On this episode of the Ad Law Access Podcast, partner Alysa Hutnik and special counsel Donnelly McDowell discuss consumer financial protection, fintech, financial services, and the consumer protection issues that the CFPB and FTC have broad discretion over.

For more information on consumer financial protection and other topics, visit:

• Taskforce on Federal Consumer Financial Law Report
• Kelley Drye’s Consumer Financial Protection Practice Page
• Advertising and Privacy Law Resource Center
• Ad Law Access Blog
• Ad Law News and Views Newsletter
• Kelley Drye’s Advertising and Marketing Practice

Crowdfunding is the process by which companies and individuals raise money from the public to fund new products, projects, or individual needs. Panelists discussed the responsibility platforms bear to shape consumer understanding of crowdfunding campaigns through adequate disclosure and communication.

The following expands on these themes and provides key takeaways from the forum:

P2P Payments as Transformational

Panelists (see list here) described the consumer benefits of P2P payments as enormous. The benefits go beyond splitting the dinner check or paying the babysitter with a few taps on a smart phone. P2P payments have expanded financial access to underserved communities, in particular, to underbanked and non-banked consumers. For example, P2P platforms enable instantaneous remittance payments or the wiring of funds, and remove obstacles in conventional banking such as delayed payment transfers and overdrafts.

And P2P platforms are not just a thing for millennials. Studies report that while millennials are conducting approximately 11 transactions a year, 45-54 year olds are conducting about 4 transactions and the over 65 crowd about 3.¹

Fraud Risk

P2P payment systems collect more consumer data beyond the traditional credit card services. Therefore, panelists believe these platforms may be disproportionately targeted by sophisticated hackers. As one panelist aptly noted: “The mode is new, but the scams are old.” One positive attribute about Fintech companies is their typical approach to data security: they are extremely good at authentication and many view themselves first as security companies. Indeed, the weakest security points in P2P payments may not be in the platform, but the consumers using the services and security vulnerabilities in their devices (for more on IoT security, see here). In response, panelists noted the importance of appropriate and reasonable data security protocols to protect consumer data in this space.

Regulatory Risk

Panelists noted the high barriers to entry into this market. This is due to the various state licensing requirements for money transmission, and to the consumer protection issues raised by this type of mobile platform. Depending on the platform type, different sets of regulation may apply, including the following:

• Banking regulations and money transfer regulations;
• Electronic Funds Transfer (EFT) Act, Reg E, requiring that financial institutions and any third party involved in EFT services disclose specific information to consumers before engaging in any transactions;
• Truth in Lending Act and Reg Z, requiring that creditors disclose clearly and conspicuously in writing the terms of the legal obligation between the parties;
• Section 5, Federal Trade Commission Act, prohibition against unfair or deceptive acts and practices; and
• Dodd-Frank’s prohibition against unfair, deceptive, and abusive acts and practices.

There was discussion among the panelists on how to communicate effectively to consumers the information collected and stored by these platform. As a cautionary tale, panelists noted the Texas Attorney General action in May 2016 against PayPal involving its Venmo mobile app. The app allegedly failed to clearly disclose how consumers’ transactions and interactions with other users would be shared, and misrepresented that communications from Venmo were actually from particular Venmo users. As a result, consumers may have publically exposed private information regarding their payments.

Crowdfunding

Crowdfunding is an evolving method of raising capital that has been used to raise funds through the Internet for a variety of projects.²

There are four basic types of crowdfunding: donation-based (e.g., GoFundMe, etc.); rewards-based (e.g., Kickstarter); equity-based (e.g., Crowdfunder.com); and debt-based (e.g., LendingClub). Equity and debt-based crowdfunding offerings are considered securities and subject to regulation by the SEC.³ Donation and rewards-based crowdfunding generally are not regulated. Hence the FTC’s heightened interest in ensuring these sites are not engaging in unfair or deceptive acts or practices in violation of Section 5 of the FTC Act.

Indeed, the FTC settled its first case in June 2015 against a creator of a crowdfunding project, Erik Chevalier (The Forking Path). Chevalier allegedly raised money from consumers to produce a board game through a Kickstarter campaign, but instead used most of the funds on himself and refused to provide refunds to his backers. Chevalier was fined approximately $112,000 and is prohibited from making misrepresentations about any future crowdfunding campaign.

