In January 2017, the Obama Administration will transfer power to the incoming Trump Administration, and Congress will convene with a Republican majority in both houses. Predictions abound as to what legislative and regulatory changes will transpire under the new administration. Earlier this month, WSJ Pro hosted a live video event to discuss how the election will impact financial regulation. Financial Regulation Editor Jacob Schlesinger moderated the discussion with two Washington financial-policy analysts: Brian Gardner of Keefe, Bruyette & Woods, and Ian Katz of Capital Alpha Partners. Both analysts expect aggressive deregulation of the financial sector according to the President-Elect’s promises during the campaign. Among the many topics covered, Gardner and Katz emphasized (i) potential changes to the Dodd-Frank Act, (ii) personnel changes at various agencies, including the Securities and Exchange Commission (SEC), and (iii) a more lenient approach to enforcement.
President-Elect Trump campaigned on a promise to get rid of the Dodd-Frank Act. Enacted in the wake of the 2008 recession, Dodd-Frank sought to limit the risks that banks can take and provided for consumer protection through the creation of the Consumer Financial Protection Bureau (CFPB). However Gardner and Katz agree that wholesale repeal of Dodd-Frank is unlikely, partly because Republicans will have a slim majority in the Senate and, thus, may lack the sixty votes needed to end a filibuster. If Senate Democrats unite in their opposition to repeal, they can prevent a vote altogether. Gardner and Katz think it more likely that the administration will modify Dodd-Frank at the margins.
Katz expects targeted efforts in that regard. For example, he predicts that the CFPB will be weakened, but not abolished. The new administration can weaken the Bureau by replacing its current single director with a Republican appointee, or by changing its structure to that of a commission with no more than three of five commissioners from either party. Given the President-Elect’s populist message, efforts to abolish the CFPB would be politically risky: the Bureau was established to protect consumers.
The administration could also target CFPB regulations. Gardner notes that promulgated rules will likely survive, but non-final rules may be withdrawn and rewritten. For example, in June 2016, CFPB proposed new restrictions on payday lending, but they have not yet been finalized. If the proposed rules are still pending in January 2017, the new administration may scrap them in favor of less onerous restrictions.
In addition to these modifications related to Dodd-Frank, Gardner and Katz discussed personnel changes at various agencies, including the Securities Exchange Commission (SEC). Although President-Elect Trump campaigned on a promise to “drain the swamp,” leaks from his transition team suggest he will rely to a great extent on veterans of past Republican administrations. Heading the efforts for independent regulators like the SEC, the Commodity Futures Trading Commission (CFTC), and the Federal Reserve is Paul Atkins, an ex-SEC Commissioner who disfavors regulation. Atkins almost certainly is looking for potential appointees who share his view. Gardner does not anticipate major shifts in the regulatory environment but, as Katz notes, individuals appointed to lead these agencies will set the tone and influence each agency’s enforcement priorities. Codified rules likely will remain, but agencies faced with close questions or grey areas of the law will probably resolve them in favor of industry.
All that said, President-Elect Trump’s candidacy did not unfold as many predicted. It will be interesting to see whether and how these expected changes to financial regulation materialize under the new administration.
On October 3, 2013, the Consumer Financial Protection Bureau announced it had filed a complaint in federal district court in Washington state against a leading debt-settlement payment processor, Meracord LLC, and its CEO. The CFPB contends that Meracord helped third parties collect millions of dollars in illegal upfront fees from consumers.
The complaint alleged violations of the Federal Trade Commission’s Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act of 2010. The CFPB contended that Meracord maintained accounts and processed payments for consumers who had contracted with providers of debt-relief servicers and mortgage assistance relief services. As is often the case, when consumers enroll in a debt-relief program, they also enter into a separate agreement with a payment processor, which establishes and maintains a “dedicated account” for the consumer. At the time of enrollment, the debt-relief service provider instructs the consumer to stop paying his or her unsecured debts and, instead, to make monthly payments to the payment processor. The processor can later pay renegotiated debts to the creditor and also pay the debt-relief servicers’ fees.
The CFPB alleged that, since October 27, 2010, Meracord processed payments for more than 250,000 consumers receiving debt-relief services from more than 250 debt-relief service servicers. According to the agency, consumers paid debt-relief service providers before any debts were settled. The Telemarketing Sales Rule has special requirements for debt reduction services. In particular, providers are not allowed to request or take fees for services before providing debt-relief services resulting in actual renegotiation or other settlement of a consumer’s debt and a payment by the consumer to a creditor. The FTC asserted that Meracord processed payments for debt reduction services which routinely charged advanced fees to consumers in violation of the TSR.
