The Consumer Financial Protection Bureau – What Schools Need to Know

1. The Consumer Financial Protection Bureau – What Schools Need to Know APSCU 2012 Webinar Robert S. Lavet, Powers Pyles Sutter & Verville PC Jonathan S. Joshua, Powers Pyles Sutter & Verville PC March 23, 2012

2. THE CFPB BACKGROUND • Dodd Frank Act signed into law on July 21, 2010. • Under Title X of Dodd Frank, the Bureau of Consumer Financial Protection (“Bureau”), a unit within the Federal Reserve, assumed all consumer financial protection functions of the Federal Reserve, the OCC, the OTS , the FDIC and NCUA.  Section 1061. • Designated transfer date was July 21, 2011.    • Richard Cordray, former AG of Ohio, became Director on January 4, 2012 through controversial recess appointment by President Obama. • Many employees transferred from other regulatory agencies (Federal Reserve, FTC, FDIC, etc.).

3. THE CFPB, cont’d CFPB Structure: Key Divisions • Consumer Engagement and Education • Supervision, Fair Lending and Enforcement • Research, Markets and Regulation • Office of General Counsel • External Affairs

4. CFPB POWERS Rulemaking Supervisory and Examination Enforcement Miscellaneous

5. CFPB POWERS – RULEMAKING Rulemaking Authority • Exclusive rulemaking authority over all Federal consumer financial law. • Designated Federal consumer financial laws include TILA, ECOA, FCRA and the FDCPA. • CFPB may enact rules to prohibit “unfair, deceptive, or abusive acts or practices.” • Expands the unfair and deceptive acts or practices doctrine under FTC Act by adding term “abusive.” • Defines “abusive” as an act or practice that: • materially interferes with ability of consumer to understand financial products. • Takes unreasonable advantage of: • Lack of consumer understanding of risks, costs or conditions. • Inability of consumer to protect interests. • Reasonable reliance by consumer on a covered person to act in consumer’s interest.

6. CFPB POWERS - SUPERVISORY Supervisory Authority • Exclusive supervisory authority including examination authority over large depository institutions ($10B or more in assets) for compliance with federal consumer financial law. • Covers affiliates of large depository institutions and service providers to such entities. • Authority over smaller insured depository institutions (assets less than $10B). • Can require reports but limited examination authority. • Primary authority over smaller depository institution compliance with federal consumer financial law.

7. CFPB POWERS - SUPERVISORY, cont’d • Supervisory Authority over Non-Bank institutions: • Supervisory authority over certain non-bank institutions, who are defined through rulemaking as “larger participants” in a market for other financial products or services. • Supervisory authority based on complaints collected by CFPB that covered person is engaging in conduct that poses risks to consumers. • Supervisory authority over persons who “offer or provide” to a consumer “private education loans” as defined under TILA.

8. CFPB POWERS - ENFORCEMENT CFPB Enforcement Powers: • May take enforcement action to prohibit unfair, deceptive or abusive acts or practices. • In taking enforcement action CFPB can: • Issue subpoenas. • Serve Civil Investigative Demands. • Conduct hearings. • Bring civil actions in state or federal courts against a covered person seeking civil penalty or other relief, including rescission, refund, disgorgement, civil penalties from $5000 to $1M per day.

9. CFPB POWERS – MISCELLANEOUS Consumer Complaints: • Collect, investigate and report consumer complaints. Monitor Markets for Consumer Financial Products and Services. • Collect, research, monitor and publish information on markets for financial products and services to identify risks to consumers and markets. • Publish at least 1 report per year of significant findings of monitoring activities.

10. CFPB AND SCHOOLS:SOURCE Of SUPERVISORY AUTHORITY • CFPB has specific supervisory authority over any non-bank that offers or provide any “private educational loans” as defined in Section 140 of Truth in Lending Act (“TILA”). Section 1024(a)(1)(D). • Schools that extend credit to their students may provide “private education loans” as defined in TILA and Regulation Z. • Schools that assess finance charges on extensions of credit are making “private education loans” unless term limited to 90 days or less. • Schools that do not assess finance charges but provide for repayment term of more than 12 months are making private education loans. • “Merchant exemption” for sellers of goods and services who provide financing plans exclusively to their customers is trumped by specific authority over “private education lenders.” See Sections 1024 and 1027.

11. CFPB AND SCHOOLS:SCOPE Of SUPERVISORY AUTHORITY CFPB Supervisory Authority over Schools that offer or make Private Education Loans • CFPB may require reports and examinations to • Assess compliance with Federal consumer financial law. • Obtain information about activities and compliance systems or procedures. • Detect and assess risks to consumers and to markets for consumer financial products and services. • CFPB Risk-Based Supervision Program • Will exercise authority based on assessment of risks to consumers in relevant product and geographic markets. • Will consider volume of transactions engaged in by school. • Will consider extent to which schools are subject to oversight state regulations.