Panelists discussed the import of the FTC’s settlement, in particular, the responsibility that crowdfunding platforms bear to shape consumer understanding and to monitor creators for fraud. Panelists agreed there was a role for both regulators to pursue fraud and for industry self-regulation to adopt best practices.

FinTech companies face high barriers to entry, an uncertain regulatory environment, and increased privacy and data security concerns. But the benefits to consumers of these types of novel platforms are enormous. P2P payments expand financial services to underserved communities; creators of successful crowdfunding projects may have access to venture capital previously unavailable to them. Regulators therefore seek to balance technological innovation with consumer protection directives, in particular, to ensure all players keep their promises, tell consumers the truth, and provide adequate disclosures.

1. Javelin LLC, P2P Payments in 2015: Market Sizing and Evaluation of P2P (Dec. 2015).
2. U.S. Securities & Exc. Comm’n, SEC Adopts Rules to Permit Crowdfunding (Oct. 30, 2015).
3. The SEC adopted Regulation Crowdfunding in October 2015 to enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions.

President Obama appointed Cordray to the position as a recess appointment, but that appointment was set to expire in January. The recess appointment garnered additional attention when a three-judge panel of the D.C. Circuit Court of Appeals invalidated recess appointments to the National Labor Relations Board, arguably calling into question Cordray’s recess appointment as well.

Under the Dodd-Frank Act, Cordray will serve a five year term as Director.

The Red Flags Rule requires certain businesses and organizations to have in place a written identity theft program designed to detect “red flags” indicative of identity theft and take appropriate steps to prevent it. While the Red Flags Rule has always applied to “financial institutions” and “creditors,” the scope of the term “creditors” has generated some confusion. The initial Red Flags Rule defined “creditor” broadly by reference to the definition in the Equal Credit Opportunity Act and arguably covered any company that extended credit by allowing a customer to defer payment. This would include most businesses and service providers, including retailers, doctors, and lawyers.

After allegations that such a broad definition exceeded the FTC’s authority under the Fair and Accurate Credit Transactions Act (“the FACT Act”), Congress reacted by passing the Red Flag Program Clarification Act of 2010. The Act clarifies that for the purposes of the FACT Act, creditor means only those creditors that regularly and in the ordinary course of business either: (1) obtain or use consumer reports in connection with a credit transaction, (2) furnish information to consumer reporting agencies in connection with a credit transaction, or (3) advance funds to or on behalf of a person, based on an obligation of the person to repay. The Act further clarifies that creditor does not include an entity that “advances funds on behalf of a person for expenses incidental to a service provided by the creditor to that person."

The FTC Guidance expands on the clarification provided by Congress by offering both general guidance and specific “FAQs” concerning the scope of the Red Flags Rule. With regard to the meaning of “regularly and in the ordinary course of business,” the Guidance explains that “[i]solated conduct does not trigger application of the rule, but if your business regularly furnishes delinquent account information to a consumer reporting company but no other information, that [would] satisf[y]” the requirement and fall within the scope of the Rule. The Guidance also explicitly advises that a professional who bills clients subsequent to rendering services would not qualify as a creditor under the Rule. On the other hand, the Guidance explains that any business that regularly uses credit reports would be subject to the Rule, even if a third party evaluates the credit reports on the business’s behalf.

The Guidance goes on to provide a “four-step process” towards compliance. Specifically, the Guidance advises covered entities to:

• Identify relevant red flags, including alerts from a credit reporting company, suspicious documents, and personal identifying information suggestive of fraud.
• Detect red flags by considering what procedures would work best in the particular organization.
• Prevent and mitigate identity theft by responding immediately and terminating service as necessary.
• Periodically update the program to stay on top of developments and industry best practices.

While the Guidance provides a helpful resource in facilitating compliance with the Red Flags Rule, companies must undertake their own analyses to customize their identity theft programs to meet the requirements of the Rule.

