Category: Consumer Protection

Consumer Financial Services Basics – ABA Conference

The National Law Review is pleased to bring you information regarding the upcoming Consumer Financial Services Basics Conference sponsored by the ABA:

When

October 08 – 09, 2012

Where

American University

Washington College of Law

Washington, DC

Program Description

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher.It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.Program FocusThis program will explain each of the major sources of regulation of consumer financial products in the context of the regulatory techniques and policies that are the common threads in a complex pattern, including:

  • Price regulation and federal preemption of state price limitations
  • Truth in lending and disclosure requirements
  • Marketing, advertising and unfair or deceptive conduct
  • Account servicing and collections
  • Regulating the “fairness” of financial institution conduct
  • Data security, fraud prevention and identity protection
  • Consumer reporting: FCRA & FACT Act
  • Fair lending and fair access to financial services
  • Remedies: regulators and private plaintiffs
  • Regulatory and legislative priorities for 2012 and beyond

Who Should Attend…The learning curve for private practitioners, in-house lawyers and government attorneys to understand the basics and changes to CFS law is very steep. This program is a great way to jump up that curve for:

  • Private practitioners with 1-10 years of experience who focus on CFS products or providers
  • In-house counsel at financial institutions and non-bank lenders
  • Government attorneys, in financial practices regulatory agencies
  • Compliance officers (who may be, but need not be, attorneys)

Illinois Employers Beware: New Law Prohibits Employers from Seeking Social Media Password Information

The National Law Review recently published an article regarding Social Media Passwords and Illinois Employers written by Norma W. Zeitler of Barnes & Thornburg LLP:

Employers in Illinois will be prohibited from seeking social networking password information from employees and applicants starting Jan. 1, 2013, now that Illinois Governor Pat Quinn has signed into law Public Act 097-0875, which is an amendment to the Right to Privacy in the Workplace Act, 820 ILCS 55/10.

As we previously reported , the legislation makes it unlawful for an employer to require an employee or applicant to disclose passwords or other related social networking account information in order for the employer to access information that might otherwise be considered private by the employee or applicant. However, employers are not barred from accessing information that is in the public domain

Illinois becomes the second state, after Maryland, to enact such a law, according to a press release from Governor Quinn’s office announcing that he signed the legislation into law on August 1. The new law does not limit an employer’s right to promulgate and maintain otherwise lawful workplace policies regarding the use of the employer’s computer equipment, Internet use, social networking site use, and electronic mail use.

Illinois employers should consider reviewing existing policies and practices with an eye toward ensuring compliance with this new law.

© 2012 BARNES & THORNBURG LLP

‘Your Baby Can Read,’ Targeted for Dubious Ads, Closes Its Doors

An article by Rachel Hirsch of Ifrah Law, ‘Your Baby Can Read,’ Targeted for Dubious Ads, Closes Its Doors, was recently featured in The National Law Review:

After nearly a decade of persuading hundreds of thousands of parents that their babies were geniuses, the popular company, Your Baby Can Read, is shutting its doors. Its demise is the result of an FTC investigation prompted by the Campaign for a Commercial-Free Childhood advocacy group, which challenged claims by the company that newborns have the ability to absorb reading and spelling skills when they are as young as three months old. According to the company’s website, the cost of fighting these legal battles has left the company with no option but to close.

Your Baby Can Read consists of interrelated videos, flash cards and books designed to teach infants as young as three months old to read. Developed in the late 1990s by Robert Titzer, an educator with a Ph.D. in human performance from Indiana University, the product claims that babies have a small window in which they absorb spelling at an extraordinary pace. Although these claims have never been substantiated through any kind of credible research, fans of the products, which are priced at $200, have given them glowing reviews. More than a million families have used the products, which the company extensively advertised on TV, at exhibitions, and on its own website, Facebook page and YouTube channel.

In April 2011, a class of consumers who purchased the educational programs filed a class action complaint against the company in California challenging the effectiveness of the product. Additionally, the Boston-based Campaign for a Commercial-Free Childhood (CCFC) filed a complaint against the company with the FTC, leading the way for a series of campaigns against what critics call the “genius baby” industry. The national watchdog group previously successfully campaigned against the way that the “Baby Einstein” program marketed its products. In its complaint with the FTC, CCFC argued that Your Baby Can Read’s claims of teaching infants to read lacked scientific support. The group requested that the FTC stop the company from continuing its allegedly deceptive marketing practices and that the company offer full refunds to “all parents who have been duped.” According to CCFC director Dr. Susan Linn, the company “exploited parents’ natural tendency to want what’s best for their children” by making grandiose promises that find no support in science.

