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Government Investigations and White Collar Litigation Group
Financial Institution Regulation

D.C. Circuit Grants Rehearing in PHH Case

On Thursday, February 16, 2017, the D.C. Circuit granted the Consumer Financial Protection Bureau’s (CFPB) petition for rehearing en banc in PHH Corporation v. Consumer Financial Protection Bureau.  The Order marks the latest twist in a case that tests the constitutional and 780536983statutory limits of the CFPB.

As we previously reported, in 2014 an Administrative Law Judge (ALJ) found that PHH Corporation (PHH) violated the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks from mortgage insurers.  PHH appealed the decision to CFPB Director Richard Cordray.  In a 38 page decision—the first administrative appellate decision for the CFPB—Cordray affirmed that PHH had violated RESPA but expanded PHH’s liability from $6 million to $109 million by holding that no statute of limitations applied to the CFPB’s administrative proceedings.

PHH appealed the matter to the D.C. Circuit.  On October 11, 2016, a three-judge panel ruled against the CFPB and held, among other things, that the CFPB’s single independent director structure was unconstitutional.  The October 11 Opinion also rejected the CFPB’s statutory arguments on the statute of limitations and RESPA.

On November 18, 2016, the CFPB filed its petition for rehearing en banc.  While the petition was pending, attorneys general from 16 states and the District of Columbia filed a motion to intervene in the case.  In the motion, the attorneys general raised concerns regarding the Trump Administration’s commitment to defending the constitutionality of the CFPB’s structure given President Trump’s criticism of the CFPB and the Dodd-Frank Wall Street Reform and Consumer Protection Act.  However, the court denied the motion on February 2, 2017.

The D.C. Circuit’s February 16 Order vacates the three-judge panel’s prior October 11 Opinion and sets oral arguments in the case for Wednesday May 24, 2016.

Notably, in the February 16 Order, the Court specially asked the parties to address three Constitutional issues in their briefs:

  1. Is the CFPB’s structure as a single-Director independent agency consistent with Article II of the Constitution and, if not, is the proper remedy to sever the for-cause provision of the statute?
  2. May the court appropriately avoid deciding the constitutional question given the panel’s ruling on the statutory issues in the case?
  3. If the en banc court, which has today separately ordered en banc consideration of Lucia v. SEC 832, 832 F.3d 277 (D.C. Cir. 2016), concludes in that case the administrative law judge who handled that case was an inferior officer rather than an employee, what is the appropriate disposition of this case?

Although the first two questions relate directly to the issues at the heart of the October 11 Opinion, the third question regarding the status of the ALJ adds a new focus to the appeal.  Lucia v. SEC, the case referenced in the Order, concerns the constitutionality of the use of Securities and Exchange Commission (SEC) ALJs in administrative proceedings.  Briefly addressed by Judge Randolph is his October 11 concurring opinion in PHH, the issue centers on the requirement under Article II, section 2, clause 2 that “inferior officers” be appointed by the President, the courts of law, or the heads of the department.

In PHH, the initial administrative decision was rendered by a Securities and Exchange Commission (SEC) ALJ. Rather than being appointed as an inferior officer, the SEC’s Chief Administrative Law Judge assigned the ALJ to the PHH case pursuant to an agreement between the CFPB and the SEC. If the SEC ALJ is in fact an inferior officer within the meaning of Article II, the ALJ’s assignment arguably violates the Constitution. The D.C. Circuit could use this Appointment Clause issue as grounds to decide the case without reaching the issue of the constitutionality of the CFPB’s structure.

PHH will file its opening brief on these issues by March 10, 2017.

