CFPB Report Focuses On Nonbank Financial Institutions

by Manatt, Phelps & Phillips, LLP

A new report from the Consumer Financial Protection Bureau (CFPB) highlighted the agency’s supervisory efforts with regard to nonbank financial institutions like payday lenders, debt collectors, and consumer reporting agencies. The CFPB also announced plans to finalize rules that would extend its supervisory authority to international money remitters with at least one million aggregate international money transfers annually. The report also says the CFPB anticipates expanding its supervisory authority to include the larger indirect nonbank auto lenders.

The Spring 2014 Supervisory Highlights report revealed that nonpublic supervisory actions by the CFPB have yielded more than $70 million in remediation to roughly 775,000 consumers between November 2013 and February 2014 in areas like deposits, consumer reporting, credit cards, mortgage origination, and mortgage servicing.

The report addressed in detail supervisory observations with respect to three nonbank markets: payday lenders, consumer reporting, and debt collectors. All three markets struggle with compliance management systems, the CFPB found, citing “systemic flaws” like consistent failures to establish a consumer complaint system. “The CFPB expects companies to respond to consumer complaints and identify major issues and trends that may pose broader risks to their customers,” according to the report.

Within each market, the agency also identified specific problems.

Payday lenders – offering small-dollar, short-term loans – presented several issues for the CFPB. The report said lenders deceive consumers to collect debts, sometimes by using deceptive practices, such as threatening legal actions they do not intend to pursue or imposing additional fees when the contract does not allow for it. Over-aggressive collection tactics by payday lenders also troubled the agency, with examples of calling borrowers multiple times per day and visiting borrowers’ workplaces. Third-party collectors employed by payday lenders engaged in similar deceptive and harassing behavior, the CFPB said.

Debt collectors generally (not just those seeking repayment of payday loans) are a source of “frustration,” the CFPB said, generating a heavy volume of consumer complaints and possible violations of statutes like the Fair Debt Collection Practices Act (FDCPA) with practices like failing to investigate credit report disputes, intentionally misleading consumers about litigation, and making “excessive, illegal” calls to consumers. One debt collector examined by the agency made approximately 17,000 calls outside of the 8 a.m. to 9 p.m. time period established by the FDCPA, the CFPB said.

Turning to credit reporting agencies, the report found some businesses in the market failed to follow proper procedures when handling credit report disputes. For example, some agencies did not forward relevant dispute documents to data furnishers; others, despite encouraging the filing of disputes online or by telephone, subsequently refused to accept the disputes.

In addition to discussing the CFPB’s expectations and suggestions for improving compliance efforts in each of these markets, the report provides guidance on what it regards as the necessary elements to mitigate fair lending risks. To read the CFPB’s full report, click here.

Why it matters: “For the first time at the federal level, nonbank financial institutions are subject to supervisory oversight that holds them accountable for how they treat consumers,” CFPB Director Richard Cordray said in a statement. The report suggests that the CFPB will intensify its focus in coming months on non-bank financial services providers, which as Director Cordray notes have not been subject to bank-like supervision in the past and as a result likely have less robust compliance functions. In addition, this intensified focus is likely to lead to greater attention being paid to companies that use the services of consumer reporting agencies and debt collectors, triggering more referrals by federal and state regulators overseeing these companies to the FTC and state attorneys general.

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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