The CFPB will hold a field hearing on small business lending in Los Angeles, CA on May 10, 2017.  The announcement, which took the form of a posting on the events page of the CFPB’s website, contains only the usual statement that the hearing will feature “remarks from Director Cordray, as well as testimony from community groups, industry representatives, and members of the public.”

Since the CFPB typically holds field hearings in conjunction with announcing a related development, it might announce a development involving the CFPB’s rulemaking to implement Section 1071 of Dodd-Frank.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses such as the race, sex, and ethnicity of the principal owners of the business.

In its annual fair lending report issued earlier this month, the CFPB stated that it had “begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  Also, at the recent House Financial Services Committee hearing at which Director Cordray appeared, Chairman Hensarling criticized the CFPB for not proceeding more quickly to issue a regulation to implement Section 1071.

 

 

The Office of Inspector General for the Fed and CFPB recently issued an audit report entitled “The CFPB Can Strengthen Contract Award Controls and Administrative Processes.”  The objective of the OIG’s audit was to assess the CFPB’s compliance with applicable laws, regulations and CFPB policies and procedures related to contract solicitation, selection and award processes, as well as the effectiveness of the CFPB’s associated internal controls.

While finding the CFPB to be generally compliant, the OIG found occasions on which reviews and approvals were overlooked or not documented as required by regulation or CFPB policy.  Among its other findings was that the CFPB could improve the documentation used to support price reasonableness determinations for sole-source contracts (i.e. contracts where there is other than a full and open competition).

The OIG’s work plan updated as of April 1, 2017 includes the following initiated projects in which the OIG will evaluate:

  • the CFPB Enforcement Office’s processes for protecting confidential information obtained through the use of the CFPB’s enforcement powers, such as information received in response to a CID (completion expected second quarter 2017)
  • the CFPB’s compliance with the requirements for issuing CIDs including those in the Dodd-Frank Act (completion expected third quarter 2017)  (Last week, the D.C. Circuit affirmed the district court’s denial of the CFPB’s petition to enforce a CID because the CFPB had not complied with the Dodd-Frank requirements.)
  • the effectiveness of the CFPB’s management of examiner commissioning and training (completion expected third quarter 2017)

Planned projects described in the work plan include (1) an evaluation of the effectiveness of the Division of Supervision, Enforcement, and Fair Lending in monitoring and ensuring that supervised entities take timely action to correct deficiencies identified in examinations, (2) an evaluation of the risk assessment framework used by the CFPB to prioritize examinations, and (3) a review of the extent to which the CFPB has assessed the risks associated with the collection, maintenance, storage, and disposal of privacy data and personally identifiable information and applied appropriate information security controls and protection over the data to mitigate those risks.

 

 

The House Financial Services Committee has released the witness list for the hearing it will hold this Wednesday, April 26, 2017, to discuss the Financial CHOICE Act.

The witnesses will be:

  • John Allison, Former President and Chief Executive Officer, Cato Institute
  • Dr. Norbert J. Michel, Senior Research Fellow, Financial Regulations and Monetary Policy Institute for Economic Freedom and Opportunity, The Heritage Foundation
  • Hester Peirce, Director of Financial Markets Working Group and Senior Research Fellow, Mercatus Center
  • Alex J. Pollock, Distinguished Senior Fellow, The R Street Institute
  • Peter J. Wallison, Senior Fellow and Arthur F. Burn, Fellow in Financial Policy Studies, American Enterprise Institute

The Committee also released a memorandum that includes a summary of the discussion draft of the bill previously released by the Committee.

The D. C. Circuit has affirmed the D.C. federal district court’s April 2016 denial of the CFPB’s petition to enforce a CID issued to the Accrediting Council for Independent Colleges and Schools (ACICS) in August 2015.

