The seismic shifts in the consumer financial services (CFS) regulatory landscape that began in 2017 continued throughout 2018. Additional changes are on the horizon as the new leadership of the Consumer Financial Protection Bureau (CFPB or Bureau) sets out to define future priorities.
As the Trump Administration, Congress and courts continue to rethink and reshape the structure and agenda of the CFPB, and as state regulators react to such changes, companies are dealing with the associated uncertainty regarding the CFS supervisory and enforcement landscape. To help institutions anticipate, adapt and respond to this rapidly evolving regulatory environment, we present a concise retrospective and guide to navigate the road ahead. Amidst the change witnessed over the past several years, and in an environment featuring strong deregulatory rhetoric, it remains paramount to take an intermediate and even long view toward compliance as the ramifications of decisions made today might not become apparent for years. As always, a commitment to best practices, a strong compliance culture and a firm grasp on enduring requirements will serve CFS market participants well.
Former Acting Director Mick Mulvaney oversaw a series of notable changes during his tenure at the Bureau, which ran from November 2017 until the confirmation of current Director Kathy Kraninger in December 2018. Former Acting Director Mulvaney initiated a sweeping review of the CFPB’s core processes and procedures, placed a moratorium on its (since resumed) enforcement activities and realigned its enforcement, supervisory and rulemaking priorities. The Bureau reorganized, for example by limiting the functions of the Office of Fair Lending and Equal Opportunity and the Office of Students and Young Consumers to outreach and educational responsibilities. These actions were met with strong opposition from consumer advocacy groups, Congressional Democrats and, in some cases, state regulators.
Although the CFPB adopted a less aggressive enforcement approach overall, the Bureau continued to employ similar legal theories and leverage its broad authority to prohibit unfair, deceptive or abusive acts or practices (UDAAP). The Bureau concurrently dialed down its fair lending enforcement activity to prioritize other areas reflecting higher consumer complaint volumes, such as disclosures and debt collection.
In light of the Bureau’s retrenchment, several state attorneys general (AGs) and regulatory agencies have used, or signaled their intent to use, their enforcement powers, including their ability under the Dodd-Frank Act to enforce violations of federal CFS laws, with many drawing on or otherwise forming special consumer units. Beyond enforcement, state AGs, regulators and legislators are further considering changes to existing laws, regulations and guidance—and enhancing multi-state coordination where feasible—all in the name of filling any perceived voids left by the CFPB.
While several legislative proposals were introduced in 2018 by Republicans to cut back the CFPB’s authority, none gained sufficient traction to pass the Republican-controlled House and Senate. Deep structural reforms are likely not on the horizon with Democrats now in control of the House. Rather, the House Financial Services Committee as chaired by Rep. Maxine Waters (D-CA) is expected to ramp up political pressure on Director Kraninger and scrutinize the Bureau’s strategies and priorities.
Former Acting Director Mulvaney left behind a full agenda, some of which has already been addressed by Director Kraninger. The Bureau recently finalized proposed revisions to its payday lending rule, and is expected to engage in rulemaking to modernize debt collection communications and to clarify the “abusive” prong under its UDAAP authority. The Bureau is also expected to revisit how it treats disparate impact claims under the Equal Credit Opportunity Act (ECOA).
Unlike former Acting Director Mulvaney, Director Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau, albeit against the backdrop of increased congressional oversight and ongoing constitutional challenges to the CFPB’s leadership structure. Notably, comments received from the CFPB’s “Call for Evidence” will allow Director Kraninger to leverage industry insights to implement more substantial and organizational changes at the Bureau going forward.
CFPB structural changes
During his tenure, former CFPB Acting Director Mick Mulvaney brought significant changes to the Bureau’s structure and operations. As the new CFPB Director, Kathy Kraninger will have the benefit of a full five-year term to develop her vision for the Bureau’s strategy and priorities.
In 2018, the CFPB issued multiple rules, and Congress passed legislation, to clarify, revise and update the regulatory framework applicable to the home mortgage origination and servicing market.
In February 2019, the CFPB released the highly anticipated revamp of its Payday Rule, reinforcing its more lenient attitude towards payday lenders. In light of the Bureau’s softer touch, as well as similar developments at the banking agencies, we expect states to step into the void and take further action to curtail payday lending at the state level.
In 2018, the CFPB shifted away from student lending supervision and enforcement. We anticipate this trend to continue in the year to come, with states seeking to fill any voids left by the Bureau.
In 2018, the CFPB continued to pay attention to the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.
The CFPB has traditionally not prioritized marketplace lenders in its supervisory and enforcement efforts. As a result, state regulators have increasingly sought to fill any perceived voids left by the Bureau.
