Thirteen Republican Senators have sent a letter to FDIC Chairman Jelena McWilliams urging the FDIC to take action to ensure that lawful businesses are no longer at risk of adverse financial consequences as a result of “Operation Choke Point, and its associated culture and Choke Point-like regulatory actions.”

“Operation Choke Point” was a federal enforcement initiative involving various agencies, including the DOJ, OCC, FDIC, and Fed.  Initiated in 2012, Operation Choke Point targeted banks serving online payday lenders and other companies that have raised regulatory or “reputational” concerns.  In June 2014, the national trade association for the payday lending industry and several payday lenders initiated a lawsuit in D.C. federal district court against the FDIC, Fed, and OCC in which they alleged that certain actions taken by the regulators as part of Operation Choke Point violated the Administrative Procedure Act and their due process rights.  In September 2018, pursuant to a joint stipulation of dismissal, the Fed was dismissed from the lawsuit.  Cross-motions for summary judgment are currently pending before the court.

In their letter, the Senators ask the FDIC if it is the agency’s official position “that lawful businesses should not be targeted by the FDIC simply for operating in an industry that a particular administration might disfavor” and “[i]f so, what [the FDIC is] doing to make sure that bank examiners and other FDIC officials are aware of this policy and have communicated it to regulated institutions?”  They also ask whether there were any communications explaining supervisory expectations of “elevated risk” or “high risk” merchants with regulated institutions that would likely qualify as a rule under the Congressional Review Act that were not properly submitted to Congress and what the FDIC is doing to ensure that its staff does not communicate policy in a matter that is inconsistent with the position of the FDIC’s Board of Directors.

The letter does not reference the FDIC’s January 2015 Financial Institution Letter (FIL) entitled “Statement on Providing Banking Services” that attempted to rectify the damage created by Operation Choke Point.  In the Statement, the FDIC “encourages institutions to take a risk-based approach in assessing individual customer relationships rather than declining to provide banking services to entire categories of customers, without regard to the risks presented by an individual customer or the financial institution’s ability to manage the risk.”  The Statement followed the FDIC’s July 2014 FIL in which the FDIC withdrew the list of “risky” merchant categories (such as payday lenders and money transfer networks) that was included in prior guidance on account relationships with third-party payment processors (TPPPs).  Consistent with the July 2014 FIL and an October 2013 FIL on TPPP relationships, the 2015 FIL advised banks that they were neither prohibited nor discouraged from providing services to customers operating lawfully, provided they could properly manage customer relationships and effectively mitigate risks.  However, unlike the prior FILs, the new FIL expressly acknowledged that “customers within broader customer categories present varying degrees of risk” and should be assessed for risk on a customer-by-customer basis.

 

 

The American Bankers Association and the Bank Policy Institute have sent a letter to the Board of Governors of the Federal Reserve System (Fed) to petition the Fed to engage in rulemaking to clarify the Fed’s September 2018 “Interagency Statement Clarifying the Role of Supervisory Guidance” (the “Interagency Statement”).  The Interagency Statement was issued jointly by the Fed, FDIC, NCUA, OCC and CFPB with the stated purpose of “explain[ing] the role of supervisory guidance and to describe the agencies’ approach to supervisory guidance.”

The letter states that the petition is made pursuant to section 553(e) of the Administrative Procedure Act.  That provision provides that each agency “shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.”  An agency must provide the grounds for the denial of a petition and a denial can be appealed to a court.

In their letter, the trade groups express concern that the Interagency Statement “may leave room for examiners to continue to base examination criticisms on matters not based in law.”  An example given is that “some examiners may continue to retain existing [matters requiring attention (MRAs) and matters requiring immediate attention (MRIAs)] based on agency guidance, on the theory that the Interagency Statement is not retroactive.”  They state that there is also “a concern that examiners might defeat the purpose of the Statement by replacing guidance-based examination criticisms with MRAs and MRIAs grounded in generic and conclusory assertions about ‘safety and soundness’ (as opposed to those that identify specific, demonstrably unsafe and unsound practices-the actual legal standard).

Finally, they observe that “the Interagency Statement’s general reference to a ‘criticism’ or ‘citation’ has engendered some confusion about whether MRAs, MRIAs, and other adverse supervisory actions are covered by the Statement.” (The Statement provided that ‘[e]xaminers will not criticize a supervised financial institution for a ‘violation’ of supervisory guidance.  Rather, any citations will be for violations of law, regulation, or non-compliance with enforcement orders or other enforceable conditions.”)

