In this podcast, we discuss in detail certain provisions of the CFPB’s Proposed Debt Collection Rule that create the possibility of a collector providing disclosures to consumers by means of electronic communications. Among other things, we detail the scope, requirements and limitations related to such electronic communications, review the logistical challenges the Rule poses as to electronic communications and compare and contrast these requirements to those of the ESIGN Act.

Click here to listen to the podcast.

Last week, Congressional representatives Maxine Waters, D-CA, Bobby Scott, D-VA, and Elijah Cummings, D-MD, as chairs of committees with oversight responsibility for the student loan servicing market, sent letters to CFPB Director Kathleen Kraninger and Department of Education Secretary Betsy DeVos about their concerns with the current state of the student loan industry. The letters arose out of the representatives’ concerns that the agencies have not taken sufficient steps to protect student loan borrowers from alleged predatory tactics. The representatives requested that the CFPB and Department of Education provide extensive information and documents chronicling their efforts to protect consumers from unlawful student loan servicing practices. The representatives sent similar letters to certain student loan servicers, requesting detailed information about their respective operations, including their policies and procedures and training materials, as well as their records related to areas such as annual revenue and executive and employee compensation.

Pennsylvania has one of the most active Attorney General offices when it comes to bringing cases against financial companies. This is due to the office’s Consumer Financial Protection Unit, which was formed by Attorney General Josh Shapiro in 2017 because of the expectation that the CFPB would become less potent in protecting consumers. The Unit is led by Nicholas Smyth, a former CFPB enforcement lawyer.

Alan Kaplinsky, the Chair of our Consumer Financial Services Group, will interview Mr. Smyth in a webinar on September 4. Chris Willis will present an industry perspective.  The webinar registration form is available here.

 

 

Last week, we published a Legal Alert discussing the petitions for rehearing filed in the Blair v. Rent-A-Center appeals which ask the Ninth Circuit en banc to overturn a panel decision holding that the Federal Arbitration Act (FAA) does not preempt California’s “McGill Rule.” The McGill Rule derives from the California Supreme Court’s ruling in McGill v. Citibank, N.A. that an arbitration agreement requiring individual arbitration and precluding a consumer from pursuing claims for “public” injunctive relief in court or in arbitration is unenforceable under California law.

To update, on August 19, amicus briefs in support of the rehearing petitions were filed by a number of industry groups, including the U.S. Chamber of Commerce, the National Association of Manufacturers, the Washington Legal Foundation, CTIA-The Wireless Association and the California Employment Law Council. The amicus briefs argue that the FAA preempts the McGill Rule because it interferes with the fundamental attributes of individualized arbitration in that it greatly magnifies the risks to the defendants while depriving them of meaningful appellate review. Moreover, the amicus briefs assert that Section 2 of the FAA independently preempts the McGill Rule and is outside the scope of the FAA’s savings clause because it is does not constitute a contract “revocation” defense, but rather is a defense related to validity or enforceability.

We will continue to keep you advised of developments in these appeals since Blair may become the next “blockbuster” arbitration decision by the U.S. Supreme Court.

On August 14, 2019, Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) wrote a letter imploring Consumer Financial Protection Bureau Director Kathy Kraninger to implement the payments provisions of the 2017 Payday Rule by the scheduled August 19, 2019, compliance date, by requesting a lifting of the stay imposed by the Texas federal district court hearing the lawsuit challenging the Rule.  Brown’s letter came a week after that Court entered an Order continuing the stay of the compliance date, which, as we previously discussed, was entered after the Bureau joined in a status report filed August 2, 2019, stating that the parties “are not requesting that the Court … lift the stay of the compliance date….”

Brown criticizes the Bureau’s inaction, and mirrors much of the criticism lodged by various consumer advocacy groups in an August 12, 2019, letter to the Bureau “call[ing] on … [it] to request an end to [the] court-ordered stay.”  Both letters criticize the Bureau’s conduct since its 2017 leadership change – which Brown characterized as “joined at the hip” with the payday lending industry – and cite the Bureau’s failure to challenge the stay of the payments provisions as contrary to its consumer protection purpose.  They likewise suggest the Bureau lacks any legal justification for its inaction, noting that it previously stated, in a March 9, 2019, status report, that “there is no legal basis” for a stay of the payments provisions.  Brown further points to this statement as evidence that the Bureau’s inaction violates the Administrative Procedures Act, which authorizes a stay of the effective date of an agency action only “to the extent necessary to prevent irreparable injury” or “to preserve status or rights pending conclusion of review proceedings.”

Brown requested a response from the Bureau by the scheduled compliance date of August 19, 2019 – with either a timeline for lifting the stay and implementing the payments provisions or a legal basis for its decision not to request a lift of the stay.  However, there was no record of any response from the Bureau as of now.