Financial Institution Regulation

Pending Senate Bill Would Restructure CFPB Leadership

On January 11, 2017, a trio of Republican Senators introduced a bill that would change the leadership structure of the Consumer Financial Protection Bureau (“CFPB”) from a single director to a five-member bipartisan “Board of Directors.”iStock_000004688619Medium1

Senate Bill 105, titled “Consumer Financial Protection Board Act of 2017,” introduced by Senators Deb Fischer (R-Neb.), Ron Johnson (R-Wisc.), and John Barrasso (R-Wyo.), and now also co-sponsored by Senator Jeff Flake (R-Ariz.), would make the following changes to the CFPB’s leadership:

  • Replace the current single-director structure of the Bureau with a five-member board appointed by the President and confirmed by the Senate, with one member appointed by the President to serve as chairperson.
  • No more than three members from one political party.
  • Staggered terms, with three of five initial members serving 30-month terms, and the other two (and subsequent) members serving five-year terms.
  • No member may be reappointed to a consecutive term, unless that individual had been appointed for less than a five-year term.
  • Removal by the President for “inefficiency, neglect of duty, or malfeasance in office.”

The bill also stipulates that board members “must have developed strong competency and understanding of, and have experience working with, financial products and services.”

In a statement, Senator Fischer stated that CFPB Director Richard Cordray’s “bad decisions have kept families locked out of economic opportunity.”  Senator Fischer said her bill “would prevent this misconduct by divesting authority from one director to a five-member bipartisan board” and “bring accountability to the Bureau and give more Americans a chance to build their own businesses and provide for their families.”

The bill is currently referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Senator Fischer’s bill represents yet another sign of potential changes to the Bureau’s leadership, structure, and authority.

As we recently reported, President Trump’s February 3 Executive Order signaled the beginning of the administration’s efforts to dismantle parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Though the Order does not explicitly mention the Bureau, President Trump has repeatedly voiced criticism of Dodd-Frank, which created the CFPB.

Also on January 11, President Trump reportedly met with former Representative Randy Neugebauer (R-Tex.) and is considering him to head the CFPB.  When he was in Congress, Neugebauer was sharply critical of the Bureau’s efforts to regulate payday lenders and introduced a bill to overhaul the agency.

Senate Bill 105 also comes as the CFPB continues to fight over the constitutionality of its leadership structure in the U.S. Court of Appeals for the District of Columbia.  As we reported, in October 2016, the D.C. Circuit ruled that the Bureau’s leadership structure, with a single director that the President could remove only “for cause” rather than “at will,” was unconstitutional.  In that decision, the court also vacated a $103 million increase to a $6 million fine levied against PHH Corp. by Director Cordray.  The parties are currently awaiting the D.C. Circuit’s ruling on the Bureau’s petition for en banc review of the panel’s decision.  However, if Senator Fischer’s bill’s becomes law it could make any potential CFPB victory a hollow one, as its leadership structure could soon change regardless of the outcome in PHH.

Finally, we have seen this amendment to the CFPB’s leadership in other bills introduced by Congressional Republicans.  The Financial CHOICE Act, released in 2016 by Representative Jeb Hensarling (R-Tex.), would have also replaced the director with a five-member commission.  However, as we have discussed, the Financial CHOICE Act also proposed a wide range of changes to the CFPB and Dodd-Frank.  Given Senate Bill 105’s narrow focus on changing the Bureau’s leadership structure, a transition from a single director to a five-member board would appear more viable through Senator Fischer’s bill.

Nonetheless, one can expect strong opposition from the left to whatever mechanism Congressional Republicans use in attempts to alter the CFPB’s structure or weaken its authority.  We will monitor the progress of Senate Bill 105, which is currently referred to the Senate Committee on Banking, Housing, and Urban Affairs.

Enforcement and Prosecution Policy and Trends

Will Cryptocurrency Abuse be an Enforcement Focus for the IRS this Tax Season?

Tax filing season began January 23rd, and with its arrival the IRS began rolling out its annual list of the so-called “Dirty Dozen.” The Dirty Dozen list is an educational effort to inform the public about scams, but it also offers insight into the tax enforcement issues on the IRS’s radar.