The problem with these types of educational products appears to be twofold. First, doctors and scientists who have tested the products have reportedly found that infants using the products are not reading, but rather are memorizing the shapes of the letters presented. Second, as the CCFC points out, the program can actually be harmful to children, as it encourages them to sit in front of television screens and computer monitors, getting them “hooked on screens” too early in life. In fact, the group notes that if parents follow the “Your Baby Can Read” instructions, by nine months, babies would have spent more than a full week of 24-hour days in front of a screen.

Although the company is going out of business, the FTC will not automatically cease its investigation. The FTC says it aims to protect the most vulnerable classes in society — and perhaps none are more vulnerable than young children, or, in this case, their overachieving parents who just want their bragging rights. It will be interesting to see which group of consumers will come out on top in the FTC investigation – the thousands of parents who were satisfied with the product or the class-action parents whose children were perhaps not as smart as they believed them to be.

© 2012 Ifrah PLLC

Advertising and Marketing Law Alert – Pinterest Gets Stuck With Disclosure Requirements

Recently The National Law Review published an article by Joan L. Long of Barnes & Thornburg LLP regarding Pinterest:

“Pinning” on the popular website Pinterest may amount to unlawful consumer endorsement or testimonial

Consumer endorsements and testimonials have recently garnered a lot of attention from the National Advertising Division (NAD) and Federal Trade Commission (FTC). There has been a renewed interest in assuring that advertisements containing an endorsement or testimonial are truthful and not misleading, that if an advertiser does not have proof that an endorser’s experience represents what consumers will achieve when using the product the ad must clearly and conspicuously disclose the general expected results in the depicted circumstances, and, if there’s a connection between the endorser and the marketer of the product that would affect how people evaluate the endorsement, that connection should be disclosed.

Social media websites certainly do not receive special treatment from the NAD or FTC when it comes to consumer opinion regarding products and services. This is especially true for advertisers of dietary and nutritional products. Testimonials claiming specific results usually will be interpreted to mean that the endorser’s experience is what others can expect. Statements like “Results not typical” or “Individual results may vary” won’t change that interpretation. If the results are not typical, an advertiser must clearly and conspicuously disclose the generally expected performance in the circumstances shown in the ad.

Recently NAD issued a decision regarding the newly popular website Pinterest. Pinterest is a virtual bulletin board, often described as a social photo-sharing website where users create and manage theme-based image collections by “pinning” digital content they find on the web to their personal boards. NAD began following Nutrisystem, Inc.’s weight-loss success stories pinned to such boards. These stories had express claims regarding consumer’s weight loss success, including the consumer’s name, total weight loss, and a link to the Nutrisystem website.

Testimonials which tout atypical results must be qualified by a clear and conspicuous disclosure noting the results the consumer can generally expect to achieve using the product in the circumstances depicted. Such disclosures should appear close in proximity to the claims they are intended to qualify. NAD found that it was undisputed that these pins represented consumer testimonials, and, as such, these pins should be accompanied by a clear and conspicuous disclosure noting the typical results consumers can expect to achieve using the Nutrisystem weight loss program.

Companies need to be aware that both NAD and the FTC closely scrutinize social media sites, such as Pinterest, Facebook, and Twitter. As social media websites become more sophisticated and allow for consumers to become increasingly intertwined with a company’s advertising message, companies need to have reasonable programs in place to monitor and inform members of their network of what can and cannot be said about products or services.

© 2012 BARNES & THORNBURG LLP

Consumer Financial Services Basics – ABA Conference

The National Law Review is pleased to bring you information regarding the upcoming Consumer Financial Services Basics Conference sponsored by the ABA:

When

October 08 – 09, 2012

Where

American University

Washington College of Law

Washington, DC

Program Description

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher.It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.Program FocusThis program will explain each of the major sources of regulation of consumer financial products in the context of the regulatory techniques and policies that are the common threads in a complex pattern, including:

  • Price regulation and federal preemption of state price limitations
  • Truth in lending and disclosure requirements
  • Marketing, advertising and unfair or deceptive conduct
  • Account servicing and collections
  • Regulating the “fairness” of financial institution conduct
  • Data security, fraud prevention and identity protection
  • Consumer reporting: FCRA & FACT Act
  • Fair lending and fair access to financial services
  • Remedies: regulators and private plaintiffs
  • Regulatory and legislative priorities for 2012 and beyond

Who Should Attend…The learning curve for private practitioners, in-house lawyers and government attorneys to understand the basics and changes to CFS law is very steep. This program is a great way to jump up that curve for:

  • Private practitioners with 1-10 years of experience who focus on CFS products or providers
  • In-house counsel at financial institutions and non-bank lenders
  • Government attorneys, in financial practices regulatory agencies
  • Compliance officers (who may be, but need not be, attorneys)

The FDA Safety and Innovation Act: Much More Than Just User Fees

The National Law Review recently published an article by Hae Park-Suk and Lynn C. Tyler, M.S. of Barnes & Thornburg LLP regarding The FDA Safety and Innovation Act:

 

 

 

 

With almost no fanfare, President Obama signed the FDA Safety and Innovation Act (SIA) into law earlier this month. The popular and legal media coverage of the bill leading up to its enactment seemed to focus on the reauthorization of user fees for prescription drugs and medical devices and the creation of new user fees for generic drugs and biosimilars. As usual, the user fees are accompanied by performance goals for the FDA’s review of the related applications. But the SIA also contains a host of other provisions relating primarily to drugs and medical devices.

