The CFPB and New York Attorney General have filed their opening briefs in their appeals to the Second Circuit in RD Legal Funding.  The CFPB filed an appeal from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  The NYAG filed an appeal from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

Both the CFPB and NYAG argue that the CFPB’s structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank Act’s for-cause removal provision that limits the President’s authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.

The NYAG makes the following two additional arguments:

  • Even if the Second Circuit concludes that the for-cause removal provision cannot be severed from Title X, it should not invalidate Dodd-Frank Sections 1041 or 1042.  As noted above, Section 1042 authorizes state AGs to enforce the CFPA’s UDAAP prohibition.  Section 1041 preserves state consumer protection laws to the extent they are not inconsistent with the  provisions of Title X.  The NYAG argues that these provisions are “wholly unrelated” to the for-cause removal provision.
  • Even if the Second Circuit concludes that the CFPB’s structure is unconstitutional and strikes Title X in its entirety, the Second Circuit must nevertheless reverse the district court’s dismissal of the NYAG’s state law claims for lack of subject matter jurisdiction.  According to the NYAG, the district court has jurisdiction because such claims involve an embedded federal issue, namely whether the federal Anti-Assignment Act (AAA) voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract.  (RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the September 11th Victim Compensation Fund of 2001 (VCF).  The district court concluded that the assignments of VCF benefits were void under the AAA.)

The CFPB’s defense of its constitutionality is at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), the DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  If the CFPB’s structure is found to be unconstitutional, and severing the for-cause removal provision is determined to be the appropriate remedy, a Democratic President might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.

The Bureau’s constitutionality is also currently before two other circuits, the Ninth and Fifth Circuits.  On January 9, 2019, the Ninth Circuit heard oral argument in Seila Law.  On March 12, 2019, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal.



The parties in Madden v. Midland Funding, LLC. have filed a joint motion with the New York federal district court seeking preliminary approval of a class settlement.

The plaintiffs’ class action complaint in Madden alleged that a debt buyer, which had purchased the plaintiffs’ charged-off credit card debt from a national bank, violated the Fair Debt Collection Practices Act (FDCPA) by falsely representing the amount of interest it was entitled to collect.  The complaint also alleged violations of New York usury law.  In an unexpected outcome, the Second Circuit held that the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act (NBA).  Accordingly, the debt buyer could be subject to the usury limitations provided by state law.  In June 2016, the U.S. Supreme Court denied the defendants’ petition for certiorari.

The proposed Settlement Class would be defined as:

All persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum regarding debts incurred for personal, family, or household purposes, whose cardholder agreements: (i) purport to be governed by the law of a state that, like Delaware’s, provides no usury cap; or (ii) select no law other than New York.  This class comprises two subclasses [with one subclass for claims arising out of New York usury law violations during a specified period and the other subclass for claims arising out of FDCPA violations during a specified period.]

The settlement provides for three main forms of relief:

  • $555,000 in monetary relief
  • $9,250,000 in balance reduction relief/credits
  • Ongoing compliance of defendants’ policies and practices with applicable law regarding collection of interest on settlement class member accounts

We continue to urge the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.


Like his FY 2018 and FY 2019 budgets, President Trump’s FY 2020 budget would make the CFPB subject to the regular Congressional appropriations process.

Pursuant to Section 1017 of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”

The FY 2020 budget contains a line item for “Restructure the Consumer Financial Protection Bureau” that shows a $23 million reduction in funding in FY 2020.  A document accompanying the budget entitled “2020 Major Savings and Reforms” states that the proposed budget would “cap transfers by the Federal Reserve Board to the CFPB during 2020 to $485 million, equivalent to the 2015 level.”  This would be followed by a $508 million funding reduction in FY 2021 and increasing funding reductions each year up to a $607 million reduction in FY 2029.  (The reductions are based on the estimated funding that would be available to the CFPB from the Fed under current law.)  Over the ten-year period, total funding reductions are projected to be about $5 billion, which is less than the approximately $6.5 billion in ten-year reductions estimated in the FY 2019 budget.

