The California Department of Financial Protection and Innovation (DFPI) announced last week that it has entered into a consent order that permanently bars James Berry and any company he owns or controls from soliciting customers for Property Assessed Clean Energy (PACE) financing and seeking future enrollment as a solicitor for PACE programs.  In its press release about the consent order, the DFPI highlighted its reliance on the new California Consumer Financial Protection Law (CCFPL) for its authority to take enforcement action against the individual and his companies.

Since the CCFPL became effective on January 1, the DFPI has moved quickly to exercise its new jurisdiction and authority.  The CCFPL gave the DFPI new rulemaking and enforcement authority over “covered persons” relating to unlawful, unfair, deceptive, or abusive acts and practices and defines the term “covered persons” expansively to include many entities that previously were not subject to DBO oversight or oversight by a primary regulator.  After announcing on January 19 that is had launched an investigation into multiple debt collectors, the DFPI announced on January 27 that it had signed memorandums of understanding with five earned wage access companies.  Those announcements were followed in February by the DFPI’s issuance of an invitation for stakeholders to provide input on rulemaking to implement the CCFPL and the announcement that it had launched an investigation into whether student-loan debt-relief companies operating in California are engaging in illegal conduct under the CCFPL and Student Loan Servicing Act.

Under the California Financing Law, the DFPI regulates PACE programs by licensing PACE program administrators that administer PACE programs on behalf of, and with the consent of, public agencies.  A PACE administrator enrolls and oversees PACE solicitors and solicitor agents who market PACE products to property owners and facilitate PACE program applications processed by the administrator.  One of Mr. Berry’s companies had been enrolled as a PACE solicitor and Mr. Berry had been enrolled as a PACE solicitor agent for that company.  Both the enrolled company and Mr. Berry were disenrolled by the administrator.  In addition to using the disenrolled company to advertise and solicit customers, Mr. Berry used another company that had never been enrolled as a solicitor to advertise PACE financing and solicit customers for such financing.  According to the DFPI, Mr. Berry not only used an unenrolled company to advertise and solicit customers, but also misled consumers by engaging in unfair and deceptive marketing practices that offered “no-cost” government-funded PACE projects and made it appear that the unenrolled company was a California government agency or affiliate.

In its press release, the DFPI states that, before the CCFPL’s enactment, Mr. Berry and his companies would have fallen outside of the DFPI’s regulatory oversight because it did not have the authority to bring enforcement actions against unenrolled individuals or companies.  However, the CCFPL prohibits “covered persons” from engaging in unfair, deceptive, or abusive practices and authorizes the DFPI to enforce that prohibition.  A “covered person” includes “[a]ny person that engages in offering or providing a consumer financial product or service to a [California resident],” or their affiliate or service provider.

 

 

In January 2020 the Federal Housing Finance Agency (FHFA) published a request for input on Property Assessed Clean Energy (PACE) transactions involving residential property. FHFA describes PACE transactions as being part of residential energy retrofitting programs that are created through special state legislation and result in the financed part of the transaction resulting in a tax assessment on the home, which is a ‘‘super-priority lien’’ over existing and subsequent first mortgages. (As previously reported, pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act (Act) the CFPB is conducting rulemaking to extend Truth in Lending Act ability-to-repay requirements to PACE transactions.)

The FHFA notes in the request for input that previously it directed Fannie Mae and Freddie Mac not to purchase mortgage loans on homes that are subject to a lien in connection with a PACE transaction. FHFA also notes that the Federal Housing Administration (FHA) will not insure loans on homes that are subject to a lien in connection with a PACE transaction. In the Request for Input, the FHFA seeks comment on enhancing the actions taken regarding PACE transactions.

In particular, the FHFA seeks comments on whether it should direct Fannie Mae and Freddie Mac to (1) decrease loan-to-value (LTV) ratios for all new loan purchases in states or in communities where PACE loans are available, or (2) increase their Loan Level Price Adjustments (LLPAs) or require other credit enhancements for mortgage loans or re-financings in communities with available PACE financing.

