Harmed African-American and Hispanic Borrowers Will Receive $9 Million
WASHINGTON, D.C. – Today, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) filed a joint complaint against Provident Funding Associates for charging higher broker fees on mortgage loans to African-American and Hispanic borrowers. The agencies also filed a proposed order that, if entered by the court, would require Provident to pay $9 million in damages to harmed African-American and Hispanic borrowers.
“Consumers should never be charged higher fees because of their race or national origin,” said CFPB Director Richard Cordray. “We will continue to root out illegal and discriminatory lending practices in the marketplace. I look forward to working closely with our partners at the Department of Justice to ensure consumers are treated fairly.”
“The Civil Rights Division is committed to ensuring that all types of lending institutions, including wholesale mortgage lenders, comply with the fair lending laws,” said Principal Deputy Assistant Attorney General Vanita Gupta of the Justice Department’s Civil Rights Division. “We look forward to further collaboration with the Bureau in protecting consumers from illegal and discriminatory lending practices.”
“The settlement demonstrates this U.S. Attorney’s office will devote the resources necessary to root out and address unfair lending practices that affect citizens of this district,” said U.S. Attorney Melinda Haag. “The law is clear: access to mortgage loans may not be made more difficult because of an applicant’s race or national origin. We are glad that Provident has agreed to put an end to this practice without engaging in protracted litigation.”
Provident is headquartered in California and originates mortgage loans through its nationwide network of brokers. Between 2006 and 2011, Provident made over 450,000 mortgage loans through its brokers. During this time period, Provident’s practice was to set a risk-based interest rate and then allow brokers to charge a higher rate to consumers. Provident would then pay the brokers some of the increased interest revenue from the higher rates – these payments are also known as yield-spread-premiums. Provident’s mortgage brokers also had discretion to charge borrowers higher fees, unrelated to an applicant’s creditworthiness or the terms of the loan. The fees paid to Provident’s brokers were thus made up of these two components: payments by Provident from increased interest revenue and through the direct fees paid by the borrower.
The Equal Credit Opportunity Act prohibits creditors from discriminating against applicants in credit transactions on the basis of characteristics such as race and national origin. In the complaint, the CFPB and DOJ allege that Provident violated the Equal Credit Opportunity Act by charging African-American and Hispanic borrowers more in total broker fees than white borrowers based on their race and national origin and not based on their credit risk. The DOJ also alleges that Provident violated the Fair Housing Act, which also prohibits discrimination in residential mortgage lending.
The agencies allege that Provident’s discretionary broker compensation policies caused the differences in total broker fees, and that Provident unlawfully discriminated against African-American and Hispanic borrowers in mortgage pricing. Approximately 14,000 African-American and Hispanic borrowers paid higher total broker fees because of this discrimination.
On December 6, 2012, the CFPB and the DOJ signed an agreement that has facilitated strong coordination between the two agencies on fair lending enforcement, including the pursuit of joint investigations such as this one.
The Dodd-Frank Wall Street Reform and Consumer Protection Act and the Equal Credit Opportunity Act authorize the CFPB to take action against creditors engaging in illegal discrimination. The consent order, which is subject to court approval, requires Provident to:
Pay $9 million in damages for consumer harm: Provident will pay $9 million to a settlement fund that will go to harmed African-American and Hispanic borrowers who paid higher interest or fees for mortgage loans from the company between 2006 and 2011.
Pay to hire a settlement administrator to distribute funds to victims: The CFPB and the DOJ will identify victims using Provident’s loan records. A settlement administrator will contact consumers, distribute the funds, and ensure that harmed borrowers receive compensation. The settlement administrator will set up various cost-free ways for consumers to contact it with any questions about potential payments. The CFPB will release a consumer advisory with contact information for the settlement administrator once that person is chosen.
Not discriminate against borrowers in assessing total broker fees: Provident will continue to have in place its non-discretionary broker compensation policies and procedures. Provident’s current policy does not allow discretion in borrower- or lender-paid broker compensation because individual brokers are unable to charge or collect different amounts of fees from different borrowers on a loan-by-loan basis. The consent order also requires that Provident continue to have in place a fair lending training program and broker monitoring program.
The complaint and the proposed consent order resolving the complaint were filed today with the United States District Court for the Northern District of California. The complaint is not a finding or ruling that the defendants have actually violated the law. The proposed federal court order will have the full force of law only when signed by the presiding judge.
The Federal Trade Commission has completed its review of the Interpretations, Rules, and Guides under the Magnuson-Moss Warranty Act and will keep them in their present form, with certain changes to the Interpretations as set forth in a Federal Register Notice (FRN) to be published shortly.
In 2011, as part of its systematic review of all current FTC rules and guides, the FTC sought public comments on its Interpretations, Rules, and Guides regarding product warranties under the Warranty Act, which became law in 1975. The Interpretations provide the Commission’s views on terms and provisions in the Act; the Guides help advertisers avoid unfair or deceptive practices; and the Rules specify disclosure requirements, require that warranty information be available before purchase, and set standards for any informal dispute settlement provisions in a warranty.
In response to the comments received, the Commission has revised Part 700.10 of the Interpretations to clarify that implied tying – warranty language that implies to a consumer that warranty coverage is conditioned on the use of select parts or service – is deceptive. It has also revised Part 700.10 to state that, to the extent that the Warranty Act’s service contract provisions apply to the insurance business, they are effective if they do not interfere with state laws regulating the business of insurance. The Commission has also updated the citation format in the Interpretations and Rules.
