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 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.
American families need an independent Consumer Bureau to look out for them when . . . student loan companies are allowed to drive millions of Americans to financial ruin with impunity.”
Former CFPB Student Loan Ombudsman Seth Frotman1
To ensure that students are adequately protected, [Director Kraninger’s] first actions as CFPB Director should include reinstating the enforcement authority of the Office of Students and Young Consumers, filling the position of Student Loan Ombudsman, and rapidly providing Congress with information on student borrowers as required by statute.”
Senator Elizabeth Warren (D-MA)2
While the CFPB remained an active participant in the student lending and servicing markets in 2017, the Bureau noticeably reduced supervisory and enforcement scrutiny in 2018, in part, due to its change in leadership and a focus on other market segments reflecting higher consumer complaint volumes.3 As we foreshadowed in last year’s issue, former CFPB Acting Director Mulvaney scaled back from an enforcement-oriented approach and increased the Bureau’s educational role and outreach in the student lending space.4 Notably, the CFPB did not file any student lending- or servicing-related enforcement actions and limited the functions of the Office of Students and Young Consumers to just consumer education by folding it into the Bureau’s financial literacy unit.5 The Bureau also indefinitely shelved a CFPB proposal from former Director Cordray to issue student loan servicing rules and reallocated resources to other rulemaking initiatives.6 The Bureau’s first (and only) Supervisory Highlights issue released under former Acting Director Mulvaney did not include any observations on student lending, compared with other areas of focus, such as debt collection and payday lending.7 In addition, although required by the Dodd-Frank Act,8 the Bureau failed to release the annual report for 2018 of its student loan ombudsman, which is designed to provide a snapshot and analysis of student borrower complaints for each year.9 At a time when new CFPB Director Kraninger is setting her agenda for 2019, we anticipate that the Bureau will continue to cede oversight of the federal student lending and servicing markets to the US Department of Education (ED). In response, states will likely continue to scrutinize student loan servicers, but may face greater challenge in federal court on preemption grounds.
The Bureau’s retreat from student lending has faced criticism, including by the former CFPB student loan ombudsman, who announced his resignation by releasing a public letter to former Acting Director Mulvaney and key members of the Trump Administration, criticizing the CFPB leadership’s decision to suppress a report about student account fees and other attempts to undermine the Bureau’s independence.10 After the CFPB declined to issue its annual ombudsman report, two advocacy groups separately released their own versions by compiling student grievances submitted to the CFPB complaint database in 2018.11 Both reports highlight servicing failures by federal student loan servicers, including errors in processing payments across multiple loans, conflicting information received about repayment options, and difficulties in accessing advertised loan benefits.12
36%
complaints related to private student loans
64%
complaints related to federal student loans
Leaders in the House and Senate have also expressed concerns about the Bureau’s apparent retreat from student lending supervision and enforcement. In a letter addressed to the new CFPB leadership, Sen. Warren (D-MA) urged Director Kraninger to ensure adequate protection of student borrowers by reinstating the Office of Students and Young Consumers to its prior supervisory functions.13 Proposed legislation by Rep. Waters (D-CA), Chairwoman of the House Financial Services Committee, also seeks to largely restore the Bureau’s organizational structure by, among other steps, reinstating and clarifying the Office of Students and Young Consumers’ role and restricting the CFPB Director’s ability to reorganize it.14 The proposed bill would also require the CFPB Director to respond to the allegations articulated by the ex-student loan ombudsman in his resignation letter.15 While it remains unclear how much weight such requests will carry with Director Kraninger, we expect that House Financial Services Committee oversight of student lending will become more aggressive in the year ahead under Rep. Waters’ direction. Although changes to the CFPB’s structure may necessitate new legislation, which is unlikely, given that Democrats control the House and Republicans control the Senate, increased public and political pressure on the Bureau’s supervision of student lending may result in requests for House Financial Services Committee hearings related to the ex-student loan ombudsman’s allegations.
Although the Bureau did not bring any new action against a student lender or servicer in 2018, one notable enforcement action remains pending. In 2017, the Bureau filed a lawsuit against the largest US student loan servicer for failing to provide routine servicing functions, including by steering borrowers into expensive forbearance programs, preventing borrowers from accessing income-driven repayment plans (IDR), misallocating payments, and failing to ensure accurate credit reporting.16 The litigation is currently embroiled in a discovery dispute related to the disclosure of borrowers’ records,17 and the Bureau did not pull back from litigation under former Acting Director Mulvaney. Accordingly, we expect the CFPB under Director Kraninger to continue litigating this matter. In 2017, the Bureau also targeted a conglomerate of private student loan trusts that, among other actions, allegedly misplaced loan documentation and initiated illegal lawsuits by filing false affidavits through third-party debt collectors.18 Although a proposed consent order was filed shortly thereafter,19 the case remains pending in US district court. It remains unclear how Director Kraninger will proceed on this issue.
