A key issue for earned wage access (EWA) programs is whether they constitute “credit” for purposes of federal consumer financial protection laws such as TILA, ECOA, and the CFPA, or under state law.  The Treasury Department’s General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals includes a proposal concerning how EWA programs should be characterized for tax purposes.

The proposal would amend the Internal Revenue Code to clarify that EWA arrangements (which the Treasury refers to as “on-demand pay arrangements”) are not loans.  It would also add a definition of on-demand pay arrangements to the IRC.  Such arrangements would be defined as “as an arrangement that allows employees to withdraw earned wages before their regularly scheduled pay dates.”

In November 2020, the CFPB issued an advisory opinion (AO) that addressed whether an EWA program with the characteristics set forth in the AO was covered by Regulation Z.  Such characteristics included the absence of any requirement by the provider for an employee to pay any charges or fees in connection with the transactions associated with the EWA program and no assessment by the provider of the credit risk of individual employees.  The AO set forth the Bureau’s legal analysis on which it based its conclusion that the EWA program did not involve the offering or extension of “credit” within the scope of Regulation Z.  

The CFPB expressly limited the AO’s application to EWA programs meeting all of the characteristics set forth in the AO.  Earlier this year, Seth Frotman, now CFPB General Counsel, stated that “products that include the payment of any fee, voluntary or not, are excluded from the scope of the advisory opinion and may well be TILA credit.”  He also indicated that more clarity on these issues was needed from the CFPB. 

While the proposal provides helpful support for the position of EWA program providers that such programs should not be regulated as “credit” products, it is unclear whether, if adopted, the CFPB or state regulators would deem the IRC’s treatment of EWAs determinative of their treatment for consumer financial protection laws.  For example, the California Department of Financial Protection and Innovation (DFPI), exercising its expanded jurisdiction over consumer financial services providers under the California Consumer Financial Protection Law (CCFPL), entered into memorandums of understanding with five EWA companies in early 2021.  In doing so, the DPFI appeared to be taking an expansive view of who are “covered persons” under the CCFPL by considering companies to be offering a “consumer financial product or service” as defined in the CCFPL even when the product or service did not constitute “credit” for purposes of TILA and Regulation Z.

Last week, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled “Examining Overdraft Fees and Their Effects on Working Families.”  A recording of the hearing is available here

After opening statements from Subcommittee Chairman Raphael Warnock (D-GA) and Ranking Member Thom Tillis (R-NC), three witnesses offered testimony and responded to questions from the Subcommittee members.  The following witnesses appeared at the hearing:

  • Aaron Klein, Senior Fellow in Economic Studies, Brookings Institution 
  • Jason Wilk, Founder & Chief Executive Officer, Dave
  • David Pommerehn, Senior Vice President and General Counsel, Consumer Bankers Association

Chairman Warnock kicked off the hearing by stating that onerous and opaque overdraft fees keep people in cycles of debt and poverty, and disproportionately impact people of color.  He observed that many banks have moved to eliminate overdraft fees, and applauded those banks for making the right choice to benefit these communities.  In his opening remarks, Ranking Member Tillis recognized the tremendous consumer choice available today as the financial services industry has developed new products.  Responding to Warnock, Tillis stated that the industry has already adopted consumer-friendly overdraft products and practices through competition and innovation and regulation is not needed.  In a nod to the recent CFPB Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services, Tillis concluded that overdraft fees should not be characterized as “junk fees.”

The testimony discussed the volume of overdraft fees charged – up to $30 billion a year according to Aaron Klein from Brookings — as well as the concentration of the impact on the most economically vulnerable individuals.  Chairman Warnock and Senator Warren both cited a CFPB study that found 80% of overdraft fees were charged to 9% of consumers.  However, it was noted throughout the hearing that overdraft fee revenue has been on the decline, in many instances due to voluntary actions within the financial services industry, including eliminating overdraft charges by many banks. 