Payment processing
The CFPB continued to be active in the consumer payments space in 2018, while the Federal Reserve and market participants considered the future of payment processing, including the development of faster payment systems.
In 2018, the CFPB continued to pay attention to the auto finance industry, with a particular focus on indirect (dealer-arranged) auto lenders and unfair or abusive loan servicing practices.
Let’s be clear. Discrimination in auto lending is alive and well.”
Senator Elizabeth Warren (D-MA)1
As the federal government stands down on protecting consumers from financial frauds and abuses, [the New York Department of Financial Services] stands up to safeguard New Yorkers from unfair lending practices [and] continues to . . . review indirect automobile lending programs where appropriate.”
Former NYDFS Superintendent Maria T. Vullo2
The CFPB has continued to target the auto finance industry, with a focus on indirect (i.e., dealer-arranged) auto lenders and unfair, deceptive or abusive loan servicing practices. In 2018, the Bureau paid particular attention to auto loan servicing activities, primarily to assess whether servicers have engaged in unfair, deceptive, or abusive acts or practices. Notably, the CFPB has specifically identified deceptive and unfair acts or practices related to billing statements and wrongful repossessions through its supervisory function.3
The results of the CFPB’s most recent examinations evidence a focus on auto loan servicing as opposed to loan origination. Still, the Bureau brought certain enforcement actions in 2018 for unfair or deceptive acts and practices, and violations of TILA in auto loan origination. The Bureau has also focused on educating service members on auto finance matters, including with respect to loan origination by publishing articles with information regarding how to shop for financing and how to evaluate add-on financing products.4
The Bureau’s supervisory efforts in 2018 addressed automobile loan servicing deficiencies by focusing on illegal repossessions and inaccurate billing statements. Specifically, the CFPB focused on unfair practices used by servicers to wrongfully repossess consumers’ vehicles in instances where the servicer and consumer had reached an agreement to cancel the repossession.5 In addition, the Bureau found that servicers acted deceptively by sending billing statements after a total vehicle loss showing that the insurance proceeds had been applied to the loan payments such that the loan was paid ahead, but then treated consumers who failed to pay by the next month as late, and in some cases, also reported the resulting inaccurate negative information to credit bureaus.6
In May 2018, President Trump signed into law a joint resolution under the Congressional Review Act that disapproves the CFPB’s Bulletin 2013-2,7 which targeted dealer markups using disparate impact discrimination theories under the ECOA.8 The resolution was passed in the wake of a December 2017 determination by the GAO that the bulletin should have been submitted for Congressional review as a rule.9 Former Acting Director Mulvaney issued a statement10 in May 2018 acknowledging that the bulletin is no longer in force and noting that the Bureau is reexamining ECOA enforcement in light of a recent US Supreme Court decision concerning the disparate impact doctrine, “distinguishing between antidiscrimination statutes that refer to the consequences of actions and those that refer only to the intent of the actor.”11 A coalition of 14 state AGs subsequently urged the Bureau against reading disparate impact liability out of the ECOA.12
The CFPB previously brought enforcement actions against auto lenders for alleged UDAAP, ECOA and Fair Credit Reporting Act (FCRA) violations, frequently through joint actions with the DOJ. The CFPB brought far fewer enforcement actions in 2018 than in past years, including in the auto lending space, but did bring certain notable enforcement actions for alleged UDAAP and TILA violations. Alleged violations included not properly describing the benefits and limitations of add-on products and the impact of obtaining a loan extension,13 as well as failing to disclose finance charges associated with auto title loans, APR and other information required by TILA in advertisements.14 In a joint enforcement action with the OCC, the Bureau notably reached an unprecedented US$1 billion settlement with a major financial institution for activities, including auto loan servicing abuses that include forcing consumers to buy mandatory auto loan insurance coverage.15 As discussed below, the various states and the District of Columbia reached a settlement with the same institution for related conduct.
The FTC also sued a group of four auto dealers for activities that included falsifying consumers’ income and down-payment information on vehicle financing applications, in some cases after the consumers had signed the applications, and deceiving consumers about the nature and terms of financing or leasing offers.16 The DOJ has also filed a lawsuit against an auto finance company for allegedly repossessing protected service members’ motor vehicles without obtaining the necessary court orders for such repossessions.17
Given the CFPB leadership’s decreased focus on UDAAP as an enforcement tool, as well as the reassignment of the CFPB’s fair lending office to educational activities,18 we anticipate that the CFPB will continue to bring enforcement actions against the auto lending industry at a slower pace than under former Director Cordray.
