The CFPB has issued an order terminating the approval order issued in December 2020 to Payactiv, Inc. through the CFPB’s Compliance Assistance Sandbox (CAS) Policy.

The approval order confirmed that  Payactiv’s earned wage access (EWA) program described in the order did not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z, and that Payactiv therefore had a safe harbor from liability under the TILA and Regulation Z in connection with the specified EWA program.  EWA products provide employees with access to earned but as yet unpaid wages.  Such products typically involve an EWA provider (such as Payactiv) that enables employees to request a certain amount of accrued wages, disburses the requested amounts to employees prior to payday, and later recoups the funds through payroll deduction or bank account debits on the subsequent payday. 

The termination order states that the CFPB’s Enforcement Office notified Payactiv on June 3, 2022 that it was considering whether to recommend that the CFPB terminate the approval order “in light of certain public statements the company made wrongly suggesting the CFPB had endorsed Payactiv or its products.”  The termination order further states that, in reply, Payactiv submitted a request to terminate the approval order, indicating that it could voluntarily terminate its participation in the sandbox program at any time and that it wanted to make material changes to its EWA program without CFPB review.

The approval order followed the issuance of an advisory opinion (AO) by the CFPB in November 2020 that dealt with EWA products and addressed whether an EWA program with the characteristics set forth in the AO was covered by Regulation Z.  Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees.  The AO set forth the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Regulation Z.  In the AO, the Bureau indicated that there may be EWA programs with nominal processing fees that nonetheless do not involve the offering or extension of “credit” under Regulation Z and advised that providers of such programs could request clarification about a specific fee structure by applying for an approval under the CAS Policy.

In October 2021, a group of 96 organizations and individuals, who described themselves as consisting of “consumer, labor, civil rights, legal services, faith, community and financial organizations and academics,” sent a letter to the CFPB urging the Bureau to regulate EWA products as credit subject to the TILA.  The letter took aim at the AO and the Payactiv approval order.  In January 2022, Seth Frotman, now CFPB General Counsel, indicated that more clarity on EWA products was needed from the CFPB.

In view of these developments, providers of EWA products would be well-advised to prepare for greater regulatory scrutiny.

In June 2022, the CFPB terminated a no-action letter issued to Upstart Network, Inc. in connection with Upstart’s automated model for making underwriting and pricing decisions on applications by consumers for unsecured, closed-end loans.  That termination followed the CFPB’s May 2022 announcement that as part of a new approach to innovation in consumer finance, it was replacing its Office of Innovation and Operation Catalyst with a new office, the Office of Competition and Innovation.  (We subsequently learned from the CFPB’s press office that despite calling its No-Action Letter and CAS programs ineffective in its announcement, the CFPB has not rescinded those programs and is still taking new applications and processing previously submitted applications.)

In response to a request from three Democratic House members, the GAO recently issued a report on its review of fair lending oversight conducted by the Office of the Comptroller of the Currency.  According to a Law360 report, the lawmakers had petitioned the GAO nearly two years ago to open an investigation into allegations that the OCC had quietly dropped several fair lending investigations during the Trump Administration.  While fair lending has already been identified as a priority for banking regulators by the Biden Administration, the GAO report, particularly its findings regarding the decline in annual fair lending examinations and deficiency findings leading to matters requiring attention at smaller banks, could further fuel the OCC’s focus on fair lending.

The GAO conducted the performance audit from January 2021 to June 2022.

The GAO looked at (1) how the OCC identifies and addresses any deficient fair lending risk management practices at supervised banks and refers potential fair lending cases to the Department of Justice, (2) the extent to which OCC examiners followed policies and procedures in a sample of 15 fair lending examinations conducted in 2018 to 2020, and (3) how examination selection processes have changed and the effects of the changes on OCC fair lending oversight.

