The ABA Journal has begun accepting nominations for its ABA Journal Web 100.  The Web 100 honors blogs, law podcasts, and tweeters followed by lawyers.  It replaces the ABA’s Blawg 100 which was limited to the best legal blogs.  Our Consumer Finance Monitor was honored to be recognized by the Blawg 100 for five consecutive years and we would be grateful to be recognized by the Web 100 in 2018.

Our blog, among the first in the legal industry, was launched as the “CFPB Monitor” on July 21, 2011, the same day the CFPB was stood up, because we recognized right from the start that the CFPB was going to have an enormous impact on the consumer financial services industry and the lawyers who counsel members of that industry.  In February 2017, we renamed our blog the “Consumer Finance Monitor,” and expanded its coverage to include the many other federal agencies that regulate our industry as well as relevant state agency and attorney general developments.

We hope our readers not only find our blog to be a place where they can go to get up-to-the-minute reporting on important developments, but also a place where they can find informed analysis that helps them to understand the significance of those developments.

We also believe our blog has been a thought leader for our industry’s perspective on many key issues and has influenced the actions of lawmakers, most notably Congress’s use of the Congressional Review Act to overturn the CFPB’s arbitration rule and its auto finance guidance.  Here are links to some of our blogs on these issues as well as small-dollar lending and the ongoing battle over the CFPB’s constitutionality:

Director Cordray continues to doubt safety and soundness concerns are raised by the final arbitration rule

Treasury Department report eviscerates CFPB arbitration rule

Congress disapproves CFPB Bulletin concerning discretionary pricing by auto dealers

OCC small-dollar lending bulletin: one step forward but one step back?

Will the CFPB appeal Judge Preska’s ruling striking Title X?

If you enjoy following our blog and value the information it provides and its role in influencing the legal debate, we hope you will nominate us for the Web 100 by completing the ABA’s nomination form by Tuesday, August 7, 2018 at 11:59 p.m. CT.  (The ABA refers to nominations as “Web 100 Amici/Friend of the Web briefs.”)  The form will ask you to supply the Consumer Finance Monitor’s URL (which is: https://www.consumerfinancemonitor.com/) and a link to a recent blog post (you can use any of the posts above or another that you liked).

As always, we appreciate your support, and thank you for following Consumer Finance Monitor.

 

 

This morning, the Senate Banking Committee held a hearing on President Trump’s nomination of Kathy Kraninger to serve as CFPB Director.  Although the hearing also included the President’s nomination of Kimberly Reed to serve as President of the Export-Import Bank, most of the questioning was directed to Ms. Kraninger.

Ms. Kraninger currently serves as Program Associate Director for General Government Programs at OMB.  A significant amount of the questioning of Ms. Kraninger by Democratic Senators was focused on obtaining information about her role at OMB in the development and implementation of the Trump Administration’s “zero-tolerance” policy for individuals attempting illegal entry into the United States.  (Republican Committee Chairman Crapo opened the hearing by rejecting the request of Democratic Senators to postpone the hearing pending Ms. Kraninger’s provision of the documents and other information about her role at OMB that they had requested in a letter sent to Ms. Kraninger.)

Ms. Kraninger was unwilling to provide any information about her involvement beyond stating that she had participated in meetings about the implementation of the zero-tolerance policy but had no role in setting the policy.  She declined requests from Democratic Senators to characterize any advice she gave at OMB concerning the policy because, according to Ms. Kraninger, doing so would require her to reveal information about the “deliberative process.”  Democratic Senators also attempted to highlight Ms. Kraninger’s lack of previous experience in the financial services industry, either as an employee of a financial institution or a regulator.

