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.

In Integrity Advance LLC v. Consumer Financial Protection Bureau, a panel of the U.S. Court of Appeals for the Tenth Circuit affirmed a CFPB Order requiring Integrity, a lender making short-term loans, and its CEO, James Carnes, to pay $38.4 million in legal and equitable restitution and imposing civil penalties against Integrity ($7.5 million) and Carnes ($5 million), for alleged violations of the Consumer Financial Protection Act, the Truth in Lending Act, and the Electronic Fund Transfer Act. 

The initial Notice of Charges was filed against Integrity and Carnes (collectively, the “Petitioners”) in 2015, and an Administrative Law Judge (“ALJ”) from the U.S. Coast Guard, importantly not a CFPB ALJ, heard the case and recommended to the CFPB Director that Petitioners be ordered to pay $38 million in restitution, jointly and severally, plus civil penalties against Integrity ($8.1 million) and Carnes ($5.4 million).

In 2016, Petitioners appealed the initial ALJ decision to the Director, but the appeal was held in abeyance pending the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018). This case would ultimately determine the constitutional status of Securities & Exchange Commission administrative law judges. When Lucia ruled ALJs were constitutional officers and, thus, required to be appointed under the Appointments Clause, the Director remanded the case in 2019 to be reviewed by the CFPB’s ALJ—by the time Lucia was decided, the CFPB had its own constitutionally appointed ALJ.

A second review was conducted by a new ALJ properly appointed under the Appointments Clause. Although Petitioners requested an entirely new hearing, the second ALJ stated she would review the record de novo, and weigh the parties’ arguments with respect to whether the record needed to be supplemented or whether portions of the record should be struck. The ALJ declined to conduct additional pre-hearing discovery or to conduct a new evidentiary hearing, and both parties moved for summary disposition on the existing record.

The ALJ subsequently recommended Petitioners be held liable on all counts, and recommended the Director hold Integrity liable for $132.5 million in equitable restitution, with Carnes jointly and severally liable for $38.4 million. The ALJ also recommended the imposition of civil penalties against Integrity ($7.5 million) and Carnes ($5 million).

On appeal in 2021, the Director (now former Director Kraninger) reduced the award against Integrity to $38.4 million but agreed the entire reduced restitution amount was joint and several as between Petitioners, and also affirmed the full award of civil penalties against Integrity and Carnes. While the ALJ characterized the restitution amount as equitable, the Director concluded restitution was warranted under “equity or law”. Because the CFPB’s Notice of Charges was filed in 2015 before the U.S. Supreme Court ruled in Seila Law that the CFPB was unconstitutionally structured, the Director also ratified the Notice of Charges to cure the constitutional defect.  

Petitioners raised several arguments before the Tenth Circuit, but two are particularly noteworthy. The first is the Petitioners’ argument that the Order should be set aside because the CFPB was unconstitutionally structured when the charges were filed. Even though the ratification occurred after the 3-year limitations period for filing the Notice of Charges had expired, the Court declined to set aside the enforcement action, essentially endorsing the ratification process used by the CFPB. The Court noted that a party could assert a claim for “compensable harm” caused by the CFPB’s unconstitutional structure. But the Court concluded Petitioners had not directed the Court to any such compensable harm. Also noteworthy was Petitioners’ argument that Lucia required a new hearing before a constitutionally appointed ALJ as the remedy for an Appointments Clause violation. Again, the Court approved the CFPB’s actions in this case, and held that the second ALJ’s de novo review satisfied the requirement of a “new hearing”.   

In a separate concurrence, Judge Phillips raised concerns about “legal restitution” under 12 U.S.C. § 5565(a). While noting the issue was not properly preserved in this case, Judge Phillips explained that “legal restitution” was questionable for three reasons: (1) restitution is generally an equitable remedy; (2) a claim to “legal restitution” could render superfluous “payment of damage or other monetary relief” separately listed under the statute; and (3) allowing the CFPB to obtain “legal restitution” in an administrative proceeding raises Seventh Amendment concerns because of guaranteed jury trial rights to parties sued for legal remedies.