The GAO’s key findings were:

  • Based on a review of 10 underwriting and pricing fair lending examinations, examiners generally followed OCC procedures and used consistent processes and analytical methods for assessing evidence.
  • Based on a review of 5 redlining examinations, examiners followed procedures inconsistently.  In three of the five examinations, examiners did not find the banks’ responses disputing their findings to be satisfactory.  They consequently concluded that the banks had engaged in potential redlining based on the lack of a satisfactory explanation from the bank for the statistical disparities and underperformance in relation to peer banks.  In the other two examinations, examiners also considered the banks’ responses, but took further steps before arriving at a conclusion as to whether the bank had engaged in potential redlining.  In addition to conducting additional analyses, the examiners considered other factors to support or contradict interpreting identified disparities to be the result of intentional discrimination.  In both examinations, examiners concluded that the bank had not engaged in redlining.
  • The OCC’s 2010 handbook does not account for new statistical analyses and methods for analyzing potential redlining since it was issued and therefore lacks specificity on how examiners should build on OCC economists’ statistical analyses and conclusions when conducting a redlining review.
  • Starting in 2018, the OCC has made substantive changes to its annual screening and selection processes for fair lending examinations at smaller banks.  These changes contributed to fewer annual fair lending examinations and deficiency findings leading to matters requiring attention at smaller banks.

Based on these findings, the GAO made the following observations and recommendations:

  • Outdated and unclear examination guidance can lead examiners to conduct inconsistent analyses of potential redlining violations.  Because examiners’ conclusions are the basis for consideration of a referral to DOJ or an enforcement action, this ambiguity could also lead to inconsistent opportunities for legal review of potential redlining violations.  As the OCC updates its redlining examination procedures, the Acting Comptroller should ensure that the Compliance Risk Policy Division takes into account new types of analyses being performed when it documents the steps that examiners should take in evaluating potential redlining violations.
  • The OCC has failed to systematically evaluate the trade-offs made each year between efficiency given available resources and effective identification of fair lending deficiencies and violations when it  identifies and selects problematic fair lending activities of smaller banks for examination.  The Acting Comptroller should ensure that the Compliance Risk Policy Division and Office of Midsize and Community Bank Supervision establish time frames for carrying out their plan to (1) centralize data on examiners’ rationales for not examining lending activities identified as having elevated fair lending risk, and (2) establish a process to track the outcomes of fair lending examinations.  The Compliance Risk Policy Division should use this information to analyze its screening and selection processes on an going basis to ensure an appropriate balance between efficiency and effectiveness.

To address these recommendations, the OCC has indicated that it will:

  • Update its fair lending examination procedures to, among other things, clarify and expand the list of redlining factors and highlight certain key points regarding redlining case elements that have historically raised concerns.  The updated procedures are expected to be issued no later than December 31, 2022.
  • Develop additional training for examiners to highlight redlining examination best practices. Training webinars are expected to be made available to examiners no later than September 30, 2022.
  • Work to develop a centralized process and procedures to collect and monitor information on fair lending activities that will include, among other things, procedures regarding the selection and non-selection of identified focal points and the disposition of focal points not selected.  The target date for implementing this process is January 1, 2023.

The OCC’s response to the GAO report is another indication of increasing attention by federal banking regulators on fair lending, a trend warranting close industry scrutiny as policies and processes evolve and change.

The CFPB has taken the first formal step towards a new rulemaking on credit card late fees by issuing an Advance Notice of Proposed Rulemaking (ANPR).  Comments on the ANPR must be received by July 22, 2022.

The issuance of the ANPR follows the CFPB’s release of a report on late fees in March 2022.  Both the CFPB’s press release about the report and its press release about the ANPR contain comments from Director Chopra regarding the amount of revenues that credit card issuers generate from late fees and concerns about fee “hikes” based on inflation.  In a blog post regarding a “new approach” to rulemaking by the CFPB, Director Chopra identified the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) rules on credit card late fees as one of the long-standing rules at which the CFPB needed to take “a fresh look.”

