After discussing what the Metaverse is and its possible uses by providers of legal and other services, we look at an array of legal issues that should be considered by lawyers and their clients operating in the Metaverse or contemplating doing so.  Issues discussed include privacy rights of users of Metaverse platforms, data security, moderation of content, preservation of data for litigation, e-discovery implications such as what information is discoverable and access to user communications, and ethical considerations for lawyers.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Phil Yannella, Co-Practice Leader of the firm’s Privacy and Data Security Group.

To listen to the episode, click here.

On October 3, 2022, the Federal Reserve finalized a rule expanding Regulation II (Debit Card Interchange Fees and Routing), the implementing regulation for the Durbin Amendment. The final RULE is substantially similar to the proposed rule issued in 2021 and requires online (card not present) debit card transactions to be enabled for processing on at least two unaffiliated payment card networks. The final rule will be effective July 1. 2023.

Federal Reserve Governor Bowman voted against the rule stating: “During the public comment process, community banks raised substantial concerns with the proposal. Although the Board has attempted to identify the likely effects of the proposed rule based on available information, I believe that significant questions remain about how the rule will affect banks, and particularly community banks, with respect to both fraud and the cost of compliance. Given this continued uncertainty, I do not support the final rule.”

Community banks opposed the changes because online debit card transactions are the fastest growing transaction type and the cost to process these PIN debit transactions is more than double the interchange fee paid the banks . See the banking industry group February 1, 2022 letter to the Federal Reserve on behalf of the community banks. The banking industry groups also urged Congress to not expand the Durbin Amendment in a May 2, 2022 letter.

American Bankers Association President and CEO Rob Nichols said, “We are deeply disappointed in the Federal Reserve’s decision to issue a final rule on changes to Reg II without resolving multiple flaws in the proposal identified by the more than 1,700 community financial institutions who offered their comments. If ultimately implemented, this rule would amplify the damage of the flawed Durbin Amendment, which never delivered on its promise to lower retail prices for consumers. We will continue to review all aspects of this final rule and consult with our members on our options.”

Last week, the CFPB issued a “Student Loan Servicing Special Edition” of Supervisory Highlights.  In this blog post, we highlight a stealth expansion of supervisory jurisdiction and focus on the CFPB’s findings in two key areas:

  • Transcript withholding policies at institutional lenders (e.g. for-profit colleges that make private loans directly to student); and
  • Administration by servicers of Public Service Loan Forgiveness (PSLF), Income-Driven Repayment (IDR), and Teacher Loan Forgiveness (TLF).

Supervisory jurisdiction.  The CFPB indicated that simultaneously with issuing the Special Edition, but after apparently having already conducted exams based on its interpretation of Dodd Frank, it had updated its Education Loan Examination Procedures regarding the definition of “private education loans” for purposes of its authority to supervise nonbanks.  A previous version of these procedures referenced the Regulation Z definition of “private education loans” which differs from the Truth in Lending Act  definition.  The updated procedures reference the TILA definition, meaning that the Bureau can supervise an institution that extends credit expressly for postsecondary educational expenses so long as the credit is not made, insured, or guaranteed under Title IV of the Higher Education Act of 1965, and is not an open-end consumer credit plan, or secured by real property or a dwelling.

Transcript withholding.  The CFPB observed that some postsecondary schools withhold official transcripts from students who are delinquent on a debt owed to the school.  The CFPB reported that one school would not release transcripts to borrowers in default that had entered into new payment agreements but had not yet paid their balances in full and that some schools collected payments for transcripts but did not provide the transcript if a student was delinquent on a debt.  The CFPB determined that blanket policies to withhold transcripts in connection with an extension of credit are abusive and directed schools to stop this practice.  (Earlier this year, the CFPB published a blog post in which it endorsed a call from Department of Education Secretary for schools to end the practice of transcript withholding in order to promote equity and diversity.  In 2019, California enacted a law that prohibits postsecondary schools from withholding transcripts as a debt collection tool.)

Administration of forgiveness programs. 

