Banks and other entities that service mortgages must credit any payment made through their websites at the time the borrower approves the payment, a divided federal appeals court has held.The 7th U.S. Circuit Court of Appeals rejected the argument that the federal Truth in Lending Act allows mortgage servicers to wait until an electronic transfer of funds is completed before crediting a payment.
Such a holding, the majority wrote, would be contrary to Congress’ intent.
“The interpretation we adopt promotes an important purpose of TILA: [T]o protect consumers against unwarranted delay by mortgage servicers,” Chief Judge Diane P. Wood wrote in an opinion joined by Judge David F. Hamilton.
In a dissent, Judge Frank H. Easterbrook contended his colleagues were misinterpreting TILA’s requirement that a mortgage servicer credit a payment “as of the date of receipt.”
Under Section 1639f(a) of TILA and an implementing regulation, Easterbrook wrote, an instruction to make a payment is not actually a payment.
“We should read the statute and regulation to mean what they say: [L]enders must give credit when they receive payment,” he wrote.
Elena Fridman’s mortgage is serviced by NYCB Mortgage Co. LLC. Her payments are due on the first of each month, but she has a 15-day grace period before she is required to pay a late fee.
Borrowers may authorize payments on their mortgages through NYCB’s website.
Every business day, NYCB puts all the authorizations it received before 8 p.m. into an Automated Clearing House file.
The following day, NYCB uses the ACH file to request that funds be transferred from the borrowers’ bank accounts.
NYCB credits payments made through its website two business days after the payment is authorized.
Late on Dec. 13, 2012, or early the next morning, Fridman accessed NYCB’s website and authorized a mortgage payment from her account at Bank of America.
NYCB placed the authorization into an ACH file on Dec. 14 and credited Fridman’s mortgage account for the payment on Tuesday, Dec. 18, which was two business days later. It charged her a late fee of $88.54.
Fridman sued NYCB, alleging TILA required it to credit her payment on the day she submitted the authorization.
U.S. District Judge Sara L. Ellis ruled in favor of NYCB, and Fridman appealed.
In its opinion Wednesday, the 7th Circuit majority wrote that a mortgage servicer decides how quickly to collect a payment when it receives a check or gets authorization on its website or over the phone to transfer funds.
Without TILA’s requirement that payment be credited on receipt of the “payment instrument,” the majority wrote, “the servicer could decide to collect payment through a slower method in order to rack up late fees.”
But Easterbrook countered that fear of losing business would prevent a mortgage servicer from engaging in such tactics.
“Playing games would put its reputation at risk,” he wrote. “Users of the Internet proclaim their grievances loudly, and many sites rate merchants based on users’ observations.”
The case is Elena Fridman v. NYCB Mortgage Co. LLC, No. 14-2220.
Daniel A. Edelman of Edelman, Combs, Latturner & Goodwin LLC argued the case before the 7th Circuit on behalf of Fridman.
“I think Judge Wood got it right,” he said.
An authorization made through a website, he said “is an electronic form of a paper check.”
And TILA requires a payment made with a check to be credited when the mortgage servicer receives the check, he said.
Edelman rejected Easterbrook’s assertion that concern over borrowers’ reaction to underhanded conduct would keep mortgage servicers in line.
Servicers don’t care what borrowers think of them, he said.
Instead, he said, servicers have an incentive to collect late fees from borrowers so they can keep their own costs down and attract more business.
“Where Judge Easterbrook went wrong is thinking market forces constrain bad behavior on the part of mortgage servicers,” Edelman said.
LeAnn Pedersen Pope of Burke, Warren, MacKay & Serritella P.C. argued the case on behalf of the bank.
The Seventh Circuit Court of Appeals, in a case argued by Mr. Edelman, holds (2-1) that when you pay your mortgage electronically, the payment must be credited as of the date you fill out the authorization on the mortgage company’s web site, assuming you do so before a reasonable cutoff time, not some later date when the mortgage company chooses to turn the authorization into money:
Like many consumers today, [plaintiff] paid her mortgage electronically, using the online payment system on the website of her mortgage servicer, NYCB Mortgage Company, LLC. By furnishing the required information and clicking on the required spot, she authorized NYCB to collect funds from her Bank of America account. The question before us concerns the time when NYCB received one of her payments. Although [plaintiff] filled out the form within the grace period allowed by her note, NYCB did not credit her payment for two business days. This delay caused [plaintiff] to incur a late fee. . . .
[The Truth in Lending Act] generally requires mortgage servicers to credit payments to consumer accounts “as of the date of receipt” of payment, unless delayed crediting has no effect on either late fees or consumers’ credit reports. 15 U.S.C. § 1639f(a). This provision’s implementing regulation, known as Regulation Z, essentially repeats this requirement. See 12 C.F.R. § 1026.36(c)(1)(i) (“No servicer shall fail to credit a periodic payment to the consumer’s loan account as of the date of receipt … .”). But what is the date of receipt? That question, on which the result in this case turns, is more complicated than one might think. . . .
TILA expressly requires servicers to “credit a payment … as of the date of receipt,” and the Official Interpretations define the “date of receipt” as when the “payment instrument or other means of payment reaches the mortgage servicer.” (Emphasis added.) This definition is far from irrational. While the CFPB (and the FRB before it) could have determined that “payment” means the receipt of funds by the servicer, the conclusion that “payment” refers to the consumer’s act of making a payment is equally sensible.
The definition is not limited to one type of payment instrument versus another type. It instead covers all instruments used to effect payment, and then it specifies that no matter what the means of payment, the relevant date of receipt is the day when the payment mechanism reaches the mortgage servicer, not any later potentially relevant time.
With this much established, we are left with the question how electronic authorizations fit into the statutory and regulatory system. [Plaintiff] argues that an electronic authorization of payment, such as the authorization she gave when she filled out NYCB’s online form, qualifies as a “payment instrument or other means of payment.” . . .
