The FTC has issued a final rule to implement a 2018 amendment to the FCRA made by the Economic Growth, Regulatory Relief, and Consumer Protection Act that requires nationwide consumer reporting agencies  (CRAs) to provide free electronic credit monitoring service for active duty military consumers.  The rule will be effective 30 days after its publication in the Federal Register, with mandatory compliance required three months after the effective date.  For a period of up to one year from the final rule’s effective date, CRAs will be able to comply with the requirement to provide free monitoring service by offering their existing commercial credit monitoring service for free to active duty military consumers.

The FCRA amendment requires a CRA to provide electronic notice of any “material additions or modifications” to the credit file of an active duty military consumer that provides the requisite information to the CRA.  A CRA can condition electronic credit monitoring on the consumer providing appropriate proof of identity, contact information, and appropriate proof that the consumer is an “active duty military consumer.”

The FTC’s final rule defines “active duty military consumer” as (1) (i) a consumer in military service who is on active duty or a reservist performing duty under a call or order to active duty, and (ii) who is assigned to service away from the consumer’s usual duty station, or (2) a member of the National Guard.  In response to recommendations from commenters that the FTC eliminate the requirement that a military consumer be assigned to service away from his or her usual duty station, the FTC stated in the final rule’s supplementary information that the statutory language limited its discretion to do so.  Also, because the statutory language does not expressly require a National Guard member to be deployed away from his or her usual duty station to be eligible for free credit monitoring, the FTC’s final rule gives the benefit of free credit monitoring to members of the National Guard regardless of whether they are assigned away from their usual duty station.

The “material additions or modifications” to the file of a consumer that trigger the electronic notice requirement include new accounts opened in the consumer’s name and inquiries or requests for a credit report (other than for a prescreened list).   A CRA must provide notice of a material change or modification within 48 hours.  A consumer who receives such a notice is entitled to free access to his or her credit file.



This week, Congress will be holding a hearing focused on fintech and two hearings at which artificial intelligence (AI) will be the focus.


Tomorrow, June 25, the House Financial Services Committee’s Task Force on Financial Technology will hold a hearing titled, “Overseeing the Fintech Revolution: Domestic and International Perspectives on Fintech Regulation.”


Tomorrow, June 25, the Senate Commerce Committee’s Subcommittee on Communications, Technology, Innovation, and the Internet, will hold a hearing titled, “Optimizing for Engagement: Understanding the Use of Persuasive Technology on Internet Platforms.”  The hearing will examine “how algorithmic decision-making and machine learning on internet platforms might be influencing the public.”

On June 26, the House Financial Services Committee’s Task Force on Artificial Intelligence will hold a hearing titled, “Perspectives on Artificial Intelligence: Where We Are and the Next Frontier in Financial Services.”

Earlier this month, we released a podcast titled, “Using artificial intelligence for consumer finance: a look at the opportunities and challenges.”   In the podcast, we discussed the opportunities and challenges created by the use of AI models in consumer financial services, including the benefits of explainable AI and its implications for the consumer financial services industry, especially for applications where understanding the model’s reasons for returning a score or decision are necessary.  Click here to listen to the podcast.


On June 14, 2019, Texas Governor Greg Abbott signed HB 996, which amends Chapter 392 of the Texas Finance Code dealing with debt collection.  The amendments are effective September 1, 2019.

The bill defines a “debt buyer” as “a person who purchases or otherwise acquires a consumer debt from a creditor or other subsequent owner of the consumer debt, regardless of whether the person collects the consumer debt, hires a third party to collect the consumer debt, or hires an attorney to pursue collection litigation in connection with the consumer debt.”  Excluded from this definition is “a person who acquires in-default or charged-off debt that is incidental to the purchase of a portfolio that predominantly consists of consumer debt that has not been charged off.”  “Charged-off debt” is defined as “a consumer debt that a creditor has determined to be a loss or expense to the creditor instead of an asset.”  Thus, it appears that the “debt buyer” definition is intended only to cover purchasers of portfolios of charged-off debt rather than purchasers of portfolios consisting primarily of current debts.