TLF.  Examiners found servicers engaged in unfair acts or practices when they wrongfully denied TLF applications in the following circumstances: (1) where consumers had already completed five years of teaching, (2) where the school was a qualifying school on the Teacher Cancellation Low Income Directory, or (3) when the consumer formatted specified dates as MM-DD-YY instead of MM-DD-YYYY, despite meeting all other eligibility requirements.  The servicers were directed to review all TLF applications denied since 2014 to identify improperly denied applications and remediate harmed consumers to ensure they received the full benefits to which they were entitled, including any refunds for excess payments or accrued interest.

PSLF. Examiners found servicers engaged in deceptive acts or practices by:

  • Implicitly representing to consumers that to be eligible for PSLF they must continue to make payments during the COVID-19 payment suspension until the effective date of forgiveness by sending standard PSLF communications or letters informing consumers that the estimated eligibility date was based on making on-time monthly payment.
  • Before ED announced the PSLF waiver in October 2021, explicitly or implicitly misrepresenting that borrowers were only eligible for PSLF if they made payments under an IDR plan, when in fact those borrowers might be eligible for the Temporary Expanded PSLF announced in 2018.

Examiners found servicers engaged in unfair acts or practices by:

  • Wrongfully denying or approving PSLF applications or Employer Certification Forms and providing miscalculated total qualifying payments or estimated eligibility dates for reaching the 120 payments required for PSLF.
  • Excessively delaying the processing of PSLF forms.

In addition to any remediation that borrowers were entitled to receive through the PSLF waiver or the one-time payment count adjustment for IDR forgiveness announced by ED, remediation steps that the CFPB directed servicers to take include completing reviews of PSLF determinations to identify consumers impacted by the PSLF violations and providing monetary relief to consumers who continue to face financial injuries from the violations.

IDR.  Examiners found servicers engaged in unfair acts or practices by:

  • Improperly processing consumers’ IDR requests resulting in erroneous denials or inflated IDR payment amounts.  The Bureau listed various types of errors that servicers made in processing applications. 
  • Failing to sufficiently inform consumers about the need to provide additional income documentation for prior gap periods  when reentering a Revised Pay As You Earn (REPAYE) plan (i.e. for the period following a consumer’s removal from REPAYE).

Examiners found servicers engaged in deceptive acts or practices by:

  • Providing consumers with a misleading denial reason after submitting an IDR recertification application when in fact servicers had denied the applications because the consumers’ income had increased.
  • Representing to consumers with parent PLUS loans that they were not eligible for IDR or PSLF when in fact such loans may be eligible for IDR or PSLF if consolidated into a Direct Consolidation Loan.  (With respect to this practice, servicers were directed to improve policies and procedures, enhance training, and improve monitoring to prevent future violations.)

In its introduction to the Special Edition, the Bureau cautioned that the findings in the report impact servicers’ entire portfolios, including commercially-owned Federal Family Education Loan Programs loans, and encouraged servicers to address the issues across their portfolios.  In its conclusion, the Bureau recommended that servicers, originators, and loan holders review the findings and implement changes in their operations to ensure that the risks identified are thoroughly addressed.  It advised market participants that it expects them to incorporate measures to avoid these violations and similar consumer risks into internal monitoring  and audit practices and notes that evidence of strong compliance programs that take these risks into account is a factor in the Bureau’s decisions on whether or not to open up follow-up investigations.  The Bureau also stated that it expects institutions to self-identify violations and compliance risks, proactively provide complete remediation to consumers, and report those actions to the Bureau.

On September 28, 2022, the Department of Justice (”DOJ”) announced a settlement with Westlake Financial Services (“Westlake”), a Los Angeles-based indirect auto finance company specializing in subprime and near-subprime loans, resolving allegations that Westlake failed to fully provide interest rate benefits to eligible servicemembers as required under the Servicemembers Civil Relief Act (“SCRA”).  Under the terms of the settlement, Westlake has agreed to pay more than $225,000, including a $40,000 civil money penalty and $185,460 to 250 servicemembers who did not receive interest rate benefits on their loans for the full period required by law.  This includes a refund to each impacted servicemember of the excess amount they paid, plus an additional payment of three times the overpayment, or $100, whichever is higher.

