We have previously blogged about the industry challenge to the CFPB’s rule on payday/vehicle title/high rate installment loans.  The Plaintiffs’ have now filed an Unopposed Motion for Reconsideration and have advised that the CFPB intends to file a separate supporting memorandum.  In their Motion for Reconsideration, the Plaintiffs’ argue that a combined stay of litigation (previously approved by the Court) and stay of the Rules’ compliance dates (previously denied by the Court) –

would relieve the parties and the Court of the burdens of litigation that might not be needed, while at the same time protecting Plaintiffs’ members from having to comply with, and prepare for compliance with, an allegedly invalid rule….

But rather than grant or deny the motion in full, the Court’s order severed these two inextricably intertwined proposals. The order thereby granted a combination of relief that was not requested by the parties, and which undermines, rather than furthers, their agreed-upon solution to the dilemma discussed above. Staying the litigation while denying a stay of the Rule relieves the parties and the Court of the burdens of litigation, but it does so without relieving Plaintiffs of the need for litigation….  Thus, absent a stay of the compliance date, Plaintiffs will have no tenable option other than to file a motion for preliminary injunction (and a lift of the litigation stay).

(emphasis in original)

We fully subscribe to the views expressed in the Motion for Reconsideration.  However, we hope the CFPB is not putting all of its eggs in one basket and counting on the court to change its mind.  A second fallback approach—which we strongly recommend—is for the CFPB to engage in formal notice and comment rulemaking to extend the compliance deadline and provide breathing space for ensuing notice and comment rulemaking on the substance of the Rule.  We think the justification for such rulemaking, should it prove necessary, is compelling.

On June 21, 2018, Judge Preska of the Southern District of New York (“SDNY”) issued a decision finding that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional.  In doing so, the SDNY held that Title X of Dodd-Frank—the title that created the CFPB and established its regulatory, supervisory, and enforcement authority—should be stricken in its entirety.

The SDNY went further in finding that Mulvaney’s ratification of the CFPB’s decision to bring the lawsuit was inadequate to cure the constitutional deficiencies.  The decision was issued in response to the motion to dismiss filed by the defendants in the CFPB’s and New York Attorney General’s case against RD Legal Funding, LLC.

This decision is in direct conflict with the D.C. Circuit’s en banc decision in the PHH case, which held that the CFPB’s structure is constitutional.  Adopting portions of two dissenting opinions in the en banc decision, the SDNY found that, not only is the CFPB’s structure unconstitutional, but the proper remedy is to strike all of Title X rather than just its for-cause removal provision.

While the SDNY dismissed the CFPB from the RD Legal Funding case, it allowed the New York Attorney General’s claims to proceed.  Because part of the case remains active, the CFPB cannot appeal the decision unless the SDNY certifies that there is no reason to delay that appeal under Rule 54(b) of the Federal Rules of Civil Procedure.  Assuming such a certification by the SDNY, the CFPB could appeal to the Second Circuit.

We will soon be blogging in further detail about the implications of the SDNY decision.

The federal banking agencies (the Federal Reserve Board, OCC, and FDIC (FBAs)), recently issued a “Policy Statement on Interagency Notification of Formal Enforcement Actions” that is intended “to promote notification of, and coordination on, formal enforcement actions among the FBAs at the earliest practicable date.”  The issuance of the policy statement follows the DOJ’s announcement last month of a new policy to encourage coordination among the DOJ and other enforcement agencies when imposing multiple penalties for the same conduct to discourage “piling on.”

The new policy statement recites that it is not intended as a substitute for routine informal communications among FBAs in advance of an enforcement action, including verbal notification of pending enforcement actions “to officials and staff with supervisory  and enforcement responsibility for the affected institution.”

