Nationwide Operation Deceptively Threatened Consumers with Criminal Prosecution and Jail Time for Writing Bounced Checks
WASHINGTON, D.C. — Today, the Consumer Financial Protection Bureau (CFPB) announced an enforcement action against a nationwide debt collection operation and its chief executive officer for using deceptive threats of criminal prosecution and jail time in order to intimidate consumers into paying debts for bounced checks. The company also misled consumers into believing that they must enroll in a costly financial education program to avoid criminal charges. The proposed order, if approved by a federal district court, would put an end to the illegal activities, impose a civil money penalty of $50,000, and require new consumer disclosures and stronger oversight of the bounced check program.
“National Corrective Group masqueraded as prosecutors and used deceptive tactics to intimidate consumers into paying hundreds of dollars in extra fees to avoid potential criminal prosecution,” said CFPB Director Richard Cordray. “Today we are taking action to put a stop to these illegal debt collection practices.”
The CFPB’s proposed order names National Corrective Group, a privately-held, California-based corporation that operates nationwide and specializes in the collection of consumer debt for bounced checks. The order also includes several related entities that purchased all of the contracts and assets of National Corrective Group and took over its operation during the course of the CFPB investigation. These companies are Victim Services Inc. and American Justice Solutions, Inc. Together, these companies operate one of the largest bad check diversion programs in the United States. Mats Jonsson, National Corrective Group’s Chief Executive Officer, is the senior company executive in charge of the daily operations of its bad check diversion programs and continues to operate Victim Services Inc. and American Justice Solutions, Inc.
State and district attorneys’ offices often offer diversion programs to people accused of writing bad checks as a way for the individuals to avoid criminal prosecution. Many bad check diversion programs are run by companies that enter into contracts with state and local prosecutors’ offices to collect bounced check debt. Under the law, a company operating a bad check diversion program cannot contact a consumer about the program until a prosecutor’s office has reviewed the case and determined the consumer is eligible. The law also requires these companies to inform consumers of certain rights, including their right to dispute allegations of bad check violations.
The CFPB alleges that National Corrective Group deceived consumers by sending them notices on prosecutors’ letterheads and creating the false impression that consumers may be prosecuted for writing bounced checks. However, the letters went to consumers before any district attorney had determined prosecution was likely. Consumers were told by the company that to qualify for the diversion program and avoid prosecution they must pay the bounced check debts as well as enroll in the company’s financial education class for an additional fee. The cost of the financial education classes were typically around $200, which was often several times the amount of the alleged bad check debt.
Specific violations alleged in the CFPB’s complaint include:
Masquerading as state or district attorneys: The CFPB complaint alleges that the National Corrective Group created a false impression for consumers that its communications were from a state or district attorney’s office. The company sent letters on prosecutors’ letterheads that appeared to be signed by the state or district attorney. The telephone numbers and mailing addresses that the company provided to consumers linked directly to its corporate offices, even though the letters indicated that the consumer would be contacting the district attorney’s office.
Intimidating consumers with false threats of criminal charges: Under the law, government prosecutors must make the determination to pursue a potential bad check violation. The Bureau alleges that National Corrective Group sent collection letters to consumers on prosecutors’ letterheads threatening criminal prosecution before district or state attorneys had even examined whether a criminal violation may have occurred, and whether participation in the diversion program was appropriate. In fact, the CFPB alleges that less than one percent of consumers who received final warning letters stating that their case was being forwarded for possible criminal prosecution were ever even referred to the prosecutor’s office for possible prosecution. The Bureau alleges that the company also threatened possible criminal prosecution where the amount of the debt was so low that criminal action would rarely or never occur.
Deceiving consumers into paying extra fees for costly financial education class: According to the Bureau’s complaint, the National Corrective Group deceived consumers into believing that they must pay to enroll in a financial education class in order to avoid possible criminal prosecution for writing a bad check. In reality, consumers are not typically at risk of prosecution, which rarely, if ever, occurs.
The CFPB alleged that the defendants violated the Fair Debt Collection Practices Act (FDCPA). Among other things, the FDCPA prohibits making misrepresentations to or deceiving consumers. The CFPB also alleged that the defendants violated the Dodd-Frank Wall Street Reform and Consumer Protection Act, which prohibits deceptive acts or practices in the consumer financial marketplace. If entered by the court, today’s order would:
End deceptive communications to consumers: The order would prohibit the companies from stating or implying that they are a state or district attorney. The order would also require that the companies clearly disclose the company name in communications with consumers.
Prohibit threats of imprisonment and other intimidation tactics: The order would require that the companies stop falsely representing to consumers that failure to pay a debt or enter the bad check diversion program will result in arrest or imprisonment. It would also require the companies to disclose to consumers that the prosecutor’s office has not made a decision about whether to charge the consumer with a crime and that many cases are never prosecuted.
Prohibit use of district attorney letterhead: The order would ban the companies from using district attorneys’ letterheads or duplicating their signatures for their communications to consumers. The operation would also be required to clearly state that the diversion program is voluntary.
Require increased program oversight: The order would prohibit companies from contacting consumers about a diversion program unless the operation is under the supervision of a state or district attorney’s office and the office has reviewed and provided written confirmation to the company that there is reason to believe the individual being contacted violated the law.
Pay a $50,000 civil money penalty: The proposed order requires the companies and Jonsson to pay a $50,000 civil penalty. The poor financial condition of the companies and Jonsson make them unable to pay a greater sum.
Question: Is there a Statute of Limitations on bad check?
Answer: 2 years for statutory penalty (measured from dishonor); 3 years for liability on the check (same); the underlying obligation may be 4, 5 or 10 years, depending on what it is (measured from breach or last payment, whichever is later). Contract for the sale of goods (including gas and oil) is 4 years; contract wholly in writing is 10 years; contract not wholly in writing (such as a credit card) is 5 years.
When it comes to car advertising, truth should be standard equipment. That’s the message of Operation Ruse Control, a coast-to-coast and cross-border sweep by the FTC and state, federal, and international law enforcers aimed at driving out deception in automobile ads, adds-ons, financing, and auto loan modification services. TheFTC cases offer 6 tips to help keep your promotions in the proper lane.
