On September 21, the CFPB finalized its proposal to amend Regulation B requirements related to the collection of consumer ethnicity and race information, in order to resolve the differences between Regulation B and revised Regulation C (the “Final Rule”).  This Final Rule is effective on January 1, 2018, the same effective date for most of the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule.  The amendment removing the existing “Uniform Residential Loan Application” form is effective January 1, 2022.

Generally, the amendments set forth in the Final Rule are being adopted as proposed.  The Final Rule institutes four primary changes to Regulation B:

  1. Applicant Information Collection for Regulation B Creditors. The Final Rule gives persons who collect and retain race and ethnicity information in compliance with Regulation B the option of permitting applicants to self-identify using the disaggregated race and ethnicity categories required by the 2015 HMDA Final Rule.  Aligning these rules allows HMDA-reporting entities to comply with Regulation B without further action, while entities that do not report under HMDA but record and retain race and ethnicity data under Regulation B may either use existing aggregated categories or the new disaggregated race and ethnicity categories.  The flexibility may be helpful for institutions that move in and out of being a HMDA reporting entity.
  2. Applicant Information Collection for HMDA Reporters. The Final Rule allows creditors to collect ethnicity, race and sex information from mortgage applicants in certain cases where the creditor is not required to report under HMDA and Regulation C, including creditors that submit HMDA data even though not required to do so, and creditors that submitted HMDA data in any of the preceding five calendar years.  This change also may benefit institutions move in and out of being a HMDA reporting entity, and institutions that may be uncertain about their reporting status.
  3. Regulation B Model Forms. The Final Rule removes the outdated 2004 Uniform Residential Loan Application (URLA) as a model form, and provides a new, one-page data collection model form that can be used to collect the revised HMDA demographic data until the 2016 URLA prepared by Freddie Mac and Fannie Mae is implemented.  As we reported previously, last year the CFPB added the 2016 URLA as a model form to Regulation B.
  4. Voluntary Collection Authorizations. The Final Rule authorizes a financial institution that is subject to only (1) the requirement to report closed-end loans, to voluntarily report home equity lines of credit (HELOCs), and (2) to the requirement to report HELOCs, to voluntarily report closed-end loans.  Moreover, the CFPB is adopting two recommendations from industry commenters that were not contained in the proposed rule.  First, a financial institution may collect applicant demographic information for dwelling-secured business loans that are not reportable because the loans are not for the purposes of home purchase, refinancing, or home improvement.  Second, the Final Rule permits, but does not require, creditors to collect applicant demographic information from a second or additional co-applicant.  The HMDA rule requires the collection of the information for the applicant and first co-applicant.

In another recent defeat for the CFPB, a California federal district court refused to award restitution sought by the CFPB in its lawsuit filed in May 2015 against two related companies offering a biweekly mortgage payment program and their individual owner.  The CFPB’s complaint alleged that the defendants engaged in abusive and deceptive acts or practices in violation of the CFPA UDAAP prohibition by making false representations regarding the costs of the payment program and the savings consumers could achieve through the program.  (Earlier this month, a Minnesota federal district court dismissed the CFPB’s Regulation E claims in a lawsuit targeting a bank’s overdraft protection program.  Last month, a federal district court in Atlanta sanctioned the CFPB for its conduct in connection with the defendants’ depositions of CFPB witnesses by striking four counts from the CFPB’s complaint, resulting in the dismissal from the case of the defendants who sought the sanctions.)

In an opinion and order issued following a seven-day bench trial, the California federal district court found that the CFPB had shown that some, but not all, of the marketing statements made by the biweekly mortgage payment companies were false or misleading and constituted deceptive practices that violated the CFPA’s UDAAP prohibition.  The CFPB had asked the court to order nearly $74 million in restitution, representing the revenue earned by the companies (less refunds) from the setup fee charged by the companies to all consumers who participated in the program during the relevant time period.  The court noted that the CFPB’s rationale for selecting refund of the setup fee as an appropriate remedy was that, in the CFPB’s view, “the setup fee effectively represents the purchase price of the financial services product, which consumers were misled into purchasing–even assuming the setup fee itself was adequately disclosed.”  To the extent restitution was not paid, the CFPB sought disgorgement from the companies’ owner of approximately $33 million, representing shareholder distributions he received during the relevant period.