The SCRA’s interest rate provision, 50 USC § 3937, is generally triggered by proper written notice from the servicemember.  Once triggered, it provides that, an obligation or liability bearing interest at a rate in excess of 6% that is incurred by a servicemember (or by a servicemember and their spouse jointly) before the servicemember enters military service must be capped at 6% interest during the period of military service.  (For mortgage loans, the covered period is extended for one year after the period of military service ends.)  The interest in excess of 6% must be forgiven and the DOJ has taken the position that the excess amount may not be applied to principal, unless the servicemember consents, after being offered other options, including a refund, as that would improperly accelerate repayment of principal .  The interest rate cap must be applied retroactively back to the date on the military orders calling a servicemember to active duty.

DOJ alleges Westlake failed to apply the SCRA interest rate cap retroactively back to the date military orders were issued calling servicemembers to active duty.  Additionally, DOJ alleges that Westlake improperly delayed the approval of SCRA benefits for some servicemembers, sometimes for more than 60 days from a servicemember’s benefits request.  Servicemembers who had their benefit applications delayed for more than 60 days will receive a $500 payment under the settlement.

These purported violations were discovered in the course of DOJ’s monitoring of a prior settlement of a 2017 SCRA action against Westlake.  That 2017 DOJ action, against Westlake and its subsidiary, Wilshire Commercial Capital, alleged illegal repossessions of at least 70 vehicles owned by servicemembers.  Under 50 USC § 3952, a contract by a servicemember for the purchase of real or personal property (including motor vehicles) may not be rescinded or terminated for breach of contract (occurring before or during a period of military service) after a servicemember enters military service.  Importantly, this provision also states that property may not be repossessed for such a breach without a court order.  Westlake had paid nearly $800,000 to resolve the 2017 allegations.

Several aspects of the new settlement are familiar from earlier SCRA settlements.  For example, the additional payment to servicemembers of three times the overpayment beyond the refund, which is not a penalty specified within the statute itself, has been used by DOJ and the OCC in other SCRA consent orders, as has the requirement that Westlake review and revise its SCRA policies and procedures and training to ensure compliance with the SCRA going forward.  Additionally, the $40,000 civil money penalty is the same amount DOJ assessed against a credit union earlier this year in a consent order settling SCRA interest rate violation allegations.

Substantively, this settlement is a reminder to all creditors and loan servicers to ensure that they are providing SCRA interest rate benefits for the entirety of servicemembers’ eligibility periods.  This includes applying the interest rate cap retroactively back to the date of the orders, as Westlake allegedly failed to do.  Creditors and servicers also need to make sure they are providing the additional year of benefits past the active duty end date for mortgage loans (as required by 50 USC § 3937(a)(1)(A)), and providing reservists with benefits beginning on the date the reservist receives their military orders (as required by 50 USC § 3917).  While not an explicit requirement within the statute itself, the Westlake settlement also is a reminder that requests for SCRA benefits should be timely evaluated and applied, as an unreasonable delay in applying the interest rate cap may be considered a failure to comply with the statute by regulators.  Creditors and servicers should also be mindful in implementing the rate cap that the SCRA broadly defines interest to include service charges, renewal charges, fees, or other charges (except bona fide insurance).

The Westlake settlement was announced almost two months after DOJ and the CFPB issued a joint notification letter (the “joint letter”) reminding auto lenders and leasing companies of their obligations under the SCRA.  In reaction to the joint letter, we commented that we expect renewed regulatory focus on the SCRA’s interest rate cap as the rate environment changes and interest rates continue to rise.  The Westlake settlement is consistent with that expectation, and we can expect to see more actions in the coming year.

The Justice Department announced that it has entered into an agreement with Lakeland Bank to settle the DOJ’s claims that Lakeland engaged in unlawful redlining in the Newark, New Jersey metropolitan area.  The DOJ’s lawsuit against Lakeland, filed in a New Jersey federal district court, is part of the DOJ’s nationwide “Combating Redlining Initiative” launched in October 2021.  According to the DOJ, the settlement represents the third-largest redlining settlement in the DOJ’s history.