The policy statement’s key instructions are:

  • When an FBA determines that it will take formal enforcement action against a federally-insured depository institution, depository institution holding company, non-bank affiliate, or institution-affiliated party, it should evaluate whether the action involves the interests of another FBA.  By way of example, the policy statement notes that an entity targeted by an FBA for unlawful practices might have significant connections with an institution regulated by another FBA.
  • If it is determined that one or more other FBAs have an interest in an enforcement action, the FBA proposing the action should notify the other FBA(s) at the earlier of the FBA’s written notification to the targeted entity or when the responsible agency official or group of officials determines that enforcement action is expected to be taken.
  • The information shared should be appropriate to allow the other FBA(s) to take necessary action in examining or investigating the entity over which they have jurisdiction
  • If two or more FBAs is considering bringing a complementary action, such as an action involving a bank and its parent holding company, those FBAs should coordinate the preparation, processing, presentation, potential penalties, service, and follow-up of the enforcement action.

We view the new policy statement as a very positive development.

The U.S. Department of Housing and Urban Development (HUD) has issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Disparate Impact Rule (Rule) should be revised in light of the 2015 U.S. Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. 

On July 19, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “HUD’s Reconsideration of its Disparate Impact Rule: Background, Analysis and Potential Implications.”  Click here to register.

The ANPR provides an important opportunity for the mortgage industry and other interested parties to address whether the Rule reflects the limitations outlined by the Supreme Court in Inclusive Communities and other concerns with the Rule.  Comments on the ANPR must be filed by August 20, 2018.

The Rule provides that liability may be established under the Fair Housing Act (FHA) based on a practice’s discriminatory effect (i.e., disparate impact) even if the practice was not motivated by a discriminatory intent, and that a challenged practice may still be lawful if supported by a legally sufficient justification.  Under the Rule, a practice has a discriminatory effect where it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.  The Rule also addresses what constitutes a legally sufficient justification for a practice, and the burdens of proof of the parties in a case asserting that a practice has a discriminatory effect under the FHA.

While the Supreme Court held in Inclusive Communities that disparate impact claims may be brought under the FHA, it also set forth limitations on such claims that “are necessary to protect potential defendants against abusive disparate impact claims.”  In particular, the Supreme Court indicated that a disparate impact claim based upon a statistical disparity “must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity” and that a “robust causality requirement” ensures that a mere racial imbalance, standing alone, does not establish a prima facie case of disparate impact, thereby protecting defendants “from being held liable for racial disparities they did not create.”  Significantly, while Inclusive Communities held that liability may be established under the FHA based on disparate impact, the district court subsequently dismissed the disparate impact claim against the Texas Department of Housing and Community Affairs based on the limitations on such claims prescribed by the Supreme Court in its opinion.

In the ANPR, HUD notes that in response to a notice it published in the Federal Register in May 2017 inviting comments to assist HUD’s identification of outdated, ineffective, or excessively burdensome regulations, it received numerous comments both critical and supportive of the Rule and taking opposing positions on whether the Rule is inconsistent with Inclusive Communities.  HUD also notes that in a report issued in October 2017, the Treasury Department recommended that HUD reconsider applications of the Rule, particularly in the context of the insurance industry.  (We have previously reported on a challenge to the Rule by the American Insurance Association and National Association of Mutual Insurance Companies in D.C. federal district court.)

The ANPR contains a list of 6 questions of particular interest to HUD.   Issues addressed in the questions include the Rule’s: burden of proof standard and burden-shifting framework; the definition of “discriminatory effect” as it relates to the burden of proof for stating a prima facie case; and the causality standard for stating a prima facie case.

Although Inclusive Communities did not resolve the question of whether disparate impact claims are cognizable under the Equal Credit Opportunity Act (ECOA), HUD’s approach to the Rule could have significance for ECOA disparate impact claims.  Recent comments by CFPB Acting Director Mick Mulvaney that the CFPB plans to reexamine ECOA requirements in light of Inclusive Communities suggest that the CFPB might review references to the effects test in Regulation B (which implements the ECOA) and the Regulation B Commentary.  In doing so, the CFPB might consider not only whether such references should be eliminated but also, if they are retained, what safeguards should apply.  As a result, changes to the Rule made by the FHA could impact the CFPB’s approach to ECOA liability.