To address these concerns, the trade groups petition the Fed to take the following two specific rulemaking actions:

  • To propose and adopt, through notice and comment rulemaking, the content of the Agency Statement “as a formal expression and acknowledgment of the proper legal status of the guidance.”
  • To include in such a rulemaking “a clear statement that MRAs, MRIAs, examination rating downgrades, MOUs, and any other formal examination mandate or sanction will be based only on a violation of a statute, regulation or order—that is, that they are the types of ‘criticisms’ or ‘citations’ at which the guidance is directed.”  For this purpose, a “violation of a statute” would include the identification of a demonstrably unsafe and unsound practice pursuant to 12 U.S.C. Section 1818(b)(1) but would not include a generic or conclusory reference to “safety and soundness.”  (The groups call this “a critical distinction,” observing that “[i]t is essential that any examination criticisms adhere to the relevant legal standard: the statutory bar on ‘unsafe and unsound’ conduct, as interpreted and binding on the agencies under governing case law.”)

The Department of Justice recently entered into a settlement with Hudson Valley Federal Credit Union to resolve allegations that it violated the Servicemembers Civil Relief Act (SCRA) by repossessing vehicles owned by servicemembers without first obtaining the required court orders.  The settlement agreement  requires Hudson Valley to pay $65,000 to compensate seven servicemembers whose vehicles were alleged to have been unlawfully repossessed and to pay a $30,000 civil penalty to the United States.  The DOJ’s press release describes Hudson Valley as one of the largest credit unions in the country and the DOJ alleged in the complaint that as of year-end 2016, Hudson Valley had total assets of $4.445 billion, total deposits of $3.99 billion, and more than 275,000 individual and business members.

The SCRA, in 50 U.S.C. § 3952(a)(1), generally requires a court order to be obtained before the vehicle of an active duty servicemember can be repossessed based on a default under a retail installment sales contract for the vehicle’s purchase as to which the servicemember made at least one deposit or installment payment before being called to active duty.

The DOJ’s complaint alleged that it launched an investigation into Hudson Valley’s repossession practices after learning of two private lawsuits filed in the Southern District of New York by servicemembers who claimed that Hudson Valley repossessed their vehicles in violation of the SCRA.  The investigation revealed seven additional SCRA violations by Hudson Valley resulting from repossessions and that, prior to August 2014, Hudson Valley did not have any written policies or procedures that addressed the SCRA’s requirements for vehicle repossessions.

The settlement agreement describes updates made by Hudson Valley in February 2018 to its collection guidelines to address such requirements and prohibits Hudson Valley from making any material changes to those guidelines without providing a copy of the proposed changes to the DOJ and giving the DOJ an opportunity to object.  It also requires Hudson Valley to provide SCRA compliance training to all of its collections and lending employees.

Based on the DOJ’s determination that seven of Hudson Valley’s vehicle repossessions between 2008 and 2014 did not comply with the SCRA, the settlement agreement requires Hudson Valley to pay $10,000 in compensation to each of six servicemembers, plus any lost equity in their vehicles with interest.  Hudson Valley must also pay $5,000 to a seventh servicemember  whose vehicle was repossessed but returned within 24 hours.  It also agrees not to pursue or assign any deficiencies associated with the repossessions and must refund any amounts paid by the servicemember or a co-borrower toward any deficiency that was remaining after a repossession.

The settlement with Hudson Valley follows several other lawsuits filed by the DOJ earlier this year and in 2017 alleging SCRA violations related to vehicle repossession and disposition.

 

 

While the pace of the CFPB’s fair lending activities has slowed under its new leadership, significant fair lending developments are occurring elsewhere.  In this week’s podcast, we discuss several of those developments and their broader implications.  Our discussion focuses on New York and Connecticut fair lending developments involving auto finance, a private redlining lawsuit, and the FDIC’s recent report on the use of digital footprint data for credit underwriting.  We conclude with a discussion of a letter recently issued by the Department of Justice to a Congressman regarding the website accessibility standards that companies must follow to be compliant with the Americans with Disabilities Act.

To listen and subscribe to the podcast, click here.

