There was movement last week on two California bills that we have been tracking closely and which could substantially alter the lending and brokering landscape under the California Financing Law (“CFL”).

On July 9th, AB-539, which proposes to cap interest rates at 36% plus the federal funds rate on CFL loans of $2,500 to $10,000, passed the Senate Committee on Judiciary and was sent to the Appropriations Committee where we believe the bill will be heard around the end of August. If the bill passes the Appropriations Committee, it will move to the Senate Floor.

On July 10th, AB-642 failed to pass the in the Senate Banking and Finance Committee. Minor amendments were made to the bill on July 11th and the bill was re-referred to the Banking and Finance Committee, which is on recess until August 12th. September 13th is the last day for a bill to be passed during in the 2019 year. No date has been set for the rehearing and we are under the impression that the bill is unlikely to advance this year.

AB-642 is described by its drafter as an attempt to modernize the CFL to add a regulatory framework designed to protect persons who use lead generators to obtain installment loans. It would expand the scope of activities that constitute “brokering” under the CFL which would then trigger licensing, disclosure and other substantive requirements. The bill would prohibit the payment of certain referral fees, require brokers to affirmatively obtain express consent from a prospective borrower to act as such person’s broker, and would make entities falling under the newly expanded definition of broker subject to supervision by the California Department of Business Oversight.

The Office of Inspector General for the CFPB (and the Fed) recently issued a report on its evaluation of the Office of Consumer Response’s sharing of complaint data within the CFPB.

As background, the report describes the tools available to Bureau users of complaint data (complaint-sharing tools) to search such data, identify issues, and summarize data, and also describes Consumer Response’s process for approving access to these tools.

Based on its analysis of 2017 data, the OIG found that Supervision, Enforcement, and Fair Lending (SEFL) accounted for the largest portion of complaint-sharing tool users and tool activity, consisting of searches and requests for internal complaint reports.  Based on interviews of 17 SEFL users, the OIG learned that 94 percent of them relied on internal complaint data for their work, with 82 percent reporting use of complaint data for supervisory activities, 59 percent for research, 12 percent to support legal actions, and 6 percent to support preparation of products such as internal memoranda and public reports.

Other OIG findings and related recommendations included the following:

  • While Consumer Response provided robust and effective training on the use of complaint-sharing tools to SEFL users, it provided fewer training opportunities to users in other Divisions, such as those in Research, Markets and Regulations. The OIG recommended that Consumer Response increase its outreach to other Divisions to identify their need for complaint data and develop targeted training.  Consumer Response indicated that such efforts were underway.
  • The OIG found that Consumer Response’s practices for approving access to the complaint-sharing tools, some of which allow access to consumers’ personally identifiable information or other sensitive information, were not aligned with its documented procedures or otherwise raised concerns that access was not being properly restricted. The CFPB’s Information Security Program Policy provides that users of complaint-sharing tools are to be granted only the access privileges needed to perform their job functions and that access privileges should be reviewed at least annually and adjusted as appropriate to prevent unauthorized or unintentional disclosure. The OIG also found that Consumer Response was not regularly assessing whether users needed continued access to complaint-sharing tools.  It recommended that all users of tools that allow access to PII have supervisory approval, other steps be taken by Consumer Response to limit users’ access to data they need to perform their job functions, and documented processes and procedures be established for evaluating whether continued access is needed.  Consumer Response indicated that it had begun taking actions responsive to these recommendations.

Effective July 28, debt collectors licensed in Washington will be subject to new requirements when collecting medical debt.

Substitute House Bill 1531, signed into law by Washington Governor Jay Inslee on April 30, amended the state’s debt collection law that requires debt collectors to be licensed by adding certain substantive requirements along with a definition of “medical debt.”  The amendments define “medical debt” as “any obligation for the payment of money arising out of any agreement or contract, express or implied, for the provision of health care services as defined in RCW 48.44.010.”  Pursuant to RCW 48.44.010(10), “health care services means and includes medical, surgical, dental, chiropractic, hospital, optometric, podiatric, pharmaceutical, ambulance, custodial, mental health, and other therapeutic services.”