1. Avoid practices that turn add-ons into bad-ons. Two of the FTC actions involve add-ons – extra products or services tacked on to the sale, lease, or financing of a car. Typical add-ons include extended warranties, guaranteed automobile protection (GAP) insurance, credit life insurance, undercoating, and the like. According to the FTC, California-based National Payment Network deceptively claimed in online ads and through a network of authorized dealers that car buyers who bought its biweekly payment program would save money. What consumers weren’t told was that the cost of the add-on often outstripped any savings. The FTC says that was a material fact that should have been disclosed upfront. In a related action, the FTC sued New Jersey dealerships Matt Blatt Inc. and Glassboro Imports LLC for pitching NPN’s deceptive add-ons and pocketing hefty commissions. To settle the case, NPN will provide consumers with $2.475 million in refunds and fee waivers. The dealerships will turn over an additional $184,000.
2. Don’t low-ball your pitch. Three of the Operation Ruse Control cases challenge allegedly deceptive advertising by auto dealers. Some crossed the line by using headlines to tout bargain prices while failing to disclose – or failing to adequately disclose – the true cost of the deal. For example, ads for Cory Fairbanks Mazdaof Longwood, Florida, pitched “used cars as low as $99.” But according to the FTC, $99 was just the minimum bid for cars offered at a liquidation sale and that didn’t include substantial mandatory fees. In a similar vein, the FTC says the dealership’s ads included photos of loaded cars without clearly explaining that some pictured features – like spoilers and sunroofs – weren’t included in the price.
3. Steer clear of deceptive “zero sum” games. Just as Seinfeld billed itself as a show about nothing, ads for Ross Nissanof El Monte focused on nothing, too – as in “$0 INITIAL PAYMENT, $0 DOWN PAYMENT, $0 DRIVE-OFF LEASE.” The California company made the same claims in Spanish language ads. Other ads promised “$0 down*, 0% APR financing*, 0 payments*, and 0 problems.” Well, the FTC had a problem with – among other things – the deceptive use of “zero.” The dealership’s “$0 at lease inception” deal wasn’t applicable if consumers wanted the cars in the ads for the advertised monthly payment. What about “$0 down payment?” The FTC says people, in fact, had to pay a down payment to finance the vehicles for the monthly payment featured in the ads. And “0% APR?” The annual percentage rate for financing those cars for the advertised payment was way more than 0%. (The complaint against Cory Fairbanks Mazda made similar allegations about deceptive “zero” claims.) The message for dealers: Don’t lure customers in with misleading “zero” promises.
4. If strings are attached, make them clear to consumers upfront. That’s the message of the FTC’s settlement with Jim Burke Nissan in Birmingham, Alabama. According to the complaint, the dealership highlighted eye-catching prices without clearly explaining what the vehicle would really cost consumers. For example, in some cases, what appeared to be the full price was actually what people would have to pay after they ponied up a down payment of as much as $3,000. Other ads featured prices that factored in special discounts or rebates that weren’t available to everyone. For example, some prices applied only to recent college grads, a restriction not prominently disclosed. The ads didn’t tell prospective buyers without a freshly-inked sheepskin that they’d have to pay more. (The Cory Fairbanks complaint includes a similar charge that the company didn’t clearly explain that the advertised discount or price had qualifications – for example, that it was available only to prior Mazda owners.) What can other dealers take from the cases? Clearly disclose material restrictions and limitations.
5. Fineprint footnotes and buried “disclaimers” are non-starters. The FTC says ads for Jim Burke Nissan, Ross Nissan of El Monte, and Cory Fairbanks Mazda all included variations on a deceptive theme: fineprint footnotes, unclear “disclaimers” that consumers had to scroll down to see, or other buried information that didn’t meet the agency’s “clear and conspicuous” standard. Advertisers often ask how big a disclosure has to be, but it’s more than a matter of font size. A clear and conspicuous disclosure is one sufficient for consumers to actually notice, read, and understand it.
6. Give credit laws the credit they’re due. The actions against all three dealers allege that they violated provisions of federal credit statutes. One common pothole: using certain “triggering terms” under the Consumer Leasing Act, Truth in Lending Act, Reg Z, or Reg M without making required disclosures. For example, if you advertise monthly lease payments, that kicks in a requirement under the CLA that you disclose other facts about the transaction – like the total amount due at lease signing, whether a security deposit is required, and the number, amount, and timing of scheduled payments.
Also part of Operation Ruse Control: a law enforcement action against Florida-based Regency Financial Services and CEO Ivan Levy. According to the FTC, the company charged financially-strapped consumers upfront fees to negotiate changes to their car notes, but often didn’t provide anything in return. A federal judge froze the defendants’ assets and entered a Stipulated Preliminary Injunction. Litigation continues in that case.
CONSUMER FINANCIAL PROTECTION BUREAU CONSIDERS PROPOSAL TO END PAYDAY DEBT TRAPS
Proposal Would Cover Payday Loans, Vehicle Title Loans, and Certain High-Cost Installment and Open-End Loans
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) announced it is considering proposing rules that would end payday debt traps by requiring lenders to take steps to make sure consumers can repay their loans. The proposals under consideration would also restrict lenders from attempting to collect payment from consumers’ bank accounts in ways that tend to rack up excessive fees. The strong consumer protections being considered would apply to payday loans, vehicle title loans, deposit advance products, and certain high-cost installment loans and open-end loans.
“Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” said CFPB Director Richard Cordray. “Too many short-term and longer-term loans are made based on a lender’s ability to collect and not on a borrower’s ability to repay. The proposals we are considering would require lenders to take steps to make sure consumers can pay back their loans. These common sense protections are aimed at ensuring that consumers have access to credit that helps, not harms them.”
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 lenders, which is the next step in the rulemaking process. The proposals under consideration cover both short-term and longer-term credit products that are often marketed heavily to financially vulnerable consumers. The CFPB recognizes consumers’ need for affordable credit but is concerned that the practices often associated with these products – such as failure to underwrite for affordable payments, repeatedly rolling over or refinancing loans, holding a security interest in a vehicle as collateral, accessing the consumer’s account for repayment, and performing costly withdrawal attempts – can trap consumers in debt. These debt traps also can leave consumers vulnerable to deposit account fees and closures, vehicle repossession, and other financial difficulties.
