Last Week, This Morning

June 24, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW®, HouseLaw®, InstallmentLaw™, PrivacyLaw®, and BizFinLaw™ - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On June 17, the Consumer Financial Protection Bureau released its first report in a series using data collected from three banks, three finance companies, and three captive lenders that recently received "market monitoring" orders from the CFPB. The report details the financing of negative equity, where the trade-in value offered for a consumer's currently owned vehicle is less than the outstanding balance owed on the financing contract, and the unpaid balance is included in the financing for the vehicle being purchased by the consumer.

In February 2023, the CFPB launched its "auto finance data pilot" by issuing market monitoring orders requiring the recipients to submit certain data about their vehicle financing portfolios. The CFPB's sample letter sent with each order states: "Information provided in response to the Order is intended to be used for monitoring the risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services, although the Bureau reserves the right to use and share internally the information for any purpose permitted by law."

The report notes several key findings:

• More than 10 percent of consumers financed negative equity from a prior vehicle finance contract into a new finance contract.
• Consumers who financed negative equity from a prior vehicle finance contract into a new finance contract were more likely to have their accounts assigned to repossession within two years.
• Consumers who financed negative equity financed larger amounts than consumers with a positive equity trade-in, which resulted in average monthly payments 27% higher than consumers with no trade-in and 26% higher than for consumers with a positive trade-in.
• Consumers who financed negative equity had lower credit scores, lower household income, and longer financing terms and were more likely to have a co-borrower than consumers with no trade-in or a positive equity trade-in.
• Consumers who financed negative equity had larger loan-to-value and payment-to-income ratios.
• Nearly a quarter of consumers financing less expensive vehicles financed negative equity, compared to nearly 16% of consumers who purchased more expensive vehicles.
• The percentage of negative equity financed compared to the price paid for the vehicle was larger for consumers who financed less expensive vehicles.

Amicus brief(ly): Most of the Bureau's observations in this report are pretty intuitive. For example, you would expect that consumers who finance negative equity have larger loan-to-value and payment-to-income ratios. If consumers could afford to pay off their prior financing arrangements when they need or want a different car, they would. More interesting, possibly, is the fact that there is some frequency of negative equity financing at even the highest income levels and by consumers who purchase expensive cars. Whereas we might typically commend readers to the CFPB's reports for interesting information or an idea of what the Bureau is thinking about a particular subject, this is not one of those times. The CFPB does not suggest that, for example, it is considering requiring some kind of negative equity financing disclosure to warn consumers that they are making an expensive decision. The report is limited to some pretty basic observations, including that financing negative equity "may" lead to worse consumer outcomes, like difficulty paying higher monthly payments and ultimately repossession at rates higher (but not a ton higher) than transactions with no trade-in or a positive-equity trade-in. Hopefully the next report in the data analysis series will be more enlightening - this one was not that informative.

On June 18, the Consumer Financial Protection Bureau announced in a blog post its intention to monitor the marketing and use of certain financial products, such as credit cards and installment loans, to pay for consumers' medical expenses.

The blog post states that the CFPB is examining how financial institutions market medical payment products to healthcare providers and whether medical payment products pose any risks to consumers, specifically noting that consumers may be unaware of deferred interest on medical credit cards and may be offered these types of products while incapacitated and unable to make informed decisions. According to the blog post: "The [CFPB] has heard troubling accounts of these products being aggressively pushed onto people who couldn't afford the required payments or who should qualify for financial assistance." The blog post also encourages healthcare providers to share their experiences with medical payment products with the CFPB.

Amicus brief(ly): The CFPB is keenly focused on the impact of medical debts - especially financed medical debts - on consumers, as evidenced by this blog post coming on the heels of the CFPB's recent announcement of its rulemaking proposing to remove certain medical debts from certain consumers' credit reports. A number of states are also working on measures that will impact holders and servicers of medical debts. The blog post makes it sounds like the CFPB is focused on how financial services providers and medical services providers are marketing credit that would help patients who may not have insurance or who have a more limited ability to pay for medical services. The CFPB does this - it worries about the marketing of consumer products like voluntary protection products in personal property finance transactions and others where it suspects that providers are offering products that consumers do not need or cannot afford. Assuming the Bureau will not find a way to make medical debt financing options go away altogether, this blog post serves as a reminder to market these products with care.

On June 18, the Consumer Financial Protection Bureau issued a consent order against Sutherland Global Services, Inc., Sutherland Mortgage Services, Inc., and Sutherland Government Solutions, Inc. (collectively, "Sutherland"). Sutherland ran a loan servicing operation that serviced reverse mortgage loans on behalf of the Department of Housing and Urban Development. The loans were designed to enable elderly homeowners to convert the equity in their homes to monthly streams of income or lines of credit, and borrowers were required to be 62 or older to qualify.

