Earlier this week, the CFPB’s Office of Research released its third “Data Point” report on Americans who are “credit invisible” – that is, those without an established credit history with the three national credit reporting agencies – and who therefore cannot be scored by most traditional credit scoring models.  The report, entitled “The Geography of Credit Invisibility,” focuses on the geographic concentrations of credit invisible consumers, to determine whether there are “credit deserts” in which access to credit is largely absent, leading to consumers in those areas being unable to become “credit visible” by establishing a credit history.

The report makes a number of interesting observations about the incidence of credit invisibility, focusing on adults over the age of 25 (because, according to the report, most Americans succeed in transitioning into credit visibility between the ages of 18 and 25, typically through credit cards or student loans).  Some of those observations are:

  • The report indicates that credit invisible consumers are concentrated in two types of geographies: in core urban areas (as opposed to suburban areas), and in rural or small-town areas.
  • Rural and small-town areas have the highest proportional incidence of credit invisibility, but because of the higher populations in urban areas, about 2/3 of credit invisible adults over age 25 reside in those areas.
  • The report provides data showing that average income level in a neighborhood is correlated with credit invisibility in urban areas, but this link between income and invisibility is absent in rural areas.
  • Because many consumers use credit cards as an “entry” product that makes them credit “visible,” the report presents data about the use of credit cards by consumers in various types of areas, and by income level. In urban and suburban areas, the use of credit cards is higher as an “entry” product, and the use of credit cards increases with income level.  In rural and small-town areas, the use of credit cards is lower, and does not increase significantly with income level.
  • Testing the hypothesis that proximity of traditional banking services may be a factor in credit invisibility, the report then examines data showing the use of credit cards as an “entry” product, sorted by the distance to the nearest bank branch. The report highlights that proximity to a bank branch is somewhat correlated with higher credit card usage as an “entry” product in urban and suburban areas, but there is no such correlation in rural areas.
  • Based on this data, the report observes that “[t]hese results provide little evidence that bank branch proximity is an important factor in explaining why consumers are credit invisible.” In fact, the report goes on to note that branch proximity is not one of the more common reasons why consumers say that they do not have a bank account.  More common reasons provided are not having enough money to put in a bank account, and a distrust of banks.
  • The report also contains data demonstrating a relationship between the availability of high-speed internet service and credit invisibility, showing that areas with less availability of internet service have significantly higher rates of credit invisibility. The report notes that credit cards, a typical “entry” product for credit invisible consumers, are typically marketed and offered online, suggesting a potential causal link between internet access and the ability to obtain a credit card.

The report does not make any policy recommendations about the subject of credit invisibility, and does not present the issue as a fair lending concern – there is no data correlating credit invisibility with any protected status under the Equal Credit Opportunity Act.  What, then, should we make of the report, and its implications for the CFPB’s future activities with respect to making credit more widely available to “invisible” consumers?

My guess is that the report will be used to support efforts to use innovation to increase access to credit for invisible consumers.  A few policy conclusions that could be drawn from the report include the following:

  1. The CFPB should encourage alternative scoring models that enable underwriting decisions to be made with respect to “invisible” consumers, and should refrain from heavy-handed application of the disparate impact theory with respect to such models. (That theory could, theoretically, be used to attack scoring models that approve members of protected classes proportionately less, but the business justification of the model’s ability to predict repayment performance should cause the Bureau to refrain from asserting it in this context).
  2. The report may suggest that models based on consumers’ internet activity may be ineffective in making credit available to consumers in areas with little internet access.
  3. Because the use of mobile devices is not dependent on the kind of high-speed home internet access the report shows to be correlated with higher rates of credit invisibility, this would suggest that the CFPB should encourage financial institutions to make products more available/accessible through mobile devices (using mobile-optimized web pages or mobile apps). This would, optimally, involve providing realistic guidance to financial institutions about how to make disclosures and obtain necessary consents through mobile devices in ways that do not deter consumers because of their cumbersome nature.
  4. The report may suggest that the Bureau’s education efforts with respect to access to credit should be concentrated in core urban and rural/small town areas.
  5. Finally, the report suggests that the problem of credit invisibility could be addressed in urban areas by products tailored to low-income consumers, and this in turn would indicate that the CFPB should encourage financial institutions to offer such products, again without heavy-handed application of “reverse redlining” theories under the Equal Credit Opportunity Act for financing sources who offer such products. This same data point would also support the Bureau’s effort to revise its small-dollar lending rule, to prevent small-dollar loans from being extinguished as an “entry” product for credit visibility.  (The report does not address this at all, since it relies on credit cards as the most common “entry” product to the three national credit reporting agencies.  However, there is credit reporting on small-dollar loans through specialty credit bureaus, and data on these credit interactions could be used to qualify consumers for other credit products).