The CARD Act, which is implemented by Regulation Z, requires that late fees imposed by credit card issuers be “reasonable and proportional” to the violation of the account terms.  It also authorized the Federal Reserve Board (which then had the Reg. Z rulemaking authority that was transferred to the CFPB by Dodd-Frank), in consultation with other agencies, to establish a “safe harbor” for specific fee amounts that are deemed to be “reasonable and proportional” to the violation.  Pursuant to that authority, the Federal Reserve Board initially set safe harbor amounts in 2010 of $25 for a first late payment and $35 for subsequent late payments and made those amounts subject to an annual inflation adjustment.  The most recent inflation adjustments to the safe harbor amounts made by the CFPB for 2022 allow a card issuer to impose a fee of $30 for a first late payment and $41 for subsequent late payments.  (Reg. Z also permits an issuer to assess a late fee that is higher than the safe harbor amounts if it can demonstrate that a higher fee is justified as a reasonable proportion of its internal costs.)

The questions on which the CFPB seeks comments in the ANPR are divided into the following categories:

  • Factors used by card issuers to set existing levels of late fees
  • Costs and losses associated with late payments
  • Deterrent effect of late fees
  • Cardholder behavior (categories used to classify cardholders based on late payment behavior and timing of late payments relative to due date)
  • Use of autopay
  • Practices regarding notifications of upcoming due dates
  • Courtesy periods and waivers
  • Use of the Reg. Z safe harbor and cost analysis provisions
  • Revenues and overall expenses from credit card operations, and late fee revenues.

When the Federal Reserve Board initially set the safe harbor amounts in 2010, it indicated that it believed those amounts were generally sufficient to cover issuers’ costs and to deter future violations and also recognized the need to annually adjust those amounts for inflation to cover increases in issuers’ costs.  Should the CFPB now seek to abandon the safe harbor amounts (by rescinding the Reg. Z safe harbor provision or resetting the safe harbor amounts and/or eliminating annual inflation adjustments), it will need to demonstrate with empirical evidence why a card issuer charging the safe harbor amounts currently permitted by Reg. Z is not charging late fees that are “reasonable and proportional” to the violation.

The Consumer Bankers Association immediately responded to the issuance of the ANPR with a statement in which it called the CFPB’s announcement “another reminder the Bureau appears more interested in advancing a particular agenda than developing fact-based policies that improve the lives of hardworking families.”  The CBA commented that “[m]issing from this announcement is the fact that banks – more than any other industry – have taken concrete steps to make their products more affordable and accessible for millions of Americans.” 

On June 23, 2022, the Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective (SRP) for spring 2022.  In the SRP, the OCC opines on its current safety and soundness concerns for banks under its regulatory umbrella, focusing on Russia sanctions, climate-related risk, and rising inflation.  Despite these challenges, the OCC believes that “[b]anks’ financial condition remains strong and positioned to deal with the economic headwinds.”

Of special note, the OCC also believes compliance risk is “heightened” for Bank Secrecy Act/Anti-Money Laundering (BSA/AML) and Office of Foreign Assets Control (OFAC) compliance because of world events and compliance staffing concerns.  In addition, the OCC warns that banks face an “elevated” risk of cyber attacks and fraud or cybersecurity risks related to digital assets.

BSA/AML Compliance Risks

The OCC devotes a paragraph to discussion of BSA/AML and OFAC concerns related to “environmental crimes.”  The OCC decries the climate risk and pollution caused by such crimes.  And, echoing the Financial Crimes Enforcement Network (FinCEN) recent notice on the same topic, the OCC cautions that environmental crimes “have a strong association with corruption and transnational criminal organizations.”  We have blogged about this topic several times in several facets, noting how these crimes are estimated to create hundreds of billions in illicit funds each year.  Like FinCEN, it appears that the OCC has this near the top of their priority list.

The OCC then zeroes in on another perennial concern: fraud in government relief programs.  Citing the Covid-19 pandemic and “recent natural disasters,” the OCC typifies fraud stemming from government relief programs as a “significant risk.”  Predicting that natural disasters will become more, rather than less, common, the OCC predicts long-term increased risk of fraud and urges banks to include both environmental crimes and government relief fraud into long-term planning and risk assessments.  The OCC clearly thinks that BSA/AML and OFAC concerns will continue to haunt government relief programs.

