On September 29, 2002, the Consumer Financial Protection Bureau (“CFPB”) filed a complaint against online lender MoneyLion Technologies, Inc, and several dozen of its subsidiaries (collectively, “MoneyLion”), alleging violations of the Military Lending Act (“MLA).  The complaint alleges that MoneyLion (i) overcharged servicemember and their dependents by imposing fees that, together with stated interest rates, exceeded the MLA’s 36% Military Annual Percentage Rate (“MAPR”), (ii) failed to provide required disclosures, and (iii) included arbitration clauses prohibited by the MLA.  The Bureau further alleges that servicemembers became “trapped” in MoneyLion’s membership program after taking out their loans, and were unable to cancel their membership – which required the payment of monthly fees – without first paying off their loans.

According to the CFPB, MoneyLion has offered loans since 2017 that consumers can access through its website and mobile app by enrolling in membership programs and paying monthly membership fees.  The CFPB alleges MoneyLion told consumers over the course of several years that they had the right to cancel their memberships for any reason even though they had a policy of prohibiting consumers with unpaid loan balances from canceling their memberships.  Beyond that, the complaint alleges that even after loan payoff, some consumers were unable to cancel their memberships until they had paid past, unpaid membership fees; that consumers were prohibited from paying off their loans using funds from MoneyLion investment accounts; and that MoneyLion sometimes refused to honor requests to stop ACH withdrawals of membership fees even after memberships were cancelled. 

The MLA and its implementing regulations contain protections for servicemembers and their dependents identified as “covered borrowers” at origination of certain credit transactions, including installment loans of the kind at issue in this case.  These protections include the maximum MAPR, a prohibition against requiring arbitration, and mandatory loan disclosures.  10 U.S.C. § 987(b), (c), (e)(3); 32 C.F.R. §§ 232.4(b), 232.6, 232.8(c).  The complaint alleges violations of these MLA limits and requirements.

As detailed in the complaint, the Bureau alleges that the monthly membership fees charged by MoneyLion– generally $19.99 but as high as $29.00 –pushed the MAPR of the installment loans, offered at APRs between 5.9% and 29.99%, above the MLA’s 36% MAPR threshold.  Under the MLA, participation fees are generally included in the calculation of the MAPR even if that charge would be excluded from the finance charge under Regulation Z.  32 C.F.R. § 232.4(c)(1)(iv). 

With regard to arbitration, the Bureau alleges that the loan contracts used by MoneyLion from the fall of 2017 until at least August 2019 required borrowers to submit to arbitration in the case of a dispute, without exception for covered borrowers, in violation of 10 U.S.C. § 987(e)(3) and 32 C.F.R. § 232.8(c).  The Bureau alleges that, during that same time period, MoneyLion failed to make certain disclosures before or at the time a covered borrower became obligated on a loan, including mandatory disclosure of the MAPR.  Under the MLA, creditors are required to disclose a “Statement of the MAPR,” advising that federal law provides protections to members of the Armed Forces and their dependents relating to extensions of consumer credit, and that the cost of that credit may not exceed an APR of 36%, including certain costs and fees.  This disclosure must be provided in writing in a form the borrower can keep and must also be provided orally (in person or through a toll-free number).  10 U.S.C. § 987(c), 32 C.F.R. § 232.6.

The complaint also alleges causes of action under the Consumer Financial Protection Act of 2010 (“CFPA”), including deceptive acts and practices relating to  loan balances and membership fees and restrictions on membership cancellation, unfair acts and practices relating to the charging of membership fees after consumer requests to cancel membership, and abusive acts and practices relating to membership-program loans.  12 U.S.C. §§ 5531, 5536(a).

In announcing the action against MoneyLion, CFPB Director Rohit Chopra said, “MoneyLion targeted military families by illegally extracting fees and making it difficult to cancel monthly subscriptions.  Companies are breaking the law when they require monthly membership fees to obtain loans and then create barriers to canceling those memberships.”

