The CFPB has issued a report titled “Payment Amount Furnishing & Consumer Reporting” that highlights changes since 2012 in the furnishing of actual payment data to consumer reporting agencies.

The report indicates that:

  • Since 2012, the share of auto, student loan, and mortgage tradelines with actual payment data has generally trended upward.  The share of mortgage tradelines with actual payment data increased from less than 70 percent in 2012 to 95 percent in 2020.  By March 2020, student loan, mortgage, and auto loans contained actual payment information in more than 90 percent of tradelines.
  • During the same period, the share of retail revolving and credit card loans with actual payment information significantly declined.  While 95 percent of retail revolving tradelines contained actual payment data in 2015, the share declined to 71 percent in 2020.  For credit cards, the share of credit card tradelines containing actual payment data declined from 88 percent in 2013 to 40 percent in 2020.

The report states that the decline in revolving and credit card tradelines with actual payment data may be attributable to concerns about poaching of consumers by other lenders.  As the report notes, the unsecured revolving lending industry distinguishes between consumers who pay their balance in full each cycle and consumers who pay a portion of the balance in the current cycle and carry the remaining portion to be paid in future cycles.  Since the industry markets services to these two groups differently, lenders may view the furnishing of actual payment data as creating a competitive disadvantage.

The report observes that reductions in available actual payment data could have implications for credit markets and consumers.  For example, a lender’s analysis of such data has the potential to provide complementary value to a consumer’s most recent consumer report and enable a more informed assessment of risk.  Also, limited access to such data could make it more difficult for lenders to market credit products and price credit for consumers.

The report notes the FCRA requirements concerning furnishing accurate information and for furnishers to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of furnished information.  While it does not directly suggest that the FCRA requires financial institutions that furnish to consumer reporting agencies to include actual payment data, the report could presage scrutiny by CFPB examiners of a financial institution’s practices regarding furnishing actual payment data.

It is believed that concerns about customer poaching also caused many credit card issuers not to furnish credit limit amounts. That ultimately led to a statement in the Interagency Guidelines Concerning the Accuracy and Integrity of Information Furnished to Consumer Reporting Agencies to the effect that furnishing information “with integrity” requires including the credit limit, if applicable and in the furnisher’s possession.

 

 

The industry trade groups challenging the CFPB’s final rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Rule) have filed their combined opposition to the CFPB’s cross-motion for summary judgment and reply to the CFPB’s opposition to the trade groups’ motion for summary judgment.  The combined motion follows the filing of an Amended Complaint by the trade groups focused on the Rule’s payments provisions, the filing of an Answer to the Amended Complaint by the CFPB, the filing of a motion for summary judgment by the trade groups, and the filing of a cross-motion for summary judgment and opposition to the trade groups’ summary judgment motion by the CFPB.

In the Amended Complaint, the trade groups allege that the Rule violates both the U.S. Constitution and the Administrative Procedures Act (APA) and that the payments provisions have additional infirmities that render them invalid.

The trade groups make the following principal arguments in their new filing:

  • The CFPB’s pre-Seila Law unconstitutional structure rendered all of the CFPB’s acts null and void.  Because the payments provisions were never validly adopted, they can only be enforced if the restructured Bureau conducts a new rulemaking process. Director Kraninger’s ratification of the payments provisions cannot cure a constitutionally tainted rule.  The circuit court cases cited by the Bureau in support of its position that Director Kraninger’s ratification cured the constitutional defect all involved enforcement proceedings or orders.  None involved an official’s attempt to ratify a completed rulemaking conducted by another official acting ultra vires years after the invalid rulemaking process ended.  The district court cases cited by the Bureau are also readily distinguished.
  • Even if ratification of rules is possible in some cases, Director Kraninger’s ratification of the payments provisions is invalid because:
    • The Bureau cannot ratify the payments provisions because it lacked the authority to adopt them at the time they were issued.
    • The Bureau’s ratification is arbitrary and capricious within the meaning of the APA because the payments provisions were based on three premises that the Bureau either rendered false or rejected in revoking the Rule’s underwriting provisions.  Such premises involve the Bureau’s 2017 cost-benefit analysis that assumed the existence of the underwriting provisions, the amount of time needed for implementation of the payments provisions, and the meaning of the Bureau’s UDAAP authority.
  • Even apart from the defective ratification, the payments provisions establish a usury limit in violation of the Dodd-Frank Act because they target installment loans above a specified interest rate.  The provisions are also arbitrary and capricious in violation of the APA for reasons that include (1) the Bureau’s failure to take into account important differences among the variety of payment transfers covered by the restriction on payment transfer attempts, (2) the Bureau’s refusal to exclude debit-card transactions, and (3) the Bureau’s denial of a petition for a rulemaking to amend the payments provisions to exclude debit-card transactions.