 

 

 

 

Democratic Senators Elizabeth Warren and Sherrod Brown have sent a letter to Kathy Kraninger, President Trump’s nominee for CFPB Director, seeking documents and other information about Ms. Kraninger’s role in the development and implementation of the Trump Administration’s “zero-tolerance” policy for individuals attempting illegal entry into the United States.

While not mentioned in her letter, Senator Warren has indicated on Twitter that she will place a hold on Ms. Kraninger’s nomination until she provides the requested documents and information.  According to media reports, the White House expected a Democratic Senator to place a hold on the nomination and that it would be necessary for Republican Senators to invoke cloture to move Ms. Kraninger’s nomination to a final vote.  Given that Ms. Kraninger’s nomination extends Mr. Mulvaney’s tenure as Acting Director while the nomination is pending (and significantly beyond), a hold by Senator Warren would not appear to disadvantage the White House.

In her letter, Senator Warren states that, in her role as Program Associate Director for General Government Programs at OMB, Ms. Kraninger oversees seven agencies, including DOJ and Homeland Security, and that such oversight includes providing “ongoing policy and management guidance” and “oversee[ing] implementation of policy options.”  According to Senator Warren, since Ms. Kraninger has served in her oversight role while DOJ and Homeland Security developed and implemented the “zero-tolerance” policy, Ms. Kraninger may have been involved in providing guidance on the policy, helped to implement the policy, and worked with Homeland Security on budgetary and funding issues as it adjusted to the policy.

The letter lists six areas of inquiry as to which Ms. Kraninger is asked to provide documentation and other information.

According to numerous media sources, the White House announced on Friday, June 16, that President Trump plans to nominate Kathy Kraninger as CFPB Director later this week.

The nomination means that pursuant to the Federal Vacancies Reform Act, Mick Mulvaney can continue to serve as Acting Director while Ms. Kraninger’s nomination is pending confirmation by the Senate and, as we explain below, potentially until mid-2020 if she is not confirmed.  In the absence of a nomination by President Trump, the FVRA would not have allowed Mr. Mulvaney to continue to serve as Acting Director beyond June 22 and created the potential for his post-June 22 actions to be challenged as invalid.  (The otherwise applicable FVRA time limit on service–210 days after the date the vacancy occurs—began to run on November 25, 2017, the date former Director Cordray’s resignation became effective.)

Ms. Kraninger is currently the Program Associate Director for General Government at the Office of Management and Budget.  (In addition to serving as CFPB Acting Director, Mr. Mulvaney currently serves as OMB Director.)  At OMB, Ms. Kraninger oversees budget development for several agencies, including DOJ, HUD, and Treasury. She has been at OMB since March 2017.  She has also held positions with two Congressional committees, the House Committee on Homeland Security and the Senate Homeland Security and Governmental Affairs Committee, and has worked in two agencies, Treasury and Homeland Security.  At Homeland Security, she served as Deputy Assistant Secretary for Policy Secretary Tom Ridge during the Bush Administration. Ms. Kraninger is a 2007 graduate of Georgetown University Law Center.

Ms. Kraninger’s nomination “resets the clock” on Mr. Mulvaney’s tenure as Acting Director under the FVRA.  He can continue to serve as Acting Director until Ms. Kraninger’s nomination is withdrawn, rejected, or returned by the Senate.  Senate rules provide that a nomination that has not been acted on by the end of the session in which it was submitted is returned to the President.  (The current target date for the Senate’s adjournment is December 14.)  Under the FVRA, the withdrawal, rejection, or return of Ms. Kraninger’s nomination would allow Mr. Mulvaney to continue to serve as Acting Director for an additional 210-day period.  If a second nomination is made (which we assume would not happen before 2019), Mr. Mulvaney could continue to serve as Acting Director until the second nomination is confirmed, withdrawn, or rejected or returned by the Senate.  If the second nomination is withdrawn or rejected or returned by the Senate at the end of the 2019 session, a further 210-day period would be triggered during which Mr. Mulvaney could continue to serve as Acting Director until approximately July 2020.  (It appears that Mr. Mulvaney’s tenure as Acting Director could not be further extended by subsequent nominations.)

