On September 14, 2020, the CFPB announced a consent order against ClearPath Lending, Inc. (ClearPath), which includes a civil money penalty of $625,000 and requirements to prevent future violations. The consent order represents the CFPB’s eighth consent order since late July, 2020 against a mortgage company to settle allegations by the CFPB that the company engaged in false and misleading advertising to service members and veterans. In all of its announcements regarding the consent orders, the CFPB indicated that the orders originated from “an ongoing sweep” of CFPB investigations into companies allegedly using deceptive direct mail campaigns to advertise VA-guaranteed mortgages.

The ClearPath consent order follows consent orders discussed in previous blog posts against Service 1st Mortgage, Inc. (Service 1st), Hypotec, Inc. (Hypotec), and PHLoans.com, Inc. (PHLoans), as well as against Go Direct Lenders, Inc. (Go Direct), and against Sovereign Lending Group, Inc. (Sovereign) and Prime Choice Funding, Inc. (Prime Choice).

As in the first seven consent orders, the CFPB found violations of Regulation Z and the Mortgage Acts and Practices—Advertising Rule (the “MAP Rule” or Regulation N), and Title X of the Dodd-Frank Act (the Consumer Financial Protection Act) in ClearPath’s advertising of VA-guaranteed mortgages to service members and veterans. Significant findings in the ClearPath consent order include “false, misleading and inaccurate representations” about cost and other credit terms, and falsely representing an affiliation with the federal government.

The CFPB found that ClearPath’s advertisements misrepresented the terms actually available to consumers, misstated actual credit terms available, and disclosed inaccurate interest rate and APR combinations. For example, one advertisement sent to 260,000 consumers disclosed an interest rate of 2.25% with an APR of 3.17%. This APR was alleged to be inaccurate because it was not based on the reasonably current index at the time for the variable-rate period or the required discount points. According to the CFPB, the accurate APR, using the correct index and including discount points, was at least 3.516%. In another example cited by the CFPB as false and misleading, a ClearPath advertisement that was sent to over 80,000 consumers disclosed a loan with “NO Lender Fees” and an APR of 3.17% when, in fact, a loan with the disclosed APR would have required the payment of two discount points by the consumer.

As it did in the first seven consent orders, the CFPB found that ClearPath’s advertisements falsely represented that the company was affiliated with the VA. Similar to previous consent orders, the CFPB found that the use of certain phrases were misleading to consumers and misrepresented that ClearPath was affiliated with the VA. Some of the phrases cited by the CFPB in the consent order include “2017 – Eligibility Notification” and “Benefit Allotment” in the header of the advertisement and statements that ClearPath had “important information regarding your VA loan” or that ClearPath had “records” that the consumer had “yet to take advantage of programs sponsored by The Department of Veteran’s Affairs.” One letter that the CFPB cited stated “It is important that you call our VA Loan Service Center toll free (866) 284-9875 within 21 business days. By taking action now your next mortgage payment may not be due until April 2018.”

The continued CFPB focus in this area reinforces the need for lenders to carefully review their advertisements to avoid a violation of the MAP Rule’s prohibition of lender misrepresentations about a government affiliation, and to also review their advertisements for potential violations that have been the basis of the CFPB consent orders. The characteristics of the advertisements cited by the CFPB in the eight consent orders issued over the past eight weeks as the basis for its findings that the advertisements misrepresented a government affiliation deserve close attention because they indicate that the CFPB takes an expansive view of what constitutes such a misrepresentation. As in certain of the prior consent orders, the ClearPath consent order prohibits it to use various terms in advertisements, including the term “VA loan specialist.”

The full content of all eight consent orders can be viewed via the links below.

ClearPath Consent Order

Accelerate Consent Order

Service 1st Consent Order

Hypotec Consent Order

PHLoans Consent Oder

Go Direct Consent Order

Sovereign Consent Order

Prime Choice Consent Order

We are delighted to share the news that Ballard Spahr has been named a finalist for the 2020 LendIt Fintech Top Law Firm Industry Award.  The award is presented to a law firm that has demonstrated deep expertise, commitment to clients, and the fostering of a deeper understanding of fintech.

Earlier this year, Ballard Spahr’s Consumer Financial Services Group and its Fintech & Payments Team received national rankings from The Legal 500 in the financial services regulation and fintech categories.  It was our first application for ranking in the fintech category.