US$54.6
billion in auto loans originated (since CFPB’s creation)30
The states have not signaled such a shift in focus,19 and will likely continue to rely on state prohibitions on unfair and deceptive acts or practices to protect consumers in this market segment. In 2018, states mainly targeted indirect auto lenders and auto dealers and successfully reached settlements with, or obtained successful verdicts against, industry participants, notably:
Going forward, the rise in state involvement may also lead to increased class action litigation against the auto lending industry.
17,134
consumer complaints related to auto loans or leases (between Nov. 2016 and Nov. 2018)31
Fintechs in the auto finance space generally focus on pairing consumers with financing offers—both for vehicle purchases and leases—by either establishing partnerships with auto finance companies or banks,24 or by allowing consumers to compare different financing options online. While such tech-focused methods—as seen in the residential mortgage space—do not appear to show any sign of subsiding, we note that there continues to be fair lending compliance and enforcement risk in this area, especially for new market entrants who may not be as familiar or experienced with applicable laws and regulations. Even if the CFPB continues to put less of an emphasis on federal fair lending enforcement, state fair lending laws will apply and state-level scrutiny of fair lending issues is likely to continue, if not increase.
In addition to state enforcement and litigation efforts, we also note the following developments:
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Consumer financial services: The road ahead
1 Renae Merle, Senate Poised to Roll Back Watchdog Effort to Prevent Discrimination in Auto Lending Market, The Washington Post (Apr. 17, 2018), https://www.washingtonpost.com/news/business/wp/2018/04/17/senate-poised-to-roll-back-watchdog-effort-to-prevent-discrimination-in-auto-lending-market/?utm_term=.3acc72789912.
2 NYDFS, DFS Takes Action to Protect New Yorkers From Unfair Auto Lending Practices as Federal Government Rolls Back Consumer Protections (Aug. 23, 2018), https://www.dfs.ny.gov/about/press/pr1808231.htm.
3 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 3, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
4 CFPB, Servicemembers, Arm Yourself With Basic Car Buying Skills—Stand Your Guard When it Comes to Add-On Products (Dec. 10, 2018), https://www.consumerfinance.gov/about-us/blog/servicemembers-arm-yourself-basic-car-buying-skills-stand-your-guard-when-it-comes-add-products/; CFPB, Servicemembers, Arm Yourself With Basic Car Buying Skills—How to Shop for Auto Financing (Nov. 27, 2018), https://www.consumerfinance.gov/about-us/blog/servicemembers-arm-yourself-basic-car-buying-skills-how-to-shop-auto-financing/.
5 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 4, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
6 CFPB, Supervisory Highlights, Issue 17 (Summer 2018), at 3-4, https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
7 S. J. Res. 57 (May 21, 2018), https://www.congress.gov/115/plaws/publ172/PLAW-115publ172.pdf.
8 Under Compliance Bulletin 2013-02, the CFPB sought to tackle target dealer markups, a practice whereby an automobile dealer charges a consumer a higher interest rate than the rate by which an indirect lender is willing to purchase the consumer's retail installment sales contract. Dealers were thereby allowed by indirect lenders to exercise significant pricing discretion, opening the door to discrimination. Many indirect lenders contended that they should not be penalized for unintentional discrimination by dealers. See https://files.consumerfinance.gov/f/201303_cfpb_march_-Auto-Finance-Bulletin.pdf.
9 Letter from Thomas H. Armstong, General Counsel, US Government Accountability Office, to The Honorable Patrick J. Toomey (Dec. 5, 2017), https://www.gao.gov/assets/690/688763.pdf.
10 CFPB, Statement of the Bureau of Consumer Financial Protection on Enactment of S.J. Res. 57 (May 21, 2018), https://www.consumerfinance.gov/about-us/newsroom/statement-bureau-consumer-financial-protection-enactment-sj-res-57/. The Bureau has indicated that it might undertake a rulemaking addressing the disparate income doctrine. See https://www.reginfo.gov/public/jsp/eAgenda/StaticContent/201810/Preamble_3170.html.
11 Tex. Dep't of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507 (U.S. 2015).
12 Jon Hill, 14 AGs Urge CFPB Not to Back Off Disparate Impact Liability, Law360 (Sept. 5, 2018), https://www.law360.com/articles/1079821/14-ags-urge-cfpb-not-to-back-off-disparate-impact-liability.
13 CFPB, Consent Order in the Matter of Santander Consumer USA Inc., 2018-BCFP-0008 (Nov. 20, 2018), https://files.consumerfinance.gov/f/documents/bcfp_santander-consumer-usa_consent-order_2018-11.pdf.