The accompanying document describes the “restructure” to which the FY 2020 budget is referring is as “limit[ing] its mandatory funding in 2020, and provid[ing] discretionary appropriations beginning in 2021.”  Of course, legislative action would be required to implement the President’s proposed “restructuring.”  During former Director Cordray’s tenure, numerous bills were introduced by Republican lawmakers that sought to make the CFPB subject to the regular appropriations process.  At Director Kraninger’s recent appearance before the House Financial Services Committee, several Republican Senators were critical of the CFPB’s insulation from the appropriations process.

The appropriations bill signed into law by President Trump in February that ended the partial government shutdown includes a provision dealing with CFPB funding requests.  It provides that during FY 2109, when the CFPB Director requests a funds transfer from the Fed, the CFPB “shall notify the Committees on Appropriations of the House of Representatives and the Senate, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate of such request.”  Such notification must also be posted on the CFPB’s website.




On March 12, the U.S. Court of Appeals for the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.

All American Check Cashing and the other appellants sought the interlocutory appeal after the district court denied their motion for judgment on the pleadings in a lawsuit filed by the CFPB that alleges the appellants engaged in abusive, deceptive, and unfair conduct in connection with making certain payday loans, failing to refund overpayments on those loans, and cashing consumers’ checks.  Citing the D.C. Circuit’s en banc PHH decision, the district court rejected the defendants’ argument that the CFPB is unconstitutional based on its single-director-removable-only-for-cause structure.  It subsequently agreed to certify the constitutionality issue for interlocutory appeal to the Fifth Circuit which accepted the appeal.  (The district court also rejected All American Check Cashing’s three other grounds for its motion for judgment on the pleadings: the CFPA violates due process because it fails to give fair notice of the conduct it proscribes; the CFPA violates the non-delegation doctrine because Congress did not clearly delineate the general policy for, or the boundaries of delegated authority to, the CFPB; and the CFPA violates principles of federalism because the CFPB based several of its CFPA claims on alleged violations of state law by All American Check Cashing.)

The Fifth Circuit panel hearing the oral argument consisted of two judges appointed by President Reagan, Judge Jerry Smith and Senior Judge Patrick Higginbotham, and a third judge appointed by President Obama, Judge Stephen Higginson. The panel’s questions and comments provided no clear clues as to how individual judges were leaning.  Most of the questioning was devoted to exploring each party’s arguments as to why U.S. Supreme Court precedent provided support for its position on the CFPB’s constitutionality.   

In its briefs, the CFPB relied primarily on the argument that because Acting Director Mulvaney was removable at will by the President and ratified the CFPB’s decision to bring the lawsuit against the appellants, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured.  While it also argued that the CFPB’s structure is constitutional under existing U.S. Supreme Court precedent, the CFPB did so as a fallback argument.

In the oral argument, however, the CFPB’s counsel made the constitutionality of the CFPB’s structure his principal argument, using the ratification argument only for purposes of arguing why All American Check Cashing would not be entitled to judgment on the pleadings in the CFPB’s lawsuit if the panel were to conclude that the CFPB’s structure is unconstitutional and strike the for-cause removal provision.  The CFPB’s counsel argued that Acting Director Mulvaney’s ratification would satisfy All American Check Cashing’s right to have the complaint filed by a CFPB Director removable at will, and that by Director Kraninger also becoming removable at will, the company’s right for the lawsuit to be prosecuted by a Director removable at will would be satisfied.

To the extent the panel members provided any clues as to how they might rule, their questions and comments suggested significant concern about the potential far-reaching consequences of a ruling striking all of Title X of the CFPA (as sought by All American Check Cashing) rather than one striking only the for-cause removal provision.

