Tuesday, December 22, 2015

CFPB Monthly Complaint Snapshot Examines Money Transfer Complaints (Dec 2015)

[re-posted media release from the CFPB] 

CONTACT:Office of CommunicationsTel: (202) 435-7170


Report Also Includes In-Depth Look at Consumer Complaints from Georgia 
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) released its latest monthly consumer complaint snapshot, highlighting consumer complaints about money transfers. The report shows that consumers’ complaints about money transfers center around trouble safely and efficiently sending money, and complaints about being victims of fraud. This month’s snapshot also highlights trends seen in complaints coming from Georgia. As of Dec. 1, 2015, the Bureau has handled over 770,100 complaints across all products. 
“People rely on the money transfer process to make payments and take care of family members that they cannot be with,” said CFPB Director Richard Cordray. “Through rules on international money transfers and continued supervision of this important financial service, the Bureau is working to make sure that consumers can easily send money without having to worry about delays or hidden fees.” 
Product Spotlight: Money Transfer 

Every year, people send tens of billions of dollars through money transfer services. Consumers send funds both abroad and domestically in order to make payments, and to help family and friends pay for important needs such as school fees, rent for elderly relatives, and other necessary living expenses. In 2013, the CFPB finalized rules on international money transfers that provided new protections such as disclosures on third party fees and exchange rates, error resolution, and cancellation rights for consumers sending money. As of Dec. 1, 2015, the Bureau had handled approximately 5,100 money transfer complaints, which include both domestic and international transfers. Some of the findings in the snapshot include:
  • Consumers victimized by fraud: Of all complaints about money transfers, 42 percent of them involved consumers complaining about being victims of fraud. A common fraud tactic mentioned by consumers involves the fraud perpetrator asking for a money transfer in order to provide relief to a family member in need. While this is the most common type of money transfer complaint, it is not targeted at the actual money transfer service being provided.    
  • Problems transferring money: Consumers complain about problems arising when they try to complete a money transfer. Some consumers complained that the amount of money transmitted was smaller than expected, while others mentioned the money they sent being significantly and unexpectedly delayed.     
  • Lack of adequate customer service: Many complaints about money transfers centered around problems consumers faced when they contacted the company for help. People complained about long hold times when attempting to speak to a representative, and that when they did manage to get through to someone, they were provided confusing or inadequate information. Other consumers said when they called they were simply unable to speak to anyone from the company.
  • Issues resolving errors: Consumers complain that refunds on money transfers are often subject to long delays, and that their rights in resolving an error are not made clear by the company they are working with.
  • Most-complained-about companies: MoneyGram, Western Union, PayPal, and JPMorgan Chase were the four companies about which the CFPB has received the most money transfer complaints. Between July 2015 and September 2015, the four companies accounted for 80 percent of all money transfer complaints. Company-level information should be considered in the context of company size and activity in the relevant market.
Company-level complaint data in the report uses a three-month rolling average of complaints sent by the Bureau to companies for response. This data lags other complaint data in this report by two months to reflect that companies are expected to close all but the most complicated complaints within 60 days. After the CFPB forwards a company the complaint, the company has 15 days to respond, confirming a commercial relationship with the consumer.
National Complaint OverviewAs of Dec. 1, 2015, the CFPB has handled 770,100 complaints nationally. Some of the highlights from the statistics in this month’s snapshot report include:
  • Complaint volume: For November 2015, the two most-complained-about financial products were debt collection and mortgages, representing nearly half—49 percent—of complaints submitted. Overall, the CFPB saw a 12 percent decrease in complaint volume between October 2015  and November 2015.
  • Product trends: In a year-to-year comparison examining the time periods of September to November, complaints about prepaid products rose 215 percent. Between Sep. 1 and Nov. 31, the CFPB received 442 complaints about prepaid products. Payday loan complaints showed the greatest decrease—14 percent—during the same time period.
  • State information: The District of Columbia and Delaware are the two places with the highest complaint volume per capita in the country. The District of Columbia had 674 complaints per 100,000 people, while Delaware had 433 complaints per 100,000. 
  • Most-complained-about companies: The top three companies about which the CFPB received the most complaints between July and September of 2015 were Equifax, TransUnion, and Experian.
Geographic Spotlight: GeorgiaThis month, the CFPB highlighted Georgia and the Atlanta metro area for the report’s geographic spotlight. As of Dec. 1, 2015, consumers in Georgia have submitted 31,300 of the 770,100 complaints the CFPB has handled. Of those complaints, 23,600 have come from consumers in the Atlanta metro area. Findings from the Georgia complaints include:
  • Mortgages are the most-complained-about product: Mortgages have been the most-complained-about product in the Atlanta metro area and Georgia as a whole. Of the 31,300 complaints submitted by consumers in Georgia, 33 percent have been related to mortgages. 
  • Georgia complaint volume mostly mirrors national trends: While consumers in Georgia complain about mortgages at a slightly higher rate than consumers nationally, complaint volume about other financial products is similar to what is seen on the national level.
  • Most-complained-about companies: Equifax, Bank of America, Experian, TransUnion, and Wells Fargo were the five most-complained-about companies from consumers in Georgia.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, established consumer complaint handling as an integral part of the CFPB’s work. The CFPB began accepting complaints as soon as it opened its doors in July 2011. It currently accepts complaints on many consumer financial products, including credit cards, mortgages, bank accounts and services, private student loans, vehicle and other consumer loans, credit reporting, money transfers, debt collection, and payday loans.
The Bureau expects companies to respond to complaints and to describe the steps they have taken or plan to take to resolve the complaint within 15 days of receipt. The CFPB expects companies to close all but the most complicated complaints within 60 days.
In June 2012, the CFPB launched its Consumer Complaint Database, which is the nation’s largest public collection of consumer financial complaints. When consumers submit a complaint they have the option to share publicly their explanation of what happened. For more individual-level complaint data and to read consumers' experiences, go to the Consumer Complaint Database at:www.consumerfinance.gov/complaintdatabase/.
To submit a complaint, consumers can:
  • Go online at www.consumerfinance.gov/complaint/
  • Call the toll-free phone number at 1-855-411-CFPB (2372) or TTY/TDD phone number at 1-855-729-CFPB (2372)
  • Fax the CFPB at 1-855-237-2392
  • Mail a letter to: Consumer Financial Protection Bureau, P.O. Box 4503, Iowa City, Iowa 52244
  • Additionally, through “Ask CFPB,” consumers can get clear, unbiased answers to their questions at Ask CFPB.