Providing welcoming remarks along with FTC Commissioner Julie Brill, Acting Deputy Director of the CFPB Steve Antonakes noted that the discussion could be broken down into three “areas of focus.” First, one must consider the initial accuracy of information that debt collectors use to pursue consumers. Second, one should consider the accuracy of the information over time, meaning whether the information “deteriorates as it ages or gets passed down the line to secondary or tertiary buyers.” Third, even accepting the accuracy of the information relied upon, safeguards should be taken to ensure that the consumer can dispute debts believed to be incorrect.

The daylong roundtable generally echoed these themes as various presenters and panels provided their thoughts on the present system and prospective channels for improvement. Most notably, participants from industry and consumer protection groups agreed that moving towards a more uniform system for data standards would facilitate a more efficient market, thus benefitting industry and consumers. While some details concerning potential data standards remained unclear, widespread agreement emerged that certain basic information should be included as part of any debt file, including the identity of the original creditor and the amount owed.

Other participants pointed to recently enacted state regulations, such as the Maryland court rule adopted in September 2011, that require debt collectors to provide certain documentation before suing debtors in state court as a possible model to be used in the non-litigation context.

Roundtable participants also discussed the approximate 90 percent non-appearance rate of debtors in court proceedings. While some participants, such as Maryland assistant attorney general Thomas Lawrie, suggested that industry benefitted from a high non-appearance rate, industry representatives countered that they would much prefer a higher appearance rate to facilitate increased discussion and resolve debts outside of court.

The roundtable took place amid recent calls by Senator Sherrod Brown (D-OH) for the CFPB to issue new regulations restricting certain debt collection practices. Senator Brown, as chair of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, released a letter the day before the roundtable asking the CFPB to consider, among other regulations, new requirements for uniform documentation prior to issuing debt collection notices and restrictions on sale and collection of unverifiable and time-barred debts.

Senator Brown also indicated in his letter that the Subcommittee will hold a hearing in the near future to examine possible reforms. We will continue to monitor developments in the debt collection industry and post updates here.

Summer Law Clerk Harrison Proctor contributed to this post.

• the amount of documentation and other information currently available to different types of collectors and at different points in the debt collection process;
• the information needed to verify and substantiate debts;
• the costs and benefits of providing consumers with additional disclosures about their debts and debt-related rights; and
• information issues relating to pleading and judgment in debt collection litigation.

Under the Dodd-Frank Act, the CFPB has primary responsibility for administering the Fair Debt Collection Practices Act (FDCPA), with the FTC exercising concurrent jurisdiction. The CFPB, in conjunction with the FTC, recently released the FDCPA Annual Report 2013, which catalogs the agencies’ actions over the past year with regard to the FDCPA, including information concerning the collection of consumer complaints, the supervision of debt collection activities, and enforcement. The FTC and CFPB also share authority in administering federal privacy and data security laws such as the Gramm-Leach-Bliley Act.

The roundtable will feature panels and presentations by FTC and CFPB leaders, including Commissioner Julie Brill and Associate Director of Financial Practices Jessica Rich from the FTC, and Acting Deputy Director Steve Antonakes and Program Manager John Tonetti from the CFPB. The program will also include an array of industry representatives, consumer advocates, and academics. Panel topics include “Information Available to Debt Collectors at Time of Assignment or Sale,” “Debt Collection Litigation,” and “Time-Barred Debts.”

The roundtable is open to the public and will also be streamed live online. We will monitor the event and post a summary.

The Dodd-Frank Wall Street Reform Act requires the CFPB to “facilitate the centralized collection of, monitoring of, and response to consumer complaints regarding consumer financial products and services.” The CFPB complaint system is distinguishable from other agency complaint systems in that CFPB will follow-up with the consumers to describe the steps taken by the CFPB or another agency in response to the complaint and whether the entity complained of has responded. Certain non-confidential complaint information is subsequently published in the CFPB’s complaint database, including the product and issue involved, the company complained of, and the company’s response.

The expansion of CFPB’s consumer complaint collection to the debt collection industry follows the release of the “Larger Participant” rule in October 2012, which defined “larger participant” for the purposes of entities engaging in the consumer debt collection market, and the beginning of the Bureau’s supervision program over debt collectors on January 2, 2013. Debt collection industry participants should take note as the CFPB continues to ramp up its oversight in this field.