The CFPB is seeking monetary relief, disgorgement or compensation to covered borrowers for unjust enrichment, civil money penalties, and a permanent injunction barring the practices that allegedly violate the MLA and CFPA.  According to the CFPB, this is its fourth MLA enforcement action in the past two years.

On September 29, the Consumer Financial Protection Bureau (CFPB or Bureau) released a special edition of its Supervisory Highlights, focusing on student loan servicing. The report contained findings on federal student loan servicing that echo many recent public comments by the Bureau, but more notably, this edition of Supervisory Highlights also focused heavily on loans made by schools themselves, and the CFPB simultaneously announced that it was updating its examination manual and would be conducting examinations of schools that make their own loans to students.

The Supervisory Highlights follows the CFPB’s announcement earlier this year that it would examine the operations of post-secondary schools that extend private loans directly to students. CFPB Director Rohit Chopra explained the decision to undertake the review at the time by stating, “Schools that offer students loans to attend their classes have a lot of power over their students’ education and financial future. It’s time to open up the books on institutional student lending to ensure all students with private student loans are not harmed by illegal practices.”

Among other findings from the report, the CFPB found:

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• When higher education institutions extend credit, the dual role of lender and educator provides institutions with a range of collection tactics that leverage their unique relationship with the student.

• Some postsecondary institutions employ the tactic of withholding transcripts for delinquent borrowers.

• Students who cannot obtain transcripts can be locked out of future higher education and certain job opportunities. For these reasons, supervisors have determined this tactic to be abusive under the Consumer Financial Protection Act.

• Income share agreements, which the Bureau unambiguously refers to as student loans, may result in borrowers realizing very large APRs or prepayment penalties that may be illegal under the Truth in Lending Act (TILA) or state usury laws.

Simultaneously with issuing the Supervisory Highlights, the CFPB updated its Education Loan Examination Procedures. The Bureau explained the need for the update as follows:

• The Consumer Financial Protection Act provides it the authority to supervise nonbanks that offer private student loans, including post-secondary institutions.

• To determine which institutions are subject to the CFPB’s authority, the Consumer Financial Protection Act references the definition found in Section 140 of TILA.

• This TILA definition varies from the one used in Regulation Z, which was the definition referred to in the previous manual.

• The new version has been updated to inform examiners that the Bureau will be using TILA’s statutory definition of private education loan for the purposes of exercising its authority.

• Specifically, the new manual instructs examiners that the CFPB may exercise its supervisory authority over an institution that extends credit expressly for postsecondary educational expenses so long as that credit is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965, and is not an open-ended consumer credit plan or secured by real property.

For schools that have their own credit programs, including tuition-payment plans and other deferred-payment options that may fall under Regulation Z’s definition of “private education loans,” the CFPB is sending the clearest of signals that it intends to devote significant attention to those programs, including the collection practices associated with them. Now would definitely be an opportune time for schools to assess their institutional loan programs.

It’s clear: the CFPB is using the FCRA to advance its agenda. The Bureau wants to create a consumer-friendly credit reporting precedent and it is using FCRA-related lawsuits and enforcement actions to get it.

It all started with the Bureau’s recent instruction to remove some medical debts from consumer credit reports, argues Chris Capurso, Financial Services Associate, Troutman Pepper, in a recent episode of the Troutman Pepper podcast, Keeping up with the Bureau.  

Medical debt is the largest reported trade line by third-party debt collectors, accounting for 58% of all tradelines. Removing medical debt means creditors and lenders are not getting a full picture of a consumer’s true credit capacity.  

The CFPB is also focused on changing the data that is reported to the credit bureaus, telling credit card companies that they are “not reporting enough historical data,” says Ethan Ostroff, Partner, Troutman Pepper, adding that the consent order with Hyundai Capital America is also a clear indication of the CFPB’s intent.  

All of this adds up to more liability. What can data furnishers do to prepare for increased scrutiny under the FCRA? 