The trade groups also argue that if the court upholds the payments provisions and lifts its stay of the Rule’s effective date, it should not allow the Bureau to require immediate compliance.  They assert that the stay was requested 445 days before the effective date and was entered with 286 days remaining until the effective date.  Accordingly, the trade groups ask the court to allow companies 445 days, or alternatively 286 days, to comply with the payments provisions.

Under the scheduling order entered by the court, briefing will close on December 18, which is the deadline for the Bureau to file its reply in support of its cross-motion for summary judgment.  The court has not yet indicated whether it will hold oral argument on the summary judgment motions.

For our financial services clients interested in monitoring important federal and state legal developments, Ballard Spahr has launched a comprehensive, national tracking service designed to serve the needs of specific segments of the consumer financial services industry.

Beginning January 2, 2021, Ballard is pleased to offer three new federal and state trackers, which are available as a package or individually, depending on your financial institution’s needs:

  • Collections Tracker – providing expanded coverage of relevant federal and state legislative and regulatory developments impacting consumer collection activities; this will still include our current COVID-19-related coverage, but the tracker will be expanded to include new and evolving federal and state collection legislative and regulatory initiatives.
  • Credit Reporting Tracker – covering applicable federal and state legislative and regulatory developments impacting credit reporting activities and requirements, as well as substantive developments in federal FCRA court decisions to assist in identifying and tracking emerging FCRA litigation trends relating to the CARES Act, specific furnishing activities, end user obligations, and the FCRA more broadly.
  • Privacy and Data Security Tracker – covering relevant federal and state legislative and regulatory developments relating to the collection, use, disclosure, and protection of personal information.

Each week, tracker subscribers will receive a tailored electronic digest updating and highlighting noteworthy federal and state developments for financial institutions.  These weekly digest updates will be supplemented by monthly roundtable calls with subscribers, during which a member of the Ballard team will discuss developments over the past month, provide analysis, identify evolving trends, and answer subscriber questions.  These monthly calls will be specific to each tracker.

Subscribers also will be enrolled in an interactive, searchable, online database that enables subscribers to have 24-hour access to our information and analysis.  Information will be displayed in a variety of formats, including through an interactive map of the United States through our Ballard 360 Client Connect platform, as well as through various search functions that will allow information to be sorted by topic, jurisdiction, date, and for the FCRA tracker, by federal court and counsel for plaintiffs.

In launching these new tracking services, our goal is to provide members of the consumer financial services industry with practical insights and guidance into these critical areas that will keep you apprised of the real-time legal developments you need to know in order to make informed and effective decisions.

Subscribers will have the option to subscribe to any individual tracker for a cost of $2,000/month.  If you would like to subscribe to all three trackers, the total cost will be $5,000/month.  Monthly subscription fees will bill at the beginning of the month and subscribers can cancel any or all of their subscriptions at any time.  Such cancellation will be effective as of the end of the month in which the subscription was cancelled.

A brochure about the new tracking services is available here.  For more information or to subscribe, please contact Stefanie Jackman or Kim Phan.

