CFPB, Federal Agencies, State Agencies, and Attorneys General
The Act, which has been introduced in the House (H.R. 5050) and Senate (S. 2833), would impose a 36% national usury limit on most forms of consumer credit. We are joined by the bill’s drafter, Professor Chris Peterson of the University of Utah S.J. Quinney College of Law, for a discussion of the rationale for the cap, its potential impact on credit access, the implementation process if enacted, and the bill’s status and political prospects.
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Education Credit Management Corporation (“ECMC”), the guarantor of the student loan debt ruled dischargeable last month by the Chief Judge of the United States Bankruptcy Court for the Southern District of New York, is appealing that decision to the United States District Court for the Southern District of New York.
On January 17, ECMC filed a notice of appeal from Judge Cecilia G. Morris’ momentous January 7 opinion, granting summary judgment in favor of a student loan debtor seeking to discharge $221,385.49 in federal student loan debt. As we previously reported, Judge Morris applied the three-part test set forth by the Second Circuit in its 1987 decision in Brunner v. N.Y. State Higher Educ. Servs. Corp. (In re Brunner) to resolve competing motions for summary judgment submitted by the debtor and ECMC on the dischargeability of the debtor’s student loan debt. Based on the papers submitted by each of the parties, and without hearing oral argument, Judge Morris concluded that the debtor had satisfied each of the three prongs of the Brunner test, and ordered the debtor’s student loan debt be discharged, challenging the commonly held assumption that student loan debt is not dischargeable in bankruptcy.
ECMC is now appealing that decision, arguing that the Bankruptcy Court “rejected 32 years of case law applying the Brunner test, in order to determine, on summary judgment, that [the debtor] met his burden to establish an undue hardship.” In her opinion, Judge Morris examined the line of cases applying Brunner, many of which have stated that a debtor must demonstrate a “certainty of hopelessness.” She concluded that later cases applying Brunner with this language have added a punitive standard to Brunner that is not part of the test.
By contrast, other courts looking at the information that was available to Judge Morris may well have concluded that the debtor failed all three parts of the Brunner test because: (1) based on current income and expenses, the debtor was able to maintain a minimal standard of living, by pursuing work as a lawyer, rather than as a tour guide in the outdoor adventure industry; (2) the debtor would likely have been able to continue to maintain a minimal standard of living over the time period during which repayment would have been required in the absence of acceleration; and (3) a payment history showing only 10 payments over a 13-year period was insufficient to demonstrate good faith efforts by the debtor to repay his student loan debt.
Through ECMC’s appeal, Judge Cathy Seibel of the United States District Court will determine whether Judge Morris correctly applied the facts in this case to conclude that the student loan debtor satisfied the Brunner test. The student loan debtor, who had been representing himself pro se, has now retained Austin C. Smith of the Smith Law Group, LLP to represent him in the appeal. The outcome of this decision will impact how other courts view Judge Morris’ application of the Brunner standard, and the assumption that student loan debt is not dischargeable in bankruptcy. If the decision is upheld, student loan debtors in similar factual circumstances will be encouraged to consider seeking discharge of their student loan debt.
David Silberman, who has served as the CFPB’s Associate Director for Research, Markets, and Regulations since 2011, announced that he has left the agency to become a part-time senior advisor to both the Center for Responsible Lending and the Financial Solutions Lab of the Financial Health Network and a member of FinRegLab’s group of advisors. He will also teach a course on consumer finance regulation at Georgetown’s McCourt School of Public Policy and at Harvard Law School in the next academic year.
Mr. Silberman also served as CFPB Acting Deputy Director after former Director Cordray appointed him to that position following the resignation in 2015 of former Deputy Director Steven Antonakes.
On February 12, 2020, the House Financial Services Task Force on Artificial Intelligence will hold a hearing titled, “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”
The Committee Memorandum flags a number of issues that could be the focus of comments and questions from lawmakers. Those issues include the potential for data sets used in AI to “contain errors, [be] incomplete, and/or contain data that reflects societal or historical inequities,” challenges in applying the existing legal framework (ECOA, FHA, FCRA) to AI technologies, and risks of “regulatory sandboxes.” Also mentioned in the memorandum is “educational redlining,” which was the subject of a recent report by the Student Borrower Protection Center. The term “educational redlining” refers to the claim that the use of education data in credit underwriting, such as whether a prospective borrower attended “a community college, an Historically Black College or University, or an Hispanic-Serving Institution,” results in higher costs to minority borrowers.