1. Train Your Staff on the Distinction between Legal and Factual Disputes

“Historically, there has been a distinction made by some courts between a legal dispute and a factual dispute,” says Derek Schwahn, Associate Attorney, Troutman Pepper. Furnishers were often able to rely on this distinction in order to get dismissals by categorizing a dispute as legal instead of factual. If a dispute is categorized as legal, Schwahn says, the furnisher can argue that they do not have liability under the FCRA to re-investigate the dispute. 

The CFPB, through amicus briefs filed in the Second, Ninth, and Eleventh Circuits, has taken the position that “nowhere in the FCRA is a distinction made between a legal dispute and a factual dispute,” explains Schwahn. If the case law is overturned, furnishers will need to shore up their dispute review process even further, including training their staff to understand the legal issues involved in a credit bureau dispute, not just comparing documents.  

2. Focus on Data Accuracy 

As seen in the Hyundai consent order, the CFPB is focused on the accurate reporting of the first date of delinquency. The first date of delinquency is “one of the most important data points” when it comes to furnishing data to the credit bureaus, according to Alan Wingfield, Consumer Financial Services Partner, Troutman Pepper. The first date of delinquency is required to be reported under the FCRA, as it controls the age of the tradelines and when they age off consumer credit reports.  

3. Study the CFPB’s Exam Expectations 

The FCRA module in the CFPB’s examination manual specifically explains that the CFPB is assessing adequacy, accuracy, and integrity. Wingfield explains, if the CFPB visits and “you don’t have a policy procedure, or it hasn’t been updated recently,” that’s going to be an “aggravating factor,” if there are other findings.

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The CFPB, in a notice published in the Federal Register on September 27, 2022, announced that it was rescinding its No-Action Letter and Compliance Assistance Sandbox policies (Policies).  The rescission was effective on September 30, 2022.

In the notice, the CFPB stated, “The CFPB determined that the Policies do not advance their stated objective of facilitation consumer-beneficial innovation.  The CFPB also determined that the existing Policies failed to meet appropriate standards for transparency and stakeholder participation.  The CFPB is developing new approaches to facilitate the development of new products and services.”

The CFPB’s rescission of the Policies is not surprising.  The Federal Register notice follows the CFPB’s announcement in a May 2022 blog post that as part of a new approach to innovation in consumer finance, it was replacing its Office of Innovation and Operation Catalyst with a new office, the Office of Competition and Innovation.  In the blog post, the CFPB called the Policies “ineffective.”  Despite the clear implication that the Policies were being eliminated at that time, a CFPB spokesperson indicated that the CFPB had not yet rescinded the Policies and was continuing to take new applications and processing previously submitted applications under the Policies.

The CFPB stated in the notice that it will continue to accept and process requests under its Trial Disclosure Policy and that entities that have made submissions under the rescinded Policies will be notified if the CFPB intends to take additional steps on such submissions.  The notice does not address the status of no-action letters or sandbox approvals previously issued under the Policies.  Law360 has reported that it received a statement from a CFPB spokesperson indicating that the notice does not extinguish previously approved and currently active letters and approvals.

Hi all, Chris Deatherage here, the newly-deemed Duke of the TCPAWorld. A lot of you folks know me from the industry, but don’t worry I’m not going to bore you with my background or life story. Instead, I’m going to bore you with the following disclaimer:

This is NOT legal advice and does NOT establish an attorney-client relationship between you, me, or the Troutman Firm. The following is only my opinion on the subject matter discussed.

Now that the disclaimer is out of the way, I bet you’re asking yourself why you should bother reading this post. The answer to that is simple. I’m about to discuss everyone’s favorite 15 letter word, indemnification. Have I piqued your interest? Well, hopefully by the end of this post I’ll have convinced you that an indemnification clause is both a vital contractual provision and worthless garbage… I swear those aren’t contradictory statements. Just stick with me as we briefly explore the struggle between contractual provisions trying to account for hypothetical situations and the harsh realities of the business world. By the end I promise it will make more sense.