The following noteworthy information discussed during the hearing:

  • In her prepared testimony and opening remarks, Ms. Kraninger outlined the following initial priorities for the CFPB, which closely track those of Acting Director Mulvaney:
    • The Bureau should be “fair and transparent, ensuring its actions empower consumers to make good choices and provide certainty for market participants,” with the Bureau making “robust use of cost benefit analysis.”  Ms. Kraninger observed that “notice and comment rulemaking is essential for ensuring the proper balancing of all interests” and “also enables consideration of tailoring to reduce the burden of compliance, particularly on consumers and smaller marketplace participants.”
    • The Bureau should work closely with other financial regulators and the states on supervision and enforcement. Ms. Kraninger stated that she would take “aggressive action against bad actors who break the rules by engaging in fraud and other illegal activity.”
    • The Bureau must recognize its duty “to protect sensitive information in its possession.”  She would limit the Bureau’s data collection “to what is needed and required under law.”
    • The Bureau must be “accountable to the American people for its actions, including its expenditure of resources.”
  • Ms. Kraninger indicated that she was willing to revisit Acting Director Mulvaney’s decisions to reorganize the CFPB’s Office of Fair Lending and its Office of Students and Young Consumers and would approach such review with “an open mind.”
  • While stating that she would be committed to enforcing fair lending laws as CFPB Director, Ms. Kraninger declined to answer Democratic Senator Jones’ question asking her whether she would support the CFPB’s continued use of the disparate impact theory.  She responded that she planned to have “detailed conversations” with CFPB staff to understand the CFPB’s position on the use of disparate impact.
  • In response to a question from Democratic Senator Warner suggesting that her support for the use of cost benefit analysis was inconsistent with her desire to limit the Bureau’s data collection, Ms. Kraninger indicated that she was committed to “data-driven decision making” but that it should be based on data that comes in response to Bureau requests for information and other sources rather than from supervised entities.
  • Republican Senator Toomey’s efforts in obtaining a determination from the GAO that the CFPB’s indirect auto finance guidance was a “rule” within the scope of the Congressional Review Act (CRA) resulted in Congress’ use of the CRA to override the guidance.  In his questioning of Ms. Kraninger, Senator Toomey used the guidance as an example of a situation in which the CFPB had failed to properly use the Administrative Procedure Act’s notice-and-comment procedures and obtained a commitment from Ms. Kraninger to use such procedures when imposing new CFPB rules.  Ms. Kraninger was not willing to state that she agreed with Senator Toomey’s statement that Dodd-Frank Section 1071 (which deals with the collection of data on credit applications made by women- or minority-owned businesses and small businesses) was the “only respect” in which Dodd-Frank requires the CFPB to deal with small businesses.  Instead, she indicated that she had not reviewed all federal consumer financial laws but that it was her belief that Congress intended to limit the CFPB’s role in dealing with small businesses.
  • In responding to questions from Democratic Senators critical of the CFPB’s plans to revisit its payday lending rule, Ms. Kraninger indicated that it was “important” to allow the CFPB’s reopening of its rulemaking process to proceed as planned.

 

The issue of the CFPB’s constitutionality is currently before the Fifth Circuit in the interlocutory appeal of All American Check Cashing from the district court’s ruling upholding the CFPB’s constitutionality.  As a result, the Fifth Circuit’s decision issued earlier this week which found that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight could be a preview of how another Fifth Circuit panel might approach the CFPB’s constitutionality.

In addition, the decision will likely influence the approach that the CFPB takes in its brief in All American Check Cashing’s appeal.  All American Check Cashing has already filed its principal brief and the CFPB is seeking a 40-day extension of the date by which it must file its brief (from August 1 to September 10).  In its motion to extend the briefing schedule, the CFPB states that the Fifth Circuit’s opinion “discussed features of the Bureau and compared them to aspects of FHFA’s structure” and thus “many of the arguments discussed by the Court are relevant to the issues in [the All American Check Cashing] case.”  The CFPB is requesting the extension “so that it may evaluate the [Fifth Circuit’s] opinion, and to decide how to address that opinion in the context of the [the All American Check Cashing] case.”  (The motion indicates that All American Check Cashing has no objection to the extension provided it receives a one-week extension for filing its reply brief.)

The FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA) to oversee two of the housing government services enterprises (GSEs).  Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.”  Also like the CFPB, the FHFA is not funded through the regular appropriations process.  Instead, the FHFA is funded through assessments collected from the GSEs.  The FHFA is overseen by the Federal Housing Finance Oversight Board (Board) which is required to testify annually before Congress about the FHFA’s performance and the safety and soundness of the GSEs but cannot exercise any executive authority, or as put succinctly by the Fifth Circuit, “cannot require the FHFA or Director to do much of anything.”