The Center for Responsible Lending (CRL) and the Consumer Bankers Association (CBA) have filed a joint petition with the CFPB that urges the Bureau to engage in rulemaking to define larger participants in the market for personal loans.  In February 2022, the CFPB established a new procedure for members of the public to submit petitions for rulemaking (including amendments to or repeals of existing rules).  The petition has been docketed by the CFPB.  Under the CFPB’s new procedure, docketed petitions will receive a final response from the CFPB.  (CBA previously sent a letter in October 2021 to then incoming Director Chopra in which it urged the CFPB to adopt a larger participant rule for fintech consumer lenders.)

In their petition, CRL and CBA describe the market for consumer credit as consisting of five segments: mortgages (including home equity loans and HELOCs), credit cards, auto loans, student loans, and “other personal loans.”  They describe the “other personal loans” category as encompassing three types of loans that can be secured (other than by an interest in real estate) or unsecured: short-term installment loans (typically with three-month to one-year terms), longer-term loans, and revolving lines of credit.  The secured loans in this category include loans to finance the purchase of durable goods (such as an appliance or mobile home) and loans backed by a security interest in existing property of the borrower (such as a vehicle). 

CRL and CBA note that in 2015, the Bureau had announced in its regulatory agenda that it expected to develop a proposed rule to define nonbank larger participants in the market for personal loans, including consumer installment loans and vehicle title loans, and reported in its Spring 2017 regulatory agenda that it was working to develop such a rule.  However, as they also note, the Bureau under former Acting Director Mulvaney reclassified the rulemaking as inactive in its Spring 2018 regulatory agenda and has not since spoken on the subject.

The reasons set forth in the petition for why the Bureau should resume the larger participant rulemaking include:

  • A rapidly growing personal installment loan market, including as a result of changes in state law that effectively prohibit payday lending; 
  • A sizable portion of consumers who use other personal loans, particularly consumers obtaining such loans from nonbanks, tend to be economically vulnerable consumers who either cannot obtain credit through a credit card or HELOC, have exhausted their available credit or have acquired so much debt that they need to refinance a credit card or HELOC;
  • Substantial growth in fintechs targeting the subprime market and offering loans consumers are struggling to repay;
  • The current regulatory regime creates an unlevel playing field with banks supervised by the CFPB and a significant risk that consumer protection issues affecting vulnerable consumers will go undetected; and
  • Risk-based supervision, because of the need for company-specific findings, is not an adequate substitute for a larger participant rule in a market with a substantial number of large participants.

In their petition, CRL and CBA recommend that the market for personal loans be defined as follows:

Originating or servicing closed-end or open-end lines of credit payable in more than one installment and extended to consumers for personal, family, or household purposes other than loans secured by real estate, post-secondary education loans as defined in 12 C.F.R. 1090.106(a), or automobile purchase or refinance loans as defined in 12 C.F.R. 1090.108(a).

With regard to their recommendation that the Bureau cover both closed-end installment loans and open-end lines of credit, CRL and CBA state that “there is an ongoing debate as whether [buy-now-pay-later (BNPL)] loans are closed-end loans or open-end lines of credit” and assert that ‘[g]rouping closed-end and open-end loans into the definition of a single personal loan market will avoid potential inconsistency with respect to Bureau supervision and avoid potential uncertainty as to the coverage of BNPL loans.”

With regard to their recommendation that the market be defined to cover both originating and servicing personal loans, CRL and CBA point to bank/fintech partnerships.  Calling the assertion that the bank in such partnerships is the true lender “debatable,” they argue that it is clear that the nonbank partner is a covered person delivering a consumer financial product or service in its role as loan servicer.  According to CRL and CBA, defining the market to cover servicing and origination “will assure that these non-depository fintechs, if large enough to meet the larger participant threshold, are subject to the Bureau’s supervision at least with respect to its servicing activities, including its activities in billing, collecting, and furnishing data to consumer reporting agencies.”