When collecting medical debt, licensed collectors will be required to do the following:

  • In the initial written notice to the debtor, include a statement informing the debtor of his or her right to request the original or redacted account number assigned to the debt, the date of the last payment, and an itemization containing specified information, including the name and address of the medical creditor, the date, dates, or date range of service, and the health care services provided as indicated by the provider in a statement provided to the licensee.  All collection efforts must cease until the itemization is provided.
  • Wait at least 180 days after receiving the original obligation for collection or by assignment before reporting adverse information to consumer reporting agencies
  • If the medical debt involves hospital debt, include a statement regarding the debtor’s possible eligibility for charity care from the hospital and hospital contact information and refrain from attempting to collect the debt during the pendency of an application for charity care or an appeal from a final determination of charity care status.

The amendments also limit the annual rate of prejudgment interest that can be charged on medical debt to nine percent and further provide that for any medical debt “for which prejudgment interest has  accrued or may be accruing as of [July 28], no prejudgment interest in excess of nine percent shall accrue thereafter.”

On June 27 the Senate passed the Gold Star Spouses and Spouses of Injured Servicemembers Leasing Relief Expansion Act as part of the Fiscal Year 2020 National Defense Authorization Act (see Sec. 6007). If it becomes law, the bill would amend the SCRA to allow spouses of servicemembers killed or injured during service to terminate certain types of leases.

The bill was originally introduced in April by Senators Elizabeth Warren (D-Mass.), Rob Portman (R-OH), Kyrsten Sinema (D-AZ), Thom Tillis (R-NC) and Ranking Member of the Senate Armed Services Committee Jack Reed (D-RI) in the Senate, and by Representatives Cheri Bustos (D-IL) and Brad Wenstrup (R-OH) in the House of Representatives. The House version has not yet passed.

The bill provides the surviving spouse of a servicemember who died during military service with a broad right to terminate a vehicle lease during a one-year period that begins to run on the date of the servicemember’s death. The bill also allows the spouse of a servicemember who sustained a “catastrophic injury or illness” to end a residential lease or vehicle lease during the one-year period that begins to run on the date of the servicemember’s injury or illness.

These added protections apply if a servicemember died or sustained the injury or illness while in military service or while performing full-time National Guard duty, active Guard and Reserve duty, or inactive-duty training.

This bill is notable in that it introduces the concept of “catastrophic injury or illness” to the SCRA, though this term itself is not new. Currently, the only references to injuries in the SCRA are relatively obscure provisions relating to desert land and mining claims. Department of Defense Instruction 1341.12 (published August 10, 2015) defines “catastrophic injury or illness” as a “permanent, severely disabling injury, disorder, or illness incurred or aggravated in the line of duty that compromises the ability to perform [activities of daily living] to such a degree that a Service member requires personal or mechanical assistance to leave home or bed, or requires constant supervision to avoid physical harm to self or others.” The term is one of several designations that can be conferred on a servicemember based on an evaluation of that servicemember’s condition as part of DoD’s Disability Evaluation System.

While the bill is silent as what types of evidence a lessor may require of a servicemember’s spouse to prove that such an illness or injury was suffered, the likeliest scenario is that the spouse could provide a copy of documentation showing the designation.

The CFPB announced that it has settled the lawsuit it filed in a California federal district court against Freedom Debt Relief (FDR) and its CEO for alleged violations of the Consumer Financial Protection Act (CFPA) and the Telemarketing Sales Rule (TSR).  The CFPB’s press release describes FDR as “the nation’s largest debt-settlement services provider.”  The Stipulated Final Judgment and Order requires FDR to pay $20 million in restitution and a $5 million civil money penalty.

The Bureau’s lawsuit alleged that FDR required consumers enrolled in its debt-settlement program to deposit money into dedicated accounts with an FDIC-insured bank and informed consumers that it would negotiate with creditors to accept less than the amounts actually owed.  When a debt was settled or collection attempts ceased, FDR charged the consumer a fee that typically ranged from 18 to 25 percent of the amount of the debt.