If confirmed as CFPB Director, Ms. Kraninger is expected to follow Mr. Mulvaney’s philosophy of not using the CFPB’s enforcement authority to “push the envelope” or to engage in “rulemaking by enforcement.”  In addition, her nomination and potential confirmation is not expected to have any impact on the CFPB’s regulatory priorities outlined in its Spring 2018 rulemaking agenda of reopening rulemaking on the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) and proposing a debt collection rule dealing with third-party collectors.  Most significantly, by eliminating a possible challenge to the validity of actions taken by Mr. Mulvaney as Acting Director after June 22, Ms. Kraninger’s nomination allows Mr. Mulvaney to move forward (hopefully expeditiously) on staying the Payday Rule’s compliance date pursuant to the Administrative Procedure Act’s notice-and-comment procedures.  (Last week, a Texas federal court granted the stay of the lawsuit filed by two trade groups challenging the Payday Rule requested in a joint motion filed by the trade groups and the CFPB but denied the stay of the Payday Rule’s August 19, 2019 compliance date also requested in the joint motion.)

The continuing “wildcard” for Ms. Kraninger’s nomination and Mr. Mulvaney’s tenure as Acting Director is the possibility of a decision from the D.C. Circuit adverse to Mr. Mulvaney in Leandra English’s appeal challenging Mr. Mulvaney’s appointment as Acting Director.  One possible outcome is that the D.C. Circuit could find that Ms. English is entitled to serve as Acting Director pursuant to the Dodd-Frank Act (DFA) provision that provides the Deputy Director shall serve as Acting Director in the Director’s “absence or unavailability” and that the DFA provision supersedes the President’s FVRA authority.  It is unclear whether the DFA provision that only allows the President to remove the CFPB Director “for cause” would similarly limit the President’s removal of an Acting Director.  (Mr. Mulvaney has asserted on various occasions that President Trump can remove him without cause.)

A second possible outcome is that the D.C. Circuit could find that Ms. English is not entitled to serve as Acting Director pursuant to the DFA because “absence or unavailability” does not include a vacancy created by a resignation and, although the President can use his FVRA authority to appoint an Acting Director, his appointment of Mr. Mulvaney is invalid because Mr. Mulvaney cannot simultaneously serve as OMB Director and CFPB Acting Director.  The 210-day time limitation established by Section 3346(a)(1) of the FVRA on an acting officer’s tenure runs from “the date the vacancy occurs.”  While a permanent officer’s nomination can extend the tenure of an existing acting officer beyond 210 days, it appears that the President cannot use the FVRA to appoint another person as acting officer after the 210-day period expires.  Thus, assuming that after June 22 President Trump could not use the FVRA to appoint someone else to serve as Acting Director, the CFPB would remain without an Acting Director until a nominee is confirmed by the Senate.  (Ms. English, unless removed by President Trump, would continue to serve as Deputy Director but could not exercise the authority of the Director.  As noted above, while the DFA only allows the President to remove the CFPB Director “for cause,” it does not speak directly to the Deputy Director’s removal.)

It is important to also note that once a new Director appointed by President Trump is confirmed, he or she will be entitled to serve for a full five-year term regardless of how long Mr. Mulvaney has served as Acting Director.  As a result, if Mr. Mulvaney were to serve as Acting Director for as long as possible (i.e. until mid-2020), even if a Democrat is elected President in 2020, a new Director appointed by President Trump and sworn-in in mid-2020 could potentially serve until mid-2025.

Such a possible scenario underscores the need for Congress to enact legislation to change the CFPB’s leadership structure to a five-member commission, something industry has previously urged lawmakers to do.  While we are pleased with the direction in which Mr. Mulvaney has moved the CFPB, regardless of whether the President is a Republican or a Democratic, in our opinion, it is better policy and will provide more stability for the Bureau to be led by a group of people with diverse viewpoints rather than a single individual tied to the President’s political agenda.