Aaron Klein testified that banks have already made sweeping changes to their products without regulation or legislation that will substantially reduce usage of overdrafts and overall costs for consumers, quantifying the impact of those voluntary changes at $5 billion a year.  David Pommerehn from the Consumer Bankers Association noted that overdraft products are based on necessity, due to limited small dollar loan options, and provide one of the last viable sources of short term liquidity for many consumers, also highlighting the choice and transparency already surrounding the product based on the requirement to opt-in.  Highlighting some of the innovation in the space, Jason Wilk discussed the products his company, Dave, offers to assist consumers in its mission to “disrupt overdraft,” including linking with their bank accounts to help customers have better visibility into upcoming bills that may lead to an overdraft.

While everyone acknowledged actions taken within the industry to address concerns about overdraft, the witnesses proposed additional policy changes.  Klein highlighted five recommendations, including (1) revising safety and soundness rules to target a small number of banks that make a totality of their profits off of overdraft fees, (2) making credit unions disclose their overdraft data like banks do, (3) having the Fed use its regulatory authority under the Expedited Funds Availability Act to implement real-time payments to address the slow payment system, thereby decreasing the reliance on payday lenders, (4) new regulation to prohibit banks from posting debits before credits and reordering payment flows from largest to smallest when processing transactions, and (5) universal Bank-On-style accounts (no overdraft, low-cost, basic accounts).  Pommerehn advocated for more short term liquidity products, and encouraging policymakers to explore alternatives, including small dollar lending. 

Yesterday, the U.S. Senate confirmed Alvaro Bedoya to serve as an FTC Commissioner  

Mr. Bedoya fills the seat on the Commission previously held by CFPB Director Rohit Chopra.  He joins the two other Democratic FTC Commissioners, Lina Khan, Chair of the Commission, and Rebecca Slaughter, thereby ending a 2-2 split and restoring a 3-2 Democratic majority.  His presence on the Commission paves the way for Chair Khan to move forward on her aggressive agenda.

With Mr. Bedoya having served as the first Chief Counsel for the Senate Judiciary Committee’s Subcommittee on Privacy, Technology & the Law, some observers have expressed the view that Mr. Bedoya will advocate for greater FTC focus on potential discrimination arising from the use of  artificial intelligence and other technological innovations as well as privacy considerations for both consumer protection and competition among Big Tech companies.

We first review the scope of the CFPB’s supervisory authority granted by Dodd-Frank and the source of its authority to supervise nonbanks that present risks to consumers.  We then discuss how we expect the CFPB to use its risk-based authority, including the types of products it may target and its decision to make public the identities nonbanks.  We also look at the practical impact of CFPB supervision for targeted nonbanks and what steps companies can take both to avoid becoming a CFPB target and to prepare for the possibility of a CFPB examination.  Finally, we consider how the CFPB’s action could impact the approach of state regulators to nonbank providers of alternative credit products.

John Grugan, a partner in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Michael Gordon and Lisa Lanham, partners in the Group.

Click here to listen to the podcast.

The Fifth Circuit held  oral argument yesterday in the appeal filed by the trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule).  Click here for the recording of the oral argument.

The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021 (which would have been until June 13, 2022).  After the appeal was filed, the Fifth Circuit entered an order staying the compliance date of the payment provisions until 286 days after the trade groups’ appeal is resolved.  The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. 

In advance of the oral argument,  the trade groups submitted the en banc Fifth Circuit decision in All American Check Cashing as supplemental authority to the panel hearing their appeal.  In All American, the en banc Fifth Circuit ruled that the CFPB’s enforcement action against All American Check Cashing could proceed despite the unconstitutionality of the CFPA’s removal restriction at the time the enforcement action was filed.  As an alternative basis for challenging the CFPB’s constitutionality, All American had argued that the CFPB’s budgetary independence from Congress contravenes the Constitution’s separation of powers by violating the Appropriations Clause.  (Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12% of the Federal Reserve’s budget, rather than through the Congressional appropriations process.)  In a concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American that the CFPB’ funding mechanism is unconstitutional and, as a result, dismissal of the enforcement action is required.  In the supplemental filing, the trade groups argue that the panel should invalidate the 2017 Rule based on Judge Jones’ concurring opinion.