The CFPB alleged that FDR and its CEO violated the CFPA by engaging in the following conduct:

  • Despite knowing there was a significant chance that it would be unable to negotiate directly with certain creditors, by touting its “negotiating power” when marketing its services, creating “the false net impression that Freedom itself would be able to negotiate directly with all creditors.”
  • Failing to disclose to consumers before they enrolled in FDR’s program that they might be required to negotiate with creditors on their own.
  • Despite representing to consumers that it would not charge any fees for its services until it had settled a debt and the consumer had made a settlement payment to the creditor, charging fees in cases where FDR had not settled the consumer’s debt and no settlement payment was made.

The CFPB also alleged that FDR and its CEO violated the TSR (and thereby also violated the CFPA) by engaging in the following conduct:

  • Charging fees in the absence of a settlement.
  • Failing to clearly and conspicuously disclose that the consumer owned the funds held in a dedicated account, could withdraw from the debt-relief service at any time, and would be entitled to all funds in the account other than fees earned by FDR if the consumer withdrew.

The settlement requires FDR to provide disclosures to consumers before enrollment regarding requests by FDR for the consumer to negotiate directly with the creditor and the consumer’s right to receive deposited funds upon withdrawal from FDR’s program.  It also prohibits FDR from charging a fee where FDR considers a debt to be resolved but where the debt had not been settled with the creditor (Non-Settlement Outcome).

The $20 million in restitution is to be paid to consumers who, during a specified period, paid a fee for a Non-Settlement Outcome or in connection with a settlement that the consumer negotiated directly with the creditor.  The settlement also provides that the CFPB will remit $493,500 of the $5 million civil penalty “in light of the civil money penalty paid under [an FDIC consent order].”  The referenced consent order was entered into in March 2018 by the FDIC-insured bank that held the dedicated accounts of FDR’s clients (and that funded loans made to FDR’s clients to pay negotiated settlements to creditors) and by a company that was FDR’s affiliate as well as a bank-affiliated company (and that marketed and serviced such loans).



24 state attorneys general, the D.C. attorney general, and the Executive Director of the Hawaii Office of Consumer Protection have sent a joint comment letter to the CFPB urging it not to make any changes to the Regulation E rule that limits the ability of financial institutions to charge overdraft fees for paying ATM and one-time debit card transactions that overdraw a consumer’s account (Overdraft Rule).  The Overdraft Rule prohibits overdraft fees from being charged on such overdrafts unless the consumer has affirmatively consented or opted-in to the institution’s payment of such overdrafts.

In May 2019, the Bureau issued its plans for conducting reviews of its rules that have a significant economic impact upon a substantial number of small business entities.  Pursuant to Section 610 of the Regulatory Flexibility Act, every agency must publish in the Federal Register a plan for the periodic review of the agency’s rules that have a significant impact on a substantial number of small business entities (610 Review).  The plan must provide for a review of the relevant rules within 10 years of a rule’s publication as a final rule.  The purpose of a 610 Review is to determine whether a rule should be continued without change, or amended or rescinded, consistent with the objectives of the relevant statute, to minimize any significant economic impact of the rule on a substantial number of small business entities. 

Together with the issuance of its plans for conducting 610 Reviews, the CFPB launched the first such review–a review of the Overdraft Rule which was adopted in 2009 by the Federal Reserve Board as an amendment to Regulation E, which implements the EFTA.  (The Dodd-Frank Act transferred authority to implement the EFTA from the Board to the Bureau.)  In connection with its review of the Overdraft Rule, the Bureau asked for comment on the nature and extent of the rule’s economic impacts on small entities and whether and how the Bureau by rule could reduce the costs of the Overdraft Rule on small entities.   

