The OCC, Federal Reserve Board, FDIC, NCUA and CFPB have issued an “Interagency Statement on the Use of Alternative Data in Credit Underwriting.”

The statement sets forth the agencies’ recognition of the benefits of using alternative data (AD) in credit decisions.  For purposes of the statement, AD means “information not typically  found in the consumer’s credit files of the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit.”  The benefits cited by the agencies include improving the speed and accuracy of credit decisions (including in connection with small business underwriting), helping firms evaluate the creditworthiness of consumers who currently may not obtain credit in the mainstream credit system (sometimes called “credit invisibles”) or would otherwise be denied credit (such as in “Second Look” programs), and enabling consumers to obtain additional products and/or more favorable pricing/terms based on enhanced assessments of repayment capacity.

The agencies specifically discuss the automated use of cash flow data to evaluate a borrower’s ability to repay as an example of how the use of AD “may present no greater risks than data traditionally used in the credit evaluation process.”  The agencies indicate that such data “may include a range of metrics that examine categories of income and expenses (e.g. fixed expenses such as housing, amount of variable expenses, etc.) and how a consumer or small business has managed an account over time (e.g. residual balances).”  Noting the traditional use of a borrower’s income and expenses to determine the borrower’s repayment ability, the agencies state that “improving the measurement of income and expenses through cash flow evaluation may be particularly beneficial for consumers who demonstrate reliable income patterns over time from a variety of sources rather than a single job.”  The agencies also comment that the cash flow data used “are specific to the borrower and generally derived from reliable sources, such as bank account records, which may help ensure the data’s accuracy”  Significantly, they observe that the use of cash flow data and other AD that are directly related to a consumers’ finances and how consumers manage their financial commitments may present lower risks than other data.  (Presumably such AD present lower risks because of their greater accuracy and direct relationship to credit underwriting.)

While recognizing the benefits of AD, the agencies also highlight the need for the use of AD to be consistent with applicable consumer protection laws, citing fair lending laws, UDAAP prohibitions and the FCRA as examples.  They comment that a well-designed compliance program would provide “for a thorough analysis of relevant consumer protection laws and regulations to ensue firms understand the opportunities, risks and compliance requirements before using [AD]” and that based on such analysis, AD “that present greater consumer protection risk warrants more robust compliance management” such as appropriate testing, monitoring and controls to understand and address consumer protection risks.

AD is often used in conjunction with artificial intelligence (AI) models.  Our weekly podcasts include an episode released in June 2019 titled, “Using artificial intelligence for consumer finance: a look at the opportunities and challenges.”  In the episode, 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.

 

In this podcast, we are joined by Tom Vartanian, who leads the Financial Regulation & Technology Institute of George Mason University Antonin Scalia Law School, to discuss his proposal for the President and Congress to establish a National Financial Technology Commission.  The issues we examine include the security and other risks financial institutions face from new technologies such as artificial intelligence, the Commission’s role in protecting the nation’s economic infrastructure, and how regulators’ use of technology can result in a better regulatory scheme.

Click here to listen to the podcast.

The U.S. Supreme Court has scheduled oral argument in Seila Law on March 3, 2020.

The question presented in Seila Law’s petition is whether the CFPB’s single-director-removable-only-for-cause structure violates the separation of powers in the U.S. Constitution.  In its Order granting Seila Law’s certiorari petition, the Supreme Court directed the parties to also brief and argue the question whether the Dodd-Frank Act’s for-cause removal provision can be severed from the Act if the Bureau’s structure is found to be unconstitutional.

Seila Law’s brief on the merits and the CFPB’s brief on the merits must be filed by December 9, 2019.  Paul D. Clement, who was appointed amicus curiae by the Supreme Court to defend the Ninth Circuit’s judgment, must file his brief on the merits by January 15, 2020.  Court rules allow 30 days for the filing of reply briefs.

Other amicus curiae briefs, on both or either question before the court, must be filed within 7 days after the party supported files its merits brief.

A decision from the Supreme Court is expected by the end of its term in June 2020.