After denying ACICS’s petition to modify or set aside the CID in October 2015, the CFPB filed a petition in D.C. federal district court to enforce the CID.  The CFPA allows the CFPB to issue a CID to “any person” that the CFPB believes may be possession of “any documentary material or tangible things, or may have any information, relevant to a violation” of laws enforced by the CFPB.  The CID’s Notification of Purpose indicated that the purpose of the CFPB’s investigation was “to determine whether any entity or person has engaged or is engaging in unlawful acts and practices in connection with accrediting for-profit colleges, in violation of sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law.”  The CFPB argued that because it has authority to investigate for-profit schools in relation to their lending and financial advisory services, it had authority to investigate whether any entity has engaged in any unlawful acts relating to accrediting such schools.  The district court denied the CFPB’s petition, holding that the CFPB lacked statutory authority to investigate the accreditation process.

In affirming the denial of the CFPB’s petition to enforce the CID, the D.C. Circuit declined to reach the broad question of whether the CFPB had statutory authority “to investigate the area of accreditation at all” and instead stated that it would “confine our analysis to the invalidity of this particular CID.”  More specifically, the D.C. Circuit considered only whether the CID satisfied the CFPB requirement that “[e]ach [CID] shall state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.”

The D.C. Circuit concluded that “as written, the Notification of Purpose [in the ACICS CID] fails to state adequately the unlawful conduct under investigation or the applicable law.”  In reaching that conclusion, the D.C. Circuit relied on case law holding that to determine whether to enforce a CID, a court should consider only whether the inquiry is within the agency’s statutory authority, whether the request is not too indefinite, and whether the information sought is reasonably relevant.

The CFPB’s Notification of Purpose defined the relevant conduct constituting the violation under investigation as “unlawful acts and practices in connection with accrediting for-profit colleges.”  According to the D.C. Circuit, because the Notification of Purpose gave “no description whatsoever” of the “unlawful acts and practices” the CFPB sought to investigate, the court “need not and probably cannot accurately determine whether the inquiry is within the authority of the agency and whether the information sought is reasonably relevant.”  The D.C. Circuit noted that the CFPB had argued that, even if it did not have statutory authority over the accreditation process, it had an interest in the possible connection between the lending practices of ACICS-accredited schools and the accreditation process.  However, the court observed that “[e]ven if the CFPB is correct, that interest does not appear on the face of the Notification of Purpose,” and the agency had failed to adequately inform ACICS of the link between the relevant conduct and the alleged violation.

The CID had identified “sections 1031 and 1036 of the [CFPA prohibiting unfair, deceptive, or abusive acts or practices], or any other Federal consumer financial protection law” as the laws applicable to the alleged violation under investigation  The D.C. Circuit determined that the this language was “similarly inadequate” because, coupled with the CID’s failure to adequately state the unlawful conduct under investigation, the statutory references “tell ACICS nothing about the statutory basis for the Bureau’s investigation.”  The court noted that although the CFPA provides detailed definitions of “Federal consumer financial law” and “consumer financial product or service,” the CID “contains no mention of these definitions or how they relate to its investigation.”  It also commented that the inclusion of the “uninformative catch-all phrase ‘any other Federal consumer financial protection law’ does nothing to cure the CID’s defect.”  According to the court, “were we to hold that the unspecific language of this CID is sufficient to comply with the statute, we would effectively write out of the statute all of the notice requirements that Congress put in.”

Because the D.C. Circuit did not reach the broader question of the CFPB’s authority to investigate the accreditation process and “express[ed] no opinion on whether a revised CID that complies with [the CFPA CID requirements] should be enforced,” the CFPB will get another bite at the apple should it decide to reissue the CID.   While the decision will likely result in more detailed Notifications of Purpose in future CFPB CIDs, because it does not substantively change the scope of the CFPB’s broad power to issue CIDs, the decision’s overall impact will likely be minimal.  In addition, there continues to be a fairly low standard for what constitutes relevant information in discovery and litigation.

 

 

 

 

 

 

On April 20, the CFPB finalized a proposed rule to delay the effective date of the final rule governing Prepaid Accounts (Prepaid Account Final Rule) by six months, from October 1, 2017 to April 1, 2018 (Effective Date Final Rule).  According to the CFPB, the delay was adopted “to facilitate compliance with the Prepaid Account Final Rule, and to allow an opportunity for the Bureau to assess whether any additional adjustments to the Rule are appropriate.”

