On July 28, 2017, California Governor Jerry Brown’s Office of Business and Economic Development recognized the California Department of Business Oversight for a successful Lean Six Sigma project that dramatically reduced the processing time for applications to amend financial services licenses.  Through the project, the Department cut the processing time from an average of 100 days to only 1.9 days!

We have previously commented that the time it takes state authorities to process license applications can be a significant factor for FinTech and other financial services companies to consider when determining how to structure their business.  State regulators who want to improve the business climate in their states would be well-advised to follow California’s lead in tackling this important issue.

On July 20, we reported that Director Cordray is scheduled to give a speech at the September 4 Cincinnati AFL-CIO Labor Day picnic.  Assuming the speculation that Director Cordray plans to run for Ohio governor is accurate, that event seemed to be an ideal venue for him to announce his candidacy.

Yesterday, the Ohio Democratic Party announced that the first in a series of six gubernatorial debates will be held on September 12 at Martins Ferry High School in Belmont County.  All of the announced candidates (former U.S. Rep. Betty Sutton, Dayton Mayor Dan Whaley, former state Senate Minority Leader Joe Schiavoni and former State Senator Connie Pillich) have agreed to participate.

As of now, Director Cordray is not slated to participate in the debate.  Party Chairman David Pepper was quoted by Cleveland.com: “I think anyone looking to run for statewide office, there aren’t that many months left before you really have to get going…As you can see, we’re moving forward.”

So far, Director Cordray has not indicated whether he is planning to enter the Ohio gubernatorial race and, if so, when that will happen.  If he decides to run, he must first resign as CFPB Director.  That could happen in early September so that he can launch his campaign on Labor Day at the Cincinnati AFL-CIO picnic, and/or participate in the first Democratic Party gubernatorial debate on September 12.

As we reported previously, on July 7, 2017 the Consumer Financial Protection Bureau (CFPB) posted on its website long awaited amendments to the TILA/RESPA Integrated Disclosure (TRID) rule, and a proposal to address the so-called “black hole” issue (regarding limits on the ability of a credit to reset tolerances with a Closing Disclosure).

Both the amendments and the proposal were published in Federal Register on August 11, 2017.  As a result, the amendments become effective on October 10, 2017, with a mandatory compliance date of October 1, 2018, and the comment deadline for the proposal is also October 10, 2017.

The Minnesota Supreme Court recently ruled that two for-profit postsecondary education schools had charged usurious interest rates on student loans and could not charge rates greater than 8% without obtaining a lending license.

Minnesota’s general usury law caps interest rates at 8% for written contracts but allows a lender to charge up to 18% on a “consumer credit sale pursuant to an open end credit plan.”  In State of Minnesota v. Minnesota School of Business, et al., the Minnesota Attorney General sought to enjoin the schools from making private student loans that typically had interest rates between 12% and 18%, alleging that the loans were subject to the 8% cap.  The schools did not pay out money to the student and instead credited the loan amount against the student’s outstanding tuition balance.  The credit was not available to the student for any other purpose.  The student repaid the loan through monthly payments pursuant to a schedule that had a fixed date by which the entire loan and accrued interest had to be paid in full, and no additional funds were available if the student paid off the loan early.

At issue was whether the loans qualified as a “consumer credit sale pursuant to an open end credit plan” on which Minnesota allowed up to 18 percent interest to be charged.  (The decision states that the parties agreed that the loans “were consumer credit sales.”)   Although the Supreme Court found that the definition of “open end credit plan” under Minnesota law only incorporated the Truth in Lending Act and Regulation Z definition of “open-end credit plan” in effect in 1971 and not as subsequently amended to expressly require revolving credit, it found that revolving credit was nevertheless an essential part of the 1971 definition.

Reversing the Minnesota Court of Appeals, the Supreme Court concluded that the loans were not made pursuant to an open-end plan.   It found that the repayment schedule on the schools’ loans, which provided for a fixed end date, was consistent with a closed-end plan and also observed that the schools had required students to sign a form containing an acknowledgment that a loan was not an “extension of credit under an open-end consumer credit plan.”  According to the Supreme Court, the schools had “structured their loans to give themselves the benefit of open-end credit plans, charging interest in excess of 8 percent-without providing their students the benefit of revolving credit.”

Having found that the schools had charged usurious interest rates, the Supreme Court concluded that to charge rates higher than 8 percent on loans that were not made pursuant to an open-end credit plan, the schools needed to obtain a Minnesota lending license.

The opinion states that the schools did not contest “that they were [engaged] in the business of making loans” for purposes of the lending license statute.  Thus, it appears that the schools did not attempt to argue that, in extending credit to students to finance tuition, they were not acting as lenders making “loans” subject to Minnesota’s general usury law but instead were acting as sellers of goods or services extending credit to buyers to which the time-price doctrine applies.  Sellers making closed-end credit sales should consult with counsel as to how they can avoid the 8 percent rate cap by taking advantage of the time-price doctrine under Minnesota law.