 

In June 2018, HUD issued an advance notice of proposed rulemaking (ANPR) seeking comment on whether its 2013 Fair Housing Act disparate impact rule (Rule) should be revised in light of the U.S. Supreme Court’s 2015 Inclusive Communities decision.  Comments on the ANPR were due by August 20, 2018.  The Rule is the subject of a lawsuit originally filed in June 2013 by the American Insurance Association and National Association of Mutual Insurance Companies in the D.C. federal district court.  In April 2016, the trade groups amended their complaint to include a claim that the Rule is inconsistent with the limitations on disparate impact claims set forth in Inclusive Communities.  As described more fully below, the district court entered an order last week that contemplates HUD’s issuance of a proposal to revise the Rule by December 18, 2018.

Oral argument on the parties’ cross summary judgment motions was initially scheduled for February 13, 2017.  However, on February 8, 2017, the court granted in part a motion filed by HUD seeking a continuance of the oral argument to allow the Trump Administration to install new HUD and Department of Justice officials, and continued the argument until a date to be determined by the court.  In addition, on February 15, 2017, the court stayed the case pending further discussions between the parties.

On October 19, 2018, the parties filed a joint status report in which the trade groups urged the court to schedule oral argument on the cross summary judgment motions in light of uncertainty as to what HUD’s proposal might provide and its refusal to commit not to take enforcement action against the trade groups’ members under the Rule.

On October 26, upon consideration of the joint status report, the court entered a minute order continuing the stay until December 18, 2018 to allow HUD “to issue a Notice of Proposed Rulemaking in response to public comments.”  The parties were also ordered to file another joint status report by December 18 “updating the Court on the status of HUD’s issuance of the rule and proposing any next steps in this litigation.”

Disparate impact also appears to be on the CFPB’s rulemaking agenda.  On October 17, the CFPB released its Fall 2018 rulemaking agenda.  In its preamble to the agenda and a blog post about the agenda, the CFPB indicated that future rulemaking it is considering includes the requirements of the Equal Credit Opportunity Act (ECOA).  More specifically, the blog post referenced the Bureau’s May 2018 announcement that “it is reexamining the requirements of the [ECOA] concerning the disparate impact doctrine in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”

 

The Conference of State Bank Supervisors (CSBS) has filed a second lawsuit in D.C. federal district court to stop the Office of the Comptroller of the Currency (OCC) from issuing special purpose national bank (SPNB) charters to fintech companies.  A similar lawsuit was filed last month in a New York federal district court by the New York Department of Financial Services.

The CSBS and the DFS had previously filed lawsuits challenging the OCC’s authority to grant SPNB charters to fintech companies at a time when the OCC had not yet decided whether it would move forward on its charter proposal.  Both lawsuits were dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The new lawsuits were filed in response to the OCC’s July 2018 announcement that it would begin accepting applications for SPNB charters from fintech companies.  In its complaint, the CSBS alleges that “things have changed substantially since the Court’s decision [dismissing the prior CSBS lawsuit].  The issuance of a [SPNB] charter is now clearly imminent.”  It further alleges that “upon information and belief, multiple pre-qualified candidates have already decided to apply (and may have already applied).”

The CSBS challenges the OCC’s SPNB charter plans in the new lawsuit on the following grounds (which generally track those asserted in the first CSBS lawsuit):

  • 12 C.F.R. Section 5.20(e)(1), on which the OCC has relied for its authority to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money—is inconsistent with the National Bank Act because the NBA does not allow the OCC to charter entities that do not receive deposits unless they are carrying on a special purpose expressly authorized by Congress.
  • Because the OCC has indicated that state law would be preempted as to fintech companies that obtain a SPNB charter, the OCC’s plans to issue the charters represent a preemption determination to which notice and comment procedures apply.
  • The OCC’s plans to issue SPNB charters to fintech companies represent a “rule” that was made without compliance with the Administrative Procedure Act and is an arbitrary and capricious action that does not constitute “reasoned decision making” as required by the APA.
  • The OCC’s plans to issue SPNB charters to fintech companies, by enabling nonbank charter holders to disregard state law, violate the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police powers necessary to regulate nonbank providers of financial services and protect consumers and the public interest from unsound and abusive financial practices.

For the reasons discussed in our blog post about the second lawsuit filed by the DFS, we expect the OCC’s power to issue an SPNB charter will ultimately be withheld.