The bill prohibits a debt buyer from commencing an action against or initiating arbitration with a consumer for the purpose of collecting a consumer debt after the statute of limitations has expired.  It provides that if a collection action is barred by this prohibition, the cause of action is not revived by a payment or oral or written affirmation of the consumer debt.

If a debt buyer is attempting to collect a debt for which a collection action is barred, the debt buyer or a debt collector acting on the debt buyer’s behalf must provide a specified notice in the initial written communication with the consumer.  The content of the notice varies depending on whether the FCRA time period for reporting the debt at issue has expired and whether the debt buyer furnishes information about the debt to a consumer reporting agency.


In this week’s podcast, we take a close look at the CFPB payday loan rule’s payment provisions that could become effective as early as this August if the current court stay is lifted.  After reviewing the limits and disclosures mandated by the payment provisions, we explain why the provisions are deeply flawed and discuss the court stay’s status and impact on lenders’ implementation of the provisions.

Click here to listen to the podcast.   To read our letters to the CFPB critiquing the payment provisions, click here.


A new (and perhaps final) chapter was added to the tale of ITT Educational Services, Inc. last week with the CFPB’s announcement that it had settled the lawsuit it filed against Student CU Connect CUSO, LLC (CU Connect), a special purpose entity company set up to fund, purchase, manage, and hold private student loans (CU Connect Loans) made to students enrolled in an ITT school.

In February 2014, the CFPB filed a lawsuit against ITT in which it alleged that ITT had engaged in unfair and abusive acts or practices through conduct that included strong-arming students into high-interest loans that ITT knew students would be unable to repay.  After failing in its attempt to obtain a dismissal of the lawsuit based on a challenge to the CFPB’s constitutionality, ITT closed all of its campuses and filed for bankruptcy protection.

In its lawsuit against CU Connect, which was filed in an Indiana federal district court simultaneously with a proposed stipulated final judgment and order, the Bureau alleged that CU Connect provided substantial assistance to ITT’s unlawful conduct through its involvement in the creation of the CU Connect Loan program, by facilitating access to funding for the loans, by overseeing loan originations, and by actively servicing and managing the loan portfolio.  The Bureau alleged that when providing this assistance, CU Connect knew, or was reckless in not knowing, that ITT was strong-arming students into the CU Connect Loans, that ITT’s financial aid practices left many students “unaware of the terms, conditions, risks, or even existence of their CU Connect Loans,” and that students were defaulting on the CU Connect Loans at high rates.

The proposed stipulated judgment and order requires CU Connect to (1) stop all activities to collect outstanding CU Connect Loans and stop accepting payments on such loans, (2) discharge and cancel all outstanding balances on CU Connect Loans, and (3) request that all consumer reporting agencies to which CU Connect furnished information about outstanding CU Connect Loans delete the trade lines associated with such loans by updating the trade lines with the appropriate codes to reflect that each trade line has been deleted and, if an explanation is required, with the codes referencing a negotiated court settlement.  According to the CFPB’s press release, the total amount of loan forgiveness is estimated to be $168 million.

It bears noting that the proposed stipulated judgment and order does not require CU Connect to refund any prior loan payments and does not assess a civil money penalty.  In addition, it recites that because CU Connect plans to cease its business operations once it completes its obligations under the settlement, the Bureau agreed to the limited injunctive relief and compliance and reporting requirements set forth in the proposed stipulated judgment and order.

44 states and the District of Columbia entered into a settlement with CU Connect on similar terms.  The state settlement is contingent on the district court’s approval of the Bureau’s settlement with CU Connect.



The California Senate’s Banking and Financial Institutions Committee will hold a hearing on AB 539 on June 26, 2019.  The hearing was previously scheduled for today.