The parties challenging the FHFA’s constitutionality were shareholders of the GSEs who were seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs that required the GSEs to pay quarterly dividends to the Treasury equal to the GSEs’ excess net worth after accounting for prescribed capital reserves.

The Fifth Circuit determined that while the “for cause” removal provision alone was not sufficient to trigger a separation of powers violation, it did trigger a violation when combined with other features of the FHFA, specifically its insulation from the normal appropriations process and the absence of any statutory provision providing for executive branch control over the FHFA’s activities.  The court observed that while two of the Board’s members are Cabinet officials, the Board exercises purely advisory functions.  It determined that the appropriate remedy for the constitutional violation was to sever the for-cause removal provision while “leav[ing] intact the remainder of HERA and the FHFA’s past actions—including the Third Amendment.”

In ruling that the FHFA is unconstitutionally structured, the Fifth Circuit stated that it was “mindful” of the D.C. Circuit’s en banc PHH decision finding the CFPB’s structure to be constitutional but “salient distinctions between the agencies compel a contrary conclusion.”  It observed that, unlike the Board, the Financial Stability Oversight Council (FSOC) can directly control the CFPB’s actions because it holds veto-power over the CFPB’s policies.  The court also commented that the shareholders were not only challenging the for cause removal provision but were challenging the “cumulative effect of Congress’s agency-design decisions.”  (emphasis included)

In its interlocutory appeal to the Fifth Circuit, All American Check Cashing has argued that not only does the CFPB’s single-director-removable-only-for-cause structure, standing alone, make the CFPB’s structure unconstitutional, but that its other features “render it even more clearly unconstitutional when combined with its single unaccountable Director.”  Such other features include the CFPB’s insulation from the regular appropriations process.  As a result, the Fifth Circuit could rely on All American Check Cashing’s “cumulative effect” argument as a basis for disagreeing with the D.C. Circuit’s en banc conclusion in PHH.  Indeed, perhaps with All American Check Cashing’s interlocutory appeal in mind, the Fifth Circuit specifically indicated that its decision was limited to the FHFA’s constitutionality.  The court stated in a footnote:

We do not question Congress’s authority to establish independent agencies, nor do we decide the validity of any agency other than the FHFA….
We leave for another day the question of whether other agencies suffer from similar constitutional infirmities.

Despite the Fifth Circuit’s reliance on the FSOC’s oversight of the CFPB to distinguish the D.C. Circuit’s en banc PHH decision, we are not convinced that the FSOC’s oversight of the CFPB is significantly different from the Board’s oversight of the FHFA.  While the FSOC can veto a CFPB regulation, it can only do so within a short time period by a two-thirds vote and only for reasons of safety and soundness (a very high standard) and not because FSOC members believe the regulation is bad policy.  Indeed, to date the FSOC has not vetoed any CFPB regulation nor has any FSOC member filed a petition to initiate a potential veto vote.  Furthermore, except for its ability to veto a CFPB regulation for safety and soundness reasons, the FSOC has no oversight over CFPB supervisory and enforcement activities.  The FSOC did not consider a veto of the CFPB’s arbitration rule even though the then Acting Comptroller of the Currency took the position that the rule threatened the safety and soundness of the banking system because of the avalanche of class action litigation that the CFPB predicted would result from the rule.  The only check on the CFPB proved to be Congress’ use of the Congressional Review Act to override the arbitration rule.

Should the Fifth Circuit conclude that the CFPB’s structure is unconstitutional, its FHFA decision also suggests that it would rule that the proper remedy is to sever the Consumer Financial Protection Act’s (CFPA) for-cause removal provision.  All American Check Cashing is arguing that the correct remedy is to strike down the CFPA as a whole.

Both the FHFA and the Treasury Department, in their briefs to the Fifth Circuit, sought to avoid the constitutionality issue by arguing that the Third Amendment was entered into by the FHFA’s Acting Director who was removable by the President at will and therefore the shareholders’ harm was not traceable to the for-cause removal restriction.  The FHFA and Treasury Department argued that because HERA, by its plain terms, only restricted the President’s authority to remove the Director but did not restrict the President’s authority to remove an Acting Director, the Acting Director was not subject to the for-cause removal restriction.  The Fifth Circuit rejected this argument stating:

But if the acting Director could be removed at will, the FHFA would be an executive agency—not an independent agency.  There is no indication that Congress sought to revoke the FHFA’s status as an independent agency when it is led by an acting, rather than appointed, Director.  So an acting Director, like an appointed one, is covered by the removal restriction. (footnotes omitted).