The TSR also makes it unlawful for third parties to assist others in violating the TSR. The CFPB used this section of the TSR against Meracord. Since Meracord collected the payments from consumers and would know whether or not they had been disbursed to creditors, and when they had been disbursed to the debt-relief servicers, Meracord would have knowledge that the debt-relief servicers were violating the TSR by collecting fees prior to delivering debt-relief services that resulted in payments to creditors.
Meracord and its CEO have agreed to settle the case. In the Stipulated Final Judgment and Order, Meracord and its CEO, Linda Remsberg, agree that they will permanently enjoined from providing account-maintenance or payment-processing services to any provider of a debt-relief service or a mortgage assistance relief service. The proposed settlement (which must be approved in court) also provides for a civil money penalty of $1.37 million and compliance reporting and monitoring, as well as ongoing recordkeeping requirements.
The CFPB’s action signals that it will use its authority to reach organizations that it believes provide substantial assistance to others allegedly violating consumer protection laws within its jurisdiction. CFPB Director Richard Cordray said, “By taking a stand against those who facilitate illegal activity, we can root out harmful behavior across the debt-settlement industry and better protect consumers.” Thus, it is not only those companies dealing directly with consumers who need to be cognizant of the CFPB’s reach. In particular, organizations within the “chain” of industries such as debt-settlement and credit repair, should review their compliance with laws and rules the CFPB may enforce (usually shared with other agencies such as the FTC), and which include the Fair Debt Collections Practices Act, the Fair Credit Reporting Act, the Telemarketing Sales Rule, the Business Opportunities Rule, and other consumer financial-related statutes.
The credit reporting industry – dominated by Experian, Equifax and Transunion – maintains a precarious balance of obligations: On the one hand, these companies bear a responsibility to banks and other businesses at large to retain reliable information to ensure that the credit scores they report are a fair representation of the individual’s credit-worthiness. On the other hand, federal law, including the Fair Credit Reporting Act, imposes an obligation upon the credit reporting agencies and other related companies to conduct reasonable investigations to address disputes about errors in individuals’ credit files. In both instances, the companies bear a weighty responsibility.
For this reason, companies in the credit reporting industry are subject to intensive regulatory scrutiny – historically by the Federal Trade Commission and, more recently, by the Consumer Financial Protection Bureau. Both agencies have issued reports on their studies of the way in which credit reporting companies handle the information entrusted to them, and how they respond to consumer disputes.
This past Sunday, CBS’s 60 Minutes – a show that most people associate with responsible news reporting – ran a segment that unfairly distorted these reports about credit reporting agencies’ compliance with their obligations. The show, which was largely based on an advance copy of an FTC study, relied upon selective interpretation of the data in that study, throwing out snippets of information without being specific on what the data meant.
The vast majority of the story can hardly be viewed as unbiased: interviews with a politically motivated state attorney general, two plaintiffs’ attorneys who spend their careers suing the credit reporting agencies, a handful of dissatisfied consumers, and several disgruntled former call center employees whose role in addressing consumer complaints was never really explained in a meaningful way. The result was a show clearly intended to convey a message that the credit data retained by these companies is riddled with errors, and that the credit reporting agencies fail to comply with their legal obligations to take steps when there is a claim of an inaccuracy.
In fact, as the Consumer Data Industry Association has pointed out, the FTC study shows that 98 percent of credit reports are materially accurate. In this regard, 60 Minutes missed the most critical point in the research – that the measure of accuracy is tied to the question of whether an error has consequences for consumers and not just whether there is an error that has little or no impact on credit scores. The FTC study actually concluded that only 2.2 percent of credit reports have an error that would lead to higher-priced credit for the consumer.
60 Minutes compounded its error by repeatedly asserting that it was “nearly impossible to expunge” an error in a credit report, and providing a forum for a state attorney general and two plaintiffs’ attorneys to assert that the credit reporting companies do not comply with their obligations under federal law. This one-sided treatment does not square with a 2011 study from the Political and Economic Research Council that showed that consumers were satisfied with the resolution of their disputes in 95 percent of the cases. It also does not square with the results of a year-long study of the dispute process by the FTC in which the agency found no violations of law.
It is not hard to understand what motivated 60 Minutes to run this story: Because everyone has a credit score, an inflammatory story about credit scores is likely to get everyone’s attention. But the one-sided and distorted way in which 60 Minutes presented this information was a disservice to the public. And even if credit reporting agencies are not perfect, they deserve better treatment at the hands of those who have the public’s ear.