The deadline to respond to the request was March 16, 2020. Among the various comments, a number of industry trade organizations joined in a comment letter. In the letter, the organizations state “[w]e jointly write . . . to express our significant concern with FHFA’s consideration of options to limit access to conventional financing for borrowers with less than a 20% down payment simply because they live in jurisdictions where PACE financing may be available. A decrease in allowable [LTV] ratios for new home purchases in jurisdictions that permit PACE financing would be unnecessarily punitive to the millions of consumers who live in those jurisdictions and who would be affected negatively due to the presence of PACE financing in that area.”

With regard to the request for input on the increase of LLPAs, the organizations oppose such a policy and state that “increased LLPAs would be an unnecessary and burdensome fee for homebuyers that is unrelated to their personal credit profiles. This policy would amount to an arbitrary and speculative tax on homebuyers in select jurisdictions and is not grounded in the reality of the risk posed by any one borrower’s loan.” The organizations note that had such a policy been in effect in 2019, the “arbitrary fees” could have applied to nearly one million home purchase transactions in the three states (California, Florida and Missouri) that permit residential PACE financing.

The organizations joining in the joint comment letter are the California Mortgage Bankers Association, Credit Union National Association, Housing Policy Council, Leading Builders of America, Mortgage Bankers Association, Mortgage Bankers Association of Florida, Mortgage Bankers Association of Missouri, National Association of Federally-Insured Credit Unions, National Association of REALTORS®, Real Estate Services Providers Council, Inc. (RESPRO), and U.S. Mortgage Insurers.

As we reported previously, the Economic Growth, Regulatory Relief and Consumer Protection Act (Act) subjects Property Assessed Clean Energy (PACE) financing to Truth in Lending Act (TILA) ability-to-repay (ATR) requirements under rules to be adopted by the CFPB. The CFPB recently issued an advance notice of proposed rulemaking to solicit information regarding PACE financing. Comments will be due 60 days from publication of the notice in the Federal Register.

For purposes of the Act, a PACE financing is defined as financing to cover the costs of home improvements that result in a tax assessment on the real property of the consumer. The Act provides that the CFPB regulations must carry out the purposes of the TILA ATR requirements and apply the TILA civil liability provisions to violations of those requirements, accounting “for the unique nature of” PACE financing. The Act also provides that in connection with adopting regulations, the CFPB may collect such information and data that it determines is necessary, and must consult with state and local governments and bond-issuing authorities.

The CFPB seeks information dealing with five main categories and numerous sub-categories of information:

  1. Written materials associated with PACE financing transactions.

In particular, the CFPB requests (a) materials provided to consumers before they sign a PACE financing agreement, (b) PACE financing agreements, and (c) bills or statements that provide payment information to consumers.

  1. Descriptions of current standards and practices in the PACE financing origination process.

Among other items of information, the CFPB requests information regarding (a) the collection and verification of information from consumers and third parties, (b) current underwriting standards, and whether those standards include a determination of a consumer’s ability to repay, (c) the process of approving or denying financing applications, (d) the parties to whom PACE financing obligations are “initially payable on the face” of the financing agreements, (e) the role of state or local governments in the origination and underwriting of PACE financing, and (f) the relationship between the PACE financing agreement and the home improvement agreement.

  1. Information relating to civil liability under TILA for violations of the ATR requirements in connection with PACE financing, as well as rescission and borrower delinquency and default.

The CFPB notes that this information request is intended to help the CFPB identify to whom TILA civil liability might apply and which parties would in fact bear the risk of any such liability. The CFPB requests information regarding (a) the assignment, sale or securitization of PACE financing agreements, (b) any indemnification agreements that are commonly part of PACE financing transactions, (c) the rescission rights available to consumers with respect to PACE financing agreements or home improvement contracts, and (d) what happens to PACE financing obligations when a consumer becomes delinquent or defaults, including information regarding any loss mitigation programs.

  1. Information about what features of PACE financing make it unique and how the Bureau should address those unique features.