NYCB . . . argues that electronic authorizations are merely the first step of an electronic fund transfer (EFT). It urges that the EFT is not complete— and the payment does not “reach” NYCB as required by the Official Interpretations—until the requested funds are transferred from the consumer’s external bank account to the mortgage servicer. This means, in NYCB’s view, that the EFT, not the electronic authorization, is the “payment instrument or other means of payment.”
The problem with that reasoning is that the same is true of a paper check, which the Official Interpretations specifically include in the definition of “payment instrument or other means of payment.” Paper checks must be credited when received by the mortgage servicer, not when the servicer acquires the funds. Just like an electronic authorization, a check is in a sense “incomplete” when the mortgage servicer receives it. It is nothing more or less than the consumer’s written permission to the payee to take another step— that is, to draw funds from the consumer’s account—just like the electronic submission Fridman tendered. The servicer does not instantaneously have the funds promised by a paper check. It must use the banking system to have the funds transferred to it—a process that takes at least one or two days. If a check must be credited on the date of physical receipt, even though the recipient does not receive the funds that day and must take further steps to acquire them, then there is no reason why a mortgage servicer should not face a comparable process when it receives an electronic “check” or authorization to draw funds from the consumer’s bank account. . . .
Fridman v. NYCB Mortgage Co., No. 14-2220 (7th Cir., March 11, 2015).
Examiners Recover $19.4 Million in Remediation for more than 92,000 Consumers
WASHINGTON, D.C. – Today the Consumer Financial Protection Bureau (CFPB) released its latest supervision report highlighting legal violations uncovered by the Bureau’s examiners. The Bureau found deceptive student loan debt collection practices, unfair and deceptive overdraft practices, mortgage origination violations, fair lending violations, and mishandled disputes by consumer reporting agencies. The report also shows that CFPB supervisory resolutions resulted in remediation of $19.4 million to more than 92,000 consumers.
“We are sharing our latest supervisory highlights report with the public so that industry can see trends, examine their own practices, and be proactive to make needed changes before consumers are hurt,” said CFPB Director Richard Cordray. “The CFPB will continue to monitor both bank and nonbank markets to ensure deception is rooted out, deficiencies are corrected, remediation is given to consumers, and violations are stopped in their tracks.”
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the CFPB has authority to supervise banks and credit unions with over $10 billion in assets and certain nonbanks. Those nonbanks include mortgage companies, private student loan lenders, and payday lenders, as well as nonbanks the Bureau defines through rulemaking as “larger participants.” To date, the Bureau has issued rules to supervise the larger participants in the markets of debt collection, consumer reporting, international money transfer, and student loan servicing.
Today’s report, which is the seventh edition of supervisory highlights, generally covers supervisory activities between July 2014 and December 2014. Among the findings:
Deceptive student loan debt collection practices: Bureau examiners found that some student loan debt collectors made deceptive statements to consumers with defaulted federal student loans. In collection calls and call scripts, examiners found that collectors overpromised the restoration of credit profiles if borrowers participated in a federal student loan rehabilitation program; and collectors misinformed consumers by telling them that they could not participate in the rehabilitation program unless they paid by credit card, debit card, or ACH payments, when, in fact, no such requirement existed.
Unfair and deceptive overdraft practices: Bureau examiners found that certain banks changed the way in which they assessed overdraft fees – and that the new approaches increased the likelihood that consumers would incur fees that they did not anticipate. The institutions did not explain the changes in a way that consumers could understand and use to avoid overdraft fees. Based on the specific situation at these institutions, examiners found that the banks had carried out unfair and deceptive practices.
Mortgage origination violations: Bureau examiners found that some loan originators illegally received compensation based on the terms of the loan. Examiners also found that at some loan originators the amounts disclosed on the HUD-1 form improperly exceeded those disclosed on the Good Faith Estimate. Some loan originators advertised the length of payment, amount of payments, numbers of payments, and finance charges without providing the required disclosures. And, the Bureau found weaknesses in compliance management systems that played a significant role in the identified violations.
Fair lending violations: Bureau examiners found that one or more institutions rejected mortgage applications from consumers because they relied on public assistance income, such as Social Security or retirement benefits, in order to repay the loan. Marketing materials contained written statements regarding the prohibition on non-employment sources of income, and discouraged applicants who received public assistance from applying for credit. This violates the Equal Credit Opportunity Act. CFPB examiners directed that remediation be made to harmed applicants.
Mishandling of disputes by consumer reporting agencies: Over the past several years, the CFPB has been examining consumer reporting agencies to see how they handle consumer disputes. While Bureau examiners found great improvements in how some handle disputes in its most recent exams, one or more agencies are still failing to consistently forward all relevant consumer information to furnishers. Such inadequate processes can lead to errors in credit files and incorrect dispute investigation outcomes.
In all cases where CFPB examiners find violations of law, they alert the institutions to their concerns and outline necessary remedial measures. When appropriate, the CFPB opens investigations for potential enforcement actions. The CFPB expects all entities under its supervision to respond to customer complaints and identify major issues and trends that may pose broader risks to their customers.
The CFPB often finds problems during supervisory examinations that are resolved without an enforcement action. Recent non-public supervisory actions and self-reported violations at banks and nonbanks resulted in $19.4 million in remediation to more than 92,000 consumers. These non-public actions have occurred in areas such as payday lending, mortgage servicing, and mortgage origination.
Thank you for joining us for this field hearing of the Consumer Financial Protection Bureau. We are here in Newark today to discuss the subject of arbitration. At its most basic level, arbitration is a way to resolve disputes outside of the court system. Parties can agree in their contract that if a dispute arises between them at a later time, rather than take it before a judge and perhaps a jury as part of a public judicial process, they will be required to turn instead to a non-governmental third party, known as an arbitrator, to resolve the dispute in private. These contractual provisions are referred to as “pre-dispute arbitration clauses.”