The FHFA also argued in the alternative that the FHFA’s structure was constitutional.  In its brief, the FHFA observed that the shareholders were relying on the D.C. Circuit’s vacated panel decision in PHH in arguing that the FHFA’s structure is unconstitutional.  The FHFA stated that “the District Court did not err by agreeing with every other court that has considered the issue that “the reasoning of the panel decision in PHH Corp. [is] unpersuasive even if it had not been vacated.'”

In a supplemental filing, the FHFA notified the Fifth Circuit of the D.C. Circuit’s issuance of its en banc PHH decision rejecting the constitutional challenge to the CFPB’s structure and indicated that the D.C. Circuit’s reasoning closely tracked the FHFA’s arguments in support of its constitutionality.  In addition to defending its constitutionality, the FHFA took the position that if its structure were found to be unconstitutional, the proper remedy would be to strike the for-cause removal provision.

The Fifth Circuit’s rejection of the argument made by the FHFA and the Treasury Department that the shareholders’ constitutionality challenge failed because the Acting Director was removable at will can be expected to influence whether the CFPB will make a similar argument in the All American Check Cashing case.  In opposing All American Check Cashing’s petition to the Fifth Circuit asking it to grant interlocutory review, the CFPB did not directly address the merits of the appellants’ constitutional challenge.  Instead, it claimed that because Acting Director Mulvaney is removable at will by the President and had ratified the CFPB’s decision to bring the lawsuit, any constitutional defect that may have existed with the CFPB’s initiation of the lawsuit was cured and the constitutionality of the for-cause removal provision was no longer relevant to the case.

According to the CFPB, Acting Director Mulvaney is removable at will by the President because the CFPA’s removal provision by its plain terms applies only to “the Director.”  Another Fifth Circuit panel could easily apply the rationale used by the Fifth Circuit in rejecting the FHA’s and Treasury Department’s “plain terms” argument and conclude that the CFPB’s Acting Director also is not removable at will because “there is no indication that Congress sought to revoke the [CFPB’s] status as an independent agency when it is led by an acting, rather than appointed, Director.”

It remains unclear what position the CFPB will take on its constitutionality in the All American Check Cashing case.  However, given that another Fifth Circuit panel now has the Fifth Circuit’s FHFA decision on which it can readily rely to reject an argument by the CFPB that the Acting Director’s ratification makes a ruling on the CFPB’s constitutionality unnecessary, there is now a greater likelihood that the Fifth Circuit will issue a decision that does rule on the CFPB’s  constitutionality.  (In the CFPB’s lawsuit against RD Legal Funding, Judge Preska of the Southern District of New York recently ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional and struck the CFPA (Title X of Dodd-Frank) in its entirety.  The CFPB has not yet indicated whether it plans to appeal Judge Preska’s decision.)

Should any of the parties to the FHFA decision wish to seek a rehearing en banc, they must do so within 45 days after entry of judgment.  The 45-day period applies when one of the parties is a United States agency (here, the FHFA and the Treasury Department) or a current United States officer or employee sued in an official capacity (here, FHFA Director Watt and Treasury Secretary Mnuchin).

 

 

Paul Watkins, who formerly was in charge of  fintech initiatives in the Arizona Attorney General’s office, has been named by Acting Director Mulvaney to serve as Director of the Bureau’s Office of Innovation.

The Bureau’s press release indicates that the recently-created Office of Innovation will “focus on creating policies to facilitate innovation, engaging with entrepreneurs and regulators, and reviewing outdated or unnecessary regulations” and identifies the encouragement of “consumer-friendly innovation” as “a key priority for the Bureau.”  The new Office will take over the work that was being done under Project Catalyst, the initiative launched by the CFPB in 2012 for facilitating innovation in consumer financial products and services.