With respect to medical devices, § 601 of the SIA precludes the FDA from refusing to approve an Investigational Device Exemption simply because it determines that the proposed study alone will not support an approval to market the device. Section 602 refines the “least burdensome” provisions to specify that FDA can only request the “minimum required information” to support clearance or approval to market a device. Section 603 requires the FDA to document the rationale for “significant decisions” in connection with IDEs, 510(k)s, and PMAs.

Section 604 requires FDA to withdraw a draft guidance on when a modification to a device requires a new 510(k) and to submit a report to Congress on a new approach. FDA may not issue a new guidance until at least 12 months after it submits the report. Other sections require FDA to improve the device recall program, authorize clinical holds on IDEs, allow a sponsor to seek a de novo classification directly rather than only after pursuing a 510(k) and receiving a “not substantially equivalent” determination, allow FDA to reclassify a device category by administrative order, reauthorize third-party reviews and inspections, revise the Humanitarian Device Exemption to allow a manufacturer to make a profit in more circumstances, require FDA to issue a proposed rule for a unique device identification system (which it recently has), expand the drug “Sentinel” system to medical devices, add timing requirements to post-market surveillance orders, and revise the definition of a “custom” device, among other changes.

The SIA makes many changes to the regulation of drugs also. Similar to the unique device identification system, FDA must create a unique facility identification system for drug facilities and maintain an electronic database of their registration and listing information. A drug is now adulterated if it is made, packaged or stored in a facility that delays, denies, or limits an inspection. The biennial inspection schedule for drug facilities will be replaced with a “risk-based” system. FDA may require manufacturers to furnish records in advance of an inspection. FDA now has ex-US jurisdiction over any violation of the Food, Drug & Cosmetic Act (FDCA) related to an article to be imported into the US. FDA may require an importer to submit records in advance of importation showing compliance with the FDCA. FDA now has authority to detain drugs an inspection reveals may be adulterated or misbranded.

The SIA makes permanent the Best Pharmaceuticals for Children Act and its six months of marketing exclusivity in exchange for conducting pediatric studies. It also makes permanent the Pediatric Research Equity Act which requires pediatric studies for most drugs and biologics. The SIA also includes several provisions to encourage the development of antibacterial and antifungal products, including an additional five years of marketing exclusivity for a product designated by FDA as a “Qualified Infectious Disease Product.”

Other drug-related provisions include § 901 which expands the products that qualify for fast track review and the endpoints that may be used to gain fast track approval. Section 902 allows FDA to accelerate approval of “breakthrough therapies” defined as those which may show “substantial improvement over existing therapies on one or more clinically significant endpoints.” The SIA requires FDA to “implement a structured risk-benefit assessment framework in the new drug approval process.” It creates a “priority review voucher” as an incentive to develop treatments for rare pediatric diseases.

The SIA includes provisions designed to mitigate the recent drug shortages. Manufacturers are required to notify FDA at least six months, or as soon as is “practicable,” before they discontinue or interrupt manufacture of a particular drug to an extent that may cause a disruption in supply. FDA must consider the impact of any warning letter or other enforcement action on the supply of a drug. FDA must create a task force to develop and implement a strategic plan to prevent and mitigate shortages. The Comptroller General must study drug shortages and their causes.

The SIA contains several miscellaneous provisions as well. Within two years, FDA must issue a guidance on the use of the internet (including social media) to promote regulated products. FDA is to work with regulators from other nations to develop uniform, scientifically driven clinical trial standards. FDA is to research the use of nanomaterials in regulated products. FDA cannot further delay the effective date of its final rule on over-the-counter sunscreens. The SIA clarifies and modifies the time frame within which an ANDA must receive tentative approval to avoid forfeiting the 180 day marketing exclusivity. The time for FDA to respond to certain citizen petitions related to generic drugs and biosimilars is shortened from 180 to 150 days. There are changes to the conflict of interest rules for FDA advisory committees.

The SIA contains other provisions, as we have mentioned only those we thought most likely to be of interest. Anyone subject to FDA regulation may wish to investigate the act, which can be found here, more thoroughly for items of potential relevance to their business.