In the first SRP since the Russian invasion of Ukraine, the OCC reminds banks that they must “assess the applicability” of the “complex and evolving” Russia sanctions “on their institutions and customers.”  The OCC urges banks to consider both the impact on branches here and abroad as well as overseas offices and subsidiaries.  Hearkening back to two March FinCEN alerts (here and here) on which we blogged (here and here), the OCC warns banks to “be vigilant against potential efforts to evade” sanctions and reminds banks that suspicious transactions may involve “real estate, luxury goods, and other high-value assets of sanctioned Russian elites and their family members and associates.”  The OCC urges banks to use this as a springboard to increase efforts to detect foreign public corruption and kleptocracy.

The SRP notes that these compliance risks are currently more difficult to respond to because “[b]ank compliance functions also are experiencing challenges retaining and replacing staff.”  It is no surprise that banks, like many other employers, are finding it difficult to hire and retain talent.  The SRP warns that “lack of access to subject matter expertise,” funding cutbacks, over-reliance on third parties to assist in these critical functions, and telework are exacerbating compliance risk.

Cybersecurity Risks

The OCC has long been concerned with operational risks posed to banks from cyber attacks.  The SRP now estimates that operational risks to banks remain “elevated” because cyber attacks continue to “evolve” and “become more sophisticated.”  Specifically, the OCC notes an increase in distributed denial of service (DDoS) attacks and ransomware campaigns directed at the financial services sector, including banks.  We noted the increase in ransomware attacks and ransomware-related SARS discussed in FinCEN’s October 15, 2021 financial trend analysis on ransomware. 

The OCC suggests “heightened threat monitoring” and “greater public-private sector information sharing” as two methods to combat DDoS and ransomware attacks.  The OCC states, as a practical matter, that banks should implement and regularly test backup systems to ensure operational resilience and require multifactor authentication and “timely patch management” to make it harder for cyber attackers to gain access.  These echo the suggestions of the Cybersecurity and Infrastructure Security Agency, a government agency within the Department of Homeland Security, in their recently announced Shields Up initiative.

Risks of Engaging with New Technologies, Including Distributed Ledger Technologies and Digital Assets

Finally, the OCC devotes significant time to cybersecurity and fraud risks related to digital assets.  While the OCC recognizes that new technologies, including distributed ledger technologies and digital assets, “can offer many benefits to both banks and their customers” the OCC believes new technologies are a common target for fraudsters.  Citing this risk of fraud and the possibility of cyber attacks, the OCC provides a number of suggestions for banks considering engaging with digital assets:

  • Banks should ensure that they have sufficient knowledge and expertise in the digital assets and the technology before engaging in new activity with digital assets;
  • Banks should pay special attention to distributed ledger or digital assets companies “delivering banking and bank-like products and services”;
  • Banks should consider their size, complexity, and risk profile before engaging in new activity with digital assets;
  • Banks should engage in “appropriate due diligence, change management, and risk management processes” prior to engaging in new activity with digital assets;
  • Banks may need to consider whether “additional or different controls [are needed] to safeguard against fraud, financial crimes, violations of sanctions requirements and consumer protection and fair lending laws, and operational errors”; and
  • Finally, before engaging in certain activities with digital assets, banks supervised by the OCC should first obtain non-objection.

The SRP’s bottom line: banks should be deliberate and do their due diligence when engaging with new technologies, including distributed ledger technologies and digital assets.

The OCC also promises greater clarity on regulation of digital assets to come in the future, likely a reference to the Sprint Initiative the OCC is engaged in with the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, on which we previously blogged.  The OCC is currently working to “develop a common vocabulary of terms” and “use cases and risks” to create “policy and supervision considerations” for digital assets for banks.  With only another vague reference to coming regulations, it remains to be seen what shape they will take and when they will be unveiled.

The CFPB has issued an advisory opinion that addresses when the Fair Debt Collection Practices Act permits a debt collector to charge “pay-to-pay” or “convenience fees,” such as fees imposed for making a payment online or by phone. 