Earlier this year, the State of Arizona created the first “regulatory sandbox” in the United States which allows new financial technologies and products to be tested in a controlled environment with reduced regulatory risk.  Last month, Ballard Spahr attorneys held a webinar, “The Regulatory Sandbox – What it Means for Fintech Companies,” in which the topics included a discussion of the concept of a regulatory sandbox, the benefits and risks associated with using one, and what a possible sandbox created by the CFPB might look like.  Mr. Watkins was one of the webinar speakers and discussed the Arizona initiative.

We applaud the Bureau for the selection of Mr. Watkins to serve in this important position.

 

 

 

The CFPB announced last Friday that it had entered into a consent order with National Credit Adjusters, LLC (NCA), a privately-held company that owns several debt collection companies, and NCA’s former CEO and part-owner (CEO).  The consent order enters a $3.0 million judgment for civil money penalties against NCA and the CEO but suspends $2.2 million of the judgment based on the financial condition of NCA and the CEO. (NCA must pay $500,000 and the CEO must pay $300,000.)

According to the consent order, the CFPB found that NCA purchased consumer debts and used a group of debt collection companies (Agencies) to collect such debts.  Some of those companies engaged in frequent unlawful debt collection practices that harmed consumers, including by representing that consumers owed more than they were legally required to pay or by threatening consumers and their family members with various legal actions that NCA did not have the intention or legal authority to take.

The consent order also finds that the CEO determined which of the Agencies NCA would place debt with, which accounts the Agencies would collect on, and the terms under which the Agencies would collect.  NCA and the CEO continued to place debt with the Agencies for collection after NCA’s compliance personnel had recommended terminating the Agencies because of their illegal debt collection practices.  NCA also sold consumer debt to one of the Agencies as a means of convincing original creditors to approve NCA’s business practices and NCA and the CEO defended the Agencies when original creditors raised concerns about their collection practices.

The consent order makes the legal conclusions that NCA and the CEO, either through their actions or through the Agencies, directly violated the CFPA’s prohibition of unfair and deceptive acts or practices by inflating account amounts, making false threats to take legal action, and placing debts with the Agencies despite their illegal collection practices.  It also concludes that the inflation of account amounts and making of false threats by NCA, through the Agencies, constituted deceptive practices or the use of unfair or unconscionable means to collect debt in violation of the FDCPA and that such FDCPA violations also constituted violations of the CFPA.  The consent order finds further that NCA and the CEO not only directly violated the CFPA and FDCPA but also violated the CFPA by knowingly or recklessly providing substantial assistance to the unfair and deceptive collection acts and practices of the Agency to which NCA sold debts.

In addition to requiring payment of $800,000 of the judgment, the consent order prohibits NCA and the CEO from engaging in the illegal collection practices addressed by the consent order, permanently bars the CEO from working in any business that collects, buys, or sells consumer debt, and requires NCA to submit a comprehensive compliance plan to the CFPB that includes, at a minimum, certain specified elements.

It is noteworthy that, like the consent order announced last month by the CFPB that also involved alleged unlawful debt collection practices, the consent order with NCA and the CEO does not require refunds to be made to consumers.  In its Spring 2018 rulemaking agenda, the CFPB stated that it “is preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures.”  It estimated the issuance of a NPRM in March 2019.

 

 

A fifth amicus brief has been filed in support of All American Check Cashing and the other appellants in their interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the district court’s ruling upholding the CFPB’s constitutionality.

The brief was filed by the Cato Institute which describes itself as “a nonpartisan public policy research foundation dedicated to advancing the principles of individual liberty, free markets, and limited government.”

The CFPB’s brief is due to be filed by August 1.  We expect the brief to reveal the CFPB’s position on its constitutionality.

For our prior blog posts on All American Check Cashing’s principal brief and the four other amicus briefs, click here and here.

 

 

The CFPB will be one of the members of the new Task Force on Market Integrity and Consumer Fraud (Task Force) to be established by the U.S. Department of Justice (DOJ).  Last week, the DOJ announced that it was disbanding the Financial Fraud Enforcement Task Force, established under the Obama Administration, and pursuant to an Executive Order issued by President Trump, plans to establish the Task Force in its place.

