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The CFPB Issues Warning and Guidance on Obtaining Consumer Authorization for Preauthorized Electronic Funds Transfers that Confirms a Recording of a Consumer’s Oral Authorization Can Satisfy Regulation E’s Requirements

posted on 2015-12-02 by David.Anthony, Ashley Taylor

On November 24, 2015, the Consumer Financial Protection Bureau (CFPB) issued a Compliance Bulletin (2015-06), warning companies that they must ensure that consumer authorization is obtained before automatically debiting a consumer’s account and that required notifications to consumers must clearly describe the terms of the preauthorized electronic funds transfers (EFTs).

Importantly, for the first time a federal regulator has publicly confirmed that companies can comply with the requirements of the Electronic Funds Transfer Act (EFTA) and Regulation E (Reg. E) by obtaining a consumer’s authorization for preauthorized EFTs through the recording of a telephone conversation, which can qualify as an electronic signature under the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001, et seq. (E Sign Act). This issue of oral authorization of EFTs has caused much debate, perplexed members of the financial services industry, and given rise to numerous national class actions. The CFPB explicitly states in the Bulletin that Reg. E “does not specify that entities must provide a writing to consumers when obtaining the authorization,” and the restriction in the E-Sign Act on the use of oral recordings as electronic records “does not apply when obtaining a consumer’s authorization for preauthorized EFTs.” Companies can now find a safe harbor in this Bulletin, but should take steps to ensure their compliance management system satisfies all the requirements for preauthorized EFTs contained in the EFTA, Reg. E, and E-Sign Act, in particular recording and retaining telephone recordings in compliance with federal and state laws and making certain a copy of the terms of the authorization is provided to the consumer.

The CFPB’s Compliance Bulletin Regarding the Requirements for Consumer Authorizations for Preauthorized EFTs

The CFPB issued the Compliance Bulletin “to remind entities of their obligations under” the EFTA and Reg. E when obtaining consumer authorizations for preauthorized EFTs from a consumer’s account. The Bulletin notes the CFPB “has observed that some entities may not fully comply with the requirements imposed by” EFTA and Reg. E, or “may be uncertain of their obligations” and “the intersections between” Reg. E and the E-Sign Act.

The Bulletin appears to be the CFPB’s summary of the current law, and includes references to relevant findings in examinations conducted by Supervision.

Background on the EFTA, Regulation E, and the E-Sign Act

In 1996, the Board of Governors of the Federal Reserve System issued Reg E. pursuant to the EFTA. Rulemaking authority under the EFTA transferred to the CFPB effective July 21, 2011, pursuant to the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376.

EFTs are defined broadly and generally include any transfer of funds initiated through an electronic terminal, telephone, computer, or magnetic tape for the purpose of ordering, instructing, or authorizing a financial institution to debit or credit a consumer’s account.

In accordance with §1693e of the EFTA, § 205.10(b) of Reg. E provides that “[p]reauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer.” Supplement I to Part 205 contains the Official Staff Interpretations of Reg. E, and in its commentary to Paragraph 10(b) of Reg. E, the Staff stated:

The similarly authenticated standard permits signed, written authorizations to be provided electronically. The writing and signature requirements of this section are satisfied by complying with the Electronic Signatures in Global and National Commerce Act, 15 U.S.C. 7001 et seq., which defines electronic records and electronic signatures. Examples of electronic signatures include, but are not limited to, digital signatures and security codes. … The authorization process should evidence the consumer's identity and assent to the authorization. The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form. ....

12 C.F.R. Part 205, Supp. 1, ¶10(b)5.

The E-Sign Act provides that electronic records and electronic signatures have the same validity as paper documents and handwritten signatures. If the EFTA calls for a writing to be made in connection with a transaction, the writing can be satisfied by an electronic record. If the EFTA requires a writing to be “signed or similarly authenticated,” the requirement can be satisfied through an electronic signature.