The FTC and CFPB share enforcement authority over non-bank mortgage advertisers and reviewed over 800 mortgage advertisements for compliance with the MAP-AD Rule, which prohibits material misrepresentations in communications regarding the terms of mortgage financing. The agencies were particularly concerned by advertisements that: (1) offered low “fixed” mortgage rates without disclosing significant terms; (2) suggested the advertiser’s affiliation with a government agency; and (3) “guaranteed” approval and low monthly payments without disclosing significant terms. Companies found in violation of the Rule face civil penalties.

As a result of the partnership, both the FTC and CFPB have opened non-public investigations into mortgage advertisers suspected to be in violation of federal law, with the CFPB announcing that it has launched formal investigations into six companies in particular. Marketers should expect to see more cooperation and collaboration between the agencies in the future.

Between July 21, 2011 and June 20, 2012, the CFPB received approximately 55,300 consumer complaints. The largest category of complaints (43%) related to mortgages, of which transactions involving consumers' inability to pay (i.e., loan modifications, collection, and foreclosure) were among the most common complaints. The report notes that consumer confusion persists around the process and requirements for obtaining loan modifications and refinancing, especially regarding document submission time frames, payment trial periods, allocations of payments, treatment of income in eligibility calculations, and credit bureau reporting during the evaluation period. These widespread consumer concerns were the likely impetus behind the CFPB's first enforcement action filed on July 18, 2012, against a law firm offering mortgage assistance relief services. According to the complaint, the firm engaged in an ongoing, unlawful mortgage relief scheme that falsely promised financially distressed homeowners a loan modification in exchange for an advance fee. This is likely the first of many enforcement actions involving loan modifications and foreclosure relief services.

Other possible enforcement targets are credit card companies and banking services engaging in unlawful financial practices. The agency reports that the second largest category of complaints (34%) related to credit cards, of which consumer billing disputes was the most common type of complaint (14%). Consumers are confused and frustrated by the process and limits to challenging inaccuracies on their monthly billing statements. The third largest category of complaints addressed bank account and service complaints (15%), of which the most common type of complaint related to the opening, closing, or managing of accounts. These complaints in particular addressed issues such as confusing marketing, denial, fees, statements, and joint accounts.

The CFPB's enforcement priorities are those violations of law that cause the greatest harm to consumers. It warns that investigations "currently underway span the full breadth of the Bureau's enforcement jurisdiction." However, companies implicated by consumer complaints are in large part reacting in a timely and sufficient manner. The report indicates that 90% of companies reported having closed 85% of the complaints submitted against them. Consequently, companies seeking to avoid becoming an enforcement target are advised to immediately address consumer complaints directed to them by the CFPB and to look for opportunities to mitigate consumer confusion in the processing and billing of financial products and services.

Director Richard Cordray announced the issuance of this final rule at a credit reporting field hearing in Detroit, Michigan. Given the critically important role credit reporting agencies play in ensuring consumers' financial stability, Director Cordray explained the need for federal supervision of a market that up to this point has been subject to limited regulation. According to various federal reports cited by the CFPB, each of the big three consumer reporting agencies is estimated to maintain credit files on more than 200 million customers. Approximately three billion consumer reports are issued every year, and 36 billion updates are made yearly to consumer files at consumer reporting agencies. In light of this activity, the CFPB believes that supervising this market will further its mission to ensure consumer access to fair, transparent, and competitive markets for financial products and services.

Among the more significant provisions, the final rule defines the "consumer reporting market" to include the following entities: consumer reporting agencies selling consumer reports; consumer report resellers, which are typically those entities that purchase consumer information from agencies and then resell the reports to lenders and other users; analyzers of consumer reports and other account information, for example, those entities that develop and sell credit scoring services and products; and specialty consumer reporting agencies, such as those that focus on payday loans and checking accounts. The final rule establishes the following test to assess whether a nonbank covered person is a "larger participant" of the credit reporting market: more than $7 million in annual receipts resulting from relevant consumer reporting activities. Covered persons meeting the test are accordingly subject to the CFPB's supervision authority under the Dodd-Frank Act.

