May 7, 2013

Debt Relief Firm Becomes First CFPB Criminal Referral

The CFPB targeted a debt relief company as its first criminal referral. Specifically, after a lengthy investigation conducted with the assistance of the U.S. Postal Inspection Service, the CFPB determined Mission Settlement Agency and its employees defrauded approximately 1,200 consumers seeking relief from credit card debt. Federal prosecutors for the Southern District of New York subsequently charged that Mission Settlement Agency “systematically exploited and defrauded” consumers by charging draconian fees while performing no work. The debt settlement company allegedly misrepresented to consumers that the fees would be utilized as part of a restructured payment plan with the creditor. The indictment claims that Mission Settlement Agency’s manager diverted the funds for his personal use, including operation of a nightclub and lease payments for multiple luxury automobiles.

CFPB Mulls Delay in Implementing Credit Insurance Premium Rule

The CFPB proposed delaying the June 1, 2013 effective date regarding its rule implementing Dodd-Frank section 1414, which prohibits creditors from financing credit insurance premiums in connection with certain consumer credit transactions secured by a dwelling.¹  The CFPB previously adopted the provision in the Loan Originator Compensation Requirements under the Truth in Lending Act.

Credit insurance, which is optional, protects the loan in the event the consumer cannot make the scheduled payments. Dodd-Frank section 1414 added TILA section 129C(d) which generally bars a creditor from financing credit insurance premiums for any residential mortgage transaction or extension of credit under an open end consumer credit plan secured by the principal dwelling. On January 20, 2013, the CFPB issued § 1026.36(i) to implement this provision.

The CFPB now seeks comment on whether to delay the effective date following questions from the industry as to whether the rule governs transactions where the insurance premiums are charged periodically. The CFPB intends to publish a new proposal this June seeking further notice and comment on, among other things, whether the scope of the prohibition on credit insurance premiums includes periodic charges. The CFPB also intends to publish a new effective date for the rule in June 2013. Until then, the CFPB has proposed to temporarily delay the June 1, 2013 effective date in order to alleviate the uncertainty regarding periodic financing of credit insurance premiums.

 May 8, 2013

CFPB, Cordray Put Private Student Lenders on Notice

The CFPB issued its report on Student Loan Affordability, which chided private student lenders for allegedly failing to offer meaningful loan modification alternatives to struggling borrowers.² When considered in conjunction with Director Cordray’s remarks at a field hearing on student loan borrowing in Miami, Florida later that evening, it is manifest that the CFPB intends to focus on what it deems to be abusive practices of private student lenders.

More specifically, the report attributed high student debt burdens as a major impediment to young graduates’ ability to secure home mortgage loans, car loans and small business loans. The report also linked rising debt caused by private student loans to an inability to save for retirement by delaying participation in employer-sponsored retirement plans and preventing saving. The CFPB further asserted that student loan debt has particularly negative consequences for students that intend to pursue a career in medicine, education or return to rural communities after graduation.³

More specifically, the report attributed high student debt burdens as a major impediment to young graduates’ ability to secure home mortgage loans, car loans and small business loans. The report also linked rising debt caused by private student loans to an inability to save for retirement by delaying participation in employer-sponsored retirement plans and preventing saving. The CFPB further asserted that student loan debt has particularly negative consequences for students that intend to pursue a career in medicine, education or return to rural communities after graduation.  The report also urged private student lenders to develop affordable income-based repayment options similar to what exists for federal student loans. The CFPB floated graduated repayment schedules, extended amortization periods, rehabilitation plans and converting private loans into federal student loans as solutions to providing instant relief for those struggling to pay back their private student loans.

Echoing concerns in the report, Director Cordray – at the field hearing – made clear that private student lending is in the CFPB’s crosshairs. Director Cordray called private student lending an “emerging issue” in consumer finance, and compared private student lending to subprime mortgage lending during the “mortgage meltdown.” Cordray chastised private student lenders for the lack of refinancing options. Cordray noted that high student loan debt “constricts” consumer choice, and encouraged private student lenders to adopt a three pronged approach of (1) “refinance relief,” (2) “road to recovery” and (3) “credit clean.” Regarding refinancing, private student lenders should allow borrowers to take advantage of today’s historic low interest rates. The “road to recovery” would correlate borrowers’ loan payments with their debt to income ratio. With a “credit clean”, lenders would provide borrowers with an opportunity to repair their credit by making consistent monthly payments at an affordable level.

It is imperative that private student lenders and servicers begin to formulate loss mitigation alternatives with a focus on income-based repayment. Based on the CFPB’s report and Cordray’s remarks, a failure to implement this type of program will invite CFPB supervision as well as potential enforcement proceedings.

_{¹  The text of the proposal is available at http://www.consumerfinance.gov/regulations/loan-originator-compensation-requirements-under-the-truth-in-lending-act-regulation-z/?utm_source=newsletter&utm_medium=email&utm_campaign=Email%2B20130508%2Breg%2Bimplementation#relatedproposals, under the heading “Related Proposals.”  UP}

 _{² The complete report is available at http://www.consumerfinance.gov/opeds/student-debt-domino-effect.}

 _{³ Specifically, the CFPB correlated high student debt with the shortfall in primary care physicians. The CFPB claims that high debt drives medical students to specialize in lucrative practices such as plastic surgery or orthopedics. The CFPB also suggested that students are dissuaded from teaching given the prolonged period teachers face in repaying their student loans. Lastly, the CFPB insinuated that high student debt discourages students from settling in rural communities given the lack of rental housing in rural communities and the necessity of owning a car given the dearth of public transportation.}