The E-Sign Act defines an “electronic signature” as “an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.” An electronic record is defined as “a contract or other record created, generated, sent, communicated, received, or stored by electronic means.” While the E-Sign Act provides that an audiotape recording of an oral communication does not qualify as an “electronic record,” it has no such caveat with respect to whether an audiotape recording qualifies as an “electronic signature.” Thus, the E-Sign Act has been interpreted to mean that nothing prevents the creation of an electronic signature through a recording of an oral communication.

Section 1693e(a) of the EFTA provides that “a copy of such authorization shall be provided to the consumer when made.” Section 1005.10(b) of Reg. E. provides that “[t]he person that obtains the authorization shall provide a copy to the consumer.” However, the Official Staff Interpretations of Reg. E in Supplement I to Part 205 contain the following Staff commentary to Paragraph 10(b): “The person that obtains the authorization must provide a copy of the terms of the authorization to the consumer either electronically or in paper form.”

Consumer Authorizations in Compliance with EFTA and Regulation E

There is good news in this Bulletin as it explains the CFPB’s expectations for how entities obtaining consumer authorizations for preauthorized EFTs can comply with relevant law, and it clarifies the obligations of entities obtaining customer authorization for preauthorized EFTs.

To comply with EFTA and Reg. E requirements, all EFTs must be authorized by the customer in writing or similarly authenticated — in either paper or electronic form, as specified by the E-Sign Act — and the customer must be provided with a copy of the authorization terms that includes the amount and timing of the recurring EFTs from her account. The Bulletin also states that consumer authorization can be given over the phone if the customer provides authentication by using a code or PIN entered on the phone’s keypad, or if an oral authorization is recorded in compliance with relevant State laws, retained by the requesting company (Reg. E imposes a two-year retention requirement), and follows the requirements of the E-Sign Act to ensure the consumer intends to sign the record.

Providing a Copy of the Terms of the Authorization to the Consumer

EFTA and Reg. E require persons obtaining an authorization for a preauthorized EFTs must provide a copy of the terms of the authorization to the consumer when it is made, in paper form or electronically.

The Bulletin notes that “two of the most significant terms of an authorization are the timing and amount of the recurring transfers from the consumer’s account.” The Bulletin explains: “In at least one examination, CFPB examiners observed that one or more companies provided consumers a notice of terms for preauthorized EFTs from a consumer’s account. Supervision determined that these notices of terms did not satisfy Reg. E, because the notices did not disclose important authorization terms such as the recurring nature of the preauthorized EFTs, or the amount and timing of all the payments to which the consumer agreed.”

Thus, it is vital that the recurring nature of the preauthorized EFTs, as well as the amount and timing of all the payments to which the consumer agreed, be clearly disclosed in any notice to a consumer containing the terms of the authorization.

The Bulletin also recognizes that there is “an alternative to providing a copy of the authorization after its execution,” another indication that a consumer’s authorization can be obtained through a voice recording. Instead, a company can comply with its obligations “to provide the consumer a copy of the authorization by using a confirmation form. For instance, a company may provide a consumer with two copies of a preauthorization form, and ask the consumer to sign and return one and to retain the second copy. However, a company does not satisfy Regulation E by only making a copy of the authorization available upon request in lieu of providing the copy.”

CFPB’s Action Letters for Consumers to Manage and Stop Preauthorized EFTs 

In addition to the Bulletin, the CFPB posted a new entry on its blog entitled “You have protections when it comes to automatic debit payments from your account.” This blog post includes suggestions for consumers when dealing with automatic debit payments and includes four sample letters a consumer can use in connection with managing and stopping preauthorized EFTs:

·         A sample letter to send to a company or merchant to revoke the consumer’s permission to auto debit the account

·         A sample letter to send to a bank or credit union to provide notice that the consumer revoked a company’s authorization to automatically debit the account

·         A sample stop payment order to instruct a bank or credit union to stop allowing the company to take payments from the consumer’s account

·         A sample letter to a bank or credit union providing notice of an unauthorized debit from a consumer’s account

