On November 22, 2021, the CFPB filed its seventh status report with the California federal district court hearing the lawsuit brought by the California Reinvestment Coalition, National Association for Latino Community Asset Builders, and two individual plaintiffs in 2019.  The purpose of the suit was to force the Bureau to issue a proposal implementing the small business data requirements of Section 1071 of the Dodd-Frank Act of 2010 after years of delay.  In the status filing, new CFPB Director Rohit Chopra, who was appointed to that role on October 12, 2021, was automatically substituted for Acting Director Dave Uejio as a defendant under the federal rules of civil procedure.

The status report reiterates the fact that the CFPB has met the deadlines to date under the Stipulated Settlement Agreement with the plaintiffs, including issuing the Small Business Regulatory Enforcement Fairness Act (“SBREFA”) outline on September 15, 2020; convening a SBREFA panel on October 15, 2020; and completing the SBREFA report on December 14, 2020.  Most recently, the Bureau met the deadline for issuance of the Section 1071 notice of proposed rulemaking (“Section 1071 NPRM”), which was due on September 30, 2021, but published slightly earlier on September 1, 2021.  The status report notes that comments on the Section 1071 NPRM are due by January 6, 2022.

Importantly, the status report indicates that after the Section 1071 NPRM rulemaking concludes, the CFPB will meet and confer with plaintiffs regarding an “appropriate deadline” for issuance of the final rule, consistent with the Stipulated Settlement Agreement.

In September 2021, Ballard Spahr attorneys held a webinar on the Section 1071 NPRM.  We also discussed the NPRM in a two-part podcast.  Click here to listen to Part I and here to listen to Part II.

Last week, the U.S. Court of Appeals for the Eleventh Circuit ordered rehearing en banc in Hunstein v. Preferred Collection and Management Services, Inc.  Yesterday, the Eleventh Circuit issued a memorandum indicating that for purposes of the en banc rehearing, the Court wants counsel to focus their briefs on the question: “Does Mr. Hunstein have Article III standing to bring this lawsuit?”

The Court also directed Preferred Collection and Mr. Hunstein to serve and file their briefs by, respectively, December 23, 2021 and January 18, 2022.  An en banc reply brief must be filed by February 1, 2022 and oral argument will be conducted during the week of February 21, 2022.

Although the Court has asked the parties to focus their briefs on Mr. Hunstein’s Article III standing, the Court could still reach the question of whether Mr. Hunstein has stated a FDCPA claim and conclude that he has not.  In the rehearing, the Court must decide whether to affirm or reverse the district court’s dismissal of the complaint for failing to state a claim.  The district court concluded that Mr. Hunstein had not sufficiently alleged that the debt collector’s transmittal of information to the vendor violated Section 1692c(b) of the FDCPA because the transmittal did not qualify as a “communication in connection with the collection of any debt.”

If the Eleventh Circuit concludes that Mr. Hunstein has Article III standing, it could also decide to affirm the district court’s dismissal for failure to state a FDCPA claim.  Alternatively, if the Eleventh Circuit rules that Mr. Hunstein does not have standing, it might still consider whether Mr. Hunstein has stated a FDCPA claim but any such discussion would be dicta.

The Federal Reserve Bank of Kansas City recently issued a research briefing titled “The Appeal and Proliferation of Buy Now, Pay Later: Consumer and Merchant Perspectives.”

The briefing divides buy now, pay later (BNPL) products into two main types based on how they are offered to consumers.  One type is offered directly to consumers by fintechs before a purchase is made and the other is offered during a purchase through a merchant who partners with a fintech or financial institution.  According to the briefing, the first type of BNPL products generally target millennials, Gen Z consumers, and financially underserved consumers such as those with no or bad credit.  The second type of BNPL products targets broader consumer segments, offers longer-term installments, and tend to have higher credit limits.

