Financial Services Report, Winter 2012

Edited by William Stern

(Lack of) Editor's Note

The holiday season is officially upon us – extra shopping week between Thanksgiving and Christmas and all. But it's been a bah humbug holiday season for the hard-working editors of the Financial Services Report because our fearless leader is in trial. And we don't mean one of those quick two-day deals; we mean a real, honest to goodness class action trial.

So, no witty remarks tying together the re-election of President Obama, the election of Elizabeth Warren to the Senate, Hurricane Sandy, or any of the other weighty events of the past quarter. Instead, we have our usual updates on privacy and arbitration, lots of Beltway and CFPB happenings, mortgage, operations, and preemption reports as well.

Until next time, we hope you have a wonderful holiday and all the best in the New Year!

BUREAU REPORT

World's Most Expensive Blue Sky

By Rick Fischer, Jim McCabe and Obrea Poindexter

On October 1, 2012, the CFPB brought its third major enforcement action against three American Express subsidiaries ("American Express"), requiring American Express to return $85 million to customers and pay approximately $14 million to the CFPB's civil money penalty fund, with another $14 million in penalties to other regulators.

The CFPB and other regulators alleged that American Express misled certain new account holders by stating that they would receive $300 when signing up for the Blue Sky credit card and satisfying other terms of the offer. American Express was also alleged to have (1) inappropriately used age as a factor in making credit decisions for applicants over the age of 35, (2) charged certain consumers late fees and interest in violation of the Truth in Lending Act ("TILA"), (3) failed to report that information was disputed by consumers when the information was furnished to credit bureaus, and (4) engaged in deceptive debt collection practices.

In connection with the alleged deceptive debt collection practices, the CFPB required American Express to "clearly and prominently" disclose "[a]ll material conditions, benefits and restrictions concerning any offer of [debt] settlement."

Who Watches Big Brother?

By Andrew Smith

Answering the question of who watches the watchers, on October 3, 2012, the Office of Inspector General ("OIG") published an evaluation of the CFPB's Consumer Response Unit and consumer complaint database. In light of the CFPB's intent to start collecting complaints about a wider variety of financial services and products, the OIG made five recommendations aimed at improving the processing of complaints and enhancing the CFPB's effectiveness.

Separately, the OIG also published a Work Plan indicating that it will examine the CFPB for compliance with Section 1100G of the Dodd-Frank Act, which requires the CFPB to consider the impact that proposed rules will have on the cost of credit for small entities. The OIG also plans to evaluate how the CFPB coordinates with other regulatory agencies and the extent to which financial institutions have a clear understanding of the CFPB examination process.

CFPB Asks Consumers to be Furnishers

By Rick Fischer and Andrew Smith

On October 22, 2012, the CFPB expanded its consumer complaint database to include information on credit reporting larger participants, thereby adding another tool to aid the CFPB's supervision and examination efforts.

The database was designed to accept complaints relating to incorrect information in credit reports, issues with complaint investigations, improper use of credit reports, an inability to obtain a credit report, and problems consumers face with creditor monitoring and identity protection services.

The database also allows consumers to highlight issues with specific consumer reporting agencies by use of a pull-down box that lists the three nationwide consumer reporting agencies, three check services companies, and five companies that provide information to specialty finance companies. Separately, the intake form asks consumers if they "believe the issue involves discrimination," including race, gender, or age discrimination.

Debt Collectors Join Larger Participant Club

By Leonard Chanin, Andrew Smith and Jim McCabe

On October 24, 2012, the CFPB released examination procedures for larger participants in the debt collection market, which direct examiners to focus on disclosures, complaint resolution procedures and compliance with the Fair Credit Reporting Act, Gramm-Leach-Bliley Act ("GLBA"), Electronic Fund Transfer Act ("EFTA) and Equal Credit Opportunity Act ("ECOA"), in addition to the Fair Debt Collection Practices Act ("FDCPA").

