CFPB Report - December 19, 2014

CFPB Issues Report on College Credit Card Agreements

On Monday, December 14, 2014, the CFPB released its second annual report to Congress on "College credit card agreements." The Credit Card Accountability, Responsibility and Disclosure Act ("CARD Act") requires the Bureau to submit to Congress an annual report listing information submitted to the Bureau concerning agreements between credit card issuers and institutions of higher education or certain organizations affiliated with such institutions. The report, which covers information received at the end of 2013, found credit card agreements have declined nearly 70 percent since the CARD Act went into effect, but agreements for prepaid and debit cards now are on the rise. The report also noted these agreements are not always readily accessible.
 
"Today, financial institutions are cutting more deals with colleges and universities to market student banking products that require less disclosure," said CFPB Director Richard Cordray in a press statement. "Schools and financial institutions should be up front on their website with students and their families about whether or not the school is being compensated to encourage students to use a specific account or card product."
 
Card issuers are required to submit certain information to the CFPB about agreements, such as:

  • The number of credit accounts covered by the agreements;
  • The amount of payments made by the issuer to the institution or organization during the year;
  • The number of new college credit card accounts covered by the agreements opened during the year; andAny Memorandum of Understanding (MOU) between the issuer and institution or affiliated organization directly or indirectly relating to any aspect of the agreement.

This is the second report by the CFPB to Congress on this issue. The first three reports were submitted by the Federal Reserve Board until this responsibility was transferred to the Bureau on July 21, 2011.
 
CFPB and State AG's Act to Prevent Illegal Debt Collection Against Servicemembers

​On Thursday, December 18, 2014, the CFPB and the Attorneys General of North Carolina and Virginia filed a consent order to require Freedom Stores, Inc., Freedom Acceptance Corporation, and Military Credit Services LLC, and their owners and chief officers to provide more than $2.5 million in compensation to consumers and to pay a $100,000 civil penalty.
 
"Our nation's servicemembers deserve better than to be targeted with illegal collections tactics when they are struggling to pay their bills," said Director Cordray in a statement. "Freedom Stores and its affiliated companies were filing thousands of lawsuits in Virginia against consumers not from there, taking money from some consumers' bank accounts without permission, and using the military chain of command to pressure and humiliate servicemembers. Today's action sends a clear message that the Consumer Bureau will continue to aggressively defend the rights of servicemembers and all consumers."
 
According to the complaint, the CFPB found the companies engaged in illegal debt collection practices. For example, Freedom Acceptance Corporation and Military Credit Services filed lawsuits against consumers who had not signed their financing contracts in that state – many of these suits resulted in default judgments, in some cases without the customer having knowledge of the suit. Some customers were double-charged when payments were made via military allotment, but also withdrawn from a bank account because of misinformation from a payment processor. The purchase contracts required borrowers' commanding officers to be contacted about their debt. Finally, the Bureau found collectors withdrew funds from family members and friends of borrowers without their consent after account information had been provided for a one-time payment.
 
CFPB Announces Project Catalyst Research Pilot On Consumer Saving

On Friday, December 12, 2014, the CFPB announced a Project Catalyst research pilot to analyze the effectiveness of practices designed to encourage positive saving habits. The research will focus on saving behavior among low- and moderate-income prepaid card users who often do not have access to traditional savings accounts, and who may face unique challenges building regular saving habits.
 
"Developing saving habits can help people reach their short-term and long-term financial goals," said Director Cordray in a statement. "This project can help us better understand how to promote saving among consumers, especially those who may be low-income and economically vulnerable."
 
As part of the CFPB's Project Catalyst initiative, American Express has agreed to share insights with the Bureau from its trial program focused on encouraging saving among certain prepaid card users. Through its program, American Express is evaluating the effectiveness of a product feature which allows prepaid card users to set money aside in a savings "wallet" separate from funds used for regular transactions. The information shared by American Express will remove personally identifiable data, and take appropriate precautions to ensure individual consumers cannot be identified.
 
CFPB Sues Company for Credit Card Practice

On Thursday, December 18, 2014, the CFPB announced it had filed a lawsuit against a Texas-based company, Union Workers Credit Services, for allegedly deceiving consumers into paying fees to sign up for a sham credit card. The Bureau alleged the company falsely advertised a general-use credit card which actually could only be used to buy products from the company. They further alleged the company deceptively implied an affiliation with unions by, among other things, using pictures of nurses, firefighters, and other public servants in its advertising. The Bureau's lawsuit seeks compensation for victims, a civil penalty, and an injunction against the company.
 
"The business model for Union Workers Credit Services is built on duping consumers into signing up for a sham credit card," said Director Cordray in a press release. "Hundreds of thousands of people, including a great many union members who were specially targeted, have been tricked into spending millions of dollars for a so-called credit card that can really only be used to buy the company's own products. From the misleading photos of nurses and firemen on its website to its bogus credit card, Union Workers Credit Services is illegally deceiving consumers."
 
CFPB Accuses Sprint Corporation of Unfair Billing Practices

On Thursday, December 17, 2014, the CFPB brought an action against Sprint Corporation in New York federal court for allegedly engaging in unfair act and practice of "unfairly billing its customers for unauthorized [premium short messaging services (PSMS)] charges by: 

  • Enrolling customers in third-party billing systems without their authorization;
  • Giving third parties access to its customers and its billing system without implementing adequate compliance controls;
  • Failing to adequately resolve customer disputes; and
  • Ignoring warnings from customers, government agencies, and public-interest groups."

OCC Highlights Key Risks for National Banks, Federal Savings Associations

On Wednesday, December 17, 2014, the OCC reported credit risk increased among national banks and federal savings associations during the first six months of 2014. The OCC's Semiannual Risk Perspective for Fall 2014 noted declining revenues and profitability in OCC-supervised institutions contributed to the increasing credit risk within the banking sector.  
 