Arbitration clauses were rarely seen in consumer financial contracts until the last twenty years or so. Arbitration is often described by its supporters as a “better alternative” to the court system – more convenient, more efficient, and a faster, lower-cost way of resolving disputes. Opponents argue that arbitration clauses deprive consumers of certain legal protections available in court, may not provide a neutral or fair process, and may in fact serve to quash disputes rather than provide an alternative way to resolve them.
Long ago, prior to the Great Depression, Congress provided a general framework that located the role of arbitration in federal law. Court decisions over the years refined the relationship between private arbitration and formal judicial proceedings under a number of federal business statutes, including the antitrust laws and the securities laws as well as under the labor laws. More recently, however, Congress has taken an increased interest in arbitration clauses in consumer financial contracts. In 2007, Congress passed the Military Lending Act, which prohibited such clauses in connection with certain loans made to servicemembers. That was the first occasion on which Congress expressed explicit concern about the effect such clauses may have on the welfare of individual consumers in the financial marketplace.
In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress went further and prohibited the inclusion of arbitration clauses in most residential mortgage contracts. Another measure in that same law is of special interest because it leads directly to our discussion today. In section 1028 of the Dodd-Frank Act, Congress directed the Consumer Bureau to conduct a study and provide a report to Congress on the use of pre-dispute arbitration clauses in consumer financial contracts. Further, Congress provided that “[t]he Bureau, by regulation, may prohibit or impose conditions or limitations on the use of” such arbitration clauses in consumer financial contracts if the Bureau finds that such measure “is in the public interest and for the protection of consumers,” and findings in such a rule are “consistent with the study” performed by the Bureau.
We have set about this mandatory task to study the use of arbitration clauses with conscious care. We began our study almost three years ago, when we issued a Request for Information seeking public input on the appropriate scope, methods, and data sources for this work. We received dozens of written comments in response and held a series of stakeholder meetings to gather more informal input. In December 2013, we released preliminary results from our study. We wanted to provide a progress report to the public on our work, while also eliciting further comments on the work plan that we had developed. In those results, we found that arbitration clauses are commonly used by large banks in credit card and checking account agreements. We also found that these clauses can be used to prevent any litigation, including class litigation, from moving forward. In addition, we observed that roughly nine out of ten such clauses barred arbitrations on behalf of a class of consumers.
Today we are releasing the results of our study and we are providing our arbitration report to Congress as the law requires us to do. As far as we are aware, this is the most comprehensive empirical study of consumer financial arbitration ever conducted. We looked at over 850 consumer finance agreements to examine the prevalence of arbitration clauses and their terms. We have reviewed the following categories of disputes: over 1,800 consumer finance arbitration disputes filed over a period of three years; a sample of the nearly 3,500 individual consumer finance cases we identified that were filed in federal court over the same time frame; and all of the 562 consumer finance class actions we identified that were filed in federal court and in selected state courts. We also looked at over 40,000 small claims filings over the course of a single year.
We have supplemented this research by assembling and analyzing a set of more than 400 consumer financial class action settlements in federal courts over a period of five years and more than 1,100 state and federal public enforcement actions in the consumer finance area. We also conducted a national survey of 1,000 credit card consumers to learn more about their knowledge and understanding of arbitration and other dispute resolution mechanisms.
Needless to say, simply assembling – let alone analyzing – all this information was a substantial undertaking. But at the Consumer Bureau, we are committed to data-driven decision-making. With limited exceptions, the debate that has taken place over arbitration clauses has not been informed by actual empirical research into the facts “on the ground” about arbitration generally or consumer finance arbitration specifically. So we believed this was an investment well worth making, even though the process took longer than it otherwise might have taken.
It is not possible in the space of a few minutes to do justice to the depth and richness of the Consumer Bureau’s report. But I want to discuss a few key findings that shed light on some of the major questions that have been much debated by various stakeholders.
In discussing these findings, it is important to bear in mind that when it comes to consumer finance, arbitration clauses are contained in standard-form contracts, where the terms are not subject to negotiation. Like the other terms of most contracts for consumer financial products or services, they are essentially “take-it-or-leave-it” propositions. Consumers may open a new account or procure a new product without being aware of what the contract says or without fully understanding its implications. As part of the study we are releasing today, we looked at arbitration clauses in at least six different consumer finance markets.
In order to understand the effects of arbitration clauses, we wanted to know how many people use consumer products or services where the standard customer agreements include such clauses. In the credit card market, we found that credit card issuers representing more than half of credit card debt have arbitration clauses. In the checking account market, we found that banks representing almost half of insured deposits have arbitration clauses. Given the size of these markets, we can safely say that tens of millions of consumers are covered by one or more such arbitration clauses. Indeed, for credit card accounts alone, the number could be as high as 80 million consumers. Sometimes consumers are given a one-time chance to opt out of these clauses, but our research showed that consumers were generally unaware of this.
A key question we asked is to what extent individual consumers use arbitration procedures or individual litigation to challenge company behavior that they believe to be wrongful. The answer is: not very often. We looked at disputes where an arbitration case is filed with the American Arbitration Association, or AAA – the largest administrator of consumer finance arbitration disputes in the country – between 2010 and 2012. Across six consumer finance product markets covering tens of millions of Americans, just over 1,800 arbitration disputes were filed with the AAA – an average of about 600 per year. And over twenty percent of these cases may have been filed by companies, rather than consumers. Moreover, almost all of these disputes involved matters where more than $1,000 was at stake; that is, in this data consumers seem to be indicating that it rarely makes sense for them to bring an individual claim with only a small amount at stake.