FDCPA section 808(1) prohibits debt collectors from collecting “any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”  In the advisory opinion, the CFPB first interprets section 808(1) to apply to “any amount” collected by a debt collector in connection with the collection of a debt, even if such amount is not “incidental to” the principal obligation.  It then interprets section 808(1) to prohibit a debt collector from collecting any amount unless such amount either is expressly authorized by the agreement creating the debt (and is not prohibited by law) or is expressly permitted by law.  Thus, under the CFPB’s interpretation, a charge is impermissible under section 808(1) if both the agreement creating the debt and other law are silent.

The CFPB also states that, under its interpretation, amounts are impermissible if they are neither expressly authorized by the agreement creating the debt or by law, “even if such amounts are the subject of a separate, valid agreement under State law.”  The CFPB declines to follow the interpretation of some courts that fees authorized by a separate agreement are permissible under section 808(1) because such fees are “permitted by law” (i.e. because they are authorized by a lawful agreement).

The CFPB also addresses debt collectors’ use of payment processors who charge convenience fees.  It states that a debt collector may violate section 808(1) in that situation.  According to the CFPB, “a debt collector collects an amount under section 808(1) at a minimum when a third-party payment processor collects a pay-to-pay fee from a consumer and remits to the debt collector any amount in connection with that fee, whether in installments or a lump sum.”

The CFPB’s interpretation of section 808(1) is not surprising.  In 2017, the CFPB issued a compliance bulletin (2017-11) on pay-by-phone fees.  Although the bulletin was primarily directed at UDAAP issues arising from such fees, it also addressed the application of section 808(1) to such fees.  The CFPB discussed the finding of its examiners that one or more mortgage servicers meeting the FDCPA “debt collector” definition had violated the FDCPA by charging fees for taking mortgage payments by phone to borrowers whose mortgage instruments did not expressly authorize such fees and who resided in states where applicable law did not expressly permit collection of such fees.

Although the advisory opinion is directed at convenience fees and by its terms only applies to “debt collectors” subject to the FDCPA, it has much broader implications.  First, the CFPB’s interpretation of section 808(1) would apply to any type of fee charged by a debt collector.  Second, the debt collection laws of many states broadly apply the FDCPA’s prohibitions to first-party collections and other persons engaging in collection activity who are not “debt collectors” under the FDCPA.   For example, the U.S. Court of Appeals for the Fourth Circuit recently ruled that a mortgage servicer, even if not a “debt collector” under the FDCPA, had violated the Maryland Consumer Debt Collection Act, which incorporates FDCPA prohibitions, by charging a $5 convenience fee to borrowers for monthly payments made by phone or online that was not expressly authorized by the mortgage documents or by law.

We discuss key regulatory issues for innovative products such as buy-now-pay later, longer term installment loans, delay pay, and card-based products (such as “virtual cards”).  We look at the different ways these products can be structured and the impact of  these differences on applicable legal requirements, such as disclosures and licensing.  We also look at secondary market considerations, legal issues arising from the offering of products through non-bank/bank partnerships including enforcement trends, and recent CFPB developments impacting innovative products.

Participating in the podcast are Michael Guerrero, Lisa Lanham, and Michael Gordon, partners in Ballard Spahr’s Consumer Financial Services Group, and Rinaldo Martinez, Of Counsel in the Group.

Click here to listen to the episode.

The CFPB has issued an interpretive rule on the scope of the Fair Credit Reporting Act’s preemption provisions.  The rule’s narrow reading of those provisions appears intended to encourage and support state legislative efforts to enact laws targeting credit reporting issues of concern to the CFPB, such as the reporting of medical debt.

The FCRA’s preemption provisions are set forth in 15 U.S.C. 1681t.  Section 1681t(a) sets forth the principle that only state laws that are “inconsistent” with the FCRA are preempted “and then only to the extent of the inconsistency.”  Section1681t(b) expressly preempts various categories of state law.  The interpretive rule focuses on sections 1681t(b)(1) and 1681t(b)(5).  According to the CFPB, the plain text of these sections makes it “apparent that both provisions have a narrow and targeted scope.”