Also this year, our Consumer Financial Services Group once again received the highest national ranking from Chambers USA: America’s Leading Lawyers for Business.  The Group was ranked in the highest tier nationally in each of the two categories, Compliance and Litigation, used by Chambers USA for Financial Services Regulation.  The Fintech & Payments Team also received national ranking from Chambers USA in the fintech legal department category.

The plaintiffs in the lawsuit filed in Massachusetts federal district court challenging the CFPB’s creation of its Taskforce on Federal Consumer Financial Law have filed their opposition to the CFPB’s motion seeking the lawsuit’s partial dismissal.

The CFPB created the Taskforce in October 2019 to examine ways to harmonize and modernize federal consumer financial laws.  The Taskforce is charged with examining the existing legal and regulatory environment for consumers and financial services providers and making recommendations to the Bureau’s leadership for improving consumer financial laws and regulations, with a focus on harmonizing, modernizing, and updating the enumerated consumer credit laws, and their implementing regulations.

The plaintiffs in the lawsuit are the National Association of Consumer Advocates (NACA), U.S. Public Interest Research Group (U.S. PIRG), and Professor Kathleen Engel.  Professor Engel, currently a Research Professor of Law at Suffolk University, unsuccessfully sought membership on the Taskforce.

The plaintiffs’ complaint included the following claims:

  • First Claim: The Bureau did not meaningfully consult with the General Services Administration (GSA) before creating the Taskforce or satisfy other requirements of the Federal Advisory Committee Act (FACA) regulations.
  • Fourth Claim: The Bureau failed to comply with FACA’s requirement that an advisory committee be “fairly balanced in terms of the points of view represented and the functions to be performed by the advisory committee.”

In its motion for partial dismissal, the Bureau asked the court to dismiss the plaintiffs’ first and fourth claims and dismiss the following elements of their prayer for relief: a declaration that the creation and establishment of the Taskforce is unlawful; setting aside the Taskforce’s charter and appointments of Taskforce members, an injunction barring the Taskforce from meeting, advising the Director, or otherwise conducting business, and an injunction barring the Bureau from relying on or using any Taskforce recommendations or advice.

In their opposition to the Bureau’s motion to dismiss, the plaintiffs make the following arguments:

  • The CFPB asserted that the plaintiffs do not have standing to challenge the procedures used by the Bureau to establish the Taskforce because they have not identified any way in which the Bureau’s failure to follow such procedures caused the informational injury they claim—preventing them from studying the Taskforce and reporting on it to the public—or shown that they were deprived of information the Bureau was required to provide.  In their opposition, the plaintiffs claim that the Bureau failed to publish various findings regarding the Taskforce’s formation as required by the FACA, including that the Taskforce is in the public interest.  According to the plaintiffs, the Bureau’s creation of the Taskforce in a non-transparent manner that deprived them of required information impedes NACA’s and U.S. PIRG’s ability to conduct mission-driven educational activities and prevents Professor Engel from carrying out her academic work.
  • The CFPB asserted that the plaintiffs do not have standing to challenge the Taskforce’s membership.  With respect to the rejection of Professor Engel’s application for Taskforce membership, the CFPB argued that she had no entitlement to Taskforce membership and the relief sought by the plaintiffs would not result in her addition to the Taskforce or otherwise redress the denial of her application.  In their opposition, the plaintiffs assert that it is not relevant whether Professor Engel had an entitlement to membership and that she suffered a constitutionally cognizable injury by the loss of an opportunity to have her membership application fairly adjudicated.  They also claim that the alleged injury to her would be redressed by dissolution of the Taskforce because her injury is not limited to exclusion from the Taskforce but also includes the “ongoing operation of a secretive, unlawful committee.”  With respect to the CFPB’s argument that the plaintiffs’ speculation about possible consumer harm resulting from hypothetical Taskforce recommendations is not sufficient to establish standing, the plaintiffs assert that the complaint states “a plausible claim that the Taskforce will recommend policies adverse to Plaintiffs’ interests” because “each of the Taskforce’s current members is a staunch opponent of consumer protections.”
  • The CFPB asserted that the plaintiffs’ remaining claims (that the Bureau violated FACA by failing to give notice of Taskforce meetings and make records publicly available) do not give the plaintiffs standing to seek declaratory or injunctive relief that would shut down the Taskforce and preclude the Bureau from using its recommendations.  In their opposition, the plaintiffs assert that there is no basis to dismiss any part of their prayer for relief because they have standing to assert all of their claims and, in any event, it would be premature to assess on a motion to dismiss whether they are entitled to their requested remedies which might require additional factual development and briefing.