Earlier this month, the Federal Trade Commission released a staff report outlining key issues facing consumers and companies as they adopt mobile payment services, entitled “Paper, Plastic . . . or Mobile? An FTC Workshop on Mobile Payments.” The report is based on a workshop held by the FTC in 2012 to examine the mobile payment industry.
Consumer use of mobile payment services continues to grow quickly. Mobile payment systems have the potential to be beneficial for both companies and consumers. However, many issues regarding fraud, privacy and security arise, and the FTC is looking to the industry to take the lead on establishing sound policies.
The FTC encourages companies that use mobile payment systems to develop clear policies on the resolution of disputes regarding unauthorized or fraudulent charges. Consumers fund their mobile purchases from a variety of sources (e.g., credit cards, bank account, mobile phone bills) and under current regulations each different method of funding has a different process for consumers to dispute an unauthorized or fraudulent charge. The FTC wants to create a clearer and streamlined process for consumers if an issue were to arise regarding a disputed charge. The FTC is planning to hold a separate roundtable on this issue in May.
The report highlights the problems associated with “cramming,” which involves placing unauthorized charges on a consumer’s phone bill. The FTC suggests that mobile carriers should perform some due diligence on companies from which they accept charges.
The report also discusses the idea of “privacy by design,” which involves strong privacy policies and transparency for consumers from inception of a company’s offerings. Consumers understand that they will need to provide some information to access a company’s services, but consumers may want to control how that information is stored and shared. The FTC and the industry realize that mobile payment systems can be an efficient, favored payment method. However, companies offering mobile payments need to be clear to consumers about how their data is being collected, maintained and used. Privacy issues are of paramount concern when using mobile payment systems because of the enormous amount of data available on smartphones.
The report also notes the potential privacy issues that can occur in the mobile payment process. Since mobile payment providers have access to both the financial information and contact information of the payer, they are in a position to create a serious privacy breach. The report suggests that companies consider privacy throughout the process of development, be transparent regarding data practices, and allow consumers options on how they want their information to be collected.
The report also encourages the industry to adopt measures to ensure that the entire mobile payment process is secure since financial information could potentially be disclosed. The FTC notes that there is technology available to make the protection of payment information more secure and suggests that financial information should be encrypted at all points in the transaction.
Companies should take note of the FTC’s report and adjust their practices. The FTC has put companies on notice about its expectations in mobile payments. It would not surprise us to see enforcement actions in the future in the area. Companies should, in particular, make clear their policy for explaining charges, and how they can be authorized. The more support a company has in showing that a charge is justified, the easier it will be to defend. This kind of specificity may also help influence authorities from even bringing charges. When offering mobile payment services, opt-in screens requiring a click or a password to make a charge and making sure the network is secure are best practices that may save an organization from being on the receiving end of an enforcement action.
According to a recent NBC News report, Equifax, one of the three largest American credit reporting agencies, has assembled an enormous database containing employment and salary information for more than 190 million U.S. adults. Very few people knew of the existence of the database, but the information in it allegedly is being sold to third parties without consumers’ consent.
According to the report, an Equifax-owned company, The Work Number obtains substantial information– through the assistance of human resources departments and other sources around the country including government agencies and Fortune 500 companies. The Work Number then sells this information. According to The Work Number’s website, payroll information comes from over 2,000 employers. Reports have stated that the database is so detailed that for many individuals it has weekly pay information, as well as other sensitive information such as the identity of the individual’s health care provider and whether the individual has ever filed a claim for unemployment benefits.
Seven members of Congress recently wrote a letter to Equifax asking for more information on the legality of The Work Number. “What is most concerning to us is that this massive database appears to generate revenue using consumers’ sensitive personal information for profit,” the letter states.
Companies state that they agree to sign up for The Work Number because it gives them a simple way to outsource employment verification of former employees. Companies provide their human resources information to The Work Number and The Work Number automates the process. There is no longer a need for companies to spend the time to verify a former employee’s work history.
In 2009, according to the NBCNews.om report, Equifax said that the data The Work Number had amassed covered 30 percent of the working U.S. population, and the database is now adding 12 million records annually according to NBCNews.com.
It is not entirely clear what Equifax is doing with the data, where it is selling it, and what can be sold without consent. In a statement after NBCNews.com broke the story Equifax said, “The Work Number does not provide debt collectors with salary/pay rate/income information. They can request only employment verification data which The Work Number will provide if there is permissible purpose as detailed by the Fair Credit Reporting Act.” Equifax also denied reports that the salary information is sold to debt collectors.