Similar to its consumer reporting market larger participant rule, the CFPB asserted that it may examine any activity of a larger participant debt collector once that entity becomes subject to supervision by the CFPB. Examiners are also directed to review a debt collection firm's litigation activities, including whether litigation involves "unfair or unconscionable means," "false, deceptive or misleading representations" or "harassing, oppressive, or abusive conduct in violation of the FDCPA".

CFPB: Greatest Hits

By Jim McCabe, Obrea Poindexter and Andrew Smith

On October 31, 2012, the CFPB released a report, entitled "Supervisory Highlights: Fall 2012," which contains an overview of the CFPB's supervisory and enforcement actions through September 30, 2012. The overview focuses on high-level examples of compliance failures and violations of consumer financial laws that the CFPB detected during supervisory activities.

The report underscores the CFPB's continued focus on governance and compliance issues, noting that several institutions exhibited weak or non-existent compliance management systems, including in the fair lending and credit reporting contexts. Specifically, the institutions failed to properly communicate policies and procedures to managers and employees, failed to properly train employees to be able to detect compliance weaknesses, or failed to have compliance management systems for entire product lines.

The report illustrated the CFPB's continued focus on credit card issuers, citing multiple violations of the Credit Card Accountability Responsibility and Disclosure Act of 2009. One example included an institution that increased the credit line of a cardholder who was under 21 years of age without notifying or seeking authorization from the adult "co-applicant." Another institution failed to establish policies and procedures or perform rate reviews on acquired portfolios within six months, as required by Regulation Z.

There were also several failures by institutions to establish proper controls over third-party service providers.

Big Brother Meets Big Data

By Obrea Poindexter, Sean Ruff and Andrew Smith

On November 14, the CFPB held an event at Google headquarters in Palo Alto to announce details of Project Catalyst. The project invites companies to identify regulations that could be improved to fit emerging technologies, as well as to partner with the CFPB to share product data and operational insights. As explained by the CFPB, Project Catalyst's goals include (1) establishing firm lines of communication with innovators to better understand the current situations in the market, (2) understanding new and emerging products in the market so the CFPB can adapt regulations and (3) engaging with innovators with ideas that "beget consumer-friendly innovation" and to "better understand what works and does not work for consumers."

The CFPB also announced that it is actively reviewing data from the following three financial services startups to better understand consumer use patterns. BillGuard, a company that alerts consumers to questionable debit and credit card charges and helps them resolve billing disputes, will provide billing dispute data to the CFPB. Plastyc, an alternative to traditional banking, will share data on "the value consumers place on easily depositing and obtaining immediate access to their funds." Simple, another banking alternative, will provide data that allows the CFPB to monitor how consumers track their own spending habits and "help the Bureau understand what tools can encourage saving."

OPERATIONS REPORT

Regulatory capital issues and the corresponding requirement for stress testing comprised much of the announced work of the federal banking agencies over the fall of 2012.

Regulatory Capital Estimation Tool

By Dwight C. Smith, III and Charles Horn

On September 24, 2012, the federal banking agencies released the "Regulatory Capital Estimation Tool," a device intended to help community banking and thrift organizations make sense of the proposed capital requirements and estimate the impact of the proposed rules on their business. For more information, read our Client Alert at http://www.mofo.com/files/Uploads/Images/121001-Regulatory-Capital-Estimation-Tools.pdf.

Final Rules on Stress Testing

By Dwight C. Smith, III and Charles Horn

On October 9, 2012, the three federal banking agencies approved final regulations to implement the Dodd-Frank Act's stress testing requirements. All banks, thrifts, and bank and thrift holding companies with assets greater than $10 billion must conduct annual stress tests. Those banking organizations with more than $50 billion in assets and other financial companies that have been designated as systemically important by the Financial Stability Oversight Council must also undertake a semi-annual test and are subject to a third test to be conducted by the Federal Reserve. The annual test will take place in the fourth quarter of each calendar year. The large banks are conducting their tests now; the midsized banks were given a one-year grace period and will begin testing in 2013. For additional background, review our News Bulletins available at: http://www.mofo.com/files/Uploads/Images/121109-Stress-Testing-and-Capital-Planning.pdf, and...