First, let’s talk about why indemnification clauses are vital and necessary contract provisions, especially in TCPAWorld. So, what is an indemnification clause anyway? That’s a complicated question because they come in many forms, but at their core indemnification clauses are essentially one entity telling another “Hey, if I screw up and damage you, I’ve got your back.”

In a place like TCPAWorld, where your vendors and affiliates can expose you to bankruptcy levels of damages, it’s easy to see why having an indemnification clause in your contract is not just important but necessary. The clause is an effective tool to potentially mitigate damages you may face as a result of the actions of others. An effective indemnification clause should theoretically prevent arguments and finger pointing between the contracted parties by making it clear under what circumstances indemnification obligations are triggered and the duties of the indemnifying party.

You notice how I used words like “potentially” and “theoretically” in the previous paragraph? That’s because indemnification clauses, like many contract provisions, are just an agreement between two parties to act in a certain way after a hypothetical scenario. There is no guarantee the clause will actually work. Why is that? Let’s talk about some harsh realities:

Harsh reality #1: an indemnification clause is only between you and the other contracted party. If you’re being sued, the judge, the plaintiff, and the jury do NOT care if you have an indemnification clause in your agreement. Your indemnification clause is totally irrelevant to the plaintiff’s claims because they aren’t a party to your contract.

Harsh reality #2: your indemnification clause is only as good as the indemnifying party. If the indemnifying party exposes you to $100 million in damages but operates out of their mother’s basement and only has $10,000 to their name, how are they going to indemnify you? What if the indemnifying party refuses to indemnify you? Sure, you can sue them to enforce the indemnification, but how much will that cost and how long will it take? Meanwhile you’re still facing down a $100 million judgment.

Harsh reality #3: there are some things that you can’t be indemnified for. For instance, if a regulator shuts you down and forbids you from ever operating again in the industry, how can you be indemnified for that?

Those are some scary scenarios, the stuff of nightmares really, but they can happen. In any of the above three scenarios an indemnification clause is rendered worthless.

Now let’s circle back around. Remember how I swore it’s not contradictory to say indemnification clauses are both vital and worthless? That’s because the clause is an incredibly effective tool when the indemnifying party is trustworthy and capable of indemnifying. It’s worthless when the indemnifying party is unreliable or incapable of indemnifying. So, what are you to do? It’s not always possible or practical to know when another party is trustworthy or of means. Thankfully, the answer to that is also simple. You just have to remember the following:

An indemnification clause is NOT A SUBSITUTE for proper vetting and monitoring of parties you’re contracting with.

To help illustrate this point, let’s use a movie almost no one remembers. Imagine an asteroid (TCPA class action) is heading towards Earth (you). Proper compliance policies that involve not just vetting incoming partners but also monitoring existing partners are like setting up an array of high-power telescopes. These effective and efficient tools will allow you to see the asteroid coming well in advance so that you can take corrective action and avoid a catastrophic impact. In contrast, an indemnification clause is like a hail Mary. The asteroid caught you off guard, impact is imminent, and your only remaining option is to call Bruce Willis. Hopefully Bruce can plant the bomb and pull this off because otherwise you’re screwed.

Well, that’s it for my post on indemnification. I hope you all have a better idea of what role indemnification clauses may have in your contracting and risk management strategy. Remember, this is all my opinion and should not be construed as legal advice. If you have questions, I’m sure the Czar would love to talk. Until next time TCPAWorld.

On September 26, Representative French Hill (R-AR) introduced new legislation, H.R. 8985, also known as the Credit Access and Inclusion Act of 2022, to amend the Fair Credit Reporting Act and allow payment information for utility bills and phone payments to be furnished to credit reporting agencies to help consumers raise their credit scores. This is an effort to address an issue highlighted by the CFPB Office of Research that estimated 26 million Americans are “credit invisible,” meaning they do not have a credit history with any of the three national credit reporting agencies.