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.  

Wednesday, December 16, 2015

EZCORP Ordered to Pay $10 Million for Illegal Debt Collection Tactics (re-post)


Bureau Issues Industry-Wide Warning on Home, Workplace Debt Collection Risks

WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) today took action against EZCORP, Inc., a small-dollar lender, for illegal debt collection practices. These tactics included illegal visits to consumers at their homes and workplaces, empty threats of legal action, lying about consumers’ rights, and exposing consumers to bank fees through unlawful electronic withdrawals. The Bureau ordered EZCORP to refund $7.5 million to 93,000 consumers, pay $3 million in penalties, and stop collection of remaining payday and installment loan debts owed by roughly 130,000 consumers. It also bars EZCORP from future in-person debt collection. In addition, the Bureau issued an industry-wide warning about collecting debt at homes or workplaces. 
“People struggling to pay their bills should not also fear harassment, humiliation, or negative employment consequences because of debt collectors,” said CFPB Director Richard Cordray. “Borrowers should be treated with common decency. This action and this bulletin are a reminder that we will not tolerate illegal debt collection practices.” 
Until recently, EZCORP, headquartered in Austin, Tex., and its related entities provided high-cost, short-term, unsecured loans, including payday and installment loans, in 15 states and from more than 500 storefronts. It did this under names including “EZMONEY Payday Loans,” “EZ Loan Services,” “EZ Payday Advance,” and “EZPAWN Payday Loans.” On July 29, 2015, after the Bureau launched its investigation, EZCORP announced that it would cease offering payday, installment, and auto-title loans in the United States. 
The CFPB found that EZCORP collected debts from consumers through unlawful in-person collection visits at their homes or workplaces, risked exposing consumers’ debts to third parties, falsely threatened consumers with litigation for non-payment of debts, and unfairly made multiple electronic withdrawal attempts from consumer accounts, causing mounting bank fees. The CFPB alleges that EZCORP violated the Electronic Fund Transfer Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition against unfair and deceptive acts or practices. Specifically, the CFPB’s investigation found that EZCORP: 
  • Visited consumers’ homes and workplaces to collect debt in an unlawful way: Until at least October 2013, EZCORP made in-person collection visits that disclosed or risked disclosing consumers’ debt to third parties, and caused or risked causing adverse employment consequences to consumers such as disciplinary actions or firing. 
  • Illegally contacted third parties about consumers’ debts and called consumers at their workplaces despite being told to stop: Debt collectors called credit references, supervisors and landlords, and disclosed or risked disclosing debts to third parties, potentially jeopardizing  consumers’ jobs or reputations. It also ignored consumers’ requests to stop calls to their workplaces. 
  • Deceived consumers with threats of legal action: In many instances, EZCORP threatened consumers with legal action. But in practice, EZCORP did not refer these accounts to any law firm or legal department and did not take legal action against consumers on those accounts. 
  • Lied about not conducting credit checks on loan applicants: From November 2011 to May 2012, EZCORP claimed in some advertisements it would not conduct a credit check on loan applicants. But EZCORP routinely ran credit checks on applicants targeted by those ads. 
  • Required debt repayment by pre-authorized checking account withdrawals: Until January 2013, EZCORP required many consumers to repay installment loans through electronic withdrawals from their bank accounts. By law, consumers’ loans cannot be conditioned on pre-authorizing repayment through electronic fund transfers. 
  • Exposed consumers to fees through electronic withdrawal attempts: EZCORP would often make three simultaneous attempts to electronically withdraw money from a consumer’s bank account for a loan payment: for 50 percent, 30 percent, and 20 percent of the total due. The company also often made withdrawals earlier than promised. As a result, tens of thousands of consumers incurred fees from their banks, making it even harder to climb out of debt when behind on payment. 