In a complaint filed in the U.S. District Court for the Northern District of California, the FTC alleges that a company that distributes a mobile banking application (App) and its founder who is the company’s sole officer have engaged in deceptive practices in violation of Section 5 of the FTC by making misrepresentations regarding consumers’ ability to access their funds and the interest rates paid on consumers’ accounts.

According to the complaint, the defendants advertised the App “as a high-interest bank account that operates by placing consumers’ funds at unspecified FDIC-insured banks.”  The FTC alleges that the defendants represented that consumers will (1) have “24/7” access to their funds and that withdrawn funds will be returned in five or fewer business days, and (2) be paid interest at “best” or “high” rates and specified “minimum base rates.”  Such representations are made on the company’s website and through the Apple App Store and Google Play Store which offer the App for download by consumers.

The FTC alleges that some App users waited weeks or even months to receive their funds despite repeated complaints to the company, while other users claimed that they never received their funds.  It also alleges that the company failed to pay users high interest rates, including minimum base rates, as represented, and in some circumstances, did not pay any interest.

According to the complaint, the FTC issued a civil investigative demand to the company seeking information about its business practices, including its practices for returning funds to consumers and for paying interest.  The FTC alleges that the company has not provide any formal or informal written answers or documentary materials in response to the CID and has refused to provide substantiation for its interest rate claims.

The complaint seeks injunctive and other relief as the court deems appropriate in the exercise of its equitable jurisdiction.  (While the FTC alleges that court’s equitable jurisdiction allows it to award restitution and disgorgement, the question of whether a court can award such relief is currently before the U.S. Supreme Court.)

 

 

The OCC has issued a proposed rule that would establish standards that a bank must follow in fulfilling its obligation to provide fair access to financial services.  Comments on the proposal are due by January 4, 2021.

The rule would apply to national banks and federal savings associations with a market position that allows them to (1) raise the price a person has to pay to obtain a financial service offered by the bank from the bank or a competitor, or (2) significantly impede a person, or a person’s business activities, in favor of or to the advantage of another person.  A bank with $100 million or more in total assets would be presumed to hold such a market position but could attempt to rebut the presumption by submitting written materials to the OCC demonstrating it does not hold either market position.

In its background discussion explaining its rationale for the proposal, the OCC takes aim at denials of financial services by banks to categories of customers “even when an individual customer would qualify for the financial service if evaluated under an objective, quantifiable risk-based analysis.”  The OCC observes that, in denying services, banks “are often reacting to pressure from advocates from across the political spectrum whose policy objectives are served when banks deny certain categories of customers access to financial services.”  As examples, the OCC references denials or terminations of financial services to various industries such as certain health care and social service providers (including family planning organizations), owners of privately owned correctional facilities, gun makers, large farming operations, and energy industries such as coal mining, coal-fired electricity generation, and Artic oil exploration.  The OCC notes that, in the case of energy industries, the terminated services were not limited to lending “where risk factors might justify not serving a particular client,” but also included advisory and other services unconnected to credit or operational risk.  The OCC also comments that “it is one thing for a bank not to lend to oil companies because it lacks the expertise to value or manage the associated collateral rights; it is another for a bank to make that decision because it believes the United States should abide by the standards in an international climate treaty.”

According to the OCC, the criteria on which banks have based such improper denials or terminations were “unrelated to safety and soundness.”  Such criteria included: “(1) personal beliefs and opinions on matters of substantive policy that are more appropriately the purview of state and Federal legislatures; (2) assessments ungrounded in quantitative, risk-based analysis; and (3) assessments premised on assumptions about future legal or political changes.”

The proposal is intended to implement the principle that “a bank’s decision not to serve a particular customer must be based on an individual risk management decision about that individual customer, not on the fact that the customer operates in an industry subject to a broad categorical exclusion created by the bank.”  Banks are instructed that they must provide fair access to “organizations involved in politically controversial but lawful businesses” and that they must offer financial services that are offered to some customers “on proportionally equal terms to all customers engaged in lawful activities.”  Banks are also advised that they should consider whether they have the expertise or knowledge to offer a service in a given market and that while not required to offer a particular service, a bank cannot provide a service to some customers but categorically deny the service to firms in a particular industry unless the associated risks change based on the industry in which a company operates.