Particular tax schemes often stay on the “Dirty Dozen” list for years until the IRS devises an effective strategy for combatting them (if it ever does). Changes on the list reveal new schemes or enforcement priorities that have caught the IRS’s attention.

Of particular interest this year: whether cryptocurrency abuse will make the list. Cryptocurrencies, of which Bitcoin is the most well-known, are digital currencies not backed by any government. They trade on public markets called exchanges, and their use has grown rapidly in recent years. The IRS taxes cryptocurrency like property, not foreign currency.document-review

The IRS is presently litigating a summons case against Coinbase Inc., a prominent U.S.-based cryptocurrency exchange, in the Northern District of California. The IRS uses John Doe summons procedure when it believes some type of transaction is being used for tax avoidance, and it wants to find out the identities of currently-unknown taxpayers who have participated in those transactions. John Doe summonses have used to sniff out the identities of, for example, taxpayers using debit cards linked offshore, or holding accounts at certain banks suspected of abuse.

The IRS’s resort to John Doe procedure suggests it views cryptocurrency dealing as a widespread tax evasion strategy. But its evidence to date proves only isolated abuse, not pervasive tax evasion. The IRS’s summons is supported by interviews with 3 taxpayers who admitted to using cryptocurrency to avoid or evade taxes. But its demand for records is far broader: all cryptocurrency transactions with a U.S. jurisdictional hook at a large cryptocurrency exchange over a 3 year period.

Based in part on this mismatch of the IRS’s evidence and the information it demands, some cryptocurrency users and Coinbase itself are litigating to fight the summons. But such efforts seldom succeed at blocking disclosure.

If the IRS viewed cryptocurrency as a common tool for tax abuse, one might expect it to serve John Doe summonses on other US-based cryptocurrency exchanges or payment applications. But it has not done so, probably for lack of evidence they have been abused. Of course, such evidence could emerge from new interviews or from Coinbase records, once produced and digested.

The IRS’s disclosures to date create real questions about just how widespread cryptocurrency-based tax fraud really is. If the IRS includes cryptocurrency abuse on its dirty dozen list, it will be sending a signal that it views the Coinbase litigation not as a one-off skirmish, but the first front in a lengthy war to come.

Financial Institution Regulation

Trump Signals Beginning of Efforts to Curtail Dodd-Frank

On February 3, President Donald J. Trump signed an executive order that signaled the beginning of the Trump Administration’s efforts to dismantle parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). subjecttoinquiryimage.jpg

The executive order, entitled Core Principles for Regulating the United States Financial System (“Order”), lays out seven core principles (“Core Principles”) to guide the Trump Administration’s regulation of the financial industry.  Specifically, the Order makes it the executive branch’s policy to:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulations efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

The Order also requires the Secretary of the Treasury to consult with the heads of the Financial Stability Oversight Council within 120 days of the executive order (and periodically thereafter) regarding whether current laws and regulations “promote the Core Principles.”  The Secretary of the Treasury then must report to the President on the extent to which current laws and regulations promote the Core Principles as well as “what actions have been taken, and are currently being taken, to promote and support the Core Principles.”

Although the Order never explicitly addresses Dodd-Frank, as we have previously reported, President Trump has long been a vocal critic of the Act.  Originally signed into law in 2010 during the Obama Administration, Dodd-Frank imposed sweeping regulatory reforms on the financial industry and created the Consumer Financial Protection Bureau (CFPB).  During his campaign, President Trump repeatedly voiced his disapproval of  the Dodd-Frank, going as far as calling the Act “a disaster” that “mak[es] it harder for small businesses to get the credit they need.”

On Friday, shortly before signing the Order, President Trump and Press Secretary Sean Spicer reiterated the Trump Administration’s commitment to dismantling Dodd-Frank.  In remarks at the Strategy and Policy Forum, Trump—citing continued concerns that over regulation is negatively affecting American businesses—told the forum that “we expect to be cutting a lot out of [the Act].”