© 2012 BARNES & THORNBURG LLP

Still Waiting for Guidance on Informed Consent of Decisionally-Impaired Subjects

A July 11, 2012 article by Gina Kolata in the New York Times describes a recent discovery of a rare gene mutation that protects people from Alzheimer’s disease by slowing the production of beta amyloid.  Excessive amounts of beta amyloid in the brain are believed to cause Alzheimer’s.  The discovery bolsters hope that drugs, currently in development, that reduce levels of brain amyloid will prove effective in slowing the progression of Alzheimer’s.

The lack of clear guidelines for enrolling in clinical research decisionally-impaired subjects, or those who may become impaired over the course of a study  may hinder efforts to conduct trials of Alzheimer’s drugs.  In 2010, an Institute of Medicine summary  of a workshop on the state of clinical trials in the United States noted that 27% of investigators in the U.S. failed to enroll any subjects in trials in which they agreed to participate, and 90% of all clinical trials worldwide fail to enroll the target number of subjects on time and must extend their enrollment periods.  Though the federal Office for Human Research Protections and the Secretary’s Advisory Committee on Human Research Protections have considered the issue of participation of decisionally-impaired subjects in research in recent years, no guidance has been released.  Further, few states’ laws explicitly address who has authority to consent to research participation on behalf a decisionally-impaired individual.

In the absence of clear guidance, to be in the best position to participate in Alzheimer’s research and other research involving subjects who are or may become decisionally-impaired, institutions and their IRBs should develop their own policies on enrollment of and consent for decisionally-impaired subjects and subjects whose capacity may diminish over the course of a study.  Having policies in place before opportunities to participate in such studies arise will help ensure consistent and efficient review by institutions and IRBs.  Individuals who have a strong interest in participating in Alzheimer’s research studies should complete health care power of attorney documents, record their wishes in writing, and discuss them with their designated health care agents.

©2012 Drinker Biddle & Reath LLP

New Safeguards to Protect Consumers from Foodborne Illness

The National Law Review recently published an article regarding Foodborne Illness by Aaron M. Phelps of Varnum LLP:

Varnum LLP

 

 

The U.S. Department of Agriculture has set new safeguards that will better protect consumers from foodborne illness in meat and poultry products. It will now be easier to trace contaminated food materials in the supply chain, to act against contaminated products sooner, and to establish the effectiveness of food safety systems.

Policy measures include the following:

  • New traceback measures to control pathogens earlier and prevent them from triggering foodborne illnesses and outbreaks.
  • Requiring establishments to prepare and maintain recall procedures, to notify the Food and Safety Inspection Service (FSIS) within 24 hours that a meat or poultry product that could harm consumers has been shipped into commerce, and to document each reassessment of their hazard control and critical control point (HACCP) system food safety plans.

© 2012 Varnum LLP

The Consumer Financial Protection Bureau – The New Sheriff in Town

The National Law Review recently published an article about The Consumer Financial Protection Bureau written by Andrew G. Berg, Karen Y. Bitar, Carl A. Fornaris, Laureen E. Galeoto, Ricardo A. Gonzalez, and Gil Rudolph of Greenberg Traurig, LLP:

GT Law

Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (“Bureau” or “CFPB”). This Bureau is focused solely on consumer financial protection. The Bureau has six primary functions,1 including the authority and responsibility to supervise covered persons for compliance with Federal consumer financial law2 and take appropriate enforcement action to address violations of same. The Bureau does not supervise covered persons for safety and soundness the way bank regulators do; rather, its sole stated interest is the protection of financial consumers in particular.

One year old on July 21, 2012, this Bureau has spent its first year aggressively pursuing its mandate: to implement and enforce Federal consumer financial law. It has been actively issuing proposed and final regulations and guidance, as well as filing amicus briefs in various court proceedings. The Bureau has also been   conducting and participating in exams of covered parties. Further, it has been gathering and analyzing consumer complaints. Notably, the Bureau’s collection of consumer complaints — which began in July 2011 and was first limited to credit cards — was expanded to handle mortgage complaints in December 2011, and expanded again in March 2012 to complaints concerning bank products and services, private student loans and other consumer loans.3 The Bureau expects to begin addressing complaints about  other covered non-depository institutions by the end of 2012.4

To date the Bureau has collected and processed a staggering 45,000 complaints,5over 37,000 of which have been forwarded to the target company for review and response.  Some of these complaints have been referred by the Consumer Response Section of the Bureau to the Bureau’s Division of Supervision, Enforcement and Fair Lending and Equal Opportunity for further action.6 The Bureau recently acknowledged that it is currently conducting private investigations into alleged violations of the Federal consumer financial laws, and regulators have publically indicated that the Bureau will soon initiate enforcement actions.7

The issues that the Bureau is currently investigating are questions that  management, compliance officers and Boards of Directors should be asking themselves now in order to begin to address potential issues before the Bureau enforcement begins. With enforcement risk looming, now is the time to pay attention and ensure compliance with the Bureau’s regulation and guidance, assess risks and establish best practices in areas of consumer protection compliance and consumer complaint management.8

Who Falls Under the Bureau’s Reach?