The CFPB seeks information on a number of topics, including information regarding (a) any public or private financing options that satisfy the Act’s definition of a PACE financing, whether or not the options are commonly understood to be PACE financing, (b) the source of funding for PACE financing, (c) the role of public bonds in PACE financing, (d) consumer repayment, (e) how PACE financing is integrated with local property tax systems and how specific information about the PACE financing is distinguished from other real property tax obligations in the tax system, (f) the financial costs to consumers that may be associated with PACE financing, (g) any costs savings associated with home improvement projects funded with PACE financing, (h) whether the addition of PACE financing affects consumers’ ability to meet their financial obligations, (i) the liens associated with PACE financing, and (j) the treatment of PACE financing obligations by servicers of mortgage loans that were placed on the property before the PACE financing encumbrance,

  1. Views concerning the potential implications of regulating PACE financing under TILA.

The CFPB requests information regarding (a) any likely effects on state and local governments or bond-issuing authorities if existing TILA ATR requirements were to apply to PACE financing, (b) the likely effects on consumers and PACE financing industry participants resulting from the application of such requirements to PACE financing, (c) which specific TILA ATR requirements, if applied to PACE financing, would conflict with existing state or local legal requirements, (d) which specific TILA ATR provisions would be difficult for market participants to apply to current PACE financing origination practices, bond processes, or laws and practices implicating real property tax systems, (e) which specific TILA ATR provisions would be beneficial for consumers, (f) how the existing TILA ATR requirements could be tailored to account for the unique nature of PACE financing, (g) any likely impacts on consumers or PACE financing market participants resulting from the application of TILA civil liability provisions to PACE financing, and (h) whether the CFPB should address the application of other TILA provisions to PACE financing.

The Federal Reserve Board, FDIC, and OCC (collectively, the “Agencies”) issued on November 23 a short Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps (“Joint Statement”), which announced – without further concrete detail – that they had assembled a “crypto asset roadmap” in order to provide greater clarity in 2022 to banks on the permissibility of certain crypto-asset activities.  Only the week before, the OCC’s Chief  issued Interpretive Letter #1179, which confirmed that a national bank or federal savings association could engage in certain cryptocurrency, distributed ledger and stablecoin activities – consistent with prior OCC letters – so long as a bank shows that it has sufficient controls in place, and first obtains written notice of “non-objection” by its supervisory office.  This post will discuss both publications.

There is great overlap between the bank activities referenced in the Joint Statement and Interpretive Letter #1179.  The 2022 clarity promised by the “roadmap” presumably will supersede, once issued, Interpretive Letter #1179, which appears to function as a general stop-gap until the 2022 publications hopefully provide more detail regarding exactly how banks can attain compliance.

Federal banking regulators have been busy in this space.  These pronouncements come closely on the heels of a Report on Stablecoins issued earlier in November by the Agencies and the U.S. President’s Working Group on Financial Markets, which delineated perceived risks associated with the increased use of stablecoins and highlighted three concerns: risks to rules governing anti-money laundering (“AML”) compliance, risks to market integrity, and general prudential risks.

A “Crypto Asset Roadmap” Promising Future Clarity

In the Joint Statement, the Agencies state that they “recognize that the merging crypto-asset sector presents potential opportunities and risks for banking organizations, their customers, and the overall financial system.”  Accordingly, “it is important that [the Agencies] provide coordinated and timely clarity where appropriate to promote safety and soundness, consumer protection, and compliance with applicable laws and regulations, including [AML] and illicit finance statute and rules.”  The Joint Statement therefore provides a “crypto asset roadmap” — the five bullet points set forth below — regarding topics for which the Agencies “plan to provide greater clarity [throughout 2022] on whether certain activities related to crypto-assets conducted by banking organizations are legally permissible, and expectations for safety and soundness, consumer protection, and compliance with existing laws and regulations[.]”  The five “roadmap” topics are:

  • Crypto-asset safekeeping and traditional custody services.
  • Ancillary custody services.
  • Facilitation of customer purchases and sales of crypto-assets.
  • Issuance and distribution of stablecoins.
  • Activities involving the holding of crypto-assets on balance sheet.