The court concluded that the CFPB had failed to show that restitution of all customers’ setup fees was appropriate.  According to the court, the CFPB had not proved that “defendants engaged in the type of fraud commonly connoted by the well-worn phrase ‘snake oil salesmen.’  [The CFPB has] not shown, and could not show, that the [payment program] never provides a benefit to consumers, or that no fully-informed consumer would ever elect to participate in the program.”  The court also observed that the CFPB had not shown that the setup fee itself was not adequately disclosed, some of the statements found to constitute misrepresentations or omissions did not apply to all customers, and the only misrepresentation affecting all customers was literally true.  Because no restitution was awarded, the court also did not order disgorgement from the companies’ owner.

While the court did award the CFPB approximately $7.9 in civil money penalties, it rejected the CFPB’s request for an award against each defendant and imposed only a single penalty for which the defendants would be jointly and severally liable.  The penalty amount was based on the CFPB’s request for the CFPA’s maximum first tier penalty of $5,000 per day for the relevant period.  Although it noted that the CFPB may have “only sought first tier penalties because it believed the restitutionary award would be large,” the court determined that nevertheless “under all the circumstances that penalty figure is appropriate.”

The court also noted that because there was evidence showing that the defendants “took affirmative steps such as training, quality control, and seeking legal counsel, in an effort to stay on the right side of the line,” the imposition of a penalty at the higher tiers for reckless or knowing violations was not warranted.  It is notable that the penalty was computed using the time period, rather than on a “per violation” basis, which we have encountered in our interactions with the CFPB.  The Dodd-Frank Act, of course, refers to the time period of the violation, but the CFPB has frequently taken the position that what the statute really means is “per violation per day.”  In this instance, however, the CFPB appears to have hewed more closely to the statutory language.

It is also notable that in this case the CFPB limited the start of the “look back” period for restitution and civil money penalties to July 21, 2011 (the Dodd-Frank Act “designated transfer date”), thereby tacitly conceding no retroactive application of the CFPA.  However, it has been our experience that during settlement negotiations, the CFPB will often seek redress for alleged violations that occurred before the designated transfer date.

 

 

 

On September 14, 2017, the CFPB issued a no-action letter – the first one ever issued by the agency – to a marketplace lender, stating that the agency had no present intention to take enforcement or supervisory action against the lender under the Equal Credit Opportunity Act (ECOA) relating to the lender’s underwriting model, and especially its use of certain alternative data fields.  The letter expires after three years, by its own terms.

As detailed in the lender’s request for a no-action letter, it uses a variety of common credit-bureau-based data fields in underwriting, but also uses other, “alternative data” that seemed to the be focus of the CFPB’s issuance of the letter.  We saw several significant aspects to the underwriting model detailed in the no-action letter request:

  • The requester excludes all residents of West Virginia from its underwriting process. This exclusion apparently did not raise any redlining concerns for the CFPB.
  • The underwriting process also requires that the applicant have a valid email account. We sometimes have been concerned that such a requirement could have a disparate impact (possibly on the basis of age) because it makes the credit product unavailable to those customers who are not digitally engaged, but the CFPB made no comment on this requirement, apparently not finding fault with it.
  • The underwriting process also uses the identity of the college attended by the applicant. This strikes us as very strange and in tension with the CFPB’s repeated attacks on the use of cohort default rate and other school-specific variables in student loan underwriting.
  • The lender also stated that it uses public records (liens and judgments) as part of its underwriting process, which is notable given the removal of such information from credit reports offered by the three large credit bureaus (although this data continues to be separately available). We blogged about this change in the credit bureaus’ inclusion of public records here.

The letter (and the CFPB’s press release) makes the point that the use of this information is being used to expand access to credit to individuals, particularly younger ones, without sufficient credit experience to have a credit score.  We have known for some time that the CFPB has indicated that it will be more understanding about the use of alternative data when it is used to expand access to credit for consumers who do not have sufficient credit bureau history, but it’s unclear how that inclination will be weighed against particular data elements that have been criticized by the CFPB (like, for example, school-specific variables).