In its proposed disparate impact rule published in today’s Federal Register, HUD sets forth a framework for making (and defending against) claims of disparate impact under the Fair Housing Act.  In this blog post, we take a closer look at a new and unique aspect of the proposed rule: its treatment of mathematical models (like risk-scoring models used in the credit industry).

In proposed section 100.500(c)(2), HUD provides three avenues of defense when a disparate impact claim is made based on the use of a “model … such as a risk assessment algorithm.”  The proposed rule allows a defendant to prevail when it can establish any of three alternative defenses:

  1. If the defendant “[p]rovides the material factors which make up the inputs used in the challenged model and shows that these factors do not rely in any material part on factors which are substitutes or close proxies for protected classes under the Fair Housing Act and that the model is predictive of credit risk or other similar valid objective.”
  2. If the defendant “[s]hows that the challenged model is produced, maintained, or distributed by a recognized third party that determines industry standards, the inputs and methods within the model are not determined by the defendant, and the defendant is using the model as intended by the third party.”
  3. If the defendant “[s]hows that the model has been subjected to critical review and has been validated by an objective and unbiased neutral third party which has analyzed the challenged model and found that the model was empirically derived and is a demonstrably and statistically sound algorithm which accurately predicts risk or other valid objectives, and that none of the factors used in the algorithm rely in any material part on factors which are substitutes or close proxies for protected classes under the Fair Housing Act.”

Overall, the proposed rule appears to provide a relatively straightforward path for review of FHA disparate impact claims related to scoring models.  For a model developed by the defendant itself (or for which it has information on attributes and performance), the first and third defenses would only require the defendant to show that it (or an objective and neutral third party) looked at the variables in the model, that none of them is a “substitute” or “close proxy” for a protected characteristic, and that the model as a whole “is predictive of credit risk or other similar valid objective.”  Note that here, the assessment of predictiveness is on the model as a whole, not on any individual variable.  This would seem to make fair lending testing much easier than a requirement that each attribute be shown to be predictive.

The second defense is interesting because it appears to be addressed to situations in which the defendant is using a model provided by a third party, and for which the defendant may not have access to information about attributes or performance.  However, if the use of the model is an “industry standard,” the defendant is relieved from liability if it uses the model “as intended by the third party” that created it.  It appears that the second defense could apply in a variety of situations, including when a mortgage lender uses the automated underwriting systems of Fannie Mae or Freddie Mac.

Although the thrust of these provisions seems to be a desire to provide a streamlined path for defendants to address disparate impact claims based on algorithmic models, the phrasing of the provisions still leaves some room for questions (and later interpretation).  For example, the proposed rule does not define a “substitute” or “close proxy” for a protected characteristic, which invites divergent views on whether a particular model input is permissible or not.  In addition, whether a model is provided by a “recognized third party that determines industry standards” seems to be somewhat ambiguous.  Would it cover any scoring product offered by a large, national provider?  Or is something more than that required to show that it is an “industry standard”?

We believe the treatment of models under the proposed HUD rule is a step in the right direction, but believe that the final rule would be made clearer by resolving these ambiguities.  Regardless, however, the proposed rule would make it difficult for plaintiffs to advance disparate impact claims based on models, because it puts the focus where it should be: on whether the models directly discriminate on the basis of a protected characteristic, and whether they are predictive of credit risk or another business justification

The California Department of Business Oversight (DBO) has issued proposed regulations to implement SB 1235, the bill signed into law in September 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans, merchant cash advances, and factoring.  The law contains exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property.

Companies providing the types of financing covered by the law are not required to comply with the new disclosure requirements until the DBO’s final regulations become effective.  Comments on the proposed regulations are due by September 9, 2019.

In addition to general formatting and content requirements, the proposal includes detailed provisions that address:

  • Closed-end transaction formatting and content requirements
  • Commercial open-end credit plan disclosure formatting
  • Factoring disclosure formatting
  • Sales-based financing disclosure formatting
  • General asset-based lending transaction disclosure formatting
  • Lease financing formatting and content requirements
  • Signature requirements
  • Rules for determining if the amount of commercial financing is equal to or less than $500,000
  • Rules for disclosures for closed-end and open-end credit plans with payment options
  • Rules for providing estimates
  • Rules for calculating APR
  • Components of finance charge
  • Examples of asset-based lending and factoring transactions

The proposed regulations are accompanied by model disclosures for six types of financing: (1) asset-based lending, (2) closed-end transactions,  (3) general factoring, (4) lease financing, (5) sales-based financing, and (6) open-end credit plan.