The proposals under consideration provide two different approaches to eliminating debt traps – prevention and protection. Under the prevention requirements, lenders would have to determine at the outset of each loan that the consumer is not taking on unaffordable debt. Under the protection requirements, lenders would have to comply with various restrictions designed to ensure that consumers can affordably repay their debt. Lenders could choose which set of requirements to follow.
Ending Debt Traps: Short-Term Loans
The proposals under consideration would cover short-term credit products that require consumers to pay back the loan in full within 45 days, such as payday loans, deposit advance products, certain open-end lines of credit, and some vehicle title loans. Vehicle title loans typically are expensive credit, backed by a security interest in a car. They may be short-term or longer-term and allow the lender to repossess the consumer’s vehicle if the consumer defaults.
For consumers living paycheck to paycheck, the short timeframe of these loans can make it difficult to accumulate the necessary funds to pay off the loan principal and fees before the due date. Borrowers who cannot repay are often encouraged to roll over the loan – pay more fees to delay the due date or take out a new loan to replace the old one. The Bureau’s research has found that four out of five payday loans are rolled over or renewed within two weeks. For many borrowers, what starts out as a short-term, emergency loan turns into an unaffordable, long-term debt trap.
The proposals under consideration would include two ways that lenders could extend short-term loans without causing borrowers to become trapped in debt. Lenders could either prevent debt traps at the outset of each loan, or they could protect against debt traps throughout the lending process. Specifically, all lenders making covered short-term loans would have to adhere to one of the following sets of requirements:
Debt trap prevention requirements: This option would eliminate debt traps by requiring lenders to determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing. For each loan, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses. Lenders would generally have to adhere to a 60-day cooling off period between loans. To make a second or third loan within the two-month window, lenders would have to document that the borrower’s financial circumstances have improved enough to repay a new loan without re-borrowing. After three loans in a row, all lenders would be prohibited altogether from making a new short-term loan to the borrower for 60 days.
Debt trap protection requirements: These requirements would eliminate debt traps by requiring lenders to provide affordable repayment options and by limiting the number of loans a borrower could take out in a row and over the course of a year. Lenders could not keep consumers in debt on short-term loans for more than 90 days in a 12-month period. Rollovers would be capped at two – three loans total – followed by a mandatory 60-day cooling-off period. The second and third consecutive loans would be permitted only if the lender offers an affordable way out of debt. The Bureau is considering two options for this: either by requiring that the principal decrease with each loan, so that it is repaid after the third loan, or by requiring that the lender provide a no-cost “off-ramp” after the third loan, to allow the consumer to pay the loan off over time without further fees. For each loan under these requirements, the debt could not exceed $500, carry more than one finance charge, or require the consumer’s vehicle as collateral.
Ending Debt Traps: Longer-Term Loans
The proposals under consideration would also apply to high-cost, longer-term credit products of more than 45 days where the lender collects payments through access to the consumer’s deposit account or paycheck, or holds a security interest in the consumer’s vehicle, and the all-in (including add-on charges) annual percentage rate is more than 36 percent. This includes longer-term vehicle title loans and certain installment and open-end loans.
Installment loans typically stretch longer than a two-week or one-month payday loan, have loan amounts ranging from a hundred dollars to several thousand dollars, and may impose very high interest rates. The principal, interest, and other finance charges on these loans are typically repaid in installments. Some have balloon payments. The proposal would also apply to high-cost open-end lines of credit with account access or a security interest in a vehicle.
When lenders have the ability to access the consumer’s account or have a security interest in a vehicle, consumers may lose control over their financial choices and these longer-term loans can turn into debt traps. The CFPB’s proposals under consideration for longer-term loans would eliminate debt traps by requiring that lenders take steps to determine that borrowers can repay. Just as with short-term loans, lenders would have two alternative ways to extend credit and meet this requirement – prevent debt traps at the outset or protect against debt traps throughout the lending process. Specifically, lenders making covered longer-term loans would have to adhere to one of the following sets of requirements:
Debt trap prevention requirements: Similar to short-term loans, this option would eliminate debt traps by requiring lenders to determine at the outset that the consumer can repay the loan when due – including interest, principal, and fees for add-on products – without defaulting or re-borrowing. For each loan, lenders would have to verify the consumer’s income, major financial obligations, and borrowing history to determine whether there is enough money left to repay the loan after covering other major financial obligations and living expenses. Lenders would be required to determine if a consumer can repay the loan each time the consumer seeks to refinance or re-borrow. If the borrower is having difficulty affording the current loan, the lender would be prohibited from refinancing into another loan with similar terms without documentation that the consumer’s financial circumstances have improved enough to be able to repay the loan.
Debt trap protection requirements: The Bureau is considering two specific approaches to the debt trap protection requirements for longer-term products. Under either approach, loans would have a minimum duration of 45 days and a maximum duration of six months. With the first, the proposal being considered would require lenders to provide generally the same protections offered under the National Credit Union Administration program for “payday alternative loans.” These loans have a 28 percent interest rate cap and an application fee of no more than $20. With the second, the lender could make a longer-term loan provided the amount the consumer is required to repay each month is no more than 5 percent of the consumer’s gross monthly income; the lender couldn’t make more than two of these loans within a 12-month period.
Restricting Harmful Payment Collection Practices
Lenders of both short-term and longer-term loans often obtain access to a consumer’s checking, savings, or prepaid account to collect payment through a variety of methods, including post-dated checks, debit authorizations, or remotely created checks. However, this can lead to unanticipated withdrawals or debits and transaction fees. When lenders attempt to get repayment through repeated, unsuccessful withdrawal attempts, consumers are charged insufficient funds fees by their depository institution and returned payment fees by the lender, and may even face account closure. These fees add to the spiraling costs of falling behind on these loan products and make it even harder for a consumer to climb out of debt. To mitigate these problems, the Bureau is considering proposals that would:
Require borrower notification before accessing deposit accounts: Under the proposals being considered, lenders would be required to provide consumers with three business days advance notice before submitting a transaction to the consumer’s bank, credit union, or prepaid account for payment. The notice would include key information about the forthcoming payment collection attempt. This requirement would apply to payment collection attempts through any method and would help consumers better manage their accounts and overall finances.