The scheduled witnesses are:
We have been closely following developments concerning the use of AI by providers of consumer financial services and discussed such use in three of our recent podcasts which can be accessed by clicking here, here and here.
Last Monday, the CFPB announced that it had entered into a new Memorandum of Understanding with the Department of Education to replace the MOU that was terminated by the ED effective October 1, 2017. The new MOU, which is effective as of January 31, 2020, is limited to the handling of student loan complaints. The announcement was followed by Director Kraninger’s appearance before the House Financial Services Committee last Thursday. At the hearing, Director Kraninger told lawmakers that the agencies were negotiating a second MOU to address supervision.
The new MOU allocates the handling of student loan borrower complaints between the CFPB and ED as follows:
The MOU provides that the agencies will meet at least quarterly “to discuss observations about the nature of complaints received, characteristics of borrowers, and available information about resolution of complaints, as well as analysis and recommendations.”
At the House hearing, Director Kraninger came under fire from Democratic Committee members regarding the CFPB’s supervision of federal student loan servicers. Since December 2017, based on ED guidance, servicers of certain federal student loans have declined to produce information requested by the Bureau’s examiners. (Last month, Democratic Senators Sherrod Brown and Robert Mendez, both members of the Senate Banking Committee, sent a letter to Director Kraninger criticizing the Bureau’s failure to resume examinations of federal student loan servicers.) As reported by American Banker, Director Kraninger told lawmakers at the House hearing that the CFPB and ED are working on a joint examination plan for federal student loan servicers under which the CFPB would examine for compliance with federal consumer financial laws and the ED would examine for contractual compliance. She also indicated that the agencies were negotiating a second MOU that would detail the new supervision process and indicated that she expected that MOU to be in place by year-end.
On March 10, 2020, the CFPB will host a day-long event, “Evolutions in Consumer Debt Relief.” The event will explore options for consumers facing unmanageable unsecured debt and limited credit options. An agenda or other details are not yet available.
The CFPB announced that it has entered into a proposed consent order with Think Finance and six subsidiaries (collectively, the “Think Entities’) to settle the Bureau’s lawsuit filed in November 2017 that alleged the Think Entities engaged in unfair, deceptive, and abusive acts or practices in connection with their collection of loans that were void under state law because the loans’ interest rates exceeded state law limits or the lenders who made the loans had not obtained required state licenses. The loans in question were made by companies owned by Native American tribes. The relevant states are Arizona, Arkansas, Colorado, Connecticut, Illinois, Indiana, Kentucky, Massachusetts, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Ohio, and South Dakota (“Subject States”).
After the lawsuit was filed, the Think Entities filed for Chapter 11 bankruptcy relief. The consent order prohibits the Think Entities and the reorganized Think Entities (“Enjoined Parties”) from providing services to a lender that constitute “extending credit to, servicing credit extended to, or collecting on credit extended to” a consumer who resides in a Subject State where the loan made by the lender would violate the Subject State’s usury law or the lender is not properly licensed in the Subject State. It also prohibits the Enjoined Parties from providing services directly to a lender, or to a third party for the lender’s use, in connection with the lender’s activities “in extending credit to, servicing credit extended to, or collecting on credit extended to” a consumer who resides in a Subject State where the loan made by the lender would violate the Subject State’s usury law or the lender is not properly licensed in the Subject State and the Enjoined Party knows, or is reckless in not knowing, that the lender is making such a loan. These prohibitions do not apply to loans “originated or issued” by federally- or state-chartered depository institutions or another entity if federal law preempts the application of state law to the loan.