We sought to study what happened in these arbitration cases, but we learned that for the cases filed in 2010 and 2011, approximately two-thirds ended without a decision from an arbitrator, either as the result of a settlement or some other informal resolution. In the cases that were decided, arbitrators awarded consumers a combined total of less than $175,000 in damages and less than $190,000 in debt forbearance. Arbitrators ordered consumers to pay $2.8 million, predominantly on debts that were disputed.
We also found that individual consumers are much more likely to bring a lawsuit in a court instead of pursuing a dispute in arbitration. During the same three-year period, we found nearly 3,500 individual consumer finance lawsuits were filed in federal court in five of the six consumer finance markets covered by the arbitration data we studied – an average of under 1,200 per year. We studied all of the cases in four markets and a random sample of credit card cases and found very few that were resolved by a court. In those that were resolved by a court, consumers won under $1 million and more than half of that total came from a single case. We also looked to small claims courts, but found little evidence of extensive consumer filings from the limited information available about those proceedings. Instead, small claims courts seemed to be used mostly by companies filing debt collection lawsuits against consumers.
The survey we conducted reflects these findings. In that survey, we asked consumers what they would do if they were charged a fee by their credit card issuer that they knew to be wrong and they had already exhausted all possible efforts to obtain relief from the company. Only two percent of consumers said they would consider bringing formal legal proceedings or would consult a lawyer. That is almost the same percentage of consumers who said they would simply accept responsibility for the fee. Most people, in fact, say they would simply cancel their card. The research thus indicates that consumers are very unlikely, acting alone, to even consider bringing formal claims against their card issuers – either through arbitration or through the courts.
Another question our study addresses is the extent to which consumer finance class actions enable consumers to get financial redress. We focused our research on class action settlements because that is generally the way consumers obtain relief in class actions. These cases rarely go to trial. (The same is generally true of individual court actions and to a lesser extent of arbitration cases as well.)
For the period from 2008 through 2012, we identified about 420 federal class action settlements in consumer financial cases. We found that those settlements totaled $2.7 billion in cash, in-kind relief, and fees and expenses. Of this, 18 percent went to attorneys’ fees and litigation and administration expenses. That means approximately $2.2 billion was available as monetary and in-kind relief for the benefit of affected consumers. Further, these figures do not account for the benefits to consumers from lawsuits or settlements that led to changes in company behavior; this value is considerable but difficult to quantify. And of course, the numbers do not include the potential benefit to other consumers from any deterrent effect associated with these settlements.
In over 100 of these settlements, payments were made to affected consumers automatically without those consumers having to submit claims forms. For those cases where numbers were available, over $700 million was paid to consumers. We were able to obtain data on payments in another 125 or so settlements in which consumers were required to file claims in order to get their money. In those cases, we found that approximately $325 million was paid to consumers. In another 25 or so cases, a combination of automatic distributions and a claims process was used, and in those cases roughly $60 million was paid to consumers. In other words, the total cash payout – excluding in-kind relief – was, at a minimum, in excess of $1.1 billion, or at least $200 million per year. These payments were provided to a minimum of 34 million consumers, which works out to an average of 6.8 million consumers annually.
The contrast between the class action system as a means of addressing consumer claims as compared to arbitration and individual litigation can be especially stark if we focus on particular markets. Consider, for example, the checking account market. Over 90 percent of all American households – roughly 114 million of them – have a checking account, making this perhaps the single largest consumer market. Between 2010 and 2012, there were a total of 72 arbitration disputes filed with the AAA and 137 individual cases filed in federal courts involving checking accounts. Yet during those same three years, six class settlements were approved involving the overdraft practices of five banks. The settlements totaled close to $600 million and covered more than 19 million consumers. The cases also resulted in changes to overdraft practices going forward – changes that brought material benefit to consumers.
A further question we studied is the extent to which arbitration clauses stand as a barrier to class actions. By design, arbitration clauses can be invoked to block class actions in court. We studied how often arbitration clauses are, in fact, used in this way. We found that it is rare for a company to try to force an individual lawsuit into arbitration. But it is quite common for arbitration clauses to be invoked to block class actions. For example, we found that when credit card issuers with an arbitration clause were sued in a class action, companies invoked the arbitration clause to block the action in nearly two-thirds of the cases. And, in the overdraft litigation to which I just referred, five banks were able to get the class actions against them dismissed because of arbitration agreements.
We also examined how often consumers seek to file class actions in arbitration. The AAA has a process that allows a consumer to pursue a dispute on behalf of a class of other consumers just as one can do in court. However, under the AAA rules, a class action arbitration can only proceed if it is permitted under the arbitration clause. We found that nearly all arbitration agreements include a provision which says that arbitrations may not proceed on a class basis. Perhaps not surprisingly, we found that only two class action arbitrations were filed with the AAA between 2010 and 2012 in the markets we studied. One of these was not pursued after it was filed and the other was pending on a motion to dismiss as of September 2014.
In addition, we looked at whether companies that include arbitration clauses in their contracts are able to offer lower prices because they are not subject to class action lawsuits. Our methodology here centered on a real-world comparison of companies that dropped their arbitration clauses and companies that made no change in their use of arbitration clauses. This was possible because in 2009, four large credit card issuers had settled an antitrust lawsuit by agreeing to drop their arbitration clauses. Meanwhile, other card issuers had either retained their arbitration clauses or continued to refrain from using arbitration clauses.
Using de-identified, account-level information from credit card issuers that represent about 85 percent of the credit card market, we compared the total cost of credit paid by consumers of some of the companies that dropped their arbitration clauses and of some of the companies whose use of arbitration clauses was unchanged. We looked at whether the elimination of arbitration agreements led to an increase in prices charged to consumers. We found no statistically significant evidence of such a price increase. We likewise found no evidence that issuers which dropped their arbitration clauses reduced access to credit relative to those whose use of arbitration clauses was unchanged.
