The CFPB recently issued its annual fair lending report covering its fair lending activity in 2021. 

In the report’s discussion of its risk-based approach for prioritizing fair lending supervisory and enforcement activity, the CFPB indicates that much of its enforcement and supervision efforts were focused on advancing its priorities of advancing racial and economic equity and promoting economic recovery related to the COVID-19 pandemic.  It also identifies the following additional fair lending supervisory areas of focus: “mortgage origination and pricing, small business lending, student loan origination work, policies and procedures regarding geographic and [income types] exclusions in underwriting, and on the use of artificial intelligence (AI) and machine learning models [in evaluating applicants for credit].”  For these areas, the CFPB identifies the following specific issues:

  • Mortgage origination—redlining (and whether lenders intentionally discouraged prospective applicants living in, or seeking credit in, minority neighborhoods from applying for credit); assessing whether there is discrimination in underwriting and pricing processes such as steering; and HMDA data integrity and validation reviews (both as standalone exams and in preparation for ECOA exams that follow).
  •  Small business lending—assessing whether there are disparities in application, underwriting, and pricing processes, redlining, and whether there are weaknesses in fair lending-related compliance.
  • Student loan origination—lender’s policies and practices in underwriting or pricing.

The report’s discussion of fair lending enforcement actions indicates that in 2021, the Bureau announced four fair-lending enforcement actions.  One of those actions is an action brought jointly with the DOJ and OCC against Trustmark National Bank (TNB) which alleged TNB engaged in lending discrimination by redlining predominantly Black and Hispanic neighborhoods in Memphis, Tennessee.  Another is the CFPB’s lawsuit against online lender LendUp that included allegations that LendUp violated the ECOA and Regulation B by failing to provide timely and accurate adverse action notices to consumers whose loan applications were denied.   

The other two enforcement actions that the CFPB labels “fair lending” actions are the CFPB’s lawsuits against Libre by Nexus and JPay.  The Libre lawsuit targeted activities directed at immigrants seeking to obtain bonds in order to be released from federal detention centers, the majority of whom were alleged to be “Spanish-speakers, most of whom do not read or write English and many of whom cannot read or write in any language.”  The immigrants’ limited English proficiency was the basis of a claim by the CFPB that the defendants engaged in abusive acts and practices in violation of the CFPA’s UDAAP prohibition.

The JPay lawsuit involved prepaid cards that JPay issued to formerly incarcerated individuals upon their release from prison.  The cards contained the balance of funds owed to former inmates upon their release, including their commissary money, and any “gate money” to which they were entitled under state or local law.  The CFPB alleged that JPay engaged in unfair, deceptive, and abusive acts and practices in violation of the CFPA’s UDAAP prohibition through conduct that included causing fees to be imposed on consumers who were required to get a JPay debit release card to access money owed to them at the time of their release from prison and misrepresenting fees.  Neither the CFPB’s press release nor Director Chopra’s statement about the lawsuit mentions concerns about vulnerable populations or discrimination.  However, in her introductory message to the report, Fair Lending Director Patrice Ficklin stated: “In the United States, incarcerated individuals and individuals reentering society are overwhelmingly men of color.  The CFPB will continue to fight discrimination that manifests as unfair, deceptive, or abusive acts and practices.”

Ms. Ficklin’s comment would appear to confirm that the CFPB’s decision to include these lawsuits in the report and characterize them as “fair lending enforcement actions” despite the absence of any apparent “lending” or “credit” in either case is tied to the CFPB’s recent announcement that it intends to use its UDAAP authority to challenge discrimination even when fair lending laws do not apply, even though that announcement occurred some months after these lawsuits were filed.  While the report does not directly reference the CFPB’s announcement in the section on pending fair lending enforcement investigations, the CFPB states that it “is looking into potential discriminatory conduct, including ECOA and unfairness, as well as unlawful conduct targeted at vulnerable populations.”

For a more detailed discussion of the new Restatement, we encourage you to also listen to the episode of the Consumer Finance Monitor Podcast released today with Ballard Spahr’s Alan Kaplinsky (who is on the ALI Board of Advisers to the new Restatement) and special guest Steven Weise from the ALI Council.