The briefing compares BNPL to other installment options, such as layaway and credit cards.   It finds that BNPL products allow consumers with no or bad credit who do not qualify for credit cards to access goods and services.  It describes interest-free BNPL products and layaway as comparable in their terms and costs but observes that BNPL allows consumers to take immediate possession of a product at the point of sale while layaway requires the consumer to wait until the product has been paid for in full.  In addition, if the use of layaway requires a service fee, BNPL can be the least expensive method of payment.  It also notes that interest-bearing BNPL products may be less expensive than credit cards because the average interest charge for BNPL is typically lower.

The briefing also discusses the risks to consumers (such as encouraging spending) as well as the benefits and risks to merchants who adopt BNPL products.

In July 2021, the CFPB published a blog post warning consumers of the risks of BNPL products.   Ballard Spahr held a webinar in August 2021, “Buy-Now-Pay-Later Credit: What You Need to Know.”

At an industry fair lending conference last week, officials from the U.S. Department of Justice (“DOJ”), the CFPB, and the U.S. Department of Housing and Urban Development (“HUD”) outlined fair lending priorities for their agencies.  These represent the first remarks by these regulators following the DOJ’s announcement of its major new “Combatting Redlining Initiative” on October 22, 2021, and it was the topic of each of their presentations.  Although the DOJ officials’ remarks largely reflected the press release concerning the new anti-redlining initiative, a few new revelations came to light related to both DOJ’s initiative and the CFPB’s general and fair lending priorities under its new Director Rohit Chopra.

DOJ.  Keynote speaker Kristen Clarke, the new Assistant Attorney General (“AAG”) for the DOJ’s Civil Rights Division, explained the agency’s “Combatting Redlining Initiative” and partnership with other federal and state agencies.  She stated that fair lending is “one of most significant issues of our time,” and that the Civil Rights Division is “compelled to tackle this issue [of redlining] head-on” because of the “widespread practice” in the lending industry and the fact that large homeownership disparities still exist in the U.S. along racial, ethnic and national origin lines.

AAG Clarke explained that the DOJ’s new initiative is the “most aggressive and coordinated effort” to address redlining to date.  She noted that the agency will work with the CFPB, HUD, prudential regulators, and U.S. Attorneys’ Offices and state attorneys general to carry out its initiative using a “whole of government” approach to root out redlining practices on a broad geographic scale.

AAG Clarke further explained that DOJ plans to investigate lenders of all types and sizes for redlining practices, including non-depository institutions that now originate the majority of residential mortgages in the U.S, and noted that several investigations are already underway. She also discussed the list of factors used by the DOJ to determine whether a lender is engaged in redlining activities.

Furthermore, AAG Clarke dwelt on the recent Cadence Bank and Trustmark National Bank redlining settlements, stating that the significance of those settlements is not just about the dollar amount, but DOJ’s goal to repair “decades of discrimination.”  She also noted that redlining settlements can ultimately benefit the health of institutions and their surrounding communities.

AAG Clarke further noted that DOJ seeks to work “cooperatively and collaboratively” with institutions to address the “deep-seated” redlining problem and wants to make a “positive and lasting impact”on the state of fair lending in the U.S.  She also noted that the DOJ will continue to pursue investigations and enforcement actions when discrimination is detected in underwriting and pricing in other types of lending beyond mortgage lending, broadly including “all types of discrimination acs the lending process and credit markets.”

In a separate panel, Jon Seward, who is Principal Deputy Chief of the Housing and Civil Enforcement Section, Civil Rights Division at DOJ, indicated that “in the not too distant future,” DOJ plans to announce an enforcement action against a non-depository institution.  Although the CFPB filed a redlining lawsuit against Townstone Financial, Inc., a nonbank mortgage lender, in 2020, the DOJ has not previously pursued redlining allegations against nonbanks, so this will break new ground for that agency.

CFPB.  Patrice Ficklin, Fair Lending Director of the CFPB, was also a keynote speaker.  She began her remarks by noting the profound impact the COVID-19 pandemic has had on low- and moderate-income communities and people of color, and the CFPB’s goal to promote equitable and inclusive economic recovery for all consumers.