The Commission’s FRN also explains, among other things, the obligations of online and offline warrantors and the Act’s application to certain consumer leases, and continues to ensure that consumers are entitled to informal dispute mechanisms provided by the Act.
The Commission vote approving the FRN announcing retention of the Warranty Act Interpretations, Guides and Rules, with modifications to the Interpretations, was 4-1, with Commissioner Maureen K. Ohlhausen voting no;Commissioner Ohlhausen issued a dissenting statement. The FRN is available on the FTC’s website and as a link to this press release and will be published in the Federal Register shortly.
Three Illinois residents who agreed to pay 139 percent interest on $2,525 in loans from Western Sky Financial — a “payday loan” company chartered in South Dakota that advertises on television and operates on the Internet — filed a state-court class action in Chicago against its owner, eight affiliated firms and some debt collectors, alleging that the defendants violated the Illinois Interest Act and the “unfair practices” provision of the Illinois Consumer Fraud Act.
Western Sky and its affiliates allegedly lacked authorization from the Illinois Department of Financial and Professional Regulation to charge interest rates greater than the 9 percent maximum provided by the Interest Act.
The defendants used the Class Action Fairness Act to yank the case into federal court. Then the district judge dismissed the lawsuit based on a contract provision that required arbitration of disputes by “an authorized representative” of the Cheyenne River Sioux Tribal Nation in South Dakota. But the 7th U.S. Circuit Court of Appeals reversed because the arbitration provision was unreasonable and unconscionable. Jackson v. Payday Financial, 764 F.3d 765 (7th Cir.2014).
Back in the district court, the defendants filed a motion to dismiss, arguing among other things that the plaintiffs failed to allege valid claims under the Illinois statutes.
Although U.S. District Judge Charles P. Kocoras dismissed a count that was based on the Illinois Criminal Usury statute — because that statute “does not imply a private right of action for individuals subject to loans charging usurious interest rates” — he declined to toss the Interest Act and Consumer Fraud claims.Jackson v. Payday Financial, 11 C 9288 (Feb. 3).
Here are highlights of Judge Kocoras’ opinion (with omissions not noted in the text):
Defendants argue that plaintiffs’ allegations concerning a violation of the Illinois Interest Act must be dismissed because the complaint does not allege that the defendants had actual knowledge that their loans were unlawful.
Under the Illinois’ usury statutes, “whether a loan is usurious depends on whether the party intended to charge unlawful interest.” Saskill v. 4–B Acceptance, 117 Ill.App.3d 336, 453 N.E.2d 761 (1983).
Plaintiffs’ allege that defendants knowingly lent money to the plaintiffs and charged interest rates more than 130 percent, well over the 9 percent cap established by the Illinois Interest Act. The complaint further specifies that the defendants were aware that the interest rates charged were unenforceable under Illinois law.
The defendants counter that they were under the belief that their loans would be governed by Cheyenne River Sioux tribal law, as specified in the loan agreement.
Despite the defendants assertions of their subjective beliefs, the present posture of the case does not support determining the facts of the case. At this juncture, the plaintiffs’ well-pled allegations establish that the defendants knew that the loans were unlawful under Illinois law.
Additionally, defendants contend that the Illinois Interest Act solely applies to individuals and corporations actually in this state. Due to their lack of Illinois contacts, defendants argue that the Illinois Interest Act does not apply to them.
Defendants point to the language of the Illinois Interest Act which states, in pertinent part: “in all written contracts it shall be unlawful for the parties to stipulate or agree that 9 percent per annum, or any less sum of interest, shall be taken and paid … in any manner due and owing from any person to any other person or corporation in this state … except as herein provided.” 815 ILCS 205/4(1).
Defendants asserted limitation on the reach of the Illinois Interest Act is not persuasive.
The Illinois Interest Act and other Illinois usury laws exist to broadly protect a “necessitous borrower” from an “unscrupulous lender.” See Rogus v. Continental Illinois Nat. Bank & Trust Co. of Chicago, 4 Ill.App.3d 557, 281 N.E.2d 346 (1972).
The portion of the Illinois Interest Act relied on by the defendants merely enunciates the lawful nature of a 9 percent interest rate. If an individual or company wishes to exceed the cap interest rate, it must fall into one of the many established exceptions, which defendants do not argue that they fit into.
Furthermore, another section of the Illinois Interest Act provides:
“When any written contract, wherever payable, shall be made in this state, or between citizens or corporations of this state, or a citizen or a corporation of this state and a citizen or corporation of any other state, territory or country (or shall be secured by mortgage or trust deed on lands in this state), such contract may bear any rate of interest allowed by law to be taken or contracted for by persons or corporations in this state, or allowed by law on any contract for money due or owing in this state.” 815 ILCS 205/8.
The permissibility of charging “any rate of interest allowed by law” in a contract made by any individual of any state defeats the defendants limited interpretation of the Illinois Interest Act.
The defendants’ motion to dismiss plaintiffs’ Illinois Interest Act claim is denied.
Disagreement concerning the application of the ICFA
Defendants argue that the plaintiffs’ ICFA claim should be dismissed because there exists a legitimate disagreement about whether the alleged conduct is unlawful under the ICFA.