 

The California Department of Business Oversight (DBO) has published modifications to its proposed regulations under the State’s Student Loan Servicing Act.  As previously covered, the DBO published notice of its initial proposed rules on September 8, 2017.  A blackline of the changes is available here.

The initial regulations mandated extensive customer service obligations.  Among other things, the regulations required that a servicer post a plain language description of the repayment and loan forgiveness options available for federal student loans on its website, with links to specified Department of Education resources.  The initial regulations also required this same repayment and loan forgiveness information be sent to each borrower, with the servicer’s toll-free customer service telephone number, at least once per calendar year (i.e., an “annual notice”).  The initial regulations provided similar requirements for a servicer of private student loans, with the added requirement that a private student loan servicer establish policies and procedures to ensure the provision of accurate private student loan repayment arrangement information and consistent presentation of those arrangements to similarly situated borrowers.  The initial regulations also provided requirements for handling borrower inquiries (“Qualified Written Requests”).  All communications were required to be sent according to the borrower’s preferred method of communication.

The proposed modifications:

  • clarify that only a servicer of federal student loans must post information about federal repayment and forgiveness options on its website or in its annual notices
  • permit a servicer of private student loans to provide information about repayment options customized to the borrower by eliminating the requirement that servicers must prominently post information about “any alternative repayment plan” for the student loans it services on its website homepage (though private loan servicers must still provide an annual notice);
  • allow a servicer to provide information about repayment and loan forgiveness options through links on its homepage, instead of aggregating the information on the homepage.
  • create a new rule that private student loan servicer representatives available at the servicer’s toll-free number must be “fully trained about, inform and discuss with callers, any alternative repayment plan offered by the servicer or promissory note holder” for the private student loan(s);
  • provide that annual notices may be sent with any other annual communications;
  • require that borrowers who do not consent to electronic communications receive communications through the U.S. Postal Service and, only if undeliverable, through email; and
  • create a new rule (that is somewhat ambiguous) that a servicer is only required to send a borrower a total of three notices stating that there will be no response to a Qualified Written Request because the borrower has previously submitted the same request, received a response, and provided no new information in its subsequent, duplicative Qualified Written Request.

The initial regulations also established payment requirements, including that a servicer credit any electronic payment on the day “electronically paid by the borrower” if received before a posted cut-off time and that a servicer credit physical payments on the day received.  The initial regulations also mandated that account information reflect payments within three days and be available to the borrower via a secure log-in system with a consolidated report of the borrower’s transaction history.

The proposed modifications:

  • clarify that, for payments (primarily, if not exclusively, paper checks) received without payment instructions, a servicer has a reasonable period of time (not to exceed ten business days) to research and apply the payment and update a borrower’s account; and
  • revise the rule regarding co-signers to require that a servicer provide a process for co-signers to follow to check to be sure that co-signer payments are credited only to the loan(s) the co-signer has co-signed.

The initial regulations provided that a servicer must maintain a current student loan servicing report (a record of all loans being serviced) including, with respect to each student loan serviced: the borrower’s name; the number of student loans serviced for each borrower; the loan number for each loan; the loan type; the origination amount; the interest rate(s) and maturity date for each loan; the loan balance and status for each loan; the cumulative balance owing for each borrower; whether a borrower has an application pending for, or is repaying under, an alternative repayment plan, listing the plan chosen; and whether the borrower has an application pending for any loan forgiveness benefit.  For each individual loan, the servicer must also maintain borrower records, including the borrower’s application, agreement, qualified written requests, and other disclosures and statements provided to the borrower.  The initial regulations also provided specific technical requirements for electronic document storage.