Limit unsuccessful withdrawal attempts that lead to excessive deposit account fees: Under the proposals being considered, if two consecutive attempts to collect money from the consumer’s account were unsuccessful, the lender would not be allowed to make any further attempts to collect from the account unless the consumer provided a new authorization. This would limit fees incurred by multiple transactions that exacerbate a consumer’s financial woes.
This is the first public step in the CFPB’s efforts to reform the markets for these products. In addition to consulting with the Small Business Review Panel, the Bureau will continue to seek input from a wide range of stakeholders before continuing with the process of a rulemaking. Once the Bureau issues its proposed regulations, the public will be invited to submit written comments which will be carefully considered before final regulations are issued.
from St. Louis Post Dispatch — this describes complaints we frequently receive
The voicemail would be enough to give anyone chills.
“Hello, this is Detective Jeff Ramsey. I am attempting to touch bases with (you)… I will be back out to your place of residence … between the hours of 4 and 6 p.m. You are to have two forms of identification, no firearms or narcotics or loose animals on the premises. This is concerning allegations in correlation to check fraud.”
There was no Detective Ramsey, or a need to put away the dogs – but there were many consumers around the country who sent money to a set of debt collection companies operating near Buffalo, N.Y., after being told they would be arrested, alleges the Federal Trade Commission in a lawsuit filed against the Four Star Resolution collection agency. In two separate lawsuits filed recently against Four Star and Vantage Point Services LLC, the FTC and New York State Attorney General’s office says consumers paid $45 million after such threats. Both firms have currently suspended operations because of a temporary restraining order. The lawsuits offer a glimpse into a world the FTC describes as “boiler rooms” where collection agents would allegedly say or do almost anything to motivate consumers to pay up.
“Please make sure that if there are any large dogs or firearms on the premises, they’re out of the immediate harm’s way of myself and the uniformed officer…(and) have adequate supervision for any minor children in the home,” the lawsuit alleges.
The phone number listed for Vantage Point Services listed with the Better Business Bureau was not accepting calls.
Linda Joseph, an attorney representing Four Star, said the FTC did not give the firm the opportunity to defend itself before essentially shutting it down with the temporary restraining order.
“We believe there has been a very serious violation of due process,” she said.
In the Vantage Point Services lawsuit, the FTC alleges that consumers were told they could face extradition from their homes for alleged debts, some agents warned. One was allegedly told he would be extradited from Florida and jailed in Michigan under a recent bill signed by Florida Governor Rick Scott. In another case, a collection agent told a consumer working in South Korea as a civilian administrator for the Air Force that they would be arrested and extradited back to the U.S. to deal with a debt, the FTC said.
The threats were made more believable by liberal use of caller ID spoofing, the FTC claims. One consumer living in Franklin County, Ohio, was told she would have to turn herself in regarding felony charges — and the call appeared to have been placed from a phone number at the courthouse. Another consumer received calls that appeared to come from a district attorney’s office in Texas, the FTC alleges.
Consumers targeted for collection weren’t the only ones who received the intimidating calls, according to the FTC. The lawsuit alleges that one target’s mother was contacted and told “if her daughter did not make a payment, Defendants would process a warrant that day and have the daughter picked up, handcuffed, and imprisoned for a minimum of 120 days.” In another case referenced in the suit, a work supervisor was called. And in still another example, a friend was called and told a sheriff would be visiting the victim’s house because the consumer had committed “identity theft” by using the friend’s information to write a “bad check.”
The FTC and New York Attorney General claim Vantage Point Services used many different business names, including names of fictitious law firms and actual government entities. Vantage Point Services also placed calls using more than 500 phone numbers, the suit claims.
One claim against Four Star alleges that an operator simply said to a consumer, “It’s the government you’re messing with!”
There was also a wide variety of name-calling: Consumers were called “f—ing no good liar,” “idiot,” “dummy,” ”piece of scum,” “thief,” “dirtbag,” “scumbag,” or “loser,” the lawsuit alleges.
Two Four Star employees signed affidavits this week attempting to persuade U.S. District Court to allow the firm to resume operations, saying that the firm had hired a compliance officer and was already working with the Consumer Financial Protection Bureau and the Better Business Bureau to improve its operations. Joseph provided the affidavits to Credit.com.
“I understand that portions of my business need improvement,” said Travell Thomas, an owner. “But I also believe that Four Star — a company devoted to hiring minority, disabled and veteran employees — should be afforded every opportunity to show it has responsible employees.”
Ronald Williams, the compliance officer at Four Star, objected to the FTC’s description of the firm as a “shady debt collector,” and said he had worked to train employees to stay on the right side of the law — employees at the firm has signed notices warning them that impersonating government officials was against the law, for example.
“(I’m) not pretending that Four Star’s operations did not have problems that need to be improved upon, but debt collection is a difficult business,” he said.
In the Vantage Point Services case, the temporary restraining order issued in January against the firm has been extended while both parties argue over imposition of a permanent injunction. The temporary restraining order in the Four Star case has been extended until May 8, according to the FTC; Joseph, Four Star’s attorney, said she was filing a motion to reopen the business this week.
FTC’s Spotlight on Debt Collectors
The FTC has stepped up prosecution against debt collectors operating against the law — the agency filed a record number of Fair Debt Collection Practices Act lawsuits in 2014. Partly because of the attention those lawsuits have attracted, the number of complaints against debt collection firms have also soared — from 205,000 in 2013 to 280,000 in 2014.
The kinds of practices alleged in these two lawsuits follow a script of tactics banned by theFair Debt Collection Practices Act. It’s illegal for collectors to misrepresent who they are, to impersonate law enforcement and to use intimidation tactics such as threatening arrest. It’s also illegal to contact third parties (without the consumer’s explicit consent or a court’s permission), and to refuse to provide supporting documentation when consumers request it, as occurred in many of these collection attempts, the lawsuits allege.