Defendants fortify their argument by relying on Stern v. Norwest Mortgage Inc., 284 Ill.App.3d 506, 672 N.E.2d 296 (1996), for the proposition that the existence of a “reasonable difference of opinion as to the meaning” of a statute cannot support a ICFA claim.
However, the Stern court went on to state that “there must be a claim seated in deceptive acts rather than a reasonable difference of opinion as to the meaning of an act of the Illinois General Assembly.” Id., 672 N.E.2d at 302.
Courts have held that an individual can pursue two types of claims under the ICFA: 1) a claim alleging that the conduct is unfair; and 2) a claim alleging that the conduct is deceptive. See Siegel v. Shell Oil Co., 612 F.3d 932 (7th Cir.2010); see also Saunders v. Mich. Ave. Nat’l Bank, 278 Ill.App.3d 307, 662 N.E.2d 602 (1996).
Plaintiffs have alleged that the defendants’ conduct was unfair for the purposes of pleading an ICFA claim.
To show that particularized conduct constitutes an “unfair practice” under the ICFA, the practice must offend public policy, be immoral, unethical, oppressive, unscrupulous or cause substantial injury to consumers. Robinson, 775 N.E.2d at 961.
“All three criteria do not need to be satisfied to support a finding of unfairness. A practice may be unfair because of the degree to which it meets one of the criteria or because to a lesser extent it meets all three.” Id.
For present purposes, the plaintiffs have pled that the defendants engaged in unfair conduct in violation of the ICFA for “contracting for and collecting finance charges, interest, and fees, from Illinois residents, in excess of the amounts permitted by Illinois law.”
In light of Illinois’ enactment of several consumer protection statutes limiting the permissible interest charged to Illinois residents, the court finds that the alleged assessment of interest over 100 percent is unscrupulous and oppressive and sufficiently constitutes an unfair practice.
Defendants submit their argument concerning a “reasonable difference of opinion” as a guise for their ultimate contention that Illinois law should not be applicable to the loan agreements.
It is not the contention of the defendants that the ICFA is ambiguous or vague in defining the conduct it prohibits. Defendants go further and ultimately challenge the application of Illinois law to their conduct. Defendants have moved for dismissal based on plaintiff’s failure to state a claim.
Plaintiffs have sufficiently alleged a violation of the ICFA under Illinois law.
Basis for ICFA claim
Defendants argue that the ICFA does not allow recovery for a violation of the Illinois Interest Act.
Defendants contend that the ICFA prescribes numerous statutes that if violated give rise to a ICFA claim; the absence of the Illinois Interest Act from the delineated violations prohibits the application of the ICFA.
Despite the defendants’ protestations concerning the absence of the Illinois Interest Act from the list of statutes qualifying as a ICFA violation, plaintiffs do not elicit the particular portion of the ICFA which relies on other violations to serve as a basis for an ICFA claim.
Plaintiffs allege that the excessive interest and fees of the loans assessed by the defendants in their loans was an unfair practice in violation of 815 ILCS 505/2 of the ICFA, which does not rely on a violation of another statute.
Plaintiffs do not allege that a violation of the Illinois Interest Act represents a violation of 815 ILCS 505/2Z of the ICFA, which provides a remedy under the ICFA for violations of other Illinois consumer statutes.
Failure to establish the proximate cause of their injury
Defendants finally contend that plaintiffs have failed to establish that their deception proximately caused plaintiffs’ injuries.
To prevail under ICFA, a plaintiff must demonstrate that the defendant’s conduct is the proximate cause of the injury. Oliveira v. Amoco Oil Co., 201 Ill.2d 134, 776 N.E.2d 151 (2002).
Therefore, plaintiffs must allege that “but for” the defendants’ unfair conduct, they would not have been damaged.
Plaintiffs allege that the loans provided by the defendants unlawfully charged finance charges, interest, and fees that were not permitted under Illinois law. As a result of paying the charged interest of over 100%, as opposed to the Illinois cap of 9%, the plaintiffs were damaged.
Plaintiff sufficiently pled the proximate cause of their injury was the defendants conduct. Defendants’ motion to dismiss plaintiffs’ ICFA claim is denied.
Article from trade publication Inside ARM about one of our cases
The Inconvenient Reality of Convenience Fees
Mike Bevel May 18, 2015
You should probably stop charging convenience fees. You also probably won’t listen to me, or to your compliance team
Nevertheless, it’s a risky prospect, the precedents aren’t terribly clear, and, if a recent case, Acosta v. Credit Bureau of Napa County, is to be believed, it’s against the Fair Debt Collection Practices Act and liable to get you sued.
Here are the facts, per the filing on 29 April 2015:
The defendant received a collection notice for $524.59. The notice helpfully listed “6 easy payment options,” including one with a convenience fee: “Pay via Credit Card. ($14.95 Chase Receivables processing fee where applicable).” Four of the remaining five options did not include a convenience fee.
However, the defendant (via her attorney), believes that that $14.95 convenience fee violates the FDCPA in the following ways:
1692e: False or misleading representations. “A debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”
1692e(2): (2) The false representation of—
(A) the character, amount, or legal status of any debt; or
(B) any services rendered or compensation which may be lawfully received by any debt collector for the collection of a debt.
1692e(10): (10) The use of any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a consumer.
1692f: Unfair practices. “A debt collector may not use unfair or unconscionable means to collect or attempt to collect any debt.”