  • Lied to consumers that they could not stop electronic withdrawals or collection calls or repay loans early:  EZCORP told consumers the only way to stop electronic withdrawals or collection calls was to make a payment or set up a payment plan. In fact, EZCORP’s consumers could revoke their authorization for electronic withdrawals and demand that EZCORP’s debt collectors stop calling. Also, EZCORP falsely told consumers in Colorado that they could not pay off a loan at any point during the loan term, or could not do so without penalty. Consumers could in fact repay the loan early, which would save them money. 
Enforcement ActionUnder the Dodd-Frank Act, the CFPB is authorized to take action against institutions or individuals engaged in unfair, deceptive or abusive acts or practices, or that otherwise violate federal consumer financial laws. Under the consent order, EZCORP must: 
  • Pay $7.5 million to 93,000 consumers: EZCORP is ordered to refund $7.5 million to about 93,000 consumers who made payments after illegal in-person collection visits or who paid fees to EZCORP or their banks because of unauthorized or excessive electronic withdrawal attempts covered by this order. 
  • Stop collection of its remaining payday and installment debt: EZCORP must stop collection of an estimated tens of millions of dollars in defaulted payday and installment loans allegedly owed by about 130,000 consumers, and may not sell those debts to any third parties. It must also request that consumer reporting agencies amend, delete, or suppress any negative information related to those debts. 
  • Stop illegal debt collection practices: If EZCORP decides again to offer payday or installment loans, it cannot, among other practices, make in-person collection visits, call consumers at their workplace without specific written permission from the consumer, or attempt electronic withdrawals after a previous attempt failed because of insufficient funds without consumers’ permission. 
  • Pay a civil penalty of $3 million: EZCORP must pay a penalty of $3 million to the CFPB’s Civil Penalty Fund. 
The full text of the CFPB’s consent order is available at:http://files.consumerfinance.gov/f/201512_cfpb_ezcorp-inc-consent-order.pdf 
Warning Against Illegal Debt Collection TacticsToday, the CFPB also issued a bulletin warning the financial services industry, and in particular lenders and debt collectors, about potentially unlawful conduct during in-person collections. Lenders and debt collectors risk engaging in unfair or deceptive acts and practices that violate the Dodd-Frank Act and the Fair Debt Collection Practices Act when going to consumers’ homes and workplaces to collect debt. 
The bulletin highlights that in-person collection visits may be harassment and may result in third parties, such as consumers’ co-workers, supervisors, roommates, landlords, or neighbors, learning that the consumer has debts in collection. Revealing such information to third parties could harm the consumer’s reputation and result in negative employment consequences. The bulletin also highlights that it is illegal for those subject to the law to engage in practices such as contacting consumers to collect on debt at times or places known to be inconvenient to the consumer, except in very limited circumstances. 
The bulletin offering guidance on debt collection practices can be found here:http://files.consumerfinance.gov/f/201512_cfpb_compliance-bulletin-in-person-collection-of-consumer-debt.pdf                                                                                                                                                                                                         ###

On December 16, 2015, the CFPB announced a consent order with EZCORP, Inc., a short-term, small-dollar lender, for illegal debt collection practices, some of which were initially discovered during the course of a Bureau examination. These practices related to in-person collection visits at consumers’ homes or workplaces, risking disclosing the existence of consumers’ debt to unauthorized third parties, falsely threatening consumers with litigation for non-payment of debts, misrepresenting consumers’ rights, and unfairly making multiple electronic withdrawal attempts from consumer accounts which caused mounting bank fees. EZCORP violated the Electronic Fund Transfer Act and the Dodd-Frank Act’s prohibition against unfair or deceptive acts or practices. EZCORP will refund $7.5 million to 93,000 consumers, pay a $3 million civil money penalty, and stop collection of remaining payday and installment loan debts owed by roughly 130,000 consumers. The consent order also bars EZCORP from future in-person debt collection. In addition, the CFPB issued an industry-wide warning about potentially unlawful conduct during in-person collections at homes or workplaces. 

