CFPB Releases Compliance Bulletin about Obtaining Authorizations for Preauthorized Electronic Fund Transfers

The Consumer Financial Protection Bureau (the “CFPB”) warned financial companies in a compliance Bulletin Monday that they must have proper authorization before automatically debiting funds from customers’ accounts. (CFPB Compliance Bulletin 2015-06, November 23, 2015.)

The Electronic Fund Transfer Act and its implementing rule, Regulation E, require that companies obtain consumer authorization for electronic fund transfers, or debits, from consumers’ accounts. The bulletin was partly meant to remind merchants and financial institutions that they must “clearly describe” the terms of an automatic withdrawal and get pre-authorization from the consumer before deducting payments. The agency’s warning follows an administrative proceeding that the CFPB filed on November 18, 2015 against an online payday lender, Integrity Advance, partly on grounds that Integrity allegedly continued to automatically deduct funds from consumers’ bank accounts after they cancelled authorizations for such withdrawals.

The CFPB said in its press release accompanying the bulletin that its supervisory process found that “one or more companies” did not provide the consumer with “critical information” about automatic debits in its disclosures, such as the amount and timing of the payments.

The bulletin provides further clarification on when companies should send disclosures and that they can get a consumer’s consent either in writing or by phone if the E-Sign Act requirements for electronic records and signatures are met.  Regulation E may be satisfied if a consumer authorizes preauthorized debits by entering a code into their telephone keypad or if the company records and retains the consumer’s oral authorization; provided in both cases that the consumer intends to sign the record as required by the E-Sign Act. Companies must keep “clear records” on what the consumer authorized, and they must provide the consumer – in paper form or electronically – a copy of the terms, including the amounts of the debits, the recurring nature of the debits, and the timing. When practical, the CFPB encourages companies to provide the copy of the authorization terms prior to initiating the first automatic withdrawal.

FTC, CFPB, and States Collaborate to Clamp Down on Illegal Debt Collection

The Federal Trade Commission last week announced an unprecedented coordinated federal-state enforcement effort targeting deceptive and abusive debt collection. This sweeping initiative, termed “Operation Collection Protection,” coordinates federal, state, and local actions under the FTC, the CFPB, 47 state attorneys general, and other enforcement officers and agencies.

As the top source of complaints to the FTC and the Consumer Financial Protection Bureau, illegal debt collection practices have long been in the agencies’ crosshairs. “Operation Collection Protection” began with 30 new coordinated law enforcement actions targeting debt collectors using illegal methods such as harassing phone calls and false threats of litigation, arrest, and wage garnishment. With the involvement of state attorneys general and variations on state laws, banks and other creditors should have the new initiative on their radars as well.

Although the FTC does not have jurisdiction over banks, they should pay close attention to the initiative because of the involvement of the CFPB and state attorneys general, and variations on state laws under which attorneys general may investigate banks and other financial institutions. Continue Reading

CFPB Reports on Access to Mobile Financial Services

The Consumer Financial Protection Bureau (“CFPB”) this week shed new light on the growing mobile financial services sector, publishing a report compiling responses to its 2014 request for information on these services.

The CFPB’s Office of Financial Empowerment issued a Request for Information (“RFI”) on June 11, 2014, regarding mobile financial services. The RFI’s stated purpose was to help the CFPB “understand better the potential for mobile financial services to help underserved consumers – including low-income, unbanked, underbanked and economically vulnerable consumers – access financial services.” Thus, the focus of this week’s report is on the challenges and opportunities of using mobile financial services to aid that population.

The RFI did not include “point of sale” payments – a technology used in mobile payment systems such as Android Pay and Apple Pay – except insofar as such systems are marketed or used by underserved customers.