1692f(1): (1) The collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation [emphasis added, editor) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.
Was that $14.95 part of the collection? That’s at issue here. Per the defendant’s counsel, the answer is yes, and because it’s yes, 1692f(1) was violated (which dominoed, in a sense, the other sections of the FDCPA). Per the agency, the answer is no, there was no collection intended: the $14.95 should be considered a “pass through.” Additionally, the agency never claimed the processing fee was due, and, too: there were four other options available to the defendant that didn’t have a convenience fee at all.
The court…didn’t see it that way. Per the court, for there to have been no collection for the agency, then that $14.95 should have gone directly to the payment (i.e., third party) processor.
And since there was a collection, the court then went on to determine whether it was “expressly authorized by the agreement creating the debt or permitted by law.” Which, per the court, this fee did neither: neither expressly authorized, and not permitted by law.
Which brings us back to the beginning of this piece: convenience fees just aren’t. Acosta tells us this. Quinteros out of New York tells us this. There are incredibly narrow applications for convenience fees; but, for the most part, the risks are too great.
What compliance folk can do now:
Examine the agreements consumers sign with your clients. If there is no express language in those agreements stating that past-due accounts sent to collections might incur additional costs, you should not charge a convenience fee.
Review your internal written policies regarding convenience fees with your own legal counsel — paying specific attention to the sections of the FDCPA quoted above.
Stop adding convenience fees to transactions. Which, I know, is easier said than done, and a tough conversation to have with operations and management. But the risks, at this point, do not outweigh the benefits at all, and simply open your agency up for lawsuits and unwanted scrutiny.
NEWARK – Acting Attorney General John J. Hoffman and the New Jersey Division of Consumer Affairs today warned consumers of a scam in which con artists, falsely claiming to represent the New Jersey Attorney General’s Office, call unsuspecting victims to demand immediate payment of a non-existent debt.
“This is the latest in a long line of government impostor scams, in which criminals cold-call their victims while claiming to represent the IRS, the Attorney General’s Office, or some other agency,” Acting Attorney General Hoffman said. “The goal is always to con the victim into sending money, or giving away personal information and opening themselves up to identity theft.”
Many government impostors, particularly in the so-called “IRS scam,” often attempt to threaten victims into sending money. Others attempt to fool victims by offering money – such as a legal settlement or a grant that the victim must claim. In either case, victims will be directed to send a payment – usually by a wire transfer service or pre-loaded debit card – and/or disclose their personal or financial information.
In this case, the scammer’s phone number appears on victims’ caller ID to have a 609 area code. However, “spoofing” technologies make it possible for scammers to disguise their phone numbers – and even make a phone call from overseas appear to be local.
“With the power of modern technology, it is easier than ever for scammers to mimic local phone numbers or to create emails, documents and websites that look like those of legitimate government entities or businesses,” Division of Consumer Affairs Acting Director Steve Lee said. “But don’t be fooled. Instead, be vigilant and skeptical. Always verify what you are told, before giving anyone your money.”
New Jersey government impostor scams have struck before. In March 2012, the Division warned consumers about a fraudulent letter, also claiming to be from the New Jersey Attorney General’s Office, which invited victims to apply for their share of the proceeds from a fictitious multimillion-dollar legal settlement. The letter included phone numbers and an email address that were staffed by con artists in on the scam.
In April 2012, the Division warned consumers about fake checks that were sent out by mail, purportedly from the New Jersey State Treasury. Such check scams usually ask the victim to deposit the full amount, then send a smaller amount back to the con artist. The victim will learn too late that the original check was a fraud, and no money has been deposited into the victim’s bank account.
The Division of Consumer Affairs has launched a “Fighting Fraud” awareness program to educate and empower New Jersey residents, help them recognize scams both old and new, and prevent victimization.
Advice for Consumers:
Scammers often contact their victims by phone, email, text message, or letter. Though the details of each scam may differ, the goal is always to profit illegally at the victim’s expense – either through outright theft or through identity theft.
Consumers should never send money, give away their personal or financial information, or click on a link or attachment, without first taking the time to make sure the communication they received is valid.
Consumers are advised to independently verify the information in an email, phone call, or letter. Use another source to find a separate phone number for the person or entity that supposedly made the communication, in order to verify whether it was genuine.
Just as important, consumers should never act without thinking. This is true especially when dealing with a sales pitch or a threat that says “you must act right away.” And even more so if the consumer is told, “keep this confidential and don’t tell anyone about this deal.”
In this and other government impostor scams, con artists try to create a false sense of urgency. They will often demand secrecy, by demanding that the victim tell no one else about the payment. These criminals know that know consumers are much more likely to become victims if their emotions are higher – and if they are prevented from discussing the scam with a friend or relative.
The Division of Consumer Affairs educates senior citizens and other New Jerseyans through a robust schedule of public events. Click here to see the Division’s public outreach calendar. Consumers seeking information about fraud prevention can find additional information in the following, free publications on the Division’s website:
The Division’s “Cyber Safe NJ” includes important consumer protection information on “The Basics of Cyber Safety,” “Preventing Identity Theft,” and “Controlling Your Privacy.”