This final rule has an effective date of September 20, 2012. All affected entities are strongly encouraged to review their consumer reporting practices in light of the CFPB's new supervisory authority.

Rules of Practice Governing Adjudication Proceedings

In promulgating the final rule governing adjudication proceedings, the CFPB seeks to promote the expeditious resolution of claims while ensuring that parties receive a fair and impartial hearing. The final rule is modeled on the rules of practice of other federal agencies, including the Federal Trade Commission (FTC), the Securities and Exchange Commission (SEC), and the prudential regulators.

In particular, it sets forth the authority of a hearing officer to conduct administrative proceedings and issue recommended decisions. Similar to the SEC rules, the final rule permits the hearing officer a specified period of time - 300 days from service of the notice of charges or 90 days after briefing is complete - to issue a recommended decision. If a recommended decision is appealed, the director must issue his final decision within 90 days. Extensions of time are generally disfavored.

Further, the final rule contains provisions for the deposition of witnesses unavailable for trial, the use of subpoenas to compel the production of documentary or tangible evidence, and expert discovery. Similar to the SEC's affirmative disclosure approach, the CFPB must provide any party in an adjudicative proceeding the opportunity to inspect and copy certain documents obtained in connection with the underlying investigation and certain non-privileged documents created by the CFPB. In addition, the final rule establishes the procedures by which parties may request confidential treatment of filings or disclose confidential information received by a third party, including the third party's right to intervene for purposes of protecting its confidential information.

Rules Relating to Investigations

The final rule relating to investigations describes a number of CFPB policies and procedures that apply in an investigational, nonadjudicative setting. Among other things, the final rule sets forth (1) the CFPB's authority to conduct investigations under Federal consumer financial law, and (2) the rights of persons from whom the CFPB seeks to compel information. This rule is modeled on investigative procedures of other law enforcement agencies, including the FTC, the SEC, and the prudential regulators.

In pertinent part, the final rule authorizes the director and certain other officials to issue civil investigative demands (CIDs) for documentary materials, tangible things, written reports, answers to questions, or oral testimony. The rule also details the authority of CFPB investigators to conduct investigations and to hold investigational hearings pursuant to CIDs for oral testimony. With regard to the rights of persons subject to an investigation, the final rule sets forth certain notification requirements and procedures to petition for CID modification or set-aside. The rule further describes the process by which persons may obtain copies of or access to documents provided in response to a CID, and details the rights of witnesses in investigations, in particular, the parameters under which witnesses may be accompanied, represented, and advised by counsel during an investigational hearing.

State Official Notification Rule

Applicable federal law mandates that the CFPB establish procedures by which state officials notify the CFPB of actions brought under the Dodd-Frank Act. Under the final rule, state officials must provide notice to the CFPB at least ten days before initiating an action under section 1042(a) of the Dodd-Frank Act. For matters of emergency, if state officials initiate an action to protect the public interest or prevent irreparable and imminent harm, they must notify the CFPB within 48 hours of filing the action. The notice must include information such as the names of parties involved and the nature of claims. In response, the CFPB can intervene and participate in the action as appropriate.

Equal Access to Justice Act Implementation Rule

The Equal Access to Justice Act (EAJA), 5 U.S.C. 504, requires agencies that conduct adversary adjudications to award attorneys fees and other litigation expenses to certain parties other than the United States in certain circumstances. The EAJA also requires that these agencies establish procedures for the submission and consideration of applications for the award of fees and other expenses. The CFPB's interim final rule establishes those procedures. Under the interim rule, a party subject to a CFPB adjudication is eligible to receive an award in two instances: first, when it is the prevailing party, unless the CFPB's position in the proceeding was substantially justified or special circumstances make an award unjust; or second, when the CFPB's demand is substantially in excess of the decision of the adjudicative officer and is unreasonable when compared with that decision, unless the party has committed a willful violation of law or otherwise acted in bad faith.

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All affected companies and businesses are strongly encouraged to carefully review the CFPB's new Rules of Practice relating to adjudicative processes and investigative proceedings, and the State Official Notification Rule. In addition, interested parties are encouraged to submit comments on the interim final rule relating to the Equal Access to Justice Act prior to the deadline of August 28, 2012.