The Bureau’s consumer financial protection functions extend farther and wider than those of its transferor agencies.9 The Bureau’s regulatory authority and enforcement arm (including the power to require reports and conduct investigations) apply to large banks, large credit unions and their affiliates,10 andnon-bank entities that engage in offering or providing consumer financial products or services. Section 1024 of Title X authorized for the first time federal supervision over non-banks engaging in financial transactions, such as: mortgage brokers, originators and mortgage servicers, payday lenders, private education lenders, and credit card companies. In addition, the Bureau’s supervisory and enforcement authority applies to any “service provider”11  of the large banks or large non-banks that provides a “material service” in connection with the offering or provision of a consumer financial product or service.12 Thus, a whole new body of direct and indirect financial services providers are now subject to examination over, and  compliance with laws that they never before had to be concerned with, in particular, Title X’s prohibition of unfair, deceptive and abusive acts or practices, the impact of which can have significant financial and reputational consequences for the service providers, banks and non-banks.

In recent guidance,13 the Bureau advised that it intends to exercise to the fullest extent its regulatory authority over service providers, including its authority to examine them for compliance with Title X’s prohibition of unfair, deceptive, or abusive acts or practices. Significantly, that guidance warned that depending on circumstances, “legal responsibility may lie with the supervised bank or nonbank as well as with the supervised service provider.” The message being conveyed is that a bank or non-bank cannot delegate its responsibility of complying with Federal consumer financial law by engaging a service provider for certain services. Accordingly, it will be important to have effective processes in place to manage the new risks of the service provider relationship created by the Bureau.14

What is on the Enforcement Horizon?

In addition to the authority to enforce “enumerated consumer laws,” the Bureau also has the authority to prohibit “unfair, deceptive, or abusive acts or practices.”  As noted above, the Bureau is looking not only at covered banks and non-banks for their compliance but also their service providers to ensure that these prohibited acts and practices are not taking place.15  While the industry has been guided for years on what is unfair or deceptive by the FTC and Federal banking agencies,16“abusive” is a new standard upon which compliance and enforcement risk hinges. The Bureau’s Supervision and Examination Manual (“Manual”), dated October 2011, provides guidance on what an “abusive” act or practice may look like.17 The description, however, of what is “abusive” is broad and leaves much to be interpreted. Moreover, a covered party may be in technical compliance with all other applicable Federal consumer protection laws, and still be in violation of UDAAP.18 Where will the Bureau be looking for possible violations of UDAAP?  Recent guidance advises that “the presence of complaints alleging that consumers did not understand the terms of a product or service may be a red flag [of a UDAAP] indicating that examiners should conduct a detailed review of the relevant practice.”19  The Manual and related guidance further instructs the examiners that “every complaint does not indicate violation of law.  When consumers repeatedly complain about an institution’s product or service, however, examiners should flag the issue for possible further review.”20  It goes on to note that even a “single substantive complaint” may be enough to raise serious concerns that warrant further review.21 At bottom, consumer complaints are considered an “essential source”22  for identifying potential violations of UDAAP.

Covered parties need to be thinking today about how they are collecting, reviewing and responding to consumer complaints on financial products and services and alleged failures to comply with Federal consumer financial laws and regulations. After all, the Bureau has already looked at over 45,000 consumer complaints, and may be more aware than a covered party of possible violations occurring in its own institution. Publicly, the Bureau has also been actively looking at a broad spectrum of products and practices including reverse mortgages, debt collection, foreclosure related services, and forced place insurance products.  Consequently, implementation of compliance with consumer protection laws and a consumer complaint management scheme before Bureau intervention will be key for the days ahead.

Are We in the Quiet Before the Storm?

Well-funded and headed by Richard Cordray, the former State Attorney General for Ohio, it is widely projected that his Bureau will be pro-active and aggressive in its enforcement of Federal consumer protection laws.  Not surprisingly, Richard Cordray was recently quoted as stating that, “[T]here will be enforcement action this year.”23 Moreover, it is publically known that the Bureau is privately conducting investigations. Thus, it is not a question of if, but of when.

What Does the Bureau’s Enforcement Power Look Like?

The Bureau has the power to conduct joint investigations, issue subpoenas and civil investigative demands, bring cease and desist proceedings, injunction proceedings and conduct hearings. Pursuant to its civil investigative demand power, the Bureau can require the subject to produce documents, produce tangible things, file written reports or answers, give oral testimony or a combination of the aforementioned.24

In addition, the Bureau has the authority to commence civil proceedings in the U.S. District Courts, or in any court of competent jurisdiction of a state in a district where there defendant is located or resides or is doing business too seek relief, including civil penalties,25 for violations of Federal consumer financial laws.