Nevertheless, we view the no-action letter as confirmation of our view that the CFPB wishes to encourage the use of alternative data to expand access to credit to “thin file” or “no file” consumers.  The problem is that there are so many limitations in the letter – and so many factual questions that are not addressed by the CFPB at all – that it serves to provide essentially no reliable guidance to the industry.  Moreover, as we detailed on this blog when the NAL process was finalized, a no-action letter does not bind the CFPB, any other federal or state governmental agency, or private litigants, and is not entitled to any deference from courts.  Our criticism of the Bureau’s no-action letter policy was followed by similar comments in the Treasury Report released earlier this year, which noted the “stringent standards that must be met before the agency will even consider a regulated party’s request” and criticized the inaccessibility of the process to industry participants.

For these reasons, the no-action letter still leaves a great deal of uncertainty surrounding other types of alternative data that may be used in underwriting models.  The CFPB could promote access to credit in a much more significant way if it provided guidance on the use of a more expansive set of alternative data than the handful of attributes noted in the no-action letter.  Unless and until that happens, lenders will need to make a judgment about the use of alternative data and equip themselves with empirical data to show the predictive power of the data, and that it is being used to expand access to credit.  That is the focus we have been concentrating on with our lender clients who make extensive use of alternative data in their underwriting models.

In addition to the guidance regarding Hurricane Harvey disaster relief, the housing agencies and government-sponsored enterprises (GSEs) recently addressed the mortgage-related relief available to victims of both Hurricane Harvey and Hurricane Irma in Presidentially-declared disaster areas.  Click here for a summary of these announcements.

In a mistaken attempt to justify the CFPB’s arbitration rule, supporters are pointing to the need to protect the rights of military servicemembers and the recent Equifax data breach.  On September 20, Democratic Senator Jack Reed will host an event entitled “The CFPB Forced Arbitration Rule,” which is described as a briefing for Senate staff and press members.

According to the event announcement, the participants will discuss how the CFPB’s arbitration rule “restores the rights of servicemembers, military families and consumers.”  Obviously overlooked (or ignored) by Senator Reed and the other participants is the fact that federal law already prohibits the use of arbitration agreements in most consumer credit contracts entered into by active-duty servicemembers and their dependents.  More specifically, this prohibition is contained in the Military Loan Act.

Since 2007, creditors have been prohibited by the MLA from including arbitration agreements in contracts for consumer credit extended to active-duty service members and their dependents where the credit is a closed-end payday loan with a term of 91 days or less in which the amount financed does not exceed $2,000, a closed-end vehicle title loan with a term of 181 days or less, or a closed-end tax refund anticipation loan.  In 2015, the Department of Defense adopted a final rule that dramatically expanded the MLA’s scope.

The final rule extended the MLA’s protections to a host of additional products, including credit cards, installment loans, private student loans and federal student loans not made under Title IV of the Higher Education Act, and all types of deposit advance, refund anticipation, vehicle title, and payday loans.  The rule already became effective for transactions or accounts consummated or established after October 3, 2016 for most products, and will become effective for credit card accounts consummated or established after October 3, 2017.

The event announcement also indicates that there will be a discussion of how the arbitration rule impacts Equifax customers.  As we have previously commented, the attempt of consumer advocates to link the Equifax data breach to the CFPB’s arbitration rule is a tempest in a teapot.  The breach has nothing to do with the arbitration rule.  While the rule covers some credit reporting company activities, it does not appear to cover data breaches such as this one.

This past January, the CFPB filed a lawsuit against TCF National Bank in Minnesota federal district court that alleged that the bank, in connection with offering overdraft services, violated the Consumer Financial Protection Act’s UDAAP prohibition and Regulation E (which implements the Electronic Funds Transfer Act).  Earlier this month, the district court granted in part TCF’s motion to dismiss the CFPB’s amended complaint and dismissed with prejudice the CFPB’s Regulation E claims.  This opinion represents a serious setback for the CFPB (1) specifically in connection with other similar overdraft protection cases in which the CFPB has alleged that a bank’s opt-in procedure violated Regulation E, and (2) generally in connection with a wide variety of cases in which the CFPB is seeking to recover damages and civil money penalties for alleged CFPA violaltions that predate July 21, 2011.

