Furnishers Beware – CFPB Signals That Civil Penalties May Be Appropriate Even Without Any Actual Consumer Injury

by Ballard Spahr LLP
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Yesterday, the CFPB announced a consent order with First Investors Financial Services Group, Inc., an auto finance company that both makes loans to consumers and purchases retail installment sale contracts from auto dealers. Under the terms of the consent order, First Investors agreed to pay a $2.75 million civil penalty relating to allegations that it knowingly failed to fix flaws in a computerized credit reporting system it had purchased from a third-party vendor. Although First Investors notified the vendor of the problem, the CFPB took issue with First Investors continuing to use that system without any fix being put in place by the vendor.

Importantly, this consent order suggests that the CFPB does not place much significance on whether it can show any resulting consumer injury in determining that a practice warrants a significant civil penalty. Notably, although “the severity of the risks to or losses of the consumer” is one of the mitigating factors to be taken into account in determining the amount of a civil penalty under Dodd-Frank, there is no mention of any actual consumer injury in the CFPB’s consent order, press release, or related prepared remarks. Instead, the CFPB stated only that First Investors “potentially harmed tens of thousands of its customers” and that in “strategically target[ing]” subprime consumers and then “knowingly” sending incorrect information to the credit reporting agencies, First Investors “put consumers with credit profiles that were already impaired into an even more perilous position.”

As such, the CFPB seems to say that the mere existence of a practice that it believes poses significant risks to consumers is sufficient to warrant a civil penalty in the millions. This means that companies cannot take comfort in the fact that a practice the CFPB may deem problematic resulted in only potential, not actual, consumer harm. The potential for consumer injury appears to be as unacceptable to the CFPB as injury in fact.

This consent order also reminds us of the need to monitor and exercise significant oversight of any vendors involved in providing financial products and services to consumers at all levels – origination, servicing, marketing, collections, and so on. Here, although First Investors did notify its vendor of the flaws in the credit reporting system, the CFPB determined that First Investors “knew there was a problem with its computer system but did not make sufficient efforts to fix the errors.” The CFPB further remarked that “[c]ompanies cannot pass the buck by blaming a computer system or vendor for their mistakes.... Using a flawed computer system purchased from an outside vendor does not get you off the hook for meeting your own obligations.” The message is clear. The CFPB wants to see companies demanding results from their vendors when issues arise, or suspend their impacted operations until those issues are addressed.

The CFPB also sent an unequivocal warning yesterday to furnishers that they must take “all necessary steps to ensure they are complying with federal laws.” These steps include: (1) monitoring consumer disputes for patterns or indications of systemic inaccuracies; (2) promptly modifying or deleting inaccurate information when it comes to the furnisher’s attention; and (3) making sure that any products or vendors furnishers use to assist in furnishing information do so in an accurate and legal manner. This warning is consistent with advice we already provide to our clients in connection with their efforts to prepare for a potential CFPB examination or enforcement action. The CFPB is unlikely to be sympathetic to any companies that do not take note of this warning with respect to their vendor relationships.

Finally, this consent order also has a number of direct impacts on the auto finance industry, an area in which we anticipate seeing additional enforcement and rulemaking activities by the CFPB in the near future. Ballard Spahr is hosting a four-part auto finance webinar series this fall and invites you to attend to further explore the current issues and trends in this area. We will begin the series on September 9, How the CFPB’s Larger Participant Rule for the Auto Finance Market Will Change the Game for Nonbank Auto Finance Companies, and follow it with a Fair Credit in the Auto Finance Industry presentation on September 30. On October 16 we will present The Application of UDAAP Proscriptions to Auto Finance and Leasing. The series will conclude on November 5 with a presentation on Regulatory Scrutiny of Ancillary Products in Auto Finance and Leasing. All of these programs will take place from noon – 1 p.m. Eastern on these dates. To register for any of these programs, simply click on the name of the event you’d like to attend and complete the registration form.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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