In August 2022, eight national trade groups filed a petition with the CFPB that urged the Bureau to engage in rulemaking to define larger participants in the market for data aggregation services.

A bi-partisan group of nine Senators (five Republicans and four Democrats) recently sent a letter to Acting FDIC Chairman Martin Gruenberg to express their support for the industrial loan company (ILC) charter and to remind him “to ensure the [FDIC] continues to follow the laws that Congress carefully designed for the FDIC to consider new deposit insurance applicants, including ILCs.”  They also expressed their strong opposition to “regulatory actions, both formal and informal, that might target the ILC charter in a manner not consistent with the laws Congress has passed.”

Giving credit to “the work of the FDIC,” the Senators commented that that “the safety and soundness of the ILC charter has been broadly successful when historically compared to the rest of the banking industry.”  They also promoted the ability of the ILC charter to allow “new and expanded opportunities in the regulated banking sector,” noting that some ILCs “perform niche lending in arenas oftentimes ignored by the larger financial institutions” and “can enhance sector or local economies in ways that traditional financial institutions do not.”

The Senators concluded the letter by asking the FDIC both for “continued supervision of ILCs to ensure safety, soundness and consumer protection, as well as full and fair consideration of any de novo applications without inherent disadvantage for an ILC charter.”

In December 2020, the FDIC issued a final rule setting forth the conditions it will impose and the commitments it will require to approve a deposit insurance application from an industrial bank or ILC whose parent company is not subject to consolidated supervision by the Federal Reserve Board.

The ILC charter has been controversial for many years because a parent company that controls an ILC and is exempt from the Bank Holding Company Act (BHCA) definition of a “bank” will not be subject to restrictions in the BHCA and Federal Reserve Board Regulation Y on nonbanking activities imposed on a bank holding company or a financial holding company. 

The CFPB recently issued a Request for Information Regarding Mortgage Refinances and Forbearances (RFI) Comments on the RFI will be due 60 days after publication in the Federal Register.

In the release announcing the RFI, the CFPB states that the RFI “is an example of the CFPB’s new approach to promoting competition and new products.”  “Rather than providing special regulatory treatment of individual firms, the CFPB will seek to identify stumbling blocks for those seeking to challenge the status quo with new products or services.”

Refinances

With refinances, the CFPB is focusing on whether it can take steps to facilitate beneficial refinances to take advantage of market rate decreases.  The CFPB is concerned that the refinance opportunities for borrowers with smaller balance loans may be more limited as the cost to refinance may not outweigh the resulting benefits.  The CFPB notes that if there are more limited opportunities to refinance smaller balance loans, Black and Hispanic borrowers and borrowers with low-to-moderate incomes would be disproportionately affected, as they are more likely to own lower value homes.  The CFPB observes that “these patterns may have contributed to the much lower rate of refinancing by Black and Hispanic consumers during recent periods of low interest rates.”  The CFPB also is concerned about the relative availability of refinance opportunities for consumers in rural areas, whose property might have lower market values than in higher-priced geographic areas.

While refinancing can provide benefits to borrowers, the CFPB observes that “refinancing also can pose risks to consumers.  Serial refinancing can be costly and reduce borrowers’ equity in their property.  Many targeted and streamlined refinance programs include protections against potential harms associated with refinances, such as requirements that the new loan reduce the consumer’s monthly payment and interest rate by certain threshold amounts and seasoning requirements.”

The CFPB notes that as part of its monitoring of the mortgage market, “some stakeholders suggested that changes to the Bureau’s ability-to-repay/qualified mortgage rule (ATR-QM rule) could play a role in facilitating beneficial refinances through targeted and streamlined programs, citing the current rule as contributing to some existing frictions to refinancing.”  Pursuant to the general ATR requirements, a creditor must consider and verify eight underwriting factors, including the consumer’s current or reasonably expected income or assets and current employment status.  Pursuant to QM requirements, a creditor must consider and verify the consumer’s income or assets relied on in making the loan.  The ATR-QM rule does not provide for relaxed requirements in connection with a streamlined refinance loan that simply reduces the interest rate and monthly payment.