Although it was undisputed that TCF had provided the opt-in notice required by Regulation E, the CFPB alleged that TCF engaged in abusive and deceptive practices in connection with enrolling new customers in overdraft services and that it did not comply with the Regulation E requirements to provide a “reasonable opportunity” for customers to consent to overdraft services and to obtain the customer’s affirmative consent.

The court was unwilling to dismiss the CFPB’s UDAAP claims because it could not conclude that “the Bureau failed to plausibly allege abusive or deceptive conduct simply because the required notice was provided at some point during the account-opening process.”  However, the court would not allow the CFPB to assert UDAAP claims arising before July 21, 2011 (the CFPA’s effective date) using “a type of continuing-violation theory.”  The court observed that “accepting the Bureau’s argument theoretically could render unlawful every account opening ever conducted by TCF, since some of them occurred after the CFPA’s effective date.”

In dismissing the CFPB’s Regulation E claims, the court rejected the CFPB’s attempt to transform conduct that allegedly violated the CFPA into Regulation E violations.  According to the court, while the CFPA broadly attaches to abusive or deceptive practices, “Regulation E, on the other hand, specifies with almost surgical precision the information banks must convey to consumers in connection with overdraft services—a description of the services, the right to opt-in (or not) and so on—and the ways in which they may obtain consumers’ consent.”

The court determined that Regulation E’s “reasonable opportunity” requirement “concerns only the manner in which consent may be obtained, and nothing more.”  In the court’s view, Regulation E’s intent was “to delineate specific information banks must provide to customers, not to more broadly prevent misleading or deceptive conduct in connection with the opt-in decision—the purview of the CFPA.”  Because the amended complaint did not allege that TCF failed to provide reasonable or appropriate means for consumers to provide consent, the court concluded that the CFPB’s “reasonable opportunity” claim failed.

The court also characterized the CFPB’ claim that customers failed to “affirmatively consent” because they did not understand what they were agreeing to as an attempt to “squeeze the CFPA’s broader proscriptions against misleading conduct into [Regulation E].”  The court noted that the amended complaint contained no plausible allegation that TCF failed to “actually obtain” new or existing customers’ consent to overdraft services. (emphasis provided). Calling this deficiency “fatal,” the court observed that Regulation E “requires a bank to obtain ‘affirmative consent’ and nothing more, and it is not infused with the CFPA’s gloss of preventing ‘abusive’ or ‘deceptive’ conduct.  By the Bureau’s reckoning, it would not be enough to obtain a consumer express (or ‘affirmative’) consent, but rather a bank such as TCF would be required to obtain the customer’s informed consent, lest it violate Regulation E.” (emphasis provided).

Last month, the CFPB issued another report on checking account overdraft services and four one-page prototype model forms to replace the current Regulation E model form for banks to use to disclose overdraft fees and obtain a consumer’s consent to overdraft services.  In its Spring 2017 rulemaking agenda, as it did in its Fall 2015 agenda and Fall and Spring 2016 agendas, the CFPB stated that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”

Professor Jeff Sovern has responded to our recent blog, “Senator Warren’s Numbers Don’t Add Up,” with a blog of his own.  He does not contest the main point of our blog, which was that Senator Warren’s claim that consumers don’t do well in arbitration is wrong.  He admits he found our discussion “interesting.”  We appreciate the compliment.

Professor Sovern does take issue with the short discussion near the end of our blog in response to Senator Warren’s remark that consumers rarely pursue individual arbitration.  We explained that most consumers resolve their disputes through companies’ informal dispute resolution procedures and also through on-line complaint portals provided by federal and state agencies.  “Is it true,” he asks, and where are the “statistics”?  Well, one such statistic is on the front of the CFPB’s website: the CFPB, through its on-line complaint portal, has handled more than 1.2 million customer complaints, and 97% of consumers get timely replies when the CFPB sends their complaints to companies.  In fact, according to the CFPB, its consumer complaint portal helps generate broad relief in the marketplace:

How one complaint can help millions

97% of complaints sent to companies get timely responses.