Spicer went further during his comments on the new executive order.  According to Spicer, the new Core Principles “sets the table for a regulatory system that mitigates risk, encourages growth, and more importantly, protects consumers.”  Then contrasting the new policy with Dodd-Frank, Spicer called Dodd-Frank, “a disastrous policy that’s hindering our markets, reducing the availability of credit, and crippling our economy’s ability to grow and create jobs.”  Spicer claimed that Dodd-Frank “imposed hundreds of new regulations on financial institutions” without adequately protecting consumers.

Given President Trump and Press Secretary Spicer’s passionate remarks, it appears that the Trump Administration does not believe that Dodd-Frank is “efficient, effective, and appropriately tailored” or that it empowers “Americans to make independent financial decisions and informed choices” as required by the new Core Principles.  Thus, expect the Secretary of the Treasury’s report on the Core Principles this June to address Dodd-Frank and its perceived shortcomings.

House Financial Service Committee Chairman Jeb Hensarling (R-Tx) was also quick to point out on Friday that the Order “mirrors provisions that are found in the Financial CHOICE Act.”  As we previously reported, the Financial CHOICE Act, which was first introduced by Congressional Republicans in 2015, is a likely blueprint for any legislative attempt by the GOP to repeal parts of Dodd-Frank this year.  The Order is another sign that President Trump is ready and willing to work with Republicans to remove parts of Dodd-Frank.

Compliance, Election and Political Law

Congress Votes to Disapprove SEC’s Resource Extraction Disclosure Rule

piplineIn previous posts, we discussed the potential impact of the SEC’s Resource Extraction Payment Disclosure (Rule 13q-1), including possible FCPA implications and the development of an appropriate compliance plan. After the election, much attention has been given by Congress to the so-called “midnight” agency rules that were adopted in the final months of the Obama Administration, including Rule 13q-1.  And, Congress wasted no time disapproving Rule 13q-1.

Rule 13q-1 requires issuers involved in the commercial development of oil, natural gas and minerals to disclose payments they made to the U.S. federal government and to non-U.S. governments in connection with their resource extraction activities. It took effect on September 26, 2016.

On February 1, 2017, however, the U.S. House of Representatives passed, under the Congressional Review Act (CRA), a resolution that would disapprove Rule 13q-1 and its disclosure requirements. On February 3, 2017, the U.S. Senate approved the disapproval resolution passed by the House.  It appears that the President is likely to sign the resolution in the coming days.

If this resolution of disapproval is signed by the President, then, under the CRA, Rule 13q-1 is effectively nullified. Moreover, Rule 13q-1 cannot be reissued in the same form barring authorization from Congress.  5 U.S.C. § 801(b)(2).  Further, any new variation that is “substantially the same” as Rule 13q-1 is also prohibited. Id.

However, where, as here, Congress has rejected a rule that the SEC is required to issue, then the SEC will be given an automatic one year extension to attempt to fashion a different rule to satisfy that requirement. Id. at § 801.

While it is unclear what the SEC’s new rule will look like, it is important to note that other countries, such as the UK and Canada, as well as the EU, have enacted rules similar to Rule 13q-1, and covered companies are already required and have begun to make disclosures regarding covered payments.

We will continue to monitor these developments and update you accordingly.

 

Compliance, Securities and Commodities

SEC Annual Exam Guidance: Cybersecurity, Robo-Advising, and Retirement

The SThinkstockPhotos-90833697_jpgEC recently announced its Office of Compliance Inspections and Examinations’ (OCIE) 2017 priorities.  Though these listed priorities are not exhaustive and remain flexible in light of market conditions, industry developments, and ongoing risk assessment, it is helpful for companies to keep these items in mind when evaluating securities compliance programs in 2017.