Sutherland was responsible for servicing up to 150,000 reverse mortgage loans each year from September 2014 through 2022. The CFPB found that Sutherland sent borrowers repayment or "due and payable" letters that often falsely conveyed that their loans were in default and that the full amount of their loans was due. The CFPB also found that Sutherland failed to effectively service borrowers' reverse mortgages, including by routinely failing to acknowledge, timely respond to, and substantively respond to borrowers' time-sensitive information requests and error notices; failing to acknowledge, investigate, and correct servicing errors; and failing to engage in two-way communications with borrowers, including after sending repayment letters to borrowers. Sutherland's conduct allegedly resulted in borrowers losing out on home sales, paying unnecessary costs, and fearing foreclosure. The CFPB found that this conduct violated the Consumer Financial Protection Act of 2010's prohibition against unfair, deceptive, and abusive acts and practices, the Real Estate Settlement Procedures Act, and RESPA's implementing regulation, Regulation X. The order permanently bans Sutherland Global Services and Sutherland Government Solutions from reverse mortgage servicing and requires Sutherland Mortgage Services to develop a plan to come into compliance with the law before the company may engage in reverse mortgage servicing. The order also requires Sutherland to pay $11.5 million in consumer redress and a $5 million civil money penalty.

The Bureau separately took action against NOVAD Management Consulting, LLC, which entered into a series of subcontracts with Sutherland. The order against NOVAD permanently bans the company from reverse mortgage servicing and requires the company to pay a $1 civil money penalty, due to its inability to pay.

Amicus brief(ly): The reverse mortgage market is pretty small - a fraction of the overall mortgage market - and caters to the elderly. HUD's Home Equity Conversion Mortgage product, which is the product these servicers were servicing on HUD's behalf, accounts for 90+% of the reverse mortgage market. These consent orders resulting in material civil penalties and consumer redress, as well as permanent bans from doing business as reverse mortgage servicers, reflect how seriously the CFPB and other federal agencies consider violations of law related to reverse mortgages that are designed to provide regular payments of home equity to elderly consumers. Servicing of these obligations involves payments to borrowers, not the standard receipt and application of payments (hence the term "reverse" mortgage), so it requires diligence and care along with attentive customer service. From the consent orders, it sounds like these servicers could have done better across the board.

The Federal Financial Institutions Examination Council recently issued its revised "Guide to HMDA Reporting: Getting it Right!" The 2024 guide provides resources to help financial institutions comply with the Home Mortgage Disclosure Act and Regulation C, its implementing regulation. The guide applies to HMDA data that financial institutions are required to collect beginning January 1, 2024, and must submit by March 1, 2025. The guide provides a high-level summary of certain requirements, including the institutions covered by Reg. C, the transactions covered by Reg. C, the information that covered institutions are required to collect, record, and report, and the requirements for reporting and disclosing data.

Amicus brief(ly): HMDA data reporting is not new, but the FFIEC updates its guide each year and publishes each annual update on its HMDA webpage. The guide is written to cover the basics of data reporting, including a scope section describing the asset-size tests and other threshold questions about who has to report loan-level data in the first place. For those not working in mortgage finance, HMDA requires certain loan originators to collect (or observe, if the consumer is not willing to share) specific loan applicant demographic information that is prohibited in non-mortgage transactions. The FFIEC collects the information to assist the federal regulators in enforcing anti-discrimination laws and ensuring that financial institutions are serving the housing needs of the communities where they are located. The FFIEC also publishes the data, washed of any applicant's personal information. The guide, complete with citations and a copy of Regulation C (in Appendix H), is a valuable compliance resource for professionals charged with working on HMDA reporting.

On June 12, Rhode Island enacted Senate Bill 2278, the Senior Savings Protection Act, which prohibits the charging of any fees to senior citizens for the provision of paper documents. The new law makes it a deceptive trade practice for any person engaged in the sale of goods or services to charge any fee to a person who is 65 years of age or older for a hard-copy paper bill, statement, or invoice. The new law takes effect on January 1, 2025.

Amicus brief(ly): The trend of steering consumers to paperless (and less expensive) transactions appears to have found its match: retirees in Rhode Island who prefer to have paper copies of transaction documents. If you are not in the servicing business, you may not have noticed the disincentives that creditors are imposing to the continued use of hard-copy paper invoices and statements, where you might pay up to $3 or more per document if you do not agree to receive documents electronically. This straightforward bill implies that it is OK to impose those fees to incentivize paperless transactions in younger people who grew up using computers and cell phones but prohibits it for consumers aged 65 and older who did not.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.