The purpose of the Task Force, according to the DOJ press release, is to deter fraud on consumers, especially veterans and the elderly, and the government, specifically as it relates to health care.  The Task Force will provide guidance both for the investigation and prosecution of specific fraud cases and provide recommendations “on fraud enforcement initiatives.”

Although the DOJ will lead the Task Force, the Executive Order directs him to include several other federal agencies, including the CFPB.  Acting Director Mulvaney, who joined Deputy AG Rod Rosenstein in the formal announcement of the Task Force, stated that  “[i]nteragency cooperation is incredibly important to these complex issues” and favorably cited the “growing cooperation” among the DOJ and other federal and state agencies.

The Task Force’s focus on consumer fraud is consistent with Acting Director Mulvaney’s statements that the CFPB will no longer use its enforcement authority to “push the envelope” and instead will use it to target violations that present “quantifiable and unavoidable harm to the consumer.”  It is also consistent with his previous statements identifying the prevention of elder financial abuse as a priority issue for the CFPB.  In his remarks at the formal announcement of the Task Force, Acting Director Mulvaney highlighted the CFPB’s initiatives to address elder financial exploitation.

The California Department of Business Oversight (DBO) has published a second round of modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published its first round of revised rules last month.

The latest revisions to the regulations clarify servicer responsibilities related to application of payments, borrower communications and handling of qualified written requests (QWRs), and recordkeeping requirements, among other miscellaneous changes.

Payments

The initial regulations provided that a servicer must credit any online payment the same day it is paid by the borrower, if paid before the daily cut off time for same day crediting posted on the servicer’s website, or the next day, if paid after the posted cut off time.  These requirements, which were unmodified by the first round of revisions, have now been changed to clarify that servicers must only apply payments the same or next business day, depending on whether received before or after the published cut off time.

Borrower Communications and Qualified Written Requests

The Act requires that a servicer respond to QWRs by acknowledging receipt of the request within five business days and, within 30 days, providing information relating to the request and an explanation of any account action, if applicable.  The first round of revised regulations added the limitation that a servicer is only required to send a borrower a total of three notices for duplicative requests.  The latest revisions add two additional provisions.  First, servicers are only required to send an acknowledgement of receipt within five days if the action requested by the borrower has not been taken within five days of receipt.  Second, servicers may designate a specific electronic or physical address to which QWRs must be sent.  If designated, however, this information must be posted on the servicer’s website.

The revised regulations also further specify what is required of customer service representatives.  Now, federal and private loan servicer representatives must inform callers about alternative repayment plans if the caller inquires about repayment options.  Federal loan servicers must now also inform callers about loan forgiveness benefits, if the caller inquires about repayment options.  These regulations have evolved significantly.  The initial regulations required that representatives “be capable of discussing” alternative repayment plan and loan forgiveness benefits with callers, and be trained in the difference between forbearance and alternative repayment plans.  The latest revisions have added specific triggers for discussing repayment options—and forgiveness benefits for federal loans.

Servicer Records

The first round of revisions eliminated the DBO’s specific record keeping formatting requirements.  In its place, the latest round of revisions has added the general requirement that the books and records required by the act must be maintained in accordance with generally accepted accounting principles.  The new revisions also change the information required as part of the aggregate student loan servicing report to require the number of monthly payments required to repay the loan.

The modifications are subject to comment until July 25, 2018.  As with the first round, the revisions will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.

The New York Department of Financial Services (NYDFS) has issued an Online Lending Report that calls for the application of New York usury limits to all online lending and increased regulation of online lenders making loans to New York consumers and small businesses.

On August 22, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar to discuss the report.  Click here to register.

A bill signed by New York Governor Cuomo required the NYDFS to study online lending in New York and issue a public report of its findings and recommendations by July 1, 2018. The report indicates that to gather data, the NYDFS asked 48 businesses believed to be engaged in online lending activities in New York to complete a “New York Marketplace Lending Survey.” The NYDFS received responses from 35 of those 48 businesses.  According to the report, the respondents varied in size “from small to some of the largest online lenders in the industry,” and of the 35 respondents, 28 were not currently licensed by the NYDFS and 7 were licensed by the NYDFS.