We certainly hope that the Bureau uses the data in this report to guide its policy decisions in a direction that will make credit more available for “credit invisible” Americans.

We have been following very closely the lawsuit filed by the CFPB and the New York Attorney General against RD Legal Funding.  We earlier reported that on June 21 Judge Preska dismissed the CFPB’s claims based on the unconstitutionality of the CFPA. We subsequently reported that on September 12 Judge Preska dismissed the claims brought by the New York Attorney General under Section 1042 of Dodd -Frank (i. e., the provision authorizing state attorneys general to initiate lawsuits based on UDAAP violations) and also dismissed the Attorney General’s state law claims for lack of subject matter jurisdiction as a result of there being no remaining federal questions in the case.

The most recent development is that yesterday Judge Preska amended her September 12 order to provide that her dismissal of the New York Attorney General’s 1042 claims are “with prejudice”. That means that the New York Attorney General should not be able to re-file her 1042 claims in state court unless and until a higher court reverses Judge Preska’s order. The CFPB has already filed an appeal with the Second Circuit and it seems likely that the New York Attorney General will do the same.

The CFPB and its Acting Director are facing a proposed class action lawsuit alleging discrimination against minority and female workers based on allegations of lesser pay and fewer promotions than their white male counterparts. The case is captioned at, Jones et al v. Mulvaney, U.S. District Court, District of Columbia, No. 18-2132.

The Complaint, filed on September 13, 2018, in the D.C. District Court, alleges violations of the 1866 Civil Rights Act, Title VII of the 1964 Civil Rights Act and the 1963 Equal Pay Act. The lawsuit is seeking punitive damages and compensation for lost pay and benefits for minorities and women who have worked as consumer response specialists at the CFPB.

The plaintiffs contend that while the CFPB and Acting Director Mulvaney are tasked with providing justice to American consumers, they have failed in their responsibility to their own employees. The plaintiffs, Ms. Carzanna Jones and Mr. Heynard Paz-Chow, are seeking certification to join in the case a class of racial minority and female employees, both past and present, working in the consumer response division, whom the plaintiffs allege were subjected to the same discrimination and retaliation while working for the CFPB. Ms. Jones is a current employee of the CFPB, and her allegations cover the length of her career at the bureau dating back to 2012. Mr. Paz-Chow is a former employee of the bureau from 2011-2014, and his allegations occurred under the leadership of former CFPB Director Richard Cordray. The consumer response division of the bureau is responsible for investigating consumer complaints and determining whether laws or regulations have been violated.

The pending lawsuit alleges that through an agency-wide pattern and practice of discrimination and retaliation, the CFPB has sought to disparately impact racial minority and female workers despite the continued objections of CFPB employees. Specifically, it is alleged that the CFPB instituted discriminatory policies and procedures in its training, assigning, evaluating, and compensation of minority and female employees. The Complaint also details specific instances of discrimination and retaliation alleged to have been suffered by the individual named plaintiffs including:

  • Denial of training and promotion opportunities
  • Unequal assignment of investigations leading to disproportionate case closings which impact employee evaluations
  • Denial of transfer requests
  • Pay disparities
  • Failure to abide by the requirements of the ADA and FMLA
  • Retaliatory actions after employees complained about inequalities