SOURCE: March 2016 issue of Supervisory Highlights, available at 

Wednesday, October 7, 2015

CFPB proposes to close loophole that allows financial services providers to avoid class actions through arbitration requirements inserted into the take-it-or-leave-it consumer contracts they draft

Arbitration clauses are widely used in consumer contracts and serve two purposes that companies favor: secrecy and avoidance of class-actions. The arbitration clause allows a company to remove a case brought by a consumer from the court system, and additional fine print in the underlying form contract typically also states that a consumer's claim may not been pursued as a class action in any forum ("class action waiver"). The Consumer Financial Protection Bureau today proposed that the regulatory environment be changed so that financial services companies cannot avoid being held accountable for wrongdoing -- such as violating consumer protection laws -- by diverting legal complaints by consumers into arbitration. The Bureau does not seek to abolish arbitration completely, but seeks to stop companies from using arbitration to thwart class actions. The Bureau prefers the term "group" rather than "class", presumably because of a more favorable connotation. The agency also proposes that arbitration claims and results ("awards" rather than "judgments") be reported to it to enhance transparency of this private form of dispute resolution, and to allow for monitoring with a view of collecting data and gaining experience that might usefully inform public policy and rule-making in the future. 
Press release and remarks by the Director of the Consumer Financial Protection Bureau follow below:  
CONTACT: Office of Communications Tel: (202) 435-7170
Proposal Would End the Free Pass Companies Use Against Group Lawsuits
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would ban consumer financial companies from using “free pass” arbitration clauses to block consumers from suing in groups to obtain relief. Buried in many contracts for consumer financial products like credit cards and bank accounts, most arbitration clauses deny consumers the right to participate in group lawsuits against companies. With this free pass, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm countless consumers. The CFPB’s proposals under consideration would give consumers their day in court and deter companies from wrongdoing.
“Consumers should not be asked to sign away their legal rights when they open a bank account or credit card,” said CFPB Director Richard Cordray. “Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing. The proposals under consideration would ban arbitration clauses that block group lawsuits so that consumers can take companies to court to seek the relief they deserve.”
Many contracts for consumer financial products and services include arbitration clauses. These clauses typically state that either the company or the consumer can require disputes about that product to be resolved by privately appointed individuals (arbitrators), rather than through the court system. Where such a clause exists, either side can generally block lawsuits from proceeding in court. These clauses also typically bar consumers from bringing group claims through the arbitration process. There are arbitration clauses in all kinds of consumer financial products, from bank accounts to private student loans. They affect tens of millions of consumers. As a result, no matter how many consumers are injured by the same conduct, consumers must resolve their claims individually against the company, which few consumers do. 
In the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress required the CFPB to study the use of arbitration clauses in consumer financial markets and gave the Bureau the power to issue regulations that are in the public interest, for the protection of consumers, and consistent with the study’s findings. The CFPB’s study – released in March of this year – showed that arbitration clauses restrict consumers’ relief for disputes with financial service providers by allowing companies to block group lawsuits.
The study also found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration or the federal courts, while millions of consumers are eligible for relief each year through group settlements. According to the study, more than 75 percent of consumers surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract. Fewer than 7 percent of those consumers covered by arbitration clauses realized that the clauses restricted their ability to sue in court.
Today, the Bureau is publishing an outline of the proposals under consideration in preparation for convening a Small Business Review Panel to gather feedback from small industry stakeholders. This is the first step in the process of a potential rulemaking on this issue. The proposals being considered would ban companies from including arbitration clauses that block class action lawsuits in their consumer contracts. This would apply to most consumer financial products and services that the CFPB oversees, including credit cards, checking and deposit accounts, prepaid cards, money transfer services, certain auto loans, auto title loans, small dollar or payday loans, private student loans, and installment loans. 
The proposals being considered would not ban arbitration clauses in their entirety. However, the clauses would have to say explicitly that they do not apply to cases filed as class actions unless and until the class certification is denied by the court or the class claims are dismissed in court. The proposals under consideration would also require that companies that choose to use arbitration clauses for individual disputes submit to the CFPB the arbitration claims filed and awards issued. This will allow the Bureau to monitor consumer finance arbitrations to ensure that the process is fair for consumers. The Bureau is also considering publishing the claims and awards on its website so the public can monitor them.
The benefits of the proposals would include:
  • A day in court for consumers: The proposals under consideration would give consumers their day in court to hold companies accountable for wrongdoing.Often the harm to an individual consumer may be too small to make it practical to pursue litigation, even where the overall harm to consumers is significant. Previous CFPB survey results reported that only around 2 percent of consumers surveyed would consult an attorney to pursue an individual lawsuit as a means of resolving a small-dollar dispute. In cases involving small injuries of anything less than a few thousand dollars, it can be difficult for a consumer to find a lawyer to handle their case. Congress and the courts developed class litigation procedures in part to address concerns like these. With group lawsuits, consumers have opportunities to obtain relief they otherwise might not get.