In other words: although the Joint Statement provides no concrete details, stay tuned for greater clarity throughout 2022 for banks regarding crypto-assets and related safety and soundness issues.  In theory, this potential regulatory clarity sounds promising – but of course, the devil is in the details, and the final product will need to judged according to its actual utility.  The Joint Statement also notes that the Agencies will evaluate bank capital and liquidity standards for crypto assets for activities involving U.S. banking organizations.

OCC Interpretive Clarification

The OCC’s Interpretive Letter #1179 refers back to three prior OCC Interpretive Letters:

  • OCC Interpretive Letter 1170, issued on July 22, 2020 and addressing whether banks may provide cryptocurrency custody services;
  • OCC Interpretive Letter 1172, issued on September 21, 2020 and addressing whether banks may hold dollar deposits serving as reserves backing stablecoin in certain circumstances; and
  • OCC Interpretive 1174, issued on January 4, 2021 and addressing (1) whether banks may act as nodes on an independent node verification network (e., distributed ledger) to verify customer payments, and (2) whether banks may engage in certain stablecoin activities to facilitate payment transactions on a distributed ledger.

All three of the above interpretive letters found that banks could perform the activity under consideration, if certain conditions were met.  Distilled, Interpretive Letter #1179 confirms that the activities described in the prior interpretive letters are “legally permissible for a bank to engage in, provided the bank can demonstrate, to the satisfaction of its supervisory office, that it has controls in place to conduct the activity in a safe and sound manner.”  Importantly, a national bank or federal savings association wishing to engage in any of the activities described above must notify in writing its supervisory regulator, and should not engage in such activities until it receives written notification of the supervisor’s “non-objection.”  As always, the adequacy of the bank’s risk management systems will be critical to this determination.  To obtain supervisory non-objection, a bank must demonstrate in writing that it understands any relevant compliance obligations, including under the Bank Secrecy Act, federal securities laws, the Commodity Exchange Act, and consumer protection laws.  Once a bank has received supervisory non-objection, the OCC will review these activities as part of its ordinary supervisor process.  It is unclear how fact regulators will act – or not – on requests for non-objection before the Agencies issue the clarity promised by “road map” sometime in 2022.

Interpretive Letter #1179 provides that banks already engaged in cryptocurrency, distributed ledger, or stablecoin activities as of the date of the letter do not need to obtain supervisory non-objection, assuming that they previously notified their supervisory offices and have adequate systems and controls in place to ensure that they are operating in a safe and sound manner.

On October 29, the CFPB published additional frequently asked questions on Regulation F, its final debt collection rule, as well as a guidance document.  The new FAQs address validation notice requirements (including for residential mortgage debts) and the guidance document deals with how to disclose the validation information on the itemization table on the model validation notice.  Regulation F is effective November 30, 2021.  (Last month, the CFPB published FAQs on the rule’s limited-content message and call frequency provisions.)

Debt Collection Rule FAQs Update

Debt collectors may use Model Form B-1 in Appendix B to Regulation F to comply with the validation information content and form requirements of § 1006.34(c) and (d)(1).  The CFPB’s new FAQs on validation information address the following questions:

  1. What information is required?
  2. Is there a model validation notice?
  3. Is use of the model validation notice required?
  4. Can the model validation notice be changed?

The CFPB’s model validation notice (in both English and Spanish ) contains five categories of validation information: (i) debt collection communication disclosures; (ii) debt-related information; (iii) itemization-related information; (iv) information about consumer protections; and (v) consumer-response information.

The CFPB expects a validation notice to contain all such required information—this is a communication from a debt collector; information about the debt; amount owed and itemization; where consumers can go for information about protections; and a way to respond—in the required format.  Debt collectors who use the Bureau’s model validation notice have a “safe harbor” for compliance with the content and format requirements.

