Consumer Finance Newsletter - May 2013

May 3, 2013


Federal Reserve Continues Strong Focus on Consumer Compliance Matters in Bank Acquisition Approval Order

The Board of Governors of the Federal Reserve System (Federal Reserve) recently approved the acquisition of Citizens Republic Bancorp, Inc., and its bank subsidiary Citizens Bank (Citizens Bank), by FirstMerit Corporation of Akron, Ohio (FirstMerit). The Order approving the transaction placed strong emphasis on both parties’ records of compliance with consumer finance laws and regulations, continuing a strong focus on consumer compliance issues found in other recent approval orders, including the order approving the acquisition of ING Bank, FSB by Capital One Financial Corporation last year. Future applicants should expect detailed scrutiny of their consumer compliance records in connection with applications to the Federal Reserve, especially on fair lending matters.

The Federal Reserve approved FirstMerit’s acquisition of Citizens Bank despite concerns raised by commenters concerning racial disparities in FirstMerit’s home purchase lending. The Order approving the acquisition placed significant emphasis on both parties’ records on consumer issues and compliance with fair lending laws, devoting nearly half of the 23 page order to consideration of these issues.

Commenters cited public data collected pursuant to the Home Mortgage Disclosure Act (HMDA) in urging that FirstMerit be denied approval. The Federal Reserve confirmed the commenters’ findings with respect to the levels of conventional home purchase loans and denial disparity ratios associated with FirstMerit conventional home purchase loans, but concluded that the HMDA data alone did not provide a sufficient basis to find that FirstMerit had denied credit on a prohibited basis and that it would not preclude approval of the transaction. The Order indicates that FirstMerit was provided an opportunity to address the limited denial disparities with additional information on individual loan denials. FirstMerit also described in detail its ongoing programs to protect against discrimination, including training as well as policies and procedures, and per the Order will be required to enhance the fair lending compliance program of Citizens Bank based on the Office of the Comptroller of the Currency’s (OCC’s) findings during a pre-merger examination of Citizens Bank.

The Federal Reserve went to some length in its Order to establish the parties’ otherwise satisfactory records with respect to consumer lending and compliance issues, perhaps because of the limited lending disparities noted above. The Federal Reserve’s evaluation of the proposed acquisition included consideration of the effects of the proposed transaction on the “convenience and needs” of the communities served and took into account the records of both FirstMerit and Citizens Bank in serving low and moderate income communities as required by the Community Reinvestment Act (CRA). It noted FirstMerit’s “outstanding” CRA rating based on its record of lending to borrowers of different income levels, and particularly noted FirstMerit’s community development lending as being responsive to community needs. It also took note of Citizens Bank’s “satisfactory” CRA rating, commenting that Citizens Bank had achieved excellent penetration among businesses of different sizes based on the bank’s lending to small businesses.

The Federal Reserve spent a good deal of its analysis considering the banks’ compliance with fair lending and consumer protection laws. The Order stated that its consumer compliance analysis was drawn from consideration of a number of sources: (1) the most recent bank supervisory analyses of both financial institutions; (2) evaluation of FirstMerit’s community development lending since its last supervisory analysis; (3) evaluation of FirstMerit’s fair lending policies and procedures; (4) consideration of other agencies’ views on FirstMerit’s fair lending compliance record; and (5) public comment on the proposed acquisition. The Order specifically noted its consultation with the OCC and the Consumer Financial Protection Bureau (CFPB), and that these consultations satisfied the Federal Reserve with respect to FirstMerit’s consumer compliance performance and policies.

Why You Should Care: The Federal Reserve Order approving FirstMerit’s acquisition of Citizens Bank echoed the thorough evaluation of consumer compliance issues found in other recent acquisition approvals, including that of ING Bank, FSB by Capital One Financial Corporation last year. Applicants seeking acquisition approval from the Federal Reserve should be prepared for substantial scrutiny of their consumer compliance records.

If You Want Further Information: The Federal Reserve’s March 22, 2013 Order approving the FirstMerit-Citizens Bank transaction can be found here.

If You Want Further Analysis: Contact Brian Boyle,, or Dixie Noonan,

The CFPB Proposes to Expand its Authority Over Student Loan Servicing

Issue: On March 14, 2013, the Consumer Financial Protection Bureau (CFPB) proposed to use its authority under Dodd-Frank § 1024(a)(1)(B) to designate certain nonbank student loan servicers as "larger participant[s]” in the student loan servicing market. Such a designation would allow the CFPB to impose reporting requirements on the servicers, and to perform periodic examinations of the servicers. Nonbank student loan servicers would be designated as larger participants if they serviced more than one million accounts at the end of the prior calendar year. Proposed 12 CFR §1090.106(b). Designated servicers would have the opportunity to dispute the designation, but once designated they would retain the designation for at least two years. 12 CFR §§1090.102, 1090.103.

A few weeks prior, on February 21, 2013, the CFPB issued a request for comment on (a) the costs of excessive student loan debt and (b) options for mitigating the purportedly harmful effects. In that request, the CFPB took a broad view of potential costs, exploring concepts such as “consumption, savings, homeownership, household formation, entrepreneurship, and other indicators of economic health[.]”