Compliance with the Telephone Consumer Protection Act continues to present challenges to the financial services industry as a result of uncertain legal standards and contradictory court decisions.  In this week’s podcast, we discuss the key recent court decisions dealing with the TCPA’s autodialer definition and what the FCC is doing to provide further guidance to industry.  We’ll also talk about what new FCC guidance might say, how it will impact future court decisions, and strategies for defendants in TCPA litigation to consider using pending the FCC’s issuance of new guidance.   

To listen and subscribe to the podcast, click here.

 

 

The FTC recently issued a paper outlining key takeaways from its December 2017 workshop examining injuries consumers may suffer from privacy and data security incidents.  

The paper indicates that the FTC convened the workshop to better understand consumer injury for the following two purposes:

  • To allow the FTC to effectively weigh the benefits of governmental intervention against its costs when making policy determinations 
  • To identify acts or practices that “cause or are likely to cause substantial injury” for purposes of bringing an enforcement action under the FTC Act for an “unfair” act or practice 

The paper discusses the examples of informational injuries given by participants.  These examples involve injuries that may result from medical identity theft, doxing (i.e. the deliberate and targeted release of private information about an individual with the intent to harass or injure), exposure of personal information, and erosion of trust (i.e. consumers’ loss of trust in the ability of businesses to protect their data).  The paper also reports that “there was some discussion of whether the definition of injury should include risk of injury [from certain practices]” and shares opposing arguments made by participants.  

The issue of whether informational injuries that may result from alleged statutory violations are sufficient to provide a consumer in a private action with Article III standing under the U.S. Supreme Court’s Spokeo standard continues to be litigated.  In Spokeo, the Supreme Court indicated that, to satisfy the “injury-in-fact” requirement for Article III standing, a plaintiff must show that he or she suffered “an invasion of a legally protected interest” that is both “concrete” and “particularized.”  To be particularized, an injury must affect the plaintiff “in a personal and individual way.”  To be concrete, an injury must “actually exist;” it must be “real.”  However, the Supreme Court also acknowledged that intangible injuries can satisfy the concrete injury standard and that in some cases an injury-in-fact can exist by virtue of a statutory violation.  (The Spokeo standard does not apply to government enforcement actions.)

 

 

The “borrower defense” final rule (Final Rule) issued by the Dept. of Education in November 2016 took effect at noon yesterday after Judge Randolph D. Moss of the D.C. federal district court refused to grant the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools (CAPPS) seeking to preliminary enjoin the arbitration ban and class action waiver provisions in the Final Rule.  CAPPS had sought to block the provisions from taking effect pending the resolution of the lawsuit filed by CAPPS against the ED and Education Secretary Betsy DeVos to overturn the Final Rule.  Judge Moss found that CAPPS had filed to show that any of its members was likely to suffer an irreparable injury in the absence of an injunction.

Shortly before the Final Rule’s initial July 1, 2017 effective date, CAPPS filed a motion for a preliminary injunction to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019 (Final Rule Delay).

On September 12, 2018, Judge Moss issued an opinion and order in Bauer v. DeVos, another case challenging the Final Rule in which he ruled that the ED’s rationale for issuing the Section 705 stay was arbitrary and capricious and that in issuing the Final Rule Delay, the ED had improperly invoked the good cause exception to the Higher Education Act’s negotiated rulemaking requirement.  The case consolidated two separate lawsuits filed after the ED’s issuance of the Section 705 stay, with one filed by two individual plaintiffs and the other by a coalition of nineteen states and the District of Columbia.  Both lawsuits were subsequently amended to challenge not only the Section 705 stay but also the other actions taken by the ED to delay the Final Rule’s effective date.  While Judge Moss vacated the Section 705 stay, he stayed the vacatur until 5 p.m. on October 12, 2018.

After the ED filed a notice with the court in June 2017 regarding its initial delay of the Final Rule’s effective date until July 1, 2018, CAPPS withdrew its motion for preliminary injunction.  Following the court’s decision in Bauer, CAPPS filed its renewed motion for a preliminary injunction.  In his decision denying CAPPS’ motion, Judge Moss stated that on October 12, the court extended the stay of the vacatur until noon on October 16.