12. CFPB AND SCHOOLS:SCOPE Of SUPERVISORY AUTHORITY, cont’d • Other Requirements • CFPB may pass rules to facilitate supervision of schools that make education loans. • CFPB may require covered schools to generate, provide or retain certain records. • May require background checks for principals, officers or directors, bonding or other financial requirements. • Service providers to a school that makes private education loans also subject to CFPB authority. • Coordination with State Agencies • CFPB shall consult with state agencies regarding requirements where appropriate. • CFPB may receive referrals from other federal agencies authorized to enforce Federal Consumer Financial Law.

13. CFPB AND SCHOOLS THAT EXTEND CREDIT BUT DO NOT MAKE PRIVATE EDUCATION LOANS • Merchant exemption protects schools that only extend credit to their students where extension of credit not private education loan. • Entities that are covered by merchant exemption are not subject to the CFPB rulemaking, supervisory or enforcement authority unless exception applies. Possible Exceptions to Merchant Exemption • Credit extended significantly exceeds market of educational services value. • School sells the debt owed by its customers except where debt is delinquent or in default. • School regularly extends credit and credit is subject to a finance charge.

14. CFPB AND SCHOOLS THAT EXTEND CREDIT BUT DO NOT MAKE “PRIVATE EDUCATION LOANS,” cont’d • Some commentators arguing that schools extending credit but not making “private education loans” should be designated as larger participants in a financial market. • TICAS comments August 15, 2011. • What about schools that arrange for banks to make loans and then repurchase loans from originating banks. • Exception to merchant exemption could be broadly interpreted by CFPB.

15. PRACTICAL ADVICE FOR SCHOOLSTHAT EXTEND CREDIT • If possible, fit credit extensions within exceptions to “private education loan” definition in Regulation Z. • Review TILA disclosures for compliance. • If “private education loan” 3 sets of disclosures under Subpart F of Regulation Z. • Review State Law Compliance. • If credit extensions are “loans” make sure you have required lender’s licenses. • If online school extends credit - may need licenses in multiple states. • If credit extensions are “credit sales” make sure forms comply with state retail installment laws.

16. PRACTICAL ADVICE FOR SCHOOLSTHAT EXTEND CREDIT, cont’d • If credit extensions are “credit sales” may have to file notification forms with certain states. • If you assess finance charges – comply with applicable state usury laws. • Consumer complaints. • Keep track of any complaints about credit extensions and keep records of responses. • Avoid loan products “designed to fail.” • High anticipated default rates may provoke CFPB scrutiny as abusive product. • Perform due diligence on service providers and monitor their performance and compliance. • Debt collectors • Loan servicers

17. CFPB RFI NOV. 17, 2011 ANDINSTITUTIONAL LOANS CFPB issued RFI seeking data and information on private student loans. RFI questions grouped into four broad categories. • Scope and use of private loans. • Information and shopping for private loans. • Institutional Loans. • Repayment. Institutional Loans Data Points • Comparison with loans offered by non-school lenders. • Funding for institutional loan programs. • How are students deemed eligible. • What types of schools offer institutional loans.

18. WHAT REGULATORS AND CONSUMER GROUPS SAY ABOUT INSTITUTIONAL LOANS MADE BY FOR-PROFIT SCHOOLS CFPB Director Richard Cordray CP: Are you concerned about for-profit colleges?1 • Cordray: “We are concerned about for-profit colleges—and we’ve said this repeatedly—because we’re concerned in general in the consumer finance market that the normal market forces may not be working properly…. • There are also forces at work [in] for-profit colleges where there is no attention to ability to repay—because there are other incentives to making those loans. • We’ve seen instances when some of the for-profit schools are anticipating as much as a 50 percent default rate on loans they make to students. They’re not telling the students that, but they are disclosing that information to their investors. So there is a lot of concern.” The Institute for College Access (TICAS)2 • “Given the abundant evidence that some for-profit schools are offering or arranging private loans to students whom they know will not be able to pay them, and which are non-dischargeable in bankruptcy, we urge the Bureau to act swiftly to stop it.” 1Interview with Campus Progress, March 12, 2012. 2Comments to CFPB RFI dated January 17, 2012