AB 539 was cleared by the California Assembly on May 23.  The bill would change several aspects of the California Financing Law (CFL), including by setting new interest rate caps, imposing new rules governing loan duration, and prohibiting prepayment penalties.  For example, while the CFL does not set a maximum interest rate on loans of $2,500 or more, AB 539 would cap the interest rate at 36% plus the federal funds rate on loans of $2,500 or more but less than $10,000.

Observers believe that the June 26 hearing will play a key role in determining the bill’s future.




Last week, the FDIC published its Consumer Compliance Supervisory Highlights that provides observations about its consumer compliance supervision activities in 2018. Importantly, the highlights include anonymized 2018 exam findings regarding violations of consumer protection laws and other information to help financial institutions stay abreast of issues and trends identified during exams and assist them in mitigating potential risks.

The FDIC’s findings should be carefully reviewed not only by banks subject to FDIC supervision but also by banks and other businesses supervised by other regulators who might raise similar issues.

The FDIC’s anonymized exam findings include:

  • Overdraft Programs. FDIC examiners observed potential UDAPs when institutions using an available balance method assessed more overdraft fees than were appropriate based on the consumer’s actual spending or when institutions did not adequately describe how the available balance method works in connection with overdrafts.

The CFPB identified a similar overdraft issue within its Winter 2015 Supervisory Highlights, describing “deceptive practices relating to the disclosure of overdraft processing logic” where institutions had charged overdraft fees on electronic transactions “in a manner inconsistent with the overall net impression created by the disclosures.”

Risk Mitigant
: The FDIC recommends that financial institutions (1) should provide clear and conspicuous disclosures about potential overdraft fees in connection with use of the available balance method so that consumers can understand when overdraft fees will be assessed and make informed decisions to avoid the assessment of such fees; and (2) when using the available balance method, ensure that any transaction authorized against a positive available balance does not incur an overdraft fee, even if the transaction later settles against a negative available balance.

  • Real Estate Settlement Procedures Act (“RESPA”) Section 8 Violations. The FDIC identified RESPA violations involving alleged payments of illegal kickbacks, disguised as above-market payments for lead generation, marketing services, and office space or desk rentals. The FDIC found that certain arrangements, structured as marketing and advertising agreements, were actually disguised payments for referrals of mortgage business where the amounts paid greatly exceeded the applicable fair market value.

The CFPB has similarly articulated concerns with such arrangements, including in its Bulletin 2015-05.

Risk Mitigant: The FDIC recommends a variety of ways to mitigate risk, including:

  1. Providing training to executives, senior management, as well as staff responsible for and involved in mortgage lending operations;
  2. Performing due diligence when considering new third-party relationships or hiring any individuals employed at or under contract to the bank that generate leads or identify prospective mortgage borrowers; and
  3. Reviewing applicable law, guidance, and statements from regulatory agencies and authorities on RESPA Section 8.
  • Regulation E – Mistakes Made in the Consumer Liability/Error Resolution Process. The FDIC described several Regulation E violations, including: (1) misapplying the timing requirements to determine a consumer’s liability regarding unauthorized transactions not involving an access device, such as electronic debits through the ACH system (banks were misinterpreting the 60-day time frame from the transmission of the periodic statement during which the consumer is not responsible for the authorized debits); (2) failing to promptly start investigations when notified of a potential error (banks had failed to investigate consumer error claims promptly upon receipt of oral notification, erroneously delaying investigation until receipt of a written confirmation of an alleged error); (3) discouraging the filing of error resolution requests (banks had implemented onerous requirements, such as requiring consumers to visit a branch or file a police report to submit the error resolution request, which had a “chilling effect” and may have unfairly discouraged consumers from asserting their rights under Regulation E; and (4) not providing notice upon completion of an investigation (banks had either not provided the written notice pursuant to the regulation or had not included all of the required information). (The CFPB has frequently noted similar findings of Regulation E violations.)

