidance for FINRA member firms and investors about key aspects of the rapidly growing arena of digital investment advice."

The report discussed two forms of digital investment advice tools: financial professional-facing tools (used by a firm's professionals) and client-facing tools, also known as robo-advisors. The robo-advisors create an automated portfolio after a client responds to a detailed questionnaire, answering questions about its risk tolerance and investment objectives.

While not establishing any new legal requirements, the report offered guidance to financial institutions in five key areas of regulatory principles and effective practices.

Of great importance: the governance and supervision of algorithms, FINRA said. Algorithms are "core components" of digital investment advice tools and their use must be evaluated at every stage of the process, from an initial assessment of the methodology of digital tools and the quality and reliability of data inputs to an ongoing evaluation (testing the tools to ensure they are performing as expected, for example) and determination of whether the models used remain appropriate in light of market changes.

The individuals responsible for supervising the tool should be identified as part of an effective governance and supervisory framework, the report suggested. Firms should also be able to explain to regulators how the tool works and complies with regulatory requirements, FINRA said.

Customer profiling also raised concerns for FINRA. "Understanding a customer's investment objectives and the specific facts and circumstances of the customer's finances—developing an investor profile—is essential to providing sound investment advice," according to the report. "FINRA believes that core principles regarding customer profiling apply regardless of whether that advice comes from a financial professional or an algorithm."

Effective practices with regard to customer profiling include identifying the key elements of information necessary to profile a customer accurately, assessing both a customer's risk capacity and risk willingness, resolving contradictory or inconsistent responses in a customer profiling questionnaire, assessing whether investing (as opposed to saving or paying off debt) is appropriate for an individual, and contacting customers periodically to determine if their profiles have changed.

While interaction with a financial professional can help resolve issues, the report advised consideration of whether the digital advice tools are designed to collect and sufficiently analyze all of the required information about customers to make a suitability determination, resolve conflicting responses to customer profile questionnaires, and match an investment profile to a suitable securities or investment strategy.

For firms, the next area of focus for digital investment advice tools should be the governance and supervision of portfolios and conflicts of interest, FINRA said. The construction of portfolios may raise concerns about conflicts of interest, including the risk, return and diversification characteristics of a portfolio that is suitable for a given investor profile.

How to mitigate such problems? Establish a review mechanism to determine the characteristics (such as return, credit risk, and diversification) of a portfolio for a given investor profile with criteria for including securities in the firm's portfolios, selecting the securities that are appropriate for each portfolio (keeping an eye on the algorithms), monitoring pre-packaged portfolios to assess if they are appropriate for the investors to which they are offered, and identifying and mitigating conflicts of interest that may result from including particular securities in a portfolio.

Rebalancing portfolios should be a priority for firms, FINRA said. The most effective practices include a written description of how the rebalancing works, accompanied by a description of the procedures that define how the digital investment tools will act in the event of a major market movement. Explicit customer intent should be expressed for automatic rebalancing, the regulator added, with customers informed of the potential cost and tax implications.

Digital tools may execute numerous rebalancing trades depending on threshold limits and the frequency of rebalancing reviews, the report noted. Firms should assess potential issues by understanding the triggers for a rebalancing by the tool and whether the rebalancing includes the possibility of adding or removing a particular security that would require another customer-specific suitability analysis.

Finally, FINRA discussed the need for training, which is "crucial" for individuals who use digital investment advice tools. "Some of the financial professional-facing tools FINRA observed can deliver sophisticated analytics, but using them effectively and communicating with clients about their output is dependent on the financial professional understanding the assumptions that go into the analytics and the potential limitations on the results," the report cautioned.

Financial professionals should receive education on the permitted use of digital investment advice tools, the key assumptions and limitations of individual tools, and when use of a tool may not be appropriate for a client, the regulator advised. Most firms require their professionals to undergo training before they are permitted to use a digital investment advice tool, and third-party vendors often offer training sessions for financial professionals, FINRA said.

Why it matters

"Digital investment advice tools will likely play an increasingly important role in wealth management, and investor protection should be a paramount objective as firms develop their digital investment advice capabilities," FINRA concluded its report. "Firms need to establish and maintain an investor protection foundation that accounts for the considerations raised by digital investment advice. One key element of that foundation is understanding customer needs. Another is using tools with sound methodological groundings, and a third is understanding those tools' limitations. FINRA trusts that the effective practices outlined in this document will help firms advance investor protection objectives in their use of digital investment advice tools." Firms using digital investment advice tools should look to the report for guidance and track the best practices set forth by the regulator or face the potential for examination issues or enforcement actions.

To read FINRA's Report on Digital Investment Advice, click here.

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UPDATE: Supreme Court Asks Solicitor General to Weigh In on Madden Case

By Brian S. Korn

The Supreme Court released the results of its March 18 status conference in the Madden v. Midland case. The Court determined that it would like to see a brief from the U.S. Solicitor General (SG). The SG is the official representative of the U.S. Government before the Supreme Court. He reports to the Attorney General and is part of the Executive Branch. I believe this decision has three main consequences:

1. It's not a "No"—With this latest decision, I believe the Court is inching closer to accepting the case for review. It had an opportunity to reject the petition and let the Second Circuit's decision stand. But instead it appears the amicus briefs and industry hubbub have had the effect of drawing attention to the importance of the case.

2. The SG will likely not have an organic stance on the case. Instead, I believe the office of the SG will solicit input from the principal bank regulators to get a sense of whether the "valid when made" preemption principle (i) is a legitimate mechanic indeed having a nearly 200-year history, and (ii) would have a fundamental disruptive impact if the Second Circuit's decision, which did not extend preemption under the National Bank Act to nonbanks, were allowed to stand. Agencies to be consulted likely include the Office of Comptroller of the Currency, the Federal Reserve and the Department of the Treasury.

3. The requirements and timing of the SG brief likely push this case to consideration during the fall 2016 term. The SG's brief would need to be filed, certiorari petition granted following another conference, briefs filed by the parties, oral argument scheduled and done, and the Court's opinion written all by the end of the Court's current term in June. This is light speed for SCOTUS and makes it unlikely that the case will be heard this term. This also opens the possibility that the President's nominee to replace the vacancy created by the death of Justice Antonin Scalia, Judge Merrick Garland, will have an impact in the decision to hear the case and, if accepted, the case's ultimate outcome. Of course with the Senate Republicans promising not to hold hearings or a vote on Judge Garland, he may not be able to play any role at all.

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