19. WHAT REGULATORS AND CONSUMER GROUPS SAY ABOUT INSTITUTIONAL LOANS AT FOR-PROFIT SCHOOLS, cont’d National Consumer Law Center3 • “Federal and state regulators should review institutional loan programs for possible violations of unfair and deceptive consumer protection laws.” National Consumer Law Center4 “As documented in NCLS’s January 2011 report, the planned default rate on these school loan products are shockingly high.”…The CFPB should examine these loans closely for unfair, deceptive and abusive acts or practices (UDAAP).” AMERICANS FOR FINANCIAL REFORM 5 “In its ongoing investigation of the for-profit college industry, the Senate Health, Education, Lender and Pensions Committee has found expected default or write-off rates for institutional (loans at for-profit colleges in the 40 to 80 percent range and institutional loan interest rates as high as 18 percent. Such predatory lending cries out for attention and action by the Bureau.” 3NCLS Report - Piling it On: The Growth of Proprietary School Loans and the Consequences for Students, January 2011. 4NCLS comments to CFPB RFI, January 17, 2012. 5Comments to CFPB dated, January 7, 2012.

20. CFPB REPORT ON PRIVATE LOANS • CFPB and Department of Education must submit Report on private education loans and private educational lenders before July 21, 2012. • CFPB Director and Secretary of Education to consult with FTC and Attorney General on report.

21. CFPB REPORT ON PRIVATE LOANS, cont’d • Report to examine: • characteristics of borrowers. • including type of institution of higher education they attend. • growth and changes in market. • characteristics of lenders. • including whether creditors are for-profit institutions of high education. • terms, conditions and pricing of private education loans. • underwriting criteria including use of CDR. • Adequacy of existing information and data to assess fair lending compliance. • statutory or legislative recommendations to improve consumer protection. • Information from RFI will be used in developing the Report. • Predictions on Content of Report.

22. CFPB STUDENT LOAN OMBUDSMAN • Private Education Loan Ombudsman established within CFPB. • Rohit Chopra appointed – former McKinsey consultant. • Ombudsman to receive, review and attempt to resolve complaints from private education loan borrowers in collaboration with Department of Education, schools, lenders, and other participants in private education loan programs. • Establish MOU with Department of Education Loan Ombudsman. • Compile and analyze data on borrower complaints. • Submit annual report to Treasury Secretary and Secretary of Education.

23. STUDENT LOAN COMPLAINT SYSTEM • On March 1st, the Consumer Financial Protection Bureau (CFPB) expanded its online consumer complaint program to accept complaints about private student loans. See, http://www.consumerfinance.gov/complaint/

24. STUDENT LOAN COMPLAINT SYSTEM, cont’d

25. STUDENT LOAN COMPLAINT SYSTEM, cont’d • Complaints about federal loans are referred to the Department of Education’s online complaint system. • For private student loans, the complaining student enters a free-form description of the complaint and is then asked to categorize the complaint as relating to: “Getting a Loan,” “Repaying your loan,” or “Problems when you are unable to pay.”

26. STUDENT LOAN COMPLAINT SYSTEM, cont’d • Some of the items included in these categories are troubling. For example, in the complaint category related to “getting a loan,” students are invited to complain about “financial aid services” and “recruiting,” although such issues aren’t directly related to getting a loan and even though the CFPB has no jurisdiction over such school functions.

27. STUDENT LOAN COMPLAINT SYSTEM, cont’d • The complaint form also asks the student if the issue involves discrimination – students may allege discrimination simply due to the prominence of that option and because students may believe that discrimination claims will be taken more seriously.

28. STUDENT LOAN COMPLAINT SYSTEM, cont’d • Even if a complaint relates solely to a private student loan lender and is not about a school, the CFPB nevertheless requires complaining students to enter the name and location of the school:

29. STUDENT LOAN COMPLAINT SYSTEM, cont’d • The CFPB then prompts the complaining student to enter a free-form description “what would be a fair resolution of your issue?” • Allowing a free-form response may raise students’ expectations and make it harder to resolve complaints on any other terms.

30. STUDENT LOAN COMPLAINT SYSTEM, cont’d • Complaints are currently being shared with the Federal Trade Commission and state Attorneys General. • The CFPB is developing a mandatory complaint resolution system for the major student loan providers and loan servicing companies. • Schools without access to the CFPB’s dispute resolution system will be unable to find out about the nature or volume of student complaints or to inform the CFPB if the complaints lack merit or are resolved.

31. Thank You Robert S. Lavet Powers Pyles Sutter & Verville PC Rob.Lavet@ppsv.com 202-872-6747 Jonathan S. Joshua Powers Pyles Sutter & Verville PC Jonathan.Joshua@ppsv.com 202-872-6745

32. DISCLAIMER This presentation is for informational purposes only and does not provide legal services or advice. Use of this information does not create an attorney-client relationship. You should not act, or refrain from acting, on the basis of information contained herein without seeking additional legal counsel regarding your own situation.