In a recent “open letter” to newly confirmed CFPB Director Rohit Chopra, Professor Jeff Sovern asks the agency not to forget about “arbitration” as it implements its regulatory agenda.  He argues that “[p]re-dispute arbitration clauses remain a serious limit on consumer protection” and can even “blow up their lives.”

That’s poor advice, Professor Sovern, and hyperbole is no substitute for facts.  The CFPB’s earlier attempt to regulate consumer arbitration took five years and was ultimately unsuccessful, in large part because its 728-page empirical study of consumer arbitration, completed in March 2015, showed that arbitration is faster and less expensive than class action litigation and results in greater recoveries for consumers.  In particular, the CFPB found, consumers who prevailed in an individual arbitration recovered an average of $5,389, and the entire arbitration process was concluded in an average of 2-7 months.  By contrast, consumers who received cash payments in class action settlements got a paltry $32.35 on average after waiting for up to two years, while their lawyers recovered a staggering $424,495,451.  The CFPB further concluded that arbitration is not per se harmful to consumers or the general  public, and it has even encouraged its own employees to use alternative dispute resolution to resolve workplace disputes because it provides “faster and less contentious results” as well as “confidentiality.”

That consumers fare better in arbitration than in court is further confirmed in a November 2020 study by the U.S. Chamber Institute for Legal Reform of more than 100,000 consumer disputes that terminated between January 1, 2014 and June 30, 2020. The study found (as did the CFPB) that arbitration is faster and less expensive than litigation, consumers are more likely to win in arbitration than in court and consumers receive higher awards in arbitration than in litigation.

We do join Professor Sovern in congratulating Director Chopra on his confirmation.  However, our advice is that the CFPB should not waste its resources and the next five years trying to fix something that isn’t broken, as shown by its own data.  Instead, we urge the CFPB to spend its resources educating consumers about the many benefits of arbitration.  That is the investment of time and money that would help “prevent consumers from making poor choices.”

The Division of Banks of the Massachusetts Office of Consumer Affairs and Business Regulation has issued a supervisory alert to warn financial institutions of the potential legal and regulatory risks arising from NSF fees charged on the representment of unpaid transactions.

The alert addresses the common scenario in which a financial institution charges an NSF fee when an ACH item is presented for payment from a consumer’s account and is declined due to insufficient funds in the account to cover the item.  If the same item is subsequently represented for payment and declined again, some financial institutions will charge an additional NSF fee for each declined representment, thereby resulting in multiple NSF fees for the same underlying transaction.

The alert observes that recent class action lawsuits have alleged breach of contract claims based on the omission of terms in the deposit account agreement regarding the assessment of NSF fees for represented items.  It also observes that standard deposit account agreements and fee schedules supplied to financial institutions by vendors may not adequately explain a bank’s actual NSF fee practices.  Specifically, although some disclosures may indicate that one NSF fee will be charged “per item” or “per transaction,” such language may not adequately explain that a single underlying  transaction can trigger multiple NSF fees.  The alert suggests that, in the absence of such explanation, charging multiple NSF fees could be viewed as inconsistent with what was disclosed to the customer.

The alert also reminds financial institutions that their deposit account disclosure and agreement practices are reviewed by state and federal regulators for UDAP compliance.  It warns that UDAP violations can result in the payment of restitution and/or civil money penalties.  It strongly encourages financial institutions to review their disclosures and processes to ensure they are in compliance with applicable laws and regulations, clearly disclose how NSF fees are charged, and are consistent with a customer’s reasonable expectations.

The alert concludes by advising financial institutions that ongoing and future examinations by the Division of Banks could require corrective measures based on examination findings.

In our latest podcast, “Still In The Crosshairs: An Update On Bank Overdraft Practices,” we discuss representment claims as well as other theories currently used by plaintiffs’ attorneys to challenge overdraft practices.  Click here to listen.

By a 50-48 party line vote, the U.S. Senate confirmed Rohit Chopra yesterday as CFPB Director.

Mr. Chopra’s confirmation clears the way for the White House to move forward on President Biden’s nomination of Alvaro Bedoya to fill Mr. Chopra’s seat as FTC Commissioner and on the President’s nomination of Acting CFPB Director Dave Uejio to serve as Assistant Secretary for Fair Housing and Equal Opportunity at the Department of Housing and Urban Development.

Once he arrives at the CFPB, Mr. Chopra can be expected to name a Deputy Director.

 

 

In addition to amendments to the Fair Credit Reporting Act dealing with the reporting of adverse information on servicemembers by consumer reporting agencies, the National Defense Authorization Act (NDAA) as passed by the House and now headed to the Senate includes amendments to the Servicemembers Civil Relief Act that restrict the use of arbitration agreements and waivers of SCRA protections.