The CFPB has issued a new advisory opinion “to affirm that the Equal Credit Opportunity Act (ECOA) and Regulation B protect those actively seeking credit and those who sought and received credit.”

The ECOA defines an “applicant” to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. 1691a(b).  As defined by Regulation  B, an “applicant” includes “any person who requests or who has received an extension of credit from a creditor.” 

The CFPB has previously taken the position in amicus briefs that the term “applicant” includes a person who had received credit and is an existing account holder and is not limited to a person in the process of applying for credit.  The CFPB took that position most recently in an amicus brief filed in December 2021 jointly with the FTC, DOJ, and Federal Reserve Board in the Seventh Circuit in Fralish v. Bank of America One, N.A.  In the brief, the agencies urge the court to reverse a district court ruling that an individual who had already received credit from the defendant and who was not currently applying to the defendant for credit was not an “applicant” for purposes of the ECOA’s adverse action notice requirement.

In October 2020, the CFPB and FTC filed a joint amicus brief with the Second Circuit in Tewinkle v. Capital One, N.A., in which they made similar arguments on behalf of a plaintiff who had alleged that a notice sent to him by the defendant bank that it was terminating his checking account and overdraft line did not comply with the ECOA/Regulation B adverse action notice requirement.  In that case, the district court agreed with the bank that the plaintiff was not an “applicant” for purposes of the adverse action notice requirement.  The Second Circuit did not issue a ruling because there was a settlement in the case.

In the advisory opinion, as it did in the amicus briefs, the CFPB takes the position that, despite the wording of the ECOA’s definition of the term “applicant,” the “best interpretation” of the ECOA is that the term includes existing borrowers.  According to the CFPB, the ECOA’s text, legislative history, and statutory purpose support reading the ECOA to include existing borrowers.  For that reason, according to the CFPB, it was reasonable for the Federal Reserve Board and then the CFPB to adopt this reading of the ECOA in Regulation B. 

By issuing the advisory opinion, the CFPB may be seeking to bolster its ability to litigate the ECOA issue in other cases (as well as head off adverse decisions in other cases) should the Seventh Circuit reject its interpretation in Fralish.  An adverse result in Fralish could also lead to an attempt by the CFPB to use its UDAAP authority to challenge discrimination against existing borrowers. 

The CFPB and the FTC recently filed an amicus brief in an appeal to the Second Circuit, arguing that the Court should reject the District Court’s “unduly narrow” interpretation of the FCRA requirement that consumer reporting agencies (CRAs) follow reasonable procedures to assure accuracy of information included in consumer reports.

In Sessa v. Trans Union, LLC, Plaintiff-Appellant brought a putative class action alleging that TransUnion reported she owed a “balloon payment” on a vehicle lease, but then inaccurately reported the amount owed as the vehicle’s residual value, which was an optional amount to purchase the vehicle at the end of the lease and greater than the actual amount owed.

The District Court for the Southern District of New York granted summary judgment to TransUnion holding that Plaintiff failed to make the “threshold showing” of inaccuracy on the consumer report.  First, the court drew a distinction between factual and legal inaccuracies and held that a CRA cannot be held liable when the issue requires a legal determination as to the validity of the debt the agency reported.  In the court’s view, whether Plaintiff in fact owed a balloon payment at the end of the lease was a “legal dispute” that requires “a legal interpretation of the loan’s term.”  Second, the court concluded that the information in the credit report was factually accurate because TransUnion reported the exact information it received from the data furnisher.

On Plaintiff’s appeal to the Second Circuit, the CFPB and FTC filed an amicus brief where they argue that the text of the FCRA makes no distinction between factual and legal inaccuracies, and that importing a distinction between factual and legal inaccuracies into the law is unworkable in practice.  They argue that most, if not all, inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule, effectively rendering the reasonable procedures section of the FCRA a nullity.  More specifically, debts are creatures of contract and any inaccurate representation pertaining to an individual’s debt obligations could arguably be characterized as a legal inaccuracy insofar as determining the truth or falsity of the representation requires contractual interpretation.  Whether an error is defined as factual or legal, a consumer report may still be incorrect.