Finally, our study examined the extent to which consumers are aware of, and understand the implications of, arbitration clauses. In our survey of 1,000 consumers with credit cards, we found that of those consumers who said they knew what arbitration was, three out of four did not know if they were subject to an arbitration clause. Of those who thought they did know, more than half were wrong about whether their agreements actually contained arbitration clauses. In fact, consumers whose agreements did not contain an arbitration clause were more likely to believe that the agreements had a clause than consumers whose agreements actually did have such a clause.
The confusion did not stop there. More than half of the consumers who were subject to an arbitration agreement and who said they knew what a class action was believed that they could participate in a class action nonetheless. Forty percent were unsure whether they could, leaving less than two percent who recognized that they could not participate in class actions.
We also asked consumers if they recalled being asked whether they wished to “opt out” of their arbitration clause so that they could retain their right to sue in court or to participate in class actions. Over a quarter of the credit card arbitration agreements we reviewed permit individual consumers to opt out. However, only one consumer whose current agreement permitted him to opt out recalled being asked whether he wished to do so.
In our governing statute, Congress specified that the results of this arbitration study are to provide the basis for important policy decisions that the Consumer Bureau will have to make in this area. So people are right to be interested in digesting these results and considering how we intend to fulfill the objectives established by Congress. We will be meeting with stakeholders after they have had a chance to read our report, and we are here today to invite you to share your thoughts on these issues in general and on that process in particular.
At the Consumer Bureau, we are dedicated to a marketplace characterized by fair, transparent, and responsible business practices. We believe that strong consumer protection is an asset to honest businesses because it ensures that everyone is playing by the same rules, which supports fair competition and positive treatment of consumers. We look forward to a robust and vigorous discussion today, which will bring us one step closer to achieving that vision.
The Consumer Financial Protection Bureau released a study indicating that arbitration agreements restrict consumers’ relief for disputes with financial service providers by limiting class actions. The report found that, in the consumer finance markets studied, very few consumers individually seek relief through arbitration and the courts, while millions of consumers obtain relief each year through class action settlements. Arbitration Clauses by the Numbers Tens of millions of consumers are covered by arbitration clauses. The CFPB looked at arbitration clauses in six different consumer finance markets: credit cards, checking accounts, prepaid cards, payday loans, private student loans, and mobile wireless contracts. • 53 percent: The market share of credit card issuers that include arbitration clauses. • 44 percent: While fewer than 8 percent of banks and credit unions include arbitration clauses in their checking account agreements, those who do represent 44 percent of insured deposits. • 92 percent: The percentage of prepaid card agreements the CFPB obtained that are subject to arbitration clauses. • 86 percent: In the private student loan market, 86 percent of the largest lenders include arbitration clauses in their contracts. • 99 percent: The Bureau was able to obtain data on payday loan agreements in California and Texas. In those states, over 99 percent of storefront locations include arbitration clauses in their agreements. • 88 percent: Among mobile wireless providers who authorize third parties to charge consumers for services, 88 percent of the largest carriers include arbitration clauses. Those providers cover over 99 percent of the market. Overview Arbitration is a way to resolve disputes outside the court system. In recent years, many contracts for consumer financial products and services have included a “pre-dispute arbitration clause” stating that either party can require that disputes that may arise about that product or service be resolved through arbitration, rather than through the court system. Where such a clause exists, either side can generally block lawsuits, including class actions, from proceeding in court. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandates that the CFPB conduct a study on the use of pre-dispute arbitration clauses in consumer financial markets. The Dodd-Frank Act also prohibits the use of arbitration clauses in mortgage contracts. And it gives the Bureau the power to issue regulations on the use of arbitration clauses in other consumer finance markets if the Bureau finds that doing so is in the public interest and for the protection of consumers, and if findings in such a rule are consistent with the results of the Bureau’s study
A.G. Schneiderman Announces Groundbreaking Consumer Protection Settlement With The Three National Credit Reporting Agencies
Experian, Equifax, And Transunion, Which Maintain Consumer Credit Information On 200 Million Americans, Have Agreed To Increase Protections For Consumers Facing Credit Report Errors; Provide Second Free Annual Credit Report To Consumers
Agreement Increases Protections For Consumers With Medical Debt; Reforms Process For Correcting Report Errors; Improves Accuracy Of Reports
A.G. Schneiderman: This Agreement Will Reform The Entire Industry And Provide Vital Protections For Millions Of Consumers Across The Country
NEW YORK – Attorney General Eric T. Schneiderman today announced a settlement with the nation’s three leading national credit reporting agencies, Experian Information Solutions, Inc., (“Experian”), Equifax Information Services, LLC (“Equifax”), and TransUnion LLC (“TransUnion”). The agreement means the companies will improve credit report accuracy; increase the fairness and efficacy of the procedures for resolving consumer disputes of credit report errors; and protect consumers from unfair harm to their credit histories due to medical debt. All three credit reporting agencies worked cooperatively with the office to develop these critical reforms.
“Credit reports touch every part of our lives. They affect whether we can obtain a credit card, take out a college loan, rent an apartment, or buy a car – and sometimes even whether we can get jobs,” Attorney General Schneiderman said. “The nation’s largest reporting agencies have a responsibility to investigate and correct errors on consumers’ credit reports. This agreement will reform the entire industry and provide vital protections for millions of consumers across the country. I thank the three agencies for working with us to help consumers.”
“Debt collection is consistently one of our top complaints, with collection of debts not owed being the number one reason New Yorkers contact us,” said NYC Department of Consumer Affairs Commissioner Julie Menin. “Mistakes like these, illegal payday loans and other information like medical debt end up on credit reports where they can misrepresent a consumer’s creditworthiness. The agreement by Attorney General Schneiderman with the three credit reporting companies is no small feat and I applaud him for ambitiously requiring these institutional agencies to make it easier to obtain and repair one’s report.”