Key Takeaways

Companies accepting payments through preauthorized EFTs can glean a number of takeaways from this Bulletin. First, all entities obtaining preauthorized EFTs from consumers should take immediate steps to ensure their policies, procedures and training is in full compliance with this Bulletin. Entities already accepting oral authorizations for preauthorized EFTs, as well as those contemplating it, can use the issuance of this Bulletin as an opportunity to assess the risks associated with this method of accepting consumer payments. Second, first party and debt collectors can find comfort in their attempts to secure agreements from consumers during a telephone call to make recurring payments, but they should be aware that the CFPB’s noted its expectation that “when practical, the CFPB encourages entities obtaining consumer authorizations for preauthorized EFTs to provide the copy of the authorization to the consumer before the first preauthorized EFT is initiated.” Finally, the CFPB and other regulators continues their focus on consumer payments, including the CFPB tightening regulations around payday lending and other installment loans, as well as the interactions of vendors (like payment processors) with consumers that involve a consumer granting direct access to her bank account so that funds can be debited directly.




David N. Anthony
Partner • 804.697.5410

John C. Lynch
Partner • 757.687.7765

Keith J. Barnett
Partner • 404.885.3423



Ashley L. Taylor Jr.
Partner • 804.697.1286

Alan D. Wingfield
Partner • 804.697.1350

Ethan G. Ostroff
Associate • 757.687.7541

Protecting the Attorney-Client Privilege: Companies Sue CFPB For Not Allowing Them to Attend Their Former Counsel’s Investigatory Testimony

posted on 2015-11-04 by Ethan G. Ostroff, Keith J. Barnett and Ashley L. Taylor, Jr


In July 2015, several companies that were the targets of non-public Consumer Financial Protection Bureau investigations sued the Bureau after it refused to allow their current counsel to attend the Bureau’s investigative testimony of one of the companies’ former attorneys.  The companies wanted one of their current attorneys to attend the testimony and assert the attorney-client privilege when necessary.  The companies sought an injunction to prevent their former counsel’s testimony and claimed that the Bureau’s refusal to allow their current counsel to attend violated the Administrative Procedures Act.  The plaintiffs and the Bureau appeared to work out their differences with respect to the testimony before the Court reached a decision on the injunction.  Notwithstanding the apparent agreement, targets of CFPB investigations should be cognizant of the possibility that the Bureau will likely try to prevent counsel for the targets from attending third party testimony even when there is a serious possibility that the attorney-client privilege will be compromised.

The plaintiffs, who filed all of their pleadings under seal, asked the district court to issue an order directing that the filed documents remain under seal and inaccessible to the public because they did not want the public to know that they were the targets of the CFPB’s investigation.  The Bureau opposed plaintiffs’ request.  The United States District Court for the District of Columbia issued an Order that required the Clerk of the Court to re-caption the case as a John Doe lawsuit, and directed the plaintiffs to redact identifying information from the pleadings that they had previously filed under seal.  The balance of the information in the pleadings would be available to the public. 

In its analysis, the Court considered the following:

            (1)     the need for public access to the documents;

            (2)     the extent to which the public had access to the documents prior to the sealing order;

            (3)     the fact that a party has objected to disclosure and the identity of that party;

            (4)     the strength of the property and privacy interests involved;

            (5)     the possibility of prejudice to those opposing disclosure; and

            (6)     the purpose for which the documents were introduced. 

The first and sixth factors weighed in favor of denying the plaintiffs’ request.  With respect to the first factor, the Court stated that “[t]here is a ‘strong presumption in favor of public access to judicial proceedings’” especially when the government is a party.  The fact that the Bureau’s investigation was non-public did not change this analysis because “judicial proceedings are normally open to the public” and sealing the entire proceeding “would thus deny the public even the most basic knowledge of its subject matter.”  The fifth factor weighed in favor of denying the request because the plaintiffs did not file documents containing privileged information and they did not identify “a risk that attorney-client privileged information would be made public if this case were unsealed.” 