On October 29, 2020, the Federal Trade Commission (FTC) will host a virtual workshop entitled, “Green Lights & Red Flags: FTC Rules of the Road for Business.”  The workshop will cover a broad array of topics within the FTC’s jurisdiction, including truth-in-advertising law, social media marketing, data security, business-to-business fraud, and other business basics.

The scheduled sessions for the workshop will address:

  • Protecting Small Business From Scams (how the FTC is protecting companies from business-to-business fraud and steps companies can take to protect themselves)
  • The Truth About False Advertising (an overview of the FTC’s truth-in-advertising expectations)
  • Avoiding a Promotion Commotion (social media marketing, consumer reviews, children’s online privacy, email marketing, etc.)
  • The Secure Entrepreneur (an overview of data security basics and practical tips on responding to a cyberattack)

In the wake of the COVID-19 pandemic, businesses have moved swiftly to expand their ability to engage in e-commerce.  The FTC’s workshop will offer practical insights for businesses on how to do so while staying focused on consumer protection and cybersecurity.

Featured speakers include Andrew Smith, Director of the FTC Bureau of Consumer Protection.

As previously reported, in August 2020 the CFPB issued a proposed rule to create a new seasoned loan qualified mortgage (QM) under the Regulation Z ability to repay rule. Initially, comments on the proposal were due by September 28, 2020. The CFPB has now extended the comment deadline to October 1, 2020. The CFPB advises that it received requests to change the original comment deadline because September 28, 2020 is the date this year of the Jewish holiday Yom Kippur.


Earlier this month, the California legislature passed three bills that will significantly impact consumer financial service providers in the state.  AB-1864 creates the Department of Financial Protection and Innovation (DFPI), widely named a “mini-CFPB” because of its broad jurisdiction and sweeping new authorities that closely resemble those of the CFPB.  The two other major bills are SB-908, which will require debt collectors to be licensed in California, and AB-376, which establishes a Student Loan Borrower Bill of Rights.  California Governor Gavin Newsom is expected to sign the three bills by the end of this month.

In the webinar, we will provide a comprehensive overview of the three bills, with a special focus on the scope of the DFPI’s jurisdiction, its new authorities, consider how the three bills will impact industry, and whether other states are likely to create their own “mini-CFPBs.”  We are delighted to be joined by Richard Cordray, former CFPB Director, author of “Watchdog: How Protecting Consumers Can Save Our Families, Our Economy, and Our Democracy,” and who worked closely with California lawmakers in drafting AB-1864, and Bret Ladine, General Counsel of the California Department of Business Oversight.

The webinar will be held on Tuesday, September 29, 2020 from 3:00 p.m. to 4:30 p.m. ET.  Click here to register.

The New York Department of Financial Services (DFS) announced on September 16 that it has filed a Statement of Charges against debt collector Forster & Garbus LLP (Forster) for alleged violations of the state’s Debt Collection Regulation, Part 1 of Title 23 of the New York Codes, Rules, and Regulations, promulgated in 2015.  The alleged violations involve Forster’s collection of student loans. The DFS states in its press release that the charges are the first brought by the DFS alleging violations of the Debt Collection Regulation.

The Debt Collection Regulation, in Section 1.4, requires a debt collector to inform the consumer of his or her right to request substantiation of a debt if the consumer disputes, orally or in writing, the validity of a charged-off debt or the debt collector’s right to collect a charged-off debt.  The debt collector can treat such dispute as a request for substantiation or must follow the requirements in Section 1.4 for providing the consumer with instructions on how to request substantiation.  The debt collector must provide written substantiation of a charged-off debt to a consumer within 60 days of receiving a request for substantiation and must cease collection of the debt until the written substantiation has been provided to the consumer.

Section 1.4 provides that substantiation of a charged-off debt includes:

  • the signed contract or signed application that created the debt or, if no signed contract or application exists, a copy of a document provided to the alleged debtor while the account was active, demonstrating that the debt was incurred by the debtor  (For a revolving credit account, the most recent monthly statement recording a purchase transaction, payment or balance transfer will satisfy this requirement);
  • the charge-off account statement, or equivalent document, issued by the original creditor to the consumer;
  • a statement describing the complete chain of title from the original creditor to the present creditor, including the date of each assignment, sale, and transfer; and
  • records reflecting the amount and date of any prior settlement agreement reached in connection with the debt pursuant to section 1.5 of this Part.