“Today marks a major victory for New York consumers; it has been widely reported over the last few years that there are gross inaccuracies that can be found on the average consumer’s credit report,” said Assemblyman Jeffrey Dinowitz. “Our system puts great faith in the credit reporting agencies to serve as the de facto watch dogs of the credit market in this country and in New York State. To put it simply, the current system was failing. As Chairman of the Assembly Standing Committee on Consumer Affairs and Protection I held a hearing on the inaccuracy of credit reports in 2013 and what we found was a system that ignored errors and made it practically impossible for a consumer to repair their credit without undue hardships. This settlement should help to restore consumers’ faith in the credit reporting system and will hopefully make repairing erroneous marks on their report that much simpler. I applaud Attorney General Schneiderman for his action on this issue.”
“Problems with credit reports routinely block people’s access to housing and jobs, particularly low income people and people of color,” said Susan Shin, Senior Staff Attorney at New Economy Project. “The practices of the big three credit reporting agencies have an outsized impact on the lives of hundreds of millions of people. We applaud Attorney General Schneiderman for his leadership in challenging fundamental inequities in the credit reporting system.”
“This agreement addresses some of the most egregious problems in credit reporting that consumer advocates have complained about for many years,” said Chi Chi Wu, National Consumer Law Center staff attorney. “We commend Attorney General Schneiderman and his staff for getting these changes, which should benefit consumers enormously.”
Experian, Equifax, and TransUnion are credit reporting agencies (“CRAs”) that maintain consumer credit information on approximately 200 million consumers. The credit information is compiled by the CRAs via voluntary submissions from “data furnishers” such as banks and collection agencies. The CRAs provide credit reports to companies who then use the reports to assess consumers’ credit-worthiness. Creditors use credit reports to assign numerical ratings, called “credit scores” that are used in determining whether to grant credit and in determining the cost of credit.
Credit report errors may arise as a result of identity theft or fraud, or through the CRAs’ process of matching information provided by furnishers to individual consumer’s credit files. For example, when consumers have similar names and share other identifying information, some or all of the credit information of one consumer can become “mixed” into the file of another consumer.
A 2012 study by the Federal Trade Commission found that 26% of study participants identified at least one potentially material error in their credit reports, and that 13% of study participants experienced a change for the better in their credit score as a result of modification to their credit report after a dispute to a credit reporting agency. These findings suggest that millions of consumers have material errors on their credit reports.
The Attorney General’s settlement requires the CRAs to institute a number of reforms to increase protections for consumers, over a three year period. Many of those reforms will be instituted nationwide:
1. Improving the Dispute Resolution Process
Consumers have the right to challenge inaccurate information in their credit report by initiating a “dispute” with a CRA. Attorney General Schneiderman’s investigation of the CRAs revealed that in some cases, the CRAs use a fully-automated process in which they reduce consumers’ disputes to a three-digit code and submit the code and any documentation to the creditor. If the creditor verifies the challenged information, the CRA rejects the consumer’s dispute without conducting any further investigation.
The agreement requires that the CRAs employ specially trained employees to review all supporting documentation submitted by consumers for all disputes involving mixed files, fraud or identity theft. The agreement also requires that, for all categories of disputes, when a creditor verifies a disputed credit item through the automated dispute resolution system, the CRA will not automatically reject the consumer’s dispute, but rather, a CRA employee with discretion to resolve the dispute must review the supporting documentation.
2. Medical Debt
Over half of all collection items on credit reports are medical debts. Medical debts often
result from insurance-coverage delays or disputes. As a result, medical debt may not accurately reflect consumers’ creditworthiness.
Pursuant to the Attorney General’s agreement, the CRAs will institute a 180-day waiting period before medical debt will be reported on a consumer’s credit report. This waiting period will provide extra time to permit resolution of delinquencies that result from insurance delays or disputes. In addition, while delinquencies ordinarily remain on credit reports even after a debt has been paid, the CRAs will remove all medical debts from a consumer’s credit report after the debt is paid by insurance.
3. Increasing the Visibility of AnnualCreditReport.com
Many consumers are not aware that they are legally entitled to one free annual credit report from each CRA via AnnualCreditReport.com. Consumers searching for a credit report online frequently find a CRA’s website, and many consumers subscribe to a CRA credit monitoring service to obtain a credit report or purchase a credit report from the CRA without understanding that they can obtain a free credit report. The agreement requires the CRAs to include a prominently-labeled hyperlink to the AnnualCreditReport.com website on the CRAs’ homepages. The hyperlink must appear directly on the CRAs’ homepages or via a drop-down menu visible on the homepages.
4. Additional Free Annual Credit Report
Consumers have a statutory right to obtain one free credit report per year from each CRA. The Attorney General’s agreement requires the CRAs to provide a second free credit report to consumers who experience a change in their credit report as a result of initiating a dispute. This requirement will permit consumers to verify that the CRA made the correction to their credit report without have to pay for a second credit report.
5. Payday Loan Debt
Predatory high-interest loans made in violation of New York lending laws are often referred to as “payday loans.” New Yorkers who take these loans often have trouble paying them back, damaging their credit, and making it more difficult to obtain a credit card, get a job, or even rent an apartment. The Attorney General’s agreement prohibits the CRAs from including debts from lenders who have been identified by the Attorney General as operating in violation of New York lending laws on New York consumers’ credit reports.
6. Furnisher Monitoring
Companies that provide consumer data to the CRAs (“furnishers”) must investigate consumers’ disputes and report their findings to the CRAs. The Attorney General’s agreement requires the three CRAs to create a National Credit Reporting Working Group (“Working Group”) that will develop a set of best practices and policies to enhance the CRAs’ furnisher monitoring and data accuracy. The Working Group will develop metrics for analyzing furnisher data, including: the number of disputes related to particular furnishers or categories of furnishers; furnishers’ rate of response to disputes; and dispute outcomes. Each CRA will implement policies to monitor furnishers’ performance and take corrective action against furnishers that fail to comply with their obligations.
