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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.

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Presentation on theme: "Preparing for a Visit from the CFPB David Bailey, Kentucky Higher Education Assistance Authority John Culhane, Ballard Spahr Dino Tsibouris, Tsibouris."— Presentation transcript:

1 Preparing for a Visit from the CFPB David Bailey, Kentucky Higher Education Assistance Authority John Culhane, Ballard Spahr Dino Tsibouris, Tsibouris & Associates

2 Dino Tsibouris (614) CFPB Issues Affecting Loan Servicing

3 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) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

4 Service Providers CFPB Bulletin “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” Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

5 Service Providers CFPB Bulletin “Supervised service providers” provide services to: – Supervised banks and nonbanks – Substantial number of small insured depository institutions or small insured credit unions Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

6 CFPB Proposed Rule Nonbank 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

7 CFPB Proposed Rule Nonbank Student Loan Servicers Response to complaints from Ombudsman’s report – “Confusion” – “Dead ends” – “Runarounds” Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

8 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

9 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

10 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

11 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

12 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

13 Service Providers Conduct thorough due diligence Verify service provider understands and is capable of complying with Federal consumer financial law Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

14 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

15 Service Providers Establish lender internal controls to monitor service provider Take prompt action to address problems Terminate agreement where appropriate Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

16 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

17 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:

18 Preparing for CFPB Reviews Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

19 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

20 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?) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

21 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

22 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

23 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

24 Anticipate Privilege Issues Privilege issues will come up in examinations (although not with CIDs) Industry-supported legislation approved December 20, 2012 (P.L ) 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

25 Some Lessons from CFPB Exams Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

26 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

27 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

28 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) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

29 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) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

30 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

31 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 (?) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

32 Some Lessons from CFPB Consent Orders and Cases Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

33 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 CFPB Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

34 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 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 (W.D. Ky. Filed Oct. 24, 2013) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

35 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. SACV JST (JEMx) (C.D. Cal. Filed Aug. 20, 2013) Consumer Financial Protection Bureau v. Meracord LLC and Linda Remsberg, Case No. 3:13-cv (W.D. Wash. Filed Oct. 3, 2013) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

36 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 Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

37 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 CFPB-003 In the Matter of Dealers Financial Services, LLC, File No CFPB Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

38 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) Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida

39 Questions? Knowledge Symposium November 5-7, 2013 ● St. Pete, Florida


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