The preamble to the Effective Date Final Rule previews that the CFPB will propose rules for “at least two issues that have been identified as areas where the Prepaid Accounts Final Rule may be posing particular complexities for implementation,” and at that time, a further delay may be proposed as well.  The two issues relate to: (1) the linking of credit cards to digital wallets that are capable of storing funds; and (2) error resolution and limitations on liability for unregistered prepaid accounts.

Over the past few months, the Prepaid Account Final Rule has faced attacks from industry representatives, such as the American Bankers Association, and from Congress under the Congressional Review Act – Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, and Senator David Perdue (R-Ga) introduced Senate Joint Resolution 19.  The Senate Joint Resolution was recently brought out of Committee and to the floor for consideration by way of a discharge petition filed by Senate Banking Chairman Mike Crapo.  The Prepaid Account Final Rule has also been defended by attorney generals from 17 states and the District of Columbia.

We will continue to monitor the status of the Prepaid Account Final Rule in relation to the substantive changes previewed by the CFPB and the progress of the congressional joint resolutions.

On April 20, the United States Court of Appeals for the Ninth Circuit declined to hear an interlocutory appeal  by CashCall of the district court’s order granting the CFPB’s partial summary judgment motion and denying CashCall’s summary judgment motion in the CFPB’s lawsuit against CashCall.  The district court previously had certified its decision for interlocutory appeal.

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

The state AGs’ motion and supporting memorandum was filed in CFPB v. Sprint Corporation, a litigation in which the Bureau alleged that Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  The associated Stipulated Final Judgment and Order (“Consent Order”) authorized the implementation of a consumer redress plan pursuant to which Sprint would pay up to $50 million in refunds.  The redress plan provided for the payment of refund claims on a “claims made” basis subject to a filing deadline.  Any balance remaining nine months after the claim filing deadline was to be paid to the CFPB.

The Bureau, in consultation with the AGs of all fifty states and the District of Columbia, which were parties to concurrent settlement agreements with Sprint relating to similar billing practice claims, and the FCC, was then to determine whether additional consumer redress was “wholly or partially impracticable or otherwise inappropriate.”  If so, the Bureau, again in consultation with the states and the FCC, was authorized to apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief were to be deposited in the U.S. Treasury as disgorgement.

In a recent Memorandum and Order recounting the history of the litigation, the district court stated that “the siren song of $15.14 million in unexpended funds [had] lured some new sailors into the shoals of this litigation” because “[d]espite full restitution to Sprint customers and subsequent consultations with the Attorneys General and the FCC, the CFPB could not identify any equitable relief to which $15.14 million in unexpended settlement funds could be applied.”  The court observed that, “[a]pparently, the prospect of simply complying with the Consent Order by paying the funds into the U.S. Treasury lacked sufficient imagination.”

Although the defendant initially filed a memorandum in opposition to the intervention motion, it subsequently filed a joint submission with the state AGs that adopted their proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAGTRI and proposed redirecting the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  (The court acknowledged that these were perhaps noble causes worthy of consideration.)  The joint submission stated that the CFPB had been consulted about the proposed modification but “[took] no position” on it.  The court characterized its failure to do so as remarkable, given that the Bureau was “the plaintiff in this lawsuit responsible for securing the $50 million settlement.”

The district court thus observed that it had been left “in a quandary” because:

  • The proposal would “alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury”;
  • The proposal may raise an issue under the Miscellaneous Receipts Act, which requires that government officials receiving money for the government “from any source” must deposit such money with the Treasury;
  • The proposed modification “does not appear, at least at first blush, to be ‘reasonably related to the allegations set forth in the Complaint’”; and
  • The defendant had concurrently entered into settlements with the Attorneys General of all 50 states and the District of Columbia and already paid them $12 million to resolve a multi-state consumer protection investigation.