The 2017 examination priorities include the following:

  • Retail Investors – Taking issue with industry marketing methods, the OCIE continues its 2016 initiatives to protect retail investors by assessing the risks to investors seeking information, advice, products, and services. OCIE looks to direct its examinations to review firms involved with “robo-advising” (delivering investment advice through electronic mechanisms) and wrap fee programs (when a single bundled fee for advisory and brokerage services is charged to an investor).
  • Senior Investment and Retirement Investments – OCIE will continue to scrutinize public pension advisers while expanding its focus on those services targeting senior investors and individuals investing for retirement. OCIE carefully reviews registrants’ interactions with senior investors, including the identification of financial exploitation.  OCIE is also widening its ReTIRE initiative to include reviews of 1) investment advisers and broker-dealers that provide insurance products to investors with retirement accounts, and 2) investment advisors that offer and manage target-date funds.
  • Market-Wide Risks – OCIE will focus on registrants’ compliance with the SEC’s Regulation SCI and anti-money laundering rules, fulfilling the SEC’s mission for maintaining fair, orderly, and efficient markets. New in 2017, OCIE will evaluate money market funds’ compliance with the SEC’s amended rules (recently effective in October 2016).
  • FINRA – OCIE will conduct inspections of FINRA’s operations and regulatory programs, focusing resources on assessing the examinations of individual broker-dealers.
  • Cybersecurity – OCIE will continue to examine firm cybersecurity compliance procedures and controls. This includes implementation testing of those procedures and controls at broker-dealers and investment advisers.

Outgoing SEC Chair Mary Jo White noted, “Whether it is protecting our most vulnerable senior investors or those investing in the trillion dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation’s securities laws.”  OCIE Director Marc Wyatt added, “OCIE’s priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements.”

While newly tapped SEC Chair Jay Clayton has not had a chance to weigh in on the 2017 examination priorities, firms providing investor services should review and update their compliance programs to best position themselves in the new year.

Compliance, Enforcement and Prosecution Policy and Trends

SEC: $7 Million Award to be Split by Three Whistleblowers

On SEC Enforcement DefenseMonday, January 23, 2017, the Securities and Exchange Commission (SEC) awarded more than $7 million to be split among three whistleblowers.  The three individuals helped the SEC in its investigation and prosecution of an investment scheme.

The identity of whistleblowers is protected by law however, the SEC did disclose that the primary whistleblower will receive more than $4 million, while the other two will split more than $3 million.

Jane Norberg, Chief of the SEC’s Office of the Whistleblower, stated, “Whistleblowers played an important role in the success of this case as they helped our agency detect and prosecute a scheme preying on vulnerable investors.”  Norberg credited the whistleblowers with helping open the investigation and also providing additional information as the investigation was underway.    Norberg served as Acting Chief when Sean McKessey left the position in July 2016, and was promoted to Chief in September 2016.

Since the inception of the whistleblower program in 2011, over $935 million in financial remedies have resulted from successful SEC enforcement actions that arose from whistleblower tips.  Approximately $149 million has been awarded to 41 whistleblowers.  Awards have varied in amounts, including awards for $500 thousand, $3 million, $7 million, $17 million, and $30 million, which is the largest award to date.

Norberg taking over for McKessey has not changed the focus of the SEC’s Whistleblower program.  We will have to wait and see the direction the SEC goes in after the Trump administration replaces Mary Jo White as SEC Chair.  Regardless of who succeeds Chairman White, it continues to be important to have internal compliance programs that are communicated and followed throughout the organization.  And as always, a company should take prompt action to address any misconduct within its ranks.

Financial Institution Regulation

CFPB Again Challenges Meaningful Attorney Involvement

The ConGovernment-Regulatory-and-Criminal-Investigations.jpgsumer Financial Protection Bureau (CFPB) has entered into its latest consent order targeting consumer debt collection law firms.  Once again, the CFPB challenges the lack of “meaningful attorney involvement” it deems required in collection actions.

This latest consent order was entered into by two Oklahoma medical debt collection law firms and their president (“Respondents”).  Respondents are required to pay $577,135 to consumers, modify business practices, and pay a $78,800 penalty to the CFPB’s Civil Penalty Fund for conduct the CFPB alleges violated the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).