 

 

 

As we’ve discussed before, the CFPB sued Navient over its student loan servicing practices in the Middle District of Pennsylvania. In doing so, the CFPB followed its strategy of announcing new legal standards by enforcement action and then applying them retroactively. The chief allegation in the complaint is that Navient wrongly “steered” consumers into using loan forbearance rather than income-based repayment plans to cure or avoid defaults on their student loans. On March 24, 2017, Navient moved to dismiss the complaint on a number of grounds. While, on Friday, August 4, 2017, the district court declined to dismiss the case, the motion raised several arguments that a court of appeals should not be so quick to gloss over. We’ll focus here on two of them: fair notice, and the constitutionality of the CFPB’s structure.

Fair Notice

Navient argued in its briefs that the CFPB was pursuing them for alleged conduct when Navient was not given fair notice that the conduct, if it occurred, violated the law. The court used a technicality to decline to consider Navient’s fair notice argument at all. The court stated that: “[Under the relevant authorities,] Navient’s fair notice argument fails if it was reasonably foreseeable to Navient that a court could construe their alleged conduct as unfair, deceptive, or abusive under the CFP Act. Navient, however, has only advanced arguments as to why it did not have fair notice of the Bureau’s interpretation of the CFP Act (emphasis added).” Thus, the court found that it need not consider the fair notice argument.

In doing so, the court ignored authorities Navient cited that held that, as Navient paraphrased, “[a]n agency cannot base an enforcement action on law created or changed after the conduct occurred.” The court also ignored the obvious and clearly-implied corollary to Navient’s argument: The only way for Navient to be liable for the claims alleged in the complaint would be for a court, namely, the Middle District of Pennsylvania, to adopt the Bureau’s position. Thus, with all due respect for the court, Navient’s fair notice argument was fairly before it and should not have been so lightly cast aside.

This is especially so given how well-founded the argument seems to have been. How could Navient have known that the CFP Act required it to provide over-the-phone individualized financial counseling to borrowers as a result of a statement on its website indicating that “Our representatives can help you by identifying options and solutions, so you can make the right decision for your situation (emphasis added).” The statement was both conditional, and placed the duty for making the right decision squarely on consumers. The court completely ignored the fact that the CFP Act’s prohibition on unfair, deceptive, or abusive conduct would not have alerted anyone that the CFPB or a court would make the inferential leap between that statement and the duty that the CFPB says Navient undertook by making it.

Constitutionality of CFPB Structure

The court also rejected the argument that the CFPB’s structure was unconstitutional. We’ve argued before why we believe that such a view is incorrect and even dangerous to our constitution. But a few of those arguments bear repeating in light of the Navient court’s ruling. The first problem with the Navient court’s holding is that it applies Humphrey’s Executor in a way that ignores the fundamental holding of the case. In Humphrey’s Executor, the Supreme Court held that for-cause removal, staggered terms, and a combination of enforcement and law-making powers was acceptable in a multi-member commission. Its rationale: because of the commission structure, the FTC would operate as a quasi-legislative and quasi-judicial body, not a quasi-executive one. Not to state the obvious, but the CFPB is not a multi-member commission; its unitary director is like the President, a unitary executive. Thus, the Supreme Court’s indulgence of these accountability-limiting features in Humphrey’s Executor does not apply to the CFPB.

Second, the retort to this argument, that the CFPB Director is somehow more accountable to the President, is a legal fiction at best. If the President has no power to remove the Director without cause, the Director is not accountable to him. Period. The President can approach the Director, ask him to implement a certain policy, and the Director can ignore the President with impunity. That is not accountability, however one may measure it. It is true that the five FTC Commissioners, the entire board of the Federal Reserve, or the SEC Commissioners could do the same. But, those interactions are more like the ones the President faces in dealing with Congress or the Judiciary, interactions that the Constitution contemplated and intended. With the CFPB Director, the President stands powerless before the unitary executive of a federal agency whose will can stand in direct contrast to his own. If that is not an affront to the Constitution’s notion of the President as a unitary executive, what is?

Third, the Supreme Court also indulged accountability-limiting features in Morrison v. Olsen, because, among other reasons, the inferior officer at issue in the case “lack[ed] policymaking or significant administrative authority.” Such is not the case with the CFPB Director. The Director is not an inferior officer. More importantly, he has substantial policymaking authority. The Director has the authority to approve and enforce regulations relating to any consumer financial product or service, companies and individuals involved in providing such services, and service-providers to those companies and individuals. The CFPB has interpreted its authority to extend not just to banks, lenders, and debt collectors, but to mobile phone companies, homebuilders, payment processors, and law firms. The court in this case ignored these substantial differences between the CFPB Director and the inferior officer approved in Morrison v. Olsen.

