The CFPB recently announced that it has issued a Compliance Assistance Statement of Terms Template (“CAST Template”) through its Compliance Assistance Sandbox Policy (“CAS Policy”) after receiving an application from Build Commonwealth, Inc. (“Commonwealth”).

The Commonwealth CAST Template can be used by employers as the basis for an application to the CFPB to obtain approval for an automatic savings program to assist employees in building emergency savings (“Autosave Program”).  The CFPB instituted the CAS Policy in 2019 in an attempt to encourage innovation through the testing of financial products that could benefit consumers but might pose regulatory uncertainty.  The CAS Policy includes CAST Templates, which allow third-parties (e.g., service providers, consumer groups, trade associations, etc.) to secure a template that can serve as the basis for approval applications to the CFPB from covered entities providing consumer financial products or services.  An approved applicant that complies in good faith with the approval’s terms has a “safe harbor” from liability for specified conduct during the testing period.

An Autosave Program permits employees who elect to participate in the program to designate a certain amount of their paycheck to the employee’s already existing account at a financial institution.  If the employee does not designate an account, the employer may create an Autosave account for the employee at a financial institution designated by the employer.  In its application for a CAST Template, Commonwealth indicated that the template was needed for Autosave Programs because of regulatory uncertainty arising from the application of the “compulsory use” prohibition in the Electronic Fund Transfer Act and Regulation E to this default feature.

The prohibition makes it unlawful for any person to require a consumer to establish an account for the receipt of electronic fund transfers with a particular financial institution as a condition of employment or receipt of a government benefit.  The Regulation E commentary indicates that, consistent with the prohibition, an employer can give employees the choice of having their salary deposited at an institution designated by the employer or receiving their salary by another means, such as by check or cash.  In connection with its prepaid card rule, the CFPB indicated that while an employer must provide its employees with a choice regarding how to receive their salary, an employer, consistent with consumer choice, could give employees a choice between two or more payment alternatives but employ a default payment method if an employee fails to indicate his or her preference.  In the CAST Template issued to Commonwealth, the CFPB indicated that Commonwealth stated in its application “that the Autosave Program is compliant with Regulation E because it embodies precisely this type of reasonable default enrollment method.”

If the CFPB grants an employer’s application for an approval based on the Commonwealth CAST Template, the employer would receive a CAST stating that, subject to the employer’s good faith compliance with the CAST, the Bureau approves the employer’s Autosave Program under the compulsory use provisions of the EFTA and Regulation E.  Such approval would provide the employer with a safe harbor from liability for a violation of the compulsory use provisions pursuant to 15 U.S.C. 1693m(d).  Section 1693m(d) states that the provisions of the EFTA “imposing any liability shall [not] apply to–(1) any act done or omitted in good faith … in conformity with any… approval by an official or employee of the [CFPB] or the Federal Reserve System duly authorized by the Bureau or the Board to issue such interpretations or approvals under such procedures as the Bureau or the Board may prescribe therefor.”

The Commonwealth CAST Template contains certifications that must be included in an employer’s application.  Among other things, an employer must certify that employees will be given a notice that provides certain information such as that participation in the Autosave Program is not a condition of employment, the employee has the right to select the institution where Autosave earnings will be deposited, and if the employee does not identify an account to which such earnings should be directed, an Autosave Account will be created for the employer at an institution designated by the employer.

On July 31, 2020, the Office of the Comptroller of the Currency (OCC) approved the national bank charter application of Varo Bank, N.A., a wholly-owned subsidiary of fintech Varo Money, Inc. The approved application is for a full-service charter, not the OCC’s controversial FinTech charter that is currently the subject of ongoing litigation. In a statement issued after presenting the charter, Acting Comptroller Brian Brooks discussed the value and attributes of a national bank charter, including the ability to operate nationwide under a uniform regulatory framework subject to a single primary prudential supervisor, and the confidence the charter inspires in consumers. Acting Comptroller Brooks stated that Varo Bank’s full-service charter, the first granted by the OCC to a consumer fintech, “represents the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”

Acting Comptroller Brooks congratulated Varo Bank leadership and staff, both in his formal statement posted on the OCC website and via a tweet on July 31, 2020: “Congratulations to Colin Walsh and the Varo Money, Inc. team — the first consumer fintech to receive a national bank charter. As other fintechs mature and grow nationally, the message from the federal banking system is: come on in. The water’s fine!”