Other key findings from the report include:

  • Competition for limited lending opportunities is intensifying, resulting in loosening underwriting standards, particularly in direct and indirect auto lending, leveraged lending, asset-based lending, commercial real estate lending, and commercial and industrial loans. Increased risk layering is also occurring in commercial loans.
  • The prolonged low interest rate environment continues to lay the foundation for future vulnerability. Banks are extending asset maturities to pick up yield, especially when relying on the stability of non-maturity deposit funding in a rising rate environment, which could face significant earnings pressure and capital erosion depending on the severity and timing of interest rate moves. The Risk Perspective includes a special section outlining data compiled in a recent study of bank reported interest rate sensitivities conducted as part of the OCC's ongoing work in this area.
  • Many banks continue to re-evaluate their business models and risk appetites to generate returns against the backdrop of low interest rates. OCC examiners will focus on banks' strategic planning to ensure banks establish and follow appropriate risk management processes.
  • Evolving cyber threats and information technology vulnerabilities require heightened awareness and appropriate controls to identify and mitigate the associated risks. Banks are expected to implement third-party risk management controls commensurate with the complexity and criticality of the arrangement.
  • Bank Secrecy Act and Anti-Money Laundering risks remain prevalent as money-laundering methods evolve, and electronic bank fraud grows in sophistication and volume. Banks are expected to incorporate appropriate controls to oversee new products and services, and higher-risk customers. 

The report reflects data as of June 30, 2014.

CBA Comments on DOD's MLA Proposal

On Thursday, December 18, 2014, CBA and other trades filed a joint letter in response to the U.S. Department of Defense's (DOD) proposed changes to the Military Lending Act (MLA). The DOD proposed a new set of requirements to address two problems it believes have developed since implementing regulations: 1) products designed specifically to evade the earlier regulations falling just outside of the existing product parameters; and 2) the possibility that some covered borrowers are not disclosing their military status to financial service providers.
 
The Department proposed significantly expanding the provisions of MLA to mainstream financial products not covered by the original regulations and, under the proposal, would become off-limits to servicemembers, their spouses and dependents. This expansion would include credit cards, student loans, overdraft lines of credit, personal lines of credit and installment loans, car and other secured refinance loans, and some mortgage loans. The proposal also would shift the responsibility to identify military status from servicemembers and their spouses and dependents to lenders by compelling lenders to screen all applicants to determine their military status or relationship to someone who serves.
 
CBA has recommended: 

  • The regulation should protect military personnel and their spouses and dependents, but it should not deprive them of valuable and beneficial mainstream products or inhibit the availability and development of new products in general – including affordable small-dollar loans.
  • The proposal is not a cap on the rate of interest, but a new "military annual percentage rate" (MAPR) cap.4. Unlike the credit cost measurements of Regulation Z, which implements the Truth in Lending Act, and state usury laws, the complicated new military annual percentage rate calculation inflates and distorts the cost of credit. The 36 percent MAPR cap captures a broad swath of consumer credit including credit cards and small-dollar affordable loans. It captures, for example, even a credit card with a 0 percent interest rate.5.
  • The proposal prohibits certain other terms, including vague but key terms the proposed regulation does not define. It also fails to recognize the significant impact the prohibition of those terms will have on the ability of depository institutions to provide a consumer loan to servicemembers and their spouses and dependents.
  • The proposal's prohibition against pre-dispute arbitration agreements means servicemembers and their spouses and dependents may lose the option as a means to resolve any dispute. This fair and typically quicker alternative to litigation is particularly convenient to servicemembers who are deployed away from their civilian home or abroad, where they lack access to courts.
  • The proposed regulation presents risks and costs for all depository institutions, even if they were able to ensure their products comply with the regulation.
  • If the regulation is expanded as proposed, the greatly increased volume of inquiries to the Department's database will cause consumer credit lending to come to a halt when the database is unavailable, as is frequently the case.
  • The Department should expand coverage as needed to address efforts at evasion, but in a targeted fashion, consistent with the history and intent of the legislation. It should exempt depository institutions from the regulation, including the MAPR component, to ensure military personnel and their spouses and dependents continue to have access to mainstream products. The Department has not identified any data or support to show products offered by depository institutions, including credit cards, have the characteristics of the predatory loans Congress and the Department intended to target or that they are the source of problems for military personnel and their spouses and dependents. 

CBA will continue to monitor and report on this issue.

Merchants Respond to OCC Testimony

On Monday, December 15, 2014, six merchant groups sent a letter to Comptroller of the Currency Thomas J. Curry about the Agency's testimony before the U.S. Senate Banking Committee on December 10, 2014. The Merchants contend the testimony provided by OCC Senior Critical Infrastructure Officer Valerie Abend inaccurately portrayed the steps taken by merchants to protect sensitive data, and the liability assumed by merchants in the event of a data breach.
 
In her opening statement before the Committee, Abend testified, "Finally, the recent breaches at large retailers highlight the need for improved cybersecurity for merchants. When breaches occur in merchant systems, we believe merchants should contribute to efforts to make affected consumers whole, so banks, particularly community institutions, do not disproportionately shoulder the cost."
 
The four-page letter cites information, questions, and a number of statements made by Abend during her testimony. The merchants stressed that retailers share the costs incurred by card fraud and pay the costs of issuing new cards to consumers after a data breach. They also claim financial institutions have more data breaches than other industries, and highlight investments made by merchants in data security.
 
The letter was signed by the Food Marketing Institute, the National Association of Convenience Stores, the National Grocers Association, the National Restaurant Association, the National Retail Federation, and the Retail Industry Leaders Association.  The letter also includes a request for a meeting with Comproller Curry.