Equifax did confirm that “pay rate” information is shared with third parties including mortgage, automobile, and other financial services companies — as authorized under the Fair Credit Reporting Act.
Since the data is considered a credit report, consumers are entitled to one free report every year, which shows the data contained in the reports and what entities have requested the data.
Companies that collect and share data will continue to face scrutiny from state and federal government agencies that have shown a consistent effort focused on protecting consumers’ privacy rights. Consumer protection laws continue to evolve and provide individuals with specific rights as well as restrictions on companies regarding information that can be shared. All companies that deal with consumer information need to take a proactive approach to make sure that they are in compliance with all governing laws. The FTC, in particular, has shown a willingness and focus to utilize laws such as the Fair Credit Reporting Act to take enforcement action against companies offering employment and credit data.
As part of its aggressive program to protect consumers in financial matters, the Consumer Protection Financial Bureau (CFPB) has announced that it is prepared to adopt a controversial “disparate impact” theory of liability against lenders. A case that the U.S. Supreme Court may accept would have a major impact on whether the CFPB is actually going to be able to do that.
The “disparate impact” theory was first articulated by the Supreme Court and further addressed by the Civil Rights Act of 1991 in the employment discrimination context. In a 1971 decision, Griggs v. Duke Power Co., the Court held that Title VII “proscribes not only overt discrimination but also practices that are fair in form, but discriminatory in operation.”
In the employment context, under Griggs, even though an employer may not intend to discriminate against a protected group, it may still be found liable under anti-discrimination laws for practices that disproportionately disadvantage such a group.
The theory was administratively adopted for federal fair lending laws in the 1990s, as laid out in a 1994 Interagency Policy Statement on Fair Lending. This statement from the Department of Justice and other federal agencies says that lenders may be liable for fair lending law violations if their policies or practices are shown to have a disparate impact on protected groups – even if there was no intent to discriminate. The statement, however, does not have the force of law.
In addition, the federal government, in practice, had not aggressively pursued fair lending cases in the absence of intentional discrimination against a protected group — until the Obama Administration’s CFPB announced its intention to use the “disparate impact” theory.
That is where the pending Supreme Court case, Mount Holly v. Mount Holly Gardens Citizens in Action, Inc. comes in. In that case, the Township of Mount Holly, N.J., made plans to redevelop a blighted residential area that was primarily inhabited by low- and moderate-income minority residents. Under the plan, the neighborhood would be demolished, and significantly more-expensive housing would be built. Many of the residents objected to the redevelopment, saying that their neighborhood would be destroyed and that they would not be able to afford to live in the new neighborhood. They sued under the Fair Housing Act, alleging that although the plan was not specifically targeted against minorities, it would have a disparate impact on them. The U.S. Court of Appeals for the Third Circuit allowed the case to proceed, and the Supreme Court is now considering it.
The issue is whether “disparate impact” is cognizable under the Fair Housing Act, as it is in the employment context. If the Court holds that impact as well as intent leads to a cause of action under the Fair Housing Act, the CFPB will go ahead and act under the theory. It will bring cases, for example, against banks that make loans only in areas that happen to be inhabited by high-income people and decline to make loans in areas where low-income people (many of whom are minorities) live. It will use geography as a proxy for racial or ethnic discrimination: Where were loans made, and where were they denied?
The Supreme Court has not yet decided whether it will hear the Mount Holly case. The most recent activity was the Court’s request, at the end of October, that the U.S. solicitor general formally express the views of the U.S. government on the issue. The solicitor general has not yet filed, and it will probably be a few weeks until he does file and the justices consider the SG’s arguments and decide whether to grant certiorari.
Consumer advocacy groups have actively pushed the disparate impact theory. The National Fair Housing Alliance has filed administrative complaints against Bank of America, Wells Fargo, and U.S. Bancorp, alleging that bank practices in maintaining foreclosed properties discriminate against people in predominantly black and Hispanic neighborhoods. Bank of America, Wells Fargo and SunTrust have recently paid some $500 million to settle claims: Since the banks opted to settle these cases, there was no formal legal ruling on the theory of liability.
Thus, “disparate impact” has been slowly taking hold in the lending context – without any real statutory basis or judicial clarification. The theory is still being used only by extension or analogy to the employment context. A high court ruling would clarify this very important area of law. Lenders, developers, and borrowers are waiting for clarification.