Risk Mitigant: The FDIC recommends that financial institutions should maintain tracking logs covering the various timing requirements to ensure compliance with Regulation E’s requirements from the time an error is alleged to the time an investigation is completed, and train new staff and conduct periodic refresher training for existing staff to ensure that personnel understand Regulation E requirements.

  • Skip-A-Payment Loan Programs. Skip-A-Payment, or deferment, programs provide consumers with the ability to skip a loan payment. While the FDIC’s statement that such programs “may provide temporary financial relief to consumers” suggests it generally views such programs favorably, the FDIC nevertheless found instances where institutions (1) failed to adequately disclose that enrollment in a Skip-A-Payment program would lead to paying additional interest over the life of the loan and a larger final payment; (2) failed to disclose that the Skip-A-Payment offer did not affect real estate borrowers’ escrow payment obligations, resulting in some consumers incurring escrow shortages or deficiencies; and (3) assessed late fees for the month in which the payment was skipped.

Risk Mitigant: The FDIC recommends that financial institutions offering such programs should (1) provide consumers with clear and adequate disclosures that explain how the program works and the program’s potential impact on a consumer’s loan; (2) clearly define customer eligibility criteria; (3) provide training to staff in advance of launching the program; and (4) set monitoring protocols to ensure compliance with bank policies.

  • Lines of Credit – Finance Charge Calculation and Disclosure. The FDIC identified instances in which institutions did not accurately calculate or properly disclose finance charges or APRs on periodic statements, resulting in understated finance charges and APRs for loans that exceeded the permitted tolerances under Regulation Z.

Risk Mitigant: Though the FDIC does not include specific recommendations, we recommend that companies include testing of finance charges and APRs on periodic statements and agreements within regular compliance and audit processes to ensure the accuracy of relevant calculations and that disclosures are properly provided to consumers and to detect any ongoing systemic programming changes that may result in calculation or disclosure errors.

The U.S. Department of Justice announced last Thursday that it had reached an agreement with First Merchants Bank, an Indiana state-chartered bank, to settle the redlining lawsuit that the DOJ filed against the bank on June 13, 2019 simultaneously with a settlement agreement and agreed order.

The agreement represents the second fair lending settlement entered into by the Republican-led DOJ under the Trump administration.  (The first was entered into with KleinBank in May 2018.)  More importantly, the settlement agreement recites that the bank was notified on June 5, 2017 that the DOJ had opened an investigation into whether the bank’s lending practices were discriminatory, suggesting that this may actually be the first redlining case to be initiated and resolved by the DOJ during the Trump administration.

The DOJ’s complaint, which relates to the bank’s residential mortgage lending business, including its home improvement loan and home equity line of credit programs, alleged that First Merchants violated the Fair Housing Act and the Equal Credit Opportunity Act by engaging in a pattern or practice of unlawful redlining of majority-Black areas in Indianapolis-Marion County.  From 2011 to 2017, the bank was alleged to have avoided providing mortgage credit to individuals in these areas.

The redlining claim was based, in part, upon the allegation that First Merchants established and maintained a discriminatory Community Reinvestment Act (CRA) assessment area that was “horseshoe-shaped,” “excluding Indianapolis-Marion County and its 50 majority-Black census tracts from the Bank’s [CRA] assessment area, while including overwhelmingly white counties.”  Even after an acquisition that resulted in the addition of Indianapolis-Marion County to its assessment area, the bank allegedly failed to open or operate a bank branch in any of the county’s majority-Black census tracts.  The DOJ also claimed that the bank failed to meaningfully advertise in such census tracts.  According to the complaint, First Merchants’ lending practices discouraged applicants in such census tracts from applying for loans, resulting in a disproportionately low number of applications and originations from such census tracts as compared to its peer institutions.