The key allegations in the DOJ’s complaint are the following:

  • During the relevant time period (2015-2021), the Newark, New Jersey-Pennsylvania Metro Division (Newark MD) as delineated in 2015 included Essex, Somerset, Union, Sussex, and Morris counties in New Jersey (Newark Lending Area).
  • As of 2021, Lakeland’s Community Reinvestment Act (CRA) assessment area included majority-white areas of Essex, Somerset, and Union counties and excluded the portions of those counties that contain majority-Black and Hispanic neighborhoods.  None of the majority-Black and Hispanic census tracts in Somerset and Union Counties were included in Lakeland’s assessment area, and only a small fraction of the majority-Black and Hispanic tracts in Essex County were included.
  • All of Lakeland’s full-service branches in the Newark Lending Area during the relevant time period were located in majority-white census tracts and none of the loan officers at those branches were assigned to target customers within majority-Black and Hispanic neighborhoods.
  • In the majority-white neighborhoods in the Newark Lending Area, residential mortgage services were available at branches to walk-in customers.  Those services were not available in majority-Black and Hispanic neighborhoods in the Newark Lending Area.
  • During the relevant time period, Lakeland relied almost entirely on mortgage loan officers, all but one of whom were assigned offices in branches in majority-white neighborhoods, to develop referral sources, conduct outreach to potential customers, and distribute mortgage lending marketing materials.
  • Lakeland took no meaningful steps to supplement the efforts of mortgage loan officers to general mortgage applications from majority-Black and Hispanic neighborhoods in the Newark Lending Area.
  • Based on its own fair lending assessment, Lakeland was aware of shortfalls in applications between itself and its peer lenders in majority-Black and Hispanic neighborhoods and shortfalls in applications from individuals identifying as Black or Hispanic compared to the local demographics and aggregate HMDA averages. 
  • During the relevant time period, Lakeland significantly underperformed its peer lenders in generating home loan applications from majority-Black and Hispanic neighborhoods in the Newark Lending Area and in making HMDA-reportable residential mortgage loans in those neighborhoods.  The disparities between Lakeland’s rate of applications from and home loan volume in majority-Black and Hispanic areas and the rate and volume of its peers were both statistically significant (i.e. unlikely to be caused by chance) and sizeable.

Based on these allegations, the DOJ alleged violations of the Fair Housing Act and Equal Credit Opportunity Act by Lakeland.  For purposes of its FHA claim, the DOJ alleged:

  • Lakeland’s policies and practices (1) constitute the unlawful redlining of majority-Black and Hispanic communities in the Newark Lending Area on account of the communities’ racial and ethnic composition, (2) were intended to deny, and had the effect of denying, equal access to home loans to residents of majority-Black and Hispanic communities, and (3) were not justified by a business necessity or legitimate business considerations.
  • Lakeland’s actions constitute (1) discrimination on the basis of race, color, and national origin in making available residential real-estate related transactions in violation of the FHA, and (2)  a pattern or practice of resistance to the full enjoyment of rights secured by the FHA, and (3) a denial of rights granted by the FHA to a group of persons that raises an issue of general importance.
  • Lakeland’s pattern or practice of discrimination was intentional and willful and implemented with reckless disregard for the rights of individuals based on their race, color, and national origin.

For purposes of its ECOA claim, the DOJ alleged:

  • Lakeland’s policies and practices constitute (1) unlawful discrimination against applicants and prospective applicants, including by redlining majority-Black and Hispanic communities in the Newark Lending Area and engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, and national origin, and (2) a pattern or practice of discrimination and discouragement and resistance to the full enjoyment of rights secured by the ECOA.
  • Lakeland’s pattern or practice of discrimination was intentional and willful and implemented with reckless disregard for the rights of individuals based on their race, color, and national origin.

The DOJ’s claim that redlining violates the ECOA raises the issue of whether such a claim can be brought under the ECOA.  The CFPB has also taken the position that redlining violates both the FHA and ECOA.  However, the ECOA focuses on the treatment of applicants, and a redlining claim addresses individuals who are not applicants.  In alleging that Lakeland violated the ECOA because its policies and practices constitute engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, and national origin, the DOJ is attempting to rely on Regulation B, the ECOA’s implementing regulation, to establish an ECOA violation.  Regulation B provides that a creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.  However, the ECOA itself does not set forth such a prohibition.  Additionally, ECOA lacks the language in the FHA that prohibits “discrimination against any person in making available” a residential real estate-related transaction.  Whether a redlining claim can be brought under the ECOA may well be an issue that will eventually come before the U.S. Supreme Court.