The second and fifth factors weighed in favor of granting the plaintiffs’ request.  With respect to the second factor, the public never had access to documents publicly identifying the plaintiffs as targets of the Bureau’s investigation.  Although the plaintiffs had filed petitions to modify or set aside the Bureau’s Civil Investigative Demand (CID) and the Bureau usually makes the petitions available to the public through its website, the Bureau had not publicly disclosed plaintiffs’ petitions as of the date of the district court’s Order.  The fifth factor weighed in favor of sealing the record because “it is not difficult to see how disclosure of the fact that an entity is subject to investigation by federal authorities would inflict non-trivial reputational and, possibly, associated financial, harm on that entity.”  The third factor was not an issue.  The fourth factor did not favor either side because although the Bureau’s investigations are non-public, there are circumstances under which a CFPB investigation could be disclosed to the public. 

The Doe case epitomizes the paradoxical situation that targets of CFPB investigations face when they—or their agents and service providers—are confronted with a CID.  Because the Bureau itself decides whether to grant a petition to quash or modify a CID—and the Bureau has denied every petition that has been filed—investigatory targets know that they have a better chance at prevailing in a courtroom.  Although the plaintiffs understandably wanted to make sure that their former counsel was not left to himself to protect the attorney-client privilege, their act of filing a public lawsuit against the Bureau, which presumably facilitated the compromise between plaintiffs and the Bureau, potentially exposed plaintiffs to the public as targets of the CFPB’s investigation.  Query whether the outcome of this case would have been different if the Bureau had publicly filed the plaintiffs’ petition to modify or quash the subpoena before the Court rendered its decision.  Going forward, parties must weigh the risks of allowing the Bureau to obtain potentially privileged information versus the public knowing that they are the target of a CFPB investigation.

Fifth Circuit: TCPA Violation Requires Connection for Prerecorded Message, But Not for Dialer

posted on 2015-11-04 by Justin Brandt, Alan D. Wingfield and Chad Fuller

On October 20, the United States Court of Appeals for the Fifth Circuit delivered its opinion in Ybarra v. DISH Network, LLC (“DISH”), a case involving alleged violations of the Telephone Consumer Protection Act, which prohibits callers from using an automatic telephone dialer system (“ATDS”) and delivering messages with an “artificial or prerecorded voice” without prior express consent of the called party.

Ybarra focused on DISH’s attempts to collect an outstanding balance owed by one of its customers by calling a cell phone number believed to belong to that customer.  At some point, the customer relinquished that cell phone number, and Ybarra subsequently became the subscriber to that number.  When DISH’s customer failed to pay the account balance, DISH called the phone number now belonging to Ybarra fifteen times from two different DISH phone numbers.  (Under recent FCC guidance, the TCPA only allows a “one-call exception” for reassigned numbers; potential liability exists after the first call attempt to a number’s new subscriber, even if the caller has no actual knowledge that the original subscriber no longer utilizes the number.)

There has been confusion regarding whether TCPA liability exists for call attempts using ATDS or prerecorded messages that fail to reach their intended recipient, whether due to lack of answer or other transmission error.  In Ybarra, DISH contended that four of the calls did not violate the TCPA because “none of these calls resulted in a prerecorded voice being used because no prerecorded voice was played.”

Based on its strained reading of the TCPA, the Fifth Circuit determined that ATDS calls do not require actual connection to violate the statute because the system is still being “used.”  However, the Fifth Circuit came to the opposite conclusion as to prerecorded messages, finding that the prerecorded voice is not “used” if no connection is made.

Although this decision presents a sliver of good news for callers using prerecorded messages, the more onerous outcome is the expansive liability for usage of ATDS even in situations in which contact is not made with the called party.  DISH evaded liability for the four calls only because Ybarra failed to produce admissible evidence that those calls were also placed with an ATDS.  Plaintiff’s lawyers will likely argue that under the view espoused by the Fifth Circuit, the TCPA can be violated by attempted calls – not just calls that actually reach the intended called party or the called party’s voicemail.