7. Media Campaign About Consumers’ Rights
To ensure that consumers understand their rights, the Attorney General’s agreement requires the CRAs to carry out an extensive consumer education campaign in New York via public service announcements and paid placements on television, radio, print media, and online. The campaign will be carried out over three years and will focus on consumers’ rights to: (a) obtain a free annual credit report; (b) dispute errors in their credit reports; and (c) submit documents in support of disputes. The agreement also requires the CRAs to expand the consumer education materials available on AnnualCreditReport.com, the website that consumers can use to obtain their free annual credit report.
All three credit reporting agencies cooperated in the Attorney General’s investigation and demonstrated a strong commitment to reforming practices to increase protections for consumers.
Tips for Consumers:
You can get a free credit report from each of the CRAs once each year.
You can request all three credit reports at the same time, or you can request the reports separately. Spreading out the reports permits you to monitor your credit over the course of the year.
It is important to review your credit report regularly in order to check for errors.
If you find an error, you have the right to dispute the error with the CRA and with the company that provided the information.
You have the right to submit copies of documents that support your dispute. You may submit such documents to the CRAs online via the CRAs’ websites.
Watch out for websites that claim to offer “free” credit reports, but require you to subscribe to their fee-based services in order to obtain the credit report.
New York City residents who need help understanding their credit report or improving their credit score, should call 311 to find their nearest Financial Empowerment Center for free financial counseling.
This case was handled by Special Counsel Carolyn Fast, Assistant Attorney General Melissa O’Neill and Bureau Chief Jane M. Azia, all of the Consumer Frauds Bureau, and Executive Deputy Attorney General Karla G. Sanchez.
The credit-reporting firms will be required to use trained employees to review the documentation consumers submit when they believe there is an error in their files.
If a creditor says its information is correct, an employee at the credit-reporting firm must still look into it and resolve the dispute.
Credit-reporting firms will have to wait 180 days before adding any medical-debt information to consumers’ credit reports
When medical debts are paid by an insurance company, regardless of the time frame, they will have to be removed from the credit report soon after.
Equifax, Experian and TransUnion will change the way they handle errors and list unpaid medical bills as part of the broadest industry overhaul in more than a decade
from Wall Street Journal
March 9, 2015 1:04 a.m. ET
The three biggest companies that collect and disseminate credit information on more than 200 million Americans will change the way they handle errors and list unpaid medical bills as part of the broadest industry overhaul in more than a decade.
Under an agreement set to be announced Monday with New York state, Equifax Information Services LLC, Experian Information Solutions Inc. and TransUnion LLC will be more proactive in resolving disputes over information contained in credit reports—a process federal watchdogs and consumer advocates have long decried as being stacked against individuals.
Most changes will be implemented nationally and will kick in over the next six to 39 months.
The credit-reporting firms will be required to use trained employees to review the documentation consumers submit when they believe there is an error in their files. If a creditor says its information is correct, an employee at the credit-reporting firm must still look into it and resolve the dispute.
Lenders, credit-card issuers and collection agencies report consumers’ debts, balances, late payments and other credit-related information, such as bankruptcies and foreclosures, to the three companies. The data are added to consumers’ reports and are used to calculate their credit scores.
These scores help lenders determine whether to approve applicants for loans and at what interest rates. Credit reports can also have far-reaching effects in other aspects of consumers’ lives, including whether they can rent an apartment, get home or car insurance, or even find a job.
The settlement comes after more than a year of talks between the companies and New York State Attorney General Eric Schneiderman . His office began investigating their practices in 2012 after receiving complaints about errors on state residents’ credit reports and the onerous process to fix them, according to a spokesman for Mr. Schneiderman. The three firms agreed to a countrywide deal to avoid creating two systems for reporting. Such nationwide deals, said the spokesman in an email, are common when individuals are affected across the country rather than in a single state.
The pact “is a good sign that the reporting agencies are finally willing to step up their game and respond to the needs of hardworking consumers and their families,” Mr. Schneiderman wrote in an email statement.
The three reporting firms referred comment to the Consumer Data Industry Association, a Washington-based trade group that represents them.
“This dialogue with a state attorney general [gave] us the chance to have a dialogue with each other and work on details on how we can proactively pursue changes to our practices,” said Stuart Pratt, president and chief executive officer of the CDIA. He added that the credit-reporting firms weren’t found in violation of any law.
The credit-reporting firms for years mostly functioned as a powerful middleman between consumers and lenders or other companies that report credit information. When consumers file a dispute, the credit-reporting firms often convert it into a three-digit code that they send to the lender. If the lender tells the credit-reporting firm that the information on the credit report is accurate the firm typically doesn’t change it, said John Ulzheimer, president of consumer education at CreditSesame.com, a credit-management site.
A report from the Consumer Financial Protection Bureau, released in 2012, found that the bureaus resolved an average of 15% of consumer disputes internally. The remaining 85% were referred to the lenders or creditors.
Unpaid medical bills—an increasingly common type of debt—will also be treated differently on credit reports. Some 43 million Americans have past-due medical debt on their credit reports, according to the CFPB. About 52% of all debt on credit reports is from medical expenses. Collection agencies typically report medical debt to the credit-reporting firms after they receive unpaid bills from hospitals, doctors and other medical professionals. While unpaid bills result from consumers not paying, they can often result when insurance companies delay payments.
Under the new agreement, the credit-reporting firms will have to wait 180 days before adding any medical-debt information to consumers’ credit reports. During that grace period, consumers will also have time to clear up discrepancies and catch up with other unpaid bills. When medical debts are paid by an insurance company, regardless of the time frame, they will have to be removed from the credit report soon after. In contrast, most delinquencies and other negative credit events stay on people’s credit reports for up to seven years.