The report includes a background discussion of the NYDFS’s  supervisory authority and New York usury limits, payday lending, “lessons from the financial crisis,” “New York’s leadership in consumer protection,” and consumer litigation financing.  It also sets forth the survey results, which cover consumer and business loans and consist of statistical and other information about (1) customer and loan numbers, (2) duration of loans, (3) loan sizes, (4) APRs, (5) fees, costs, expenses, and other charges, (6) loan delinquencies (past due 30 days or more), (7) business models, (8) marketing and advertising, (9) credit assessment/underwriting, and (10) complaints and investigations.

The NYDFS had listed topics to be addressed in the report on its website and solicited public comments on such topics.  In the report, the NYDFS also summarizes the 12 comments it received in response to that solicitation.  The NYDFS describes the commenters as “technology and lending associations, chambers of commerce, business associations, and banking, mortgage and credit union associations.”

The report concludes with a discussion of the benefits and risks associated with the lending activities and practices of online lenders based on the survey results followed by the NYDFS’s conclusions and recommendations.  Most of these recommendations will require legislation.

Key items in the report consist of the following:

  • Application of consumer protection laws to small business loans.  The NYDFS recommends that New York consumer protection laws and regulations “should apply equally to all consumer lending and small business lending activities.” According to the NYDFS, such protections include laws and regulations relating to transparency in pricing, fair lending, fair debt collection practices, and data protection.  The NYDFS further states that its “equal application” recommendation “includes robust consumer disclosures; the use of technology easily permits transparency, including disclosures of the full cost of a loan to a borrower and providing the consumer with full understanding of the long-term consequences of accepting short-term relief for a financial need.”  The NYDFS acknowledges that under existing federal law, small business loans are generally exempt from coverage.  To our knowledge, no state has ever subjected small business loans to the same regulations as consumer loans.  The report is devoid of any empirical data supporting this extreme recommendation.  The report does not even mention, let alone address, the risk that subjecting small business loans to the same state statutes that apply to consumer loans may lead to a reduction in the availability of small business loans and an increase in pricing for such loans. The NYDFS does not even define what would be considered a “small business loan.”
  • Application of New York usury laws to all online lending.  The NYDFS recommends the application of New York usury law “to all lending in New York.”   According to the NYDFS, “a loan is a loan from a borrower’s perspective, and  the borrower deserves to get the benefit of New York’s protections, whether the borrower borrows from a bank or credit union or from an online lender.”  While the report acknowledges that out-of-state banks are exporting their interest rates into New York, the report cavalierly suggests that, contrary to well-established U.S. Supreme Court precedent, New York can nevertheless apply its usury limits to such loans.  The recommendation follows earlier discussions in the report in which (1) the NYDFS observes that “a number of online lenders” have partnered “with federally chartered banks, or FDIC-insured banks located  in jurisdictions that do not have interest rate protections on par with New York’s” to expand their consumer lending “through their online platforms without regard to the type of loan offered, the size of the loans or the interest rates charged,” (2) the NYDFS expresses its support for the use of the “true lender theory” to challenge claims by such online lenders that loans they have made in partnership with banks are not subject to New York usury law, and (3) the NYDFS describes the Second Circuit’s holding in Madden v. Midland Funding that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge, but makes no mention of the fact that the OCC believes Madden was wrongly decided.

Thus, in recommending that “all lending in New York” be subject to New York usury laws, the NYDFS appears to be taking the position that no online lender partnering with a bank can permissibly rely on the bank’s federal law power to export interest rates to charge the interest the bank is permitted to charge on loans the bank has assigned to the online lender when such interest exceeds New York usury limits. The NYDFS also notes its opposition to H.R. 4439, the “Modernizing Credit Opportunities Act,” which is intended to address the uncertainty created by “true lender” challenges.  (A group of 21 state attorneys general recently sent a letter to the Senate majority and minority leaders as well as to the chairman and ranking member of the Senate Banking Committee urging them to reject H.R. 4439 and H.R. 3299, the “Protecting Consumers’ Access to Credit Act of 2017,” a bill often referred to as the “Madden fix” bill.)

