The California Reinvestment Coalition has filed a lawsuit against the CFPB in a California federal district court seeking a declaration that the CFPB’s failure to issue regulations implementing Section 1071 of the Dodd-Frank Act violates the Administrative Procedure Act and requiring the CFPB to promptly issue such regulations.

Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.  In April 2011, the CFPB issued guidance indicating that it would not enforce Section 1071 until it issued implementing regulations.  In May 2017, the CFPB issued a RFI and a white paper on small business lending in conjunction with a field hearing on small business lending.  The RFI was intended to inform the CFPB’s Section 1071 rulemaking.  While previously classified in the Bureau’s semi-annual rulemaking agendas as a current rulemaking, the Bureau’s Fall 2018 agenda reclassified the Section 1071 rulemaking as a long-term action item.  In the Fall 2018 agenda’s preamble, the CFPB attributed the rulemaking’s new status to the Bureau’s need to focus additional resources on various HMDA initiatives.

In its complaint, the CRC claims that the Bureau’s current HMDA activities, unlike Section 1071 rulemaking, were not mandated by Congress and are “directed at discretionary amendments to the 2015 final [HMDA] rule.”  According to CRC, “CFPB has chosen to prioritize its discretionary policy preferences over an explicit congressional mandate that it has now failed to implement for more than eight years.”  CRC alleges that the CFPB’s failure to implement Section 1071 harms CRC and the small businesses and communities it serves by inhibiting CRC’s “ability to advocate, educate and issue reports about access to credit; to advise economic development organizations working with women-owned, minority-owned, and small businesses on getting loans; and to work with lenders to arrange investment in low-income communities and communities of color.”  CRC further alleges that the “small business lenders and community development financial institutions, and organizations that work directly to ensure equal access to capital” that are among CRC’s members are directly harmed by the CFPB’s failure to implement Section 1071 because they are “hindered in their efforts to provide and secure loans for members of the impacted communities.”  CRC claims that without the data mandated by Section 1071, such members “have to expend additional organizational resources–and in some respects are entirely unable–to identify particular needs and opportunities.”

In seeking relief under the APA, CRC cites 5 U.S.C. section 706(1) and (2) which, respectively, allow a court to “compel agency action unlawfully withheld or unreasonably delayed and “hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “in excess of statutory jurisdiction, authority, or limitations.”  CRC claims that by failing to implement Section 1071, the CFPB has “unlawfully withheld and unreasonably delayed agency action.”  It also claims that by “countermand[ing] Congress’s requirements by informing financial institutions not to [comply with the requirements of Section 1071 to make inquiries, compile, maintain and submit data]” and “set[ting] aside the explicit requirements that Congress directly imposed on financial institutions in Section 1071,” the CFPB has “acted arbitrarily and capriciously, not in accordance with law, and in excess of statutory authority.”

In claiming that CRC has countermanded the requirements of Section 1071 by informing financial institutions not to comply, CRC is implicitly claiming that such requirements are currently effective despite the absence of implementing regulations.  That suggestion is inconsistent with the express language of Section 1071 which requires financial institutions to compile and maintain records of the information required to be obtained pursuant to Section 1071 “in accordance with regulations of the Bureau.”  It also ignores that elsewhere in Dodd-Frank, specifically in various mortgage-related provisions of Title XIV for which the Bureau was also directed to issue implementing regulations, Congress expressly provided that the requirements set forth in those provisions would become effective on a specified date if the Bureau had not issued implementing regulations with an earlier effective date.  Congress did not include similar language in Section 1071 making the requirements set forth in Section 1071 effective before the effective date of implementing regulations.

Somewhat ironically, in the CFPB’s Spring 2019 rulemaking agenda that was released today on the Bureau’s website, the Section 1071 rulemaking has been restored to current rulemaking status, with January 2020 indicated as the date for pre-rule activity.  In the agenda’s preamble, the CFPB states that it “intends to recommence work later this year to develop rules to implement section 1071 of the Dodd-Frank Act.”  It also states that it “delayed rulemaking to implement this provision pending implementation of the Dodd-Frank Act amendments to HMDA and started work on the project after the HMDA rules were issued in 2015.  The Bureau decided to pause work on section 1071 in 2018 in light of resource constraints and the priority accorded to various HMDA initiatives. The Bureau expects that it will be able to resume pre-rulemaking activities on the section 1071 project within this next year.”