Arbitration.  The NDAA adds a new provision to the SCRA that requires post-dispute written consent to use arbitration “whenever a contract with a servicemember, or a servicemember and the servicemember’s spouse jointly, provides for the use of arbitration to resolve a controversy subject to a provision of [the SCRA] and arising out of or relating to such contract.”  All parties to the dispute must give such written consent.  The requirement applies to all contracts “entered into, amended, altered, modified, renewed, or extended after the date of the enactment of [the NDAA].”

The Military Lending Act, which applies to certain loans made to servicemembers already on active duty, prohibits the use of mandatory arbitration agreements in loans covered by the MLA.  The proposed SCRA amendment would round out that protection by restricting the enforcement of arbitration provisions against active duty service members where the underlying agreement was made before the start of active duty service.  (The SCRA’s coverage, however, is broader than the MLA.  The MLA applies to loans covered by TILA, with exceptions for purchase money loans and mortgages, while the SCRA covers a wide range of obligations, not just loans.)

Waivers.  The SCRA allows a servicemember to waive SCRA protections and generally requires that for a waiver to be effective, (1) it must be in writing and (2) the waiver agreement must be separate from the document creating the obligation or liability to which the waiver applies and executed during or after the servicemember’s period of military service.

The NDAA amends the SCRA’s waiver provision to add the requirement that for a waiver to be effective, it must be agreed to after a specific dispute has arisen and must identify the dispute.  The amendment applies to waivers made on or after the date of the NDAA’s enactment.

 

The National Defense Authorization Act as passed by the House and now headed to the Senate includes amendments to the Fair Credit Reporting Act dealing with the reporting of adverse information on servicemembers by consumer reporting agencies.

The amendments add the defined terms “uniformed consumer” and “deployed uniformed consumer” to the FCRA.  A “uniformed consumer” is defined as a consumer who is a member of the uniformed services (i.e. Army, Navy, Air Force, Marine Corps, Space Force, Coast Guard, and commissioned corps of the Public Health Administration and National Oceanic and Atmospheric Administration) or the National Guard and is in active service.  A “deployed uniformed consumer” is defined as a uniformed consumer who serves in a combat zone, aboard a U.S. combatant, support, or auxiliary vessel, or in a deployment and is in active duty for such service for not less than 30 days.

The amendments impose the following prohibition and requirements:

  • A CRA is prohibited from reporting “any item of adverse information about a uniformed consumer, if the action or inaction that gave rise to the item occurred while the consumer was a deployed uniformed consumer.”
  • If an item of adverse information is included in a consumer’s file and the consumer provides the CRA with “appropriate proof, including official orders” that the consumer was a deployed uniformed consumer at the time of the action or inaction that gave rise to the item occurred, the CRA must “promptly delete the item of adverse information from the [consumer’s] file and notify the consumer and the furnisher of the information of the deletion.”
  • If a CRA receives any item of adverse information about a consumer who has provided appropriate proof that he or she is a uniformed consumer, the CRA must promptly notify the consumer that it has received such item, provide a description of the item, and provide the method by which the consumer can dispute the item’s validity.
  • For a consumer who has provided appropriate proof to the CRA that he or she is a uniformed consumer, if the consumer gives the CRA separate contact information to be used while the consumer is a uniformed consumer, the CRA must use that contact information for all communications while the consumer is a uniformed consumer.

The amendments are accompanied by a statement of the “sense of Congress” that anyone using a consumer report that contains an item of adverse information arising from an action or inaction that occurred while the consumer was a uniformed consumer should “take such fact into account when evaluating the creditworthiness of the consumer.”

Despite having been a target for over a decade, bank overdraft practices still remain a focus of regulators and plaintiffs’ class action attorneys.  We discuss federal and state legislative, regulatory, and enforcement developments; theories currently used by plaintiffs’ attorneys to challenge overdraft practices, including retry payment claims; litigation involving alleged Regulation E violations; and the use of arbitration provisions to help avoid class action exposure.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Marty Bryce and Mark Levin, partners in the firm’s Consumer Financial Services Group, and Amy Schwartz, Of Counsel and Co-Leader of the firm’s Retail Customer Litigation Team.

Click here to listen to the podcast.

FTC Chair Lina Khan sent a memo this week to the other FTC Commissioners and FTC staff outlining her “vision and priorities” for the agency.