“Today’s action should make it clear that nobody is above the law, and when shady debt collectors engage in illegal and abusive business practices, they will be held accountable,” said Attorney General Eric Schneiderman. “The use of threats, including the threat of arrest, to collect debts is unconscionable, and I am pleased to partner with the FTC to stand up for consumers against these bad actors.”
Consumers who are contacted by a debt collector should immediately ask for verification of the debt — paperwork supporting the alleged debt. If an agent refuses, you may file a complaint with the FTC and your state attorney general’s office. If the firm continues to contact you, you may send a letter demanding that it ceases contact with you. A series of sample letters for dealing with debt collectors are available at the CFPB website.
Banks and other entities that service mortgages must credit any payment made through their websites at the time the borrower approves the payment, a divided federal appeals court has held.The 7th U.S. Circuit Court of Appeals rejected the argument that the federal Truth in Lending Act allows mortgage servicers to wait until an electronic transfer of funds is completed before crediting a payment.
Such a holding, the majority wrote, would be contrary to Congress’ intent.
“The interpretation we adopt promotes an important purpose of TILA: [T]o protect consumers against unwarranted delay by mortgage servicers,” Chief Judge Diane P. Wood wrote in an opinion joined by Judge David F. Hamilton.
In a dissent, Judge Frank H. Easterbrook contended his colleagues were misinterpreting TILA’s requirement that a mortgage servicer credit a payment “as of the date of receipt.”
Under Section 1639f(a) of TILA and an implementing regulation, Easterbrook wrote, an instruction to make a payment is not actually a payment.
“We should read the statute and regulation to mean what they say: [L]enders must give credit when they receive payment,” he wrote.
Elena Fridman’s mortgage is serviced by NYCB Mortgage Co. LLC. Her payments are due on the first of each month, but she has a 15-day grace period before she is required to pay a late fee.
Borrowers may authorize payments on their mortgages through NYCB’s website.
Every business day, NYCB puts all the authorizations it received before 8 p.m. into an Automated Clearing House file.
The following day, NYCB uses the ACH file to request that funds be transferred from the borrowers’ bank accounts.
NYCB credits payments made through its website two business days after the payment is authorized.
Late on Dec. 13, 2012, or early the next morning, Fridman accessed NYCB’s website and authorized a mortgage payment from her account at Bank of America.
NYCB placed the authorization into an ACH file on Dec. 14 and credited Fridman’s mortgage account for the payment on Tuesday, Dec. 18, which was two business days later. It charged her a late fee of $88.54.
Fridman sued NYCB, alleging TILA required it to credit her payment on the day she submitted the authorization.
U.S. District Judge Sara L. Ellis ruled in favor of NYCB, and Fridman appealed.
In its opinion Wednesday, the 7th Circuit majority wrote that a mortgage servicer decides how quickly to collect a payment when it receives a check or gets authorization on its website or over the phone to transfer funds.
Without TILA’s requirement that payment be credited on receipt of the “payment instrument,” the majority wrote, “the servicer could decide to collect payment through a slower method in order to rack up late fees.”
But Easterbrook countered that fear of losing business would prevent a mortgage servicer from engaging in such tactics.
“Playing games would put its reputation at risk,” he wrote. “Users of the Internet proclaim their grievances loudly, and many sites rate merchants based on users’ observations.”
The case is Elena Fridman v. NYCB Mortgage Co. LLC, No. 14-2220.
Daniel A. Edelman of Edelman, Combs, Latturner & Goodwin LLC argued the case before the 7th Circuit on behalf of Fridman.
“I think Judge Wood got it right,” he said.
An authorization made through a website, he said “is an electronic form of a paper check.”
And TILA requires a payment made with a check to be credited when the mortgage servicer receives the check, he said.
Edelman rejected Easterbrook’s assertion that concern over borrowers’ reaction to underhanded conduct would keep mortgage servicers in line.
Servicers don’t care what borrowers think of them, he said.
Instead, he said, servicers have an incentive to collect late fees from borrowers so they can keep their own costs down and attract more business.
“Where Judge Easterbrook went wrong is thinking market forces constrain bad behavior on the part of mortgage servicers,” Edelman said.
LeAnn Pedersen Pope of Burke, Warren, MacKay & Serritella P.C. argued the case on behalf of the bank.
The Seventh Circuit Court of Appeals, in a case argued by Mr. Edelman, holds (2-1) that when you pay your mortgage electronically, the payment must be credited as of the date you fill out the authorization on the mortgage company’s web site, assuming you do so before a reasonable cutoff time, not some later date when the mortgage company chooses to turn the authorization into money:
Like many consumers today, [plaintiff] paid her mortgage electronically, using the online payment system on the website of her mortgage servicer, NYCB Mortgage Company, LLC. By furnishing the required information and clicking on the required spot, she authorized NYCB to collect funds from her Bank of America account. The question before us concerns the time when NYCB received one of her payments. Although [plaintiff] filled out the form within the grace period allowed by her note, NYCB did not credit her payment for two business days. This delay caused [plaintiff] to incur a late fee. . . .
[The Truth in Lending Act] generally requires mortgage servicers to credit payments to consumer accounts “as of the date of receipt” of payment, unless delayed crediting has no effect on either late fees or consumers’ credit reports. 15 U.S.C. § 1639f(a). This provision’s implementing regulation, known as Regulation Z, essentially repeats this requirement. See 12 C.F.R. § 1026.36(c)(1)(i) (“No servicer shall fail to credit a periodic payment to the consumer’s loan account as of the date of receipt … .”). But what is the date of receipt? That question, on which the result in this case turns, is more complicated than one might think. . . .
TILA expressly requires servicers to “credit a payment … as of the date of receipt,” and the Official Interpretations define the “date of receipt” as when the “payment instrument or other means of payment reaches the mortgage servicer.” (Emphasis added.) This definition is far from irrational. While the CFPB (and the FRB before it) could have determined that “payment” means the receipt of funds by the servicer, the conclusion that “payment” refers to the consumer’s act of making a payment is equally sensible.