 

 

According to American Banker, Kristen Donoghue, who has served as the CFPB’s Assistant Director of Enforcement since November 2017, has resigned.

American Banker also reports that Cara Petersen, the CFPB’s Principal Deputy Enforcement Director, has been named Acting Director of Enforcement, and that Jeffrey Ehrlich, the CFPB’s Deputy Enforcement Director, will become Principal Deputy Enforcement Director.  (Jeff spoke on Monday at the second presentation of PLI’s 24th Annual Consumer Financial Services Institute in Chicago.  The event was co-chaired by Alan Kaplinsky, who leads our Consumer Financial Services Group.)

 

I am pleased to report that as a result of the efforts of its business and consumer critics (among whom I include myself), the Tentative Draft of the Restatement of the Law, Consumer Contracts was put “on hold” yesterday at ALI’s annual meeting in Washington, D.C., making next year’s annual meeting the earliest date when the Restatement will again be considered by ALI’s members.

Although the meeting agenda had assigned a four-hour session for consideration of the Restatement, only the first of the Restatement’s nine sections reached a vote.  Section One contains the Restatement’s definitions and describes its scope.  ALI’s members voted to approve an amendment to Section One to clarify that to the extent the Uniform Commercial Code applies to a transaction and provides a rule, the Restatement does not apply.  While not objectionable, the amendment seems unnecessary since to the extent the Restatement sets forth the common law, common law cannot override statutory law such as the UCC.

The remainder of the session was devoted to debate on Section Two, which deals with how a consumer manifests consent to a transaction.  No vote was taken on Section Two.  A motion to convert the Restatement into a “principles project” was deferred until the 2020 annual meeting.

While the Restatement technically remains alive, its future is unclear.  Instead of becoming a principles project, the Restatement could continue as such but with redrafting.  Possible next steps could include a meeting of ALI’s Council or a meeting of the Restatement’s Advisers (of which I am one) and/or ALI’s Members Consultative Group.

One thing is clear, however.  Substantial work will be needed to arrive at a redrafted Restatement that is acceptable to both business and consumer groups.

As recently reported, the Washington, D.C. Department of Insurance, Securities, and Banking (DISB) published a Bulletin in late April reminding those who service student education loans in the District of Columbia of their obligation to file an annual report. The DISB has now released the required forms for both the 2018 and 2019 filings.

In an email to servicers, the Commissioner explained that the DISB was waiting to release the 2018 annual report form until Student Loan Servicing Alliance v. District of Columbia, et al. was resolved. Both the DISB and SLSA have now withdrawn their appeals of the decision. The Bulletin also explains that because of the litigation, the 2018 annual report form is now due by June 15, 2019 and no late fees will be assessed based upon the initial statutory deadline of January 30. The letter also informed servicers that the information collected in the annual report will be used to generate the annual assessment that is due on November 15, 2019. The 2019 annual report form is due by January 30, 2020, consistent with Section 3014 of the DISB regulations.

The annual report forms request information regarding the total number of borrowers and dollar amount of loans serviced in the District of Columbia, as well as the total number of borrowers and dollar amount of loans involving: delinquencies of 30 to 90 and 91 to 180 days; collections; modifications; deferments; loans sold, assigned, or transferred to the licensee; and loans sold, assigned, or transferred from the licensee.

Plans announced on May 15 by the FCC to empower voice service providers to offer more aggressive call-blocking programs could create significant problems for creditors and debt collectors.  In addition to allowing providers to block unwanted calls by default, the FCC plans to allow providers to offer opt-in blocking in which a consumer can elect to block calls from any numbers that are not on the consumer’s own contact list.  Such opt-in blocking could result in the blocking of legitimate communication attempts, such as collection calls from creditors or debt collectors.

The FCC’s press release and fact sheet indicate that FCC Chairman Pai has circulated a declaratory ruling that would allow voice service providers to start offering default call-blocking programs.  While many providers currently offer blocking programs, they do so only on an opt-in basis.  The default programs can be “based on any reasonable analytics designed to identify unwanted calls and will have flexibility on how to dispose of those calls, such as sending straight to voicemail, alerting the consumer of a robocall, or blocking the call altogether.”  The FCC ruling would allow consumers to opt out of call blocking and would provide that call blocking should not interfere with emergency communications.