  • Deterrent effect: The proposals under consideration would incentivize companies to comply with the law to avoid lawsuits. Arbitration clauses enable companies to avoid being held accountable for their conduct; that makes companies more likely to engage in conduct that could violate consumer protection laws or their contracts with customers. When companies can be called to account for their misconduct, public attention on the cases can affect or influence their individual business practices and the business practices of other companies more broadly.
  • Increased transparency: The proposals under consideration would make the individual arbitration process more transparent by requiring companies that use arbitration clauses to submit the claims filed and awards issued in arbitration to the CFPB. This would enable the CFPB to better understand and monitor arbitration cases. The proposal under consideration to publish the claims filed and awards issued on the CFPB’s website would further increase transparency.
In addition to consulting with small business representatives, the Bureau will continue to seek input from the public, consumer groups, industry, and other stakeholders before continuing with the process of a rulemaking. When the Bureau issues proposed regulations, the public is invited to submit written comments which will be carefully considered before final regulations are issued.
A list of questions on which the Bureau will seek input from the small business representatives providing feedback to the Small Business Review Panel will be available on Wednesday at:http://www.consumerfinance.gov/f/201510_cfpb_small-business-representatives-providing-feedback-to-the-small-business-review-panel.pdf
The March 2015 report on arbitration is available at:http://www.consumerfinance.gov/reports/arbitration-study-report-to-congress-2015/
A factsheet summarizing the Small Business Review Panel process can be found at: http://www.consumerfinance.gov/f/201510_cfpb_fact-sheet-small-business-review-panel-process.pdf
CONTACT:Office of CommunicationsTel: (202) 435-7170
Prepared Remarks of Richard CordrayDirector, Consumer Financial Protection Bureau
Field Hearing on Arbitration
Denver, Colo.October 7, 2015
Thank you all for joining us in Denver today.  We are here to talk about something important that is often buried deeply in the fine print of many contracts for consumer financial products and services, such as credit cards and bank accounts.  It is called an arbitration clause, or more precisely, a mandatory pre-dispute arbitration clause.  If you do not know what an arbitration clause is, you are just like the vast majority of American consumers.
Companies use this clause, in particular, to block class action lawsuits.  They thus provide themselves with a free pass from being held accountable by their customers.  That free pass is secured by making sure their customers cannot group together to seek relief for wrongdoing.  Many violations of consumer financial law involve relatively small amounts of money for the individual victim.  Group claims often are the only effective way consumers can pursue meaningful relief for harms that can add up to large amounts of money for financial providers.  At the Consumer Financial Protection Bureau, we estimate that this free pass affects tens of millions of consumers.
To understand this issue more plainly, we can look at a hypothetical example based on real-world consumer experiences.  Maria and Kate (their names are fictitious) are customers at two different banks, and both are beginning to rack up unexpected overdraft fees on their checking accounts.  It turns out that their banks are processing transactions in unexpected ways that increase the number of overdraft fees and without ever clearly explaining what they are doing.  These practices cost Maria and Kate at most a few hundred dollars each.  But they have earned the banks hundreds of millions of dollars across many customers.
After consulting lawyers, Maria and Kate are told that similar practices have been found to be illegal at another bank, but it would not make economic sense to sue just to recover the small amount each of them has been overcharged.  Maria and Kate could call their banks and demand a refund, but there is no guarantee they would get their money back.  Even if they managed to do so, the same practices would continue to affect others.  So Maria and Kate each agree to sue their banks, not just on behalf of themselves, but on behalf of all the other consumers who were victimized in the same way.
Maria succeeds in bringing a group claim and obtaining a settlement with her bank on behalf of two million customers.  As a group, the customers are eligible to receive upwards of a $100 million refund for the fees they were wrongfully charged, and their bank agrees to change its practices so these harms cannot continue.  By contrast, Kate’s lawsuit is dismissed.  So far as we know, Kate gets nothing for herself and the other customers of the bank are left without relief, despite the fact that her bank engaged in similar practices and used similar disclosures.  The difference is that Kate’s bank had an arbitration clause that gave it a free pass from her efforts to pursue relief by blocking her group claims.
By simply invoking the magic words of the arbitration clause, Kate’s bank could avoid being held to account for its actions.  The only option for customers at Kate’s bank was to bring their own individual arbitration cases for such relatively small amounts that it would be impractical to pursue them.  In addition, the results of any such arbitration cases would never be revealed to the general public.
The dramatically different experiences of these two consumers illustrate how companies have been able to use this little-known clause to rig the game against their customers.  Group lawsuits can result in substantial relief for many consumers and create the leverage to bring about much-needed changes in business practices.  But by inserting the free pass into their consumer financial contracts, companies can sidestep the legal system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm consumers on a large scale.
Let me take a step back and give you a little background on how we got here.  At its most basic level, arbitration is a way to resolve disagreements outside of the federal and state court systems.  Originally, arbitration was primarily used for disputes between businesses; it was rarely used in disagreements between businesses and consumers.  But in the last 20 years or so, companies started including arbitration clauses in their consumer contracts requiring any disputes or disagreements be resolved through private arbitration.  And to make doubly sure that they could escape accountability, many companies specifically blocked group claims even in arbitration, thus forcing consumers to go through the process by themselves in isolation, or forgo it altogether.