The proposal’s background discussion references “Operation Choke Point, ” a federal initiative launched in 2012 involving the FDIC and other federal agencies.   In Operation Choke Point, banks were pressured by regulators to deny access to financial services to online payday lenders and other companies that raised “reputational” concerns or were otherwise disfavored.  The proposal seeks to stop banks from using similar criteria on their own initiative as the basis for a decision not to serve particular companies.

Under the proposal, to provide fair access to financial services, a bank must:

  • Make each financial service it offers available to all persons in the geographic market it serves on proportionally equal terms
  • Not deny any person a financial service offered by the bank except to the extent justified by such person’s quantified and documented failure to meet quantitative, impartial risk-based standards established in advance by the bank
  • Not deny any person a financial service offered by the bank when the effect of the denial is to prevent, limit, or otherwise disadvantage the person:
    • From entering or competing in a market or business segment; or
    • In such a way that benefits another person or business activity in which the bank has a financial interest
  • Not deny, in coordination with others, any person a financial service the bank offers.

The OCC cautions banks in its background discussion that “unlike [OCC] prior articulations” of the fair access principle, the proposal, if finalized, “would have the force and effect of law and enable the agency to take supervisory or enforcement action, when appropriate.”

 

The FTC recently published a blog post about a warning letter it sent to TAPD, Inc., which does business as Frank Financial Aid, warning the company that advertising and marketing, including on its website, may be misleading consumers about pandemic-related relief in the form of grants available to postsecondary students and a cash advance product offered by the company, in violation of Section 5 of the FTC Act.  The letter also warns the company that the advertising of the cash advance product on its website may violate TILA disclosure requirements.  According to the FTC, the takeaway for other marketers is that the pandemic does not change established consumer protection principles and, with that in mind, “FTC staff is keeping a careful watch on companies’ claims.”

In explaining the concerns that prompted the letter, the FTC notes that the Department of Education has made clear that for its Higher Education Emergency Relief Fund created by the CARES Act, each school has its own unique application process and “decides the criteria for qualified students to receive a grant, the grant amount, and how and when the grant will be disbursed (paid out) to students.”  In the letter, the FTC warns the company that the potentially misleading claims on its website include:

  • Consumers are told they may “apply in 2 minutes for your student emergency grant” through the company’s site and that “Frank emails you everything you need to send to your school.”  This may be misleading because Frank creates letters for consumers to submit to schools that are not tailored to the application process and documentation requirements of each school.
  • Consumers are told that to be eligible for emergency relief, students and/or their parents must have experienced one or more of four identified criteria since March 1, 2020 (for example, a firing or furlough).  This may be misleading because each school determines its own grant eligibility criteria.
  • Consumers who obtain a cash advance through the company are told they can pay it back when they receive their financial aid but, in fine print, are also told that they are required to pay the cash advance back 61 days after the date of disbursement.  (Presumably the FTC’s view is that the “fine print” does not prevent the preceding statement from being misleading.)

With regard to the company’s website advertising of the cash advance product, the FTC states in the letter that although the advertising indicates that consumers can get cash advances of up to $5,000 on their student loans with “No interest, no fees – ever,” the company charges a monthly fee of $19.90.  The FTC warns that in addition to potentially violating the FTC Act because it is false or misleading, the advertising could violate TILA by not including the disclosures required by TILA when certain trigger terms (such as the amount of any finance charge) appear in an advertisement.