At the end of January, an en banc Fifth Circuit heard oral argument in the rehearing of Collins v. Mnuchin, in which a Fifth Circuit panel found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  It determined that the appropriate remedy for the constitutional violation was to sever the provision of the Housing and Economic Recovery Act of 2008 (HERA) that only allows the President to remove the FHFA Director “for cause” but “leave intact the remainder of HERA and the FHFA’s past actions.”

Petitions for rehearing en banc were filed by both the plaintiffs and the FHFA.  The plaintiffs, shareholders of two of the housing government services enterprises (GSEs), are seeking to invalidate an amendment to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs.  Their petition for rehearing en banc sought reconsideration of the panel’s rulings that the FHFA acted within its statutory authority in entering into the agreement and that the FHFA’s unconstitutional structure did not impact the agreement’s validity.

The FHFA’s petition for rehearing en banc sought reconsideration of the Fifth Circuit’s ruling that the FHFA’s structure is unconstitutional.  In addition to arguing that the panel’s constitutionality ruling conflicts with U.S. Supreme Court precedent and the D.C. Circuit’s en banc PHH decision, the FHFA argued that the plaintiffs do not have Article III standing to bring a separation of powers challenge.

In the All American Check Cashing oral argument, both parties were asked whether the panel should hold its  decision until the en banc court issues its decision in Collins v. Mnuchin, with one judge observing that the en banc court could “overrule” their decision in All American Check Cashing.  All American Check Cashing’s counsel urged the panel not to hold its decision because the en banc court might not reach the constitutionality issue.  The CFPB’s counsel however indicated that it may be appropriate for the panel to wait to issue its decision if panel members knew that the en banc court will reach the constitutionality issue.

A recording of the oral argument is available here.

Two other cases involving a challenge to the CFPB’s constitutionality are currently pending in the circuit courts.  In RD Legal Funding, which is pending in the Second Circuit, the CFPB and New York Attorney General filed their opening briefs at the end of last week.  In Seila Law, which is pending in the Ninth Circuit, oral argument was held on January 9, 2019.



Less than a week after warning subpoena and CID recipients to take their obligation to respond “seriously,” the FTC took aim at perceived inadequacies in compliance reports submitted pursuant to FTC consent orders and litigated judgments. In its March 11, 2019 blog post, the FTC’s Bureau of Competition alleges that “some Respondents are not taking seriously their responsibility to provide detailed and timely” compliance reports that demonstrate compliance with the obligations imposed in FTC Orders.

In an effort to curb this perceived trend of inadequate compliance reporting, the FTC is introducing the following new model language that will be included in future FTC orders:

“Each compliance report shall contain sufficient information and documentation to enable the Commission to determine independently whether Respondents are in compliance with the Order. Conclusory statements that Respondents have complied with their obligations under the Order are insufficient. Respondents shall include in their reports, among other information or documentation that may be necessary to demonstrate compliance, a full description of the measures Respondents have implemented or plan to implement to ensure that they have complied or will comply with each paragraph of the Order; a description of all substantive contacts or negotiations for the divestitures and the identities of all parties contacted, and such supporting materials shall be retained and produced later if needed.”

The FTC explains that it intends this new language to clarify, not change, the requirements for compliance reporting.

The FTC also reminds respondents that each compliance report must include a “meaningful level of data” and appropriate documentation to demonstrate substantive compliance with the FTC’s order. If a report lacks adequate detail or support, the FTC may require the respondent to submit a supplemental report. Misleading or incomplete reports are more serious and can constitute independent violations of the order that may result in further enforcement action or contempt penalties. The FTC warns respondents to “plan ahead” to ensure they can satisfy their compliance reporting requirements.

Although this announcement was made by the FTC’s Bureau of Competition, which is responsible for policing antitrust violations, compliance reporting is a common requirement in many FTC orders, including those arising from enforcement actions brought by the FTC’s Bureau of Consumer Protection. But even if the Bureau of Consumer Protection does not adopt similar language in its orders, the FTC’s post should serve as a warning to respondents to FTC orders to remain mindful of their compliance reporting obligations.