Varo Bank, N.A.’s application to the FDIC for deposit insurance was approved in February of 2020 subject to conditions that included OCC charter approval, and approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) permitting Varo Money, Inc. to become a bank holding company, which the Company reports was received.

As the parent of a full-service national bank, Varo Money, Inc. will be a Bank Holding Company (BHC), subject to Federal Reserve supervision and will be subject to the limits on nonbanking activities contained under Federal Reserve Board Regulation Y and the Bank Holding Company Act of 1956, as amended.

As we have discussed previously, two recent FDIC deposit insurance approvals for proposed fintech-owned Utah industrial banks, and the FDIC’s proposed rule setting forth requirements and conditions it would impose on industrial bank / industrial loan company (collectively, “ILC”) deposit insurance applications, have revived the long-dormant ILC as an alternative for fintechs that wish to own a bank but engage in commercial activities beyond those permitted for BHCs. However, as the Varo Bank N.A. charter demonstrates, eligible fintechs whose activities and ownership structure are permissible for BHCs may elect to pursue an OCC full-service charter option. The OCC and FDIC both continue to demonstrate keen interest in supporting technology and innovation in the delivery of consumer financial services.

In the wake of the U.S. Supreme Court’s June 29, 2020 decision in Seila Law LLC v. Consumer Financial Protection Bureau, which held that the CFPB’s leadership structure violates the separation of powers mandated by the U.S. Constitution and made the Bureau’s Director removable by the President at will, many are urging Congress to further reform the Bureau’s leadership structure, possibly by replacing the CFPB Director with a five-member commission. Proponents of Congressional action to further address CFPB leadership include CFPB Director Kathy Kraninger, Republican members of the House Financial Services Committee, sponsors of legislation introduced in Congress, and many trade associations.

A bill introduced in the U.S. Senate on June 17, 2020 would re-name the CFPB the “Financial Product Safety Commission”, and change its leadership to a five-member commission. The Financial Product Safety Commission Act of 2020 was introduced by U.S. Senator Deb Fischer (R-Neb.), who since 2013 has introduced successive versions of legislation seeking to reform the CFPB’s leadership structure.

A companion bill, H.R. 6116, the Consumer Financial Protection Commission Act, was introduced in the U.S. House of Representatives by Representative Blaine Luetkemeyer (R-MO) in March 2020.

Propelled by the U.S. Supreme Court’s Seila Law decision, the sponsors of the CFPB restructuring bills are urging Congress to move forward and adopt the bills. Both Senator Fischer and Representative Luetkemeyer issued statements on June 29, 2020 calling for the passage of their respective bills.

Also on June 29, trade associations including the Consumer Bankers Association, the Credit Union National Association, and the American Bankers Association issued statements calling for Congress to pass legislation creating a bipartisan commission to lead the CFPB.

S. 3990 and H.R. 6116 both provide that the five commissioners of a re-named consumer financial products watchdog agency, the “Financial Product Safety Commission” (per S. 3990) or the “Consumer Financial Protection Commission” (per H.R. 6116), would be appointed by the President, confirmed by the Senate, and serve staggered five-year terms. One commissioner would be appointed by the President to serve as Chair. No more than three commissioners could be members of the same political party. Until all five commissioners and the Chair are appointed, the current CFPB Director would serve as Chair of the Commission. The President could remove a commissioner for “inefficiency, neglect of duty, or malfeasance in office”. The proposed legislation also would establish quorum requirements, the authority of the Chair, and limitations on that authority.

Earlier this year, numerous trade associations joined in letters to Representative Luetkemeyer and Senator Fischer supporting the bills, citing the benefits of the proposed restructure including a more stable and balanced regulatory environment and prevention of executive and political interference in the supervision and regulation of financial institutions.