The allegations in the Complaint stretch back as far as 2011 and address statistical studies and congressional reports that have highlighted equality issues at the CFPB under multiple directors. According to the Complaint, those analyses and investigations have shown deficiencies in the pay and promotion of both racial minorities and female employees in line with the allegations of the Complaint. The Complaint cites to a Congressional Investigation by the U.S. House of Representatives initiated in 2014 and an Office of Inspector General (“OIG”) report from 2015. Both authorities found significant issues with widespread disparities negatively impacting racial minority and female employees with regard to performance ratings, pay, promotion and related areas. During a hearing of the U.S. House of Representatives Financial Services Committee, a CFPB attorney testified that the white males in authority at the bureau gave themselves the best performance evaluations to garner better raises and bonuses.

The BCPB has historically taken the position that it can use investigations to conduct compliance “sweeps” of entire industries. Indeed, a version of the BCFP’s Enforcement Policies and Procedures Manual made available to the public through a FOIA request in 2016 stated that: “It is not necessary to have evidence that a law has in fact been violated before opening a formal investigation. That means, for example, that the Bureau could conduct a ‘compliance’ sweep to investigate whether industry participants are complying with a law or regulation.”

The BCFP has historically used CIDs and investigations to supervise industries over which it otherwise lacked supervisory authority—imposing huge costs on industry participants without justification.  On September 6, 2018, the Fifth Circuit took a dim view of that tactic. In its opinion in the The Source for Public Data, L.P. case, the Fifth Circuit struck down a CID apparently issued as part of such an industry sweep. “Simply put,” the court held, “the CFPB does not have the ‘unfettered authority to cast about for potential wrongdoing.’”

Dodd-Frank requires the BCFP to include a “Notification of Purpose” in every CID stating “the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” The BCFP has historically read this requirement very loosely. Paraphrasing, most Notifications of Purpose said no more than: “The purpose of this investigation is to determine whether anybody did anything wrong.”  They generally gave CID recipients no information whatsoever as to the conduct under investigation. Sometimes it was possible to guess based on the document requests and interrogatories included in the CIDs, but the Notifications of Purpose were not generally specific enough to allow recipients to meaningfully negotiate the scope of the CID or to know whether they were targets of an investigation or only third-party witnesses. The BCFP has taken and endorsed this approach even under Mulvaney, who recently denied a request to modify or set aside a CID containing a broad Notification of Purpose.

The Fifth Circuit acknowledged this as a real problem. It found that such broad Notifications of Purpose did not allow courts to meaningfully evaluate whether the information requested by the BCFP was “reasonably relevant” to the matter under investigation—the standard courts apply to government requests for information. As a result, the Fifth Circuit found that it could not enforce the CID and, reversing the lower court, struck the CID down entirely. In doing so, the Fifth Circuit joined with the D.C. Circuit which, in 2017, rejected a similarly broad Notification of Purpose in the ACICS case. In striking the CID, the Fifth Circuit held that “[t]here are consequences to ‘the absurdity of giving a notification that notifies of no purpose whatsoever.”

Beginning in 2019, all California “debt collectors”—including creditors collecting their own debts regularly and in the ordinary course of business—will be required to provide notice to debtors when collecting on debts that are past the statute of limitations and will be prohibited from suing on such debts. The new law is based on provisions in the 2013 California Fair Debt Buying Practices Act. However, unlike the 2013 Act, which limited the notice requirement to “debt buyers,” the new law extends the notice requirement to any collector, wherever located, that is engaged in collecting a debt from a California consumer.

The notice requirements have been added to the Rosenthal Fair Debt Collections Practices Act, which applies to “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.” Under the new law, collectors must deliver one form of notice if an account is reported to credit bureaus and another form if it is beyond the Fair Credit Reporting Act’s seven-year limitation period, or date for obsolescence. (There is no separate notice for a collector who has not reported, and will not report, an account to credit bureaus for any other reason.)