The proposed modifications:

  • clarify that servicers may provide the required aggregated servicing information through reports segregated by loan type;
  • revise the recordkeeping rule to require that a servicer maintain records for three years after pay off, assignment, or transfer unless a contract requires a shorter period; and
  • eliminate the specific optical image reproduction and electronic record storage requirements of Section 2056(b).

The initial rules also provided a variety of miscellaneous rules regarding licensing (including provisions requiring a servicer to submit policies and procedures related to borrower protection requirements) and account management.

The proposed modifications:

  • remove the requirement that a servicer appoint the Commissioner as their agent for service of process;
  • provide that, between regulatory examinations, a servicer need not submit changes to their policies and procedures related to borrower protection requirements; and
  • delete the rule requiring monthly reconciliations of trust accounts.

The modifications are subject to comment until June 18, 2018 and will not be effective until approved by the Office of Administrative Law and filed with the Secretary of State.  The short comment period suggests that the DBO intends to have the rules finalized by the effective date of the Student Loan Servicing Act, July 1, 2018.

Comptroller of the Currency Joseph Otting appeared before the House Financial Services Committee yesterday and before the Senate Banking Committee today.

In his nearly identical written testimony submitted to both committees, Mr. Otting identified the following items as his priorities as Comptroller: modernization of Community Reinvestment Act (CRA) regulations; encouraging banks to meet consumers’ short-term, small-dollar credit needs; enhancing supervision of Bank Secrecy Act/anti-money laundering compliance and making it more efficient; simplifying regulatory capital requirements; and reducing burdens associated with the Volcker Rule.

CRA modernization was a focus of many of the Democratic lawmakers on both committees.  In his written testimony, Mr. Otting stated that that the federal banking agencies (presumably the OCC, Fed and FDIC) are discussing an Advanced Notice of Proposed Rulemaking to solicit comments on how best to modernize CRA regulations.  In his written and live testimony, Mr. Otting voiced his support for a new CRA framework that would (1) expand the types of activities that qualify for CRA consideration (e.g. to include small business lending and opportunities for consumers to access short-term, small dollar loans), (2) revisit the concept of assessment areas to broaden it beyond branches and deposit-taking ATMs, and (3) use a metrics-driven approach to evaluating CRA performance to increase public transparency and reduce subjectivity in examiner ratings.

In their questioning of Mr. Otting, Democratic lawmakers expressed skepticism about the CRA changes outlined by Mr. Otting, suggesting that they would allow banks to be less responsive to the needs of minority communities and questioning whether Mr. Otting has sufficient awareness of and concern about banks engaging in discrimination against minorities.

Another focus of Democratic lawmakers on both committees was the “horizontal reviews” of bank sales practices conducted by the OCC at more than 40 national banks in 2016-2017.  According to Mr. Otting, the OCC reviewed between 500 million and 600 million new accounts opened in a three-year span and found 20,000 accounts that lacked proof of authorization or had other issues resulting in 252 “matters requiring attention.”  He indicated that the OCC’s review had not revealed any “pervasive or systemic” issues concerning improper account openings but did show a need for banks to improve their policies, procedures, and controls.

Other issues discussed at the hearings included the following:

  • Special purpose national bank (SPNB) charter.  Lawmakers at the House hearing questioned Mr. Otting about the OCC’s proposal to issue SPNB charters to fintech companies.  Mr. Otting repeated his recent statement that the OCC would announce its decision on the proposal next month.  Lawmakers also noted the concerns that have been raised by comments reportedly made by Mr. Otting regarding “rent-a-charter” arrangements between banks and non-bank entities.  Mr. Otting indicated that, in light of the increasing number of banks partnering with fintech companies, the OCC was open to developing guidance to address such partnerships.
  • Short-term, small dollar loans.  Mr. Otting was questioned about the bulletin issued by the OCC last month to encourage its supervised institutions to make short-term, small dollar installment loans.  As we reported, the bulletin contained language about compliance with applicable state law that was confusing or likely to cause confusion.  We observed that federal law (12 U.S.C. Section 85) governs the interest national banks can charge and authorizes banks to charge the interest allowed by the law of the state where they are located, without regard to the law of any other state.  We also called upon the OCC to clarify that it did not mean to suggest otherwise.  In response to a question from Republican Rep. Blaine Luetkemeyer about the meaning of the OCC’s language, Mr. Otting indicated that the OCC was not retreating from preemption and did not intend to suggest that national banks had to charge the interest permitted by the law of the borrower’s state rather than the interest permitted by the law of the bank’s home state. Mr. Otting expressed confidence that more banks would be entering into the market for short-term, small dollar installment loans.
  • Madden decision.  Mr. Otting was questioned about the Second Circuit’s Madden decision by Republican Senator Pat Toomey, who observed that the decision has resulted in a substantial reduction in credit access to consumers.  (In Madden, the Second Circuit ruled that a nonbank that purchases loans from a national bank could not charge the same rate of interest on the loan that Section 85 of the National Bank Act allows the national bank to charge.)  Mr. Otting agreed with Senator Toomey that the decision was wrong.  However, when asked by Senator Toomey what steps the OCC was taking to address the problems caused by Madden, Mr. Otting said only that the OCC had filed a brief disagreeing with the decision.  (Presumably, Mr. Otting was referring to the amicus brief filed by the Solicitor General and OCC with the U.S. Supreme Court expressing their view that the Court should deny the petition for certiorari filed by the Madden defendants  despite their view that Madden was wrongly decided.)

We have advocated for the OCC’s adoption of a rule providing that (1) loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  In other words, it is the origination of the loan by a national bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

The CFPB announced that it has entered into a consent order with Security Group Inc. and its subsidiaries (Security Group) to settle an administrative enforcement action that charged the companies with having engaged in unlawful debt collection and credit reporting practices.  The consent order requires Security Group to pay a civil money penalty of $5 million.

The consent order states that Security Group owned and operated approximately 900 locations in 20 states.  According to the consent order, certain Security Group entities were primarily in the business of making consumer loans and other entities were primarily in the business of purchasing retail installment contracts from auto dealers. The consent order concludes that Security Group engaged in debt collection practices that constituted unfair acts and practices in violation of the Consumer Financial Protection Act and credit reporting practices that violated the Fair Credit Reporting Act and Regulation V.

The consent order finds that:

  • The unlawful debt collection practices in which Security Group engaged included the following:
    • Visiting consumers’ homes and places of employment, as well as the homes of their neighbors, and visiting consumers in other public places, thereby disclosing or risking disclosure of consumers’ delinquencies to third parties, disrupting consumers’ workplaces and jeopardizing their employment, and humiliating and harassing consumers
    • Routinely calling consumers at work, sometimes calling consumers on shared phone lines and in the process speaking with co-workers or employers and thereby disclosing or risking disclosure of consumers’ delinquencies to third parties, and also calling after being told that consumers were not allowed to receive calls at work and that future calls could endanger their employment
    • Failing to heed and properly record consumers’ and third parties’ requests to cease contact or to give personnel access to cease-contact requests logged by employees in other stores, thereby resulting in repeated unlawful calls to consumers and third parties
  • The unlawful credit reporting practices in which Security Group engaged included the following:
    • Failing to establish and implement any reasonable policies and procedures regarding the accuracy and integrity of information furnished to consumer reporting agencies (CRAs)
    • Failing to address in policies and procedures how to properly code customer account information or responses to consumer disputes using the Metro 2 Guide and not ensuring that its monthly furnishing system was coordinated with its consumer dispute furnishing practices
    • Regularly furnishing information to CRAs that it had determined was inaccurate based on information maintained in its data base or other information, such as information provided by consumers as part of a credit reporting dispute or information provided to CRAs

The consent order appears to indicate that first-party collectors that engage in conduct that the FDCPA would prohibit as unfair conduct by third-party collectors continue to be at risk for violating the CFPA’s UDAAP prohibition.  It also appears to indicate that the CFPB continues to disfavor in-person debt collection activities and that companies that do so remain in great peril.  In December 2015, the CFPB issued a bulletin to provide guidance to creditors, debt buyers and third-party debt collectors about compliance with the CFPA UDAAP prohibition and the FDCPA when conducting in-person debt collection visits, such as visits to a consumer’s workplace or home.