The key statements in her memo relevant for consumer financial services are:

  • Use of authorities. In light of the U.S. Supreme Court’s AMG decision, it is particularly critical for the FTC to use its “full set of tools and authorities,” including rulemaking and research in addition to enforcement.  (In AMG, the Supreme Court ruled that Section 13(b) of the FTC Act does not authorize the FTC to seek monetary relief such as restitution or disgorgement.)
  • Strategic approach. To ensure that the FTC’s efforts are directed at the most significant harms across markets, including those involving marginalized communities, the agency should focus on “power asymmetries” and the unlawful practices that such imbalances enable.  Enforcement efforts should be oriented around targeting root causes rather than looking at one-off effects, which means focusing on structural incentives that enable unlawful conduct (i.e., conflicts of interest, business models, or structural dominance) as well as looking upstream at the firms that are enabling and profiting from this conduct.  The FTC should be particularly attentive to next-generation technologies, innovations, and nascent industries so that the FTC can quickly target unfair practices.
  • Policy priorities. The FTC will take aim at how certain contract terms, particularly those that are imposed in “take-it-or-leave-it” contracts, constitute unfair or deceptive practices.
  • Operational objectives. The FTC should move away from existing “siloes” between competition and consumer protection and take an integrated approach to its cases, rules, research, and other policy tools.  This approach can reveal interconnections between conditions that give rise to antitrust and consumer protection violations.

It is not surprising that Chair Khan would want to pursue greater use of the FTC’s rulemaking authority in the wake of AMG.  For violations of consumer protection rules issued under Section 18 of the FTC Act, the FTC can file actions in federal district court seeking either consumer redress under Section 19 or civil penalties under Section 5(m)(1)(A) of the FTC Act.

At her first FTC meeting in July 2021, Chair Lina Khan paved the way for increased use of the FTC’s rulemaking authority with the Commission’s approval (by a 3-2 vote) of changes to the FTC’s rulemaking process.  Pursuant to the 1975 Magnuson-Moss Warranty Act, instead of using the Administrative Procedure Act rulemaking process, the FTC must follow specific procedures for the promulgation of trade regulation rules under Section 18 of the FTC Act.  Section 18 authorizes the FTC to prescribe “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce.”  Further procedural requirements were imposed on the FTC’s Section 18 rulemaking by the Federal Trade Commission Improvement Act of 1980 and Rules of Practice adopted by the FTC.

Among other changes, under the agency’s revised Rules of Practice approved in July, the FTC Chair, instead of the Chief Administrative Law Judge, serves as or designates the Presiding Officer for rulemaking proceedings and the Commission is given more control over the hearing process.

In her memo, Chair Khan also announced her intention to name Samuel Levine as Director of the Bureau of Consumer Protection and she officially did so this week.  Mr. Levine had been serving as Director in an acting capacity since June 2021.  He first worked in the FTC’s Midwest Regional office and then became an attorney advisor to Commissioner Rohit Chopra in the FTC’s D.C. office.  Before joining the FTC, Mr. Levine worked for the Illinois Attorney General.

 

The CFPB has filed its opposition to the motion of the two trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule (2017 Rule) that asks the court to extend its stay of the compliance date until 286 days after their appeal to the Fifth Circuit is resolved.  The trade groups have appealed from the Texas federal 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.

In its opposition, the CFPB asserts that the trade groups’ have not established a likelihood of success or substantial case on the merits of their claim that the 2017 Rule was rendered void by the invalid Dodd-Frank Act provision restricting the President’s removal of the CFPB Director.  In addition, the CFPB argues that the balance of equities weighs against extending the stay.  According to the CFPB, the trade groups have not shown irreparable harm that would justify an extension of the stay because the payment provisions “impose only modest requirements on lenders” and they “have never established that their compliance costs would be significant.”  The CFPB contends that, on the other side of the balance, further postponing the payments provisions would harm the Bureau’s and the public interest in having the provisions’ protections take effect.

In their reply in support of their motion, the trade groups argue that the Bureau’s balancing of the equities ignores the trade groups’ irreparable harm, with the Bureau “superficially suggest[ing], with no evidence, that compliance costs are ‘modest.’”  They assert that the Bureau “still refuses to address [the trade groups’] declaration to the contrary, which explains why costs are substantial and significant.”  According to the trade groups, because of this balance of equities, they need only satisfy the substantial case on the merits standard.  They argue that they have met this standard because the constitutional issue is still before the Fifth Circuit on remand from the U.S. Supreme Court in Collins and in All American Check Cashing.