According to the CFPB, “research has suggested that frictions in the refinance process, including potentially documentation requirements under the ATR-QM rule, may limit some refinancing opportunities that could benefit consumers.  In the course of the Bureau’s market monitoring, some stakeholders have asserted that it may be appropriate to address those frictions in some circumstances in which borrowers would receive a demonstrated benefit from refinancing, such as lower interest rates or lower monthly payments, and where other protections are in place, such as protections against serial refinances.”

In the release announcing the RFI, the CFPB stated “refinancing volume has dropped dramatically, down almost 70% from [2021], as interest rates have risen. New streamlined and automatic refinancing mortgage products could make sure that those buying a home now, or refinancing to cover other needs, are able to benefit from the next interest rate drop.”

The CFPB notes that some creditors have introduced new mortgage loan products to promote beneficial refinances, such as offering reduced closing costs for future refinances with the same lender.  The CFPB raises the potential of two additional loan products.  One is an “auto-refi” mortgage, which the CFPB describes as “a mortgage loan that provides for automatic or streamlined refinancing in the future when certain market conditions are met, with little or no affirmative action by the consumer.”  The other is a “one-way adjustable rate mortgage” or “one-way ARM.”  The CFPB states that a one-way ARM could provide for automatic interest rate decreases when market rates decrease, but would not provide for rate increases.  A variation of this product would provide for an interest rate that automatically fluctuates with market rate changes, but the rate would never exceed the original rate. 

Among other matters, the CFPB seeks comment on:

• Barriers to refinancing, including the extent to which large fixed costs of refinancing and limited profitability for smaller loan balances limit beneficial refinances, and what policies could lower costs for such refinances.

• How the CFPB can support industry efforts to facilitate beneficial refinances through targeted and streamlined refinance programs.

•The protections that should be included in refinance programs to ensure consumer benefits, such as requirements for lower rates and payments, loan term limits, serial refinancing limits, and requirements to refinance a borrower into a more stable loan product.

• Whether the CFPB should amend its rules, including the ATR-QM rule, to encourage beneficial refinances while preserving important protections for consumers, and the risks and benefits of amending the ATR-QM rule requirement that a creditor must consider and verify a consumer’s income or assets.

• The products or programs that lenders have introduced to attempt to facilitate refinances.

• The benefits and drawbacks of loans that provide for automatic refinances under specified conditions, and “one-way ARMs” that provide for interest rate decreases under specified conditions, but do not provide for rate increases, or that provide for rate changes with market changes, but never above the original rate.

• Whether market factors or practical difficulties, including secondary market liquidity and mortgage-backed securities investor interests, preclude the development of auto-refi mortgages or one-way ARMs.

• Whether the CFPB should amend the ATR-QM rule or other rules to permit or encourage creditors to offer auto-refi mortgages or one-way ARMs.

• Whether there are other new products that creditors could feasibly develop to allow more borrowers to receive the benefits of reduced mortgage interest rates.

Forbearances and Loss Mitigation

With forbearances and loss mitigation, the CFPB notes the relative success of CARES Act forbearances and similar forbearances, along with the related long-term loss mitigation efforts that were implemented.  The CFPB is focusing on whether it should take steps to spur automatic and streamlined short and long-term loss mitigation efforts for borrowers impacted by temporary financial hardship in general, and not just related to the pandemic.  The CFPB “is particularly interested in receiving information about what features of these COVID-era short and long-term loss mitigation programs should be made more generally available to borrowers, and in particular, if there are ways to automate and streamline the offering of short and long-term loss mitigation solutions.  The Bureau is interested in ensuring that homeowners who are economically affected by events such as natural disasters are able to receive timely payment relief that could help them avoid foreclosure.”

Among other matters, the CFPB seeks comment on:

• The benefits and drawbacks of automating and streamlining short and long-term loss mitigation efforts.

• If such automation and streamlining is incorporated into new loan products, the manner in which such products should be structured and the features that should be established, such as the note, contracts between investors and servicers, or CFPB or other federal regulations.