Director Ficklin proceeded to outline the Bureau’s three key priorities under new Director Chopra’s leadership:

  1. Stimulate greater competitive intensity in the consumer financial services market.  She noted that greater competitive intensity would benefit individuals and families, citing the “dearth of competition” in the mortgage refinance market for individuals of color.  In keeping with Director Chopra’s priorities honed during his recent tenure as an FTC commissioner, the CFPB will pay close attention to practices that may hamper competition by “dominant incumbents,” including those in Big Tech.
  1. Sharpened focus on repeat offenders that violate agency or court order.  Director Ficklin noted that the Bureau has entered into a substantial number of consent orders and will closely monitor compliance with them.  When needed, the CFPB will work closely with state and federal regulators to address non-compliance and fashion appropriate remedies.
  1. CFPB will look for ways to restore relationship banking in an era of Big Data.  As artificial intelligence and machine learning credit models proliferate, there is less transparency into how credit decisions are made through “black boxes” today, and sometimes those practices can reinforce bias and discrimination.  According to Director Ficklin, preserving relationship banking is “crucial to our nation’s resilience and recovery, particularly during times of stress.”

Director Ficklin then outlined the Bureau’s fair lending priorities:

  • Redlining.  She noted that redlining has been a top priority since the Bureau’s inception in 2011 and both the Trump and Biden administrations, and that the CFPB intends to take “fresh approaches,” citing the DOJ’s anti-redlining initiative.  She also underscored Director Chopra’s remarks at the DOJ press conference announcing the initiative that the CFPB will focus on digital redlining going forward, including concerns about “black box” algorithms that may reinforce biases that already exist.
  • Appraisal bias.  She noted this was one of Director Chopra’s key priorities.  She explained that home valuations have traditionally been based on human judgment and discretion, and additional objective controls are needed.  The CFPB has already held meetings with industry representatives concerning the policies, procedures and controls currently in use to better understand valuation issues.  The Bureau is also partnering with the FHFA and prudential agencies on a long-standing rulemaking for QC standards for automated valuation methods stemming from a requirement in the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which is currently in the pre-rule stage.  An interagency taskforce established in June by President Biden is expected to issue a report with recommendations in the future.
  • Special purpose credit programs (“SPCPs”).   Also a top priority of Director Chopra, the CFPB seeks to promote usage of SPCPs to increase equitable access to credit.  Ms. Ficklin noted the Bureau’s December 2020 guidance on SPCPs and encouraged lenders to reach out to CFPB to discuss plans to launch an SPCP.
  • Small business lending.  The CFPB issued a notice of proposed rulemaking that would implement Section 1071 of the Dodd-Frank Act in September 2021, and Ms. Ficklin encouraged public comments, which are due on January 6, 2022.  She noted that the Bureau also launched a small business webpage on its website, including a “tell your story” portal for small business applicants to share their stories about applying for credit to help the CFPB better understand the small business lending market.
  • Limited English Proficiency (“LEP”) consumers.  She noted that LEP individuals face unique challenges in learning about and accessing consumer financial products and services because disclosures are generally not available in non-English languages.  She briefly explained the CFPB’s LEP guidance issued in January 2021 that sought to provide better guidance to the industry on serving LEP consumers, and in September 2021, the Bureau’s publication of a blog post on how mortgage lenders can better serve LEP borrowers.
  • Focus on unfairness and discrimination in examinations and supervision.  Ms. Ficklin stressed that violations of law will not be tolerated, especially during the pandemic.  In the CFPB’s quest to advance racial and economic equity, the Bureau has now increased resources targeted toward small business lending.  The CFPB will also pursue “other illegal practices outside of ECOA and HMDA,” with the goal of using its authority to narrow the racial wealth gap and ensure markets are clear, transparent and competitive.  Again, Director Chopra’s focus on anticompetitive market behavior appears to be evident in her remarks.

HUD.  David Enzel, who is the General Deputy Asst. Secretary for Fair Housing, at HUD, also expressed his concerns about redlining practices.  He noted that HUD maintains a dedicated team in Washington focused on that topic and that several “significant issues” are currently underway at the agency.  Mr. Enzel encouraged proactive use of “second look” review programs for both credit applications and low appraisals and close review of advertising practices for intentional and unintentional bias, especially those that are digital and custom-tailored to individuals, which can sometimes be based on race and ethnicity factors.