The actions that Lakeland must take under the proposed consent order include the following:

  • Invest at least $12 million in a loan subsidy fund for residents of Black and Hispanic neighborhoods in the Newark area; $750,000 for advertising, outreach and consumer education; and $400,000 for development of community partnerships to provide services that increase access to residential mortgage credit.
  • Open two new branches in majority-Black and Hispanic census tracts in the Newark Lending Area, including at least one in the city of Newark; assign at least four mortgage loan officers to solicit mortgage applications in majority-Black and Hispanic census tracts in the Newark Lending Area; and employ a full-time Community Development Officer to oversee the continued development of lending in majority-Black and Hispanic census tracts in the Newark Lending Area.
  • Conduct using a third-party consultant a Community Credit Needs Assessment for majority-Black and Hispanic census tracts in the Newark Lending Area
  • Conduct using a third-party trainer an annual fair lending training of all employees with substantive involvement in mortgage lending, marketing, or fair lending or CRA compliance, or who have management responsibility over such employees, senior management with fair lending and marketing oversight, and members of the Board of Directors.

In April 2020, the CFPB issued a final HMDA rule increasing the Home Mortgage Disclosure Act (HMDA) reporting threshold for closed-end mortgage loans from 25 covered loans originated in each of the prior two years to 100 covered loans originated in each of the prior two years. The federal district court for the District of Columbia recently invalidated the change, although the court let stand the increase in the permanent threshold for reporting open-end lines of credit made by the April 2020 rule from 100 covered lines of credit in each of the two prior years to 200 covered lines of credit in each of the two prior years. The ruling is relevant for both single-family and multi-family mortgage lenders. 

The reporting triggers of 25 covered closed-end loans and 100 covered open-end lines of credit originated in each of the prior two years were established by an October 2015 HMDA rule. Prior to that rule, for closed-end loans the reporting trigger for non-bank mortgage lenders included a requirement that the lender originated at least 100 home purchase or refinance loans in the prior year, and the reporting trigger for depository institutions focused on non-volume factors. Additionally, prior to that rule, the reporting of open-end lines of credit was optional, so there was no reporting trigger. 

After the adoption of the 2020 rule, the National Community Reinvestment Coalition, Montana Fair Housing, Texas Low Income Housing Information Service, Empire Justice Center, the Association for Neighborhood & Housing Development, and the City of Toledo, Ohio, filed a lawsuit challenging the changes to the closed-end loan and open-end line of credit reporting thresholds. The court noted the plaintiffs asserted “that HMDA data have been invaluable in ‘uncovering and addressing redlining, fair lending violations, and other inequitable lending practices’ over the decades.” The plaintiffs challenged the 2020 Rule as arbitrary and capricious, contrary to law, and in excess of the CFPB’s statutory authority under the Administrative Procedure Act (APA). The court noted that the CFPB based the change in the reporting thresholds on concerns from lower-volume reporting institutions that the burdens of reporting were not justified based on the small amount of data that they report. 

The parties each filed motions for summary judgment, with the court granting the plaintiffs’ motion on the closed-end loan threshold change and granting the defendant’s motion on the open-end line of credit threshold change.

As noted by the court, the October 2015 rule not only changed the threshold to be a HMDA reporting institution for closed-end loans, and made the reporting of open-end lines of credit mandatory, the rule more than doubled the number of data points that institutions must collect and report.  Additionally, a number of the new data reporting items are complex.  However, a subsequent law enacted by Congress created a partial exemption for lower volume lending depository institutions that basically exempted the institutions from the expanded reporting requirements. 

After addressing the assertions of both parties, the court concluded with regard to the change in the reporting threshold for closed-end loans that while the change did not exceed the CFPB’s statutory authority, the “CFPB failed adequately to explain or support its rationales for adoption of the closed-end reporting thresholds under the 2020 Rule, rendering this aspect of the rule arbitrary and capricious.”

