CFPB Orders Large Money Center Bank to Pay $3.7 Billion: The Issues and What Banks Should Know About the Order

Background:

On December 20, 2022, a large national bank (“Bank”) agreed to a wide-ranging Consent Order with the Consumer Financial Protection Bureau (“CFPB”), under which it will pay $3.7 billion in remediation and civil penalties to address issues regarding auto loans, mortgage loans and deposit accounts. Of the non-monetary aspects of the order, the Bank agreed to numerous material changes in their operations that other banks should understand, including: (1) for perceived fraudulent account transactions, to issue an item-level hold or other restraint less than a full freeze of the deposit account when reasonable; (2) to maintain a policy and practice to ensure that the unused portion of a GAP contract is refunded to the borrower, regardless of state law; and (3) to not charge Authorized-Positive Overdraft Fees on debit card purchases or ATM withdrawals.

Notably, the Order comes at a time when the CFPB faces an existential crisis of sorts in light of the US Court of Appeals for the Fifth Circuit’s decision holding that the CFPB’s funding structure is unconstitutional, which the CFPB has since appealed to the Supreme Court. See Community Financial Services Association of America, et al. v. CFPB, et al., No. 22-448 (Pet. Filed Nov. 14, 2022). It does not appear the Bank sought to challenge or delay the CFPB’s enforcement action based upon the pending constitutional challenges; this is at a time when other banks and entities have been raising the Community Financial decision to challenge CFPB actions. 

The Full Story:

The Bank has previously entered into Consent Orders with the CFPB in 2016 (relating to student loans) and in 2018 (relating to mortgage and auto lending). The 2022 Consent Order alleges that the Bank’s acts and practices, in three distinct categories of their operations, were “unfair, deceptive, or abusive” in violation of the Consumer Financial Protection Act, 12 U.S.C. §§ 5536(a)(1)(B), 5531(c)(1) (the “CFPA”). Specifically, the Order notes the following alleged improper conduct by the Bank:

Alleged Automobile Loan Servicing Acts and Practices

1. Incorrectly applying or processing payments for many borrowers’ auto-loan payments. These alleged failures included failing to correctly apply principal-only payments to past due loan amounts, failing to apply certain borrower payments in a way described on the Bank’s website, failing to post certain borrower payments in a timely fashion, and failing to ensure that certain automatic payment amounts reflected the amount owed and due.
2. Assessing borrowers erroneous fees and interest, such as by incorrectly entering the effective date of a payment deferment, which resulted in improper late fees.
3. Repossessing vehicles despite the customer making a payment or entering into an agreement to forestall the repossession, and failing to provide legally required information to certain borrowers.
4. Failing to sell a repossessed vehicle in a commercially reasonable amount of time.
5. Failing to ensure that unearned GAP¹ fees were refunded.

Alleged Mortgage Servicing Acts and Practices

1. Overstating attorneys’ fees in loan-modification applications, sometimes causing otherwise qualified borrowers not to be offered the modification.
2. Erroneously identifying certain borrowers as deceased, and, therefore, not assessing their eligibility for no-application modifications.
3. Erroneously assessing other charges and fees.

Alleged Consumer Deposit Account Acts and Practices

1. Freezing consumers’ entire deposit account and other accounts when the Bank believed a fraudulent deposit was made.
2. Failing to waive monthly service fees, contrary to the Bank’s disclosures.
3. Assessing “Authorized-Positive Overdraft Fees” on debit card purchases and ATM withdrawals.

In each case the Bureau alleged that the Bank’s practices were “unfair.” A practice is unfair if the practice “causes or is likely to cause consumers substantial injury that is not reasonably avoidable and if the substantial injury is not outweighed by countervailing benefits to consumers or to competition.” Banks should consider whether their practices could be considered “unfair” under this standard.

The Settlement Terms:

In exchange for a release, the Bank agreed to $3.7 billion in restitution and civil penalties—$1.7 billion of which will go to the Bureau’s Civil Penalty Fund. In addition, as noted above, the Bank agreed to ensure that any unused portion of a GAP contract that it finances or acquires is refunded to the borrower, issue item-level and not whole-account holds where reasonable when fraud is suspected, and to not charge Authorized-Positive Overdraft Fees on debit card purchases or ATM withdrawals. Banks should consider whether they engage in any of these practices.

Key Takeaways Other Financial Institutions and Covered Parties Should Understand:

The CFPB is continually identifying practices that it deems to be “unfair, deceptive, or abusive” in violation of the CFPA. The Consent Order highlights the CFPB’s continued focus on:

• Authorized-Positive Overdraft Fees;
• policies regarding the freezing of deposit accounts versus item-level holds in the event of suspected fraudulent deposits;
• refunds of unused portions of GAP contracts; and
• failures of technology systems, internal controls, processes or training in connection with loan servicing, to the detriment of consumers.

Consent Orders like the one as well as policy statements and press releases from the CFPB, are good indicators of what issues the CFPB is currently targeting (and what other banking regulators could conceivably target). Regular consultation with legal counsel on the CFPB’s current and upcoming areas of focus is critical to staying ahead of the regulatory curve.

 

¹ Guaranteed Asset Protection (GAP) contracts are a type of debt cancellation contract that generally relieve the borrower from the obligation to pay the remaining amount of the borrower’s loan. With respect to auto loans, GAP contracts generally relieve the borrower from the obligation to pay the remaining amount of the borrower’s loan on the vehicle above the vehicle’s depreciated value in the case of a major accident or theft.