The letters also point out that the original version of the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted by the U.S. House of Representatives in 2010 provided that the CFPB would be led by a bipartisan five-member commission. However, as ultimately enacted, Congress placed the CFPB under the leadership of a single Director insulated from at-will removal.

In an opinion published in on-line newsletter The Hill on July 27, 2020, Senator Fischer again called on Congress to adopt her bill replacing the CFPB’s single Director with a five-member commission. She noted that while the Seila Law decision was a “win when it comes to separation of powers”, she urged that further action is needed in order for the CFPB to be the independent agency envisioned by its original architects: “Beyond questions of constitutionality and prudence, the CFPB’s current single-directorship model means that the agency’s extensive regulatory, investigative, and enforcement actions are subject to change with every presidential election, creating a whiplash effect. The agency is simply too powerful for this to be sustainable…”.

On July 30, 2020, as reported in the American Banker, CFPB Director Kathy Kraninger told the House Financial Services Committee she would welcome action by Congress to address the CFPB’s leadership structure. During the hearing, Republican members of the Committee made statements supporting the idea of a bipartisan commission to lead the CFPB.

While the narrow scope of the current bills might make them better candidates for adoption than previous bills such as 2016’s CHOICE Act, that not only would have changed the CFPB’s leadership but also introduced a broad array of controversial provisions, we still think it is unlikely that the current bills would be supported by Democratic lawmakers. Republican support for the current bills seems to be growing, but it is doubtful that the bills will gain traction this year. In addition, while we continue to share industry’s preference for the CFPB to be led by a commission, the Supreme Court’s Seila Law decision calls into question whether insulation from at-will removal would be deemed appropriate even for a bi-partisan five-person leadership structure. Although the Supreme Court did not overrule its 1935 decision in Humphrey’s Executor v. United States, which upheld the constitutionality of the for-cause removal protection afforded to the FTC’s five commissioners, it narrowly read that decision to create an exception to the President’s unrestricted removal power only for “multimember expert agencies that do not wield substantial executive power.” The Court contrasted “the New Deal-era FTC upheld [in Humphrey’s Executor]” with the CFPB, highlighting the CFPB Director’s authority to “promulgate binding rules fleshing out 19 federal statutes, including a broad [UDAAP prohibition]”, “unilaterally issue final decisions awarding legal and equitable relief in administrative adjudications”, and “seek daunting monetary penalties on behalf of the United States in federal court.”

As discussed in our June 12th post, the New York City Department of Consumer Affairs (“DCA”) issued new debt collection rules related to limited English proficiency servicing. These rules took effect June 27, 2020, but due to the COVID-19 crisis, DCA provided the industry with a 60-day enforcement grace period until August 26, 2020.

After discussions with industry trade groups requesting clarifications on the new rules, DCA agreed to issue formal guidance answering Frequently Asked Questions (“FAQs”). This formal guidance was released today, August 6, 2020. Specifically the FAQs clarify the following:

  • Applicability of the rules: The new rules apply to anyone required to obtain a debt collection agency license and certain provisions also apply to creditors as well. The provisions applicable to creditors are laid out in detail in the guidance. Additionally, the guidance clarifies that the rules do not apply to litigation activities that only a licensed attorney can perform.
  • Language access services: “Language access services” means any service available in a language other than English. Debt collectors are permitted to provide some language access services and not others. The new rules do not require debt collectors to offer any language access services but provide that if a collector does not offer any such services, that must be disclosed in its initial validation notice and on its public website.
  • Annual reports: Annual reports must be maintained in the debt collection agency’s records and produced to DCA upon request. The annual report form is available at nyc.gov/BusinessToolbox.
  • Recording language preference: Debt collectors are never permitted to infer the language preference of a consumer. Debt collectors are not required to request a consumer’s language preference in each communication with the consumer. Collectors must make reasonable attempts to obtain and record the language preference, but if a consumer declines to provide it, the obligation can be satisfied by recording the non-response.
  • Legally required notices: A debt collector must confirm the identity of the consumer and provide any legally required notices before requesting the consumer’s language preference. If the collector has language access services that enable them to communicate in the consumer’s preferred language, the collector must offer those services and repeat all notices in that language.
  • Debt collectors involved in numerous business activities: If a collector is engaged in numerous business activities, it is only required to include the two required statements of 6 RCNY § 5-77(h) on its websites that relate to the collection of debts after debt collection procedures have begun.