Written by Christie G. Thompson

Spokeo is a self-proclaimed "people search engine." According to the complaint, Spokeo assembles consumer information from hundreds of online and offline sources, including social networking sites, to create searchable consumer profiles. These profiles contain individuals' full name, physical address, phone number, age range, and email address, as well as other information such as hobbies, ethnicity, religion, participation in social networking sites, and photos. Spokeo promotes its service as providing "coherent people profiles" and "powerful intelligence," and sells this information through paid subscriptions and application program interfaces (API).

FCRA

The FTC alleged that for a two-year period, Spokeo operated as a consumer reporting agency by marketing consumer profiles as an employment screening tool to human resources professionals and job recruiters. Spokeo specifically exhorted recruiters to "Explore Beyond the Resume" by using the company’s services to capture job applicants' personal interests and online activities. According to the complaint, Spokeo violated the FCRA by failing to ensure that the information it sold was accurate and would be used only for legally permissible purposes, and by failing to tell prospective employers about their obligations under the FCRA, including the requirement that consumers be notified when adverse actions are taken against them based on information contained in the profiles.

FTC Act

In addition to the FCRA violations, the FTC alleged that Spokeo directed employees to post endorsements of its services on third party websites using fake account names in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a). According to the FTC, Spokeo misled consumers by representing that these comments were independently generated by ordinary consumers or business users. These misrepresentations allegedly constitute unfair or deceptive acts or practices prohibited by the FTC Act.

Settlement Terms

Under the proposed settlement terms, Spokeo will pay an $800,000 civil penalty. The settlement bars Spokeo from future violations of the FCRA and the FTC Act. Undoubtedly this is the first of many cases of alleged FCRA violations for the use of social media data in the employment screening context. This settlement serves as a cautionary tale that the FCRA will apply with full force when a consumer reporting agency assembles or evaluates consumer report information, including data collected from social networking sites, to be used for employment screening purposes. Written by Christie G. Thompson.

• Rule on Investigations. The CFPB drew heavily from the FTC's current and proposed nonadjudicative procedures. The final rule is largely based on section 20 of the FTC Act and its corresponding regulations with a few notable distinctions, as discussed below.

Consistent with analogous FTC provisions, the CFPB’s final rule establishes the following: (1) the CFPB’s authority to conduct investigations in the interest of the public; (2) procedures for issuing information requests and civil investigative demands (“CIDs”); and (3) the rights of recipients of CIDs. While the CFPB has broad discretion in opening and closing investigations, the power to issue a CID is limited to the CFPB Director, Assistant Director of the Office of Enforcement, and Deputy Assistant Director of the Office of Enforcement. Consistent with the Dodd-Frank Act, the rule permits the CFPB to share confidential information with other agencies to the extent the disclosure is relevant to the agency’s authority. CID recipients have the right to (1) be notified of the investigation and the applicable provision of law; (2) retain or request a copy of everything submitted in response to a CID or document request; and (3) obtain counsel. The rule also allows the CFPB to refer investigations to appropriate Federal, State, or foreign government agencies with authority.

Unlike the FTC’s rules, the CFPB's final rule includes a provision disfavoring extensions of time for petitions to modify or set aside a CID. The CFPB believes this is appropriate in light of its significant interest in promoting an efficient process for seeking materials through CIDs. In addition, though both agencies' regulations require a statement of the nature of the conduct at issue and the relevant provisions of law, the FTC rule additionally requires that the recipient of the CID be advised of the "purpose and scope" of the investigation. Commenters expressed concern that the CFPB's exclusion of this phrase would lead to requests for material outside the scope of an investigation. The CFPB disagreed, noting that its notice provisions are consistent with the Dodd-Frank Act and provides for sufficient notice to recipients of CIDs.

• Rule on Adjudicatory Proceedings. The CFPB incorporated the adjudicatory rules of other agencies to create an efficient yet fair resolution of matters. Under this final rule, hearing officers must issue recommended decisions in each adjudication. Parties have the right to contest the recommended decision by filing a notice of appeal. The rule also grants parties access to non-privileged documents and reduces pre-trial procedures.