The warning letter advises Frank to promptly review and monitor all of its advertising and marketing (including websites, social media, email, telemarketing, and text messages) “to ensure any deceptive or unlawful claims or offers are removed or corrected, as appropriate, and any other required disclosures are provided.”  The letter also directs the company to notify the FTC by a specified date of the specific actions it has taken to address the FTC’s concerns and to indicate how “any claims that remain in [the company’s] advertising and marketing” comply with Section 5 of the FTC Act and TILA.

 

As previously reported, in August 2020 the CFPB released the Home Mortgage Disclosure Act (HMDA) Filing Instruction Guide (FIG) for data that must be collected in 2021 and reported in 2022. Recently, the CFPB released an update to the FIG. Edits Q656 and Q657 that were in Table 8: Macro Quality Edits for Loan/Application Register of the prior version of the FIG have been reclassified and moved to Table 7: Quality Edits for Loan/Application Register in the updated version of the FIG. A macro quality edit checks whether the submitted loan/application register as a whole conforms to expected values. A quality edit checks whether entries in the individual data fields or combinations of data fields conform to expected values.

Last Thursday, on remand from the U.S. Supreme Court, the U.S. Court of Appeals for the Ninth Circuit heard oral argument in Seila Law.   The members of the three judge panel were Judge Susan Graber and Judge Paul Watford from the Ninth Circuit and Judge Jack Zouhary from the U.S. District Court for the Northern District of Ohio.  Judge Graber was appointed by President Clinton, Judge Watford was appointed by President Obama, and Judge Zouhary was appointed by President George W. Bush.

After ruling that the CFPB’s structure was unconstitutional because its Director could only be removed by the President “for cause,” the Supreme Court remanded the case to the Ninth Circuit to consider the CFPB’s argument that former Acting Director Mulvaney’s ratification of the CID issued to Seila Law cured any constitutional deficiency.  Because it had ruled that the CFPB’s leadership structure was constitutional, the Ninth Circuit had not previously considered the CFPB’s ratification argument.  Following the Supreme Court’s decision, the CFPB filed a declaration with the Ninth Circuit in which Director Kraninger stated that she had ratified the Bureau’s decisions to: issue the CID to Seila Law, deny Seila Law’s request to modify or set aside the CID, and file a petition in federal district court to enforce the CID.

On remand, Seila Law argued that the appropriate remedy is for the Ninth Circuit to reverse the district court and deny the CFPB’s petition to enforce the CID.  Seila Law urged the Ninth Circuit to conclude that because of its structural constitutional defect, the CFPB lacked the authority to issue and enforce the CID, its actions in doing so were void, and the ratifications of the CID by former Acting Director Mulvaney and Director Kraninger were invalid.  Relying on U.S. Supreme Court precedent, Seila Law argued that for a valid ratification to occur, the party ratifying must be able to do the act ratified both at the time the act was done and at the time of ratification.  According to Seila Law, the CFPB could not satisfy either requirement because, as principal, the CFPB did not have the authority to issue the CID at the time it was issued and as a result, ratification was unavailable to its agent, the CFPB Director.  Seila Law also asserted that the CID was invalid because the applicable three-year statute of limitations for bringing an enforcement action against Seila Law for the alleged violations to which the CID relates had expired by the date of Director Kraninger’s ratification.

Seila Law’s arguments encountered considerable skepticism from all three panel members.  With regard to Seila Law’s argument that denying enforcement of the CID was necessary to provide it with meaningful relief, Judge Graber observed that a constitutional violation will not entitle a defendant to reversal of a criminal conviction where no harm or prejudice is found to have resulted from the violation.

With regard to Seila Law’s argument that there could not be a valid ratification of the CID, the questions asked by both Judge Watford and Judge Zouhary suggested that they were not persuaded that the cited Supreme Court precedent necessarily supported Seila Law.  Judge Zouhary commented that the Supreme Court had implicitly rejected Seila Law’s argument, citing to the following language in Chief Justice Robert’s opinion:  “If [Seila Law] is correct [that the removal provision cannot be severed], and the offending removal provision means that the agency is unconstitutional and powerless to act, then a remand would be pointless.”