In a press release, Representative Hill harkened back to his roots to explain the need for the proposed legislation. “As a former community banker, I understand how access to credit can open doors to opportunities like homeownership, yet too many central Arkansans are denied affordable credit opportunities because they don’t have a traditional credit payment history. My bill levels the playing field by allowing for additional data, such as utility and phone payments, to be reported to determine credit worthiness so that millions of hardworking Americans get credit for bills they are already paying.”

H.R. 8985 has been referred to the House Committee on Financial Services for consideration. A companion bill, S.2417, has been introduced in the Senate by Senator Tim Scott (R-SC) and Senator Joe Manchin (D-WV).

The Mortgage Bankers Association indicated its support for the bill, stating: “MBA applauds Representative French Hill for the introduction of the Credit Access and Inclusion Act which would promote the use of rental, utility, and telecommunications data to supplement traditional data provided to consumer reporting agencies. Underserved borrowers often have less experience using traditional financial products, creating barriers to entry for many consumers during the home purchase application process. The responsible utilization of alternative data, such as rental, utility, and telecommunications payment histories, will help safely expand access to credit to underserved borrowers.” The bill is also supported by the U.S. Chamber of Commerce, National Association of REALTORS, and The National Association of Hispanic Real Estate Professionals.

We will continue to track H.R. 8985 as it moves through the legislative process.

For a lot of lenders, especially newer fintechs, who have spent the last two years originating loans and lines of credit, the obvious collections strategy solution to the challenge of an influx of charged-off or delinquent accounts is to use third-party collections agencies to handle delinquent and charged-off accounts.

How you vet those vendors and how you manage those vendor relationships will make or break your collections strategy. Proper management of those third-party collections vendors is critical to a successful recovery strategy, and it mitigates the risks associated with collecting on consumer debt.

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Consumers are leveraging credit and loans at record levels, and you might not be prepared for the record increase in originations leading to a major increase in delinquent and charged-off accounts. Plus, consumers are still facing challenges like lingering inflation and economic uncertainty, and the CFPB has been extremely active and vocal about debt collection regulation, which makes collecting delinquent and charged-off accounts risky.

Bringing in a third-party vendor can help solve some challenges, but don’t forget that outsourcing your collections doesn’t necessarily reduce your risk.

Outsourcing work to a service provider with dubious practices could invite a supervisory review, which could lead to serious reputational, if not financial and legal, damage if enforcement action is taken. The CFPB plans to use its supervisory authority to examine any nonbank financial company that poses a risk to consumers, so it is imperative that companies who previously believed they were not subject to the oversight of the CFPB start preparing now.

Read on to find out how to improve (or build) a robust vendor management program:

What potential collections vendor warning signs should you look for before you sign the contract?

Finding a good vendor can be a real challenge, especially for newer collections & recovery departments. Be on the lookout for these early red flags from your potential vendor partners:

1. Inauthenticity. Honesty is key when it comes to maintaining a good relationship with your vendors, and the longer you can maintain those relationships, the easier your job will be. If your potential vendor starts their conversations with a sales pitch before even getting to know you, that’s a red flag.

2. Lack of Research. Just like at any job interview, you want the candidate to show that they’ve done their homework. Especially today, when it’s incredibly easy to reach out via LinkedIn with mass sales templates, you’ll want to stick with vendors who know what problems you’re trying to solve, and who are intentional in the way they reach out to you.

3. They’re too eager. No one wants to be bombarded with sales emails. If you’ve made it clear to the sales team at a potential vendor that you’re not quite ready to discuss a partnership, but they keep reaching out, that’s a red flag.

4. Lack of Preparation. Your vendor should have subject matter experts on your discovery calls, since it’s likely the salesperson doesn’t have all the industry knowledge you need. If your discovery calls don’t include the right people from their team, it’s the sign of a potentially rocky relationship down the road.

Which key questions should you ask potential third-party agency partners?