By contrast, the FTC’s enforcement efforts continued to target student loan debt relief scams in coordination with state AGs as part of Operation Game of Loans.20 In 2018, the FTC resolved several actions21 and filed a new lawsuit against debt relief companies for allegedly collecting illegal upfront fees and deceiving student borrowers about their eligibility for federal relief programs or their affiliation with the ED.22 The FTC also separately entered into a settlement with a leading student loan refinancer for allegedly misrepresenting the average amounts borrowers would save by refinancing their loans with the company.23
8,340
student loan-specific complaints filed with the CFPB in 201841
Fintechs in the student lending space have principally focused on developing tech-driven solutions to assist student borrowers with consolidating and refinancing their debt. By leveraging non-traditional data analytics (e.g., education, employment and salary history), student loan-focused fintech companies often endeavor to tailor their services to each individual borrower. Increased reliance on non-traditional sources of data in loan underwriting or refinancing continues, however, to raise fair lending risks, especially for new market entrants who may not be as familiar with applicable consumer protection laws. Although the CFPB has yet to clearly communicate its view on the appropriate use of alternative data, the Bureau has demonstrated increased openness to tech-driven approaches and may provide future guidance as the recently created Office of Innovation sets its agenda. Finally, and as highlighted in last year’s issue, new arrangements such as “Income-Share Agreements”24 also raise novel legal and policy concerns but continue to gain traction with universities25 and receive political support26 as an alternative to traditional student loans.
FULL MAGAZINE
Consumer financial services: The road ahead
1 Resignation Letter to CFPB Acting Director Mulvaney (Aug. 27, 2018), https://www.nclc.org/images/pdf/student_loans/Frotman_Letter.pdf.
2 Joe Adler, How Should Kraninger Run CFPB? Warren Has Some Ideas, American Banker (Dec. 20, 2018), https://www.americanbanker.com/list/how-should-kraninger-run-cfpb-warren-has-some-ideas.
3 CFPB, Complaint Snapshot: 50 State Report (Oct. 23, 2018), https://www.consumerfinance.gov/data-research/research-reports/complaint-snapshot-50-state-report/.
4 CFPB, Financial Literacy Annual Report (December 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_financial-literacy_annual-report_2018.pdf.
5 Kate Berry, Mulvaney Guts CFPB's Student Lending Office, American Banker (May 9, 2018), https://www.americanbanker.com/news/mulvaney-guts-cfpbs-student-lending-office.
6 CFPB, Spring 2018 Rulemaking Agenda (May 10, 2018), https://www.consumerfinance.gov/about-us/blog/spring-2018-rulemaking-agenda.
7 CFPB, Supervisory Highlights, Issue 17, Summer 2018 (September 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/bcfp_supervisory-highlights_issue-17_2018-09.pdf.
8 The Dodd-Frank Act requires the CFPB Student Loan Ombudsman to prepare an annual report "that describes the activities, and evaluates the effectiveness of the Ombudsman during the preceding year." 12 U.S.C. § 5535(d). The Dodd-Frank Act, however, only requires the Ombudsman to "compile and analyze data on borrower complaints regarding private education loans," but does not impose a similar requirement for federal student loans. Id. § 5535(c)(3).
9 This is the first time that the CFPB did not issue the annual report since it started investigating student loan complaints in 2012.
10 Resignation Letter to Acting Director Mulvaney (Aug. 27, 2018), https://www.nclc.org/images/pdf/student_loans/Frotman_Letter.pdf.
11 See Student Borrower Protection Center, A Year Without Action (Dec. 11, 2018), https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/12/SBPC-A-Year-Without-Action_2018-002-1.pdf; LendEDU, Report: 2018's CFPB Student Loan Complaints (Jan. 8, 2019), https://lendedu.com/blog/report-2018s-cfpb-student-loan-complaints.
12 Id.
13 Joe Adler, How Should Kraninger Run CFPB? Warren Has Some Ideas, American Banker (Dec. 10, 2018), https://www.americanbanker.com/list/how-should-kraninger-run-cfpb-warren-has-some-ideas.
14 H.R. 6972 (Consumers First Act), 115th Cong. (2017-2018), https://www.congress.gov/115/bills/hr6972/BILLS-115hr6972ih.pdf.
15 Id.
16 Consumer Fin. Prot. Bureau v. Navient Corp. et al., case no. 3:17-cv-00101 (M.D. Pa. Jan. 1, 2017).
17 Id. The CFPB is accused of withholding thousands of documents the servicer sees as potentially critical to its defense against the Bureau's allegations.
18 CFPB, Fall 2018 Rulemaking Agenda (Oct. 17, 2018), https://www.consumerfinance.gov/about-us/blog/fall-2018-rulemaking-agenda/.
19 Consumer Fin. Prot. Bureau v. The National Collegiate Master Student Loan Trust, et al., case no. 1:17-cv-01323 (D. Del. Sept. 18, 2017).
20 Operation Game of Loans is a coordinated federal-state enforcement initiative first announced by the FTC in October 2017, which targets deceptive student loan debt relief scams nationwide. See FTC, State Law Enforcement Partners Announce Nationwide Crackdown on Student Loan Debt Relief Scams (Oct. 13, 2017), https://www.ftc.gov/news-events/press-releases/2017/10/ftc-state-law-enforcement-partners-announce-nationwide-crackdown.