 

 

 

The CFPB and FTC announced the issues that the panels will discuss at the workshop on accuracy in consumer reporting that the agencies will co-host on December 10, 2019.

The workshop will examine issues affecting the accuracy of traditional credit reports as well as employment and tenant background screening reports, including changes in legal requirements and technological developments.  Panelists will include industry representatives, consumer advocates, and regulators.

The workshop will feature four panels.  The issues the panels will discuss include:

  • the current practices of furnishers of information and compliance with accuracy requirements;
  • current accuracy topics for traditional credit reporting agencies;
  • accuracy considerations for background screening; and
  • navigating the dispute process.

The workshop will also feature remarks by FTC Commissioner Noah Joshua Phillips and CFPB Deputy Director Brian Johnson.  In September 2019, the agencies had requested comments recommending topics that should be addressed or specific     information on the following potential topics for discussion.

 

 

 

The Department of Defense announced in its Fall 2019 rulemaking agenda that it is engaged in proposed rulemaking to amend its Military Lending Act (MLA) regulations, apparently in order to allow non-bank creditors to provide secured auto financing for purchase transactions.  (The DoD’s agenda was filed as part of the Fall 2019 Unified Agenda of Federal Regulatory and Deregulatory Actions, which is coordinated by the Office of Management and Budget.)

The DoD indicates that the purpose of the amendment is “to ensure continued access to reasonable credit by Service members and families to finance a motor vehicle purchase and reduce the burden and risk to business of potentially extending unsecured credit for such transactions.”  The DoD notes that at present the MLA prohibits the use of a motor vehicle as security for a credit transaction unless the creditor is chartered or licensed under federal or state law as a bank, savings association, or credit union.

How did we get here?  When the DoD expanded the scope of the MLA regulations in 2015, consistent with the purchase money exception in Section 987(h)(6) of the MLA, it specifically excepted from the scope of the new regulations any credit transaction with a covered borrower that is expressly intended to finance the purchase of a motor vehicle when the credit is secured by the motor vehicle being purchased.

However, the DoD further limited the exception when, without any real discussion, it equated purchase transactions with vehicle title loans, which are prohibited by Section 987(e)(5) of the MLA.  In describing its rationale for allowing banks, thrifts and credit unions to use a motor vehicle as security for a credit transaction, the DoD stated that the carve out was necessary to avoid denying opportunities for covered borrowers to refinance “existing auto loans” (NOT vehicle title loans) in order to get reduced rates from banks, thrifts and credit unions, as those transactions would otherwise be prohibited.  The proposed amendment would apparently now allow non-banks to also provide such refinancing opportunities to covered borrowers.

While we strongly support this change, we would also like to see the DoD revisit its controversial position on GAP insurance, something that, unfortunately, appears to be outside of the scope of the rulemaking proceeding contemplated by the DoD.  The DoD’s position on GAP insurance is similarly based on an unduly narrow interpretation of the MLA purchase money exception for consumer credit transactions “expressly intended to finance the purchase of a motor vehicle when the credit is secured by the vehicle being purchased.”  As interpreted by the DoD, a transaction qualifies for the purchase money exception when costs related to the motor vehicle securing the credit are financed.  But the transaction is disqualified from the MLA’s purchase-money exception if it includes any credit-related costs, such as financing for GAP and credit insurance.

Of course, we have only seen the DoD’s agenda item and not an actual proposed rule.  We will provide an update when the proposed rule is published, and we encourage the industry to use this opportunity to submit comments addressing the GAP insurance issue and any other aspect of the proposed rule that might merit comment.

 

 

The Colorado Attorney General’s Office recently published licensing applications for entities that are engaged in servicing student loans owed by Colorado residents.

There are two types of applications available: (1) a short “form” for “Federal Contractors” who hold a contract awarded by the U.S. Secretary of Education to service federal student loans; and (2) a longer “application” for all “Other Servicers” who are not federal student loan servicing contractors.