The CFPB has filed a request in the District Court for the Southern District of New York to enforce a civil investigative demand (“CID”) against the Law Offices of Crystal Moroney, P.C. (“LOCM”), a debt collection law firm located in New City, New York, continuing under Director Kraninger the CFPB’s pursuit of law firms despite the fact that such entities are generally exempt from the CFPB’s enforcement authority under section 1027(e) of Dodd-Frank.

Originally issued on June 23, 2017, the CID was part of the CFPB’s investigation into LOCM’s potential violations of the Fair Debt Collection Practices Act and the Fair Credit Reporting Act. It sought answers to 21 interrogatories, seven requests for written reports, 15 requests for documents, and four requests for other “tangible things” by July 21, 2017. While LOCM initially provided responses to at least some of the CFPB’s requests and engaged in discussions with respect to potential modifications and extensions to the CID, the CFPB now alleges that LOCM refuses to answer the remaining requests “based on its interpretation of certain rules of professional responsibility” for New York and New Jersey. The exact nature of the requested information is unclear, but the CFPB further alleges that it relates to telephone calls, written correspondence with consumers, credit reporting disputes, and LOCM’s contracts with its clients.

Unsurprisingly, the CFPB’s filing does not attempt to refute LOCM’s assertion that it is prevented from responding due to its professional obligations. It instead uses formulaic language declaring its “power of inquisition” where “the investigation is being conducted for a legitimate purpose, that the inquiries may be relevant to that purpose, that the information sought is not already within the [its] possession, and that [applicable] administrative steps [are followed].

While LOCM’s response is likely to provide additional detail as to the ethical defenses on which it relies, we have long been concerned with the potential for the CFPB to use its broad CID powers to infringe on professional obligations such as attorney-client privilege. This filing is a keen reminder to financial institutions of that risk.

In this week’s podcast, we review the four key focus areas of the 2015 diversity and inclusion standards adopted by the Offices of Minority and Women Inclusion at the CFPB and other federal financial regulators, identify issues regulated entities should consider in addressing those areas and deciding whether to conduct D&I self-assessments, and discuss the evolving Congressional and regulatory D&I landscape since 2015, including recent letters sent to regulated entities regarding D&I efforts and self-assessments and D&I benefits for letter recipients to consider.

Click here to listen to the podcast.

The CFPB’s Winter 2019 Supervisory Highlights discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  We discussed the Bureau’s auto loan servicing findings in a separate blog post.  In this blog post, we focus on the Bureau’s additional findings.

Although issued under Director Kraninger’s leadership, the Winter 2019 Supervisory Highlights covers examinations generally completed between June and November 2018 when Mick Mulvaney was Acting Director.  It represents the CFPB’s second Supervisory Highlights covering supervisory activities conducted under Mr. Mulvaney’s leadership.  Like the Summer 2019 Supervisory Highlights, the Winter 2019 issue contains the following language in its introduction:

It is important to keep in mind that institutions are subject only to the requirements of relevant laws and regulations.  The information contained in Supervisory Highlights is disseminated to help institutions and better understand how the Bureau examines institutions for compliance with those requirements.  In addition, the legal violations described in this and previous issues of Supervisory Highlights are based on the particular facts and circumstances reviewed by the Bureau as part of its examinations.  A conclusion that a legal violation exists on the facts and circumstances described here may not lead to such a finding under different circumstances.

Also like the Summer 2019 Supervisory Highlights, the new issue’s introduction and the Bureau’s press release about the report does not include any statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of five consent orders entered into by the Bureau, including its settlements with Cash Tyme, a payday retail lender, and Cash Express, a small-dollar lender.)