The definition is not limited to one type of payment instrument versus another type. It instead covers all instruments used to effect payment, and then it specifies that no matter what the means of payment, the relevant date of receipt is the day when the payment mechanism reaches the mortgage servicer, not any later potentially relevant time.
With this much established, we are left with the question how electronic authorizations fit into the statutory and regulatory system. [Plaintiff] argues that an electronic authorization of payment, such as the authorization she gave when she filled out NYCB’s online form, qualifies as a “payment instrument or other means of payment.” . . .
NYCB . . . argues that electronic authorizations are merely the first step of an electronic fund transfer (EFT). It urges that the EFT is not complete— and the payment does not “reach” NYCB as required by the Official Interpretations—until the requested funds are transferred from the consumer’s external bank account to the mortgage servicer. This means, in NYCB’s view, that the EFT, not the electronic authorization, is the “payment instrument or other means of payment.”
The problem with that reasoning is that the same is true of a paper check, which the Official Interpretations specifically include in the definition of “payment instrument or other means of payment.” Paper checks must be credited when received by the mortgage servicer, not when the servicer acquires the funds. Just like an electronic authorization, a check is in a sense “incomplete” when the mortgage servicer receives it. It is nothing more or less than the consumer’s written permission to the payee to take another step— that is, to draw funds from the consumer’s account—just like the electronic submission Fridman tendered. The servicer does not instantaneously have the funds promised by a paper check. It must use the banking system to have the funds transferred to it—a process that takes at least one or two days. If a check must be credited on the date of physical receipt, even though the recipient does not receive the funds that day and must take further steps to acquire them, then there is no reason why a mortgage servicer should not face a comparable process when it receives an electronic “check” or authorization to draw funds from the consumer’s bank account. . . .
Fridman v. NYCB Mortgage Co., No. 14-2220 (7th Cir., March 11, 2015).
Examiners Recover $19.4 Million in Remediation for more than 92,000 Consumers
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) released its latest supervision report highlighting legal violations uncovered by the Bureau’s examiners. The Bureau found deceptive student loan debt collection practices, unfair and deceptive overdraft practices, mortgage origination violations, fair lending violations, and mishandled disputes by consumer reporting agencies. The report also shows that CFPB supervisory resolutions resulted in remediation of $19.4 million to more than 92,000 consumers.
“We are sharing our latest supervisory highlights report with the public so that industry can see trends, examine their own practices, and be proactive to make needed changes before consumers are hurt,” said CFPB Director Richard Cordray. “The CFPB will continue to monitor both bank and nonbank markets to ensure deception is rooted out, deficiencies are corrected, remediation is given to consumers, and violations are stopped in their tracks.”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has authority to supervise banks and credit unions with over $10 billion in assets and certain nonbanks. Those nonbanks include mortgage companies, private student loan lenders, and payday lenders, as well as nonbanks the Bureau defines through rulemaking as “larger participants.” To date, the Bureau has issued rules to supervise the larger participants in the markets of debt collection, consumer reporting, international money transfer, and student loan servicing.
Today’s report, which is the seventh edition of supervisory highlights, generally covers supervisory activities between July 2014 and December 2014. Among the findings:
Deceptive student loan debt collection practices: Bureau examiners found that some student loan debt collectors made deceptive statements to consumers with defaulted federal student loans. In collection calls and call scripts, examiners found that collectors overpromised the restoration of credit profiles if borrowers participated in a federal student loan rehabilitation program; and collectors misinformed consumers by telling them that they could not participate in the rehabilitation program unless they paid by credit card, debit card, or ACH payments, when, in fact, no such requirement existed.
Unfair and deceptive overdraft practices: Bureau examiners found that certain banks changed the way in which they assessed overdraft fees – and that the new approaches increased the likelihood that consumers would incur fees that they did not anticipate. The institutions did not explain the changes in a way that consumers could understand and use to avoid overdraft fees. Based on the specific situation at these institutions, examiners found that the banks had carried out unfair and deceptive practices.
Mortgage origination violations: Bureau examiners found that some loan originators illegally received compensation based on the terms of the loan. Examiners also found that at some loan originators the amounts disclosed on the HUD-1 form improperly exceeded those disclosed on the Good Faith Estimate. Some loan originators advertised the length of payment, amount of payments, numbers of payments, and finance charges without providing the required disclosures. And, the Bureau found weaknesses in compliance management systems that played a significant role in the identified violations.
Fair lending violations: Bureau examiners found that one or more institutions rejected mortgage applications from consumers because they relied on public assistance income, such as Social Security or retirement benefits, in order to repay the loan. Marketing materials contained written statements regarding the prohibition on non-employment sources of income, and discouraged applicants who received public assistance from applying for credit. This violates the Equal Credit Opportunity Act. CFPB examiners directed that remediation be made to harmed applicants.
Mishandling of disputes by consumer reporting agencies: Over the past several years, the CFPB has been examining consumer reporting agencies to see how they handle consumer disputes. While Bureau examiners found great improvements in how some handle disputes in its most recent exams, one or more agencies are still failing to consistently forward all relevant consumer information to furnishers. Such inadequate processes can lead to errors in credit files and incorrect dispute investigation outcomes.
In all cases where CFPB examiners find violations of law, they alert the institutions to their concerns and outline necessary remedial measures. When appropriate, the CFPB opens investigations for potential enforcement actions. The CFPB expects all entities under its supervision to respond to customer complaints and identify major issues and trends that may pose broader risks to their customers.
The CFPB often finds problems during supervisory examinations that are resolved without an enforcement action. Recent non-public supervisory actions and self-reported violations at banks and nonbanks resulted in $19.4 million in remediation to more than 92,000 consumers. These non-public actions have occurred in areas such as payday lending, mortgage servicing, and mortgage origination.
Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau. We are here in Newark today to discuss the subject of arbitration. At its most basic level, arbitration is a way to resolve disputes outside of the court system. Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private. These contractual provisions are referred to as “pre-dispute arbitration clauses.”
Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so. Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.
Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law. Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws. More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts. In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers. That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts. Another measure in that same law is of special interest because it leads directly to our discussion today. In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts. Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.