The short form requires a servicer to submit the signature page from its government contract, to indicate the types of servicing activities in which it engages, to provide some basic information about the company, and to designate contacts for examinations and complaints as well as the entity’s general mailing address.

The longer application requires more detailed information, such as personal affidavits (from each owner, partner, member, officer, director, and principal employee), a financial statement, trade name affidavit, business location list, and copies of the entity’s formation documents (articles of incorporation, certificate of organization, or partnership agreement) along with certificates of authority or good standing or a statement of foreign entity authority.

While not explicitly expressed, presumably, those who service student loans under both federal and private contracts may apply as a “Federal Contractor” with the short form. That seems to be the result contemplated by the instructions for the longer application.

Both applications require a $12,500 licensing fee; however, those applying as “Other Servicers” are also required to submit a $500 one-time investigation fee. The license must be renewed annually by January 31st of each year. Such renewal forms will be posted online at a later date.

Under the Colorado statute, student loan servicers must be licensed by January 31, 2020. Thus, the Colorado regulators recommend that licensing applications and forms be submitted on or before January 1, 2020 to meet the deadline.

Last week, the defendant filed its answer brief in Bratton v. Sisters of Charity of Leavenworth Health System, Inc., an appeal now pending before the Montana Supreme Court involving a challenge to the defendant’s use of prepaid cards to make refunds to the plaintiff.  In addition, the Montana Bankers Association, the American Bankers Association, and the Consumer Bankers Association filed an amicus brief in support of the defendant.

In her lawsuit, the plaintiff alleged that SCL Health (SCL), her healthcare provider, violated Montana law by directing its bank to issue two prepaid cards to the plaintiff to refund credit balances on her account with SCL.  The district court rejected the plaintiff’s argument that SLC violated Montana law by transferring to the bank without her consent SLC’s obligation to refund the credit balances on her account.  According to the court, rather than transfer its duty to the bank to make the refunds, SCL had the bank withdraw money from SCL’s general account and send the cards to the plaintiff, a situation the court viewed as similar to SLC authorizing the bank to issue a wire transfer or cashier’s check.  It found that the plaintiff’s consent was not necessary “just because SLC Health refunded Bratton’s money in a manner Bratton found inconvenient.”  The court also rejected the plaintiff’s claims of conversion, unjust enrichment and constructive trust, as well as her claim under the Montana Consumer Protection Act.

In its answer brief, the defendant highlights the plaintiff’s ability to obtain, upon request, a check from the bank for the amounts on the prepaid cards without incurring any cost.  (The defendant also notes that the prepaid cards could be: exchanged for cash at banks or credit unions without the plaintiff paying any fees, used to withdraw cash from ATMs without the plaintiff paying any fees, and used at point-of-sale locations, including online, without the plaintiff paying any fees.)  The defendant asserts that the plaintiff’s ability to obtain a check for the amounts on the prepaid cards without activating the cards refuted her argument that she and other cardholders were harmed because they could not access their refunds without agreeing to the bank’s cardholder agreement.

In their amicus brief, the trade groups argue that the plaintiff’s “idiosyncratic preference” for receiving her refunds via paper checks instead of prepaid cards “should not impair the ability of financial institutions to offer Montanans services that have become standard nationwide.”  The trade groups observe that the plaintiff’s argument that SCL forced her to obtain her refunds from the bank rather than SCL by paying her with debit cards rather than paper checks was based on a misunderstanding of how banks facilitate payments to third parties.  They demonstrate that there is no material difference between prepaid card and check transactions in terms of who is making payment and whether any payment obligation has been transferred.  According to the trade groups, by issuing the prepaid cards, “[the bank] was never obligated to Appellant on the underlying refund.  The obligations it assumed were the obligations of a financial institution instructed to tender funds—the same obligations it would have had if presented with a check.”

The trade groups also discuss the important role debit cards play in modern finance, the benefits they provide to consumers, and the applicable regulatory framework.  They argue that if the plaintiff prefers a different regulatory regime, she is free to seek further rulemaking but “should not ask this Court to act as legislator and regulator and impose [her] ill-considered views on businesses and consumers doing their best to navigate an increasingly paperless economy.”