Key findings include:

Deposits.  CFPB examiners found that one or more institutions engaged in deceptive acts or practices by representing that payments made through their online bill-pay service would be debited no sooner than the date selected by the consumer and failing to disclose (or disclose adequately) that the debit might occur earlier than that date when the payee only accepted a paper check.  Such paper checks were sent by the institution several days before the consumer’s designated payment date, at the institution’s discretion, and would be debited from the consumer’s account when presented and cashed by the payee.  As a result, the debit could have occurred earlier or later than the designated date.  In response to the Bureau’s findings, the institutions “undertook a revision” of their consumer-facing materials and “undertook a plan to remediate consumers” who were charged an overdraft fee due to a paper check being negotiated before the consumer’s designated payment date.

Mortgage Servicing.  CFPB examiners found:

  • Servicers engaged in unfair practices by charging late fees greater than those permitted by the mortgage notes.  In one example, the FHA mortgage note permitted late fees based on a percentage of the overdue principal and interest only.  However, the servicer charged late fees based on a percentage of the full periodic payment of principal, interest, taxes, and insurance.  The overcharges were the result of programming errors in the servicing platform and “lapses in service provider oversight.”  In response to the findings, servicers conducted a review to identify and remediate affected borrowers and changed their policies and procedures “to assist in charging the late fee authorized by the mortgage note.”
  • Servicers engaged in deceptive practices by misrepresenting the conditions for the cancellation of private mortgage insurance (PMI).  One or more servicers were found to have told borrowers requesting PMI cancellation that such requests were declined because the borrowers has not reached the 80% loan to value requirement for cancellation.  While the relevant amortization schedules did not yet reach 80% LTV, the borrowers had in fact reached 80% LTV by making additional principal curtailment payments.  Although the borrowers had not satisfied additional conditions necessary for PMI cancellation, the servicers did not identify those conditions as the reasons for denying the borrowers’ cancellation requests.  In response to the Bureau’s findings, the servicers “changed templates, as well as policies and procedures, to ensure that PMI cancellation notices state accurate denial reasons.”
  • One or more servicers were found not to have satisfied the Regulation X requirement for a servicer to exercise “reasonable diligence” in obtaining documents and information to complete a loss mitigation application.  The servicers offered short-term payment forbearance programs during collection calls to delinquent borrowers who had expressed interest in loss mitigation and submitted financial information that the servicer would consider in evaluating them for loss mitigation.  However, the servicers had not notified the borrowers that their forbearance offers were based on an incomplete application evaluation and did not contact the borrowers, near the end of the forbearance period, to inquire whether they wanted to complete the applications to receive a full loss mitigation evaluation.  In response to the Bureau’s findings, the servicers “used enhanced processes, such as a centralized queue, to track borrowers receiving short-term forbearance programs and subsequently notify them that additional loss mitigation options may be available and that they could apply for such options over the phone or in writing.”
  • In examinations reviewing servicing of Home Equity Conversion Mortgage loans, examiners criticized the notices sent by servicers to successors of deceased borrowers informing them that they could qualify for an extension of time to delay or avoid foreclosure to enable them to purchase or market the property and directing them to return a form indicating their intentions for the property.  While the notices listed several documents that might be needed to evaluate whether the successor qualified for an extension, it did not direct them to submit such documents within a certain timeframe to be eligible for an extension. The Bureau found that the servicers had assessed foreclosure fees, and in some instances had foreclosed on properties, where successors had returned the form indicating that they intended to purchase or market the property but had not returned the documents necessary for an evaluation. While examiners did not find this to be a legal violation, they observed that it could pose a risk of a deceptive practice by creating an impression that the statement of intent was all that was needed to delay foreclosure.  In response to the Bureau’s findings, the servicers “planned to improve communications with successors, including specifying the documents successors needed for an extension and the relevant deadlines.”

Remittances.  CFPB examiners found that one or more supervised entities violated the remittance rule’s error resolution requirements by failing to refund fees and, as allowed by law, taxes to consumers whose remitted funds were made available to designated recipients later than the date of availability stated in the entity’s remittance disclosures and the delay was not due to any of the rule’s excepted events. The CFPB cited the violations, even though the delays at issue were due to a mistake by a non-agent foreign payer institution.  The CFPB reminded companies that “neither the relationship between a remittance transfer provider and the institution disbursing the funds to the designated recipient, nor the particular entity that is at fault for the delayed receipt of funds, is relevant to whether the remittance transfer provider must refund fees and taxes to the consumer.”  In response to the Bureau’s findings, the entities are making the mandated refunds.