Section 1681t(b)(1). This provision contains eleven subsections each of which preempts state law “with respect to any subject matter regulated under” an enumerated FCRA section.  The enumerated section is followed by a parenthetical phrase beginning with “relating to” that describes the enumerated section.  For example, section 1681t(b)(1)(E) generally preempts state law “with respect to any subject matter regulated under section 1681c of this title, relating to information contained in consumer reports.”  According to the CFPB, for a state law to be preempted by section 1681t(b)(1)(E), it must both concern the subject matter regulated by section 1681c and relate to the specific topics regarding consumer report information addressed by section 1681c (such as obsolescence and information that must be included).  Thus, in the CFPB’s view, section 1681t(b)(1)(E) does not preempt state laws “about subject matter regarding the content of or information on consumer reports beyond these examples.” 

As an example of what follows from its reading of section 1681t(b)(1)(E ), the CFPB states that although “how long” categories of information can continue to appear on a consumer report is a subject matter regulated by section 1681c, “what or when items generally may be initially included on a consumer report is not a subject matter regulated under section 1681c.” (emphasis included).  Accordingly, the CFPB concludes that state laws “relating to what or when items generally may be initially included  on a consumer report—or what or when certain types of information may initially be included on a consumer report—would generally not be preempted by section 1681t()(1)(E).” 

The CFPB advises that its reading of section 1681t(b)(1)(E ) means that states “retain substantial flexibility to pass laws involving consumer reporting to reflect emerging problems affecting their local economies and citizens.”  Citing various concerns about medical debt that it has previously raised, the CFPB states that “to address these concerns and others, States may pass laws addressing the furnishing and reporting of medical debt.”  It then indicates that a state law “forbid[ding] a consumer reporting agency from including medical debt in a consumer report for a certain period of time after a debt was incurred…would generally not be preempted.”

The CFPB also indicates that a state law that “prohibited a furnisher from furnishing information about medical debt for a certain period of time after the debt was incurred, such a law would not be preempted by section 1681t(b)(1)(F).”  Section 1681t(b)(1)(F) preempts state laws “with respect to any subject matter regulated under section 1681s-2 of this title, relating to the responsibilities of persons who furnish information to consumer reporting agencies.”  The CFPB observes that while section 1681s-2 sets forth requirements for furnishers to assure the accuracy of information provided to consumer reporting agencies, it “says nothing about when a furnisher may or must begin furnishing information about a consumer’s account.”

Another area for possible state regulation identified by the CFPB is the reporting of rental information (e.g. rent-related charges and fees, eviction records) and criminal and civil information.  Once again citing concerns it has previously raised about such information, the CFPB states that “to address these concerns and others, States may pass laws addressing the furnishing and reporting of rental information.”  It indicates that a state law “prohibiting a consumer reporting agency from including information (or certain types of information) about a consumer’s eviction, rental arrears, or arrests on a consumer report would generally not be preempted under section 1861t(b)(1).”  According to the CFPB, although section 1861c regulates how long information such as civil suits, judgments, and arrest records can appear on a consumer report, “nothing in section 1681c regulates the content of eviction information, rental arrears, or arrest records, or when such information may initially appear on a consumer report.”

Section 1681t(b)(5).  This provision preempts state law “with respect to the conduct required by the specific provisions of [nine enumerated parts of the FCRA].  For example, section 1681t(b)(5)(E) preempts state law “with respect to the conduct required by the specific provisions of section 1681j(a),” which is the FCRA provision that sets forth the requirement for consumer reporting agencies to provide free annual credit reports.  The CFPB indicates that this provision only preempts state laws concerning the annual disclosure.  Thus, according to the CFPB, since section 1681j(a) contains no requirements regarding the language in which disclosures are provided, a state law that “required a consumer reporting agency [to] provide information required by the FCRA at the consumer’s requests in language other than English…would generally not be preempted by section 1681t(b)(5)(E).”

The California Department of Financial Protection and Innovation (DFPI) has issued proposed regulations implementing certain provisions of the state’s Consumer Financial Protection Law (CFPL).  Comments must be submitted by August 8, 2022.