The NYDFS also appears to be willing to ignore the comments it discusses in the report highlighting the importance of the access to credit that online lending provides to consumers and small businesses.  The NYDFS’s recommendation is likely to further reduce credit availability for New York consumers and small businesses.  Indeed, a recent study showed that credit availability contracted sharply in Connecticut, Vermont, and New York after Madden was decided. See Colleen Honigsberg, Robert J. Jackson, Jr., and Richard Squire, “The Effects of Usury Laws on Higher-Risk Borrowers,” Columbia Business School Research Paper No. 16-38 (May 13, 2016).

  • Expansion of licensing and supervision.  New York law currently requires a nonbank lender to obtain a “Licensed Lender” license if it makes consumer purpose loans of $25,000 or less or business purpose loans of $50,000 or less and the interest rate is greater than 16% (New York’s civil usury limit). The NYDFS comments in the report that “given the low level of national interest rates in recent years, certain online lenders have been able to offer profitable rates under New York’s usury limit such that they would not be required to be licensed and overseen by the Department.”  The NYDFS expresses its continued support for legislation that would “reduce the interest rate above which a non-depository lender is required to be licensed to 7 percent per annum from 16 percent per annum.”
  • Scrutiny of consumer litigation financing.  The NYDFS “notes the growth of consumer litigation financing” and expresses concern “about the amounts that consumers are required to provide to financing companies, which can be a significant portion of the total recoveries from their lawsuits that would be usurious if lending rules were to apply.”  It also expresses concern “about the information many companies provide to consumers about the transactions and the manner in which they provide that information.”  The NYDFS calls for further study of these issues and  expresses its belief that “legislation could provide important safeguards for consumer that do not currently exist.”  The NYDFS does not provide a scintilla of empirical data for its apparent conclusion that legislation containing consumer safeguards is necessary.  It should be noted that the discussion of litigation financing consists of just one paragraph of a 31-page report.

 

In response to the U.S. Supreme Court’s decision in Lucia v. SEC, President Trump has issued an executive order that changes the process used by federal agencies for administrative law judges (ALJs).

In Lucia, the Supreme Court ruled that administrative law judges (ALJs) used by the SEC are “Officers of the United States” under the Appointments Clause in Article II of the U.S. Constitution because they exercise “significant authority pursuant to the laws of the United States.”  Under the Appointments Clause, the power to appoint “Officers” is vested exclusively in the President, a court of law, or the head of a “Department.”

Currently, federal agencies hire ALJs through a competitive merit-selection process administered by the Office of Personnel Management (OPM).  The Executive Order removes ALJs from the “competitive service,” a federal worker classification that follows the OPM’s hiring rules, and places them into the “excepted service,” a category of federal workers who are subject to a different hiring process, by creating a new excepted service category specifically for ALJs.

Federal regulations provide that appointments of workers who are in the excepted service are to be made “in accordance with such regulations and practices as the head of the agency concerned finds necessary.”  The executive order amends such regulations to provide that for ALJs, such regulations and practices must include the requirement that an ALJ who is other than an incumbent ALJ must be licensed to practice law by a state, the District of Columbia, the Commonwealth of Puerto Rico, or any territorial court established under the U.S. Constitution.

Presumably, to address Lucia’s conclusion that ALJs must be appointed by an agency official who qualifies as the “head of a Department” for purposes of the Appointments Clause, the agency regulations for hiring ALJs issued pursuant to the executive order will provide that a final hiring decision must be made by the agency head rather than a subordinate official.  However, even if ALJs are only hired by agency heads, it is not certain that the heads of all agencies would qualify as the “head of a Department.”

As we have previously observed with regard to the CFPB, the Dodd-Frank Act provided that “[t]here is established in the Federal Reserve System, an independent bureau to be known as the “[BCFP].”  Under U.S. Supreme Court decisions that have addressed the meaning of the term “Department,” it is unclear whether an establishment’s status as an independent agency with a principal officer who is not subordinate to any other executive officer is sufficient to render it a “Department” or whether it must also be self-contained.  While compelling arguments can be made that that the CFPB’s status as an independent agency should be sufficient to render it a “Department,” Congress’ decision to house the CFPB in the Federal Reserve means that the CFPB’s status as a “Department” is not free from doubt.  Similarly, because the OCC is housed in the Treasury Department, there is a question whether the Comptroller would qualify as the “head of a Department.”