 

The New York Department of Financial Services has issued a proposed regulation to implement S 5470–B, which requires consumer-like disclosures for “commercial financing” transactions of $2.5 million or less.  The proposed regulation would give the provisions added by S 5470-B to the Financial Services Law the title “Commercial Finance Disclosure Law” (CFDL).  The CFDL becomes effective on January 1, 2022.  Comments on the proposal will be due no later than 60 days after the date it is published in the State Register.

The CFDL defines “commercial financing” as “open-end financing, closed-end financing, sales-based financing, factoring transaction, or other form of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.”  The CFDL’s definition of “sales-based financing” encompasses merchant cash advances.  The CFDL includes exemptions for federally- and state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies and providers that make no more than five commercial financing transactions in New York in a 12-month period.  It requires a provider to provide specified disclosures to a recipient “at the time of extending a specific offer” for open-end financing, closed-end financing, sales-based financing, or a factoring transaction.  The disclosures must be signed by the recipient and must not include additional information not required to be disclosed under the CFDL.

The disclosures for all types of commercial financing include the “finance charge,” “annual percentage rate,” and “amount financed.”  Although the CFDL’s definition of “finance charge” tracks the TILA “finance charge” definition, the proposed regulation includes additional amounts in the finance charge that vary depending on the type of commercial financing.

Additionally, the proposed regulation provides a definition of the “amount financed” that varies depending on the type of commercial financing.  Where the amount financed is greater than the amount of funding the recipient will receive, the proposed regulation requires an additional disclosure, which must be in a substantially similar form to an example in the proposed regulation.  Specific language is also required depending on whether the amount financed includes funds paid to brokers.

Similarly, although the APR or estimated APR for all commercial financing is to be calculated in accordance with TILA, the proposed regulation prescribes how the TILA methodology should be applied for different types of commercial financing.  The proposed regulation provides a definition of the “amount financed” that varies depending on the type of commercial financing.  Other required disclosures also vary depending on the type of commercial financing.  For example, for factoring transactions, in addition to the finance charge, estimated APR, and amount financed, the required disclosures include an explanation why the recipient is not ordinarily required to make payments under the contract, the estimated term and an explanation describing how the term was calculated, repurchase costs, and collateral requirements.

The proposed regulation includes provisions that:

  • Define terms used in the CFDL and in the regulation
  • Provide methodologies for calculating the finance charge and annual percentage rate
  • Establish allowed tolerances
  • Establish formatting requirements for the various types of financing covered by the CFDL
  • Establish the duties of providers of commercial financing and brokers
  • Provide rules for determining whether the amount of a transaction falls within the $2.5 million threshold

Like New York, California has also enacted a law (SB 1235) that requires consumer-like disclosures for “commercial financing” transactions, including merchant cash advances.  Last month, the California Department of Financial Protection and Innovation issued second modifications to its proposed regulations to implement SB 1235.

Maryland has enacted legislation that revises the rules of determining creditworthiness.  On May 30, 2021, Maryland Governor Lawrence J. Hogan (R) signed HB1213 into law, which adds to Maryland Code Ann. Financial Institutions (FI) § 1-212.

Effective October 1, 2021, certain financial institutions (banking institutions, credit unions, savings and loan associations, community development financial institutions, and certain credit grantors) must adhere to the rules concerning evaluations of applications under federal law, specifically 12 C.F.R. § 1002.6. The affected financial institutions will also be required to consider the following as verifiable alternative indications of potential creditworthiness:

  • History of rent or mortgage payments;
  • History of utility payments;
  • School attendance; and
  • Work attendance.

Additionally, if an applicant requests, the financial institution must consider other verifiable alternative indications of creditworthiness presented by the applicant.

While there is no further indications of what constitutes “school attendance” or “work attendance”, this likely refers to measuring school or work attendance in the context of an component being evaluated.  For example, a creditor may have to consider work attendance if the creditor is evaluating each component of the applicant’s income for reliability, such as assessing the probable continuance of employment income.  Similarly, a creditor making student loans might have to consider school attendance if the creditor is assessing the likelihood of graduation.

The Maryland Department of Labor has stated here that entities subject to this legislation should be prepared to comply with these requirements starting on the effective date of October 1, 2021.  This includes integration of the requirements into risk and compliance frameworks by establishing sufficient policies, procedures and control to ensure compliance with the changes to the rules.

This law is similar to other established state laws that require creditors to consider other information submitted by applicants. (See  815 Ill. Comp. Stat. Ann. 120/4, and Nev. Rev. Stat. Ann. § 604A.5038).  Similarly, this law doesn’t require a creditor to change its underwriting standards.  So while creditors will be required to consider information of this nature when provided by applicants, we do not think the practical impact of the legislation will be very large.