The court appears to have been influenced by the position of the CFPB under Director Cordray regarding reporting.  The court noted that under Director Cordray the CFPB concluded that “while higher volume exemption thresholds ‘might not significantly impact the value of HMDA data for analysis at the national level,’ they ‘would have a material negative impact on the availability of data about patterns and trends at the local level,’ which data was ‘essential to achieve HMDA’s purposes.’” The court cited to the preamble to the October 2015 rule in noting that the “CFPB further explained that ‘the loss of data in communities at closed-end mortgage loan-volume thresholds higher than 25 would substantially impede’ the ability of the public and public officials in these locales and others ‘to understand access to credit in their communities.’”  However, the portions of the preamble cited by the court provided generalized or conclusory statements as to why the 25 loan reporting threshold is the appropriate level, and not concrete data as to why such threshold is necessary.

Addressing the changes made by the April 2020 rule, the court noted data cited by the CFPB for calendar year 2018 indicating that 1,700 institutions out of 4,680 HMDA closed-end loan reporting institutions ceased to be reporting institutions based on the rule.  As previously reported, focusing on the number of HMDA reporting institutions, and not the number of transactions, can misrepresent changes in HMDA data reporting. Significantly, the court also noted that based on 2018 data the April 2020 threshold change would exclude 112,000 closed-end loan applications taken by the 1,700 institutions from reporting. For 2018, a CFPB report indicates that there were 10.3 million closed-end loan applications reported. Based on these numbers, requiring the 1,700 institutions to resume HMDA reporting will increase the number of closed-end loan applications reported by approximately 1.09% per year, an infinitesimal increase in the number of reported closed-end loan applications.

As noted, the court let stand the threshold of 200 open-end lines of credit originated in each of the prior two years.  Based on an initial action and subsequent action taken by the CFPB, the 100 open-end lines of credit reporting threshold provided for in the October 2015 rule never became effective. The threshold was temporarily increased to 500 open-end lines of credit originated in each of the prior two years in order to provide the CFPB with time to assess if the 100 lines of credit threshold was too low.  The CFPB ultimately decided on the threshold of 200 lines of credit originated in each of the prior two years. The fact that the 100 lines of credit threshold never became effective, and that in the end the CFPB was for the first time requiring the reporting of open-end lines of credit, were factors influencing the court in allowing the 200 lines of credit threshold to stand.

The CFPB has not issued a public statement regarding whether it plans to appeal the ruling.  Presumably, the current leadership of the CFPB would favor the reduction of the closed-end loan reporting threshold to the 25 originated loans in each of the prior two years level set by the October 2015 rule. If the CFPB does not appeal the ruling, then the CFPB will need to determine how to re-implement the 25 closed-end loan threshold. When the CFPB increased the threshold from 25 to 100 closed-end loans in April 2020, it required the collection of HMDA data through June 30, 2020 for institutions that would no longer be subject to HMDA requirements for closed-end loans. Such institutions no longer had to collect data starting July 1, 2020, and the reporting of any closed-end loan data collected in 2020 was optional for such institutions. A potential approach that the CFPB may take is to re-implement the 25 closed-end loan threshold for the 2023 reporting year, with institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 being subject to HMDA requirements for closed-end loans. 

The U.S. Chamber of Commerce, joined by six other trade groups, filed a lawsuit yesterday in a Texas federal district court against the CFPB challenging the CFPB’s recent update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) section of its examination manual to include discrimination.  The other plaintiffs are American Bankers Association, Consumer Bankers Association, Independent Bankers Association of Texas, Longview Chamber of Commerce, Texas Association of Business, and Texas Bankers Association. 

In July 2022, the Chamber, together with American Bankers Association, Consumer Bankers Association, and Independent Community Bankers of America, sent a letter to Director Chopra calling on the CFPB to rescind the update.  The letter was accompanied by a white paper setting forth the legal basis for their position. 