The Court in a civil action and the Bureau in an adjudication proceeding, respectively, have been given the jurisdiction and authority to grant legal and equitable relief.26 Relief available includes monetary penalties that can pack a lot of punch — reaching up to $1 million per day for every day a covered party “knowingly” violates a Federal consumer protection law. The other relief available also includes the power to rescind or reform contracts, order refund of monies or return real property, restitution, disgorgement or compensation for unjust enrichment.

Is There Notice Before Enforcement?

In a bulletin released by the Bureau in November of 2011, the Bureau gave notice of some of the actions it may take, at its discretion, prior to commencing enforcement.27  Most notably, the Office of Enforcement, may, prior to recommending that the Bureau commence enforcement, “give the subject of such recommendation notice of the nature of the subject’s potential violations and may offer the subject the opportunity to submit a written statement in response.” The primary focus of this responsive statement, also referred to as a NORA letter, should be on legal and policy matters relevant to the potential proceeding. However, if factual assertions are relied upon, the response must be made under oath by a person with personal knowledge of the facts.28 A subject will have only 14 days from receipt of notice to respond. Understandably, notice by the Office of Enforcement may not always be appropriate, such as in instances of ongoing fraud or other situations that may require quick action.29

A word of caution for covered parties is that the NORA letter may be discoverable by third parties.30 The Bureau’s Rule on Confidential Treatment of Privileged Information, released on July 5, 2012, will become final on August 6, 2012.31 This Rule seeks to protect a covered entity’s submission of privileged information to the Bureau in response to a request for information during an examination. This Rule may not protect information voluntarily contained in a NORA.

What About the Federal Banking Agencies’ Enforcement Authority?

For all insured depository institutions and credit unions with assets in excess of $10 billion, or any affiliate thereof, the Bureau has primary enforcement authority with respect to compliance with federal consumer financial laws. The federal banking agencies that regulate such “large” institutions will continue to have enforcement authority under their long-standing enforcement powers under Section 8 of the Federal Deposit Insurance Act (the “FDI Act”) for violations of law generally. However, with respect to violations of Federal consumer financial laws specifically by such “large” institutions, if a federal banking agency wishes to trigger enforcement, the agency must first recommend that the Bureau initiate an enforcement action. If the Bureau does not initiate an enforcement action within 120 days of receipt of the recommendation, then the federal banking agency may initiate an enforcement action under its FDI Act enforcement powers.

For depository institutions with assets under $10 billion, the Bureau has no enforcement authority with respect to compliance with Federal consumer financial law. This means that the federal banking agencies have exclusive enforcement authority over these smaller institutions with respect to compliance with Federal consumer financial law.

At the End of the Day, What Does This All Mean?

It is a new day and there is a new Sheriff in town. Risk assessment, risk management, complaint management and robust compliance are top priorities. As the Bureau evolves and the meaning of “abusive” morphs into a more concrete meaning, covered parties can best protect themselves by engaging in best practices that comply with the Bureau’s guidance.

 

1The Bureau’s Six Primary Functions include: 1) conducting financial education programs; 2) collecting, investigating, and responding to consumer complaints; 3) collecting, researching, monitoring, and publishing information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets; 4) supervising covered persons for compliance with the Federal consumer financial law, and taking appropriate enforcement action to address violations of Federal consumer financial law; 5) issuing rules, orders, and guidance implementing Federal consumer financial law; and 6) performing such support activities as many be necessary or useful to facilitate the other functions of the Bureau. See Sec. 1021 (c).

2See generally Sec. 1021, of Subtitle B — General Powers of the Bureau. See also Sec. 1002(14). Under Title X, “Federal consumer financial law,” includes: 1) the provisions of Title X, such as Sec. 1031’s prohibition of unfair, deceptive or abusive acts or practices (“UDAAP”); 2) the enumerated laws found at Sec. 1002(12), which include the Alternative Mortgage Transaction Parity Act of 1982, the Consumer Leasing Act of 1976, the Electronic Fund Transfer Act, the Equal Credit Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the Home Owners Protection Act of 1998, the Fair Debt Collection Practices Act, subsections (b) – (f) of section 43 of the Federal Deposit Insurance Act, sections 502 – 509 of the Gramm-Leach-Bliley Act, the Home Mortgage Disclosure Act of 1975, the Home Ownership and Equity Protection Act of 1994, the Real Estate Settlement Procedures Act of 1974, the S.A.F.E. Mortgage Licensing Act of 2008, the Truth in Lending Act, the Truth in Savings Act, section 626 of the Omnibus Appropriations Act, 2009, and the Interstate Land Sales Full Disclosure Act; 3) the laws for which authorities are transferred under Subtitles F and H; and 4) any rule or order prescribed by the Bureau under Title X, enumerated consumer law or authorities transferred under subtitles F & H. Federal consumer financial law does NOT include the Federal Trade Commission Act. Title X should be reviewed and consulted for other exceptions.