According to the Statement of Charges, Forster’s written policies included a provision setting forth its obligation under the DFS regulation to provide a consumer with written substantiation of a charged-off debt within 60 days of receiving a request for substantiation and to cease collection of the debt until written substantiation has been provided.  The policies also stated that Forster would request documentation to substantiate a debt from its client and would review the documents received to determine if they comply with DFS requirements.

The DFS alleges that despite its written policies, the DFS found numerous instances in which Forster failed to provide consumers with any substantiation, failed to provide sufficient documentation to consumers to substantiate debts, or failed to provide written substantiation within the 60-day timeframe.  As “frequently-occurring examples” of Forster’s provision of insufficient documents, the Statement of Charges cites:

  • Providing consumers with the application and a document titled “Statement of Purchased Account” which failed to clearly identify the creditors who purchased the consumer’s student loan
  • Failing to provide the underlying transaction documents, such as a loan application, which created the debts to be collected
  • Failing to provide complete chain of title, omitting assignments, sales and transfers of title of the debt
  • Merely providing a court document, such as a court judgment, with little or no other documentation

Under Section 408 of the Financial Services Law, the DFS can impose a civil penalty of up to $1,000 for a violation of the Debt Collection Regulation.  The DFS alleges in the Statement of Charges that “each failure to provide any substantiation, timely substantiation, or sufficient substantiation of debt constitutes an independent offense.”  The Statement of Charges sets a hearing date of January 12, 2021 on the DFS’s charges.


Last week, the CFPB announced the appointment of new members to its advisory committees: Consumer Advisory Board (CAB), Community Bank Advisory Council (CBAC), Credit Union Advisory Council (CUAC), and Academic Research Council (ARC).

In 2019, Director Kraninger announced a series of enhancements to the Bureau’s advisory committee charters, including: expanding the focus of the meetings to cover broad policy matters; increasing the frequency of in-person meetings from two times a year to three times a year for the CAB, CBAC, and CUAC; elevating the ARC to a Director-level advisory committee and increasing its meeting frequency; and increasing term lengths from one year to two years.  The enhancements followed steps taken by the CFPB under former Acting Director Mulvaney to reconstitute the committees that were criticized by consumer advocates and former committee members.

The Dodd-Frank Act mandated the creation of the CAB to advise and consult with the Bureau’s Director on a variety of consumer financial issues. The CBAC, CUAC, and ARC are discretionary councils created by the Bureau.  The CBAC and CUAC advise and consult with the Bureau on consumer financial issues related to community banks and credit unions.  The ARC advises the Bureau on its strategic research planning process and research agenda and provides feedback on research methodologies, data collection strategies, and methods of analysis, including methodologies and strategies for quantifying the costs and benefits of regulatory actions.

The following members will serve on each of their respective committees:

Consumer Advisory Board

Eric Kaplan, Director of the Housing Finance Program, Milken Institute (Washington, DC), was appointed to serve as CAB Chairperson.  The other individuals appointed to the CAB are:

  • Joaquin Altoro, CEO, Wisconsin Housing & Economic Development Authority (Madison, WI)
  • Nikitra Bailey, EVP, Center for Responsible Lending (Durham, NC)
  • Lorray Brown, Attorney/Consumer Law Attorney, Co-Director, Michigan Poverty Law Program (Ypsilanti, MI)
  • Nadine Cohen, Managing Attorney, Greater Boston Legal Services (Boston, MA)
  • Mae Watson Grote, Founder and CEO, The Financial Clinic (Brooklyn, NY)
  • Tim Lampkin, CEO, Higher Purpose Co. (Clarksdale, MS)
  • Leigh Phillips, President and CEO, EARN DBA SaverLife (San Francisco, CA)
  • Jean Setzfand, Senior Vice President, AARP (Washington, DC)
  • Rebecca Steele, President/CEO, National Foundation for Credit Counseling (Washington, DC)
  • Tim Welsh, Vice Chairman Consumer and Business Banking, U.S. Bank (Minneapolis, MN)

