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The Department of Education (ED) recently delivered a letter to the Consumer Financial Protection Bureau (CFPB) providing notice of its intent to terminate the Memoranda of Understanding (MOUs) between the agencies. The letter is highly critical of the CFPB. The sharp rebuke proclaims ED’s “full oversight responsibility of federal loans” and does not explicitly salvage any part of the agencies’ former cooperation.

Signed by Acting Assistant Secretary of the Office of Postsecondary Education Kathleen Smith and Chief Operating Officer of Federal Student Aid (FSA) Dr. A. Wayne Johnson, the letter was addressed to Director Richard Cordray and dated August 31, 2017. The letter provides that the MOUs will terminate thirty-days after the date of the letter—on September 30th, 2017—as provided by the terms of the MOUs.

The letter references two specific MOUs: the “Memorandum of Understanding Between the Bureau of Consumer Financial Protection and the U.S. Department of Education Concerning the Sharing of Information” (Sharing MOU), dated October 19, 2011; and the “Memorandum of Understanding Concerning Supervisory and Oversight Cooperation and Related Information Sharing Between the U.S. Department of Education and the Consumer Financial Protection Bureau” (Supervisory MOU), dated January 9, 2014.

The Sharing MOU provided that the agencies would collaborate to resolve borrower complaints related to their private education or federal student loans. The Supervisory MOU encouraged additional information sharing with respect to the coordination of student financial services oversight and supervisory activities.

As we have noted, the CFPB began accepting federal student loan complaints in February of 2016. Previously, such complaints were directed to ED. Unlike the expansion of complaints regarding private student loan complaints or online marketplace lender complaints, the CFPB did not publish a press release announcing the new complaint solicitation. Instead, the CFPB referenced the expansion in its midyear update on student loan complaints in August 2016 and its monthly complaint reports from November 2016.

As justification for the split, ED accuses the CFPB of “violating the intent” of the agreements by failing to forward Title IV federal student loan complaints within ten days of receipt and handling complaints itself. The letter provides that the CFPB’s “intervention” caused “confusion to borrowers and servicers who now hear conflicting guidance” related to Title IV loans, and that the “unilateral” action of the CFPB allowed it to usurp ED’s data as a means to expand its jurisdiction—a “characteristic of an overreaching and unaccountable agency.”

The U.S. House of Representatives’ Committee on Education and the Workforce shared the letter as part of a press release. Chairwoman Rep. Virginia Foxx (R-NC) issued a statement praising ED for “taking its authority back from the CFPB,” which was “complicating and undermining” ED’s efforts to serve students. Rep. Foxx criticized the Obama administration for letting the CFPB “abuse its privilege” with respect to student loan oversight because “Congress bestowed the powers to oversee student loans and student loan servicing solely to the Department of Education.”

On the same day as the letter, ED announced a “stronger approach” to FSA oversight, including a broadening of scope, an increase in capacity, and a “more sophisticated strategy.” That strategy includes targeting “illegitimate debt relief organizations, schools defrauding students and institutions willfully ignoring their Clery Act responsibilities.” (The Clery Act requires disclosure of campus security policies and crime statistics.) ED intends to ensure parties understand their new compliance responsibilities and the consequences of non-compliance by “comprehensive” executive outreach. The release also noted FSA’s continued coordination with its “stakeholders”—including the Department of Justice and the Federal Trade Commission—but not the CFPB, which was conspicuously absent from the list.

The letter does not reference the agencies’ joint MOU with the Departments of Veterans Affairs and Defense “to prevent abuse and deceptive recruiting practices by schools serving servicemembers, veterans, spouses and other family members” under a 2012 Executive Order from President Obama. The letter also follows a previous decision to withdraw various memoranda issued by the Obama Administration ED Secretary and FSA that provided policy direction for a new student loan servicing scheme.

While the exact course the CFPB will take remains to be seen, ED has made its position clear that there is no room for CFPB involvement here, and by implication, no room for state regulators or state attorneys general either. In a statement obtained by Politico, CFPB spokesman David Mayorga said that the Bureau seeks further justification as to why ED is terminating the agreements. The Bureau noted that it will “continue to work with” ED towards its shared goals, but also signaled its intent to continue independent enforcement efforts under its “statutory responsibilities to protect student borrowers.”