3 See the CFPB’s Consumer Response Annual Report, dated March 31, 2012.

4 See Id. 

5 See Id., and the CFPB’s Consumer Response:  A Snapshot of Complaints Received, dated June 19, 2012.

6See the CFPB’s Consumer Response Annual Report, dated March 31, 2012.  The complaint database, referred to in the report, is publicly viewable and is creating concerns by the consumer financial industry that it might result in making them a target of  plaintiffs’ law firms or consumer protection groups which can utilize the public information for their own aims in unfair and deceptive practices actions.  Under the process for complaint handling set-up by the Bureau, a company has 15 calendar days to respond to the complaint. The company can respond to the consumer via a secure portal; the consumer then has an opportunity to dispute the response. The Consumer Response section prioritizes for review and investigation those complaints where the consumer disputes the response or where the companies fail to timely respond. For more information on the CFPB’s complaint collection and processing see the report of the CFPB, on Consumer Response Annual Report, dated March 31, 2012 and CFPB’s Consumer Response:  A Snapshot of Complaints Received, dated June 19, 2012. See also the Bureau’s proposed rule on Disclosure of Consumer Complaint Data, Federal Register, Vol. 77, No. 121, 6/22/12.

7See New York Times article, “New Agency Plans to Make Over Mortgage Market,” by Wyatt, E., 7/5/12. See also the statements made by Richard Hackett, Assistant Director, Office of Installment & Liquidity Lending Markets Research, Markets & Regulations CFPB, at the PLI Program on 4/24/12, titled “Title X & XIV of the Dodd-Frank Act: The New Consumer Financial Protection Bureau” (his statements were made with the caveat that his statements are his own and not those of the Bureau); and the CFPB Annual Report 2012, Fair Debt Collections Practices Act (“FDCPA”), at pp. 17, wherein the Bureau stated that it is “currently conducting non-public investigations of debt collection practices to determine whether they violate FDCPA or the Dodd-Frank Act.”

8Supervised entities are expected “to have an effective compliance management system adapted to it business strategy and operations.”  See the Supervision and Examination Manual, CMR 1, dated October 2011.

9Consumer financial protection functions previously held by the Board of Governors, the FDIC, the Federal Trade Commission, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Department of Housing and Urban Development were transferred to the Bureau as annunciated in Section 1061 of Title X. The FTC and the Bureau have overlapping authority with regards to certain enumerated consumer laws; there is currently a Memorandum of Understanding in place between the two agencies with regards to the enforcement of the Fair Debt Collection Practices Act. See The CFPB Annual Report 2012, Fair Debt Collection Practices Act, at p. 21 and App. A.

10Section 1025 of Title X authorized the Bureau to supervise large insured depository institutions and credit unions with more than $10 billion in total assets. In addition, the Bureau has supervisory authority over all affiliates and service providers of a large bank and credit union. Section 1026 of Title X authorizes the Bureau to require reports from smaller insured depository institutions and to include its examiners at the prudential regulator’s examinations in order to assess compliance with the Federal consumer financial laws.

11“Service Providers,” include any person who “provides a material service to a covered person in connection with the offering or provision by such covered person of a consumer financial product or service, including a person that — (i) participates in designing, operating, or maintaining the consumer financial  product or service; or (ii) processes transactions relating to the consumer financial product or service (other than unknowingly or incidentally transmitting or processing financial data in a manner that such data is undifferentiated from other types of data of the same form as the person transmits or processes).” Sec. 1002(26). Regarding examinations or requiring of reports by service providers, Sec. 1024(e) and 1025(d), state that the Bureau shall coordinate with the appropriate prudential regulator as applicable.  Thus, under Title X, service providers are to be subject to the authority of the Bureau, “to the same extent as if such service provider were engaged in a service relationship with a bank, and the Bureau were an appropriate Federal banking agency under section 7 (c) of the Bank Service Company Act.

12Presently, the Bureau is focusing on third party debt collectors/service providers hired by the large banks and non-banks.  In addition, it is anticipated, that on the finalization of the Bureau’s proposed “larger participant” rule this summer, that larger non-bank debt collectors will fall under the Bureau’s supervisory and enforcement authority per Sec. 1024 (a)(1)(B).  Last, under Section 1024(a)(1)(C), the Bureau’s authority may extend to others whom the Bureau has reasonable cause to determine has engaged or is engaging in conduct which poses risks to consumers with regard to the offering or provision of consumer financial products or services.