Troutman Sanders LLP has unique industry-leading expertise with the TCPA, with experience gained trying TCPA cases to verdict and advising Fortune 50 companies regarding their compliance strategy.  We will continue to monitor regulatory any judicial interpretation of the TCPA following this ruling in order to identify and advise on potential risks.

Missouri Attorney General Files Suit Against Charter Communications Alleging No-Call Violations

posted on 2015-10-28 by Justin Brandt, Alan D. Wingfield and Chad Fuller


On October 19, Missouri Attorney General Chris Koster filed a federal lawsuit in the United States District Court for the Eastern District of Missouri against Charter Communications, Inc., alleging violations of federal and state telemarketing and “do-not-call” laws.  Koster claims that his office received 350 complaints from consumers “about harassing practices by Charter’s telemarketers … [in] an attempt to sell Charter’s cable, internet, and phone services.”

In addition to the National Do Not Call Registry, Missouri has its own No-Call list of 4.5 million phone numbers, comprised of both cell phones and landlines.  Additionally, Missouri’s telemarketing law supplements federal law by prohibiting telemarketers from contacting consumers “repeatedly or continuously in a manner a reasonable consumer would deem to be annoying, abusive, or harassing.”

Koster’s complaint generally alleges that Charter Communications and its vendors “placed at least thousands of telemarketing calls to Missouri consumers, even after the consumers asked that Charter stop calling.”  The complaint specifically alleges that individual consumers received dozens of calls in less than a year and up to five calls per day.  Despite requests for the calls to cease, Charter allegedly informed consumers that it would take forty-five days to place consumers on its internal do-not-call list.

The complaint seeks substantial damages, including up to $16,000 for each violation of the federal Telemarketing Sales Rule (TSR), at least $500 for each violation of the federal Telephone Consumer Protection Act (TCPA), up to $5,000 for each violation of the state No-Call statute, and an unspecified civil penalty for each violation of the state telemarketing statute.  Given the substantial damages potential, it is imperative for companies to institute robust compliance procedures to avoid and/or defend against such litigation.

Koster’s complaint is a reminder that in addition to federal do-not-call requirements of the TCPA and the TSR, many states have their own specific requirements.

Troutman Sanders LLP has unique industry-leading expertise with state and federal telemarketing laws, with experience gained trying such cases to verdict and advising Fortune 50 companies regarding their compliance strategies.  We will continue to monitor litigation in this area, especially interpretation and application of unique state telemarketing laws, in order to identify and advise on potential risks.

CFPB Director’s Remarks at MBA Annual Convention: Progress, Updated HMDA Reporting, and Warning to Parties Engaged in Marketing Services Agreements

posted on 2015-10-28 by Ethan G. Ostroff and Mary C. Zinsner


Consumer Financial Protection Bureau Director Richard Cordray addressed the Mortgage Bankers Association at its Annual Convention on October 19.  In his remarks, Cordray:

  • Summarized the progress the CFPB has made in addressing the serious problems confronting consumers in the mortgage market and steps taken by the Bureau to restore the American Dream of homeownership;
  • Characterized the updated reporting requirements of the Home Mortgage Disclosure Act (HMDA) as a “sunlight” statute intended to provide the public and lawmakers with transparency about how lenders are meeting the needs of communities; and
  • Warned that parties participating in marketing service agreements (MSAs) need to be wary and in compliance with rules and regulations or they will face the CFPB in an enforcement action.

Cordray outlined the tasks the CFPB had accomplished from its initiation as a new agency to address the problems in the mortgage market.  Soon after its formation, the CFPB put new rules in place to protect prospective homebuyers and support responsible lenders.  These regulations included the “Ability to Repay Rule,” which is sometimes referred to as the “Qualified Mortgage” rule.  Critics predicted the rules would cause origination costs to double and lamented that the regulations would lead to the demise of community banks and credit unions.  However, according to Cordray, two years later these concerns have not come to pass.  Instead, the CFPB believes mortgage lending has increased and that the industry saw only minor consolidation.  Cordray reiterated that the restoration of the mortgage and housing market is essential to restoring the American Dream.  A home is the most important financial decision most families will ever make.  But more importantly, Cordray noted, “a house that becomes a home is much more than four walls and a roof.  Instead it is a special place to raise a family and create lasting memories, a place to hold up as a source of pride and accomplishment.”