The Office of the Comptroller of the Currency (OCC) has filed a motion to dismiss the lawsuit filed by the New York Department of Financial Services (DFS) challenging the OCC’s authority to grant special purpose national bank (SPNB) charters to nondepository fintech companies.

The DFS lawsuit, which was filed in May 2017 in a New York federal district court, is similar to the lawsuit filed in April 2017 by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.  Earlier this month, the OCC filed a motion to dismiss the CSBS lawsuit.

The arguments made by the OCC in support of its motion to dismiss the DFS lawsuit track those made in support of its motion to dismiss the CSBS lawsuit.  Most notably, the OCC again makes the central argument that because it has not yet decided whether it will offer SPNB charters to companies that do not take deposits, the DFS complaint should be dismissed for failing to present either a justiciable case or controversy under the U.S. Constitution or a reviewable final agency action under the Administrative Procedure Act.

In remarks given last month, Acting Comptroller Keith Noreika confirmed that the OCC is continuing to consider its SNPB charter proposal despite the departure of the SPNB proposal’s architect, former Comptroller Thomas Curry, who Mr. Noreika replaced.  While indicating that the OCC planned to vigorously defend its authority to grant an SNPB charter to a nondepository company in the DFS and CSBS lawsuits, Mr. Noreika was noncommittal about what the OCC’s ultimate position would be on implementing the proposal.  He also suggested that fintech companies consider seeking a national bank charter by using more established OCC authority.

As expected, the Federal Financial Institution Examination Council (FFIEC) member agencies issued new data resubmission guidelines under the Home Mortgage Disclosure Act (HMDA) effective for the 2018 data collection year.  The change coincides with the substantial expansion of the HMDA data reporting fields that is effective January 1, 2018.

When examining an institution’s HMDA Loan Application Register (LAR), regulators will assess if the correction and resubmission of any data is required based on a review of a sample of reported loans.  Currently for institutions that have a total of less than 100,000 loans or applications on their annual LAR, which is the vast majority of HMDA reporting institutions, (1) an institution must correct and resubmit its entire LAR if 10% or more or of the entries in the sample contain errors, and (2) an institution must correct and resubmit an individual data field in the LAR if there are errors in that field with 5% or more of the entries in the sample.  An institution can be required to correct and resubmit data even if the 10% or 5% thresholds are not reached, if the errors would make analysis of the institution’s data unreliable.  Regulators will first assess a smaller set of entries in a LAR, and if one or no errors are found they typically cease the verification process at that point.

Under the new guidelines, there are revised thresholds for requiring resubmission, and for assessing if a full review of the sample will be performed based on errors in the initial smaller set of loans.  Assessment of the data will be conducted on an individual data field basis.  The new testing sample sizes and thresholds are as follows:

For institutions with fewer than 30 LAR entries, the resubmission threshold is still 3, so the effective resubmission threshold percentage is higher than 10%.  As is the case currently, even if the thresholds are not met an institution can be required to correct one or more data fields and resubmit one or more data fields in its HMDA LAR if examiners have a reasonable basis to believe that errors in the field or fields will likely make analysis of the HMDA data unreliable.

Under the revised guidelines, if an institution has a total of 1,000 entries on its LAR, the regulator would first review an initial sample of 35 loans.  If the regulator finds two or more errors in a data field, the regulator would then review the full 79 loan sample.  If four or more errors are found in any data field, the institution would be required to resubmit its LAR with the applicable data field corrected.

Unlike the current approach, under the new guidelines there are tolerances for certain data fields, and an error within the applicable tolerance will not be considered an error for either threshold.  The tolerances are as follows:

  • Date of Application: Three calendar days or less with regard to the date the application was received or date shown on application form and the date reported in the LAR.
  • Loan Amount: One thousand dollars or less in the amount of the covered loan or loan applied for and the amount reported in the LAR.
  • Date Action Taken: Three calendar days or less with regard to the date the action was taken and the date reported in the LAR, provided that the difference does not result in reporting data for the wrong calendar year.
  • Income: Errors in rounding the gross annual income relied upon to the nearest thousand.