 

The CFPB and the New York Attorney General have filed their response and reply briefs in the Second Circuit, where the CFPB and NYAG filed appeals from the district court’s decision and RD Legal Funding filed a cross-appeal.  The CFPB and the NYAG filed their opening briefs in March and RD Legal filed its opening brief in June.

RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (the “NFLSA”) and the September 11th Victim Compensation Fund of 2001 (the “VCF”).  The CFPB and NYAG sued RD Legal Funding in federal district court, asserting claims under the CFPA and state law.  The CFPB appealed from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  The NYAG appealed from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

Despite dismissing the NYAG’s federal and state claims, Judge Preska determined in her June 21 decision that the purchase agreements effected assignments of the benefits that, as to the NFLSA benefits, were void under the terms of the underlying settlement agreement and, as to the VCF benefits, were void under the federal Anti-Assignment Act (AAA).  After determining that the assignments were void, Judge Preska concluded that, as a result, the transactions were necessarily disguised usurious loans. (For the reasons discussed in our prior blog post, we believe the court’s conclusion is flawed.)  RD Legal Funding filed a cross-appeal from the district court’s conclusion that the transactions were disguised loans and stated UDAAP claims under the CFPA and claims for usury and misleading conduct under New York law.

Both the CFPB and NYAG restate their arguments that the CFPB’s structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank’s for-cause removal provision that limits the President’s authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.

CFPB Response and Reply Brief.  In its brief, the CFPB makes the following additional arguments:

  • RD Legal’s cross-appeal is improper because it is not aggrieved by the judgment dismissing the CFPA claims and, if the Second Circuit reverses the judgment, it will become aggrieved but only by the district court’s refusal to dismiss the complaint based on the merits of the CFPA claims.
  • The Second Circuit could address RD Legal’s merits arguments as an alternative ground for dismissal and, should it do so, find that the complaint states valid claims for CFPA violations because (1) RD Legal is a “covered person” because the purchase agreements, without the invalid assignments of benefits, grant consumers the right to defer payment of a debt, and (2) the complaint states claims for violations of the CFPA’s UDAAP prohibitions.

NYAG Response and Reply Brief.  In its brief, the NYAG makes the additional arguments above advanced by the CFPB and the following principal arguments:

  • The Second Circuit should reverse the district court’s dismissal of the NYAG’s state law claims for lack of subject matter jurisdiction because such claims involve an embedded federal issue, namely whether the AAA voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract.  This is a substantial “federal question” because the Second Circuit’s interpretation of the AAA “could also have ramifications for how courts construe other federal statutes barring the assignment of federal payments.”
  • Because the complaint states a claim for deceptive practices under the CFPA, it also states a claim for misleading acts or practices under New York law.
  • Because the purchase agreements were actually loans or forbearances, the complaint states a claim for a violation of New York usury law.

At the end of June, Seila Law filed a petition for a writ of certiorari with the U.S. Supreme Court seeking review of the Ninth Circuit’s ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional.  The DOJ has not yet filed its reply brief (which is now due by September 18) but is expected to agree with Seila Law that the CFPB’s structure is unconstitutional.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank Act’s for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  On March 12, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.

The U. S. Supreme Court has given the Solicitor General another extension of the date by which the government must file its response to Seila Law’s petition for a writ of certiorari.  The petition seeks review of the Ninth Circuit’s ruling that the CFPB’s single-director-removable-only-for-cause structure is constitutional.  The new extension gives the SG until September 18 to file the government’s response.

The original July 29 deadline for the government’s response was extended to August 28 after the Solicitor General filed a motion asking for the extension in which the SG stated that the government’s response was delayed “because of the heavy press of earlier assigned cases to the attorneys handling this matter.”  In the SG’s letter seeking a second extension until September 18, the SG similarly stated that the extension “is necessary because the attorneys with principal responsibility for preparation of the government’s response have been heavily engaged with the press of previously assigned matters with proximate due dates.”

 

HUD’s proposed revisions to its disparate impact rule were published in today’s Federal Register.  Comments on the proposal are due on or before October 18, 2019.

Originally adopted in 2013, the rule sets forth the requirements for HUD or a private plaintiff to establish liability under the Fair Housing Act for discriminatory practices based on disparate impact even if there is no discriminatory intent.  The proposed revisions include a new burden-shifting framework and other changes to reflect the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v Inclusive Communities Project, Inc.

Under the proposal, a plaintiff would need to allege five elements to establish a prima facie case based on a claim that a policy or practice has a discriminatory effect, including that the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective and that there is a robust causal link between the challenged policy or practice and a disparate impact on members of a protected class which shows the specific policy or practice is the direct cause of the discriminatory effect.  As might be expected, HUD’s announcement this past Friday that it was releasing the proposal was quickly followed by criticism of the proposal from consumer groups.