The notices, which are identical to those in the 2013 California debt buying law, must be “included in the first written communication provided to the debtor after the debt has become time-barred” or “after the date for obsolescence,” respectively. “First written communication” means “the first communication sent to the debtor in writing or by facsimile, email or other similar means.” We recommend that clients who email the “first written communication” ensure they receive an effective consent to receive electronic communications from debtors.

We surmise that the BCFP may be studying California’s disclosures as the BCFP formulates its notice of proposed rulemaking for third-party debt collection, which it has said it will issue next year. The 2013 advance notice of proposed rulemaking and 2016 outline of proposals issued by the Cordray-era Bureau suggested it was considering limits on the collection of time-barred debts. Therefore, California’s new law may influence any ongoing discussions and drafting by the Bureau’s current staff and leadership on this point.

The new California law also amends the statute of limitations provision in Section 337 of the California Code of Civil Procedure to prohibit any person from bringing suit or initiating an arbitration or other legal proceeding to collect certain debts after the four year limitations period has run. With this amendment, the expiration of the statute of limitations will be an outright prohibition to suit, rather than an affirmative defense that must be raised by the consumer.

I am very excited to announce that today, Ballard Spahr’s Consumer Financial Services Group has launched The Consumer Finance Monitor Podcast, a weekly podcast program focused on legal developments that are of importance to the consumer finance industry.  We’ll be talking about how to make sense of breaking developments, avoid risk, and make the most of opportunity.

While we hope our blog readers will continue to follow our blog for current information on important developments, and we will continue to hold webinars and report on developments through legal alerts, we want to offer our clients and friends the convenience of listening to podcasts as another way of keeping up with what’s going on in their industry.  In addition to Ballard Spahr’s website, our podcasts will be available on Apple iTunes, Google Play, and Spotify.  A new podcast will be available each Thursday.

Our podcasts will feature attorneys who focus on every facet of the consumer finance industry—from new product development and emerging technologies to regulatory compliance and defense of government regulatory enforcement actions and private litigation.

In the first podcast, we discuss the litigation challenging the CFPB’s constitutionality and President Trump’s nomination of Kathy Kraninger to lead the CFPB.  We will also address the recent statements by HUD and the CFPB signaling an intent to revisit the disparate impact theory, and the implications for fair lending of these efforts.  Future topics will span federal and state regulation and enforcement, litigation trends, fair lending, debt collection, marketplace lending, Fintech, mortgage banking, auto and student lending, and cybersecurity.

We are hoping our podcast listeners will find our podcasts to be another source of reliable information and insight.  To listen and subscribe to the podcast, click here.

 

The CFPB is asking the Texas federal district court to give it a 45-day extension to respond to the preliminary injunction motion filed by two trade groups in their lawsuit challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule).  The motion seeks a preliminary injunction to block the CFPB from enforcing the Payday Rule and asks the court to act on the motion by November 1.  The trade groups also filed a motion to lift the stay of their lawsuit that the district court had granted despite denying their request for a stay of the Payday Rule’s August 19, 2019 compliance date.

In its motion to extend the response deadline, the CFPB states that, if the stay of the lawsuit were not in effect, its response would be due by September 21.  The 45-day extension is sought if the court grants the trade groups’ motion to lift the stay.  In support of its request, the CFPB states the following:

The relief sought by this motion will not prejudice Plaintiffs. Moreover, to the extent that Plaintiffs aver their members are suffering irreparable harm that justifies Plaintiffs’ request for a ruling from this Court by November 1, the current time constraints are largely of Plaintiffs’ own making.  Plaintiffs did not file this lawsuit challenging the Payday Rule until almost 6 months after that rule was published in the Federal Register.  Plaintiffs then waited 94 days after the Court denied the parties’ joint motion to stay the compliance date of the Payday Rule, including 38 days after the Court denied Plaintiffs’ motion for reconsideration, before submitting their Motion for a Preliminary Injunction.  The Bureau and the Court should not be unduly rushed in arguing and adjudicating these issues as a result of Plaintiffs’ own delay.  The requested extension would, if granted, give the Bureau 45 days to respond to Plaintiffs’ motion.