The credit-reporting industry said it has been taking some steps to promote accuracy on its own. In 2013, the three firms began sending paperwork that consumers could mail in with their disputes to the lenders or other companies to address specific complaints, said Mr. Pratt. He added that Equifax, Experian and TransUnion are already able to accept or deny information from lenders and other companies. But the “formalization of the dialogue” is new, he said.
Credit experts say the settlement marks the biggest reform for the credit-reporting industry since 2003, when a federal law addressed how credit-reporting firms would treat disputes and required giving consumers access to their three credit reports free once every 12 months. The law, the Fair and Accurate Credit Transactions Act, accelerated the dispute process for the consumer when an error was related to fraud or identity theft.
The agreement follows several efforts to make consumers more creditworthy. Last August, Fair Isaac Corp., the firm that created the so-called FICO credit score, announced it would stop including in its newest credit-score version any record of paid or settled bills with collection agencies and would give less weight to unpaid medical bills that are with collection agencies.
The settlement also underscores the growing pressure on credit-reporting firms over the past couple of years to provide more consumer protections and better manage the accuracy of credit reports. The Consumer Financial Protection Bureau began overseeing the credit-reporting industry in 2012 and has been focusing on accuracy issues—including complaints by consumers who say it is difficult to get the errors on the credit reports corrected.
Studies have found that a large number of consumers are affected by credit-report errors. One in five consumers have an error in at least one of their three major credit reports, according to a 2013 Federal Trade Commission study mandated by Congress. Equifax, Experian and TransUnion received some eight million requests disputing information on credit reports in 2011, according to the CFPB. Errors can occur when creditors accidentally send wrong information and can also result from identity theft and fraud, such as when a thief opens a credit-card account in someone else’s name.
From Inside ARM, a collection industry publication
Patrick Lunsford March 3, 2015 (Be the first to respond)
Publicly traded debt buyers Encore Capital Group (NASDAQ: ECPG) and PRA Group (NASDAQ: PRAA) recently announced financial results for the full year 2014 marked by record cash collections and revenues driven by acquisitions and global growth. But both also made special note of specific, ongoing CFPB investigations and the potential financial impact of resolving the actions.
San Diego-based Encore late last week reported that it had crossed the $1 billion line in 2014, bringing in $1.07 billion in revenue last year. It marked a 39 percent increase over 2013 revenues. Gross collections from the portfolio purchasing and recovery business grew 26 percent to $1.61 billion, compared to $1.28 billion in 2013.
Net income was $105 million or $3.83 per share, compared to $77 million or $2.94 per share in 2013.
Encore’s growth last year is directly attributable to several major acquisitions, some of which the company closed or initiated in the second half of 2013. The buying spree also saw significant expansion into international ARM markets.
In June 2013, Encore closed the acquisition of rival public debt buyer Asset Acceptance in a deal valued at $200 million. A month later, Encore closed on its purchase of UK debt buyer Cabot Credit Management for $177 million. Both of the acquisitions were integrated in late 2013 with 2014 being the first full year Encore recognized additional revenues from the deals.
Encore also made some moves in 2014 that resulted in additional revenues recognized last year. It made smaller acquisitions in Latin America and UK, announced a very large deal for another UK-based ARM firm Marlin Financial for $480 million, and bought U.S. ARM firm Atlantic Credit & Finance for nearly $200 million in a deal that closed later in 2014.
“Our diversification has positioned us to be able to deploy capital in a number of different asset classes and geographies around the world in order to maximize expected returns,” said CEO Ken Vecchione in Encore’s earnings release. Vecchione also noted that throughout 2014, the “strategic combinations” drove efficiencies and higher levels of productivity.
After its discussion of 2014 results in its annual report SEC filing and on a conference call with investors, Encore disclosed that it is currently engaged in discussions with the staff of the CFPB regarding practices and controls relating to its debt collection practices that may result in the company reaching “a negotiated settlement or become engaged in litigation.” The company said “It is reasonably possible that we could agree to pay penalties or restitution and could recognize a pretax charge in excess of $35 million.”
Encore noted that discussions with CFPB staff involve various aspects of the company’s practices and that “We agree with the staff on some items under discussion and disagree with the staff on others.” The company noted that it will defend its interpretation of the law.
Encore’s primary U.S. competitor, Norfolk, Va.-based PRA Group, reported its earnings after the market closed Monday. PRA said that it also had a record year in 2014, with record revenue of $881 million, an increase of 20 percent from 2013. Cash collections increased 21 percent to $1.38 billion. But the company shouldn’t be too far off from crossing the $1 billion itself; PRA reported fourth quarter 2014 revenue of $250.7 million.
PRA’s net income for the year increased one percent to $176.5 million, or $3.50 per share.
Global expansion also drove PRA’s results last year. In July 2014, PRA completed a massive transaction to acquire European debt buyer Aktiv Kapital. The deal was valued at $1.3 billion, including the assumption of debt. PRA also expanded its UK operations with the closing of a smaller deal for Pamplona Capital Management.
PRA disclosed that it is the focus of a CFPB investigation in similar fashion to Encore; it was mentioned in the company’s annual report and on a conference call Monday afternoon with investors. PRA noted that its discussions also involved matters on which the company and the Bureau did not see eye-to-eye, saying, “the CFPB has taken positions with respect to legal requirements applicable to debt collection practices with which we disagree.”
PRA said that it has discussed resolution of the investigation “involving possible penalties, restitution in the adoption of new practices and controls and the conduct of our business.” It could also become involved in litigation.
But the PRA disclosure did not make specific mention of an amount that it may have to pay to settle the CFPB matter.
Both Encore and PRA’s CFPB disclosures noted that they are not the only ARM companies being investigated. PRA mentioned specifically that it was responding to a civil investigative demand (CID) from the CFPB and that others had received the same
Please contact us if you received a collection letter on a consumer debt from any of the following entities between April 1, 2014 and September 15, 2014.
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