Community Bank Advisory Council  

Valerie Quiett, SVP and Chief Legal Officer, Mechanics and Farmers (M&F) Bank (Durham, NC), was appointed to serve as CBAC Chairperson.  The other individuals appointed to the CBAC are:

  • John Buhrmaster, President & CEO, First National Bank of Scotia (Scotia, NY)
  • Patrick Ervin, EVP, Independent Bank (Troy, MI)
  • Shan Hayes, President and CEO, Heartland Tri-State Bank (Elkhart, KS)
  • Ronette Hauser-Jones, Mortgage Division President, Great Plains Bank (Oklahoma City, OK)
  • Bruce Ocko, Senior VP Director of Mortgage & Consumer Lending, Bangor Savings Bank (Bangor, ME)
  • Kristina Schaefer, General Counsel & Chief Risk Officer, Fishback Financial Corporation/First Bank & Trust (Brookings, SD)
  • Brad Williamson, CEO & President, Islanders Bank (Friday Harbor, WA)

Credit Union Advisory Council

Racardo McLaughlin, VP Mortgage Originations/Operations, TwinStar Credit Union (Lacey, WA), was appointed to serve as CUAC Chairperson.  The other individuals appointed to the CUAC are:

  • Monica Davis, Senior Vice President Risk management, Union Square Credit Union (Wichita Falls, TX)
  • Michelle Dwyer, President/CEO, Franklin First Federal Credit Union (Greenfield, MA)
  • Rick Durante, VP, Director of Corporate Social Responsibility and Government Affairs, Franklin Mint Federal Credit Union (Chadds Ford, PA)
  • Doe Gregersen, Vice President & General Counsel, Landmark Credit Union (New Berlin, WI)
  • Brian Holst, General Counsel, Elevations Credit Union (Boulder, CO)
  • Jose Iregui, Vice President of Loan Servicing and Collections, Langley Federal Credit Union (Newport News, VA)
  • Jeremiah Kossen, President & CEO, Town and Country Credit Union (Minot, ND)

 Academic Research Council

Joshua Wright, Professor, Scalia Law School at George Mason University (Arlington, VA), was appointed to serve as ARC Chairperson.  The other individuals appointed to the ARC are:

  • Michael Baye, Bert Elwert Professor of Business Economics, Indiana University (Bloomington, IN)
  • Vicki Bogan, Associate Professor, Cornell University (Ithaca, NY)
  • Terri Friedline, Associate Professor, University of Michigan (Ann Arbor, MI)
  • Tom Miller, Professor of Finance and Jack R. Lee Chair, Mississippi State University (Mississippi State, MS)
  • Michael Staten, Professor and Associate Dean, University of Arizona (Tucson, AZ)
  • Anthony Yezer, Professor of Economics, George Washington University (Washington, DC)


The CFPB  has taken a significant step towards issuing regulations to implement Section 1071 of the Dodd-Frank Act by releasing an outline of the proposals it is considering in preparation for convening a small business review panel (Panel).  Section 1071 amended the ECOA to require financial institutions to collect and report 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.  The Small Business Regulatory Enforcement Fairness Act (SBREFA) and the Dodd-Frank Act require the CFPB to convene a Panel when developing rules that may have a significant economic impact on a substantial number of small businesses.  It also requires the Panel to consult with representatives of small business entities that are likely to be subject to the rules under consideration.

The Bureau’s release of the SBREFA outline on September 15 meets the rulemaking timetable established by the Stipulated Settlement Agreement in the lawsuit filed against the Bureau alleging wrongful delay in adopting regulations to implement Section 1071.  Under the Stipulated Settlement Agreement, the Bureau agreed to release the SBREFA outline by September 15 and convene a Panel by October 15, 2020, or as soon as practicable thereafter if Panel members are not available to convene.  In its second status report filed with the court, the Bureau indicated that it would hold meetings with the Panel and small entity representatives during the week of October 19.  Since SBREFA requires the Panel to complete a report on the input received from the small business representatives within 60 days of convening, if convened on October 15, the Panel’s deadline for completing its report would be December 14, 2020.

The Bureau is considering a proposed rule that would include the following provisions:

Scope.  Section 1071(b) imposes requirements regarding “any application to a financial institution for credit for [a] women-owned, minority-owned, or small business.”  The Bureau is considering proposing that the data collection and reporting requirements of its Section 1071 rule apply to any application for credit for a “small business” as defined by the rule, including for a women-owned or minority-owned business that meets the “small business” definition.  Under this approach, a financial institution would not be required to collect and report Section 1071 data for women-owned or minority-owned businesses that are not a “small business.” 