Some companies offer their customers the chance to opt out of an arbitration clause.  But very few customers, if any, ever exercise that option, which is unsurprising given that the majority of consumers do not even know that the arbitration clause exists.  Group lawsuits depend on a group.  The few consumers who opt out of arbitration find that very few others are still available to join their lawsuits.  It is simply impossible to have an effective group claim where the vast majority of consumers have all lost their right to have their day in court.
Even before the Consumer Bureau was created, Congress had started to take a more active role in dealing specifically with the problems of forced arbitration.  In the last decade, Congress had begun to distinguish between mandatory pre-dispute arbitration, which is typically imposed on consumers in the contractual boilerplate, and arbitration that both parties can freely decide to undertake after a dispute has already arisen between them.  In 2007, Congress passed the Military Lending Act, which prohibited mandatory pre-dispute arbitration clauses in connection with certain loans made to servicemembers.  Three years later, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Congress went further and banned such clauses from most residential mortgage contracts.
In the Dodd-Frank Act, Congress also put in place a further measure that brings us to where we are today.  In a two-step process, the law empowers the Bureau to address the same concerns that Congress had already highlighted around mandatory pre-dispute arbitration clauses.  First, Congress required the Bureau to conduct a study and issue a report on the use of arbitration clauses in connection with consumer financial products or services.  Once that initial work was completed, Congress gave the Bureau the broad authority to consider whether to issue regulations that it deemed to be in the public interest, for the protection of consumers, and consistent with the results of its study.
We published that study and issued our report to Congress earlier this year.  In the months since, even our critics have acknowledged that the multi-year study, which runs to 728 pages and analyzes extensive data, was the most rigorous and comprehensive study of consumer finance arbitration ever undertaken.  In the study, we found that arbitration clauses are pervasive, but the vast majority of consumers do not even know they exist.  We also found that tens of millions of consumers are covered by arbitration clauses in several consumer finance markets.  Large banks, in particular, commonly include these clauses in their standard agreements for credit cards and checking accounts.  We also found that many payday lenders put such clauses in their contracts.  And our study shows that more than three-quarters of the consumers we surveyed in the credit card market did not know whether they were subject to an arbitration clause in their contract.
The Bureau’s study specifically concluded that group lawsuits can be an effective way to provide relief to consumers when they are allowed to proceed.  Indeed, by examining five years of data, we found that group lawsuits delivered, on average, about $220 million in payments to 6.8 million consumers per year in consumer financial services cases.  But we also saw that in many instances, as in Kate’s situation, group claims are thwarted by companies that invoke their arbitration clauses to cut off such relief.  For example, in cases where credit card companies with an arbitration clause in their contracts were sued in a class action, the companies invoked the clause to block the lawsuit almost two-thirds of the time.
One point of special interest to us was the claim, frequently made by companies that tout the benefits of arbitration, that these clauses enable them to lower the cost of consumer financial services for consumers.  Our study was able to examine this claim closely by comparing large credit card companies that did and did not have arbitration clauses in their contracts, including some companies that previously had such clauses but had stopped using them in the wake of adverse litigation.  Our analysis did not find evidence that credit card companies either increased prices or reduced access to credit when they eliminated their arbitration clauses.
After carefully considering the findings of our landmark study, the Bureau has decided to launch a rulemaking process to protect consumers.  The proposal under consideration would prohibit companies from blocking group lawsuits through the use of arbitration clauses in their contracts.  This would apply generally to the consumer financial products and services that the Bureau oversees, including credit cards, checking and deposit accounts, certain auto loans, small-dollar or payday loans, private student loans, and some other products and services as well.
One approach we might have taken would be a complete ban on all pre-dispute arbitration agreements for consumer financial products and services.  Our proposal would not do that.  Companies could still have an arbitration clause, but they would have to say explicitly that it does not apply to cases brought on behalf of a class unless and until the class certification is denied by the court or the class claims are dismissed in court.  This means we are not proposing at this time to limit the use of arbitration clauses as they apply to individual cases.
This approach is consistent with the conclusions reached in our study.  It is also consistent with rules that the Financial Industry Regulatory Authority has applied to broker-dealers for years, with the approval of the Securities and Exchange Commission.  While at one time certain individual arbitration systems were problematic for consumers in terms of procedures and results, we found that companies today generally cannot bring cases against consumers in arbitration.  We also found that companies rarely use their arbitration clauses to block consumers from suing them in individual cases.  In addition, we found that only a small number of consumers bring individual arbitrations.
Although we are not proposing to prohibit the use of pre-dispute arbitration clauses, we will continue to monitor the effects of such clauses on the resolution of individual disputes.  To enable us to do so, our proposals would require companies to send to the Bureau all filings made by or against them in consumer financial arbitration disputes and any decisions that stem from those filings.  By developing comprehensive data on these matters, over time we will be able to refine our evaluation of how such proceedings may affect consumer protection, if at all.