Subject to an exception, for purposes of the guidelines a “data field” generally refers to an individual HMDA Filing Instructions Guide (FIG) field, and such fields are identified by a distinct Data Field Number and Data Field Name.  The July 2017 version of the FIG for data collected in 2018 is available here.    The exception is for information on the ethnicity or race of an applicant or borrower, for which a data field consists of a group of FIG fields as follows:

  • The Ethnicity of Applicant or Borrower data field group—comprised of six FIG fields with information on an applicant’s or borrower’s ethnicity (FIG Data Field Numbers 19-24);
  • The Ethnicity of Co-Applicant or Co-borrower data field group—comprised of six FIG fields with information on a co-applicant’s or co-borrower’s ethnicity (FIG Data Field Numbers 25-30);
  • The Race of Applicant or Borrower data field group—comprised of eight FIG fields with information on an applicant’s or borrower’s race (FIG Data Field Numbers 33-40); and
  • The Race of Co-Applicant or Co-borrower data field group—comprised of eight FIG fields with information on a co-applicant’s or co-borrower’s race (FIG Data Field Numbers 41-48)

If one or more of the six data fields for such a data field group has errors, this would count as one error.

 

In a letter dated August 16, 2017 to House Judiciary Committee Chairman Bob Goodlatte, Assistant U.S. Attorney General Stephen Boyd stated that “[a]ll of the [DOJ’s] bank investigations conducted as part of Operation Chokepoint are now over, the initiative is no longer in effect, and it will not be undertaken again.”  Acting Comptroller of the Currency Keith Noreika, in a letter sent yesterday to House Financial Services Committee Chairman Jeb Hensarling, indicated that the OCC “welcome[d] the recent clarification by the [DOJ] of its position ending Operation Chokepoint” and would “continue to articulate [the OCC’s] position rejecting the tactics and goals of Operation Chokepoint….”

“Operation Chokepoint” was a federal enforcement initiative involving various agencies, including the DOJ, the FDIC, and the Fed.  Initiated in 2012, Operation Chokepoint targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In his letter, which responded to a letter sent by Representative Goodlatte to Attorney General Jeff Sessions, Assistant AG Boyd called Operation Chokepoint “a misguided initiative conducted during the previous administration.”  He stated that the DOJ “share[s] your view that that law abiding businesses should not be targeted simply for operating in an industry that a particular administration might disfavor.  Enforcement should always be based on the facts and the applicable law.”

Assistant AG Boyd indicated that to the extent the DOJ continues to pursue ancillary investigations involving criminal activity discovered as a result of subpoenas issued as part of Operation Chokepoint, none of such investigations “relates to or seeks to deter lawful conduct.”  He also stated that the DOJ “will not discourage the provision of financial services to lawful industries, including businesses engaged in short-term lending and firearms-related activities.”

Acting Comptroller Noreika’s letter was sent in response to a letter sent by Representative Hensarling asking the OCC to issue a formal policy statement repudiating Operation Chokepoint.  In his response, Mr. Noreika stated that “[t]he OCC is not now, nor has it ever been part of Operation Chokepoint.”  He indicated that the OCC “rejects the targeting of any business operating within state and federal law as well as any intimidation of regulated financial institutions into banking or denying banking services to particular businesses.”  Mr. Noreika observed that the OCC “expects the banks it supervises to maintain banking relationships with any lawful businesses or customers they choose, so long as they effectively manage any risks related to the resulting transactions and comply with applicable laws and regulations.”

Operation Chokepoint is currently the target of a lawsuit pending in D.C. federal district court in which several payday lenders allege that certain actions taken by regulators as part of Operation Chokepoint violated their due process rights.  (The action was filed against the OCC as well as the Fed and FDIC.)  In a decision issued last month, the district court denied the agencies’ motion to dismiss, holding that the plaintiffs had established both standing and a plausible claim for relief, and concluded that the agencies were not entitled to judgment on any of the plaintiffs’ due process claims.