The consent order’s monetary provisions, which are part of the Think Entities’ bankruptcy plan, requires each of the Think Entities to pay a $1 civil money penalty (or a total of $7). The Bureau’s press release states that the proposed consent order is part of “the global resolution of the Think Finance Entities’ bankruptcy proceeding…which includes settlements with the Pennsylvania Attorney General’s Office and private litigants in a nationwide consumer class action. Consumer redress will be disbursed from a fund created as part of the global resolution, which is anticipated to have over $39 million for distribution to consumers and may increase over time as a result of ongoing, related litigation and settlements.”
Since the Bureau’s lawsuit against the Think Entities was filed under former Director Cordray’s leadership, the settlement does not provide insight regarding Director Kraninger’s views on tribal lending or the Bureau’s enforcement of state usury laws.
On January 29, 2020, the House passed H.R. 3621, the Comprehensive Credit Reporting Enhancement, Disclosure, Innovation, and Transparency Act of 2020 (“Comprehensive CREDIT Act”). Sponsored by Rep. Ayanna Pressley (D-MA), it passed by a mostly party-line vote of 221-189, with all but two Democrats supporting it. The legislation is a package of several Democrat-sponsored bills that target consumer reporting and, if passed into law, would affect all aspects of the industry. For example, the Act includes provisions:
The House approved the Act over sharp criticism from organizations such as the U.S. Chamber of Commerce. It now awaits consideration by the Senate, which will likely ignore the legislation as long as Republicans remain in control. With the 2020 election looming, however, a change in the Presidency and control of the Senate could also mean passage of the Act or something similar to it—and, with it, significant changes for the consumer reporting industry. Furnishers and CRAs alike should consider this legislation a preview of what could occur if Democrats control the White House and both houses of Congress in November.
The U.S. Court of Appeals for the Seventh Circuit recently ruled in Horia v. Nationwide Credit & Collection, Inc. that a consumer was not precluded from bringing a second FDCPA lawsuit against a debt collector for failing to notify a credit reporting agency that the debt was disputed even though the first lawsuit brought by the consumer against the debt collector alleging the same FDCPA violation in connection with a different debt had been settled and dismissed with prejudice.
The district court dismissed the second lawsuit on the grounds of issue preclusion, finding that the consumer had impermissibly split his claims. Reversing the dismissal, the Seventh Circuit found that although both lawsuits involved the same FDCPA requirement and the same debt collector, the wrongs differed and the consumer’s injuries differed. According to the Seventh Circuit, “[e]ach failure to notify could have caused an additional harm to credit score or peace of mind.” It concluded that “[e]ach time a debt collector fails to give a credit agency the required notice for a debt is a stand-alone wrong. Disputes that have an independent existence may be litigated separately.”
While ruling in favor of the consumer, the Seventh Circuit offered advice for how “bill collectors can protect themselves.” First, it observed that the debt collector could have negotiated a broader release that covered all disputes between the same parties and not just the dispute already in court. (The court noted that while it was possible the release did cover the second lawsuit, “release is an affirmative defense.”)
Second, referencing the FDCPA provision that allows a court to award additional damages of up to $1,000 per case, the Seventh Circuit indicated that a debt collector could argue, and district court judges would have discretion to conclude, that “a debtor who has already collected $1,000 in statutory damages should not receive more from the same defendant for the same sort of wrong.” It stated that “[d]ebt collectors are also free to contend, and judges to find, that the second suit entails the same ‘actual damage’ (§1692k(a)(1)) as the first, so that an additional award on that front is inappropriate. If a bill collector’s first failure to notify a credit bureau damages a debtor’s credit score and causes emotional distress, a second suit based on a second failure to notify the same credit bureau allows the debtor to collect only the marginal loss caused by the second wrong.”
Third, the Seventh Circuit referenced the FDCPA provision that allows a debt collector to collect its attorneys’ fees from the consumer if it can show a lawsuit was brought in bad faith and for the purpose of harassment. It stated that the FDCPA “thus provides debt collectors with tools to discourage abusive litigation.”
After reviewing how the CFPB has used its abusiveness authority, we look at why such authority has created industry concern, consider implications of the CFPB’s decision to forego rulemaking, discuss the policy statement’s three parts and likely practical impact on the CFPB’s behavior and industry’s assessment of risk, and examine continuing industry concerns about the Bureau’s unfairness and deceptiveness authority.
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