We have set about this mandatory task to study the use of arbitration clauses with conscious care. We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work. We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input. In December 2013, we released preliminary results from our study. We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed. In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements. We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward. In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.
Today we are releasing the results of our study and we are providing our arbitration report to Congress as the law requires us to do. As far as we are aware, this is the most comprehensive empirical study of consumer financial arbitration ever conducted. We looked at over 850 consumer finance agreements to examine the prevalence of arbitration clauses and their terms. We have reviewed the following categories of disputes: over 1,800 consumer finance arbitration disputes filed over a period of three years; a sample of the nearly 3,500 individual consumer finance cases we identified that were filed in federal court over the same time frame; and all of the 562 consumer finance class actions we identified that were filed in federal court and in selected state courts. We also looked at over 40,000 small claims filings over the course of a single year.
We have supplemented this research by assembling and analyzing a set of more than 400 consumer financial class action settlements in federal courts over a period of five years and more than 1,100 state and federal public enforcement actions in the consumer finance area. We also conducted a national survey of 1,000 credit card consumers to learn more about their knowledge and understanding of arbitration and other dispute resolution mechanisms.
Needless to say, simply assembling – let alone analyzing – all this information was a substantial undertaking. But at the Consumer Bureau, we are committed to data-driven decision-making. With limited exceptions, the debate that has taken place over arbitration clauses has not been informed by actual empirical research into the facts “on the ground” about arbitration generally or consumer finance arbitration specifically. So we believed this was an investment well worth making, even though the process took longer than it otherwise might have taken.
It is not possible in the space of a few minutes to do justice to the depth and richness of the Consumer Bureau’s report. But I want to discuss a few key findings that shed light on some of the major questions that have been much debated by various stakeholders.
In discussing these findings, it is important to bear in mind that when it comes to consumer finance, arbitration clauses are contained in standard-form contracts, where the terms are not subject to negotiation. Like the other terms of most contracts for consumer financial products or services, they are essentially “take-it-or-leave-it” propositions. Consumers may open a new account or procure a new product without being aware of what the contract says or without fully understanding its implications. As part of the study we are releasing today, we looked at arbitration clauses in at least six different consumer finance markets.
In order to understand the effects of arbitration clauses, we wanted to know how many people use consumer products or services where the standard customer agreements include such clauses. In the credit card market, we found that credit card issuers representing more than half of credit card debt have arbitration clauses. In the checking account market, we found that banks representing almost half of insured deposits have arbitration clauses. Given the size of these markets, we can safely say that tens of millions of consumers are covered by one or more such arbitration clauses. Indeed, for credit card accounts alone, the number could be as high as 80 million consumers. Sometimes consumers are given a one-time chance to opt out of these clauses, but our research showed that consumers were generally unaware of this.
A key question we asked is to what extent individual consumers use arbitration procedures or individual litigation to challenge company behavior that they believe to be wrongful. The answer is: not very often. We looked at disputes where an arbitration case is filed with the American Arbitration Association, or AAA – the largest administrator of consumer finance arbitration disputes in the country – between 2010 and 2012. Across six consumer finance product markets covering tens of millions of Americans, just over 1,800 arbitration disputes were filed with the AAA – an average of about 600 per year. And over twenty percent of these cases may have been filed by companies, rather than consumers. Moreover, almost all of these disputes involved matters where more than $1,000 was at stake; that is, in this data consumers seem to be indicating that it rarely makes sense for them to bring an individual claim with only a small amount at stake.
We sought to study what happened in these arbitration cases, but we learned that for the cases filed in 2010 and 2011, approximately two-thirds ended without a decision from an arbitrator, either as the result of a settlement or some other informal resolution. In the cases that were decided, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators ordered consumers to pay $2.8 million, predominantly on debts that were disputed.
We also found that individual consumers are much more likely to bring a lawsuit in a court instead of pursuing a dispute in arbitration. During the same three-year period, we found nearly 3,500 individual consumer finance lawsuits were filed in federal court in five of the six consumer finance markets covered by the arbitration data we studied – an average of under 1,200 per year. We studied all of the cases in four markets and a random sample of credit card cases and found very few that were resolved by a court. In those that were resolved by a court, consumers won under $1 million and more than half of that total came from a single case. We also looked to small claims courts, but found little evidence of extensive consumer filings from the limited information available about those proceedings. Instead, small claims courts seemed to be used mostly by companies filing debt collection lawsuits against consumers.
The survey we conducted reflects these findings. In that survey, we asked consumers what they would do if they were charged a fee by their credit card issuer that they knew to be wrong and they had already exhausted all possible efforts to obtain relief from the company. Only two percent of consumers said they would consider bringing formal legal proceedings or would consult a lawyer. That is almost the same percentage of consumers who said they would simply accept responsibility for the fee. Most people, in fact, say they would simply cancel their card. The research thus indicates that consumers are very unlikely, acting alone, to even consider bringing formal claims against their card issuers – either through arbitration or through the courts.
Another question our study addresses is the extent to which consumer finance class actions enable consumers to get financial redress. We focused our research on class action settlements because that is generally the way consumers obtain relief in class actions. These cases rarely go to trial. (The same is generally true of individual court actions and to a lesser extent of arbitration cases as well.)
For the period from 2008 through 2012, we identified about 420 federal class action settlements in consumer financial cases. We found that those settlements totaled $2.7 billion in cash, in-kind relief, and fees and expenses. Of this, 18 percent went to attorneys’ fees and litigation and administration expenses. That means approximately $2.2 billion was available as monetary and in-kind relief for the benefit of affected consumers. Further, these figures do not account for the benefits to consumers from lawsuits or settlements that led to changes in company behavior; this value is considerable but difficult to quantify. And of course, the numbers do not include the potential benefit to other consumers from any deterrent effect associated with these settlements.