Financial Institutions Covered.  The definition of “financial institution” in Section 1071(h) covers any entity that engages in financial activity and includes both depository and non-depository institutions. The Bureau is considering the following standards for exempting financial institutions from Section 1071 data collection and reporting requirements:

  • Size-based exemption for depository institutions.  The asset-based exemption under consideration would exempt depository institutions with assets less than one of two possible threshold levels, $100 million or $200 million in assets, to be determined either at the end of the last calendar year or the end of both of the last two calendar years.
  • Activity-based exemption for all financial institutions.  The activity-based exemption under consideration would exempt financial institutions with small business lending activity that is less than one of three possible threshold levels: originations of at least 25 loans or $2.5 million; originations of at least 50 loans or $5 million; or originations of at least 100 loans or $10 million, to be determined either at the end of the last calendar year or the end of both of the last two calendar years
  • Combined size- and activity-based exemptions.  A combined exemption would require all financial institutions that meet an activity-based threshold for the relevant time period to comply with Section 1071 data collection and reporting requirements but depository institutions with assets under a given asset threshold would be exempt from reporting, regardless of the number or dollar value of the small business loans they originated during the relevant time period.

“Small Business” Definition. Section 1071(h) defines a “small business” applicant as having the same meaning as a “small business concern” in the Small Business Act.  The Bureau is considering proposing to define “small business” by cross-referencing the SBA’s general “small business concern” definition but adopting a simplified size standard for purposes of its Section 1071 rule that uses one of the following three alternative approaches under consideration:

  • Gross annual revenues in the prior year of less than $1 million or $5 million
  • Maximum of 500 employees for manufacturing and wholesale industries and $8 million in gross annual revenues for all other industries
  • A size standard (for which the Bureau would need SBA approval) using gross annual revenues or number of employees that looks to the SBA’s industry-specific size standards which are expressed in terms of a business’s average annual receipts or average number of employees and that would result in eight different size standards and 13 industry categories.

The definition of a “business concern” under the SBA’s regulations is limited to for-profit entities with a place of business located in the United States and that operate primarily within the United States or which make a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.  The Bureau indicates that if it adopts the SBA definition for purposes of Section 1071, financial institutions would not be required to collect and report Section 1071 data for not-for-profit entities or foreign companies. 

Product Coverage.  Section 1071 requires financial institutions to collect and report information regarding applications for “credit.”  The Bureau is considering proposing that a covered product under Section 1071 is one that meets the ECOA definition of “credit” and is not excluded under the Bureau’s rule. It is considering proposing that covered products include term loans, lines of credit, and business credit cards and that the following products are not covered:

  • Consumer credit used for business purposes.  Products designated by the creditor as consumer purpose products would not be covered.
  • Leases.  Leases would not be covered unless the product is a credit sale.
  • Trade credit.  Trade credit, which typically involves a transaction in which the seller allows a buyer to purchase its goods without requiring immediate payment and the seller is not otherwise in the financial services business, would not be covered.
  • Factoring.  Factoring, which typically involves a business’s sale of its unpaid invoices at a discount to a factor, would not be covered.  (Factoring is not generally considered subject to the ECOA or Regulation B.)
  • Merchant cash advances.  Merchant cash advances typically involve a merchant’s receipt of a cash advance which it promises to repay, plus an additional amount, by either pledging a percentage of its future revenue or agreeing to pay a fixed daily withdrawal amount to the advance provider until the agreed payment amount is satisfied.  The Bureau cites the “unique structure of the transactions” as a reason for not including merchant cash advances as a covered product.   

“Application” Definition.  Section 1071 does not define the term “application.”  The Bureau is considering proposing to define an “application” in a way that is largely consistent with Regulation B, which defines an “application” as “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.”  However, the Bureau is proposing to exclude the following circumstances even if they would be considered an “application” under Regulation B:

  • Inquiries/prequalifications
  • Reevaluation, extension and renewal requests, except requests for additional credit amounts
  • Solicitations and firm offers of credit

The Bureau considered, but decided against, defining an “application” for purposes of Section 1071 as a “completed application” as defined under Regulation B or as particular documents or specific data points that, if collected, would trigger a duty to collect and report Section 1071 data.