The DOJ also alleged that the bank’s mortgage loan policy contained a lending preference for customers within its branch footprint, which was based in majority-White areas.  It alleged that the adoption of this policy “was intentional and willful, and has led to a large statistically significant disparity in the number of residential mortgage loan applications and originations First Merchants Bank has received from majority-White areas and majority-Black areas within the [bank’s assessment area] between 2011 and 2017.”  The complaint alleges that the bank’s conduct constitutes discrimination on the basis of race in violation of the FHA and ECOA and a pattern or practice of “resistance to the full enjoyment of rights secured by the [FHA and ECOA]” and “unlawful discrimination and a denial of rights granted by the [FHA] to a group of persons that raises an issue of general public importance.”

Under the settlement agreement, First Merchants agrees to take various actions including:

  • Retaining an independent third party consultant to conduct an assessment of the bank’s fair lending risk management program and providing a report to the DOJ regarding the bank’s plans to adopt or implement the consultant’s recommendations
  • Maintaining a fair lending monitoring program
  • Providing training to all employees with significant involvement in mortgage lending, marketing, or CRA compliance within the lending area, all senior management, and all board members to ensure that their activities are conducted in a non-discriminatory manner
  • Engaging an independent third party consultant to conduct a community credit needs assessment
  • Designating a full-time Director of Community Development for the duration of the order (which is four years)
  • Having modified its CRA assessment area after the 2016 acquisition to include Indianapolis-Marion County, serving a lending area that includes the entire county
  • Opening one new full service branch in a majority-Black census tract in Indianapolis-Marion County
  • Opening one loan production office in Indianapolis-Marion County that is centrally located to multiple majority-Black census tracts and accessible to residents of those tracts through public transportation, advertising this location in a manner similar to which the bank advertises other branches, providing visible signage indicating the office’s location, placing a full-service ATM at the office, and maintaining regular business hours at the office
  • Spending a minimum of $125,000 per year on advertising, outreach, consumer financial education, and credit repair counseling, for a total of $500,000 over the term of the order
  • Meeting certain minimum requirements set forth in the order for advertising and conducting outreach within majority-Black census tracts during the term of the order, including, but not limited to: advertising each year in at least one print medium directed to African American readers in Indianapolis-Marion County; providing two outreach programs annually for real estate brokers and agents, developers, and others engaged in residential real estate-related business in majority-Black census tracts; developing a consumer education program for loan applicants from majority-Black census tracts in Indianapolis-Marion County on consumer finance and/or credit repair; and providing at least four outreach seminars annually targeted at residents of majority-Black census tracts in Indianapolis-Marion County
  • Investing a minimum of $1.12 million in a special subsidy fund to be used to increase the amount of credit that the bank extends to residents in majority-Black census tracts in Indianapolis-Marion County for home mortgage loans, home improvement loans, and home refinances, with a qualified applicant eligible for a subsidy of up to $7,500

The First Merchants settlement, like the KleinBank settlement, does not require the bank’s payment of a civil money penalty. This stands in contrast to previous redlining settlements under the Obama administration, such as those involving Hudson City Savings Bank and BankcorpSouth Bank.


RD Legal Funding has filed its opening brief in the Second Circuit, where the CFPB and New York Attorney General 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.

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.  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.

In its brief, RD Legal Funding argues that the district court correctly concluded that the CFPB’s structure is unconstitutional and cannot be cured by severing the for-cause removal provision from the CFPA.  It also argues that the district court correctly dismissed the NYAG’s state law claims for lack of subject matter jurisdiction.

RD Legal Funding makes the following additional arguments:

  • The Second Circuit does not need to reach the issue of the CFPB’s constitutionality because RD Legal Funding is not a “covered person” under the CFPA.  The transactions at issue are sales of assets rather than extensions of credit under the CFPA.  Thus, RD Legal Funding is not a person that offers or provides a consumer financial product or service.
  • The transactions at issue cannot be recharacterized as loans under New York law for various reasons, including that payment to RD Legal Funding is contingent on the distribution of the purchased receivables, with RD Legal Funding holding the entire risk that the purchased receivables will not materialize and having no recourse against the sellers of the receivables in that event.
  • The court’s conclusion that the transactions were loans because the assignments were void is contrary to law because a transaction cannot be both an assignment and a loan.
  • The complaint fails to state a claim for relief for reasons that include that many of the claims are based on the premise that the transactions are loans.