 

 

 

 

The two trade groups that unsuccessfully attempted to obtain a stay of the August 19, 2019 compliance date for the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) have now filed a Motion for Preliminary Injunction to enjoin the CFPB from enforcing the Payday Rule.  While the Texas federal district court had denied a stay of the compliance date, it had granted the trade groups’ request for a stay of the April 2018 lawsuit they had filed challenging the Payday Rule.  According, concurrently with filing the preliminary injunction motion, the trade groups also filed an Unopposed Motion to Lift the Stay of Litigation.

Early this year, the CFPB announced that it intended to engage in a rulemaking process to reconsider the Payday Rule pursuant to the Administrative Procedure Act (APA) and in its Spring 2018 rulemaking agenda, it indicated that it expects to issue a Notice of Proposed Rulemaking to revisit the Payday Rule in February 2019.  In their Unopposed Motion to Lift the Stay of Litigation, the trade groups state that the CFPB “has noted that it does not expect that rulemaking to be complete before the compliance date.  Moreover, it is impossible to know what the result of that rulemaking will be.”  They assert that because the compliance date has not been stayed, they “now have no choice but to pursue a preliminary injunction” to avoid the irreparable injuries the trade groups’ members will suffer in preparing for compliance with the Payday Rule’s requirements.  They indicate that they have conferred with the CFPB about the motion and that the CFPB has stated that it does not oppose the motion provided the trade groups agree that the CFPB does not have to file an answer in the case pending further court order.”  The trade groups agreed to the CFPB’s request.

In the preliminary injunction motion, the trade groups argue that they are likely to succeed on the merits in their lawsuit challenging the Payday Rule because:

  • The Payday Rule was adopted by an unconstitutionally-structured agency.
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “unfair” because extending payday loans without satisfying the Bureau’s “ability to repay” determination is not likely to cause “substantial injury” to consumers, any injury caused by the prohibited practices is “reasonably avoidable,” and any injury that is not reasonably avoidable is “outweighed by countervailing benefits.”
  • The lending practices prohibited by the Payday Rule do not meet the CFPA’s standard for an act or practice to be deemed “abusive” because consumers do not lack “understanding” of the loans covered by the Payday Rule and the prohibited practices do not take “unreasonable advantage” of consumers’ inability to protect their interests.
  • The Payday Rule violates the CFPA provision prohibiting the Bureau from establishing a usury limit.
  • The account access practices prohibited by the Payday Rule do not meet the CFPA’s standards for an act or practice to be deemed “abusive” or “unfair.”

The trade groups also argue that a preliminary injunction is necessary to prevent irreparable harm to their members in the form of the “massive irreparable financial losses” they will suffer if required to comply with the Payday Rule beginning in August 2019.  They assert that these harms are not mitigated by the Bureau’s plans to reconsider the Payday Rule because “[t]he outcome of that rulemaking is uncertain and, in any event, repeal would not remedy the harms that are occurring now.”

Finally, the trade groups contend that the balance of harms and public interest favor a preliminary injunction. With regard to the balance of harms, they assert that there will be no cost to the Bureau in preserving the status quo pending an adjudication of the Payday Rule’s validity and “given its decision to reconsider the Final Rule, the Bureau will actually benefit from an injunction, which will ensure that the Bureau has sufficient time to conduct a thorough and careful reassessment of the rule.”  (emphasis included).  With regard to the public interest, the trade groups assert that the Payday Rule’s “unlawful nature” weighs heavily in favor of an injunction and a stay “will ensure that borrowers whom the rule would otherwise deprive of needed sources of credit will continue to have access to payday loans until the rule’s legality is resolved.”