The new CFPB report, issued Nov. 4, found that mobile financial services present a mixed bag of benefits and risks to consumers. The report cited comments that “mobile financial services is not a panacea or a silver bullet” for customers facing “fundamental financial issues.” The report pointed to a “general consensus . . . that for mobile financial services to effectively reach underserved consumers, the mobile channel must be paired with consultative or assistance services, at least in the short-term.” Additionally, the report noted emerging security and privacy issues arising from mobile financial services, and mentioned some commenters’ call for new regulations on data privacy issues.

In defining mobile financial services, the CFPB referred in its Nov. 4 report to commenters’ statements that mobile financial services are not “discrete” banking services and products per se, but a “channel” by which such services and products may be accessed. “Both consumer and some industry groups,” the report stated, “cautioned that using the mobile channel should not be viewed as a replacement for accessing products and services via other, more traditional channels.” By suggesting that mobile financial services are derived from more traditional services, the report possibly indicates that the CFPB will take a more “traditional” approach to regulating mobile financial services. Continue Reading

Hastert Reaches Plea Deal in Anti-Money Laundering Case – Guilty Plea Expected

As I reported in a June 2, 2015 client alert, on May 28, 2015, Dennis Hastert, former Speaker of the U.S. House of Representatives, was indicted by a federal grand jury in the Northern District of Illinois. Mr. Hastert, a former high school teacher and football coach, was charged with making a “materially false, fictitious, or fraudulent statement or representation” to the FBI in violation of 18 U.S.C. section 1001(a)(2), and with structuring financial transactions “knowingly and for the purpose of evading the reporting requirements” of federal AML regulations issued by the Financial Crimes Enforcement Network (“FinCEN”), in violation of 31 U.S.C. section 5324(a)(3).

My analysis of Mr. Hastert’s indictment was also covered by on June 9, 2015 – Ex-Speaker Hastert to Give First Answer to Hush-Money Charges. In that article, I commented that “Hastert may ultimately negotiate a plea deal under which he might serve little if any prison time because of his long record of public service.” It turns out that a plea deal appears to have been reached.

This morning, the Chicago Tribune reported that Mr. Hastert “plans to plead guilty to an indictment that alleges that he agreed to make $3.5 million in hush money payments to cover up wrongdoing from years ago.” See “Dennis Hastert reaches plea deal, to admit wrongdoing,” Chicago Tribune (Oct. 15, 2015), available at According to the Tribune, Mr. Hastert has been ordered to appear in court on October 28 to enter the guilty plea. The plea agreement itself is expected to be submitted to the court on Monday, October 19.

We will continue to follow this story closely and report on the substance of the plea agreement, and the impact of this action on future AML enforcement actions and prosecutions.

Travis P. Nelson is a member of Reed Smith’s Financial Services Regulatory Group, and Co-Chair of the Anti-Money Laundering & Trade Sanctions Group, resident in the New York and Princeton offices. Travis is formerly an Enforcement Counsel with the Office of the Comptroller of the Currency, U.S. Treasury Department, and regularly represents clients in regulatory compliance, BSA/AML compliance and defense, and examinations and enforcement actions. Travis is also adjunct faculty at Villanova Law School, where he teaches Financial Institutions Regulation; editor-in-chief of the ABA’s Banking Law Committee Journal; and Vice-Chair of the Banking Law Section of the New Jersey State Bar.

Georgia Court Sheds Light on CFPB’s Power to Sue Companies that ‘Recklessly Provide Substantial Assistance’

On September 1, 2015, the Consumer Financial Protection Bureau (“CFPB”) won an important decision in which a federal court, for the first time, interpreted the meaning of “recklessly provid[ing] substantial assistance” under the Consumer Financial Protection Act (“CFPA”).2 Perhaps since it was an order denying the defendants’ motions to dismiss released just before the Labor Day weekend, it has not received much attention. But it has wide-ranging implications for those business-to-business (“B2B”) companies that may have previously thought they could fly below the CFPB’s radar.