In over 100 of these settlements, payments were made to affected consumers automatically without those consumers having to submit claims forms. For those cases where numbers were available, over $700 million was paid to consumers. We were able to obtain data on payments in another 125 or so settlements in which consumers were required to file claims in order to get their money. In those cases, we found that approximately $325 million was paid to consumers. In another 25 or so cases, a combination of automatic distributions and a claims process was used, and in those cases roughly $60 million was paid to consumers. In other words, the total cash payout – excluding in-kind relief – was, at a minimum, in excess of $1.1 billion, or at least $200 million per year. These payments were provided to a minimum of 34 million consumers, which works out to an average of 6.8 million consumers annually.
The contrast between the class action system as a means of addressing consumer claims as compared to arbitration and individual litigation can be especially stark if we focus on particular markets. Consider, for example, the checking account market. Over 90 percent of all American households – roughly 114 million of them – have a checking account, making this perhaps the single largest consumer market. Between 2010 and 2012, there were a total of 72 arbitration disputes filed with the AAA and 137 individual cases filed in federal courts involving checking accounts. Yet during those same three years, six class settlements were approved involving the overdraft practices of five banks. The settlements totaled close to $600 million and covered more than 19 million consumers. The cases also resulted in changes to overdraft practices going forward – changes that brought material benefit to consumers.
A further question we studied is the extent to which arbitration clauses stand as a barrier to class actions. By design, arbitration clauses can be invoked to block class actions in court. We studied how often arbitration clauses are, in fact, used in this way. We found that it is rare for a company to try to force an individual lawsuit into arbitration. But it is quite common for arbitration clauses to be invoked to block class actions. For example, we found that when credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block the action in nearly two-thirds of the cases. And, in the overdraft litigation to which I just referred, five banks were able to get the class actions against them dismissed because of arbitration agreements.
We also examined how often consumers seek to file class actions in arbitration. The AAA has a process that allows a consumer to pursue a dispute on behalf of a class of other consumers just as one can do in court. However, under the AAA rules, a class action arbitration can only proceed if it is permitted under the arbitration clause. We found that nearly all arbitration agreements include a provision which says that arbitrations may not proceed on a class basis. Perhaps not surprisingly, we found that only two class action arbitrations were filed with the AAA between 2010 and 2012 in the markets we studied. One of these was not pursued after it was filed and the other was pending on a motion to dismiss as of September 2014.
In addition, we looked at whether companies that include arbitration clauses in their contracts are able to offer lower prices because they are not subject to class action lawsuits. Our methodology here centered on a real-world comparison of companies that dropped their arbitration clauses and companies that made no change in their use of arbitration clauses. This was possible because in 2009, four large credit card issuers had settled an antitrust lawsuit by agreeing to drop their arbitration clauses. Meanwhile, other card issuers had either retained their arbitration clauses or continued to refrain from using arbitration clauses.
Using de-identified, account-level information from credit card issuers that represent about 85 percent of the credit card market, we compared the total cost of credit paid by consumers of some of the companies that dropped their arbitration clauses and of some of the companies whose use of arbitration clauses was unchanged. We looked at whether the elimination of arbitration agreements led to an increase in prices charged to consumers. We found no statistically significant evidence of such a price increase. We likewise found no evidence that issuers which dropped their arbitration clauses reduced access to credit relative to those whose use of arbitration clauses was unchanged.
Finally, our study examined the extent to which consumers are aware of, and understand the implications of, arbitration clauses. In our survey of 1,000 consumers with credit cards, we found that of those consumers who said they knew what arbitration was, three out of four did not know if they were subject to an arbitration clause. Of those who thought they did know, more than half were wrong about whether their agreements actually contained arbitration clauses. In fact, consumers whose agreements did not contain an arbitration clause were more likely to believe that the agreements had a clause than consumers whose agreements actually did have such a clause.
The confusion did not stop there. More than half of the consumers who were subject to an arbitration agreement and who said they knew what a class action was believed that they could participate in a class action nonetheless. Forty percent were unsure whether they could, leaving less than two percent who recognized that they could not participate in class actions.
We also asked consumers if they recalled being asked whether they wished to “opt out” of their arbitration clause so that they could retain their right to sue in court or to participate in class actions. Over a quarter of the credit card arbitration agreements we reviewed permit individual consumers to opt out. However, only one consumer whose current agreement permitted him to opt out recalled being asked whether he wished to do so.
In our governing statute, Congress specified that the results of this arbitration study are to provide the basis for important policy decisions that the Consumer Bureau will have to make in this area. So people are right to be interested in digesting these results and considering how we intend to fulfill the objectives established by Congress. We will be meeting with stakeholders after they have had a chance to read our report, and we are here today to invite you to share your thoughts on these issues in general and on that process in particular.
At the Consumer Bureau, we are dedicated to a marketplace characterized by fair, transparent, and responsible business practices. We believe that strong consumer protection is an asset to honest businesses because it ensures that everyone is playing by the same rules, which supports fair competition and positive treatment of consumers. We look forward to a robust and vigorous discussion today, which will bring us one step closer to achieving that vision.
The Consumer Financial Protection Bureau released a study indicating that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration and the courts, while millions of consumers obtain relief each year through class action settlements. Arbitration Clauses by the Numbers Tens of millions of consumers are covered by arbitration clauses. The CFPB looked at arbitration clauses in six different consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts. • 53 percent: The market share of credit card issuers that include arbitration clauses. • 44 percent: While fewer than 8 percent of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 percent of insured deposits. • 92 percent: The percentage of prepaid card agreements the CFPB obtained that are subject to arbitration clauses. • 86 percent: In the private student loan market, 86 percent of the largest lenders include arbitration clauses in their contracts. • 99 percent: The Bureau was able to obtain data on payday loan agreements in California and Texas. In those states, over 99 percent of storefront locations include arbitration clauses in their agreements. • 88 percent: Among mobile wireless providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses. Those providers cover over 99 percent of the market. Overview Arbitration is a way to resolve disputes outside the court system. In recent years, many contracts for consumer financial products and services have included a “pre-dispute arbitration clause” stating that either party can require that disputes that may arise about that product or service be resolved through arbitration, rather than through the court system. Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates that the CFPB conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets. The Dodd-Frank Act also prohibits the use of arbitration clauses in mortgage contracts. And it gives the Bureau the power to issue regulations on the use of arbitration clauses in other consumer finance markets if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau’s study
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