A new research paper released by the Federal Reserve Bank of Philadelphia found that fintech lending has expanded consumers’ ability to access credit.  The paper, “Fintech Lending: Financial Inclusion, Risk Pricing, and Alternative Information,” used account-level data provided by a large fintech lender to “explore the advantages/disadvantages” of loans made by such lender “and similar loans that were originated through traditional banking channels.”

The study’s key findings include:

  • The fintech lender’s consumer lending activities penetrated into areas that could benefit from additional credit supply, such as areas that have lost a disproportionate number of bank branches and highly concentrated banking markets.
  • Consumers presenting the same credit risk could obtain credit at lower rates through the fintech lender than through traditional credit cards offered by banks.
  • The lender’s use of alternative credit data allowed consumers with few or inaccurate credit records (based on FICO scores) to access credit at lower prices, thereby resulting in enhanced financial inclusion.

In February 2017, the CFPB issued a request for information that seeks information about the use of alternative data and modeling techniques in the credit process.

The Federal Housing Finance Agency has announced that it has reopened and extended until September 1, 2017 the comment period on its Request for Input on improving language access in mortgage lending and servicing.  The FHFA previously extended the comment period until July 31, 2017.

According to the FHFA, it took this action “to allow interested parties more time to consider additional information on issues facing qualified mortgage borrowers with Limited English Proficiency (LEP) throughout the mortgage life cycle process, including mortgage lending and servicing.”

Issued this past May, the FHFA has stated that it intends to use the information it receives in response to the RFI to inform “additional steps that could potentially be taken to further support [LEP] borrowers and the mortgage industry’s ability to serve them throughout the mortgage life cycle.”

On July 20, the Trump Administration posted its first Unified Agenda of Regulatory and Deregulatory Actions. For the first time, the Agenda included a list of “inactive” actions to notify the public of regulations “still being reviewed or considered.” The list of 109 “inactive” actions includes the DOJ’s web accessibility rulemakings under Title II (local and state governments) and Title III (places of public accommodation) of the Americans with Disabilities Act (“ADA”).

Businesses, including banks and financial services providers, have been awaiting a web accessibility rule since the DOJ issued an Advance Notice of Proposed Rulemaking (“ANPRM”) on the topic in 2010. The 2010 ANPRM stated the DOJ’s position that Title III of the ADA encompasses online content as places of public accommodation and officially put digital accessibility on the private sector’s radar. However, the DOJ’s efforts to promulgate formal regulations to that effect have continuously stalled, and the DOJ instead has used enforcement actions and settlement agreements to communicate its position to Title III entities. The lack of legislative and administrative action on web accessibility also has contributed to the circuit split on whether websites of private entities are subject to the ADA. Private litigants and advocacy groups have taken, and continue to take action to ensure that interactions with the public, including through websites and mobile applications, are accessible to people with disabilities.

Classification of the web accessibility rulemaking as “inactive” marks the continuation of a prolonged period in which business entities have faced a lack of clear guidance from the DOJ on the proper application of the ADA to websites. It also signals that businesses should continue to be prepared to defend against civil action, as advocacy groups and plaintiffs’ firms will likely work to fill the void left by the DOJ. Additionally, many states have anti-disability discrimination laws that mirror, or incorporate by reference, the ADA. Now that the DOJ seems to have backed away, we may see an increase in state Attorneys General acting to enforce such state laws to address the web accessibility issue.

Public accommodations are advised to stay abreast of the legal issues and practical considerations involved in managing risk in this evolving and increasingly litigious climate.

In a statement released today, Acting Comptroller Keith Noreika announced that he will not petition the Financial Stability Oversight Council to stay the effective date of the CFPB’s final arbitration rule.

Earlier this month, Acting Comptroller Noreika and Director Cordray exchanged a series of letters in which Mr. Noreika raised OCC concerns about the arbitration rule’s impact on the safety and soundness of the U.S. banking system.  Acting Comptroller Noreika also requested data and analysis used by the CFPB in support of the arbitration rule.