This past Friday, the CFPB issued guidance to its staff titled “Ethics Guidance for Engaging with Former Federal Employees.”

In an accompanying statement, Director Chopra indicated that the guidance was needed to protect the public interest from potential risks and misconduct associated with the “revolving door.”  He described the “revolving door” (i.e. when an individual moves back and forth between government and private employment) as a phenomenon that allows former government employees to “market themselves to regulated entities, law firms, and lobbying organizations by touting their knowledge of the inner workings of a regulatory agency” and expressed concern “that some former employees may have a financial incentive to exploit confidential information to which they may have had access.”

Director Chopra warned that the guidance “will allow the CFPB to detect activity by former employees and other government agencies who may be violating existing ethics and confidential information disclosure laws and regulations” and that the CFPB will use information provided by CFPB employees about such potential violations “to make appropriate referrals to civil and criminal authorities” and, in the case of  former government attorneys, to “make referrals to state licensing bodies and bar associations that may wish to consider disciplinary proceedings.”

The guidance advises CFPB employees not to give preferential treatment to former federal government employees or their new employers and to treat former employees “in the same manner as all other members of the public who have business pending before the Bureau.”  However, in his statement, Director Chopra goes a step further, indicating that stricter scrutiny will apply to matters involving former CFPB employees.  Director Chopra states that “[CFPB] alumni will not get special treatment.  In fact, it will be just the opposite.  We will be applying heightened scrutiny to matters and decisions where a party has employed or retained the services of a former employee….”

In addition to advising CFPB staff not to give preferential treatment to former CFPB employees, the guidance advises staff to:

  • Protect supervisory, confidential, and non-public Bureau information by not sharing such information with another CFPB employee “as soon as [he or she] submits their paperwork to transition out of the Bureau.”
  • Report if a former employee communicates or appears before the Bureau in connection with a specific-party matter that the employee worked on while employed by the government
  • Report any suspected disclosure by a former employee of confidential or non-public Bureau information
  • Report any contact by a former employee with the Bureau on behalf of any third party within the first year following the employee’s departure
  • Report any “behind-the-scenes assistance” by a former Bureau attorney on a specific-party matter in which the attorney participated while at the Bureau

The CFPB has not indicated whether a specific ethics-related incident occurred that prompted the issuance of the guidance.

A group of Democratic House members, joined by a Republican House member, has reintroduced a bill  (H.R. 5974) that would make consumer credit extended to any consumer subject to the Military Lending Act’s “all-in” 36% rate cap.

The bill provides that 10 U.S.C. Sec. 987(b) applies “to a creditor who extends consumer credit to a consumer to the same extent as such section applies to a creditor who extends credit to a covered member or a dependent of a covered member.” (emphasis added)  Sec. 987(b) establishes the 36% cap.

The MLA provides that the 36% cap does not apply to:

  • Residential mortgages
  • A loan to purchase a motor vehicle when the loan is secured by the motor vehicle purchased
  • A loan to buy personal property when the loan is secured by the property purchased

In addition, the Department of Defense regulations implementing the MLA make credit transactions that are not subject to Regulation Z generally exempt from the MLA.

The bill includes the MLA exemptions for residential mortgages and purchase money loans secured by a motor vehicle but does not expressly exempt purchase money loans secured by personal property from the cap.  The bill also contains an exemption for loans made by federal credit unions subject to the NCUA usury limit.  Thus, it is unclear whether the bill, in applying the MLA rate cap to consumer credit extended to any consumer “to the same extent as [the MLA rate cap] applies to a creditor who extends credit to a covered member or a dependent of a covered member,” incorporates all MLA exemptions.

While the bill could be passed by the House, it seems doubtful that it would gain any traction in the Senate where Republicans can use the filibuster to block the bill.

The bill is opposed by the American Financial Services Association and other trade groups.  AFSA asserts that, contrary to the bill sponsors’ claims, the bill will actually harm consumers’ access to credit during this time of economic uncertainty.

The trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule) have filed their opening brief with the Fifth Circuit.  The trade groups filed an appeal with the Fifth Circuit from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021 (which would have been until June 13, 2022).

The Fifth Circuit subsequently entered an order staying the compliance date of the payment provisions until 286 days after the trade groups’ appeal is resolved.

The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule.  They also argue that:

  • Ratification cannot cure the constitutional defect because the defect concerns the unlawful exercise of governmental authority by the Bureau and its Director, not the authority of an agent to make decisions on behalf of the Bureau or its Director.  The only appropriate remedy for an invalid rulemaking is a valid rulemaking.
  • The 2017 Rule continues to be invalid because there are two continuing separation of powers violations.  One violation arises from the Bureau’s funding mechanism which does not require Congressional appropriations.  The other violation arises from the Bureau’s unconstitutional exercise of legislative powers granted exclusively to Congress.  If Congress gives authority to agencies, it must articulate an intelligible principle.  There is no intelligible principle in the delegation of appropriations to the Director or in the Bureau’s “vague and sweeping UDAAP authority invoked to justify the [2017] Rule.”
  • Even if ratification can sometimes cure defects in rulemaking, the Bureau’s ratification of the payment provisions violates both the CFPA and the APA because it was unlawful and arbitrary and capricious.  The ratification violates the APA and CFPA because it was a rulemaking that required notice-and-comment under the APA and did not satisfy the CFPA’s requirement for a cost-benefit analysis.  The ratification is arbitrary and capricious because the Bureau’s 2020 rulemaking revoking the 2017 Rule’s ability-to-repay provisions eliminated the justifications for the payment provisions by rejecting the Bureau’s prior UDAAP interpretation.  The ratification was also inconsistent with the cost-benefit analysis required by the CFPA because the Bureau’s 2017 cost-benefit analysis of the payment provisions relied on the ameliorative impacts of the ability-to-repay provisions which the 2020 rulemaking completely removed.
  • Independent of the unlawful ratification, the payment provisions must be set aside as unlawful and arbitrary and capricious.  The payment provisions are unlawful because they fall outside of the Bureau’s UDAAP authority.  The Bureau based the payment provisions on unreasonable and overbroad interpretations of its UDAAP authority.  The payment provisions are arbitrary and capricious because the Bureau failed to consider the payment provisions’ countervailing effects, such as the increased likelihood that a loan will enter into collections sooner than it would have (if at all) and the Bureau acted based on stale data.  At a minimum, the payment provisions are arbitrary and capricious because of their coverage of separate installments of multi-payment installment loans and debit- and prepaid- card payments.  These payments and payment-transfer methods do not engender the harms targeted by the provisions.

 

After reviewing federal regulators’ traditional theory of redlining, we discuss the types of underwriting practices that are likely targeted by Director Chopra’s recent comments expressing concern about “algorithmic redlining,” examine how the use of machine learning (ML) underwriting models incorporating alternative data can be more inclusive than traditional logistic regression models and result in more approvals for protected class members and “credit invisibles,” and offer our thoughts on actions that technology and credit providers should take in response to Director Chopra’s comments when developing and using ML models.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Chris Willis, Co-Chair of the firm’s Consumer Financial Services Group.

Click here to listen to the podcast.

Earlier this week, the CFPB issued a Request for Information (RFI) regarding an assessment of the significant amendments to the Home Mortgage Disclosure Act rules, known as Regulation C, adopted in October 2015 and subsequently revised in several additional rulemakings (the “HMDA Rule”).  Responses to the RFI will be due 60 days after it is published in the Federal Register.  It is clear from the title of the CFPB’s press release announcing the assessment, “CFPB Seeks Input on Detecting Discrimination in Mortgage Lending,” that the CFPB is treating this assessment as an initiative addressing fair lending.