In addition to imposing the $5 million civil money penalty, the consent order prohibits Security Group from engaging in the debt collection practices found to be unlawful, and requires it to:

  • implement and maintain reasonable written policies and procedures regarding the accuracy and integrity of the information furnished to CRAs
  • correct or update any inaccurate or incomplete information furnished to CRAs
  • provide a prescribed notice to customers affected by inaccurate information furnished to CRAs
  • update its policies and procedures to include a specific process for identifying when information furnished to CRAs is inaccurate or requires updating (which must include at a minimum the monthly examination of sample accounts and monitoring and evaluation of disputes received from CRAs and customers)
  • submit a compliance plan to the CFPB to ensure that Security Group’s credit reporting and collections comply with applicable federal consumer financial laws and the terms of the consent order (which includes a list of items that, at a minimum, must be part of the compliance plan

It is noteworthy that while the consent order imposes a $5 million civil penalty on Security Group, unlike a 2015 CFPB consent order that required the respondents to refund amounts collected through in-person visits found to be unlawful, the consent order does not require Security Group to make refunds to consumers.

In its Spring 2018 rulemaking agenda, the CFPB stated that it “is preparing a proposed rule focused on FDCPA collectors that may address such issues as communication practices and consumer disclosures.”  It estimated the issuance of a NPRM in March 2019.

Republican Congressman Blaine Luetkemeyer, a member of the House Financial Services Committee, has sent letters to six agencies asking them to issue and publish statements concerning the effect and use of “agency statements-for example, guidance documents, supervisory letters or examination manuals—that have not gone through notice and comment rulemaking.”  One such letter was sent to the Federal Reserve Board and the other letter was sent to the FDIC, NCUA, SEC, OCC and CFPB.

In the letters, Rep. Luetkemeyer requests that, in such statements, the agencies affirm that agency statements that have not gone through notice and comment rulemaking “do not establish binding legal standards, and thus shall not be the basis of enforcement actions or supervisory directives, including but not limited to the issuance of ‘Matters Requiring Attention’ or ‘Matters Requiring Immediate Attention.'”

Rep. Luetkemeyer also requests that the agencies:

  • Clarify in their statements “that any failure to adhere to guidance shall not, directly or indirectly, form the basis of any other adverse supervisory determinations, such as ratings downgrades
  • Establish a standard practice by which any subsequently issued guidance includes a statement regarding the effect of the guidance consistent with the above limitations
  • Ensure that examiners are “appropriately educated about the use and role of guidance; and held accountable when guidance is applied inappropriately”

Rep. Luetkemeyer observes in the letters that greater clarity about the appropriate use and interpretation of guidance is needed because “[o]ver the years, a significant number of agency guidance, handbooks and circulars have been issued.  Almost none has been withdrawn or rescinded; similarly, almost none went through notice and comment rulemaking or was submitted to the Congress pursuant to the Congressional Review Act.”

In his letter to the five agencies, Rep. Luetkemeyer references the determination by the Government Accountability Office (GAO) that the Fed’s leveraged lending guidance was a rule for CRA purposes but was not submitted to Congress before it took effect.  Following that determination, the GAO determined that the CFPB’s bulletin on discretionary pricing by auto dealers was also a rule for CRA purposes.  The bulletin subsequently became the first guidance document to be disapproved by Congress pursuant to a joint CRA resolution.

In a statement issued about the signing of the CRA resolution by President Trump, the CFPB stated that the resolution’s enactment “clarifies that a number of Bureau guidance documents may be considered rules for purposes of the CRA, and therefore the Bureau must submit them for review by Congress.”  The CFPB also indicated that it plans to “confer with Congressional staff and federal agency partners to identify appropriate documents for submission.”