In his statement, Acting Comptroller Noreika indicates that the OCC “has only begun its review of the CFPB’s data and analysis” and that “[n]othing so far diminishes my concerns that the rule may adversely affect the institutions within the federal banking system and their customers.”  However, according to Mr. Noreika, “the OCC cannot complete [its] thorough review in the limited time before a petition must be filed with the [FSOC].”

Acting Comptroller Noreika states that he will not petition the FSOC “[g]iven that Congress is considering use of the Congressional Review Act to overturn the CFPB’s Final Rule.”  He expresses hope that “Congress will act on this opportunity to preserve effective alternatives for consumers to resolve their disputes without lengthy and costly litigation and to reduce the ‘piling on’ of legal and regulatory burden….”

On July 25, the House passed H.J. Res. 111 which provides for Congressional disapproval of the arbitration rule under the Congressional Review Act.  A resolution disapproving the rule under the CRA has also been introduced in the Senate but a vote is not expected until September.

Based on a Law360 article reporting on an interview with Thomas Pahl, the Acting Director of the FTC Bureau of Consumer Protection, it appears that under its new leadership, the FTC will take a less aggressive approach to enforcement than the agency had taken under the Obama Administration.  Mr. Pahl was appointed Acting Director by Maureen Ohlhausen, who President Trump named Acting Chairman of the FTC.

While Mr. Pahl stated that privacy enforcement will continue to be an FTC priority, he indicated that the FTC will not follow the Obama Administration’s approach of labeling certain privacy and data security practices unfair or deceptive in the absence of clear consumer harm.  According to Mr. Pahl, the FTC’s enforcement activity will target practices where there is concrete, tangible evidence of consumer injury.

With regard to national advertising, Mr. Pahl indicated that the FTC’s enforcement activity will focus on fraud and quasi-fraud and will prioritize matters involving advertising and marketing directed at certain populations such as the military, the elderly, and consumers living in rural areas.  He also indicated that in deciding whether to recommend an enforcement action, FTC staff will look at consumer injury and the costs and benefits of a practice.

With regard to financial practices, Mr. Pahl indicated that the FTC’s enforcement activity will target matters involving fraud or quasi-fraud in areas such as debt collection and payday lending, with priority given to matters that are outside of the CFPB’s jurisdiction.  Such matters include claims against auto dealers, claims under the Credit Repair Organizations Act, and claims against companies belonging to industries for which the CFPB has created a “larger participant” rule, such as debt collectors, but that do not qualify as a “larger participant.”  Under the Dodd-Frank Act, the CFPB has authority to supervise, regardless of size, providers of residential mortgage loans and certain related services, payday loans, and private education loans.  Dodd-Frank also gave the CFPB supervisory authority over providers considered to be “a larger participant of a market for other consumer financial products or services.”

Once CFPB Director Cordray departs and is replaced by a successor appointed by President Trump, we would hope and expect that he or she will narrow the CFPB’s enforcement priorities in a manner similar to what Mr. Pahl has described for the FTC.

 

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has written to the Department of Education urging the ED to issue preemption guidance.

In its letter, NCHER urges the ED “to issue regulatory guidance that clearly states that federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”  Earlier this month, the Education Finance Council, another national trade group representing higher education finance organizations, wrote to the ED requesting similar guidance.

In its letter, NCHER discusses the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the Higher Education Act (HEA).  NCHER also discusses the resulting compliance costs of such requirements and their potential to create borrower confusion.

In addition, NCHER observes that a number of state attorneys general have begun to take action against student loan servicers for activities governed by the HEA, federal regulatory requirements, and the terms of federal contracts.  It urges the ED to take “a leadership role” with regard to federal contractors, which could include intervening with an AG’s office on behalf of an agency or working with both parties to achieve a resolution.  According to NCHER, state AGs “should not be permitted to make an end run around the Department by intimidating its contracted loan servicers.”  Also discussed in NCHER’s letter is an attempt by Connecticut to apply its registration requirement for collection agencies to guaranty agencies that have agreements with the ED.