The trade groups’ motion to stay the compliance date and litigation was filed jointly with the CFPB.  In the preliminary motion, the trade groups state that they conferred with the CFPB and the CFPB stated that it could not take a position on the motion before reading it.  Whether or not the CFPB opposes the motion, we expect consumer advocacy groups, in all likelihood the same groups that opposed the stay motion, will seek to file an amicus brief opposing the preliminary motion.  Should the CFPB not oppose the preliminary injunction motion, the consumer advocacy groups are likely to assert as they did in opposing the stays that their participation is necessary to provide the court with the benefit of adversarial briefing.

We were hopeful that after the district court denied the trade groups’ request for reconsideration of the court’s denial of a stay of the Payday Rule’s compliance date, the CFPB would move quickly to issue a proposal to delay the compliance date pursuant to the APA’s notice-and-comment procedures.  The filing of the preliminary injunction motion suggests that the trade groups are not optimistic that the CFPB will promptly take this course.  Perhaps the CFPB will reveal its plans in its response to the motion.

In light of the CFPB’s prior support for the trade groups’s stay motion, the CFPB might consent to the entry of a preliminary injunction.  Even if it does so, however, there is no certainty that the district court will grant a preliminary injunction.  If the district court were to deny the preliminary injunction motion, the trade groups would have the right to appeal the denial to the Fifth Circuit which already has before it another case which raises the same constitutional challenge to the CFPB that the trade groups have raised.

 

 

As expected, following Judge Preska’s dismissal on September 12 of all of the New York Attorney General’s federal and state law claims, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21 ruling in the RD Legal Funding case in which she held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.

In its Notice of Appeal filed on September 14, the CFPB gives notice that it “appeals to the United States Court of Appeals for the Second Circuit from this Court’s June 21, 2018 Order (ECF No. 80), as amended by its September 12, 2018 Order (ECF No. 105), dismissing the Bureau’s claims against Defendants, and this Court’s Judgment (ECF No. 106) entered on September 12, 2018.”

Since Judge Preska dismissed all of its claims, the NYAG can also appeal to the Second Circuit.  Alternatively, the NYAG can refile its CFPA and state law claims in New York state court (although a state court might stay the case pending a decision by the Second Circuit in the CFPB’s appeal, particularly if the NY AG decides to appeal the dismissal of its claim brought under Dodd-Frank Section 1042.  If the NYAG appeals the jurisdictional dismissal of its state law claims, then RD Legal should be able to file a cross-appeal of Judge Preska’s June 21 decision ruling on the merits of the state law claims and denying RD Legal’s motion to dismiss.

The CFPB’s appeal means that the Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

In June 2018, the CFPB announced that it planned to reconstitute three of its advisory groups, the Consumer Advisory Board (CAB), the Community Bank Advisory Council (CBAC), and the Credit Union Advisory Council (CUAC), and disbanded the three groups.  Last week, the CFPB announced the appointment of new members to those groups.

The CFPB announced 9 new CAB members, 7 new CBAC members, and 7 CUAC members.  All new members will serve a one-year term.  Before their disbandment, each of the advisory groups was much larger, with the CAB having as many as 25 members, the CBAC as many as 19 members, and the CUAC as many as 15 members.  New CAB members previously served a three–year term and new members to the CBAC and CUAC previously served a two-year term.

The CFPB’s announcement has met with considerable criticism from consumer advocates and former CAB members who have asserted that as a result of its reduced membership, the CAB lacks sufficient diversity and depth of perspective.  They have also criticized the CFPB not only for reducing the number of consumer advocates on the CAB from 8 to 2 but also for not including any large financial institutions, major credit card providers, or debt collectors on the new CAB.  Consumer advocates observe that although such sectors “probably have other opportunities for access with the CFPB, one of the most valuable aspects of the recently disbanded CAB was that it provided a forum for fruitful and productive conversations among a variety of stakeholders in consumer finance, which often generated valuable insights for the Bureau and the CAB members.”

The CFPB has announced that the three groups will have meetings on September 27.  According to the agenda published by the CFPB, each group will meet separately in the morning and will participate jointly in afternoon sessions on “Credit Invisibles and Alternative Data: Opportunities to improve credit profiles” and “Utilizing technology to prevent and respond to elder financial abuse.”