The American Law Institute (“ALI”) is expected to approve the Restatement of the Law, Consumer Contracts (the “Restatement”) tomorrow, May 17, 2022 at ALI’s 2022 Annual Meeting in Washington, DC.  The Restatement culminates an 11-year project by ALI to address how contractual terms are adopted, modified, and enforced in contracts between businesses and consumers.  The Restatement of the Law, Consumer Contracts, sets forth a series of rules that are intended to represent the current black letter law for consumer contracts.  The foundational principal behind the new Restatement is that consumer contracts are asymmetrical in nature, with sophisticated business parties entering into numerous identical transactions with unsophisticated consumers.  While acknowledging there are benefits to standard form contracting, the new Restatement diverges from the Restatement Second of Contracts in some key areas, including changes in terms, assent, parol evidence, and defenses to enforceability.  The new Restatement only covers these and a few other select common law contract issues, and, will override the Restatement Second of Contracts where there is a conflict between the two.  Because courts often look to Restatements of the Law to guide their decision making, all companies that contract with consumers will need to familiarize themselves with the new Restatement as it may require immediate changes to consumer contracts.

According to the ALI, Restatements of the Law are primarily addressed to courts and reflect the common law as it presently stands or might appropriately be stated by a court.  In contrast, Principles of the Law, another category of ALI publications, are intended to be aspirational statements of best practices.  The distinction is important because the controversy surrounding the new Restatement emanates from numerous instances where many believe the Restatement’s Reporters (the authors) have attempted to set forth black letter authority on issues for which there is a dearth of relevant case law and that goes beyond what most courts have actually held.  Some critics have also pointed out that much of the case law relied upon consists of federal court decisions, which are not binding authority on state courts. This is problematic because Restatements are expected to present the common law as developed on the state level.

Interestingly, there has been almost universal criticism of the new Restatement throughout the project from both consumer- and business-affiliated interests.  In 2019, 23 State Attorneys General urged ALI members to reject the draft Restatement, concluding it “represents an abandonment of important principles of consumer protection in exchange for illusory benefits.”  This past January, a coalition of general counsels of major corporations and representatives of leading trade associations (including those in the financial services industry) wrote to the ALI urging it not to approve the Restatement on the grounds that it is conceptually flawed and riddled with major public policy changes that are completely at odds with the common law that has actually been adopted by courts.  Previously-released episodes of our Consumer Finance Monitor Podcast, available here and here, include substantive discussions of many of these criticisms and responses from the ALI.  Some of these concerns have been addressed by the ALI in the current draft, including clarifications concerning mutual assent that seem to have appeased criticism from consumer groups.

The new Restatement is broken down into nine sections and also includes an appendix summarizing the black letter law.  Section 1 provides definitions used throughout the document, a statement regarding the scope of the project, and an outline of the substantive issues.  The other sections, like other Restatements of the Law, begin with a succinct statement of the black letter law on a particular issue, followed by commentary from the Reporters and “illustrations” presenting various use cases.  Each section concludes with detailed Reporters’ Notes, with include citations to the cases underlying their conclusions and analysis.  The sections include:

§ 2. Adoption of Standard Contract Terms

§ 3. Adoption of Modification of Standard Contract Terms

§ 4. Discretionary Obligations

§ 5. Unconscionability

§ 6. Deception

§ 7. Affirmations of Fact and Promises that Are Part of the Consumer Contract

§ 8. Standard Contract Terms and the Parol Evidence Rule

§ 9. Effects of Derogation from Mandatory Provisions

Potential issues abound for any company that contracts with consumers.  Just a few examples include:  

  • The need to ensure clear notice to consumers of key contractual terms and any subsequent modifications of those terms in clickwrap or other online agreements §§ 2, 3).
  • The elevation of deception (§ 6) as a universal, black letter common law defense to a consumer contract term.  While many businesses are already subject to state and federal consumer statutes prohibiting deceptive acts or practices, the Restatement holds that material terms of a contract may be unenforceable even where the actions of the business do not satisfy the elements of fraud.
  • While the common law of many states considers a contract or term unconscionable only where it is both substantively and procedurally unconscionable (with the degree of each determined on a sliding scale), the new Restatement holds that it is sometimes sufficient to only prove one of these factors to challenge a contract (§ 5b).  This opens the door for consumers to strike down contracts and terms on the grounds that they are unsophisticated and didn’t understand what they were agreeing to, thereby rendering the contract or term procedurally unconscionable.
  • In addressing contract terms that are substantively unconscionable in limiting consumer redress (§ 5), the Reporters acknowledge that the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the Federal Arbitration Act preempts state law and allows arbitration agreements with class action waivers, but then state they take no position on preemption and cite to a handful of cases in concluding that arbitration clauses can be unconscionable under state common law. 
  • In § 8, the Restatement dilutes the parol evidence rule in holding that standard consumer contract terms that contradict or unreasonably limit prior affirmations or promises of a business do not constitute a final expression of the agreement.  While the Reporters state in the comments that the parol evidence rule still applies, the black letter law and illustrations open the door for courts to entirely ignore merger and integration clauses in striking down contract terms on the basis of prior written or oral understandings of the parties.