In addition to allowing default blocking, the declaratory ruling would allow providers to offer opt-in blocking tools based on consumers’ contact lists or other “white list” options.  According to the fact sheet, the ruling “makes clear that carriers can permit consumers to use their own contact lists as a ‘white list,’ blocking calls not included on that list.  The white list could be updated automatically as consumers add and remove contacts from their smartphones.”

According to the FCC’s press release, the draft declaratory ruling is accompanied by a draft notice of proposed rulemaking that would provide a safe harbor for providers that implement network-wide blocking of calls that fail caller authentication under the “SHAKEN/STIR framework” once it is implemented.  SHAKEN is an acronym for “Signature-based Handling of Asserted Information Using toKENS” and STIR is an acronym for the “Secure Telephone Identify Revisited” standards.  Under the framework, “calls traveling through interconnected phone networks would have their caller ID ‘signed’ as legitimate by originating carriers and validated by other carriers before reaching consumers.”  In other words, “SHAKEN/STIR digitally validates the handoff of phone calls passing through the complex web of networks, allowing the phone company of the consumer receiving the call the verify that a call is from the person making it.”

Last year, Chairman Pai called on the nation’s largest voice service providers to adopt a robust call authentication system by the end of 2019 and indicated that he would consider regulatory intervention if necessary.  On May 13, the FCC issued a public notice announcing that Chairman Pai will convene a summit focused on the industry’s implementation of SHAKEN/STIR on July 11, 2019 in Washington, D.C.  The notice states that the summit “will showcase the progress that major providers have made toward reaching [the goal of deploying the SHAKEN/STIR framework in 2019] and provide an opportunity to identify any challenges to implementation and how best to overcome them.”

 

 

In a letter sent to Senator Elizabeth Warren regarding the CFPB’s supervision of student loan servicers, CFPB Director Kathy Kraninger discussed the Bureau’s relationship with the Department of Education.

In the letter, Director Kraninger responded to a question from Senator Warren regarding the guidance issued by the ED in December 2017 to student loan servicers about the application of the Privacy Act of 1974 to certain student loan records.  Director Kraninger stated that since December 2017, based on such guidance, student loan servicers have declined to produce information requested by the Bureau’s examiners in connection with exams related to Direct Loans and Federal Family Loan Program loans held by the ED.  (Under the ED’s guidance, servicers would have been required to obtain the ED’s permission to produce the information requested by the Bureau’s examiners.)

Director Kraninger also noted that the ED terminated a Memorandum of Understanding with the Bureau effective October 1, 2017.  She commented that because the Bureau is statutorily mandated to have an MOU with the ED, “it is a priority for us at the Bureau to make progress on a new MOU.”  Director Kraninger also indicated that she wants to have a Private Education Loan Ombudsman in place to work on a new MOU “and facilitate a productive relationship going forward with the Department so that we can carry out our responsibilities.”  (Seth Frotman, the former Ombudsman and now a vocal critic of the Bureau, resigned in August 2018.)

Director Kraninger noted that since the MOU was terminated, the ED has provided the Bureau “with the confidentiality assurances necessary for the Bureau to share confidential supervisory information with it.”

 

 

Tomorrow, the American Law Institute’s members are scheduled to vote on the Tentative Draft of the Restatement of the Law, Consumer Contracts at ALI’s annual meeting in Washington, D.C.  In this podcast, Alan Kaplinsky, who leads our Consumer Financial Services Group, interviews Steven Weise, a member of ALI’s Council, about the criticism of the Restatement from businesses and consumer advocates.  In addition to explaining the Restatement’s background and rationale, Steven responds to criticism of the research methodology and specific substantive provisions.

Click here to listen to the podcast.

In last week’s podcast, Alan interviewed Professor Adam Levitin of Georgetown University Law School about the reasons businesses and consumer advocates are both opposed to the proposed Restatement.  To listen to last week’s podcast, click here.

 

 

Last Friday, the CFPB announced that it had filed yet another meaningful attorney involvement lawsuit against a debt collection law firm – Forster & Garbus, P.C.  It’s notable enough that the Bureau continues to pursue these cases (even while proposing a “safe harbor” for meaningful attorney involvement in its proposed debt collection rules), but there are a number of very notable – and troubling – things about this particular case.