The plaintiffs claim that the manual update should be set aside because it violates the Administrative Procedure Act (APA)  for the following reasons:

  • The update exceeds the CFPB’s statutory authority in the Dodd-Frank Act.  The CFPB cannot regulate discrimination under its UDAAP authority because Congress did not give the CFPB authority to enforce anti-discrimination principles except in specific circumstances.  The CFPB’s statutory authorities consistently treat “unfairness” and “discrimination” as distinct concepts.  (To demonstrate the compliance burdens resulting from the update, the plaintiffs allege that the CFPB has provided no guidance for regulated entities on what might constitute unfair discrimination or actionable disparate impacts for purposes of UDAAP. As examples of issues creating confusion, the plaintiffs allege that the CFPB has not identified what are protected classes or characteristics or what activities are not discrimination (such as those identified in the ECOA), and has not explained how regulated entities should conduct the sorts of assessments that the CFPB appears to be contemplating given existing prohibitions  on the collection of customer demographic information.)
  • The update is “arbitrary and capricious” because the CFPB’s interpretation of “unfairness” contradicts the historical use and understanding of the term. The plaintiffs allege that the FTC’s unfairness authority does not extend to discrimination and that Congress borrowed the FTC Act’s unfairness definition for purposes of defining the CFPB’s UDAAP authority.  They also allege that the CFPB’s contemplated use of disparate impact liability when pursuing UDAAP claims flouts congressional intent and U.S. Supreme Court authority.
  • The update violates the APA’s notice-and-comment requirement because it is a legislative rule that imposes new substantive obligations on regulated entities.

In addition to claiming that the manual update should be set aside due to the alleged APA violations, the plaintiffs allege that the update should be set aside because the CFPB’s funding structure violates the Appropriations Clause of the U.S. Constitution.  (Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12% of the Federal Reserve’s budget, rather than through the Congressional appropriations process.)  As support for their unconstitutionality claim, the plaintiffs cite the concurring opinion of Judge Edith Jones in the Fifth Circuit’s en banc May 2022 decision in All American Check Cashing in which Judge Jones concluded that the CFPB’s funding mechanism is unconstitutional.  

Although the en banc Fifth Circuit did not reach the funding argument, a Fifth Circuit panel is expected to consider that issue in the CFSA lawsuit which challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule.  The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions.  On May 9, 2022, a Fifth Circuit panel heard oral argument in the CFSA lawsuit. 

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.  However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.

The unconstitutionality of the CFPB’s funding structure has also been raised by Populus Financial Group, Inc. in the lawsuit filed by the CFPB in July 2022 against Populus in a Texas federal district court.  Populus has filed a motion to dismiss in which it argues that the CFPB’s enforcement action is invalid because the CFPB’s funding structure violates the separation-of-powers principle embodied in the Appropriations Clause of the U.S. Constitution.

Populus Financial Group, Inc., which does business as ACE Cash Express, has filed a motion to dismiss the lawsuit filed by the CFPB in July 2022 against Populus in a Texas federal district court in which the CFPB alleges that Populus engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers and making unauthorized debit-card withdrawals.  Populus also filed a motion to stay all proceedings in the case pending the Fifth Circuit’ decision in Community Financial Services Association of America Ltd. v. CFPB.

In its motion to dismiss, Populus argues that the CFPB’s enforcement action is invalid because the CFPB’s funding structure violates the separation-of-powers principle embodied in the Appropriations Clause of the U.S. Constitution.  Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12% of the Federal Reserve’s budget, rather than through the Congressional appropriations process.  Populus argues:

  • This structure shields the CFPB from Congressional oversight in violation of the Appropriations Clause, which mandates that Congress alone wields the power of the federal purse.
  • The CFPB is “doubly insulated” from the appropriations process because the Federal Reserve itself is insulated from the appropriations process due to its own self-funding mechanism. 
  • The U.S. Supreme Court’s decision in Seila Law, which invalidated the CFPB Director’s for-cause removal protection, makes Congress’s abdication of its power over the purse even more dangerous because it puts that power in the President’s hands without any Congressional oversight.
  • No other federal agency is doubly insulated from the appropriations process and wields the Bureau’s range of legislative, executive, and judicial power.  Populus contrasts the narrower missions and authority of the Federal Reserve, FDIC, and OCC, which are also self-funded.  With regard to the OCC, Populus distinguishes the OCC’s reliance on fees from the entities it regulates which it asserts creates political accountability for the OCC.  With regard to the Federal Reserve and FDIC, Populus distinguishes their multimember, bi-partisan leadership structure.