Under the Dodd-Frank Act, the CFPB must conduct an assessment of each significant rule or order it has adopted under federal consumer financial law and publish a report of each assessment no later than five years after the effective date of the rule or order.  The CFPB advises that while it determined that the HMDA Rule is not a significant rule for purposes of the Dodd-Frank Act, the CFPB “considers the HMDA Rule to be of sufficient importance to support the [CFPB] conducting a voluntary assessment.”  The CFPB plans to issue a report of its assessment not later than January 1, 2023 (most of the October 2015 amendments became effective on January 1, 2018).

The CFPB advises that it intends to focus its evaluation on the following primary topic areas: (1) institutional coverage and transactional coverage, (2) data points, (3) benefits of the new data and disclosure requirement, and (4) operational and compliance costs.  The CFPB’s public guidance that sets forth the balancing test used to determine whether and how HMDA data should be modified prior to its disclosure to the public to protect applicant and borrower privacy is outside the scope of the assessment.  With regard to operational and compliance costs, the CFPB notes that  it “will work from the methods and findings it published with the cost-benefit analysis in the 2015 HMDA Final Rule [and] will also use comments responding to this request for information to determine whether those methods and findings remain valid.”

The CFPB requests information on a number of specific issues, including:

  • Data and other factual information that the CFPB may find useful in executing its assessment plan and answering related research questions, particularly research questions that may be difficult to address with the data currently available to the CFPB.
  • The specific data points reported under the HMDA Rule that help meet the objectives of the Rule.
  • Data and other factual information about the benefits and costs of the HMDA Rule for communities, public officials, reporters, mortgage industry participants, or other stakeholders, the effects of the rule on transparency in the mortgage market, and the utility, quality, and timeliness of HMDA data in meeting the Rule’s stated goals and objectives.
  • Data and other factual information about the accuracy of estimates of annual ongoing compliance and operational costs for HMDA reporters, or the analytical approach used to estimate these costs, as delineated in the Small Business Review Panel Report issued by the panel that the Bureau convened and chaired in 2014 pursuant to the Small Business Regulatory Enforcement Fairness Act.  In particular, the CFPB seeks comments:
    • Related to the nature and magnitude of any operational challenges in complying with the HMDA Rule, and whether they are significantly different from those delineated in the published Report of the Small Business Review Panel.
    • Delineating and describing the ongoing costs incurred in collecting and reporting information for the HMDA Rule, and whether they are significantly different from those delineated in the published Report of the Small Business Review Panel.
  • Recommendations for modifying, expanding, or eliminating any aspects of the HMDA Rule, including but not limited to the institutional coverage and loan-volume thresholds, transactional coverage, and data points.

In a surprising turn of events this morning, the U.S. Court of Appeals for the Eleventh Circuit issued an order sua sponte to rehear Hunstein v. Preferred Collection and Management Services, Inc. en banc.  The sua sponte order was issued after an Eleventh Circuit judge requested a poll on whether the case should be reheard en banc and a majority of the active judges voted in favor of the rehearing.  The order also expressly vacated the existing substitute opinion issued by the panel earlier this month, meaning that the opinion is no longer binding precedent in the Eleventh Circuit and should not be cited as having any precedential value within the Eleventh Circuit or beyond.

Today’s order to rehear the case en banc follows the panel’s 2-1 decision last month, in which the panel issued a substitute opinion in response to the first effort to obtain rehearing by the defendant.  In the substitute opinion, the majority affirmed its original April 2021 holding that the plaintiff had Article III standing and sufficiently pled a claim but also included analysis of the U.S. Supreme Court’s intervening decision in TransUnion v. Ramirez in the panel’s standing analysis.  In dissent, Judge Tjoflat argued that the majority’s decision conferred standing too broadly in light of Ramirez and that Congress did not intend for a violation of FDCPA §1692c(b) to create standing in the absence of actual damages.

The next step will be for the Eleventh Circuit to state the specific issues on which it requests briefing and establish the timing for rehearing en banc.  We are hopeful that the full court will agree to consider not just the standing issue on which the panel divided, but also the broader issue of whether any FDCPA claim can exist under the circumstances in light of the plain language of the FDCPA and other considerations, all of which were briefed extensively in prior amicus petitions supporting the defendant’s original rehearing effort earlier this year.