The court characterized as “particularly galling” the argument that Fed. R. Civ. P. 60(a) permits the proposed modification to correct a clerical mistake.  It noted that the parties had “unmistakably understood that the Consent Order related to federal claims and that any undistributed settlement funds would be paid to the U.S. Treasury.”

In view of the foregoing, the court concluded that it needed “to hear from the Government” because of “the peculiar posture of the intervention application.”  Specifically, the court noted that the CFPB, as the plaintiff in the action, needed to take a position on the proposed intervenors’ motion and application to modify the Consent Order.  And because the proposed modification would redirect funds earmarked for the U.S. Treasury, the court noted that the United States has a direct interest that should be considered.

Accordingly, the court directed the CFPB and the Department of Justice to respond separately to the proposed intervenors’ motion and application to modify the Consent Order.  Their separate memoranda must be filed by May 10, 2017; the state AGs and the defendant may file responsive memoranda by May 24, 2017.  The court stated that the responsive submission of the Bureau “should advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application.”   We will continue to monitor developments in this case.

 

On April 13, 2017, the CFPB proposed substantive changes and technical corrections to the 2015 Home Mortgage Disclosure Act (HMDA) Final Rule (Final Rule) amending Regulation C.  The proposal, which is discussed in more detail here, would clarify certain key terms under the Final Rule, including temporary financing, automated underwriting system, multifamily dwelling, extension of credit, income, and mixed-use property.

The proposal also (1) describes the CFPB’s plans to create an online geocoding tool to avoid errors in the reporting of census tracts and provide protection from HMDA or Regulation C liability if the tool is used as intended, (2) provides clarification regarding the selection and reporting of ethnicity and race information; (3) clarifies reporting issues with respect to Regulation Z disclosures, (4) provides guidance on reporting multiple credit scores, (5)  clarifies how the reporting thresholds apply and expressly permits voluntary reporting by financial institutions that do not meet the reporting thresholds, and (6) establishes transition rules for the loan purpose and loan originator identifier data points.

Most of the proposed amendments would take effect on January 1, 2018.  Interested parties should assess if programming and operational changes that would be necessary based on the proposals can be appropriately completed by January 1, 2018.

The House Financial Services Committee announced that it will hold a hearing on April 26, 2017 to discuss the Financial CHOICE Act.  It also released a discussion draft of a revised version of the bill.

In February, Rep. Hensarling, who chairs the Committee, circulated a memorandum to the Committee’s Leadership Team describing key revisions to the bill introduced last year.  Last week, he issued an outline of changes to the bill in which he identified more revisions, including revisions that would further reduce the CFPB’s powers.  Presumably, these revisions are reflected in the discussion draft.

 

The CFPB has adopted changes to its “Policy on Ex Parte Presentations in Rulemaking Proceedings,” which generally requires anyone who communicates with the CFPB about a pending rulemaking to submit a written copy of the presentation (or a summary of an oral presentation) to the CFPB and public rulemaking docket within a specified period after the communication to the CFPB.

In addition to various non-substantive changes, the updated policy makes the following substantive changes:

  • As originally adopted, the policy required copies or summaries of presentations to be submitted to the CFPB within three business days of the presentation.  The CFPB has changed the policy to extend that period to ten business days.  In addition, the policy had directed persons submitting ex parte presentation materials to also file them directly with the public rulemaking docket at www.regulations.gov.  The updated policy only requires the materials to be submitted electronically to the CFPB, which will post them on the public rulemaking docket.
  • The updated policy creates an exemption from its requirements for ex parte presentations “by State attorneys general or their equivalents, State bank regulatory authorities, or State agencies that license, supervise, or examine the offering of consumer financial products or services, including their offices or staff, when acting in their official capacities.”  For purposes of the policy, “State” means “any State, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or possession of the United States or any federally recognized Indian tribe.”  According to the CFPB, it created the exemption because, in its experience, “communications from these entities have at times been sensitive, and the CFPB believes that these entities are likely to provide more frank and robust feedback if communications are not subject to the disclosure requirements of the Policy.”