In their comment letter, the state AGs indicate that they “are aware of no support for any claim that the Overdraft Rule has placed substantial economic burdens on small financial institutions that would justify modifications to the Rule.”  They assert that “given the enormous success of the Rule in reducing overdrafts and overdraft fees for consumers, the fact that the Overdraft Rule appears to have marginally reduced the revenues and profits of many large and small banks because millions of consumers individually chose not to opt in to costly services is no argument against the Rule.”  The AGs also ask the Bureau to consider “expanding the Overdraft Rule to cover other transactions such as checks and automated clearinghouse (“ACH”) transactions, and to require that all overdraft fees be proportional to the amount paid by a bank to cover the overdrawn transaction (i.e., fees of no more than a certain percentage of the covered amount), capping what are essentially high rates of interest on short-term, low-risk loans.”

According to an American Banker report, banking industry trade groups, including the American Bankers Association, have submitted comment letters urging the CFPB not to change the Overdraft Rule.






In this podcast, we look at the changes to the FDCPA validation notice that the CFPB’s proposed debt collection rules would make and discuss compliance challenges and other issues raised by the changes, including the requirement to itemize the debt, the dispute “tear-off” form, the option to provide Spanish and other foreign language translations of the notice, and electronic delivery of the notice.

Click here to listen to the podcast.

In an interesting twist, the FHFA has informed the Fifth Circuit in Collins v. Mnuchin, that despite having previously advised the en banc court that it would not defend the FHFA’s constitutionality, it has reconsidered its position under the leadership of its new Director and will take the position going forward that the agency’s structure is constitutional.  The en banc Fifth Circuit held oral argument in the case in January 2019.

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.  A Fifth Circuit panel found that the FHFA is unconstitutionally structured because it is excessively insulated from Executive Branch oversight but 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” while “leav[ing] intact the remainder of HERA and the FHFA’s past actions.”  The plaintiffs sought a rehearing en banc to overturn the panel’s rulings that the FHFA acted within its statutory authority in entering into the amendment and that the FHFA’s unconstitutional structure did not impact the amendment’s validity.  The FHFA also sought a rehearing en banc, principally seeking to overturn the panel’s determination that the plaintiffs had Article III standing to bring a constitutional challenge but also arguing that the panel’s constitutionality ruling was incorrect.

Following the appointment of Joseph Otting as Acting Director, however, the FHFA announced that it would not defend its constitutionality to the en banc court.  In a supplemental brief filed before the oral argument, the FHFA stated that Mr. Otting had “reconsidered the issues presented in this case.”  While continuing to take the position that the plaintiffs’ lack of standing made it unnecessary for the en banc court to reach the constitutionality issue, the FHFA indicated that to the extent the court found it necessary to do so, it would not defend the constitutionality of the HERA’s for cause removal provision and agreed with the Treasury Department’s position that the provision was unconstitutional because it infringes on the President’s executive authority.

In its letter informing the Fifth Circuit of its latest change in position, the FHFA indicated that Mark Calabria had become FHFA Director in April 2019 and that it “respectfully requests that, to the extent the Court finds it necessary to reach the constitutional issue, the Court uphold FHFA’s structure and otherwise affirm the judgment below as to the Third Amendment.”

In March 2019, a Fifth Circuit panel heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  At the oral argument, both parties were asked whether the panel should hold its decision until the en banc court issued its decision in Collins v. Mnuchin.

The CFPB, which defended its constitutionality in All American Check Cashing, may be unable to do so in the U.S. Supreme Court should the court grant the petition for a writ of certiorari filed by Seila Law seeking review of the Ninth Circuit’s ruling that the CFPB’s structure is constitutional.  While the DOJ opposed the certiorari petition filed last year by State National Bank of Big Spring (SNB) that also asked the Supreme Court to decide whether the CFPB’s structure is constitutional, it did so despite agreeing with SNB that the CFPB’s structure is unconstitutional.  Its opposition was based on its view that the case was “a poor vehicle to consider the [constitutionality] question.”