In May 2019, the Ninth Circuit ruled in Seila Law that the CFPB’s single-director-removable-only-for-cause structure is constitutional.  Last week, appellant Seila Law filed a motion to stay the Ninth Circuit’s mandate pending its filing a petition for a writ of certiorari with the U.S. Supreme Court.  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 Federal Reserve Board has issued a report, “Perspectives from Main Street: Stakeholder Feedback on Modernizing the Community Reinvestment Act,” that summarizes the feedback it received during a series of roundtable discussions on the current state of, and potential revisions to, the Community Reinvestment Act (CRA).

Last August, the OCC issued an advance notice of proposed rulemaking (ANPR) in which it invited public comment in an effort “to solicit ideas for building a new framework to transform or on ways to transform or modernize the regulations that implement the [CRA].’”  The ANPR followed the Treasury Department’s issuance of a memorandum in April 2018 that made recommendations for modernizing the CRA to reflect the significant organizational and technological change experienced by the U.S. banking industry since the CRA’s enactment.

The Fed, together with the OCC and FDIC, are the primary CRA regulators, and each agency has adopted regulations to implement the CRA.  In April 2019, American Banker reported that, according to comments made by officials from the three agencies, the agencies were ready to begin working on an interagency proposal to reform their CRA regulations and hoped to have a proposal ready by early 2020.

The Fed’s report indicates that, as one channel for obtaining “nuanced perspectives,” its staff read the nearly 1,500 comments that were submitted in response to the OCC’s ANPR.  As a second channel, the Fed hosted 29 roundtables around the country that were attended by over 400 bankers and community group members.

Participant feedback received at the roundtables included the following:

  • Assessment areas.  Many participants believed that assessment areas should be expanded and based on a combination of a bank’s lending activities, deposits, and/or market share, defined by both the bank’s physical and online presences.  Bankers and community group members both made the point that assessment area designations should reflect where there are community needs, with several participants suggesting that a bank should have flexibility to go beyond its defined assessment area to receive credit for activities in areas that are not currently being served and where the greatest needs exist.  Several participants recommended the creation of “CRA zones” in which any qualified activity by a bank would entitle the bank to CRA credit.
  • Evaluating performance.  While raising significant concerns about the use of a single metric approach, many participants were open to more quantitative assessments of CRA performance and supported the use of more data in evaluations. Some participants suggested that metrics should be based on a bank’s financial capacity, using factors such as tier 1 capital, deposits, or income, while others suggested that metrics could be based on the number of bank employees or the share of the bank’s overall CRA activities in a community.  A common theme, particularly among community group members, was that bank performance should be based on more than the number and dollar amount of CRA activities and should also consider the impact of a bank’s activities.  It was suggested that regulators develop a standard set of data-driven factors to outline community conditions and needs, which could help all stakeholders consistently assess a bank’s performance and, specifically, a bank’s responsiveness to identified needs.
  • Defining community development activities.  Bankers and community group members stressed the need for a clearer definition of what qualifies as an eligible community development activity and urged an expansion of the products and services eligible for CRA credit.  Some participants recommended that the CRA should better encourage banks to offer financial products and services aimed at helping customers improve their financial health by including educational assistance loans, payday loan alternatives, automobile loans, and individual development loans.  Community group members suggested that regulators should evaluate whether banks are providing affordable checking and savings accounts for low and moderate income consumers and not just access to credit and should penalize banks for offering products with high fees or other potentially harmful features.  Many bankers indicated that community development credit should be given for financing vital community services such as health clinics and police vehicles even if the activity does not meet the explicit purpose test or is not in a distressed or underserved non-metropolitan middle-income geography.