According to Cordray, the CFPB has been flexible in working with the MBA to meet the needs of lenders and make adjustments to rules where necessary.  He noted that the Bureau approved recent amendments to mortgage origination rules to broaden the definitions of “small creditor” and “rural area” because it had been persuaded that the lines it had drawn were too rigid.  Over the course of the coming year, the CFPB will be launching a “look-back process” for certain rules,  providing another vehicle for lender feedback.

The CFPB has also implemented the “Know Before You Owe” mortgage disclosure rule.  According to Cordray, the CFPB recognized the system and operational changes necessary to adjust to the new requirements and allowed for a long implementation period.  Cordray acknowledged the struggles lenders were having with vendors and noted that “examiners will be squarely focused on whether you have been making good-faith efforts to come into compliance with the rule.”  He further addressed arguments of critics of the rule, articulating again the CFPB’s position that it is necessary for consumers to review closing costs and to compare them to estimates before they get to the closing table to ensure they are getting the deal they were promised.  The Home Loan Toolkit was also introduced by the CFPB to guide consumers through the process of buying and shopping for a mortgage.  Similarly, the CFPB’s “Owning a Home” online tool provides consumers an interactive internet resource to help consumers make sound decisions about their home purchase.

The next “homework assignment” for the CFPB mandated by Congress is updating the reporting requirements of the Home Mortgage Disclosure Act.  Cordray noted that the CFPB recently finalized the HMDA rule.  He characterized the new HMDA as a “sunlight” statute intended to educate the public and lawmakers about how lenders are serving housing needs, and that provides an understanding of what is happening in local markets.  The new rule will require more robust data such as the requirement that lenders disclose home equity lines of credit, the age of borrowers, and rates and fees charged by lenders.  Additionally, the new rule adds other data elements to enable the Bureau to better understand trends, such as the dynamics of manufactured housing.  Cordray acknowledged that the HMDA modification will mean yet another implementation process for mortgage lenders.  With that in mind, the CFPB has set the date for compliance with most provisions for January 2018, with initial reports including the new data due in early 2019. 

In addition to improving available data, the CFPB is also focused on building a better collection system to streamline and modify the reporting requirements.  Cordray stated that the four ways the CFPB will achieve this goal are: (1) the final rule aligns definitions with the MISMO standards, the prevailing mortgage data standards in the industry; (2) the CFPB is working with the Federal Financial Institutions Examination Council and HUD to modernize the data submission process to collect information more efficiently; (3) the new rule exempts institutions originating fewer than 25 closed-end mortgage loans or 100 open-end lines of credit from HMDA data reporting requirements; and (4) the CFPB has issued plain-language implementation materials and will soon release a compliance guide for small entities.

Reiterating the CFPB’s purpose as a supervisor and regulator, Cordray closed his remarks with a warning, making clear that the Bureau’s charge includes oversight of the parties to MSAs.  He noted the risks stemming from MSAs and the opportunity for parties to pay or accept illegal compensation for referrals of settlement service business.  He noted the Bureau’s “grave concern about the use of MSAs in ways that evade the requirements of RESPA,” which is reflected in the bulletin released on October 8, which provided guidance to the mortgage industry with an overview of the federal prohibition on mortgage kickbacks and referral fees, examples from the Bureau’s enforcement experience, and the risks faced by lenders entering into these agreements.  He warned that any party participating in MSAs, including lenders, brokers, title companies, and real estate professionals, should ensure compliance with applicable laws and regulations or be prepared to see increased enforcement actions from the CFPB.  “We want the industry to follow the rules – because that is good for consumers, honest businesses, and the economy as a whole.”

In closing, Cordray thanked the MBA for its contributions toward making the mortgage market more fair and transparent for all Americans.  “Together we are building a more solid foundation so that you can thrive and so that families across the country can make the American Dream their reality.”

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