Consumers who believe they have been cheated or scammed by a business, or suspect any other form of marketplace abuse, can file a complaint with the New Jersey Division of Consumer Affairs by visiting its website or by calling 1-800-242-5846 (toll free within New Jersey) or 973-504-6200.**
Prepared Remarks of Richard Cordray
Director of the Consumer Financial Protection Bureau
Field Hearing on Student Loans
May 14, 2015
Thank you all for joining us today in Milwaukee. Plato once said, “The direction in which education starts a man will determine his future life.” More Americans are heeding that advice and going to college at record rates – including both women and men, I might add, unlike in Plato’s day. At the same time, the high price of college has created pressure and anxiety for students and families across the country.
Today the Consumer Financial Protection Bureau is here in Wisconsin to focus on how tens of millions of Americans are affected by their student debt load, which in the aggregate now tops $1.2 trillion. Wisconsin alone has about 812,000 federal student loan borrowers who owe $18.2 billion. This does not even include the expensive private student loans that many Wisconsin students most likely took out to get through school. This is a significant burden now being carried by many of our best and brightest.
Student loans are now the largest source of consumer debt outside of mortgages. Two-thirds of graduates are finishing their bachelor’s degrees with debt that averages nearly $30,000. Among the most careful observers of economic data, there is a growing consensus that a strain of this magnitude can have repercussions that threaten the economic security of young Americans and economic growth for all Americans. Significant debt can have a domino effect on the major choices people make in their lives: whether to take a particular job, whether to move, whether to buy a home, even whether to get married.
Two years ago, we issued a public notice and held a hearing to gather input on the student debt domino effect. We received more than 28,000 responses. The responses identified areas of concern, including an overwhelming feeling by many borrowers that the process of paying back their loans creates harms of its own and should be improved. They said the frustrations and difficulties of understanding when, where, and how to pay back student debt are stressful and counter-productive. Today we are going to be focusing on these issues.
Borrowers who finance a home, a car, or an education often find that a company they never heard of acts as their loan servicer, with the responsibility to collect and allocate the loan payments. For young people finishing college, student loan servicers will be their primary point of contact on their outstanding loans. These companies are responsible for collecting payments and sending the payments to the loan holders. Borrowers rely on them to process payments accurately, to provide billing information, and to answer questions about their accounts, including ways to help prevent default. The servicer is often different from the lender. This means consumers often have no control or choice over the company they are dealing with to manage their loans.
As a growing share of student loan borrowers reach out to their servicers for help, the problems they encounter bear an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during, and after the financial crisis. Having seen the improper and unnecessary foreclosures experienced by many homeowners, the Consumer Bureau is concerned that inadequate servicing is also contributing to America’s growing student loan default problem. At this point, about 8 million Americans are in default on more than $100 billion in outstanding student loan balances.
Today we are launching a public inquiry into student loan servicing practices. The inquiry seeks information on the hurdles that make repayment a stressful process and even at times a harmful one. For many young people, repaying a student loan is one of their first experiences in the financial marketplace. Starting off their financial lives with such a big debt load can feel overwhelming, and it can become all the more stressful when things do not go right. Defaulting on a student loan can be devastating, making it harder for a young person to gain a firm financial footing. The resulting pressures can make student loan borrowers feel like they are walking a tightrope where any false move can cause them to fall.
The Request for Information that the Consumer Bureau is issuing today is meant to find ways to put the “service” back into the student loan servicing market and help people avoid unnecessary defaults. We are encouraging student borrowers to share their experiences by visiting ConsumerFinance.gov. To spread word of this initiative online, use the hashtag #StudentDebtStress.
At every stage of the process of paying back their student loans, borrowers have told us they are wrapped in mounds of red tape, particularly for private student loans. From the beginning, when they first graduate and start making their initial payments, consumers can experience problems with payment posting, problems with attempted prepayments, and problems with partial rather than full payments. For example, some former students have told us they find it takes a few days for servicers to process their payments, which can cause them to have to pay additional interest. We have also heard from borrowers who complain about inconsistency, noting that they often get widely different information, protections, and rights depending on what type of loan they have.
When borrowers do seek any sort of help, the range and severity of their problems can quickly snowball. They have told us about lost paperwork, unanswered inquiries, and no clear path to get answers. They also find that when errors are made, they may not be fixed very quickly. They may encounter limited access to basic account information, including their payment history over the years. One borrower told us, for example, that she made her payment on-time and in-full each month through an automatic payment system established by the lender but still faced problems with unexpected fees. Once again, these kinds of problems are not new to loan servicing in general, and in particular they have happened repeatedly in the mortgage servicing market over the past decade.
The stress can get even worse when loans change hands from one servicer to another. Transfers are very common in this market, and the consumer has no control over it. Between 2010 and 2013, more than 10 million student loan borrowers had their loans move from one servicer to another for various reasons other than consumer preference. One person told us that after seven years her account was switched to another company. Suddenly, she stopped receiving paper statements and since then has had to call the new servicer each month to confirm her payment amount.
These loan transfers can produce real headaches and confusion for consumers. Some borrowers have complained that they are charged late fees because they mailed their payments to their old servicers without being aware that this was now an error. Other types of problems can arise as well. We heard from one person who said he made full payments each month for six years. But when he informed the new company handling his loan that he wished to enroll in an alternative payment plan that had been available from his original servicer, he was told that was no longer an option.
In today’s Request for Information, we are seeking greater understanding of industry practices and the underlying market forces that are causing various pain points for borrowers.