The FTC and the CFPB further argue that the mere fact that a CRA reports the exact same information provided by a furnisher is not a proper basis to reject a reasonable procedures claim.  They argue that, although reliance on a furnisher may constitute some evidence of the reasonableness of the CRAs procedures, whether those procedures are reasonably designed to assure the maximum possible accuracy of the information in a consumer report is a fact-intensive question that usually cannot be resolved at summary judgment.

The Eighth Circuit reiterated in a decision last month that trial courts must distinguish between FCRA plaintiffs who have suffered concrete harm and plaintiffs who merely seek to collect statutorily allowed damages as a way to ensure compliance with the law.  Under the Supreme Court’s decision in Spokeo, the former have Article III standing to assert FCRA claims but the latter do not.

In Schumacher v. SC Data Center, Inc., plaintiff Ria Schumacher sought a job with defendant SC Data.  During the application process, Schumacher responded “no” to a question asking whether she had ever been convicted of a felony.  SC Data offered a position to Schumacher and then obtained her authorization to allow a third party to independently investigate her criminal records.  SC Data later rescinded its offer to Schumacher when the report that it obtained revealed Schumacher’s 1996 felony conviction.

Schumacher alleged three FCRA violations on behalf of herself and a class: (1) taking an adverse employment action based on a consumer report without first providing the report to the applicant; (2) obtaining a consumer report without providing an FCRA-compliant disclosure form; and (3) obtaining more information about an applicant than allowed by the authorization.  Four days after the Supreme Court’s decision in Spokeo, SC Data moved to dismiss Schumacher’s claims for lack of standing.  The trial court found that Schumacher had standing to pursue all three claims, but the Eighth Circuit reversed.

The Eighth Circuit began with Schumacher’s adverse action claim.  The FCRA provides that before an employer takes an adverse action against a consumer based on a consumer report, the employer must provide a copy of the report to the consumer. 15 U.S.C. § 1681b(b)(3)(A).  The Court concluded that SC Data violated the FCRA when it did not provide a copy of the report to Schumacher before rescinding her job offer.  Still, the Court noted the split in authority regarding whether an employer’s failure to provide a pre-action report is a bare procedural violation or conduct that causes an intangible harm sufficient to confer standing. 

Those courts that have found standing, the Court explained, did so on the premise that an employee has a right to discuss with an employer the information in a report prior to any adverse action.  However, the Eighth Circuit agreed with the Ninth Circuit that no such right is found in the FCRA’s text or supported by its legislative history.  Instead, the FCRA was intended to protect against the dissemination of inaccurate information.  Schumacher did not claim that the information contained in the report was inaccurate, so her adverse action claim was not redressable under the FCRA.

The Court turned next to Schumacher’s improper disclosure claim.  When an employer obtains a consumer report for employment purposes, the FCRA requires the employer to provide the applicant with a “clear and conspicuous” written disclosure “in a document that consists solely of the disclosure.” 15 U.S.C. § 1681b(b)(2)(A)(i).  Schumacher pointed to several purported statutory defects in SC Data’s disclosure form, including the size of the disclosure’s font.  However, the Court held that a technical violation of the disclosure provision, without “something more,” is insufficient to confer standing.  Schumacher did not point to any tangible or intangible harm that flowed from the purported technical violations, such as confusion about the consent being given.  Thus, she lacked standing to pursue this claim, too.

Finally, the Court turned to Schumacher’s failure-to-authorize claim.  The FCRA forbids an employer from obtaining a consumer report without the employee’s written authorization. 15 U.S.C. § 1681b(b)(2)(A)(ii).  However, Schumacher indisputably authorized SC Data to obtain a type of consumer report documenting her criminal history.  The Court found that the report at issue fit within these parameters.  To the extent the report exceeded Schumacher’s authorization, Schumacher failed to plead any facts demonstrating a concrete harm.  Thus, regardless of whether the report contained noncriminal information, Schumacher lacked Article III standing.