The CFPB explicitly states that the final rule “does not require a debt collector to use the model validation notice” and that use of the model notice “is one way to comply to comply [with the content and format requirements in Regulation F.]”  It states further that debt collectors who choose “not to use the model validation notice” or who make “changes that are not specified in the Rule,” resulting in a notice that is not substantially similar to the model validation notice, do not necessarily violate the final rule.  They will not, however, be able to avail themselves of the safe harbor protection in a lawsuit or a supervisory context.

The Bureau also published new FAQs on validation information for residential mortgage debt that address the following questions:

  1. Is there a special rule for residential mortgage debt when disclosing itemization information?
  2. What information may be omitted?
  3. Is there safe harbor protection for residential mortgage debt?
  4. What is the “most recent periodic statement” for purposes of the Mortgage Special Rule?
  5. What itemization date is used for the Mortgage Special Rule?

An itemization of the debt is generally a required component of a validation notice.  However, under the final rule’s special rule for certain residential mortgage debt in § 1006.34(c)(5) (Special Rule), debt collectors can instead provide the most recent periodic statement required by Regulation Z as a substitute for the itemization-related information.  The CFPB indicates that the statement can be one that was provided by the debt collector (as long as that periodic statement was required by Regulation Z at the time it was provided).  The statement must be included in the same communication as the validation notice.  In the space on the validation notice where a debt collector would have put the omitted itemization information, the debt collector could provide the statement, “See the enclosed periodic statement for an itemization of the debt.”

The itemization-related information that debt collectors using the Special Rule are permitted to omit from the validation notice consists of the (i) itemization date; (ii) amount of the debt as of the itemization date; and (iii) itemization of the current amount of the debt.  However, the Bureau does explicitly (and emphatically) point out that “while the Itemization Table on the model validation notice includes the validation information that may be omitted, it also includes the current amount of the debt, which is validation information that may not be omitted from the validation notice under the Special Rule.  A debt collector who uses the Special Rule must still disclose the current amount of the debt on the validation notice.”  The CFPB also points out that although a debt collector using the Special Rule does not need to disclose an itemization date on the validation notice, it still needs to determine the itemization date to disclose the other date-dependent validation information.

Although confirming that the safe harbor remains available to a debt collector who uses the model validation notice but also complies with the Special Rule, the CFPB stated that the safe harbor is limited to compliance with validation information and format requirements for the information provided in the actual model validation notice only.  The debt collector does not receive a safe harbor for the content and format requirements for the content included in the periodic statement.

Debt Collection Rule: Disclosing the Model Validation Notice Itemization Table

In addition to its new FAQs, the CFPB also published a guidance document, “Debt Collection Rule: Disclosing the Model Validation Notice Itemization Table.”  The Bureau indicates that one way a debt collector using the model validation notice may, but is not required to, complete the Itemization Table is by using the following four steps:

  1. Select the itemization date.
  2. Determine the amount of the debt as of the itemization date.
  3. Determine the Itemized Amounts since the itemization date.
  4. Determine the amount of the debt.

In the guidance document, the CFPB provides a detailed discussion of each of these four steps.  It also provides example itemization tables illustrating how a debt collector could complete the Itemization Table when collecting various types of debts.  The types of debts illustrated in the examples are credit card debt, residential mortgage debt, medical debt, and multiple medical debts owed by the same consumer.

With help from Ballard Spahr colleagues Mindy Harris and Ron Vaske, I have now completed a months-long project in updating and expanding a 2017 White Paper addressing bank-model lending—programs involving partnerships between banks (or savings associations) and fintech or other nonbank companies in the interstate delivery of loans.

The new White Paper, which runs 49 pages single-spaced, is designed to serve as a comprehensive survey of laws, cases and regulatory attitudes addressing bank-model lending.  It costs $7,500 and covers:

  • the statutes and cases providing the legal framework for the nationwide “exportation” of interest charges under bank-model lending programs;
  • cases supporting and rejecting “true lender” attacks on bank-model programs;
  • Madden and subsequent developments, including OCC and FDIC rules rejecting its conclusion that a nonbank loan purchaser loses the usury authority of the bank selling it loans;
  • potential Maryland and other licensing attacks on bank-model programs;
  • an analysis of the parties posing risks for these programs, including risk rankings of the states of greatest concern (with explanations); and
  • risk factors, risk mitigants and risk reduction measures.