The case, CFPB v. Universal Debt & Payment Solutions, LLC, et al., arose from a scheme by some allegedly fly-by-night companies that were collecting “phantom” debt – that is, debt that consumers did not owe.3 In March 2015, the CFPB filed a complaint in the Northern District of Georgia against not only the alleged phantom debt collectors and their owners, but also against the much larger payment processors that enabled them to take debit and credit card payments.4 Since the payment processors did not provide services directly to consumers, the CFPB alleged that they were “service providers” to the debt collectors, and that they had engaged in unfair practices in connection with debt collection. In denying the defendants’ motions to dismiss, the court held the CFPB had alleged facts sufficient to support this count.5

In addition – for the first time in a litigated case – the CFPB included a count alleging that the payment processors also violated section 1036(a)(3) of the CFPA6 by recklessly providing substantial assistance to companies. Following a thorough discussion of what it means to “recklessly provide substantial assistance,” the court found that the CFPB had alleged facts sufficient to support this count. This client alert summarizes the key points of the court’s order.

To continue reading, please click here.

CFPB Warns Again About Marketing Services Agreements

Following up on a series of enforcement actions against industry participants engaged in “marketing services agreements” (“MSAs”), the CFPB issued a Compliance Bulletin (No. 2015-15) entitled “RESPA Compliance and Marketing Services Agreements [“MSAs”].” (The Bulletin can be accessed by clicking here.) The thrust of the Bulletin is again warning companies that “many MSAs necessarily involve substantial legal and regulatory risk for the parties to the agreement, risks that are greater and less capable of being controlled by careful monitoring than mortgage industry participants may have recognized in the past.”

Background. MSAs have been around for some time now. Basically, they are contracts in which a person who is in a position to refer settlement service business (e.g., real estate brokers, title insurance agents, residential mortgage lenders) agrees to perform certain advertising and marketing services on behalf of a settlement service provider in return for compensation.

RESPA § 8(a) prohibits the payment of fees or other “things of value” for the referral of settlement service business. Notwithstanding RESPA § 8(a), many industry participants have long believed that MSAs could be justified so long as the advertising and marketing services were bona fide, non-duplicative and actually performed, and the compensation paid for the services did not exceed their reasonable market value – even if referrals were involved. This belief was based on § 8(c)(2) of RESPA (“Nothing in [RESPA § 8] shall be construed as prohibiting … the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”), and § 14(g)(iv) of Regulation X (“Section 8 of RESPA permits … [a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed”).

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CFPB Moves to Ban Class Action Waivers But Will Not Ban Individual Arbitration

In a move that the financial industry long anticipated but nonetheless greeted with loud groans, the Consumer Financial Protection Bureau (“CFPB”) on October 7, 2015 proposed to ban class action waivers in contracts for consumer financial products and services. Although the proposed ban would not take effect for a few years, it would have a significant impact on banks and nonbank lenders because it is expected to lead to a major increase in class action litigation. Since class action waivers and arbitration clauses have historically gone hand-in-hand in consumer agreements, these provisions have helped stem the tide of class actions in recent years. According to the CFPB, more than half of credit card contracts and 44 percent of checking account agreements contain arbitration clauses, and these provisions are common in auto finance contracts as well.

The CFPB’s announcement came in the form of a 34-page “outline of proposals”1 that must be reviewed by a Small Business Review Panel before the CFPB can begin formal rulemaking. The CFPB discussed its proposals at a field hearing in Denver, where CFPB Director Richard Cordray criticized class action waivers as a “free pass that prevents consumers from holding their financial providers directly accountable for the harm they cause when they violate the law.”2 Industry representatives argued that the proposed class action waiver ban would be harmful because it would encourage frivolous lawsuits. They also argued that it was unnecessary because most consumers are able to resolve their disputes through customer service inquiries or complaint mechanisms operated by the CFPB and the state attorneys general.

To continue reading, please click here.