In challenging the constitutionality of the CFPB’s funding structure, Populus places substantial reliance on the concurring opinion of Judge Edith Jones in the Fifth Circuit’s en banc May 2022 decision in All American Check Cashing.  The en banc Fifth Circuit ruled that that the CFPB’s enforcement action against All American Check Cashing could proceed despite the unconstitutionality of the CFPB’s single-director-removable-only-for-cause-structure at the time the enforcement action was filed.  However, in a scholarly concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American Check Cashing’s argument that the CFPB’s funding mechanism is unconstitutional.  (The majority opinion did not consider the funding argument but indicated that the district court could consider other constitutional challenges on remand.)

Although the en banc Fifth Circuit did not reach the funding argument, a Fifth Circuit panel is expected to consider that issue in the CFSA lawsuit which challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule.  The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions.  On May 9, 2022, a Fifth Circuit panel heard oral argument in the CFSA lawsuit. 

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.  However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.

In its stay motion, Populus argues that, because the Fifth Circuit panel is poised to rule on the constitutionality of the CFPB’s funding structure in the CFSA lawsuit, the district court should stay all proceedings in the CFPB’s enforcement action pending the panel’s decision.

Populus argues that a stay would be efficient for the court and the parties because a decision on the constitutionality issue would substantially simplify the issues in the enforcement action and potentially resolve it outright.  It also argues that a stay will avoid inconsistent outcomes by ensuring that the district court’s orders do not conflict with the forthcoming Fifth Circuit decision, Populus would be prejudiced if a stay is not granted because it could be forced to unnecessarily expend substantial resources defending an enforcement action that could soon be found to be invalid, and the CFPB would not be prejudiced by a stay.

In a new blog post, “Buy now, pay later – and comply with the FTC Act immediately,” the FTC reminds nonbank participants in the buy-now-pay-later (BNPL) market, such as retailers, BNPL providers, marketers, and debt collectors, that they can be liable for violations of Section 5 of the FTC Act based on the information they communicate to consumers and how they communicate such information.

Market participants are advised by the FTC to keep the following three key principles in mind when conducting a BNPL compliance review:

  • Misrepresentations regarding the cost of a product or the terms of the transaction, including associated fees, are deceptive and violate the FTC Act.  Even if some consumers achieve the advertised result, an advertising claim can still be deceptive if it is not true for the typical consumer and not supported by reliable data.
  • When designing and incorporating user interfaces that offer BNPL to consumers, particularly when using aggregate or individualized consumer data in that process, companies should avoid “dark patterns” that negatively affect consumers’ understanding of the material terms of the transaction such as hiding or obscuring material information from consumers, whether by requiring users to navigate a maze of screens, using non-descript dropdowns or small icons, or burying information in Terms of Service documents.
  • The presence of multiple actors in a transaction is not a shield against liability. When retailers and BNPL companies offer payment plans to consumers, both may be held liable for practices that are deceptive or unfair.  For example, if a customer does not receive a timely refund on goods purchased using a BNPL product, any company that made misleading claims about the refund process or that was involved in delaying refunds could be liable under the FTC Act.

Earlier this month, the CFPB issued its long-awaited report on BNPL products in which it identified consumer risks arising from BNPL products.  The CFPB also announced its plans to consider various actions to address the potential consumer risks identified in the report, such as issuing interpretive guidance or rules to apply certain credit card protections to BNPL, supervising BNPL lenders, and reviewing credit reporting practices.

On October 3, 2022, from 1 p.m. to 2 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB’s Report on Buy-Now-Pay-Later: What are the Takeaways and the CFPB’s Expected Next Steps?” Click here for more information and to register.

After reviewing the roles of data aggregators and other key players in the data aggregation market, we discuss the implications of the transition from screen scraping to application programming interfaces (API), how aggregators can enhance consumer financial services, and the risks associated with data aggregators.  We also discuss the CFPB’s Section 1033 rulemaking on providing data access to consumers, including the expected timetable and issues the CFPB is likely to address in its proposed rule, and potential larger participant rulemaking for aggregators.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.

To listen to the episode, click here.

To read an article published by the Federal Reserve Bank of Kansas City and co-authored by Mr. Alcazar,  “Data Aggregators: The Connective Tissue for Open Banking,” click here.