The Commodity Futures Trading Commission (CFTC) is apparently going to appeal a U.S. district judge’s ruling that had overturned its decision to impose limits on the number of contracts that commodity traders can hold.
The CFTC had found that under the recently passed Dodd-Frank law, which amended the Commodity Exchange Act of 1936, it now need not make a finding of “necessity” before it puts forth a rule to impose these position limits. It had ruled, in fact, that it was mandated by Congress to set limits and that it had no discretion to choose not to impose such limits.
The swaps and derivatives industries, however, challenged the CFTC’s interpretation in U.S. District Court for the District of Columbia. The industries contended that even under the Dodd-Frank amendments, the agency must find that it is “necessary and appropriate” to set position limits. In other words, for each given commodity, it would need to show that there was a risk of dangerous speculation.
On September 28, U.S. District Judge Robert Wilkins rejected the CFTC’s position. He sent the rule back to the CFTC for further consideration, just two weeks before the limits were set to take effect. He said that Dodd-Frank did not give the agency a “clear and unambiguous mandate” to set position limits without showing they were necessary in each instance.
The law, wrote Judge Wilkins, requires “that the Court remand the rule to the agency so that it can fill in the gaps and resolve the ambiguities.”
One would think that the agency would accept this direction from the judge and come up with an interpretation of the Dodd-Frank law that would indeed fill in gaps and resolve ambiguities. That is what an agency is supposed to do.
Now, however, according to Reuters and other reports in early November, there appears to be a CFTC majority – three of the five commissioners — in favor of appealing Judge Wilkins’ decision to the U.S. Court of Appeals for the D.C. Circuit.
It seems odd to us, at the very least, that the agency is insisting on an interpretation of the Dodd-Frank law that strips it of all discretion and requires it to set position limits for dozens of commodities without a finding that the limits are going to be helpful to police the markets and limit excessive speculation. Especially now that a judge has ruled that Congress didn’t unambiguously decide to tie the agency’s hands, why pursue this appeal?
There may be a legal hurdle or two for the Consumer Financial Protection Board to jump after the recess appointment of agency director Richard Cordray (the House Judiciary Committee held a hearing on the matter on February 15). But the consumer protection agency created under the Dodd-Frank Wall Street Reform Act of 2010 is pressing forward with its initiatives. Not too surprisingly, several recently proposed initiatives from the agency would stretch the agency’s authority into areas that extend beyond the industries targeted in the Dodd-Frank Act.
The day after the House Judiciary Committee debated the constitutionality of Cordray’s appointment (it doesn’t appear that the hearing was much more than some Republican caterwauling for the record), the CFPB released news of its first major regulatory proposal: to bring consumer credit reporting agencies and debt collection services under its scrutiny.
Those who are vaguely familiar with Dodd-Frank may be aware that the legislation gives the CFPB oversight of specific nonbank markets for (1) nonbank mortgage companies, (2) payday lenders, and (3) private student lenders. These are popular and understandable targets for probes of predatory lending practices. Headlining these industries as needing increased oversight is part of what made the legislation popular and easier for Congress to pass. So where do credit reporting agencies and debt collectors fit under the regulatory scheme? Quite simply, the Dodd-Frank Act also provides for CFPB oversight of other nonbank financial companies that are “larger participants of a market for other consumer financial products or services.”
Oversight of “larger participants”? What on earth does that mean? Congress doesn’t appear to have given clear guidance on what it meant by “larger participants,” leaving the term to the agency to define. As certain as the law of gravity is the law of bureaucratic power: What is not confined (by legislative delineation) necessarily will expand.
Don’t assume that the Dodd-Frank Act’s vagueness concerning what the CFPB would oversee was … well, an oversight. Congress often provides a broad policy concept and then delegates to administrative agencies the power to run with their interpretation and execution of that concept. Hence the impossibly cumbersome Code of Federal Regulations. Even so, however, the breadth of the power delegated to the new consumer protection agency is a bit much.
To the CFPB’s immense credit, it has published at least two requests for public comment to help it define “larger participants” and included an article on the agency’s blog regarding the matter. Indeed, the CFPB seems to be doing a pretty good job of explaining its steps and initiatives and of providing a user-friendly forum to keep the public apprised of their actions. And it is not entirely the agency’s fault that it is obeying the laws of bureaucratic power reach – it would be unnatural for the agency to try to constrict its authority.
What we should glean from the CFPB’s latest proposal, though, is that the CFPB will be running with its power and companies that provide any kind of consumer finance product must be aware of the possibility of government scrutiny.