In order to create more transparency and spur broader thinking by researchers and other interested parties, we are considering publishing this information for all to see, so the public can analyze it as they see fit.  Depending on what the data reveals, down the road these issues could be subject to further consideration by the Bureau and by other policymakers.
So the essence of the proposals we have under consideration is that they would get rid of this free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.  Doing so would produce three general benefits.
First, consumers would have the opportunity to get their day in court.  This is a core American principle.  Under the U.S. Constitution, each one of us is entitled to seek justice through due process of law.  This right is reinforced in many state constitutions, which recognize the right to an effective remedy to redress injuries we may sustain to our person or our property.  This is an important element of personal liberty, that people should have the ability to protect themselves by acting to vindicate their rights.  Nobody should have to rely on the government first deciding to pursue an enforcement action in order to get their money back and hold others accountable.  But as we have already noted, it is simply not worth it for consumers to undertake the burden and cost of bringing an individual case just to challenge small fees and charges.
As noted U.S. Court of Appeals Judge Richard Posner has convincingly observed, “The realistic alternative to a class action is not 17 million individual suits, but zero individual suits, as only a lunatic or a fanatic sues for $30.”  That is, in fact, a primary reason why procedures allowing for group lawsuits have been widely adopted in virtually all of our federal and state courts in the last century.  By joining together to pursue their claims as a group, all of the affected consumers would be able to seek and, when appropriate, obtain meaningful relief that as a practical matter they could not get on their own.
Second, another important benefit of the proposals we are considering is that they would deter wrongdoing on a broader scale.  One way this is often expressed is by describing group lawsuits as being brought by “private attorneys general” as a means of vindicating public rights and as an aid to other methods of law enforcement.  Although many consumer financial violations impose only small costs on each individual consumer, taken as a whole these unlawful practices can yield millions or even billions of dollars in revenue for financial providers. 
Arbitration clauses that bar group lawsuits protect these ill-gotten gains by enabling companies to avoid being held accountable for their misdeeds.  Thus, companies are likely to take less care to ensure that their conduct complies with the law than they would have taken if they did not have a free pass from group lawsuits.  Indeed, some companies may even feel emboldened that they can safely engage in conduct that could violate consumer protection laws or even their own contracts with customers.  The potential to be held accountable in a group lawsuit changes this dynamic. 
When a group lawsuit leads to a court order conferring relief on tens of thousands of consumers who were victimized by suspect practices, the likely result is to create a safer market for current and future customers of that company, as well as the other companies in the same market.  That is true because a substantial monetary award can lead a company to rethink its practices by reassessing its bottom line.  It is also true because such actions may result in specific measures that force companies to change the way they do business.  And the public spotlight on these cases can influence business practices at other companies that become aware of the need to make similar changes to avoid facing the ire of their customers and the risks of similar lawsuits.
Third, by requiring companies to provide the Bureau with arbitration filings and written awards, which might be made public, the proposals we are considering would bring the arbitration of individual disputes into the sunlight of public scrutiny.  This would provide a safeguard against arbitration proceedings that are unfair or otherwise harmful to consumers.  Furthermore, both the Bureau and the public would be able to monitor and assess the pros and cons of how arbitration clauses affect resolutions for individuals who do not pursue group claims.  This will improve our understanding and enable policymaking that is better informed and more precise.  In the end, that will be better for consumers, for responsible businesses, and for the economy as a whole.
One way to think about the effect of enforced pre-dispute arbitration clauses is to recall what Sherlock Holmes described as “the curious incident of the dog in the night-time.”  In the famous detective story, everyone except Holmes misses the fact that the dog did nothing during the night, including not barking at all, which yields the important clue that the intruder likely was recognized.  What the story illustrates is that it is often hard to grasp the significance of something that does not happen and thus can easily go unnoticed.
The same point can also be applied to arbitration.  What we learned in the course of our study is that very few consumers of financial products and services are seeking relief individually, either through the arbitration process or in court.  Moreover, there are also an unknown number of cases that are never filed because of the mere presence of an arbitration clause.  And millions of other consumers who may not even realize that their rights are being violated might have obtained relief if group lawsuits were permissible.  Like the dog that did not bark in the night, the silent fact of all this missing relief for consumers can be hard to notice, but it is nevertheless a vital piece of the story.
The central idea of the proposals we are considering is to restore to consumers the rights that most do not even know had been taken away from them.  Companies should not be able to place themselves above the law and evade public accountability by inserting the magic word “arbitration” in a document and dictating the favorable consequences.  Consumers should be able to join together to assert and vindicate their established legal rights.  Under the approach we are considering, companies would not be able to tip the scales in their favor by writing their own free pass to the detriment of consumers.  Everyone benefits from a market where companies are held accountable for their actions.  Thank you.