The proposal includes provisions implementing the DFPI’s authority under the CFPL to issue and enforce rules defining unfair, deceptive, or abusive acts or practices as they relate to “commercial financing,” as that term is defined in Cal. Fin. Code 22800(d), or financial products and services offered or provided to small businesses, nonprofits, and family farms.  The proposal would make it unlawful “for a covered provider to engage, have engaged, or propose to engage in any unfair, deceptive, or abusive act or practice.”

Under the proposal, an act or practice engaged in by a “covered provider” would be considered “unfair” or “deceptive” if it is unfair or deceptive within the meaning of such terms under the Dodd-Frank Act or under the California Business and Professions Code section 17200.  The proposal would consider an act or practice engaged in by a “covered provider” to be “abusive” if it is abusive within the meaning of the Dodd-Frank Act.

The proposal contains definitions for various terms that it uses.  A “covered provider” is defined as “any person engaged in the business of offering or providing commercial financing or another financial product or service to a covered consumer.”  A “covered consumer” is defined as “a small business, nonprofit, or family farm whose activities are principally directed or managed from California.”  The term “commercial financing” is defined to have “the same meaning as in Financial Code section 22800, subdivision (d)” and the term “financial product or service” is defined to have “the same meaning as in Financial Code section 90005” (except that “consumer” and “consumer financial product or service” in that definition are expanded to include, respectively, business entities and financial products or services offered or provided for other than personal, family, or household purposes).  Other terms defined in the proposal include “family farm,” “nonprofit,” and “small business.”

Also included in the proposal are provisions setting forth an annual reporting requirement for “covered providers.”

The Federal Trade Commission (FTC) recently proposed a rule that would impose a number of new substantive and disclosure requirements on auto-dealers in the car-buying process.  The FTC described the proposed Rule as one designed “to ban junk fees and bait-and-switch advertising tactics that can plague consumers throughout the car-buying experience.”  As the impetus for the proposed Rule, the FTC cited surging auto prices, and high levels of consumer complaints related to automobiles in spite of vigorous enforcement efforts in recent years in the car-buying space. 

The proposed Rule would make it an unfair or deceptive act or practice in violation of Section 5 of the FTC Act for a motor vehicle dealer:

  • To make any misrepresentation, expressly or by implication, regarding a laundry list of specific topics relating to purchasing, financing or leasing of a vehicle;
  • To fail to make clear and conspicuous disclosures about the offering price for a vehicle, about optional add-on products or services, that add-ons need not be purchased (if true) by the consumer, about the total amount of payments required for a purchase or lease, and that lower payment options will increase the total amount the consumer will pay (if true);
  • To charge for add-ons that provide no benefit, to charge for optional add-ons without certain specific disclosures, and to charge a consumer for any item unless the dealer obtains the consumer’s express, informed consent for the charge.

The proposed Rule also imposes certain record-keeping requirements on dealers relating to the Rule’s provisions, and prohibits any attempt to obtain a consumer’s waiver of the protections of the Rule.  Finally, the proposed Rule declares that it does not supersede state law that is consistent with the Rule, and that state law is not inconsistent with the Rule just because the state law affords greater protections to consumers.

The notice includes questions for public comment, and states that, after the FTC reviews the comments received, it will decide whether to proceed with issuance of a final rule.  The notice states it will be published in the Federal Register soon, and that comments must be received 60 days from the publication date of the notice.

The new proposed Rule is obviously of interest to auto-dealers.  However, it also should be of interest to automobile finance or leasing companies that can potentially be held liable for dealer misconduct, such as under the FTC Holder Rule.