The Final Rule broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It does not apply to private loans.  The Final Rule includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses, and schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

It would seem that because the Final Rule is now effective, the new federal standard it establishes for evaluating defenses to repayment would be applicable in actions seeking to collect on Direct Loans disbursed on or after July 1, 2017 or to recover amounts previously collected on such loans.  However, because the arbitration ban and class action provisions of the Final Rule are requirements with which a school must comply as a condition of receiving Title IV assistance, the ED presumably could waive such requirements (as well as other provisions subject to ED enforcement such as the actions and events in the Final Rule that can trigger a requirement for a school to provide a letter of credit or other financial protection to the ED to insure against future borrower defense claims and other liabilities to the ED.)

Earlier this week, Judge Randolph D. Moss of the D.C. federal district court heard oral argument on the renewed motion for a preliminary injunction filed by the California Association of Private Postsecondary Schools (CAPPS) seeking to preliminary enjoin the arbitration ban and class action waiver provisions in the “borrower defense” final rule (Final Rule) issued by the Dept. of Education in November 2016 pending the resolution of the lawsuit filed by CAPPS against the ED and Education Secretary Betsy DeVos to overturn the Final Rule.

Shortly before the Final Rule’s initial July 1, 2017 effective date, CAPPS filed a motion for a preliminary injunction to which the ED responded by issuing a stay of the Final Rule under Section 705 of the Administrative Procedure Act (APA).  The Section 705 stay was followed by the ED’s issuance of an interim final rule delaying the effective date until July 1, 2018 and the promulgation of a final rule further delaying the effective date until July 1, 2019 (Final Rule Delay).

On September 12, 2018, Judge Moss issued an opinion and order in Bauer v. DeVos, another case challenging the Final Rule in which he ruled that the ED’s rationale for issuing the Section 705 stay was arbitrary and capricious and that in issuing the Final Rule Delay, the ED had improperly invoked the good cause exception to the Higher Education Act’s negotiated rulemaking requirement.  The case consolidated two separate lawsuits filed after the ED’s issuance of the Section 705 stay, with one filed by two individual plaintiffs and the other by a coalition of nineteen states and the District of Columbia.  Both lawsuits were subsequently amended to challenge not only the Section 705 stay but also the other actions taken by the ED to delay the Final Rule’s effective date.  While Judge Moss vacated the Section 705 stay, he stayed the vacatur until 5 p.m. on October 12, 2018.

After the ED filed a notice with the court in June 2017 regarding its initial delay of the Final Rule’s effective date until July 1, 2018, CAPPS withdrew its motion for preliminary injunction.  Following the court’s decision in Bauer, CAPPS filed its renewed motion for a preliminary injunction.  Oral argument on the renewed motion was held on October 9, 2018.  According to a Politico report, Judge Moss, who was appointed by President Obama under whose administration the Final Rule was promulgated, was skeptical about arguments made by CAPPs that its member colleges would be irreparably harmed if the Final Rule took effect, questioning whether some potential harm to the schools was too speculative or premature for him to address.

The Final Rule broadly addresses the ability of a student to assert a school’s misconduct as a defense to repayment of a federal student loan.  It includes a ban on all pre-dispute arbitration agreements for borrower defense claims by schools receiving Title IV assistance under the Higher Education Act (HEA) and a new federal standard for evaluating borrower defenses to repayment of Direct Loans (i.e. federal student loans made by the ED).  Both mandatory and voluntary pre-dispute arbitration agreements are prohibited by the rule, whether or not they contain opt-out clauses, and schools are prohibited from relying on any pre-dispute arbitration or other agreement to block a borrower from asserting a borrower defense claim in a class action lawsuit until the court has denied class certification and the time for any interlocutory review has elapsed or the review has been resolved.  The prohibition applies retroactively to pre-dispute arbitration or other agreements addressing class actions entered into before July 1, 2017.

On August 31, 2018, following negotiated rulemaking, the ED published a notice of proposed rulemaking that would rescind the Final Rule and replace it with the “Institutional Accountability regulations” contained in the proposal.  Among the major changes to the Final Rule that would be made by the proposal is the removal of the Final Rule’s ban on the use of pre-dispute arbitration agreements and class action waivers.

As of now, Judge Moss’s ruling in Bauer creates the possibility that the Final Rule could become effective as soon as 5:00 p.m. tomorrow.  It seems likely that there will be further developments in the CAPPS litigation before that time.