The CFPB claims that Respondents violated the FDCPA by the following:

  • Communications Misrepresenting Attorney Involvement. The firms allegedly sent demand letters on law firm letterhead which included an attorney’s name and, in some cases, threatened suit.  The CFPB claimed that this was misleading because no attorneys had reviewed account documentation or made a professional determination regarding the legitimacy of the debt before the letters were sent.  Similarly, collectors allegedly misled consumers during collection calls by stating that they were calling from a law firm.  The CFPB claimed that this wrongfully implied that attorneys had participated in the decision to make the calls, even though no attorney had reviewed the account.
  • Falsifying Affidavit Notarizations. The firms solicited signed and notarized affidavits from clients for use in the debt collection lawsuits.  However, when a client returned an executed affidavit that had not been notarized, the firm allegedly instructed its employees to notarize the affidavits and use them in litigation, without taking proper notarial steps to verify the signature.

Similarly, the Respondents allegedly violated the FCRA by:

  • Furnishing Information to a Credit Reporting Agency Without Requisite Policies. The firms allegedly furnished consumer information to a credit reporting company despite lacking written policies or procedures addressing the transmission of that consumer information.

Since late 2015, the CFPB has entered into several consent orders targeting consumer collection law firms and, specifically, the vague and evolving “meaningful attorney involvement” standard.  In December 2015, the CFPB entered into a consent order with a Georgia-based law firm based upon allegations that its attorneys were not meaningfully involved in lawsuits.  The CFPB alleged that attorneys did not review account level documentation before filing suit.  Rather, the firm used an automated and non-attorney staff driven lawsuit process that mass generated suits to where one attorney signed more than 130,000 lawsuit complaints in a two-year period.  Based on similar allegations, the CFPB entered into a consent order with a New Jersey-based consumer debt collection law firm in April 2016.  The CFPB again challenged the firm’s overreliance on automated software and non-attorney staff in the lawsuit process and found that attorneys often spent less than several minutes reviewing each file before initiating suit.

In addition to the monetary penalties, the latest consent order prohibits Respondents from engaging in specified future conduct unless an attorney has been “meaningfully involved” in reviewing the consumer’s account and has made a professional assessment regarding the debt.  This includes restrictions on what law firms may state or imply to consumers in written communications and collection calls, including prohibiting the use of an attorney’s name or the phrase “Attorney at Law” in demand letter signature blocks.

While meaningful attorney involvement remains a nebulous concept, creditors and consumer collection law firms should expect increased scrutiny regarding attorney involvement in collection matters and should continue to ensure that attorney involvement is comprehensive and well documented.

Financial Institution Regulation

The Forgotten Face of Student Lending

MentiCashon student loans and the face that comes immediately to mind is probably someone in their early twenties. A recent report from the CFPB sheds light on an overlooked segment of the student loan population – consumers 60 years old and older. The number of older student loan borrowers has skyrocketed in recent years. The ranks of older student loan borrowers has quadrupled in the last decade and their amount of debt has grown exponentially. The CFPB’s report considers the effect student loans have on older borrowers and examines complaints filed by older borrowers.

So who are these borrowers? Baby boomers seeking a degree for a second or even third career? No. The majority of older student loan borrowers (around 73%) are financing their children’s or grandchildren’s educations. There were an estimated 2.8 million such older borrowers in 2015, up from an estimated 700,000 just ten years earlier. During the same period, the average debt load of student loans borrowers has more than doubled, going from $12,100 to $23,500. One trait these older student loan borrowers share with younger borrowers is an alarming default rate. Close to 40% of older student loan borrowers are in default.

The profile of older student loan borrowers differs widely their younger counterparts. Older borrowers are reaching the end of their peak earning years, while younger borrowers fresh out of college have their entire career in front of them. Health concerns that might hamper an older borrower’s ability to earn an income or to make payments are also less likely to plague younger borrowers. Finally, older borrowers are likely to have more debt, such as mortgages, credit cards, and auto loans.