It remains to be seen how the new Restatement will be received by courts in light of the controversy surrounding it and the apparent paucity of case law supporting some of its conclusions.  However, once adopted, the Restatement will create new potential defenses for consumers and a litigation risk for any business that has not reviewed its consumer contracts for compliance with the black letter law as formulated by the Restatement.  Beyond reviewing specific forms of contracts, companies should review their entire process for entering into consumer contracts, as well as the methods used for modifying them.  The good news is the use cases provided in the illustrations should be helpful in developing and refining best practices to address these risks.  Additionally, the case citations throughout the various sections represent a generally comprehensive collection of precedent, useful for any litigator addressing claims or counterclaims that are colored by the Restatement’s formulation of the black letter law of consumer contracts. 

With ALI’s members poised to approve the new Restatement, providers need to understand the Restatement’s impact on their consumer agreements, particularly those entered into online.  After reviewing the rationale for the new Restatement and ALI’s approach to developing the rules it contains, we look at the issues covered by each section, such as the rules that deal with assent to contract terms, change in terms, unconscionability, and deception.  We also discuss how businesses can use the Restatement to their benefit and ALI’s next steps for finalizing the draft.

Alan Kaplinsky, Ballard Spahr Senior Counsel and a member of the ALI Board of Advisers to the new Restatement, leads the conversation.

Click here to listen to the podcast.  (Today’s release is in place of our regular Thursday podcast episode release this week.)

In Wednesday’s edition of Consumer Law & Policy Blog, Professor Jeff Sovern laments that during Director Rohit Chopra’s recent testimony before the Senate Banking Committee and the House Financial Services Committee, neither he nor any member of the Committees mentioned “arbitration” as an action item on the CFPB’s agenda. Professor Sovern expresses hope that the arbitration issue will nevertheless appear on the CFPB’s regulatory agenda when it is soon published. Don’t hold your breath, Professor Sovern!

There are many reasons why it would be foolish for the CFPB to revisit arbitration:

  1. Director Chopra already has a very robust agenda for the CFPB. Among other things, that includes rulemakings under Section 1071 of Dodd-Frank (small business loan data collection) and Section 1033 of Dodd-Frank (consumer access to data). Both of these rulemakings are very complex and controversial. The CFPB does not have the bandwidth and resources to take up arbitration which would also undoubtedly be complex and controversial. 
  2. Director Chopra’s term may end in 2024. It would not make practical or political sense for him to launch another arbitration rulemaking which would never be completed within his term in office. The CFPB’s original arbitration rulemaking took five years from beginning to end and it ended up very badly for the Bureau since Congress passed a joint resolution to repeal the rulemaking under the Congressional Review Act. Even if Congress had not done that, a lawsuit would have been filed against the CFPB to invalidate the arbitration rule. 
  3. Under the Congressional Review Act, the CFPB is disabled from promulgating a similar arbitration rule. The Bureau would not be able to ban class action waivers in arbitration provisions. It also seems doubtful that the CFPB would ban consumer financial services arbitration altogether, both because they may be barred from doing that by virtue of the Congressional Review Act and because the CFPB’s earlier study of arbitration did not support an all-out ban of arbitration. Indeed, the data in that earlier study showed that individual arbitration is faster, cheaper and more beneficial for consumers than class action litigation.
  4. In order to propose a new arbitration rule, the Bureau could not rely on the study it conducted prior to proposing its original arbitration rule. Instead, the CFPB would need to go back to square one and initiate a new study which would take years to complete and without being assured of success. 
  5. Federal agencies are generally loathe to interfere with bills pending before Congress. The House recently passed the FAIR Act which would ban all consumer arbitration. Since Congress is already dealing with the issue, it would be presumptuous and improper for the CFPB to interfere. 

A key issue for earned wage access (EWA) programs is whether they constitute “credit” for purposes of federal consumer financial protection laws such as TILA, ECOA, and the CFPA, or under state law.  The Treasury Department’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals includes a proposal concerning how EWA programs should be characterized for tax purposes.

The proposal would amend the Internal Revenue Code to clarify that EWA arrangements (which the Treasury refers to as “on-demand pay arrangements”) are not loans.  It would also add a definition of on-demand pay arrangements to the IRC.  Such arrangements would be defined as “as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”

In November 2020, the CFPB issued an advisory opinion (AO) that addressed whether an EWA program with the characteristics set forth in the AO was covered by Regulation Z.  Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees.  The AO set forth the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Regulation Z.  