 

The three trade groups challenging an amendment to Nevada law that allows an applicant for credit with no credit history to request that the creditor deem the applicant’s credit history to be identical to that of the applicant’s spouse during the marriage have responded to the motion to dismiss their lawsuit filed by the Commissioner of the Financial Institutions Division (FID) of the Nevada Department of Business and Industry and the Nevada Attorney General.  The amendment is contained in Senate Bill 311 which was signed into law by the Nevada Governor on July 1, 2019 and became effective on October 1.  A preliminary injunction motion filed by the trade groups is currently pending.

The lawsuit includes an allegation that the amendment is  preempted by the Fair Credit Reporting Act and the Equal Credit Opportunity Act.  In their motion to dismiss, the Commissioner and AG argue that the plaintiffs’ claims do not satisfy Article III ripeness standards because there is no history of enforcement and the FID should be allowed to consider regulations to address the plaintiffs’ preemption concerns.

In their response to the motion to dismiss, the trade groups argue that their lawsuit is constitutionally ripe because (1) it coerces their members “into a dilemma of having to choose between violating state law or violating federal law” which is “precisely the sort of dilemma the Declaratory Judgment Act was meant to ameliorate,” and (2) there is a credible threat that the amendment will be enforced.  The reasons given by the trade groups for why there is a credible threat include: the FID declined the trade groups’ request for it to issue a notice of non-enforcement before the amendment took effect; when a statute is new, the absence of historical enforcement is not relevant; and the universe of potential complainants is not limited to the defendants since the law can be enforced by private plaintiffs.

The trade groups also assert that it is irrelevant and wrong for the Commissioner and AG to suggest that the FID could resolve the conflict between the amendment and federal law.  According to the trade groups, the contention is irrelevant because the FID has provided no evidence of what it intends to do to resolve the conflict nor have the Commissioner or AG explained “why, if all problems might be solved through agency action, the [FID] has done nothing about SB 311 in the six months that have passed since the Governor approved it.”  They assert the contention is wrong “because resolving the conflict between SB 311 and federal law will not address the many other practical and privacy-related defects set forth in the plaintiffs’ complaint.”

 

On November 22nd, the CFPB issued a press release announcing that a stipulated final judgment and order (Order) were filed in the U.S. District Court for the Southern District of New York against Sterling Infosystems, Inc. (Sterling) to resolve allegations that the employment background screening company violated the Fair Credit Reporting Act (FCRA).  The CFPB’s complaint alleged that Sterling’s internal procedures violated the FCRA by:

  • Creating a heightened risk that its consumer reports would include criminal records belonging to another individual with the same name as the applicant because Sterling used only two personal identifiers to match criminal records to an applicant,
  • Failing to ensure that public record information that was included in the consumer reports was complete and up to date,
  • Not notifying consumers that public record information was being reported,
  • Reporting adverse information about consumers outside of the allowable reporting period of seven years, and
  • Incorporating “high risk” indicators from a third party source without verifying the accuracy of such designations.

If the Order is entered by the court, Sterling will be required to pay $6 million in monetary relief to affected consumers whose employment opportunities may have been adversely affected by Sterling’s practices and a $2.5 million civil money penalty to the CFPB.  The Order also includes injunctive relief to prevent the claimed illegal conduct from recurring.  Among other requirements set forth in the Order, Sterling must remain registered on the CFPB’s Company Portal for at least five years and establish a Compliance Committee that will be responsible for overseeing compliance with the Order.

This is a stark reminder that the CFPB’s enforcement jurisdiction extends to all entities subject to the FCRA’s requirements, regardless of whether the entity is a bank or non-bank company providing consumer financial services.   It is also a reminder that both the creation of employment background screening reports and the use of such reports by employers when making personnel decisions triggers FCRA compliance obligations.  The CFPB previously entered into a consent order with providers of employment background screening reports to settle alleged FCRA violations.