Why You Should Care: The CFPB’s releases signal a desire to assert greater authority over the student loan market, especially over federal student loans which make up 86% of all outstanding student loan debt by dollar amount. 17 FR 18,902, 18,905 (March 28, 2013).

Currently, nonbank servicers of federal student loans are generally supervised by the Department of Education, 20 U.S.C. §1087f(b), and the CFPB does not even accept complaints against servicers of federal student loans. In its release, the CFPB suggests that the Department of Education may not be sufficiently focused on all aspects of federal consumer financial law. 17 FR 18,902, 18,910. The CFPB also notes that nonbank servicers of private student loans are not subject to supervision by any federal regulator.[1] As a result of these perceived deficiencies, the CFPB believes its proposed authority over nonbank student loan servicers will increase compliance with federal consumer financial law. The CFPB also notes the additional powers it can bring to bear, stating that even if a servicer “does not violate an express prohibition[,]” of federal consumer financial law, the CFPB may nonetheless deem the servicer’s actions to violate prohibition against unfair, deceptive or abusive acts or practices. 17 FR 18,902, 18,911; 12 U.S.C. §5531.

Banks with more than $10 billion in assets are already subject to CFPB supervision with respect to their consumer finance activities, including their servicing of student loans. Increased CFPB supervision of nonbank student loan servicers may affect the balance between banks and nonbanks in the student loan servicing market.

Comments on the CFPB’s proposal to supervise nonbank student loan servicers are due by May 28, 2013.

If You Want Further Information: The CFPB’s March 14, 2013 proposal to assert examination authority over student loan servicers can be found here. The CFPB’s February 21, 2013 request for comment can be found here.

If You Want Further Analysis: Contact Brian Boyle,, or Ana Acevedo,

[1] Dodd-Frank §1024(a)(1)(D) gives the CFPB examination authority only over the providers (i.e., lenders) of private student loans, but provides no examination authority over those who only service such loans.

The CFPB Highlights Its Enforcement and Advocacy Activities Under the FDCPA

Issue: On March 20, 2013, the CFPB issued its second annual report summarizing its supervisory, enforcement, rule-making, and research activities in connection with the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692 et seq. (FDCPA). Among other things, the report (i) discusses the increasing prevalence of debt purchasing and more frequent use of litigation as a debt collection strategy; (ii) summarizes debt collection complaint trends; (iii) highlights the CFPB’s role in supervising third-party debt collectors as an extension of its authority to supervise nonbank entities in the residential mortgage, payday lending, and private education lending markets; (iv) describes the Federal Trade Commission’s (“FTC”) continuing role in collecting consumer complaints and enforcing the FDCPA; and (v) and discusses the CFPB’s education and outreach initiatives, emphasizing its focus on “special populations,” including students, older Americans, servicemembers, and veterans.

The report also highlights the CFPB’s advocacy activities, and in particular, notes the CFPB’s appearance as an amicus in two cases arising under the FDCPA. In Marx v. General Revenue Corp., 133 S.Ct. 1166 (2013), the CFPB filed an amicus brief in the Supreme Court arguing that a consumer who loses a suit under the FDCPA is not required to pay the defendant’s court costs unless she filed the suit in bad faith for the purpose of harassment. The Supreme Court disagreed with the CFPB (and plaintiff). The Supreme Court held that the FDCPA’s provision specifying that a court may award a defendant attorneys’ fees and costs on “a finding by the court that an action was brought in bad faith or for the purpose of harassment” did not displace the district court’s discretion to award costs to a prevailing party under Fed. R. Civ. P. 54(d) (which authorizes a district court to award costs to the prevailing party “[u]nless a federal statute provides . . . provides otherwise”).

In Birster v. American Home Mortgage Servicing, Inc., 481 Fed. App’x 579 (11th Cir. 2012), the CFPB filed an amicus brief arguing that businesses involved in enforcing security interests can be considered “debt collectors” for the purposes of the FDCPA. In its report, the CFPB acknowledges that whether the FDCPA applies to businesses engaged in enforcing security interests is a question on which district courts have been split, but the report argues that decisions finding that business are not debt collectors when enforcing security interests leave “consumers vulnerable to harmful collection tactics as they fight to save their homes from foreclosure” (notwithstanding the many state law causes of action that may be available and/or are often asserted in the wrongful foreclosure context). The CFPB noted that the Eleventh Circuit ultimately agreed with the Bureau’s amicus position. (Prior analysis of the Marx opinion and the CFPB’s amicus activity generally can be found here and here.)

Why You Should Care: The CFPB’s report reveals the Bureau’s enforcement and advocacy priorities and continues to signal that it will advocate for plaintiff-friendly interpretations of the FDCPA. Entities supervised by the CFPB should anticipate that the Bureau will push for more disclosure in debt collection practices.

If You Want Further Information: The CFPB’s 2013 Annual Report regarding the FDCPA can be found here.