Finally, the court ignored the implications of its ruling. Before long, if the CFPB structure is replicated elsewhere in government, we’ll have a government where Congress, the President, and even the Courts are relegated to the sidelines while powerful bureaucrats make law, interpret the law, and enforce it with virtually no political oversight.

* * *

As the case progresses, Navient will continue to defend itself. We will keep a close eye on the case and, as always, keep you posted.

A new research paper released by the Federal Reserve Bank of Philadelphia found that fintech lending has expanded consumers’ ability to access credit.  The paper, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information,” used account-level data provided by a large fintech lender to “explore the advantages/disadvantages” of loans made by such lender “and similar loans that were originated through traditional banking channels.”

The study’s key findings include:

  • The fintech lender’s consumer lending activities penetrated into areas that could benefit from additional credit supply, such as areas that have lost a disproportionate number of bank branches and highly concentrated banking markets.
  • Consumers presenting the same credit risk could obtain credit at lower rates through the fintech lender than through traditional credit cards offered by banks.
  • The lender’s use of alternative credit data allowed consumers with few or inaccurate credit records (based on FICO scores) to access credit at lower prices, thereby resulting in enhanced financial inclusion.

In February 2017, the CFPB issued a request for information that seeks information about the use of alternative data and modeling techniques in the credit process.

A report by the majority staff of the House Financial Services Committee concludes that there is a “valid and factual basis” for instituting contempt of Congress proceedings against Director Cordray.  The report states that it was issued in furtherance of “the Committee’s on-going investigation into the CFPB’s arbitration rulemaking.”

The report recites the history of what the majority staff calls “the CFPB’s longstanding failure to fully comply with the Committee’s on-going oversight regard pre-dispute arbitration. The report describes the Committee’s request for records relating to the CFPB’s arbitration rulemaking issued in April 2016, the CFPB’s failure to produce the requested records, the subpoena issued by the Committee to Director Cordray in April 2017 requiring production of the requested arbitration-related records as well as documents requested by the Committee on other topics, and Director Cordray’s default on the subpoena.

The report focuses on the two specifications in the subpoena related to the arbitration rulemaking.  One specification required production of “all documents relating to pre-dispute arbitration agreements between the CFPB and [specified consumer advocacy groups.]”  The other specification required production of “all communications from one CFPB employee to another CFPB employee relating to pre-dispute arbitration agreements.”  The majority staff provides a detailed explanation for their finding that Director Cordray has defaulted on the two specifications and that due to such default, there is “ample basis to proceed against [him] for contempt of Congress.”

Politico has reported that Jen Howard, a CFPB spokesperson, issued a written statement in which she indicated that the CFPB has “been working diligently to comply with the committee’s oversight on a number of fronts,” and “[o]n this particular matter, we have produced thousands of pages of documents thus far, and by next week we will have completely responded to one of the two specifications at issue.”

The Committee has not yet taken a contempt vote.  We hope the report may help persuade Republican Senators who are reportedly undecided on how they will vote on the resolution introduced in the Senate to disapprove the CFPB’s arbitration rule under the Congressional Review Act to vote in favor of the resolution.

The Federal Housing Finance Agency has announced that it has reopened and extended until September 1, 2017 the comment period on its Request for Input on improving language access in mortgage lending and servicing.  The FHFA previously extended the comment period until July 31, 2017.

According to the FHFA, it took this action “to allow interested parties more time to consider additional information on issues facing qualified mortgage borrowers with Limited English Proficiency (LEP) throughout the mortgage life cycle process, including mortgage lending and servicing.”

Issued this past May, the FHFA has stated that it intends to use the information it receives in response to the RFI to inform “additional steps that could potentially be taken to further support [LEP] borrowers and the mortgage industry’s ability to serve them throughout the mortgage life cycle.”

The CFPB has issued another report on checking account overdraft services, “Data Point: Frequent Overdrafts.”  The new report represents the CFPB’s third report dealing with overdraft services.  It previously issued a white paper in June 2013 and another “Data Point” report in July 2014.

In addition to the new report, the CFPB released four one-page prototype model forms to replace the current Regulation E model form for banks to use to disclose overdraft fees and obtain a consumer’s consent to the bank’s overdraft service for ATM and one-time debit card transactions.  The CFPB stated in its press release that it developed the prototypes through interviews with consumers and is now testing them more widely.

The 2014 report used data taken from account-level and transaction-level data for about two million accounts at large banks covered by the CFPB’s supervisory authority (i.e., banks with more than $10 billion in total assets). The new report states that the CFPB relied on a portion of the data set used in the 2014 report and supplemented that data with “additional data for a randomly selected subset of the active accounts in our sample from a nationwide credit repository.”