The CFPB expressly limited the AO’s application to EWA programs meeting all of the characteristics set forth in the AO.  Earlier this year, Seth Frotman, now CFPB General Counsel, stated that “products that include the payment of any fee, voluntary or not, are excluded from the scope of the advisory opinion and may well be TILA credit.”  He also indicated that more clarity on these issues was needed from the CFPB. 

While the proposal provides helpful support for the position of EWA program providers that such programs should not be regulated as “credit” products, it is unclear whether, if adopted, the CFPB or state regulators would deem the IRC’s treatment of EWAs determinative of their treatment for consumer financial protection laws.  For example, the California Department of Financial Protection and Innovation (DFPI), exercising its expanded jurisdiction over consumer financial services providers under the California Consumer Financial Protection Law (CCFPL), entered into memorandums of understanding with five EWA companies in early 2021.  In doing so, the DPFI appeared to be taking an expansive view of who are “covered persons” under the CCFPL by considering companies to be offering a “consumer financial product or service” as defined in the CCFPL even when the product or service did not constitute “credit” for purposes of TILA and Regulation Z.

Last week, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled “Examining Overdraft Fees and Their Effects on Working Families.”  A recording of the hearing is available here. 

After opening statements from Subcommittee Chairman Raphael Warnock (D-GA) and Ranking Member Thom Tillis (R-NC), three witnesses offered testimony and responded to questions from the Subcommittee members.  The following witnesses appeared at the hearing:

  • Aaron Klein, Senior Fellow in Economic Studies, Brookings Institution 
  • Jason Wilk, Founder & Chief Executive Officer, Dave
  • David Pommerehn, Senior Vice President and General Counsel, Consumer Bankers Association

Chairman Warnock kicked off the hearing by stating that onerous and opaque overdraft fees keep people in cycles of debt and poverty, and disproportionately impact people of color.  He observed that many banks have moved to eliminate overdraft fees, and applauded those banks for making the right choice to benefit these communities.  In his opening remarks, Ranking Member Tillis recognized the tremendous consumer choice available today as the financial services industry has developed new products.  Responding to Warnock, Tillis stated that the industry has already adopted consumer-friendly overdraft products and practices through competition and innovation and regulation is not needed.  In a nod to the recent CFPB Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services, Tillis concluded that overdraft fees should not be characterized as “junk fees.”

The testimony discussed the volume of overdraft fees charged – up to $30 billion a year according to Aaron Klein from Brookings — as well as the concentration of the impact on the most economically vulnerable individuals.  Chairman Warnock and Senator Warren both cited a CFPB study that found 80% of overdraft fees were charged to 9% of consumers.  However, it was noted throughout the hearing that overdraft fee revenue has been on the decline, in many instances due to voluntary actions within the financial services industry, including eliminating overdraft charges by many banks. 

Aaron Klein testified that banks have already made sweeping changes to their products without regulation or legislation that will substantially reduce usage of overdrafts and overall costs for consumers, quantifying the impact of those voluntary changes at $5 billion a year.  David Pommerehn from the Consumer Bankers Association noted that overdraft products are based on necessity, due to limited small dollar loan options, and provide one of the last viable sources of short term liquidity for many consumers, also highlighting the choice and transparency already surrounding the product based on the requirement to opt-in.  Highlighting some of the innovation in the space, Jason Wilk discussed the products his company, Dave, offers to assist consumers in its mission to “disrupt overdraft,” including linking with their bank accounts to help customers have better visibility into upcoming bills that may lead to an overdraft.

While everyone acknowledged actions taken within the industry to address concerns about overdraft, the witnesses proposed additional policy changes.  Klein highlighted five recommendations, including (1) revising safety and soundness rules to target a small number of banks that make a totality of their profits off of overdraft fees, (2) making credit unions disclose their overdraft data like banks do, (3) having the Fed use its regulatory authority under the Expedited Funds Availability Act to implement real-time payments to address the slow payment system, thereby decreasing the reliance on payday lenders, (4) new regulation to prohibit banks from posting debits before credits and reordering payment flows from largest to smallest when processing transactions, and (5) universal Bank-On-style accounts (no overdraft, low-cost, basic accounts).  Pommerehn advocated for more short term liquidity products, and encouraging policymakers to explore alternatives, including small dollar lending. 

Yesterday, the U.S. Senate confirmed Alvaro Bedoya to serve as an FTC Commissioner  

Mr. Bedoya fills the seat on the Commission previously held by CFPB Director Rohit Chopra.  He joins the two other Democratic FTC Commissioners, Lina Khan, Chair of the Commission, and Rebecca Slaughter, thereby ending a 2-2 split and restoring a 3-2 Democratic majority.  His presence on the Commission paves the way for Chair Khan to move forward on her aggressive agenda.

