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CFPB Weekly Update: The CFPB's Enforcement Action Against U.S. Bank and Dealers' Financial Services; and the CFPB Offers Enforcement Guidance

June 28, 2013

1. On June 26, 2013, the CFPB executed consent orders with U.S. Bank and Dealers’ Financial Services (“DFS”) arising out of the CFPB’s review of Military Installment Loans and Educational Services Program (MILES), which is an automobile loan program that U.S. Bank and DFS developed and implemented.  The CFPB alleged that U.S. Bank (“a covered person” under the CFPA) and DFS (a “service provider” under the CFPA) violated Regulation Z of the Truth in Lending Act (“TILA”) “for failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for MILES loans where U.S. Bank served as the creditor.”  The CFPB also alleged that U.S. Bank and DFS violated the CFPA’s prohibition of unfair, deceptive, abusive acts and practices (UDAAP) “(a) for failing to accurately disclose the finance charge, annual percentage rate, payment schedule, and total of payments for MILES loans; (b) for deceptive marketing with respect to the prices for a service contract; and (c) for deceptive marketing with respect to the coverage of a service contract.”  The foregoing violations were based upon the following findings of fact:

  • The purpose of MILES was to help U.S. military service members finance automobiles through dealer assisted transactions.
  • U.S. Bank served as the primary lender for MILES.
  • DFS recruited and managed the members of the MILES auto dealer network, “maintain[ed] the MILES website, provide[d] telemarketing, create[d] the MILES marketing and promotional materials, and gather[ed] and review[ed] loan applications before sending them to U.S. Bank for final approval.”
  • Although U.S. Bank has a contractual right to review all of the marketing and advertising materials for the MILES program it did not always do so.
  • Service members participating in the MILES program were required to repay their loans through their military pay allotment.
  • Service members were required to use Military Assistance Company, LLC (“MAC”) for processing allotments for MILES loans.
  • MAC collected and shared with DFS a $3 monthly fee for allotment processing.  The $3 monthly MAC allotment fee was, in effect, a finance charge that should have been disclosed as a finance charge under the TILA, but was not disclosed.
  • Although the allotment fee was taken twice per month, and the MILES website stated that funds are taken for allotments twice a month, the funds were credited to the service member’s account only at the end of the month, which was a violation of the TILA.  The effect of the once-per-month credit was that service members paid a greater amount of interest on their loans than a twice-per-month credit.
  • DFS sold add on products to the service members.  These add on products were advertised to add “just a few dollars to your monthly payment,” but were slightly over $40 per month on average.
  • The marketing brochure and service contract document contained subheadings listing categories of covered parts, without stating that some parts that would fall within those subheadings were not covered.  The brochure listed only covered parts and did not prominently disclose the existence of parts excluded from coverage.

Penalties

  • U.S. Bank was required to pay up to $3.2 million in redress to affected service persons.  If the amount of redress was less than $3.2 million, then U.S. Bank was required to pay the balance to the CFPB.
  • DFS was required to pay up to $3.3 million in redress to affected service persons.  If the amount of redress was less than $3.3 million, then DFS was required to pay the balance to the CFPB.
  • U.S. Bank is prohibited from extending credit on the condition of repayment through military pay allotments.
  • DFS cannot, and U.S. Bank must take reasonable steps to ensure that its authorized program dealers do not, misrepresent material terms of add-on products.
  • The DFS and U.S. Bank Boards or Board committees must take responsibility for all policies and procedures necessary for compliance with the Consent Order.

Well, we knew that the CFPB has been looking at auto lending this year and, not surprisingly, has gone after a covered bank that engages in auto lending.  This case is interesting to the extent that the CFPB not only executed a consent order with the “covered person,” U.S. Bank, it also executed a consent order with the “service provider” over which it has jurisdiction under the CFPA.  I find it interesting because, in the Discover, American Express and Capital One consent orders that the CFPB executed last year, the CFPB did not execute consent orders with the third party service providers.  Rather, the CFPB ordered the credit card companies to do a better job with respect to their oversight of the service providers.  I think that we can expect to CFPB to continue to go after service providers going forward, but not in lieu of the “covered person.”  As we see with this case, the CFPB made it a point to emphasize that U.S. Bank had the opportunity to monitor DFS and did not adequately do so (according to the CFPB.)  In addition, this is another case in which the UDAAP law is used.  Like I have been saying for the past year, you should expect UDAAP in every consent order and enforcement action.

2. On June 25, 2013, the Bureau issued a report providing guidance on the factors that it considers in determining the punishment, if any, it would impose in connection with an enforcement matter.  In the preamble of the report, the Bureau stated that it “could resolve an investigation with no public enforcement action, treat the conduct as a less severe type of violation, reduce the number of violations pursued, or reduce the sanctions or penalties sought by the Bureau in an enforcement action. It must be emphasized, however, that in order for the Bureau to consider awarding affirmative credit in the context of an enforcement investigation, a party’s conduct must substantially exceed the standard of what is required by law in its interactions with the Bureau.”  The Bureau listed the following as factors that it considers with respect to the severity of penalties arising out of an enforcement action:

(1)          The nature, extent, and severity of the violations identified

  • Was this an isolated act?
  • How long did it last before being detected?
  • How did the conduct affect the company’s profits?

(2)          the actual or potential harm from those violations

  • Did you quickly and completely remediate the harm resulting from violations?
  • How did the company redress the harm to the consumers

(3)          whether there is a history of past violations;

(4)          a party’s effectiveness in addressing violations.

  • Were the affected consumers informed in a timely manner?
  • Was the conduct stopped immediately?
  • Were the offending employees punished?
  • Did the company preserve the information and other evidence related to the misconduct?
  • What is the company culture/attitude at the top?
  • Did you proactively self-police for potential violations?
  • Do you have a robust compliance management system appropriate for the size and complexity of a party’s business?
  • Did the compliance system work?
  • Was the compliance system fixed to make sure the same misconduct does not occur again?
  • Does the compliance system “measure up to customary supervisory expectations?”
  • How was the violation detected and who detected it?
  • Did you promptly self-report to the Bureau?
  • Did you affirmatively cooperate with any Bureau investigation above and beyond what is required?
  • Did you have continued cooperation with the Bureau?
  • Did you share your findings from an internal investigation with the Bureau and not wait for the Bureau to ask for the information?
  • Did you encourage your employees to cooperate with the Bureau?
  • Did you thoroughly review the nature, extent, origin and consequences of the misconduct?
  • Did you provide any substantial and meaningful assistance
  • Do you encourage proper compliance?

This has been a long update, so I will just leave you to ponder on the foregoing questions.  Have a great weekend and remember that all of the prior updates are on our website, cfpaguide.com.

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