Yesterday, the CFPB released the Winter 2019 edition of its Supervisory Highlights.  The report discusses the Bureau’s examination findings in the areas of automobile loan servicing, deposits, mortgage loan servicing, and remittances.  In this blog post, we focus on the Bureau’s findings relating to auto loan servicing.  (We will discuss the Bureau’s other findings in a separate blog post.)

The auto loan servicing findings include a discussion of interest to auto finance companies, based on the now-familiar topic of ancillary products.   Notably, however, the ancillary product issues identified concern refunds on such products when a consumer’s vehicle is repossessed or is declared a total loss.  These observations underline not only the Bureau’s continued interest in ancillary product issues, but also its high degree of attention to repossession- and collection-related issues in auto finance, which have been present in numerous examinations over the past couple of years.  The Bureau’s emphasis on ancillary product cancellation and refund issues also mirrors similar efforts by state regulators that we have observed.

The discussion in Supervisory Highlights mentions two practices that the Bureau found to be unfair or deceptive.  First, the Bureau stated that “one or more servicers” had made errors in requesting refunds on extended service contracts purchased with used cars.  In essence, the servicers allegedly had used the total mileage on the cars in calculating the refund amount, when the correct calculation should have been based on the miles driven by the consumer after purchase.  The Bureau noted that this error reduced the amount of the refunds provided to consumers, which in turn increased their deficiency balances.  According to the Bureau, the attempts made to collect these inflated balances were “unfair” under Dodd-Frank.  The servicer(s) involved remediated the issues (although the type of remediation is unspecified), and began to “verify mileage calculations” on service contract refunds.

Our take on this issue is that it reflects a pattern we continue to see in CFPB examinations – that errors in operations – be they human or system errors – are still a fertile ground for UDAAP findings by the CFPB.  And, as noted below, when those errors affect deficiency balances or collections, they Bureau will likely identify them as UDAAP violations.

The second issue discussed in Supervisory Highlights seems to be potentially more generally applicable.  The Bureau noted that “one or more servicers” failed altogether to request refunds on ancillary products after repossession or total loss events.  According to the CFPB, the servicers then sent deficiency balance notices to consumers, including a line item for “total credits/rebates.”  The Bureau concluded that this deceived consumers, who interpreted the statements as including any available refunds from ancillary products, when in fact no refunds had been requested by the servicer.  The Bureau went on to note that the servicer(s) involved “remediate[d] affected borrowers,” and “changed deficiency notices to clarify the status of eligible ancillary product rebates.”

On the one hand, this seems like a fairly obvious issue – auto finance companies should make an effort to request ancillary product refunds in the event of a total loss or repossession.  But there are two very strange things about the CFPB’s discussion of this issue that will tend to confuse, rather than assist, auto finance companies.  First, the Bureau notes this as purely a disclosure issue, arguing that the wording of the deficiency notices was misleading.  Second, the going-forward solution was for the deficiency balance disclosure to be changed to “clarify the status” of refunds on ancillary products.

That’s easy for auto finance companies to do, but industry players will undoubtedly be asking the question, “what is the extent of my duty to request ancillary product refunds in these situations?”  This is a significant operational question for auto finance companies, especially because many ancillary products are offered by dealers and administered by companies with which the finance company or bank has no relationship.  The CFPB’s discussion of this issue seems to suggest that there is no duty to request a refund, and indeed there is no indication that the entity involved was required to actually request refunds.  But we think that conclusion is probably a risky one to adopt, since we know that the Bureau (on other occasions) and state regulators have insisted that the finance company or bank does have such a duty.   But, since the Bureau’s discussion is confined solely to disclosure issues, we don’t know what the scope of that duty is.