According to the report, the data set used for the new report contains information on about 240,000 active accounts, including about 48,000 accounts belonging to “frequent overdrafters.”  The CFPB defines “frequent overdrafters” as “accounts with more than 10 overdrafts and NSFs combined in a 12-month period.”  (“Very frequent” overdrafters are defined as “accounts with more than 20 overdrafts and NSFs combined in a 12-month period,” “non-overdrafters” are defined as “those with no overdrafts or NSFs in a 12-month period, and “infrequent” overdrafters are defined as “those with three or fewer overdrafts and NSFs combined in a 12-month period.”)

The new report’s key findings include:

  • Frequent overdrafters account for nine percent of all accounts but paid 79 percent of all overdraft and NSF fees.  Very frequent overdrafters account for about five percent of all accounts but paid over 63 percent of all overdraft and NSF fees.
  • Frequent overdrafters generally have lower credit scores and are less likely to have a general purpose credit card than non-overdrafters or infrequent overdrafters.  Those that have a general purpose credit card have less available credit on such cards than non- or infrequent overdrafters.
  • The dollar amount of monthly deposits into a checking account and the variability in monthly deposits, even after excluding low-activity accounts, is not strongly correlated with the number of overdrafts or NSFs incurred.  Once low-activity accounts are excluded, the CFPB found that overdrafters have lower median deposits than non-overdrafters.
  • The account usage characteristics and circumstances of frequent overdrafters vary considerably.  Four groups constituting nearly 70 percent of frequent overdrafters have low end-of-day balances (with medians between $237 and $439), low or moderate credit scores (with medians between 532 and 661), and low or moderate monthly deposits (with medians between $1,516, and $2,724).  Another group constituting 20 percent of frequent overdrafters has low end-of-day balances (median of $140), low monthly deposits (median of $1,313) and no credit score.  The remaining group, constituting about 11 percent of frequent overdrafters, has higher end-of-day balances (median of $1,403), significantly higher monthly deposits (median of $7,828), but only moderate credit scores (median of 635).
  • Compared to the median frequent overdrafter that has opted-in to overdraft services on one-time debit card transactions, the median frequent overdrafter that has not opted-in experiences only four fewer overdrafts per year but, accounting for fee reversals, pays 13 fewer overdraft fees per year.  Thus, opted-in consumers pay significantly more overdraft fees but incur only slightly more overdrafts than consumers who are not opted-in.  The CFPB suggests that this is likely the result of “authorize positive/settle negative” transactions (i.e. transactions that result from a bank’s payment or authorization of another debit between the authorization and settlement of the one-time debit transaction where the intervening debit creates a negative balance).

The CFPB offers no conclusions based on its findings and while the CFPB does not discuss its rulemaking plans, rulemaking does not appear to be imminent.  In its Spring 2017 rulemaking agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB stated that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  We have previously suggested that the CFPB may feel it is less urgent for it to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process electronic debits because most of the banks subject to its supervisory jurisdiction have already changed their processing order

A Florida federal district court has granted the motion filed by Ocwen Financial Corporation to invite the U.S. Attorney General to express the AG’s views on the CFPB’s constitutionality.

In April 2017, the CFPB filed a lawsuit against Ocwen in which it alleged Ocwen had engaged in unlawful conduct in connection with its servicing of residential mortgages.  In anticipation of filing a motion to dismiss challenging the CFPB’s constitutionality, Ocwen filed a motion in which it asked the court to invite the AG to participate in the briefing on the motion to dismiss.  In its motion, Ocwen referenced the amicus brief filed by the AG in the D.C. Circuit’s en banc rehearing in the PHH case in which the AG agreed with PHH’s position that the CFPB’s structure is unconstitutional.  Ocwen asserted that because the AG’s views on the CFPB’s constitutionality conflict with those of the CFPB, it was necessary for the court to hear “both sides from the government entities.”

In June 2017, Ocwen filed a motion to dismiss in which it argued that the CFPB’s structure violates the U.S. Constitution’s separation of powers.  In its order entered last week granting Ocwen’s motion to invite the AG to participate, the court stated that “[i]n light of [Ocwen’s] constitutional concerns, the Court finds it appropriate and prudent to ask the Attorney General of the United States to share with the Court its views on the issues raised in [Ocwen’s motion and the CFPB’s response].”

The order provides that “[p]ursuant to 28 U.S.C. section 2403 and Federal Rule of Civil Procedure 5.1, the court certifies to the [AG] that a statute has been questioned and permits the United States to intervene.”  (Section 2403 requires district courts to notify the AG of a constitutional challenge in which the United States is not a party.)  The order sets an October 2, 2017 deadline for the AG’s brief, an October 16, 2017 deadline for the CFPB to respond, and an October 23, 2017 deadline for the AG’s reply brief.