The DCA notes in its guidance that it intends to modify the new rules to align with the interpretations provided in its FAQs. While this guidance is helpful in clarifying some of the questions these new rules raise, many questions still remain and unfortunately, DCA declined to provide any model disclosures in the FAQs relating to how to disclose the nature of what, if any, language access services are provided, to the dismay of many.

On August 3, 2020, the Federal Financial Institutions Examination Council (“FFIEC”) issued a joint statement to provide prudent risk management and consumer protection principles for financial institutions to consider when working with borrowers as consumer and business loans near the end of initial loan accommodation periods during the coronavirus pandemic. The guidance notes that the principles outlined in the joint statement apply to both commercial and retail loan accommodations and are consistent with the Interagency Guidelines Establishing Standards for Safety and Soundness. Furthermore, the principles are intended to be tailored to a financial institution’s size, complexity and loan portfolio risk profile, as well as the industry and business focus of its customers or members.

The joint statement recognizes the significant adverse impact that the COVID-19 crisis has had on consumers, businesses, financial institutions, and the U.S. economy. The Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES Act”) provided several forms of financial relief to businesses and individual borrowers, and some states and localities have provided similar credit accommodations. Many financial institutions have also offered voluntary credit accommodations to borrowers.

The FFIEC members reiterate their prior guidance, the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (revised) dated April 7, 2020 (“Interagency Statement on Loan Modifications”), that encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual loan payment obligations because of COVID-19. Specifically, that guidance stated that loan accommodations are generally viewed as positive actions that can mitigate adverse impacts on borrowers.

The joint statement notes that while some borrowers will be able to resume contractual payments at the end of an accommodation, others may be unable to do so due to continuing financial challenges. The FFIEC members encourage financial institutions to consider prudent accommodation options that are based on an understanding of the borrower’s credit risk, consistent with applicable laws and regulations, and designed to ease cash flow pressures on affected borrowers while improving their capacity to service debt and facilitating a financial institution’s ability to collect on its loans. Such arrangements may mitigate long-term borrower financial impacts by avoiding delinquencies or other adverse consequences.

FFIEC members encourage financial institutions to observe several risk management and consumer protection principles to work with borrowers in a safe and sound manner as loans near the end of accommodation periods, as described below. Importantly, the guidance recommends that financial institutions should ensure that clear, accurate and timely information is provided to both borrowers and guarantors regarding any accommodation.

  • Prudent risk management practices: Such practices include identifying, measuring, and monitoring credit risk for loans that receive accommodations. Monitoring and assessing the terms of loan accommodations on an ongoing basis enables financial institutions to recognize any credit deterioration and loss exposure in a timely manner. The guidance also recommends effective management reporting to ensure that the management team fully understands the scope of loans that received an accommodation, the types of initial and any additional accommodations provided, when the accommodation periods end, and credit risk for higher-risk segments of the institution’s loan portfolio.
  • Well-structured and sustainable accommodations: The guidance recommends that a financial institution’s determination of whether to consider additional accommodation options for a borrower should be based on a comprehensive review of how the hardship has affected the financial condition and current and future performance of the borrower. Additional accommodations should be well-designed and consistently applied to mitigate losses both for the borrower and the financial institution while helping the borrower resume structured, affordable and sustainable repayment of amounts contractually due over a reasonable period of time.
  • Consumer protection: The guidance encourages financial institutions to provide consumers with available options for repaying any missed payments at the end of their accommodation to avoid delinquencies or other adverse consequences. Financial institutions are also encouraged, where appropriate, to provide consumers with options for making prudent changes to credit product terms to support sustainable and affordable long-term payments. The guidance also recommends several effective approaches to consumer protection risk management.
  • Accounting and regulatory reporting: The guidance advises financial institutions to follow applicable accounting and regulatory reporting requirements for all loan modifications as the term “modification” is used in generally accepted accounting principles (GAAP) and regulatory reporting instructions, which includes maintenance of appropriate allowances for loan and lease losses (ALLL) and allowances for credit losses (ACL), as applicable. The guidance also advises financial institutions to consult Section 4013 of the CARES Act (Temporary Relief from Troubled Debt Restructurings) and the Interagency Statement on Loan Modifications.
  • Internal control systems: Controls should include quality assurance, credit risk review, operational risk management, compliance risk management, and internal audit functions that are commensurate with the size, complexity and risk of a financial institution’s activities. Targeted testing of the process for managing each stage of the accommodation is also advisable. The guidance notes that if these functions are outsourced, a financial institution remains responsible for oversight of the service provider.