• State Official Notification Rule. This final rule provides how States should update the CFPB on actions they bring under the Dodd Frank Act. State officials must provide notice to the CFPB at least ten days before initiating an action under section 1042(a) of the Dodd-Frank Act. For matters of emergency, if State officials initiate an action to protect the public interest or prevent irreparable and imminent harm, they must notify the CFPB within 48 hours of filing the action. The notice must include information like the names of parties involved in the action and the nature of claims. In response, the CFPB can intervene and participate in the action as appropriate.

Companies should watch how the CFPB enforces these rules to avoid possible violations under the Dodd-Frank Act. The CFPB will begin accepting comments on this interim final rule after it is published to the Federal Register. Comments must be submitted 60 days after publication.

The proposed rule states that the CFPB will provide a nonbank covered person with a notice and reasonable opportunity to respond. The notice will include a description of the basis for the CFPB's belief that the respondent is a nonbank covered person engaging in conduct posing risks to consumers and will provide a respondent with two opportunities to respond - first in writing and second, if requested by the respondent, through a supplemental oral response generally conducted by phone. The written response, if submitted, should include any records, documents, or other items that the respondent would like the CFPB to consider while the supplemental oral response will be an opportunity to present arguments to the CFPB.

The proceedings outlined by the proposed rule would be informal and not an adjudicatory proceeding under Section 554 of the Administrative Procedures Act. Thus, discovery would not be permitted, a supplemental oral response would not constitute a hearing on the record, and witnesses would not be called as part of the supplemental oral response. After the proceedings have concluded, the CFPB's Assistant Director for NonBank Supervision will provide a recommended determination to the CFPB's Director, who will then make a final determination subjecting the respondent to the CFPB's supervisory authority or stating that the respondent is not subject to the CFPB's supervisory authority. The proposed rule also outlines how a respondent could consent to the CFPB's supervisory authority, the means for a respondent to petition for the termination of an order two years after its issuance, and notice procedures and an opportunity to respond if the CFPB issues a notice of charges.

The CFPB has described the proposed rule as offering a more robust process than required under the Dodd-Frank statute by providing the opportunity to participate in a supplemental oral response. While largely a procedural rule, the proposed rule moves the CFPB forward in setting up the mechanisms to further exercise its supervisory powers. Comments are due on July 24, 2012.

North Carolina Congressman David Price introduced CFPB Director Richard Cordray, who provided a brief overview on the current state of prepaid cards. Two panels representing industry experts and consumer and civil rights advocates were asked to briefly comment and then the floor was opened to the public. In his opening remarks, Director Cordray noted that more than 7 million Americans currently use prepaid cards. Prepaid cards offer services ranging from general purpose reloadable use to government disbursements, payroll, employee benefits, health care, and gift giving. They are particularly popular among the 9 million U.S. families who lack any type of checking, debit, or credit cards, colloquially referred to as "unbanked," and the 21 million "underbanked" who have bank accounts but heavily rely on nonbank products such as prepaid cards and payday loans. According to the two largest program managers of prepaid cards, the number of active cards in use increased from 3.4 to 7 million in the past three years, and is estimated to grow by 40% each year through 2014. Industry analysts predict $167 billion will be loaded onto prepaid cards in the next two years. Though they operate similarly to a debit card, prepaid cards are not linked to a bank account and are outside the reach of federal consumer protections applicable to debit and credit cards. Further, consumer protections such as redress for theft, loss, or unauthorized charges vary from program to program, and many prepaid card services lack clear disclosures of overdraft fees and surcharges.

In light of these shortfalls, Director Cordray identified safety and transparency as the two key goals of the CFPB's new initiative. Echoing these sentiments, panelists and audience participants collectively recommended that the following practices be implemented: expanding the current regulatory framework for credit and debit cards to prepaid cards; imposing FDIC insurance requirements; and mandating clear, standardized disclosures for fees and surcharges. Other recommendations included complete prohibition of practices such as overdraft fees, credit product tie-ins, and arbitration clauses. Though panelists and community participants emphasized the potential abuses in the prepaid card ecosystem, a number of notable advantages were identified. This included the prepaid card's convenience and utility in budget-monitoring. Some panelists suggested that the CFPB do more to use prepaid cards as a vehicle for the unbanked and underbanked to gain access to traditional financial services like checking and savings accounts. In those instances, prepaid cards could provide financial products to the underbanked community at very low costs. Though the current lack of regulation and unbridled abusive practices weaken the value proposition of prepaid cards, panelists and audience participants expressed optimism in the creation of a stronger, more robust financial product.