The Table of Authorities in the White Paper contains hyperlinks to all relevant authorities cited in the White Paper.

Banks and companies interested in purchasing the White Paper should contact Jasmine Loftland at 215.864.8610 or loftlandj@ballardspahr.com.

CFPB enforcement activity has already ramped up and the pace is expected to increase with Director Chopra now at the helm.  We look at the areas expected to be the focus of intensified enforcement activity, such as military lending, fair lending, and treatment of LEP consumers, and new areas under consideration by CFPB enforcement staff, such as machine learning models, use of alternative data, and fair lending related to servicing and loss mitigation (particularly in light of the end of pandemic-related forbearances).  Other issues discussed include the CFPB’s use of aiding and abetting liability to reach service providers and the implications of a recent 7th Circuit decision on judicial relief available to the CFPB.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Chris Willis, Co-Chair of Ballard Spahr’s Consumer Financial Services Group, James Kim, a partner in the Group, Sarah Reise, Of Counsel in the Group, and Sarah Pruett, an associate in the Group.

Click here to listen to the podcast.

A group of 96 organizations and individuals, who describe themselves as consisting of “consumer, labor, civil rights, legal services, faith, community and financial organizations and academics,” have sent a letter to the CFPB urging the Bureau to regulate fee-based earned wage access (EWA) products as credit subject to the Truth in Lending Act.  EWA products provide employees with access to earned but as yet unpaid wages.  Such products typically involve an EWA provider that enables employees to request a certain amount of accrued wages, disburses the requested amounts to employees prior to payday, and later recoups the funds through payroll deduction or bank account debits on the subsequent payday.

The letter takes aim at the Bureau’s November 2020 advisory opinion dealing with EWA products and its December 2020 approval order issued in connection with Payactiv’s EWA program.  The advisory opinion addressed whether an EWA program with the characteristics set forth in the opinion was covered by Regulation Z.  Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees.

The approval order, which was issued through the Bureau’s Compliance Assistance Sandbox Policy, confirmed that Payactiv’s EWA program described in the order did not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z, and therefore, Payactiv had a safe harbor from liability under TILA and Regulation Z in connection with the specified EWA program.  In concluding that Payactiv did not offer or extend credit under the EWA program, the Bureau noted that various features often found in credit transactions were absent from Payactiv’s program.  For example, Payactiv had no rights against the employee if a payroll deduction was insufficient to cover the amount of already earned wages transferred to an employee and did not charge any interest or other fees against a transfer of earned wages, ensuring that the amount PayActiv is entitled to recover did not increase over time.

In their letter to the Bureau, the organizations and academics assert that “[r]egardless of how they are structured, the essence of virtually all [EWA] programs is that a third party advances funds to the consumer before the consumer’s regular payday and is repaid later in some fashion out of the paycheck.  That is a loan.  Methods to verify that the consumer has earned wages coming to them are simply a form underwriting or security.”  They claim that viewing EWA products as something other than “credit” leads to evasion of federal credit laws such as TILA, and of state laws, particularly state usury laws.  They also raise concerns about the potential impact of the Bureau’s reasoning in the advisory opinion and approval order on fair lending laws, claiming that such reasoning “could be used in an attempt to weaken the scope of the ECOA and its protections against discrimination against communities of color and other protected classes.”

In addition to urging the Bureau to treat fee-based EWA programs as credit covered by TILA, they urge the Bureau to rescind the advisory opinion or revise it to focus only on whether providers of free EWA programs are “creditors’ under TILA, revisit and potentially revoke Payactiv’s approval order (which they claim Payactiv is “misusing”), and supervise fee-based EWA providers under the CFPB’s authority to supervise payday lenders.