• The circumstances under which short or long-term loss mitigation solutions should be offered automatically.

• For example, whether forbearance should be offered automatically upon the declaration of a national emergency or presidentially declared disaster, when unemployment rates in the consumer’s locality reach a certain level, when a borrower loses their job, when a co-borrower on the loan dies, or under other circumstances.

• Whether any factors should be considered regarding these circumstances.

• Whether any documentation from the consumer should be required in any of these circumstances.

• With short-term loss mitigation options, whether there is a tension between the goal of offering temporary immediate payment relief and the goal of ensuring that the balance owed does not grow so large as to make long-term loss mitigation solutions difficult to achieve.

• Whether changes should be considered relating to the impact forbearances and other short-term loss mitigation solutions would have on a consumer’s credit reporting.

• Whether the CFPB mortgage servicing regulations, such as those relating to communications with delinquent borrowers, the CFPB’s regulatory definition of delinquency, and the loss mitigation process in general, would have any impact on automating and streamlining short and long-term loss mitigation offers.

• When considering the potential automation and streamlining of short and long-term loss mitigation efforts, whether there would be advantages or drawbacks if more creditors retained the servicing of the loan.

• Other than the mortgage products already mentioned in the RFI, whether there are there other mortgage products or features of mortgage products that could help borrowers weather various financial shocks.

The White House has announced the names of two Republicans who President Biden is nominating to serve as members of the FDIC Board of Directors.

The FDIC Board of Directors has five members, two of whom are the Comptroller of the Currency and the CFPB Director.  Currently, there are only three members, all of whom are Democrats (consisting of Acting Chair Martin Gruenberg, Acting Comptroller Michael Hsu, and CFPB Director Rohit Chopra).  No more than three members can be from the same political party.

The two Republican nominees are:

  • Travis Hill, who has been nominated to also serve as Vice Chair, worked at the FDIC from 2018 to 2022 as Senior Advisor to former Chair Jelena McWilliams and Deputy to the Chair for Policy.  Previously, Mr. Hill served as Senior Counsel at the Senate Banking Committee, where he worked from 2013 to 2018.
  • Jonathan McKernan is a Senior Counsel at the Federal Housing Finance Agency (FHFA).  He is currently on detail from FHFA to the Senate Banking Committee, where he is a Counsel on the Committee’s Minority Staff.  Mr. McKernan previously served as a Senior Policy Advisor at the Treasury Department and to Senator Bob Corker (R-TN).

Last week, the CFPB issued its long-awaited report on buy-now-pay-later (BNPL) products.  While the report identifies consumer risk and harms arising from BNPL products, it does not discuss any actions that the CFPB plans to take based on the report.  Those follow-up actions were left for Director Chopra to preview in his prepared remarks on the report and for the CFPB to announce in its press release on the report.  In this blog post, we will take a closer look at the consumer risks identified by the CFPB in the report and the CFPB’s plans for addressing those risks.

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 to register.

The report identified three broad categories of potential consumer risk arising from BNPL: overextension, data harvesting, and “discrete consumer harms” (consisting of lack of standardized disclosures, dispute resolution challenges, compulsory use of autopay, multiple payment re-presentments, and late fees).  According to the CFPB, these concerns manifest themselves as follows:

  • Overextension risk.  The CFPB stated that the data it reviewed “suggests that many BNPL consumers may not be simply shifting their existing purchases to a new payment platform; they may be spending (and borrowing) more than they otherwise would.”   The CFPB views much of this “incremental consumption” as the result of “repeat usage” by consumers and sees it as creating a “risk of overextension” among “a subset of the BNPL borrower base.”  According to the CFPB, this risk can take two distinct forms: loan stacking and sustained usage, which it describes as follows:
    • Loan stacking.  This is the risk that a borrower takes out concurrent BNPL loans at different lenders and is unable to pay some or all of them.  The CFPB believes that the factors creating this risk include the ease with which a borrower can borrow from multiple BNPL lenders within a short time frame and the historical practice of BNPL lenders not furnishing loan performance data to consumer reporting agencies.
    • Sustained usage.  This is the risk that frequent BNPL usage may threaten borrowers’ ability to repay non-BNPL financial obligations, such as rent, utilities, mortgages and other loans.  The CFPB cites a 2017 study published by TransUnion which, to the surprise of the study’s authors, found that consumers with at least one active personal loan, auto loan, mortgage, and credit card prioritized personal loan payments above the other three.  To explain this behavior, the CFPB offers two hypotheses.  One is the prevalence of autopay for repayment of personal loans.  The second is that because payments on personal loans tend to be smaller in amount as compared to mortgage and auto loans, consumers find the prospect of making a full payment on a personal loan more attractive than making a partial payment.  According to the CFPB, the structure of BNPL “is closely aligned” with personal loans, thus making it likely consumers will prioritize repayment of BNPL loans over other debts with higher consequences for nonpayment.
  • Data harvesting.  The CFPB reported that BNPL lenders often collect a consumer’s data “to increase the likelihood of incremental sales and maximize the lifetime value they can extract from the consumer.”  In addition to risks to consumers’ privacy, security, and autonomy, the CFPB cited two other primary risks arising from data harvesting and the monetizing of consumer data.  One such risk is “a consolidation of market power in the hands of a few large tech platforms who own the largest volume of consumer data.”  The second is the risk that harvested data can be used to offer target discounts to some consumers but not others, resulting in different groups of consumers paying different prices for the same goods at the same retailer.  The CFPB divided the use of data by BNPL lenders into two general categories: (1) individual consumer demographic, psychographic, and behavior data leveraged to optimize the specific products and brands promoted to the consumer, and (2) aggregated data that modifies the general product experience (font, color scheme, word choice etc.) “to drive consumer behavior in subtle ways toward a desired outcome.”  According to the CFPB, BNPL lenders benefit financially from these uses through incremental merchant discount fee revenues in the merchant partner acquisition model and increased affiliate fees and interchange revenue in the app-driven model.  The CFPB foresees an increase in the availability and effectiveness of both use categories as lenders acquire more customers through BNPL-branded apps than from merchant partnerships.  It also raised the potential for BNPL lenders’ use of consumer data for revenue-generating purposes to increase overextension “by engendering repeat usage and contribute to market concentration by rewarding a small number of firms who achieve the largest quantity of consumer data.”
  • Lack of standardized disclosures.  The CFPB observed that most BNPL lenders do not provide the initial cost-of-credit disclosures required by Regulation Z or periodic statements required for credit cards.  (Because BNPL loans are typically repayable in not more than four installments and no finance charge is imposed, they are not subject to Regulation Z.)  The Bureau is concerned that “the lack of clear, standardized disclosure language may obscure the true nature of the product as credit and make important information about loan terms, including when and how fees are assessed, and when payments are due, less accessible.”
  • Dispute resolution challenges.  The CFPB cited dispute resolution as the top-ranking BNPL-related complaint category in its consumer complaint database. The CFPB attributed this to the lack of uniform billing error dispute rights such as those that apply under Regulation Z to credit cards.  (With regard to credit cards, Regulation Z provides consumers with the right to assert claims or defenses relating to a purchase against the card issuer and also establishes a process for consumers to dispute billing errors and imposes requirements, including timetables and limitations on collecting disputed amounts and finance charges, that card issuers must follow in responding to such disputes.)
  • Compulsory use of autopay.  The CFPB stated that “[m]ost BNPL lenders require that borrowers use autopay” and that “some BNPL lenders make removing autopay challenging or impossible.”  The CFPB noted the Regulation E prohibition on a requiring loan payments through autopay but did not directly assert that BNPL lenders were violating that prohibition by requiring autopay.  (The report notes that, in addition to withdrawals from a deposit account subject to the Regulation E prohibition, most BNPL lenders permit repayment through credit cards.)
  • Multiple payment re-presentment.  The CFPB stated that all of the five BNPL lenders to whom it sent marketing monitoring orders re-present failed payments “in some instances up to eight times for a single installment.”
  • Late fees.  The CFPB stated that the policy of at least one of the five BNPL lenders to whom it sent marketing monitoring orders allowed it to impose multiple late fees on the same missed payment (but notes “it appears those practices have changed at the time of report publication.”)  The CFPB mentioned the Regulation Z prohibition on assessing multiple late fees for the same missed payment on an open-end credit card account and the requirement that late fees on an open-end credit card account be “reasonable and proportional.” 