Data Points.  Section 1071(b) requires a financial institution to inquire whether an applicant for credit is a women-owned, minority-owned, or small business and to maintain a record of the responses to that inquiry separate from the application and accompanying information.  The Bureau is considering proposing that collection and reporting of women-owned and minority-owned business status be based solely on the applicant’s self-reporting, without any obligation on the financial institution to verify the accuracy of that information.  The Bureau is not considering proposing the use of visual observation or surnames by institutions to determine an applicant’s status.

Section 1071(e) requires a financial institution to collect and report “the race, sex, and ethnicity of the principal owners of the business” but does not define “principal owner.”  The Bureau is considering proposing to define the term “principal owner” in a way that is consistent with FinCEN’s customer due diligence rule, which makes an individual the “principal owner” of a business if he or she directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25 percent or more of the equity interests in the business.  It is also considering proposing that financial institutions use HMDA aggregate race, sex, and ethnicity categories when requesting that applicants self-report race, sex, and ethnicity information.  As with the collection and reporting of women-owned and minority-owned business status, the Bureau is considering proposing that collecting and reporting of the race, sex, and ethnicity of a business’s principal owners be based solely on applicant self-reporting.

The Bureau indicates that while the definition of an “application” triggers a financial institution’s duty to collect and report Section 1071 data, that definition does not necessarily govern when during the application process Section 1071 data must be collected.  The Bureau is not currently considering specifying a particular time period in which financial institutions must seek to collect Section 1071 data from applicants.  The Bureau notes that it decided not to specify a time period despite the risk that absent such a designated time period, financial institutions may not seek to collect demographic information until late in the process when applicants may be less motivated to provide such information.

Public disclosure of Section 1071 data.  Section 1071(f) generally requires that Section 1071 data compiled and maintained under Section 1071 by institutions be made publicly available by the institution upon request and by the Bureau annually.  Section 1071(e) gives the Bureau discretion to “delete or modify data…which is or will be available to the public, if the Bureau determines that the deletion or modification of the data would advance a privacy interest.”  In exercising this discretion, the Bureau is proposing to use a “balancing test” that weighs the risks and benefits of public disclosure.  Under this test, data would be modified or deleted if its disclosure in unmodified form would pose risks to privacy interests that are not justified by the benefits of public disclosure in light of Section 1071’s purposes.  If the risks of disclosing unmodified data outweigh the benefits, the Bureau would consider whether modifications could bring them into balance.  The Bureau is considering applying the balancing test to the privacy interests of both non-natural persons and natural persons with respect to protecting, respectively, sensitive commercial information and sensitive personal information.  As an alternative to a balancing test, the Bureau is considering an approach in which it would modify data if an identified privacy risk crossed a significance threshold without weighing the risk against the benefits of disclosure.

In addition, the Bureau is also considering proposing an approach in which financial institutions can satisfy the requirement for them to make Section 1071 data publicly available upon request by referring the public to the Bureau’s website where such data would be available (with any modifications or deletions required based on the Bureau’s application of the balancing test).

Implementation.  The Bureau is considering proposing that financial institutions have approximately two calendar years for implementation following the Bureau’s issuance of a final Section 1071 rule.

A SBREFA outline would ordinarily be a strong indicator of the approach the Bureau is likely to take in a proposed rule implementing Section 1071.  However, if Joe Biden is elected President in November, a proposed rule would likely be issued under a new CFPB Director appointed by him.  As a result, the proposal might vary more than usual from the outline and be more closely aligned with views of consumer advocates.  The National Community Reinvestment Coalition issued a press release about the SBREFA outline in which it stated that “there are approaches outlined in the proposal that must not be included in further proposals.”  The Coalition cited the Bureau’s approaches to exemptions based on asset size and for “non-traditional lenders like merchant cash advance providers” as problematic.


Topics discussed include how the banking regulators and FinCEN will approach the decision whether to take enforcement action against a financial institution (including what BSA/AML program failures typically would (or would not) result in cease and desist orders), how the regulators’ statement differs from 2007 guidance, how the enforcement statements relate to recent updates to the BSA/AML examination manual, suggested practices for reducing compliance risk for  institutions and individuals, and the Presidential election’s potential impact on BSA/AML enforcement.

Click here to listen to the podcast.