Two of the signatories to the letter, the National Consumer Law Center and the Center for Responsible Lending, sent the Bureau a separate 46-page letter urging the Bureau to take similar actions but also providing a detailed critique of the advisory opinion and approval order.  The letter includes a discussion of the two organizations’ claim that the Bureau’s TILA analysis “could provide arguments for other emerging products that claim not to be credit or covered by credit laws [including] income share agreements, PACE loans, share appreciation home financing, and some online point-of-sale retail financing.”

In concluding in the Advisory Opinion that “Covered EWA Transactions” are not “credit” under TILA, the CFPB relied on Comment 2(a)(14)-1(v), which excludes from credit “[b]orrowing against the accrued cash value of an insurance policy or a pension account if there is no independent obligation to repay.”  While we agree with NCLC and CRL that the Opinion includes several nonessential characteristics of “Covered EWA Transactions” in its “credit” analysis, we disagree with their objections to the crux of the Opinion, which is that “a Covered EWA Program facilitates employees’ access to wages they have already earned.”  NCLC and CRL attempt to undercut the CFPB’s analysis by asserting that Covered EWA are analogous to tax refund anticipation loans (RALs) and home equity loans (HELs) (both of which are “credit” under TILA), in which “people borrow against accrued value, essentially their own money.”

NCLC and CRL diminish the fact that, unlike Covered EWA Transactions, borrowers have an independent obligation to repay these products.  This is a significant distinction in our view.  When there is no independent obligation to repay, as with a Covered EWA Transaction, then repayment is only from funds that the consumer has already earned, so no “debt” can be created.  We hope the CFPB takes a close look at the merits of the consumer groups’ arguments and bases any future activity related to EWA Programs – and any other emerging products – on stronger legal footing.

The National Defense Authorization Act as passed by the House and now headed to the Senate includes amendments to the Fair Credit Reporting Act dealing with the reporting of adverse information on servicemembers by consumer reporting agencies.

The amendments add the defined terms “uniformed consumer” and “deployed uniformed consumer” to the FCRA.  A “uniformed consumer” is defined as a consumer who is a member of the uniformed services (i.e. Army, Navy, Air Force, Marine Corps, Space Force, Coast Guard, and commissioned corps of the Public Health Administration and National Oceanic and Atmospheric Administration) or the National Guard and is in active service.  A “deployed uniformed consumer” is defined as a uniformed consumer who serves in a combat zone, aboard a U.S. combatant, support, or auxiliary vessel, or in a deployment and is in active duty for such service for not less than 30 days.

The amendments impose the following prohibition and requirements:

  • A CRA is prohibited from reporting “any item of adverse information about a uniformed consumer, if the action or inaction that gave rise to the item occurred while the consumer was a deployed uniformed consumer.”
  • If an item of adverse information is included in a consumer’s file and the consumer provides the CRA with “appropriate proof, including official orders” that the consumer was a deployed uniformed consumer at the time of the action or inaction that gave rise to the item occurred, the CRA must “promptly delete the item of adverse information from the [consumer’s] file and notify the consumer and the furnisher of the information of the deletion.”
  • If a CRA receives any item of adverse information about a consumer who has provided appropriate proof that he or she is a uniformed consumer, the CRA must promptly notify the consumer that it has received such item, provide a description of the item, and provide the method by which the consumer can dispute the item’s validity.
  • For a consumer who has provided appropriate proof to the CRA that he or she is a uniformed consumer, if the consumer gives the CRA separate contact information to be used while the consumer is a uniformed consumer, the CRA must use that contact information for all communications while the consumer is a uniformed consumer.

The amendments are accompanied by a statement of the “sense of Congress” that anyone using a consumer report that contains an item of adverse information arising from an action or inaction that occurred while the consumer was a uniformed consumer should “take such fact into account when evaluating the creditworthiness of the consumer.”