The primary thrust of the CFPB’s allegations was that the law firm filed lawsuits without receiving or reviewing underlying account-level documentation, or other documentation like debt sale agreements to debt buyers.  This probably comes as no surprise to most observers in this area, since the CFPB entered into consent orders with two law firms in December 2015 and April 2016, both of which required the law firms to possess, and review, “original account-level documentation” before filing a lawsuit against a consumer.  But the really strange thing about the Forster lawsuit is that the relevant period identified in the complaint is from 2014 through 2016.  In other words, it appears that the CFPB is attempting to hold the law firm responsible for not having complied with the two previous consent orders for a period of nearly two years before the first of those consent orders was entered into.

The relevant time period in the complaint also suggests that the Bureau did not find evidence of lack of meaningful attorney involvement after 2016.  In addition to the potential statute of limitations problems involved in bringing such stale claims (the FDCPA has a one-year limitations period, and Dodd-Frank borrows that limitations period for UDAAP claims based on an FDCPA violation), it also raises the policy question of why the Bureau would use enforcement – which its leadership has stated would be a “last resort” – in a case where the alleged violation ceased occurring more than two years ago.

But there’s something else really unusual – and disappointing – about the new complaint.  One section alleges that the law firm collected debts on behalf of clients who had entered into consent orders with the CFPB related to debt collection, and that the firm therefore should have been more attentive to understanding the basis for the debts it was collecting.  But in this section, the CFPB mischaracterizes two of its own consent orders, taking them out of context in a way that is, to say the least, surprising.

One order was against a large bank that acquired a portfolio of student loans from another bank, and the CFPB found in a consent order that the acquiring bank became a “debt collector” under the FDCPA because some of the acquired accounts were “in default” at the time the portfolio transfer occurred.  This finding was, of course, overruled by the U.S. Supreme Court’s decision in Henson v. Santander Consumer USA.  It seems strange that the Bureau would cite this consent order in its allegations, highlighting its own previous error of law, and especially since this aspect of its prior consent order had nothing to do with the accuracy of account information.

In another series of allegations in the new complaint, the Bureau notes that one of the law firm’s bank clients has entered into a consent order with the Bureau because it had “falsified court documents filed in debt-collection cases in New Jersey state courts.”  But those of us who remember those cases recall that the Bureau’s press release about that consent order recited that the bank’s outside counsel had falsified the documents; and that the bank itself had discovered the conduct by its outside counsel, informed the court, and voluntarily remediated affected consumers’ accounts.  Indeed, the Bureau specifically stated that no civil monetary penalty was being imposed on the bank because of this conduct.  But as retold in the Forster complaint, this consent order should have been some kind of warning sign to the law firm that the bank’s account records were suspect.  This is, at the least, a significant mischaracterization of the underlying consent order.

The takeaway from the Forster complaint seems to be that the CFPB still has a high level of motivation to bring meaningful attorney involvement cases, even though it litigated and lost such a case last year, and even when the facts are stale and the premise on which the lawsuit is based includes “warning signs” like the ones detailed above.  It makes us wonder what kind of “safe harbor” the Bureau is really offering in section 18(g) of its proposed debt collection rules.

 

Earlier today, I published a blog post explaining why I believe the American Law Institute’s members should not approve the Tentative Draft of the Restatement of the Law, Consumer Contracts (the “Restatement”) on which they will be voting at ALI’s annual meeting next Tuesday in Washington, D.C.  As I indicated in my blog post, the upcoming vote on the Restatement presents an unusual circumstance where both consumer and business groups find themselves in agreement that the Restatement should be rejected by ALI’s members.

On the consumer side, a group of 22 state Attorneys General joined by the D.C Attorney General have sent a letter to ALI’s members urging them to reject the Restatement because, in the AGs’ view, it does not adequately protect the interest of consumers.

We also note that a peculiar controversy has erupted involving Professor Adam Levitin of Georgetown University Law School, a critic of the Restatement, who I interviewed on Tuesday about the Restatement for our podcast.  Adam reportedly made a copy of the Restatement available online so that his blog readers could access the document and better understand the basis for his objections.  In response, he is reported to have received emails from ALI’s leadership demanding that he take down the Restatement and asserting that the Restatement is subject to ALI’s copyright, and that ALI finances its activities by selling copies of its Restatements.  ALI is further reported to have disabled Adam’s access to the ALI web site but, upon being challenged, to have restored his access.  While ALI has reportedly not yet withdrawn its demand that Adam take down the Restatement, ALI is reported to have posted the Restatement on its own web site, outside of the password-protected wall.