How does the CFPB plan to address the potential consumer risks that it identified in the report?  To address “discrete consumer harms,” the CFPB described two courses of action it plans to take in its press release.  First, it “will identify potential interpretive guidance or rules to issue with the goal of ensuring that [BNPL] lenders adhere to many of the baseline protections that Congress has already established for credit cards.”  Based on the report and Director Chopra’s comments, it appears the baseline protections that the CFPB has in mind are Regulation Z disclosures, dispute and error resolution procedures, and late charge limits.  Since BNPL is generally not subject to the Truth in Lending Act and Regulation Z, the CFPB would not appear to have any applicable rulemaking authority other than its UDAAP and Section 1032 rulemaking authority.  In issuing interpretative guidance, the CFPB would presumably rely on its UDAAP authority. 

Second, the CFPB stated in its press release that it “will also ensure [BNPL] lenders, just like credit card companies, are subjected to appropriate supervisory examinations.”  In his remarks, Director Chopra stated that “[w]e understand that some [BNPL] firms may welcome CFPB examination in order to identify potentially problematic business practices before they create widespread harm.  We are inviting these firms to self-identify to us if they wish to be examined.”  He also stated that the CFPB was reviewing its “appropriate authorities to conduct examinations on a compulsory basis, as well.”  Presumably, as the basis for conducting compulsory examinations of nonbank BNPL lenders, the CFPB would look to either its risk-based supervisory authority or its authority to supervise “larger participants.”  Director Chopra also commented that the CFPB would “also be working with state regulators that license nonbank finance companies on examinations of these firms.”

With regard to Director Chopra’s suggestion that companies self-identify if they wish to be examined, it is unclear what Director Chopra has in mind.  Under the CFPB’s procedural rule on risk-based supervision, a nonbank that receives a notice from the CFPB that it may have reasonable cause to determine that the nonbank is engaged in conduct that poses risks to consumers may voluntarily consent to the Bureau’s supervision.  We are not aware of any other procedure that allows a nonbank to voluntarily consent to CFPB supervision.

To address the risk of overextension, both Director Chopra’s remarks and the CFPB’s press release indicate that the CFPB will be looking at how the industry and consumer reporting agencies (CRAs) “can develop appropriate and accurate credit reporting practices.”  These practices can be expected to include those outlined by the CFPB in a June 2022 blog post.  In the blog post, the CFPB indicated that BNPL providers who furnish BNPL payments to CRAs should furnish both positive and negative data.  The CFPB also criticized CRAs for their slowness in developing “mature credit reporting protocols” for BNPL.  It also called on CRAs to adopt appropriate standardized BNPL furnishing codes and formats, to incorporate the BNPL data into core credit files, and ensure that BNPL data are accurately reflected on consumer reports.  Additionally, the CFPB called on credit scoring companies and lenders to build and calibrate scoring models that account for the unique characteristics of BNPL loans.

The steps that the CFPB plans to take to address risk issues with data harvesting were outlined by Director Chopra in his remarks.  He stated that the CFPB will be looking into “some of the types of demographic, transactional, and behavioral data that is collected for uses outside of the lending transaction, including for the purpose of sponsored ad placements, sharing with merchants, and developing user-specific discounting practices.”  He indicated that this inquiry was related to the CFPB’s inquiry into Big Tech payment systems, “which appear to be integrating [BNPL] into their offerings.”  In addition, Director Chopra stated that the CFPB will be coordinating with the FTC “ which launched a rulemaking process on commercial surveillance, and, if finalized, these rules will be enforceable by the CFPB in the financial services arena.”