If You Want Further Analysis: Contact Elizabeth McKeen,, Danielle Oakley,, or Edgar Martinez,

The CFPB’s Enforcement Priorities and Resources

Issue: Recent statements from the CFPB have provided further information regarding what it perceives as its enforcement priorities and resources. The CFPB is particularly focused on ongoing concerns with deceptive practices, as well as concerns about the consequences of short-term lending and with discrimination in the access to and pricing of credit. The CFPB also announced a partnership with other federal agencies to evaluate diversity at financial institutions.

In April 2013, the CFPB released its Strategic Plan, Budget, and Performance Plan and Report. Its Strategic Plan includes the stated intent of preventing harm to consumers through regulation and enforcement, as well as researching and monitoring financial markets and evaluating them through data-driven analysis. The report also showed that the budget for "Supervision, Enforcement, and Fair Lending" will grow from $83 million in 2012, to $133 million in 2013, to $165 million in 2014.

The release of this report followed the CFPB providing information about its present and future priorities in its semi-annual report to Congress on March 29, 2013, earlier information from the CFPB Consumer Advisory Board meeting in February 2013 and the March 28, 2013 official release of the consumer complaints database. Deceptive practices were identified as an ongoing area of concern, with Director Cordray highlighting the numerous enforcement actions against credit card companies. The bureau also identified a new category of concern – situations where the consumer cannot respond to allegedly poor service by switching providers, such as debt collection, loan servicing and credit reporting. Another area of focus is to be short-term small-dollar lending, such as payday lending or certain forms of high fee overdraft protection lending, which Director Cordray characterized as a cause of "debt traps." Finally, discrimination was listed as a key priority, both in terms of access to credit and pricing of credit. The bureau once again said it would pursue practices it believes were intentional discrimination and also those facially nondiscriminatory acts that the CFPB believes had a disparate impact.

Director Cordray said the consumer complaints database will allow the CFPB to prioritize its activities, stating: "if we hear about a particular problem from fifty consumers, that likely means it looms larger than if we hear about it from two."

In addition, the March 29, 2013 semi-annual report to Congress revealed that the CFPB is coordinating with the FDIC, the Federal Reserve, the NCUA, the OCC, and the SEC to create “standards for assessing the diversity” in the workforce of the financial institutions they regulate.

Why You Should Care: On February 20, 2013, Director Cordray avowed that the bureau recovered $425 million for consumers in 2012 via enforcement actions. The bureau’s rapidly increasing supervision and enforcement budget, its continued identification of perceived problems, and its assertion that it has broad powers to examine and take enforcement actions in all areas of consumer finance portend increasing supervisory and enforcement activity.

If You Want Further Information: Director Cordray’s February 20, 2013 remarks before the Consumer Advisory Board can be found here. The March 28, 2013 announcement regarding complaints, along with Director Cordray’s speech on that topic can be found here and here. The CFPB’s Semi-Annual Report to Congress can be found here. The CFPB Strategic Plan, Budget, and Performance Plan and Report can be found here.

If You Want Further Analysis: Contact Randall W. Edwards,, or Rachel P. Zuraw,

The Federal Reserve Board Extends Previous Foreclosure-Related Guidance To All FRB-Regulated Mortgage Servicers

Issue: On April 23, 2013, the Federal Reserve Board (“FRB”) issued guidance regarding standards for reviewing mortgage loan files with foreclosure sales scheduled to occur within 60 days. This guidance updates and broadens the application of guidance on the same topic that it had issued jointly with the OCC in February 2012. Whereas the February 2012 Guidance impacted only those mortgage servicers subject to FRB and OCC consent orders, which account for 57% of residential mortgage servicing volume, the more recent guidance extends to “any financial institution, supervised by the Federal Reserve,[1] regardless of asset size, that engages in mortgage servicing activities.” By extending the requirements beyond those subject to consent orders, the FRB seeks to ensure consistency among mortgage servicers concerning pre-foreclosure compliance reviews.

The requirements include reviewing files scheduled for foreclosure sale within 60 days to ensure the following are true: “The loan is in default under applicable law and investor requirements; any borrower complaints, appeals, or escalations have been considered and addressed; the borrower is not subject to specific legal protections such as those afforded under the Servicemembers Civil Relief Act and bankruptcy law; the financial institution has the appropriate legal authority to foreclose; all appropriate notices have been provided to the borrower; appropriate outreach and other loss mitigation efforts have been made; the loan is not currently in an active loss mitigation program; the borrower is not currently qualified or being considered for a loss mitigation action; and the financial institution is in compliance with all applicable federal, state, local, and other legal requirements.” Servicers that have not already implemented these standards must do so immediately.

Why You Should Care: As a result of numerous consent orders between regulators and large mortgage servicers, there has been a divergence of regulatory expectations with regards to large versus small mortgage servicers. The stated purpose for the recent guidance is to narrow that gap and ensure consistent compliance efforts among mortgage servicers.

If You Want Further Information: The FRB’s April 23, 2013 announcement is available here.

If You Want Further Analysis: Contact Elizabeth L. McKeen,, or Danielle Oakley,

[1] This list includes state banks that are members of the Federal Reserve System; bank holding companies, savings and loan holding companies, and their non-bank subsidiaries; and U.S. branches and agencies of foreign banking organizations.