With regard to Seila Law’s argument that the three-year SOL for bringing an enforcement action barred the CFPB from ratifying the CID, Judges Graber and Watford both pressed Seila Law’s to explain the SOL’s relevancy in the context of a petition to enforce a CID and why it would make the CID invalid.  Seila Law’s counsel asserted that because the potential violations sought to be investigated through the CID related to Seila Law’s involvement with Morgan Drexen in 2015 and earlier, an enforcement action based on that activity would have been time-barred as of the date the CID was ratified.  The judges highlighted the investigatory purpose of CIDs and suggested that the CID might reveal other violations as to which the CFPB could still bring an enforcement action.  

The CFPB’s counsel did not face as rigorous questioning as did Seila Law’s counsel.  In countering Seila Law’s argument that the CFPB did not have the authority to issue the CID due to the constitutional violation, the CFPB’s counsel highlighted language in Chief Justice Robert’s opinion stating that “[t]he provisions of the Dodd-Frank Act bearing on the CFPB’s structure and duties remain fully operative without the offending tenure restriction.”  According to the CFPB’s counsel, because the CFPB, as principal, had the authority to conduct investigations at the time the CID was issued despite the constitutional violation and Director Kraninger was removable at will by the President when she ratified the CID, the CID was validly ratified and remains enforceable.

In responding to Seila Law’s SOL argument, the CFPB’s counsel contended that the SOL had no application outside of an enforcement action, the CFPB had not alleged any specific violations by Seila Law, and it would be premature to adjudicate the application of the SOL.  He asserted that even if the CFPB could not bring an enforcement action now for Seila Law’s 2015 conduct, it would still be entitled to gather information about Seila Law’s conduct going back to that time, which might shed light on subsequent developments and still could be relevant to the CFPB’s investigation.

The CFPB’s counsel also argued that the Ninth Circuit should follow its decision in CFPB v. Gordon that involved former Director Cordray’s ratification of the CFPB’s enforcement action against Gordon.  Director Cordray ratified the action after his recess appointment was called into question by the U.S. Supreme Court’s Canning decision and he was reappointed and confirmed by the Senate.  In that case, the Ninth Circuit ruled that the enforcement action was validly ratified by Director Cordray.   Seila Law’s counsel argued that Gordon was not controlling because it did not involve a “structural” constitutional violation and instead only involved the authority of an agent to act on behalf of the principal.

In response, the CFPB’s counsel asserted that Seila Law’s emphasis on the “structural” nature of the violation in Gordon was merely a label and missed that the Supreme Court’s problem with the removal provision was that it put the Director outside the President’s ability to supervise.  According to the CFPB’s counsel, both Seila Law and Gordon called into question the authority of an agent who first authorized a CFPB action because of an Article II problem—insufficient accountability to the President in Seila Law and an improper appointment in Gordon.  As a result, both constitutional defects could be cured through ratification of the challenged action by a Director not subject to the original Article II problem.

Given the strong headwinds faced by Seila Law’s counsel during the oral argument, we would be surprised if Seila Law prevails in its efforts to invalidate the CID.

 

 

We are joined by Bret Ladine, the DFPI’s General Counsel.  We discuss the DFPI’s plans for adding new staff, promoting innovation through the new Financial Technology Innovation Office, providing guidance on CFPL exemptions, and handling complaints.  Other topics include the DFPI’s approach to its new authority regarding UDAAPs (which covers small business financing), registration of covered persons, and civil penalties.

Click here to listen to the podcast.

The CFPB recently announced that it, along with the Comptroller of the Currency and Federal Reserve Board, issued a final rule that will maintain the current exemption threshold to the appraisal requirement for higher priced mortgage loans (HPML). The initial exemption threshold was $25,000, and the threshold is subject to annual adjustment based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers. Currently transactions of $27,200 or less are exempt from the HPML appraisal requirement, and based on the final rule that dollar exemption threshold also will apply for calendar year 2021.