The U.S. Department of Education has issued a new interpretation “to revise and clarify its position on the legality of State laws and regulations that govern various aspects of the servicing of Federal student loans.”  The new interpretation revokes and supersedes the ED’s 2018 preemption determination.  It was not unexpected, as the ED has taken a number of steps in recent months to reverse Trump Administration policies that hindered state oversight of federal student loan servicers.  Although the interpretation will be effective on the date of its publication in the Federal Register, the ED is seeking comment “so it can identify any additional changes that may be needed.”  Comments must be filed no later than 30 days after the publication date.

Underlying the new interpretation is the “overarching principle” that:

[T]he States have an important role to play in this area and it is appropriate to pursue an approach marked by a spirit of cooperative federalism that provides for concurrent action according to a concerted joint strategy intentionally established among Federal and State officials.  Accordingly…the Department believes that there is significant space for State laws and regulations relating to student loan servicing, to the extent these laws and regulations are not preempted by the Higher Education Act of 1965, as amended (HEA), and other applicable Federal laws.

The conclusion reached by the ED is that state laws regulating the servicing of federal student loans “are preempted only in limited and discrete aspects as further discussed in this interpretation.”  The ED finds that the 2018 interpretation’s approach to preemption is “seriously flawed” and for the reasons given in the new interpretation, the ED states that it “is changing its approach to preemption of State student loan servicing laws that was laid out in the 2018 interpretation.”

The ED gives the following key reasons for its new interpretation:

  • Preemption is at its weakest in areas where states assert they are acting under their general police powers for the purpose of protecting their citizens.  In the ED’s view, such areas include student loan servicing laws, and education has been long regarded as a subject for the exercise of predominately state powers.
  • The 2018 interpretation found that federal law preempts the entire field of law relating to federal student loan servicing.  At no time before issuing the 2018 interpretation did the ED take the view that field preemption applied to the servicing and collection of federal student loans and the courts have held that the ED did not provide persuasive reasons for its position.  After reexamining the issue of field preemption, the ED rejects the 2018 interpretation’s analysis and concludes that field preemption does not apply to the servicing and collection of federal student loans.
  • The 2018 interpretation also based preemption of state student loan servicing laws on the ground that the HEA expressly preempts state laws requiring federal student loan servicers to provide information not required by federal law.  The ED determines that the 2018 interpretation failed to distinguish between satisfying HEA disclosure requirements and conveying accurate information so as not to mislead a borrower.  In reconsidering the issue of express preemption, the ED finds that, except in the limited and specific instances expressly set forth in the HEA, state student loan servicing laws are not expressly preempted by the HEA.
  • Implied conflict preemption only applies where there is a direct conflict between state and federal law, which in the ED’s view is limited to state laws that would allow for the revocation of state licensing of federal student loan servicers.  According to the ED, recent court decisions considering conflict preemption have consistently determined that the HEA places no emphasis on maintaining uniformity in federal student loan servicing and have upheld state authority to address fraud and affirmative misrepresentations.
  • Case law does not support the uniformity argument made in the 2018 interpretation as the basis for finding that state laws prohibiting affirmative misrepresentations by servicers of loans made under the Direct Loan Program are preempted by general disclosure requirements in federal law.
  • For Federal Family Education Loan Program (FFEL Loans), while federal law preempts state laws that conflict squarely on issues such as timelines, dispute resolution procedures, and collections, the ED concludes that it does not preempt state laws relating to affirmative misrepresentations as well as other measures intended to address improper conduct that may occur in FFEL Loans and that do not conflict with federal law.
  • The 2018 interpretation sought to justify how the ED could provide adequate oversight of federal student loan servicers on its own.  A different approach in which there is a coordinated  partnership between federal and state officials is, in the ED’s reconsidered view, more likely to succeed.  In describing what this new approach means, the ED states:

Rather than viewing [State attempts to address customer service issues] as inconvenient or detrimental to its objectives, the ED now recognizes that State regulators [and State attorneys general] can be additive in helping to achieve the same objectives championed in the 2018 interpretation.  Rather than expending time and effort contesting the authority of the States in unproductive litigation, the Department intends to work with the States to share the burdens and costs of oversight to ensure that loans servicers are accountable for their performance in better serving borrowers.