The FTC’s proposed rule would not apply to all auto dealers. In issuing the proposed rule, the FTC relies on its authority under Section 1029(d)  of the Dodd-Frank Act to prescribe rules under Section 5 of the FTC Act that apply to auto dealers exempt from the CFPB’s jurisdiction pursuant to Dodd-Frank Section 1029(a).  (This represents the FTC’s first use of this authority.)   Section 1029(a) exempts most, but not all, auto dealers from the CFPB’s jurisdiction.  Specifically, Section 1029(a) provides that the CFPB “may not exercise any rule-making, supervisory, enforcement or any other authority…over a motor vehicle dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both.”  However, pursuant to Section 1029(b), many dealers typically known as “Buy Here, Pay Here” (BNPH) dealers are not exempt from the CFPB’s jurisdiction because they extend retail motor vehicle credit or leases to consumers without routinely assigning them to unaffiliated third parties.  Thus, these BNPH dealers would not be directly subject to the FTC’s rule.  It is possible the CFPB would take the position that BNPH dealers who engage in the actions prohibited by the FTC rule are engaging in UDAAP violations.

The FTC rule could also have implications outside of the FTC Holder Rule for auto finance and leasing companies subject to CFPB jurisdiction that purchase retail installment contracts and leases from dealers that fail to comply with the FTC rule.  The CFPB could take the position that such companies have engaged in conduct that is a UDAAP violation.  (It is also possible that the FTC could assert a UDAP claim against such companies.)

On June 22, 2022, the American Law Institute (“ALI”) circulated minor (mostly technical) revisions to Tentative Draft No. 2 of the Restatement of the Law, Consumer Contracts (the “Restatement”). 

The Restatement was approved last month at ALI’s 2022 Annual Meeting, subject to minor changes agreed to by members at the Annual Meeting, the most notable of which is the addition of a new section on “Interpretation and Construction of Consumer Contracts.”  The Restatement sets forth a series of rules that are intended to represent the current black letter law for contracts between businesses and consumers. 

Key changes to the Tentative Draft No. 2 include:

  • Clarification in the Introduction that the law on consumer contracts is still developing, and the “Restatement does not seek to cement the rules governing this body of law and stifle their evolution.”
  • Addition of a new Section 4 titled “Interpretation and Construction of Consumer Contracts” and a renumbering of the sections that follow.  The Interpretation section’s black letter law states that (a) a consumer contract imposes a non-disclaimable duty of good faith and fair dealing on each party, (b) in choosing among the reasonable meanings of a standard contract term, the meaning which operates against the business is preferred, (c) ambiguities in notices in the adoption process are resolved against the business, and (d) standard contract terms are interpreted in a manner that effectuates the reasonable expectations of the consumer.  The comments within the new section are based on language from the Restatement of the Law Second, Contracts and comments previously found in other sections of Tentative Draft No. 2 which have now been moved to Section 4.
  • Addition of “Reasonable” as a defined term in the Section 1 definitions and a comment on the reasonableness standard, which is a fact-intensive analysis based on the totality of the circumstances.
  • Clarification in Section 2 (Adoption of the Standard Contract Terms) between the conceptual meaning of “adoption of term” as compared to “assent to contractual relationship.”
  • Clarification in the Adoption Section (previously § 5 and now renumbered as § 6) that satisfaction of the adoption process does not prevent a finding of substantive or procedural unconscionability.
  • An explanation in the section regarding Standard Contract Terms and the Parol Evidence Rule” (previously § 8 and now renumbered as § 9) that the section “is not a complete statement of the parol evidence rules and does not supplant or derogate from other limitations on the parol evidence rule that might apply.”

ALI has set an August 1, 2022 deadline for any comments on the changes by project participants for the Restatement and 2022 Annual Meeting attendees.  (We have not provided the text of the proposed revisions or a summary prepared by ALI because these items are only available to ALI members.)

In addition to our blog posts about the Restatement, a recent episode of our Consumer Finance Monitor Podcast featured a discussion of the Restatement with Ballard Spahr’s Alan Kaplinsky (who is on the ALI Board of Advisers to the new Restatement) and special guest Steven Weise from the ALI Council.

The Restatement applies to all contracts with consumers pertaining to the sale of goods and services to the extent that it is applied by courts.  It is critically important that companies that enter into contracts with consumers, particularly online, become knowledgeable about the Restatement and revise their contracts and procedures for entering into and changing terms of contracts so that they conform with the Restatement.  Otherwise, companies run the risk that their contracts with consumers will not be enforced by courts.