21 FTC v. American Student Loan Consolidators LLC, case no. 0:17-cv-61862-DPG (S.D. Fla., Nov. 30, 2018); FTC v. Student Debt Doctor, LLC, case no. 0:17-cv-61937-WPD (S.D. Fla., Dec. 7, 2018).
22 FTC v. American Financial Benefits Center, et al., case no. 4:18-cv-00806-SBA (N.D. Cal., Dec. 21, 2018).
23 FTC v. Social Finance, Inc., FTC-162-3197 (Oct. 29, 2018).
24 Income-Share Agreements (ISA) are financial arrangements, whereby students receive a fixed amount to pay for tuition and, in exchange, agree to pay back a fixed percentage of future income for a fixed number of years.
25 Purdue University was first to launch an ISA fund in 2016. Additional universities offering similar arrangements include, among others, Lackawanna College, Messiah College, Norwich University, and Clarkson University.
26 See H.R. 3145 (Investment in Student Achievement Act of 2017), 115th Congress (2017-2018), which proposes the legal framework necessary for private ISA funders to operate, and addresses issues surrounding taxation, repayment, discharge and disclosures. A companion bill was also introduced in the Senate. See S. 268 (Investing in Student Success Act of 2017), 115th Congress (2017-2018).
27 Ed, Federal Preemption and State Regulation of the Department of Education's Federal Student Loan Programs and Federal Student Loan Services, 83 Fed. Reg. 10619 (Mar. 12, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-03-12/pdf/2018-04924.pdf.
28 A.B. 2251 (Ca. 2016); H.B. 6915, Gen. Assemb. (Ct. 2015); District of Columbia Student Loan Borrower's Bill of Right (2017); S.B. 1351, 100th Gen. Assemb. (Il. 2017); S.B. 6029, 65th Leg., Reg. Sess. (Wa. 2017).
29 See the Financial Consumer Protection Act of 2018, S.B. 1068, 2018 Reg. Sess. (Md. 2018). See also Maryland Commissioner of Financial Regulation, Student Loan Ombudsman (Sept. 28, 2018), https://www.consumerfinancemonitor.com/wp-content/uploads/sites/14/2018/10/Maryland-CFR-Notice-re-Student-Loan-Ombudsman.pdf. Among other things, the Maryland student loan ombudsman is charged with receiving and resolving borrower complaints, engaging in educational efforts with both students and the state of Maryland, and compiling and analyzing student loan data. Id.
30 H.B. 620, 99th Gen. Assemb., Reg. Sess. (Mo. 2017); S.B. 3198, 217th Leg. (N.J. 2017); A.B. 8862, Ass., Reg. Sess. (N.Y. 2017); H.B. 432, 132th Gen. Assemb. (Oh. 2017); H.B. 1915, Gen. Assemb. (Va. 2017).
31 ED, Federal Preemption and State Regulation of the Department of Education's Federal Student Loan Programs and Federal Student Loan Services, 83 Fed. Reg. 10619 (Mar. 12, 2018), https://www.gpo.gov/fdsys/pkg/FR-2018-03-12/pdf/2018-04924.pdf.
32 20 U.S.C. § 1098g.
33 See Section 493E(d) of the PROSPER Act, H.R. 4508, 115th Congress (2017-2018).
34 State of New York Office of the Attorney General (Mar. 15, 2018), https://ag.ny.gov/sites/default/files/ag_letter_student_loan_preemption.pdf.
35 CSBS, Letter Addressed to Congress, CSBS Opposes Department of Education Plan to Preempt State Authority on Student Loans (Mar. 2, 2018), https://www.csbs.org/csbs-opposes-department-education-plan-preempt-state-authority-student-loans.
36 See Illinois v. Navient Corp., Cir. Court of Cook County (Jan. 17, 2018), http://www.illinoisattorneygeneral.gov/pressroom/2017_01/NavientFileComplaint11817.pdf; Pennsylvania v. Navient Corp., case no. 3:17-cv-01814-RDM (M.D. Pa. Oct. 5, 2017); Washington v. Navient Corp. (Jan. 18, 2017), http://agportal-s3bucket.s3.amazonaws.com/uploadedfiles/Another/News/Press_Releases/20170118ComplaintRedacted.pdf.
37 See California v. Navient Corp., et al., case no. CGC-18-567732 (Super. Ct., Nov. 1, 2018); Mississippi v. Navient Corp., et al., case no. 25CH1:18-cv-00982, Chancery Court of Hinds Country (Jul. 17, 2018).
38 The states of California and New York did not participate in the multistate settlement.
39 New Jersey v. Career Educ. Corp., et al. (Jan. 2, 2019), available at https://www.law360.com/articles/1115076/attachments/0.
40 See id.
41 LendEDU, Report: 2018’s CFPB Student Loan Complaints (Jan. 8, 2018), https://lendedu.com/blog/report-2018s-cfpb-student-loan-complaints.
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