Acting Comptroller Brooks recently revealed the OCC’s plans to create a national payments charter for payment processing companies.  After discussing the new charter’s intended purpose and benefits, we look at the OCC’s planned two-phase roll-out, how a payments charter would differ from the OCC’s fintech charter, other charter options for non-bank payment processors, and possible legal challenges.

Click here to listen to the podcast.

In March 2020, the Fifth Circuit, on its own motion, entered an order vacating the panel’s ruling in All American Check Cashing that the CFPB’s structure was constitutional and granting rehearing en banc.  On June 30, the Fifth Circuit tentatively calendared the case for en banc oral argument during the week of September 21, 2020 and ordered the parties to file supplemental briefs.  All American filed its supplemental en banc brief at the end of last week.

The underlying case is an enforcement action filed by the CFPB against All American in 2016 in a Mississippi federal district court for alleged violations of the CFPA’s UDAAP prohibition.  In March 2018, the district court denied All American’s motion for judgment on the pleadings based on the Bureau’s unconstitutionality and ruled that the CFPB’s structure was constitutional.  In opposing All American’s motion to certify the case for interlocutory appeal, the CFPB argued that a notice of ratification of the action by former Acting Director Mulvaney cured any constitutional defect and mooted the constitutional issue.  The district court did not rule on the CFPB’s ratification argument and in March 2018 granted All American’s motion for interlocutory appeal which the Fifth Circuit agreed to hear.

With the U.S. Supreme Court having ruled in Seila Law that the Bureau’s structure is unconstitutional, the en banc Fifth Circuit can be expected to reverse the panel’s ruling upholding the Bureau’s constitutionality.  Having ruled that the CFPB’s structure was constitutional, the panel did not reach the CFPB’s ratification argument.  On July 17, the CFPB filed a declaration with the Fifth Circuit in which Director Kraninger stated that she has ratified the Bureau’s enforcement action against All American.  Accordingly, the ratification issue could now be decided by the en banc Fifth Circuit.

In its supplemental brief, All American argues that dismissal of the Bureau’s enforcement action is the proper remedy for the constitutional violation.  According to All American, if a court declares an agency unconstitutional without giving meaningful relief to the prevailing challenger, the Constitution’s structural separation of powers guarantee would become meaningless because victims of constitutional violations would have no incentive to challenge such violations.

As an independent grounds for dismissal of the enforcement action, All American argues that the district court lacked jurisdiction to hear the action.  According to All American, because of the CFPB’s defective structure, the CFPB was not lawfully vested with executive power when it filed the enforcement action.  As a result, it lacked standing to sue and the district court never had subject matter jurisdiction over the action.