We also note that although the discussion of this issue in Supervisory Highlights concerned repossessions and total loss situations, it can also arise in the context of early payoffs, when a consumer has purchased a GAP waiver product.  In our view, banks and auto finance companies should be equally sensitive to requesting refunds, calculating those refunds properly, and disclosing their status to consumers when an early payoff makes a GAP product no longer necessary for a consumer.


Director Kraninger was sharply criticized by Democrats at today’s hearing on the Bureau’s semi-annual report held by the Senate Banking Committee.

Ms. Kraninger’s opening remarks and written testimony repeated nearly verbatim her opening remarks and written testimony to the House Financial Services Committee last week.  She indicated once again that the Bureau’s primary goal would be prevention of harm, that the Bureau would focus its enforcement activities on “bad actors, and that she would emphasize stability, transparency, and consistency. 

Like their Democratic counterparts on the House committee, Democratic members were highly critical of the Bureau’s proposal to eliminate the ability to repay (ATR) requirement in its payday loan rule, its decision to discontinue MLA compliance examinations, and the decline in CFPB enforcement activity with regard to fair lending and student loan servicing.  Several Democratic members also criticized the Bureau’s continued employment of Eric Blankenstein as Policy Associate Director of the Bureau’s Office of Supervision, Enforcement, and Fair Lending.  Mr. Blankenstein is alleged to have made racially offensive comments in 2016.

As she did during her House appearance, Ms. Kraninger held steadfast to her view that the CFPB lacks clear authority to examine financial institutions for MLA compliance and referred lawmakers to the proposed legislation submitted by the CFPB that would amend the Dodd-Frank Act to expressly provide such authority.

With regard to the Bureau’s proposal to eliminate the payday loan rule’s ATR requirement, Democratic members called into question the sufficiency of the CFPB’s basis for its proposal and highlighted the more than $7 billion in additional revenue that the CFPB has estimated lenders would receive as a result of eliminating the ATR requirement.  Despite Ms. Kraninger’s statement that she would approach the rulemaking with an “open mind,” Democratic members expressed skepticism as to whether the Bureau would objectively consider the evidentiary record.  

In response to a question from Senator Doug Jones regarding the Bureau’s use of the disparate impact theory in future fair lending cases, Ms. Kraninger referenced the CFPB’s Fall 2018 rulemaking agenda which indicated in its preamble that the future rulemaking under consideration included the requirements of the Equal Credit Opportunity Act regarding the disparate impact doctrine.  Ms. Kraninger declined to express her personal views on the doctrine but indicated that she was involved in internal discussions regarding potential pre-rulemaking activities.   

As might be expected, Senator Elizabeth Warren was perhaps Director Kraninger’s harshest critic, highlighting the lack of new Bureau fair lending and student lending enforcement actions filed since Director Cordray’s departure.  Senator Elizabeth Warren concluded her questioning with the comment that if Ms. Kraninger had “any decency,” she “would do [her] job or resign.”

In addition to the questions asked by Democratic members about topics also covered at the House hearing, Senator Mark Warner asked Ms. Kraninger about the CFPB’s “GSE patch” for qualified mortgages.  The “patch” is an exemption created by the CFPB’s QM rule from its 43 percent debt to income ratio cap for mortgages eligible for purchase by Fannie Mae or Freddie Mac.  It is a temporary measure that is set to expire in January 2021 or on the day the GSEs exit conservatorship, whichever occurs first.  Senator Warner stressed the need for the CFPB to take steps to address the patch to avoid potential adverse consequences to the mortgage market should the patch expire.

Like their Republican counterparts on the House committee, Republican members renewed their criticism of Director Cordray’s “regulation by enforcement” approach.  They also expressed continuing concern over the Bureau’s data collection practices, praised former Acting Director Mulvaney’s creation of an Office of Cost Benefit Analysis, and voiced support for the Bureau’s use of such an analysis in carrying out its authorities.