The inquiry seeks to determine if the student loan servicing industry is doing things that make repayment more complicated and more costly for consumers. We are interested to know whether payments are applied in ways that maximize fees or lengthen the amount of time for repayment. And we also want to know whether servicers are forwarding enough information to the new company when the rights to a loan are sold.
We also intend to get a deeper understanding of whether there are in fact, as some would claim, economic incentives for inadequate service. Because student loan borrowers generally do not get to choose the company that handles their loans, ordinary market forces will not guarantee reasonable customer care. The model used in most third-party student loan servicing contracts provides companies with a flat monthly fee for each account. This fee is generally fixed and does not rise or fall depending on the level of attention that a particular borrower requires in a given month. This means that student loan servicers often make more money when they spend as little time as possible on each account, and they typically get paid more when a borrower is in repayment longer. So we are evaluating whether the typical methods of servicer compensation can jeopardize the interests of borrowers. We especially want to know if there are adequate economic incentives to take the time to enroll people in flexible repayment options or to help them avoid default.
We also are interested in seeing what we can learn from protections offered in other consumer credit markets. Protections offered to consumers with credit cards and mortgages might help improve the quality of student loan servicing as well. In recent years, policymakers have adopted broad-based changes to strengthen federal consumer financial laws so that they better protect consumers with mortgages and credit cards. But there is currently no comprehensive statutory or regulatory framework that provides uniform standards for the servicing of all student loans.
This means servicers in other markets are subject to more precise rules that include customer service standards, limits on certain fees, written acknowledgement of disputes, and protections when loans are sold. In some cases, servicers are required to explain the options that are available to distressed borrowers. For example, a mortgage servicer must consider all foreclosure alternatives available and cannot steer homeowners to those options that are most financially favorable to the servicer.
And so we are deeply interested to learn more about whether recent reforms in the credit card and mortgage servicing markets might help improve performance in the student loan servicing market. After all, loan servicing generally includes many common functions, irrespective of the underlying consumer financial product, such as account maintenance, billing and payment processing, customer service, and managing accounts for customers experiencing financial distress.
Some of these comparisons may be quite specific. For example, credit card users have had certain protections under the CARD Act since 2009. Consumers get timely posting of their payments and periodic billing statements at least 21 days before payment is due. If a consumer has multiple balances at multiple interest rates, any extra payments generally must be allocated to balances with the highest interest rate, so borrowers can get out of debt as quickly as possible. We are seeking information on whether applying these same approaches might benefit student loan borrowers as well.
In the same vein, the Bureau is seeking information on whether the reforms we recently made to the mortgage servicing market might also benefit student loan borrowers. Reforms related to payment handling, loan transfers, error resolution, interest rate adjustment notifications, loan counseling, and treatment of distressed borrowers are all now in place to improve the functioning of the mortgage servicing market. We are analyzing whether these protections should inform policymakers and market participants when considering improvements in student loan servicing.
Furthermore, the lack of transparency of the student loan market remains deeply problematic. Both the financial regulators and the public lack access to basic, fundamental data on student loan origination and performance. Without this information, we will be challenged to understand the complete set of risks posed by student debt burdens. Today’s Request for Information asks whether more can be done on this issue and what, in fact, should be done.
At the Consumer Bureau, our mission is to provide evenhanded oversight of industry while promoting fair and transparent markets. For this reason, we finalized a rule that will allow us to supervise larger nonbank student loan servicers, thereby closing a significant gap in oversight for compliance with federal consumer financial laws. So the landscape is already changing.
We are also grateful to our partners at the Departments of Education and Treasury and among the state attorneys general for their work to protect student loan borrowers. As our country pursues a vigorous debate about higher education policy, it is imperative that we keep in mind the very real challenges of those who have already accrued substantial student loan debt. We must do more on their behalf. Student loans play a pivotal role in young people’s lives as they seek to establish their creditworthiness and eventually finance their first major purchases. And with more than 40 million Americans now carrying substantial student debt loads, it is simply unacceptable to leave them without robust consumer protections and a well-functioning servicer market.
Abigail Adams once said, “Learning is not attained by chance, it must be sought for with ardor and diligence.” In today’s world, her statement applies not only to how we should seek to educate ourselves, but also to how we should seek to provide financing that makes educational opportunity possible. The rights of consumers to be treated fairly and according to the law must likewise be pursued with ardor and diligence. Thank you.
CONSUMER FINANCIAL PROTECTION BUREAU LAUNCHES PUBLIC INQUIRY INTO STUDENT LOAN SERVICING PRACTICES Bureau Seeks Information On Industry Practices That Can Create Student Debt Stress
WASHINGTON, D.C. — Today the Consumer Financial Protection Bureau (CFPB) is launching a public inquiry into student loan servicing practices that can make paying back loans a stressful or harmful process for borrowers. The issues that the Bureau is seeking information on include: industry practices that create repayment challenges, hurdles for distressed borrowers, and the economic incentives that may affect the quality of service. The CFPB is also re-launching an enhanced version of its Repay Student Debt online tool to help borrowers figure out their options for affordable repayment.
“Student debt stress can make borrowers feel like they are walking a tightrope where any false move in paying back a loan can cause them to fall,” said CFPB Director Richard Cordray. “Today’s inquiry seeks information on the pain points in student loan servicing that make repayment a more difficult and stressful process.”