All American also argues that the ratification of the enforcement action by Director Kraninger and former Acting Director Mulvaney does not remedy the constitutional defect for the following principal reasons:

  • Unlike an action tainted by an appointment defect that involves an agent’s authority, an action taken by a structurally defective agency cannot be ratified.
  • Even if the ratification doctrine applies, U.S. Supreme Court precedent requires that two conditions must be satisfied for a valid ratification: the party ratifying an act must have been able (1) to do the act ratified at the time the act was done, and (2) to also do the act at the time of ratification.
    • The first condition cannot be satisfied because, as a result of the constitutional defect, the CFPB had no authority to bring the enforcement action at the time it was filed nor did it have standing to bring the action.
    • The second condition cannot be satisfied because the CFPB’s purported ratification (whether by Director Kraninger or former Acting Director Mulvaney) occurred after the expiration of the relevant 3-year CFPA statute of limitations.
  • The CFPB’s prosecution of the enforcement action after the Supreme Court’s Seila Law decision remains unconstitutional because the Bureau’s funding structure violates the U.S. Constitution’s Appropriations Clause in Article I by insulating the Bureau from congressional oversight, a problem made worse by the decision because the Bureau is now an executive agency “subject to full control by a President unconstrained by Congress’s appropriations power.”

As we reported, Acting Comptroller of the Currency Brian Brooks has previewed the OCC’s plans to introduce another special purpose national bank charter that would give payment companies a nationwide servicing platform and federal preemption of state laws regarding licensing and regulation of money transmitters and payment services providers.  Acting Comptroller Brooks’ statements drew swift reaction in the form of a July 29, 2020 letter from seven leading banking trade associations.

Recognizing the role of technological innovations for financial services, the trade associations stated their belief that “when banks and technology companies partner, they can deliver customers the best of both worlds: innovative services that customers demand from a partner that they can trust with their financial future.”

The trade associations expressed serious concerns regarding the “narrow-purpose payments charter” and “encourage[d] the OCC to continue to proceed carefully, deliberately, and transparently as it has throughout its deliberations on new charters.”  In particular, the trade associations expressed concern whether an entity that owned a narrow-purpose payments charter would be deemed a bank holding company, subject to regulation and oversight under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and Federal Reserve Board Regulation Y.  In their letter, the associations acknowledged that holders of limited purpose charters in the past have a specific exemption from “bank” status under the BHCA, but argued that “no such specific exemption exists for the special purpose charter under consideration by the OCC, and the Federal Reserve Board has not yet publicized its views on the potential application of the BHCA to such a charter.”

Finally, the associations noted the recent legal challenges to the OCC’s authority to issue a special purpose national bank charter for fintech companies and stated that they “would oppose any effort by the OCC to offer a narrowly focused payments charter.”  We will be discussing the OCC’s proposed payments charter in an upcoming Consumer Finance Monitor Podcast.

 

Last week, the FTC released two new reports about the agency’s findings from an April 2017 study of consumers’ experiences with the car buying process.  The FTC’s Bureau of Consumer Protection (BPC) authored a summary report called “Buckle Up: Navigating Auto Sales and Financing.”  The BPC, in partnership with the FTC’s Bureau of Economics, also published, “The Auto Buyer Study: Lessons from In-Depth Consumer Interviews and Related Research,” which provides a more detailed discussion of the April 2017 study underlying the FTC’s findings.

The study was an in-depth qualitative study of 38 consumers who had recently purchased and financed a vehicle.  Although the participants were a small, non-representative sample of consumers, the FTC sought to include a reasonable cross-section of consumers in the sample, including age, gender, prime and sub-prime credit, and the type of dealership where the purchase took place (i.e. franchise dealer, independent dealer, buy-here pay-here dealer).  The scope of the study encompassed the entire car-buying process, from the marketing that attracted the consumer to the dealership to the review and execution of the purchase and financing documents.

The study found that many participants felt mislead about the dealer’s advertising, finding out late in the process that they either did not qualify for some offers, or offers were incompatible with other terms the participants negotiated.  Relatedly, many participants did not know that they could negotiate any terms other than vehicle price, and some participants with poor credit felt they had no ability to negotiate at all.  Additionally, many participants felt rushed to review and sign deal documents and did not understand all of the terms of their purchase.  For example, some participants did not know what their APR was, or misunderstood that the deal was final with no “cooling off” period.