By submitting a complaint, consumers can be heard by financial companies, get help with their own issues, and help others avoid similar ones. Every complaint provides insight into problems that people are experiencing, helping us identify inappropriate practices and allowing us to stop them before they become major issues. The result: better outcomes for consumers, and a better financial marketplace for everyone.

What do class actions accomplish for consumers that is better than this?  Professor Sovern concedes that few putative class members submit settlement claim forms even when they are entitled to payment.  That is a problem that “bedevils class action claims,” he admits.  He also argues that “class actions … deter misconduct in a way that arbitration claims don’t.”  But you don’t need arbitration or class actions to deter alleged misconduct when agencies such as the CFPB are already doing so through their enforcement activities, without charging a hefty attorneys’ fee.  Here, again, the first page of the CFPB’s website states that its enforcement actions have brought more than $11.9 billion in relief to more than 29 million consumers.  And the CFPB maintains a public database of the consumer complaints it receives.  That is also a significant deterrent.

Finally, Professor Sovern criticizes our argument that the number of consumer arbitration filings is attributable in part to the fact that the CFPB has not spent any resources educating consumers about arbitration.  He states, “I am not aware of any evidence that consumers can be usefully educated about arbitration.”  That is a surprising position for a legal educator to take.  Unlike Professor Sovern, we are optimistic that consumers can be “usefully educated about arbitration” and that more education would help consumers recognize the many benefits that arbitration can provide if other means of resolving a dispute are not successful.

The CFPB’s final arbitration rule was the subject of an article by Ballard Spahr partners Alan Kaplinsky and Mark Levin recently published by The Regulatory Review, a publication of the University of Pennsylvania Law School’s Penn Program on Regulation.

The article, The CFPB’s Final Arbitration Rule Run Amok, discusses the final rule’s failure to satisfy the Dodd-Frank Act’s limits on the CFPB’s arbitration rulemaking authority and its promotion of an untethered public policy favoring class action litigation that benefits only class action lawyers.

 

In an unusual procedural move last week in the RD Legal Funding case about which we have previously blogged, SDNY Judge Loretta Preska (the judge presiding over the CFPB’s lawsuit against RD Legal Funding) has referred to EDPA Judge Anita Brody the question of whether the NFL Concussion Litigation settlement agreement forbids assignments of settlement benefits. Judge Brody has been presiding over the multidistrict litigation for over five years and is currently overseeing the implementation of the settlement. Within the Order, Judge Preska noted “[t]his case presents an unusual situation in which the Defendants’ underlying conduct is intertwined with an MDL class action settlement in another court,” and stated the referral “ensures uniformity of adjudication with a single ruling that will apply not only to the Defendants in this action but also to other potential lenders to class members who might assert the same defense[.]” The referral had been requested by the NFL Concussion Litigation Co-Lead Class Counsel, Christopher Seeger.

In related news, earlier this week Judge Brody granted a request from Seeger to compel several entities to produce (1) a list of all retired NFL players with whom the entities communicated, (2) a list of all retired NFL players with whom the entities entered into agreements related to the NFL Concussion Settlement, and (3) a copy of any agreement related to the settlement. However, Judge Brody denied Seeger’s request to compel production of similar information from RD Legal Funding.

Earlier this week the CFPB released its Summer 2017 Supervisory Highlights, which covers supervisory activities generally completed between January through June of 2017. The report touts the $14 million total restitution payments consumers received due to nonpublic supervisory activities during this period-plus the approximately $1.15 million in consumer remediation and $1.75 million in civil monetary penalties resulting from public enforcement actions that grew out of or were bolstered by CFPB examinations.