The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.

Monday, September 21, 2015

Small creditors operate under different rules - CFPB issues rule on access to mortgage credit in rural areas (media release re-post)

CFPB logo
FOR IMMEDIATE RELEASE:September 21, 2015
CONTACT:Office of CommunicationsTel: (202) 435-7170


Bureau Extends Provisions to Cover More Community Banks, Credit Unions, and Other Creditors
Washington, D.C. – The Consumer Financial Protection Bureau (CFPB) today finalized several changes to its mortgage rules to facilitate responsible lending by small creditors, particularly in rural and underserved areas. The new rule, which was proposed in January, will increase the number of financial institutions able to offer certain types of mortgages in rural and underserved areas, and gives small creditors time to adjust their business practices to comply with the rules.
“The financial crisis was not caused by community banks and credit unions, and our mortgage rules reflect the fact that small institutions play a vital role in many communities,” said CFPB Director Richard Cordray. “These changes will help consumers in rural or underserved areas access the mortgage credit they need, while still maintaining these important new consumer protections.”
In January 2013 and May 2013, the CFPB issued several mortgage rules, most of which took effect in January 2014. Among these rules, the Ability-to-Repay rule protects consumers from irresponsible mortgage lending by requiring that lenders generally make a reasonable and good-faith determination that prospective borrowers have the ability to repay their loans. Under the Ability-to-Repay rule, a category of loans called Qualified Mortgages prohibit certain risky loan features for consumers and are presumed to comply with ability-to-repay requirements.
There are a variety of provisions in the rules that affect small creditors, as well as small creditors that operate predominantly in rural or underserved areas. For instance, a provision in the Ability-to-Repay rule extends Qualified Mortgage status to loans that small creditors hold in their own portfolios, even if consumers’ debt-to-income ratio exceeds 43 percent. Small creditors that operate predominantly in rural or underserved areas can originate Qualified Mortgages with balloon payments even though balloon payments are otherwise not allowed with Qualified Mortgages. Similarly, under the Bureau’s Home Ownership and Equity Protection Act rule, such small creditors can originate high-cost mortgages with balloon payments. Also, under the Bureau’s Escrows rule, eligible small creditors that operate predominantly in rural or underserved areas are not required to establish escrow accounts for higher-priced mortgages.
Since issuing the mortgage rules, the CFPB has continued to monitor the mortgage market and seek public feedback. The changes finalized today reflect the Bureau’songoing study of the market and extensive outreach to stakeholders including consumer advocates and industry groups. Today’s final rule will:
  • Expand the definition of “small creditor”: The loan origination limit for small-creditor status will be raised from 500 first-lien mortgage loans to 2,000 and will exclude loans held in portfolio by the creditor and its affiliates.
  • Include mortgage affiliates in calculation of small-creditor status: The final rule does not change the current asset limit for small-creditor status, which is set at less than $2 billion (adjusted annually) in total assets as of the end of the preceding calendar year. However, under the new rule the assets of the creditor’s mortgage-originating affiliates are included in calculating whether a creditor is under the limit.
  • Expand the definition of “rural” areas: In addition to counties that are considered to be “rural” under the CFPB’s current mortgage rules, today’s final rule expands the definition of “rural” to include census blocks that are not in an urban area as defined by the Census Bureau. The rule adds two new safe harbors for determining whether a property location meets the definition of rural. A creditor will be able to rely on an automated address look-up tool available on the Census Bureau’s website or on a new automated tool that will be provided on the Bureau’s website. The rule maintains the current safe harbor for creditors who choose to rely on the county lists available on the Bureau’s website.
  • Provide grace periods for small creditor and rural or underserved creditor status: Creditors that exceed the origination limit or asset-size limit in the preceding calendar year will be allowed to operate, in certain circumstances, as a small creditor with respect to mortgage transactions with applications received prior to April 1 of the current calendar year. Today’s final rule creates a similar grace period for creditors that no longer operated predominantly in rural or underserved areas during the preceding calendar year.
  • Create a one-year qualifying period for rural or underserved creditor status: The final rule adjusts the time period used in determining whether a creditor is operating predominately in rural or underserved areas, from any of the three preceding calendar years to the preceding calendar year.
  • Provide additional implementation time for small creditors: Eligible small creditors are currently able to make balloon-payment Qualified Mortgages and balloon-payment high-cost mortgages regardless of where they operate, under a temporary exemption scheduled to expire on January 10, 2016. Today’s final rule extends that period to include balloon-payment mortgage transactions with applications received before April 1, 2016, giving creditors more time to understand how any changes will affect their status, and to adjust their business practices.
Today’s final rule is being adopted as proposed, with several technical changes and clarifications. The final rule, including its changes and clarifications, will take effect January 1, 2016.