You can mitigate a lot of risk if you are picky when choosing your partners. Regulators expect proper due diligence before you select a partner.

Make sure to get good answers to the following 5 questions when vetting prospective partners:

1. What type of experience do they have working with the type of account that is being outsourced?

2. How familiar are they with the laws that regulate the particular type of debt they will be working with?

3. How well-documented are their policies and procedures?

4. How well is their staff trained?

5. What types of controls are in place to ensure they are compliant with and continue to comply with not just the laws and regulations, but with our contractual obligations?

For more, read Looking for a New Vendor? These 4 Red Flags Should Stop You in Your Tracks and Creditors: Can You Outsource Risk by Outsourcing Collections? Not Anymore.

How to manage your vendor / partner relationship for success

It can be tough to strike a good vendor management balance. Creditors who are too prescriptive can damage their relationships with vendors. Those who are not prescriptive enough can find themselves at risk for regulatory or reputational damage. But maintaining good relationships with your third-party vendors is key to a successful collections & recovery strategy. Here are four best practices for managing those vendors once they’re on board:

1. Communicate expectations. Don’t just hand over your MSA/SOW/SLA and expect your agency vendors to abide by your terms. Collections & recovery executives should work with their vendors to create those work documents, and collections & recovery vendors should be able to understand performance and compliance expectations – and whether or not they’re meeting those expectations – at a glance.

2. Use their expertise. There’s a reason you’re seeking a third-party agency vendor: you need their expertise. It’s a mistake to approach the relationship like you “know it all.”

3. Connect the experts. Connecting business units and SMEs can help you make sure that nothing is lost in translation. Some problems can only be solved by communication between the affected business units.

4. Get back to on-site visits and audits. After more than two years of a global pandemic and a major shift to remote work, many companies have fallen out of the habit. But, on-site audits allow you to gauge your agency’s preparedness in a way remote audits do not.

For more details about vendor management best practices, check out 4 Vendor Management Best Practices for Collections and Recovery.

How to plan for successful third-party agency audits

Once you’ve set those expectations, it’s time to audit your third-party agency thoroughly to ensure those expectations are being met. Audit frequency will vary, but you need to plan to be on-site for an audit at least yearly, and remember: audits don’t have to be adversarial. Both parties should go into an audit with open minds. Your vendor’s success is your success, so here are three ways collections & recovery vendors can support their partners in advance of an audit:

1. Provide a specific agenda and checklist based on your contract. All of your expectations should be laid out in a manner that allows a quick, efficient audit.

2. Give your vendor partner adequate time to prepare. Sending out the agenda and expectations with only a few days’ or a week’s notice is a recipe for disaster. Your vendor partner needs time to get all of their documentation together. And since many companies are allowing remote or hybrid work schedules, they may need time to get the correct staff scheduled for your visit. Each contract should specify how much notification is required prior to an audit based on the vendor’s risk calculation.

3. Highlight new policies and regulations. Call out anything that is new since your last vendor audit to give your partner ample time to gather evidence that they are applying those policies in their operations. 

If you’ve provided adequate support, the audit should go smoothly. If they don’t, that could be a warning sign. Here are two MAJOR major audit warning signs that you may need a new vendor partner: 

1. They’re disorganized.  Being organized and prepared doesn’t guarantee that they are following your policies and procedures as part of their normal operations, but it’s a good sign. Conversely, if your partner is disorganized during the audit, it might signal deeper problems. Consider a deeper look into their operations.

2. You’re surprised by a finding. Your pre-audit agenda and checklist should be enough for your vendor partner to discover any weaknesses or potential findings before the audit. They should alert you to them as soon as possible, which also sets aside time for remediation. 

Bonus material: 

4 Best Practices to Optimize Collections & Recovery Vendor Audits.

You can also hear from experts at vendor management in our three part on-demand webinar series, The Vendor Management Masterclass. 

The Vendor Management Masterclass I

The Vendor Management Masterclass II

The Vendor Management Masterclass III

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