The report includes discussions of the following topics:

Auto Loan Servicing: The publication addresses repossession practices by auto loan servicers, stating that in the course of examinations the Bureau found that “one or more entities were repossessing vehicles after the repossession was supposed to be cancelled,” and concluding that the servicer(s) had committed an unfair practice by repossessing vehicles where “borrowers had brought the account current, entered an agreement with the servicer to avoid repossession, or made payments sufficient to stop the repossession, where reasonably practicable given the timing of the borrower’s action.”

Credit Card Account Management: The report focuses on four alleged credit-card related practices: (1) failure to provide tabular account-opening disclosures as required by Regulation Z (the table set forth in Appendix G-17); (2) deceptive misrepresentations to consumers regarding costs and availability of pay-by-phone options; (3) deceptive misrepresentations to consumers about the benefits of debt cancellation products; and (4) noncompliance with requirements related to billing error resolution and liability for unauthorized transactions.

Debt Collection: According to the report, the CFPB uncovered various FDCPA violations in the course of examinations of larger participants in the debt collection market. These alleged violations include unauthorized communications with third parties, false representations made to authorized credit card users regarding their liability for debts, false representations regarding credit reports, and communications with consumers at inconvenient times.

Deposit Accounts: The CFPB also claims to have found a number of Regulation E and UDAAP violations in connection with deposit accounts offered by banks. The alleged violations relate to (1) the freezing of customer deposit accounts relating to suspicious activity observed by banks; (2) misrepresentations about fee waivers for deposit products subject to a monthly service fee; (3) violations of error resolution requirements under Regulation E; and (4) deceptive statements about overdraft protection products.

Mortgage Origination and Servicing: The report details the results of supervision following the CFPB’s first round of mortgage examinations for compliance with the Bureau’s “Know Before You Owe” mortgage disclosure rule. The publication states that “for the most part, supervised entities, both banks and nonbanks, were able to effectively implement and comply with the Know Before You Owe mortgage disclosure rule changes,” but notes that examiners did find some violations relating to the content and timing of Loan Estimates and Closing Disclosure. Other origination practices addressed in the report include the failure to reimburse unused portions of service deposits and the inclusion of an arbitration notice on certain residential mortgage loan notes that was held to violate Regulation Z even though the note apparently lacked an arbitration provision. On the servicing side, the report focuses on violations of Regulation X in connection with assisting borrowers complete loss mitigation applications, and the inclusion of broad waiver of rights clauses in short sale and cash-for-keys agreements as a UDAAP. The report also cites fair lending concerns identified during examinations of mortgage servicers relating to data quality issues and “a lack of readily-accessible information” concerning borrower characteristics.

Short-Term Small Dollar Lending: The CFPB cites a number of alleged UDAAP violations, such as workplace collection calls, repeated collection calls to third parties, misrepresentations in marketing about small dollar loan products, misrepresentations about the use of references provided by borrowers in connection with loan applications, and the handling of unauthorized debits and overpayments.

Statistics Regarding CFPB’s Action Review Committee Process: Another notable aspect of the report is the inclusion of new statistics about the Bureau’s Action Review Committee (ARC) process, which senior executives in the CFPB’s Division of Supervision, Enforcement, and Fair Lending use to decide whether issues that come up in examinations will be handled using a confidential supervisory action or will be investigated for possibly bringing a public enforcement action. The report includes a table detailing the total number of ARC decisions made—and the outcomes of such decisions—for fiscal years 2012 through 2016. Importantly, only a subset of CFPB matters go through the ARC process, and of these matters, 24.59% were deemed “appropriate for further investigation for possible public enforcement action.” A further 11.48% of these matters were determined to be appropriate in part for further investigation for public enforcement, and in part for resolution through confidential supervisory action. Finally, the CFPB commits in the report to publishing ARC data at the end of each fiscal year (starting with 2017 data to be published in its upcoming Fall 2017 Supervisory Highlights).

As a general matter, we should note that many of the issues discussed in the report appear to stem from system errors and failures to monitor third party vendors and service providers. Given that the CFPB now regularly conducts examinations of service providers, both banks and non-banks should pay careful attention and seek advice from outside counsel in managing their relationships with outside service providers—especially since the CFPB has taken the position that a company can be vicariously liable for violations committed by its service providers.