Student loans can negatively affect older borrowers in ways they don’t affect younger borrowers. The federal government can offset older borrowers’ social security benefits to offset missed student loan payments. Older borrowers are also more financially vulnerable than younger borrowers, as seen in the higher likelihood to forego necessary healthcare needs.

Despite the differences in older and younger borrowers and the unique difficulties facing older borrowers, the number of CFPB complaints filed by older borrowers on student loans is small. Older borrowers have filed less than 2,000 complaints relating to student loans. The proliferation of older borrowers with student loans may, however, portend more complaints in the future.

Older borrower’s complaints have focused on several issues. Older borrowers complain about “roadblocks” to their participation in income-driven repayment plans. One common complaint is that servicers are slow to adjust income-driven plans when older borrowers switch from a salary to a fixed-income. Some of these borrowers are placed in graduated repayment plans better suited for their younger counterparts whose careers are in the ascendency.

Another complaint by older borrowers, specifically those who co-signed on a loan, is that their loan is allocated to other student loans owed by the primary borrower. This can have the double whammy effect of causing the older borrower to incur late fees and interest and resulting in a negative mark on the borrower’s credit history.

Older borrowers have also complained about certain debt collection practices. Some of the debt collection practices encountered, such as the use of aggressive and hostile tactics, are not unique to older borrowers. But older borrowers have also complained that some debt collectors of private student loans have threatened to collect on their federal benefits, including social security, even though social security benefits cannot be collected on based on private student loans.

The CFPB’s report does not offer any recommendations for addressing the issues faced by older student loan borrowers, but urges policymakers to consider the report in shaping reform in the higher education finance market. If the number of older borrowers continues on its upward trajectory, this will be an issue to watch for those in the student loan servicing industry and ultimately servicing older borrowers’ debt might require a different protocol tailored to the unique challenges they face.

Compliance, Financial Institution Regulation

CFPB’s 2017 Fair Lending Priorities

Government-Regulatory-and-Criminal-Investigations.jpg

The CFPB recently issued its Fair Lending Priorities for 2017.  According to its December blog post, the CFPB plans to increase its focus on the following three areas, which it describes as “presenting a substantial risk of credit discrimination for consumers.”

Redlining: The CFPB “will continue to evaluate whether lenders have intentionally avoided lending in minority neighborhoods.”  The CFPB will likely seek to build off its recent redlining enforcement actions and this redlining focus is consistent with the CFPB’s Fall 2016 Supervisory Highlights, which identified “redlining as a priority area in the Bureau’s supervisory work.”

Mortgage and Student Loan Servicing: The CFPB “will determine whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race or ethnicity.”

Small Business Lending: “Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when they apply for credit, and has required the CFPB to take steps to ensure their fair access to credit.”  This is likely a reference to Dodd-Frank Section 1071, which required financial institutions to collect and maintain certain data on credit applications made by women- or minority-owned businesses and small businesses.  In 2016, the CFPB began building a small business lending team that has focused on outreach and research to develop its understanding of the players, products, and practices in business lending markets and of the potential ways to implement section 1071.

“Because [it] is responsible for overseeing so many products and so many lenders,” the CFPB noted that it “re-prioritize[s] [its] work from time to time, to make sure that [it is] focused on the areas of greatest risk to consumers.”  This list identifies the “key areas where the CFPB’s fair lending team will focus in 2017.”

Clients should remain cognizant of these issues and be sure that there is appropriate attention paid to them in 2017.  However, given the ongoing PHH litigation, continued speculation that President-elect Trump may seek to terminate Director Cordray for cause, and Republicans’ general focus on reigning in the CFPB and rolling back Dodd Frank in the new Congress, it must be noted that these priorities could shift in the coming months.  If they do, we will be sure to highlight that in future Subject to Inquiry blog posts.