With Mr. Bedoya having served as the first Chief Counsel for the Senate Judiciary Committee’s Subcommittee on Privacy, Technology & the Law, some observers have expressed the view that Mr. Bedoya will advocate for greater FTC focus on potential discrimination arising from the use of  artificial intelligence and other technological innovations as well as privacy considerations for both consumer protection and competition among Big Tech companies.

We first review the scope of the CFPB’s supervisory authority granted by Dodd-Frank and the source of its authority to supervise nonbanks that present risks to consumers.  We then discuss how we expect the CFPB to use its risk-based authority, including the types of products it may target and its decision to make public the identities nonbanks.  We also look at the practical impact of CFPB supervision for targeted nonbanks and what steps companies can take both to avoid becoming a CFPB target and to prepare for the possibility of a CFPB examination.  Finally, we consider how the CFPB’s action could impact the approach of state regulators to nonbank providers of alternative credit products.

John Grugan, a partner in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Michael Gordon and Lisa Lanham, partners in the Group.

Click here to listen to the podcast.

The Fifth Circuit held  oral argument yesterday in the appeal filed by the trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule).  Click here for the recording of the oral argument.

The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021 (which would have been until June 13, 2022).  After the appeal was filed, the Fifth Circuit entered an order staying the compliance date of the payment provisions until 286 days after the trade groups’ appeal is resolved.  The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. 

In advance of the oral argument,  the trade groups submitted the en banc Fifth Circuit decision in All American Check Cashing as supplemental authority to the panel hearing their appeal.  In All American, the en banc Fifth Circuit ruled that the CFPB’s enforcement action against All American Check Cashing could proceed despite the unconstitutionality of the CFPA’s removal restriction at the time the enforcement action was filed.  As an alternative basis for challenging the CFPB’s constitutionality, All American had argued that the CFPB’s budgetary independence from Congress contravenes the Constitution’s separation of powers by violating the Appropriations Clause.  (Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12% of the Federal Reserve’s budget, rather than through the Congressional appropriations process.)  In a concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American that the CFPB’ funding mechanism is unconstitutional and, as a result, dismissal of the enforcement action is required.  In the supplemental filing, the trade groups argue that the panel should invalidate the 2017 Rule based on Judge Jones’ concurring opinion.

The CFPB has issued a new advisory opinion “to affirm that the Equal Credit Opportunity Act (ECOA) and Regulation B protect those actively seeking credit and those who sought and received credit.”

The ECOA defines an “applicant” to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. 1691a(b).  As defined by Regulation  B, an “applicant” includes “any person who requests or who has received an extension of credit from a creditor.” 

The CFPB has previously taken the position in amicus briefs that the term “applicant” includes a person who had received credit and is an existing account holder and is not limited to a person in the process of applying for credit.  The CFPB took that position most recently in an amicus brief filed in December 2021 jointly with the FTC, DOJ, and Federal Reserve Board in the Seventh Circuit in Fralish v. Bank of America One, N.A.  In the brief, the agencies urge the court to reverse a district court ruling that an individual who had already received credit from the defendant and who was not currently applying to the defendant for credit was not an “applicant” for purposes of the ECOA’s adverse action notice requirement.

In October 2020, the CFPB and FTC filed a joint amicus brief with the Second Circuit in Tewinkle v. Capital One, N.A., in which they made similar arguments on behalf of a plaintiff who had alleged that a notice sent to him by the defendant bank that it was terminating his checking account and overdraft line did not comply with the ECOA/Regulation B adverse action notice requirement.  In that case, the district court agreed with the bank that the plaintiff was not an “applicant” for purposes of the adverse action notice requirement.  The Second Circuit did not issue a ruling because there was a settlement in the case.

In the advisory opinion, as it did in the amicus briefs, the CFPB takes the position that, despite the wording of the ECOA’s definition of the term “applicant,” the “best interpretation” of the ECOA is that the term includes existing borrowers.  According to the CFPB, the ECOA’s text, legislative history, and statutory purpose support reading the ECOA to include existing borrowers.  For that reason, according to the CFPB, it was reasonable for the Federal Reserve Board and then the CFPB to adopt this reading of the ECOA in Regulation B. 

By issuing the advisory opinion, the CFPB may be seeking to bolster its ability to litigate the ECOA issue in other cases (as well as head off adverse decisions in other cases) should the Seventh Circuit reject its interpretation in Fralish.  An adverse result in Fralish could also lead to an attempt by the CFPB to use its UDAAP authority to challenge discrimination against existing borrowers.