Pursuant to Dodd-Frank Section 1054(e), the CFPB would need the DOJ’s consent to represent itself in the Supreme Court in Seila Law.  The DOJ’s position regarding SNB’s certiorari petition makes it seem unlikely that the DOJ will oppose Seila Law’s petition.  The more likely scenario would seem to be that the DOJ will agree with Seila Law that the Supreme Court should grant the petition and rule that the CFPB’s structure is unconstitutional.  As a result, should the Supreme Court grant Seila Law’s petition, it may be necessary for the Supreme Court to appoint an amicus curiae to defend the Ninth Circuit’s judgment, an action that is part of the Supreme Court’s usual practice when no party is defending the circuit court’s judgment.



The Economic Growth, Regulatory Relief, and Consumer Protection Act (Growth Act) enacted last year includes a provision to protect veterans from loan churning by providing, among other requirements, that a loan to a veteran that refinances an existing loan is not eligible for guaranty by the Department of Veterans Affairs (VA) until the date that is the later of (1) the date that is 210 days after the date that the first monthly payment is made on the existing loan and (2) the date on which the sixth monthly payment is made on the existing loan.

The House recently passed H.R. 1988 to amend the loan seasoning requirement to provide that a loan to a veteran that refinances an existing loan is not eligible for guaranty by the VA until the date that is the later of (1) the date on which the borrower has made at least six consecutive monthly payments on the existing loan and (2) the date that is 210 days after the first payment due date of the existing loan. By measuring the 210-day period from the due date of the first payment, and not the date that the first payment is actually made, the legislation provides for greater certainty in assessing if the seasoning requirement is satisfied. The Senate previously passed a companion bill in June 2019.

As previously reported, the Growth Act also includes a corresponding provision that prohibits the inclusion of a VA loan in a Ginnie Mae securitization unless the original loan seasoning requirement is satisfied. The requirement became effective upon the adoption of the Growth Act, which resulted in a number of VA loans that had already been made becoming ineligible for inclusion in a Ginnie Mae securitization. The recent legislation removes the loan seasoning requirement with regard to Ginnie Mae, thus removing the bar to the inclusion of the existing loans in a Ginnie Mae securitization.

Only a few months have passed since the U.S. Department of Housing and Urban Development filed a charge of discrimination against Facebook, alleging that the ad-targeting techniques used to determine which users would see advertising related to housing and housing-related service (like mortgage loans) were based on protected characteristics and “close proxies” for those characteristics, violating the Fair Housing Act.  Now, the New York Department of Financial Services has opened a similar investigation, in response to a request from the Governor of New York.

But although the HUD charge of discrimination is squarely aimed at Facebook itself – even alleging that Facebook used protected characteristics in targeting ads without advertisers’ knowledge – the statements surrounding the New York investigation focus on the conduct of advertisers who may have used protected characteristics to direct their ads.  A quote from NYDFS Superintendent Linda Lacewell stated that “[t[he Department will investigate Facebook advertisers to examine these disturbing allegations and we are prepared to take whatever measures necessary to make certain that all financial services providers are in compliance with New York’s stringent statutory and regulatory consumer protections.”

While this emphasis on advertiser conduct differs from the HUD charge of discrimination, the NYDFS press release suggests that the investigation could also involve Facebook’s conduct.  For example, the press release includes a quote from NY Lieutenant Governor Kathy Hocul in which she stated that “[w]e are taking action to fully uncover the deeply concerning allegations being made against Facebook.”

What is obvious, though, is that there seems to be a groundswell of regulatory concern about targeting of digital advertising based on protected characteristics under anti-discrimination laws, and especially targeting on the Facebook platform.  Financial services companies need to be aware of the characteristics that they are consciously using to target advertisements, and also need to inquire of third parties about the factors that may be used to create “lookalike” campaigns or similar efforts to reach targeted groups of customers.  As more regulatory investigations are announced, the danger level for financial institutions using targeted digital advertising only grows, and so does the need for transparency by advertising providers like Facebook.   At the moment, this is still a very uncertain area of the law, with almost no regulatory guidance or precedent to guide financial institutions.  The recent announcement by NYDFS tells us, though, that there is real risk in this uncertain area, so caution is most certainly needed