Student loans make up the nation’s second largest consumer debt market. The market has grown rapidly in the last decade. Today there are more than 40 million federal and private student loan borrowers and collectively these consumers owe more than $1.2 trillion. The market is now facing an increasing number of borrowers who are struggling to stay current on their loans.
Servicers are a critical link between the borrowers and the lenders. They manage borrowers’ accounts, process monthly payments, and communicate directly with borrowers. When facing unemployment or other financial hardship, borrowers must contact student loan servicers to enroll in alternative repayment plans, obtain deferments or forbearances, or request a modification of loan terms. A servicer is often different than the lender, and a borrower typically has no control over which company services a loan.
The CFPB has heard from borrowers through its complaint handling, its Tell Your Story function, and from staff travelling across the country. The CFPB has observed that many borrowers are experiencing significant student debt stress. Consumers have complained about billing problems associated with payment posting, prepayments, and partial payments. For example, borrowers report that payments may be processed in ways that make repaying student loans even more expensive. Other consumers have complained about lost records, slow response times to fixing errors, and a general lack of customer service. Often, consumers who have their loan transferred from one servicer to another report experiencing interruptions when receiving notices, billing statements, or other routine communications.
The CFPB has also heard from distressed borrowers that student loan servicers may have difficulty helping them avoid defaults and delinquencies. Repayment roadblocks can exacerbate problems. Distressed borrowers complain that they are given the runaround when they ask for help, they have a hard time getting straight answers from servicing staff, and that the staff are untrained or unequipped to deal with their problems.
For many young consumers, repaying a student loan is their first experience in the financial services marketplace. Student loans play a pivotal role as they seek to establish their creditworthiness and, eventually, finance their first major purchases. This potential impact on millions of Americans lives only heightens the student debt stress borrowers face.
In light of these concerns, the CFPB is seeking input on ways to ensure borrowers receive quality student loan servicing. The public inquiry focuses on the following:
Industry practices that create repayment challenges: The CFPB’s inquiry seeks information about specific practices that could potentially create problems as consumers repay their loans. The inquiry seeks information on whether consumers are harmed by billing error dispute processes, whether payments are applied in a way that maximizes fees or increases the amount of interest paid, and if the borrower receives enough information when a loan is transferred between servicers.
Hurdles for distressed borrowers: The CFPB estimates that there are nearly 8 million borrowers in default, representing more than $110 billion in balances. Today’s public inquiry requests information on whether servicers’ policies and procedures are resulting in struggling borrowers paying more fees or prolonging repayment. It seeks information on whether these policies and procedures are driving borrowers to default on their loan.
Economic incentives affecting the quality of service: The CFPB is seeking information on whether the typical ways that servicers are paid may indirectly lead to borrower harm. The model used in most third-party servicing contracts provides student loan servicers with a flat monthly fee per account serviced. This fee is generally fixed and does not rise or fall depending on the level of service a particular borrower requires in a given month. The CFPB’s inquiry seeks information on whether student loan servicers have adequate economic incentives to take the time to enroll borrowers in flexible repayment options or help them avoid default.
Application of consumer protections in other markets: For student loan borrowers, there are no comprehensive federal regulations to ensure standards for the servicing of their loans. The CFPB is analyzing whether there are protections in other consumer credit markets – such as credit cards or mortgages – that could inform policymakers and market participants when considering options to improve the quality of student loan servicing. For example, servicers in some other markets are subject to more stringent rules that include early intervention for delinquent borrowers, protections when loans are sold, written acknowledgement of disputes, and limits on certain fees. A recent Presidential Memorandum requested that the Department of Education consider, in consultation with the CFPB and the Department of the Treasury, whether these other markets should inform potential student loan servicing standards.
Availability of information about the student loan market: The CFPB is looking at whether a general lack of transparency in the market may be contributing to consumer harm. The Bureau is seeking information on whether there is adequate information available about how the market is functioning to determine whether servicers are providing help to those repaying their loans and those struggling to avoid default.
The CFPB oversees the student loan servicing industry for compliance with federal consumer financial protection laws. The Bureau currently supervises student loan servicing at the largest banks and nonbank student loan servicers that handle more than one million borrower accounts, regardless of whether they service federal or private loans. This represents most of the activity in the student loan servicing market.
The CFPB is working with the Department of Education and the Department of the Treasury to identify initiatives to strengthen student loan servicing. Members of the public are encouraged to submit comments. The submissions to this request for information may serve to assist federal and state regulatory and enforcement agencies in prioritizing resources. The public comments will also be used to inform a report required by the recent Presidential Memorandum. The deadline for submitting comments is July 13, 2015.
Repay Student Debt 2.0 Today, the CFPB has re-launched its Repay Student Debt web tool. This interactive resource offers a step-by-step guide to navigate borrowers through their repayment options, especially when facing default. The new version of this tool provides student loan borrowers with sample instructions to send to their student loan servicer to protect themselves against payment processing problems and auto-defaults. It also has information about how to request a lower monthly payment when experiencing financial distress. Student loan borrowers experiencing problems related to repaying student loans or debt collection can also submit a complaint to the CFPB.