13The CFPB Bulletin 2012-03, dated April 13, 2012, set forth guidance concerning service providers and the Bureau’s expectations with regards to banks and non-banks in managing the risks of the service provider relationships.   Five specific steps that banks and non-banks should take to ensure their business arrangements do not pose “unwarranted risks to consumers,” include: 1) Conducting thorough due diligence to verify that the service provider understands and is capable of complying with Federal consumer financial law; 2) Requesting and reviewing the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contract or compliance responsibilities; 3) Including in the contract with the service provider clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities, including engaging in unfair, deceptive, or abusive acts or practices; 4) Establishing internal controls and on-going monitoring to determine whether the service provider is complying with Federal consumer financial law; 5) Taking prompt action to address fully any problems identified through the monitoring process, including terminating the relationship where appropriate.

14See Id. at p. 2.

15See Secs. 1021(c)(4), 1031(a), 1036 of Title X; and The CFPB Annual Report 2012, Fair Debt Collections Practices Act, p. 11.

16See FTC guidance under Sec. 5 of the Federal Trade Commission Act.

17The Supervision and Examination Manual, dated October 2011, mirrors the language of the Sec. 1031(d), in describing an abusive act or practice as one that: “Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or takes unreasonable advantage of — a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; The inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.”
18See CFPB, Guidance Documents, Supervision and Examination Manual, Version 1.0, Consumer Laws and Regulations: Unfair, Deceptive or Abusive Acts or Practices.

19Id.

20The Supervision and Examination Manual, dated October 2011 at UDAAP 10.

21Id. at UDAAP 10.

22CAP, Guidance Documents, Supervision and Examination Manual, Version 1.0, Consumer Laws and Regulations: Unfair, Deceptive or Abusive Acts or Practices.

23See Richard Cordray’s, Director of the Bureau, statement, “[T]here will be enforcement action this year, and we have quite a bit of activity going on.” New York Times article, “New Agency Plans to Make Over Mortgage Market,” by Wyatt, E., 7/5/12.

24See Sec. 1052(c).

25See Sec. 1055(c), which provides that, “Any person that violates, through any act or omission, any provision of Federal consumer financial law shall forfeit and pay a civil penalty pursuant to this subsection.” Three tiers of penalties are identified, including: a) For any violation of law, rule, or final order  or condition imposed in writing by the Bureau, a civil penalty may not exceed $5,000 for each day during which such violation or failure to pay continues. b) Notwithstanding paragraph (a), for any person that recklessly engages in a violation of a Federal consumer financial law, a civil penalty may not exceed $25,000 for each day during which such violation continues. c) Notwithstanding paragraphs (a) and (b), for any person that knowingly violations a Federal consumer financial law, a civil penalty may not exceed $1,000,000 for each day during which such violation continues.

26See Sec. 1055 (a).

27See CFPB Bulletin 2011-14 (Enforcement), Notice and Opportunity to Respond and Advise, dated November 7, 2011.

28See Id.

29See Id.

30 See Id.

31See Federal Register, Vol. 77, No. 129, 7/15/12, regarding 12 CFR Part 1070, Confidential Treatment of Privileged Information.

©2012 Greenberg Traurig, LLP

Consumer Financial Services Basics – ABA Conference

The National Law Review is pleased to bring you information regarding the upcoming Consumer Financial Services Basics Conference sponsored by the ABA:

When

October 08 – 09, 2012

Where

American University

Washington College of Law

Washington, DC

Program Description

Facing the most comprehensive revision of federal consumer financial services (CFS) law in 75 years, even experienced consumer finance lawyers might feel it is time to get back in the classroom. This live meeting is designed to expose practitioners to key areas of consumer financial services law, whether you need a primer or a refresher.It is time to take a step back and think through some of these complex issues with a faculty that combines decades of practical experience with law school analysis. The classroom approach is used to review the background, assess the current policy factors, step into the shoes of regulators, and develop an approach that can be used to interpret and evaluate the scores of laws and regulations that affect your clients.Program FocusThis program will explain each of the major sources of regulation of consumer financial products in the context of the regulatory techniques and policies that are the common threads in a complex pattern, including:

  • Price regulation and federal preemption of state price limitations
  • Truth in lending and disclosure requirements
  • Marketing, advertising and unfair or deceptive conduct
  • Account servicing and collections
  • Regulating the “fairness” of financial institution conduct
  • Data security, fraud prevention and identity protection
  • Consumer reporting: FCRA & FACT Act
  • Fair lending and fair access to financial services
  • Remedies: regulators and private plaintiffs
  • Regulatory and legislative priorities for 2012 and beyond

Who Should Attend…The learning curve for private practitioners, in-house lawyers and government attorneys to understand the basics and changes to CFS law is very steep. This program is a great way to jump up that curve for:

  • Private practitioners with 1-10 years of experience who focus on CFS products or providers
  • In-house counsel at financial institutions and non-bank lenders
  • Government attorneys, in financial practices regulatory agencies
  • Compliance officers (who may be, but need not be, attorneys)