14 CFPB, Consent Order in the Matter of Triton Management Group, Inc., TMS Group, Inc. d/b/a Always Money, EFS, Inc. d/b/a Quik Pawn Shop, and Three Rivers Investment, Inc. d/b/a Always Money, 2018-BCFP-0005 (July 19, 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_triton-management-group_consent-order_2018-07.pdf.
15 CFPB, Consent Order in the Matter of Wells Fargo Bank, N.A., 2018-BCFP-0001 (Apr. 20, 2018), https://files.consumerfinance.gov/f/documents/cfpb_wells-fargo-bank-na_consent-order_2018-04.pdf.
16 FTC, FTC Charges Auto Dealerships in Arizona and New Mexico with Falsifying Consumers' Information on Financing Documents (Aug. 1, 2018), https://www.ftc.gov/news-events/press-releases/2018/08/ftc-charges-auto-dealerships-arizona-new-mexico-falsifying.
17 DOJ, Justice Department Sues Subprime Auto Lender in Orange County, California, for Illegally Repossessing Servicemembers' Cars (Mar. 28, 2018), https://www.justice.gov/opa/pr/justice-department-sues-subprime-auto-lender-orange-county-california-illegally-repossessing.
18 Kate Berry, CFPB's Mulvaney Strips His Fair-Lending Office Of of Enforcement Powers, American Banker (Feb. 1, 2018), https://www.americanbanker.com/news/cfpbs-mulvaney-strips-his-fair-lending-office-of-enforcement-powers.
19 Kevin Wack, Auto Lending Scrutiny: Will States Pick Up Where CFPB Left Off?, American Banker (May 7, 2018), https://www.americanbanker.com/news/auto-lending-scrutiny-will-states-pick-up-where-cfpb-left-off.
20 Press Release, Auto Lender to Provide More Than $700,000 in Debt Relief and Refunds to Consumers Victimized by Fraudulent Auto Dealerships (Dec. 27, 2018), https://www.mass.gov/news/auto-lender-to-provide-more-than-700000-in-debt-relief-and-refunds-to-consumers-victimized-by.
21 Press Release, NJ Consumer Affairs Files Second Lawsuit Against 21st Century Auto Group Alleging the Dealership and Owner Dmitry Zeldin Continue to Engage in Deceptive Business Practices (May 1, 2018), https://nj.gov/oag/newsreleases18/pr20180501b.html.
22 Press Release, Rutledge Announces Trial Victory Over Northwest Arkansas Used Auto Dealer (Aug. 17, 2018), https://arkansasag.gov/media-center/news-releases/rutledge-announces-trial-victory-over-northwest-arkansas-used-auto-dealer/.
23 Press Release, AG Brnovich Obtains $130,000 for Arizonans from Auto Dealer (Apr. 24, 2018), https://www.azag.gov/press-release/ag-brnovich-obtains-130000-arizonans-auto-dealer.
24 For instance, AutoFi has partnered with Ford Motor Credit to connect dealers to lenders so customers can finance and purchase vehicles online in minutes and has also entered into a partnership with Chase Bank. See, e.g., AutoGravity, Blinker, and Honker.
25 Alan Wingfield, Brooke Conkle, Amir Shachmurove, Ashley L. Taylor Jr., Federal Deregulation Opens the Door for State-Level Threats to Auto Finance, Business Law Today (Jan. 16, 2018), https://businesslawtoday.org/2018/01/federal-deregulation-opens-the-door-for-state-level-threats-to-auto-finance.
26 Settlement Agreement, by and among Wells Fargo Bank, N.A. and the Various Attorneys General (Dec. 28, 2018), https://portal.ct.gov/-/media/AG/Press_Releases/2018/20181228_WellsFargo_MultistateSettlement.pdf?la=en.
27 NYDFS, Indirect Automobile Lending and Compliance with New York's Fair Lending Statute (Aug. 23, 2018), https://www.dfs.ny.gov/legal/industry/il180823.pdf.
28 N.Y. Exec. L. § 296-a.
29 NYDFS, DFS Takes Action to Protect New Yorkers from Unfair Auto Lending Practices as Federal Government Rolls Bank Consumer Protections (Aug. 23, 2018), https://www.dfs.ny.gov/about/press/pr1808231.htm.
30 CFPB Consumer Credit Panel, Auto Loans Origination, https://www.consumerfinance.gov/data-research/consumer-credit-trends/auto-loans/origination-activity/#anchor_lending-levels.
31 CFPB, Complaint Snapshot: Mortgage (January 2019), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_complaint-snapshot-mortage_2019-01_liwsYNV.pdf.
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