Consumers Paid $49 Million in Fees for Deceptive Mortgage Payment Program
WASHINGTON, D.C. —(ENEWSPF)—May 11, 2015. Today the Consumer Financial Protection Bureau (CFPB) filed a lawsuit in federal district court against Nationwide Biweekly Administration, Inc., Loan Payment Administration LLC, and the companies’ owner, Daniel Lipsky, alleging that Nationwide misrepresents the interest savings consumers will achieve through a biweekly mortgage payment program and misleads consumers about the cost of the program. The CFPB is seeking compensation for harmed consumers, a civil penalty, and an injunction against the companies and their owner.
“These companies and their owner, Daniel Lipsky, took advantage of consumers with false promises of savings on their mortgage,” said CFPB Director Richard Cordray. “Homeowners deserve accurate information in the financial marketplace. Today we are taking action to end these illegal and deceptive practices, and to hold these companies accountable for their actions.”
Nationwide Biweekly Administration is an Ohio-based company that transmits funds from consumers to their mortgage servicers. Loan Payment Administration LLC is a wholly owned subsidiary of Nationwide. Daniel Lipsky is the founder, president, and sole owner of Nationwide, and has managerial responsibility for both companies.
Nationwide offers a product for mortgage borrowers that it calls the “Interest Minimizer.” Most consumers who enroll in the Interest Minimizer program send Nationwide half their monthly mortgage payment every two weeks, effectively making one additional monthly payment per year. Nationwide charges consumers a setup fee of up to $995 to enroll in the program and charges consumers between $84 and $101 in payment processing fees each year they remain enrolled.
Nationwide advertises the “Interest Minimizer” program online and via direct mail, and in 2014 aired an infomercial on Lifetime television. Many of the company’s marketing materials promise that consumers who enroll will save money, with language such as “Am I guaranteed to save money? Yes!” Other documents contained statements like “soon you will be . . . saving thousands of dollars in unnecessary payments.”
The CFPB’s complaint alleges that the defendants made misrepresentations about Nationwide’s mortgage payment program to consumers, and collected approximately $49 million in setup fees between 2011 and 2014. Consumers enrolled after being promised substantial and immediate savings on their mortgages. However, the Bureau alleges the defendants know that consumers will pay more in fees than they save in interest for the first several years in the program, and that many consumers will leave the program without saving any money at all. The CFPB alleges these practices violate the Telemarketing Sales Rule and the Consumer Financial Protection Act’s prohibition against unfair, deceptive or abusive acts or practices.
Violations alleged in the CFPB’s complaint include:
Falsely promising consumers they could achieve savings without paying more: In direct mail, online, and other marketing materials, Nationwide claims that consumers enrolled in the Interest Minimizer program will save money without increasing their mortgage payments. In a video on Nationwide’s website, Lipsky states, “you’re not increasing your payment. You’re just switching to a smaller biweekly or weekly amount.” In fact, consumers in the program pay processing fees for each biweekly payment and the initial setup fee to Nationwide, plus the equivalent of one additional monthly payment each year.
Falsely promising immediate savings that take years to achieve: Despite promises of immediate savings, a consumer would have to stay enrolled for many years to recoup the fees that Nationwide charges. Nationwide claims that the median consumer in its Interest Minimizer program in 2013 had a 30-year mortgage for approximately $160,000 with an interest rate of 4.125 percent. A consumer with those loan terms would have to stay in the program for nine years to recoup her fees – at which point she would have paid more than $1,200 in fees to Nationwide. Only 25 percent of the consumers enrolled at the end of 2014 had been enrolled for longer than four years.
Misleading consumers about the cost of the program: Nationwide’s direct mail and marketing materials falsely claim that consumers’ extra payments “are directed 100% to the principal of the loan.” However, Nationwide keeps the first extra biweekly payment (up to $995) as the setup fee. When consumers ask Nationwide sales representatives how much the program costs, some of the company’s sales scripts instruct the representative to redirect the consumer, and other scripts say representatives should only mention the fee if consumers “persist to ask about fees.” None of the scripts states the dollar amount of the setup fee.
Falsely claiming to be affiliated with mortgage lenders or servicers: Nationwide’s marketing materials misrepresent that it is affiliated with consumers’ mortgage lenders or servicers. For example, in one telemarketing sales script, when consumers ask, “Do you work with/affiliated with my lender?” sales representatives were instructed, “Do NOT say ‘No’” – when the accurate answer is “No.”
Through this lawsuit, the Bureau seeks to stop the alleged unlawful practices of the two companies and Daniel Lipsky. The Bureau has also requested that the court impose penalties on defendants for their conduct and require that compensation be paid to consumers who have been harmed.
The Bureau’s complaint is not a finding or ruling that the defendants have actually violated the law.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visitconsumerfinance.gov.
Our consumer protection, collection abuse and class action law firm, attorneys and lawyers represent clients throughout Illinois and Wisconsin including, but not limited to Chicago, Elgin, Aurora, Schaumburg, Naperville, Bolingbrook, Joliet, Plainfield, Barrington Hills, Waukegan, Winnetka, Evanston, DeKalb, Geneva, Batavia, Wheaton, Woodridge, Rockford, Harvey, Markham, Westchester, Cicero, Berwyn, Belvidere, West Chicago, Country Club Hills, Crestwood, Rolling Meadows, Romeoville, Chicago Heights, Tinley Park, Orland Park, Oak Forest, Homewood, Lansing, Calumet City, Hazel Crest, Dolton, Riverdale, Midlothian, Frankfurt, Oak Lawn, Oak Park, Cook County, DuPage County, Kane County, Will County, McHenry County, Lake County and more.