Because Schumacher lacked standing to assert any of her claims, the Court vacated the trial court’s orders and remanded the case with instructions to return the case to the state court.

The post-Spokeo landscape is still very much in development.  Schumacher provides a reminder that employers who find themselves defending against FCRA claims should closely scrutinize whether plaintiffs have alleged mere procedural violations or the kind of concrete harm sufficient to open the doors to the federal courthouse.

Our Consumer Finance Monitor podcast continues to cover the most important industry issues.  In anticipation of the American Law Institute (“ALI”) considering the Restatement of the Law, Consumer Contracts (the “Restatement”) at its Annual Meeting in Washington, DC on Tuesday, May 17, we plan to release an episode about the Restatement with guest Steven Weise, a member of ALI’s Council on Monday, May 16.  Mr. Weise will be interviewed by Alan Kaplinsky, former Chair of Ballard Spahr’s Consumer Financial Services Group and a member of ALI’s Board of Advisors to this Restatement project.

The Restatement is the culmination of an 11-year effort by ALI to create a special Restatement focused on selected aspects of consumer transactions, such as when consumers will be bound by online contracts (including changes in terms) and defenses to the enforceability of consumer contracts such as unconscionability.  In many instances, the Restatement’s formulation of “law” will differ from the common law of particular states.  BECAUSE COURTS WILL OFTEN LOOK TO RESTATEMENTS TO GUIDE THEIR DECISION MAKING, ALL COMPANIES THAT CONTRACT WITH CONSUMERS MUST BECOME INTIMATELY FAMILIAR WITH THIS RESTATEMENT SINCE IT MAY REQUIRE IMMEDIATE CHANGES TO CONSUMER CONTRACTS.  Our podcast is intended to provide a roadmap for industry to use in conforming their contracts to the new Restatement’s requirements.

This ALI project has largely flown under the radar throughout its existence.  It has gotten very little media attention.  That is about to change very soon if ALI’s members approve the Restatement on May 17.  We are proud to be at the forefront of reporting on this enormously important development.

We will also be releasing a new podcast on Thursday of this week (May 12) on the CFPB’s recent announcement that it plans to invoke its “dormant authority” to supervise nonbanks that present a risk to consumers.

The Fourth Circuit heard argument earlier this week on whether Section 230 of the Communications Decency Act shields on-line data aggregator, PublicData.com, from FCRA liability in a putative class action dismissed last year by a federal judge in Virginia.  We previously blogged about the amicus brief filed in the appeal by the CFPB, FTC, and North Carolina Department of Justice.

At oral argument, counsel for PublicData.com stressed that reversing the lower court decision would open the door to allowing federal and state governments to impose “a suite of onerous regulations” on internet platforms based on third party content, when such platforms otherwise would be immune from liability for third party content under Section 230. 

Counsel for the consumer-plaintiffs argued that Section 230 immunity for online platforms applies only when such platforms limit themselves to “traditional publishing functions,” and that PublicData.com’s alleged active assembly of government information and generation of reports goes beyond that, and should be subject to regulation under the FCRA.  Counsel for PublicData.com claimed the plaintiffs were mischaracterizing the nature of PublicData.com’s activities, arguing that the site is simply a conduit of information republished in searchable format.

Attorneys for the state attorneys general and FTC also argued in support of the plaintiff’s position, contending that the plaintiffs’ claims are not targeting PublicData.com as a third-party publisher such that Section 230 would be implicated.  Counsel for the FTC also emphasized that the court’s decision would have broad impact on the government’s ability to enforce the FCRA against all on-line platforms.

Comments from the panel were mixed, but seemed to lean in favor of the plaintiffs’ position that PublicData.com’s activities were in fact subject to the FCRA.

We will await the Fourth Circuit’s decision in the appeal, and will report on it here.