The CFPB concluded the hearing by asking that consumer experts, industry stakeholders, and the public continue the conversation by submitting comments on the ANPR on or before July 22, 2012.

Written by Christie G. Thompson.

The CFPB grouped ten questions into four broad categories: (a) regulatory coverage of products by some or all of Regulation E, (b) product fees and disclosures, (c) product features, and (d) other information on GPR cards. Specific questions include the definition of GPR cards in the context of Regulation E, potential disclosure requirements related to fees, and additional features related to GPR cards, such as overdraft, savings accounts, or the opportunity to improve credit. The CFPB's proposed rulemaking, coupled with its field hearing conducted today, show that the Bureau is moving forward on regulating the prepaid card market and participants should consider weighing in during these early stages of proposed regulation.

The CFPB has not yet issued a proposed rule defining "larger participants" for prepaid cards but specifically identified prepaid cards as a market under consideration in its Notice and Request for Comments published on June 29, 2011, along with Debt Collection; Consumer Reporting; Consumer Credit and Related Activities; Money Transmitting, Check Cashing, and Related Activities; and Debt Relief Services. The CFPB proposed a rule defining larger participants in Debt Collection and Consumer Reporting on February 17, 2012 but has not yet issued a rule on larger participants for prepaid cards. This field meeting, therefore, may provide insight into the CFPB's direction on supervision and examination of prepaid card market participants.

Promulgated in 1976, the Holder Rule protects consumers who enter into credit contracts with a seller of goods or services by preserving their right to assert claims and defenses against any holder of the contract, even if the seller subsequently assigns the contract to a third-party creditor. In particular, the Holder Rule requires sellers that arrange or offer credit to finance consumers' purchases to include in their credit contracts the following disclosure:

ANY HOLDER OF THIS CONSUMER CREDIT CONTRACT IS SUBJECT TO ALL CLAIMS AND DEFENSES WHICH THE DEBTOR COULD ASSERT AGAINST THE SELLER OF GOODS OR SERVICES OBTAINED . . . . RECOVERY HEREUNDER BY THE DEBTOR SHALL NOT EXCEED AMOUNTS PAID BY THE DEBTOR HEREUNDER.

Some courts have barred consumers from affirmative recoveries unless rescission is warranted under state law. In light of this practice, NCLC and the other entities sought affirmation by the FTC of consumers' broad rights under the Holder Rule. The FTC's opinion letter affirms that the Rule unambiguously places no limits on a consumer's right to an affirmative recovery of payments already made under a credit contract. According to the FTC, this interpretation gives full effect to its original intent of the Rule to hold sellers and creditors responsible for misconduct and to shift seller misconduct costs away from consumers. The advisory opinion provides a good reminder for companies offering credit to check contractual terms to ensure they meet federal requirements and to evaluate current practices.

Written by Christie G. Thompson

The study will result in a report to Congress addressing the use of arbitration agreements in connection with the offering or providing of consumer financial products or services. As a preliminary step to undertaking the study, the CFPB has published a Notice and Request for Information seeking suggestions from the public to identify the appropriate scope of the Study and appropriate methods and sources of data for conducting the study.

The CFPB's Request asks for information on the following topics:
• The prevalence of arbitration clauses in consumer financial products and services;
• What claims consumers bring in arbitration against financial services companies;
• If claims are brought by financial services companies against consumers in arbitration;
• How consumers and companies are affected by actual arbitrations; and
• How consumers and companies are affected by arbitration clauses outside of actual arbitrations

The CFPB's request also includes, for each of the above-mentioned points, questions regarding what method of study the Bureau should use, what data the Bureau should seek and from which entities, whether particular markets should be a focus and, if so, which markets. Comments are due on June 23, 2012.

The upcoming study reflects an increasing scrutiny on arbitration clauses and companies using arbitration agreements should watch the developing study closely.