One of the most problematic aspects of the car-buying process identified in the study related to disclosures about ancillary products. The study indicated that for most participants, add-ons were not discussed until the financing process, when participants felt pressured to close a deal.  Participants also experienced confusion regarding the price of add-ons.  Some participants thought they were free.  Others only received disclosures regarding how the price of add-ons would increase their monthly payment.  Some dealers bundled add-ons, making it difficult for consumers to negotiate which add-ons they purchased and to identify the cost of specific add-ons.  Finally, some participants lacked an understanding of what services or repairs were covered by add-ons.

The BPC’s emphasis on add-ons is not surprising. Add-on and ancillary products have been a significant focus of the FTC and CFPB.  This scrutiny seems unlikely to change, as the BPC concluded its “Buckle Up” report by identifying potential areas of future study, which included ancillary or add-on products, in addition to the length and complexity of the auto transaction, GPS tracking capabilities, and yo-yo financing tactics.  The BPC also warned that it “expects to continue to focus on law enforcement and deceptive or unfair tactics in the auto industry.”

The U.S. Court of Appeals for the Third Circuit ruled last week in Commonwealth of Pennsylvania v. Navient Corp. that the PA Attorney General could bring a parallel enforcement action against Navient, a servicer of federal student loans, under the Consumer Financial Protection Act (CFPA) even though the CFPB had previously filed a lawsuit against Navient based on the same alleged conduct.  The Third Circuit also ruled that the federal Higher Education Act (HEA) did not preempt the PA AG’s loan-servicing claims against Navient for alleged violations of PA’s Unfair Trade Practices and Consumer Protection Law to the extent such claims were based on voluntary affirmative misrepresentations.

Navient services federal student loans made under the Direct Loan Program, under which the Department of Education (ED) makes loans directly to borrowers.   It also services federal student loans made under the Federal Family Education Loan Program, under which the federal government guarantees privately funded student loans (Indirect Loans).  Both Direct and Indirect Loans are subject to comprehensive ED regulations that address all aspects of the loan process, including how and when servicers must communicate with borrowers about forbearance and the availability of income-driven repayment plans.

Concurrent actions.  While the CFPA at 12 U.S.C. 5552 (a)(1) permits state AGs to file lawsuits asserting CFPA claims, it requires state AGs to notify the Bureau before filing such a lawsuit and grants the Bureau authority to intervene in such lawsuits.  Deciding that it did not need to address the significant constitutional issues inherent in the prosecution of concurrent actions over the same alleged violation of law, on the grounds that they were not part of the interlocutory appeal, the Third Circuit concluded that the notification requirement is largely perfunctory.  Pointing to other CFPA sections that expressly prohibit concurrent actions, the Third Circuit concluded that Congress’s omission of an explicit prohibition against concurrent actions in Section 5552(a)(1) was intentional and therefore the section’s plain language permits concurrent actions.It was unwilling to find that either the CFPA’s pre-suit notification requirement or its authorization for the Bureau to intervene in state-filed actions was sufficient to override the CFPA’s statutory language.

Preemption.  The HEA, at 20 U.S.C. 1098g, provides that “[l]oans made, insured, or guaranteed pursuant to a program authorized by Title IV of the Higher Education Act…shall not be subject to any disclosure requirements of any State law.”  The Third Circuit concluded that Section 1098g did not expressly preempt the PA AG’s UDAP claims to the extent they alleged affirmative misrepresentations rather than failures of disclosure.  The Third Circuit also concluded that Section 1098g did not impliedly conflict with the PA AG’s state law claims or preempt the field of regulation of student loans.

It is important to note that while the Third Circuit did not agree with Navient’s position regarding the scope of HEA preemption, it affirmed that the HEA establishes the disclosure requirements for the servicing of Direct and Indirect Loans and preempts any state law claims alleging violations of those disclosure requirements.  In addition, while the Third Circuit found that the district court had correctly concluded that claims based on affirmative misrepresentations were not preempted by the HEA, it acknowledged the possibility that on remand, a closer allegation-by-allegation analysis of the PA AG’s claims might reveal that certain claims were not based on voluntary affirmative misrepresentations and instead were based on failures of disclosure (and therefore preempted by the HEA).  It likewise left open the constitutional challenges to concurrent jurisdiction.