CFPB Issues Rule on Mortgage Guidelines for Special Classes of Creditors

The Consumer Financial Protection Bureau (“CFPB”) this week issued a final rule making a series of changes to its mortgage guidelines for small creditors and creditors in rural and underserved communities.

In a series of rulemakings issued pursuant to the Dodd-Frank Act, the CFPB has applied special standards for mortgages extended by small creditors and creditors operating in rural and underserved communities.  In these rulemakings, the CFPB stated that it likely would revisit its regulatory definitions of small creditors and creditors operating in rural and underserved communities.  Several rules issued by the CFPB, including those related to escrow requirements for higher-priced mortgage loans (“HPML”), ability-to-repay requirements (“ATR”), and requirements under the Home Ownership and Equity Protection Act (“HOEPA”), contain these terms and are thus subject to the CFPB’s regulatory definitions.  Continue Reading

FinCEN Proposes AML Regulations for Investment Advisers

In August 2015, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed regulations that would require investment advisers subject to SEC registration to establish anti-money laundering (AML) programs.1 The proposal also adds such investment advisers to the definition of “financial institutions” under the Bank Secrecy Act (BSA), which consequently requires them to report suspicious activity to FinCEN and subjects them to reporting and recordkeeping requirements under the BSA.

Background FinCEN has been contemplating AML regulations for investment advisers for over a decade. In 2003, FinCEN proposed regulations that would have required SEC-registered investment advisers and a significant number of unregistered advisers to establish AML programs.2 In 2008, FinCEN withdrew that proposal, stating that it would “continue[] to consider the extent to which BSA requirements should be imposed on investment advisors.”3 In subsequent years, FinCEN directors noted in public remarks that the agency was in the process of drafting new AML regulations covering investment advisers.4 In light of these developments, as well as SEC no-action relief permitting investment advisers to perform broker dealers’ customer identification program obligations,5 some investment advisers have already implemented voluntary AML programs.

To read the full client alert, please click here.

What Do You Get for the Plaintiff Who Has Everything? Maybe a Class Action, Ruled The Seventh Circuit

Perturbed by two allegedly unwanted faxes, Arnold Chapman brought a putative class action under the Telephone Consumer Protection Act (“TCPA”). For himself, he sought the most the statute could provide – $3,000, an injunction, and costs. ($3,000 represents $500 in statutory damages for each of the two faxes, trebled for an allegedly knowing or wilful violation.) The defendant offered Chapman $3,002, and the entry of an injunction, and costs. Chapman let the offer expire without accepting it. The District Court dismissed the case as moot.

Chapman appealed, and late last week, the Seventh Circuit reversed the lower court ruling. In Arnold Chapman v. First Index, Inc., the Seventh Circuit held that an expired offer of judgment does not moot an individual plaintiff’s claims. In so ruling, the panel reversed circuit precedent and aligned itself with the Second, Ninth, and Eleventh Circuits on the issue.

Per the court, “A case becomes moot only when it is impossible for a court to grant any effectual relief whatever to the prevailing party,” citing to Knox v. Service Employees International Union, 132 S. Ct. 2277, 2287 (2012). “Many other decisions say the same thing. By that standard, Chapman’s case is not moot. The district court could award damages and enter an injunction. Chapman began this suit seeking those remedies; he does not have them yet; the court could provide them.”

The court acknowledged that in other circumstances, an unaccepted offer of judgment would moot the case. Indeed, “If there is only one plaintiff, however, why should a court supply a subsidized dispute-resolution service when the defendant’s offer means that there’s no need for judicial assistance, and when other litigants, who do need the court’s aid, are waiting in a queue?” But in a class setting, “Settlement proposals designed to decapitate the class upset the incentive structure of the litigation by separating the representative’s interests from those of other class members.”

The Seventh Circuit sought to clarify the law in that circuit ahead of the same issues that will be presented for the Supreme Court in Campbell-Ewald Co. v. Gomez. Oral arguments in Campbell-Ewald v. Gomez are scheduled for October 14, 2015.