The CFPB will hold a field hearing on small business lending in Los Angeles, CA on May 10, 2017.  The announcement, which took the form of a posting on the events page of the CFPB’s website, contains only the usual statement that the hearing will feature “remarks from Director Cordray, as well as testimony from community groups, industry representatives, and members of the public.”

Since the CFPB typically holds field hearings in conjunction with announcing a related development, it might announce a development involving the CFPB’s rulemaking to implement Section 1071 of Dodd-Frank.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses such as the race, sex, and ethnicity of the principal owners of the business.

In its annual fair lending report issued earlier this month, the CFPB stated that it had “begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  Also, at the recent House Financial Services Committee hearing at which Director Cordray appeared, Chairman Hensarling criticized the CFPB for not proceeding more quickly to issue a regulation to implement Section 1071.

 

 

In its new annual report covering its fair lending activities during 2016, the CFPB identifies the following three areas on which it “will increase our focus” in 2017:

  • Redlining.  The CFPB “will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods.”
  • Mortgage and Student Loan Servicing.  The CFPB “will evaluate whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race, ethnicity, sex, or age.”
  • Small Business Lending.  “Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when they apply for credit, and has required the CFPB to take steps to ensure their fair access to credit.  Small business lending supervisory activity will also help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection process; and the nature, extent, and management of fair lending risk.”

The three 2017 priority areas are the same as those identified by Patrice Ficklin, Associate Director of the CFPB’s Office of Fair Lending, in her December 2016 blog post that outlined the CFPB ‘s fair lending priorities for 2017.  However, unlike Ms. Ficklin’s blog post, the fair lending report includes the CFPB’s plans to ramp up its small business lending supervisory activity. 

The report states that in 2016, CFPB fair lending supervisory and public enforcement actions resulted in approximately $46 million in remediation.  In the report’s section on supervisory activities, the CFPB reviews information previously provided in its June 2016 Mortgage Servicing Special Edition of Supervisory Highlights and its Summer 2016 and Fall 2016 editions of Supervisory Highlights.  In the section on enforcement, the CFPB reviews several fair lending public enforcement actions and its implementation of several consent orders.  The report also discusses HMDA warning letters sent by the CFPB in October 2016 and notes that in 2016, the CFPB referred 8 matters to the Department of Justice.  The CFPB states that at the end of 2016, it had a number of pending redlining investigations as well as a number of pending investigations in other areas.  It is unclear how much collaboration between the CFPB and DOJ will occur in the Trump Administration. 

In the section on rulemaking, the CFPB discusses its final rule amending Regulation C (which implements HMDA) and related HMDA/Regulation C developments.  The CFPB also discusses the status of the new uniform residential loan application, the collection of race and ethnicity information under Regulation B, and its March 2017 proposal regarding amendments to Regulation B to facilitate Regulation C compliance and address other issues.  

In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the CFPB tracks verbatim much of what was stated in last year’s fair lending report.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.)  As it did last year, the CFPB states that the first stage of its Section 1071 work will be focused on outreach and research, after which it “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for  information-gathering and public disclosure.”  The report again states that the CFPB “has begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  This year’s report adds the statement above that the CFPB intends to use its future small lending supervisory activity to “help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.” 

Two other sections of the report discuss the CFPB’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights).  The last section of the report is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.    

The CFPB has issued a request for information (RFI) that seeks information about the use of alternative data and modeling techniques in the credit process.  On March 21, 2017 from 12:00 to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: The New Frontier of Alternative Credit Models: Opportunities, Risks and the CFPB’s Request for Information.  A link to register is available here.

According to the CFPB, the RFI stems from the Bureau’s desire “to encourage responsible innovations that could be implemented in a consumer-friendly way to help serve populations currently underserved by the mainstream credit system.”  The CFPB had signaled the likelihood of future action relating to alternative credit data in a May 2015 report, “Data Point: Credit Invisibles,” that reported the results of a research project undertaken by the CFPB to better understand the demographic characteristics of consumers without traditional credit reports or credit scores.  The report, which the RFI cites, concluded that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities.

In conjunction with the RFI’s issuance, the CFPB held a field hearing on alternative credit data in Charleston, West Virginia at which Director Cordray gave remarks.  (In a break from its prior practice, the CFPB did not publish advance notice of the field hearing on its website.)

In the RFI’s Supplementary Information, the CFPB states that it not only seeks information relating to consumer credit but, “because some of the Bureau’s authorities relate to small business lending,” it “welcomes information about alternative data and modeling techniques in business lending markets as well.”  To that end, for many of the specific questions asked in the RFI on which the CFPB seeks comments, the CFPB asks commenters to describe “any differences in your answers as they pertain to lending to businesses (especially small businesses) rather than consumers.”  (The CFPB notes the ECOA’s coverage of consumer and business credit and that it has begun the process of writing regulations to implement Dodd-Frank Section 1071, which requires data collection and reporting for lending to women-owned, minority-owned, and small businesses.)  Comments on the RFI must be received on or before May 19, 2017.

The Supplementary Information includes a discussion of alternative data and modeling techniques in which the CFPB provides examples of the types of data and modeling techniques that have been labeled “alternative.”  It also discusses prior research by other federal regulators, such as the FTC’s report on big data.  (The CFPB notes that the non-traditional data that might be used to assess borrower creditworthiness could include “big data.”  To address the growing interest in the use of “big data” and “machine learning” by a wide range of businesses, we recently held a webinar, “Big Data and Computer Learning – Lots of Opportunity and Lots of Legal Risk.”)

In the Supplementary Information, the CFPB lists potential consumer benefits and risks it has identified and states that it intends to use the information gleaned from the RFI’s questions “to help maximize the benefits and minimize the risks” from the use of alternative data and modeling techniques.  The RFI contains 20 specific questions (most of which have numerous subsidiary questions) that are divided into four sections: alternative data, alternative modeling techniques, potential benefits and risks to consumers and market participants, and specific statutes and regulations as they pertain to alternative data and modeling techniques.  The CFPB notes that although each question speaks generally about all decisions in the credit process, “answers can differentiate, as appropriate, between uses in marketing, fraud detection and prevention, underwriting, setting or changes in terms (including pricing), servicing, collections, or other relevant aspects of the credit process.”

The CFPB states in the RFI that it not only seeks to understand the benefits and risks stemming from the use of alternative data and modeling techniques, but “also to begin to consider future activity to encourage their responsible use and lower unnecessary barriers, including any unnecessary regulatory burden or uncertainty that impedes such use.”  We hope the CFPB’s issuance of the RFI reflects its recognition of the complexity of the issues involved in the use of alternative data and modeling techniques and the need for it to carefully consider the interests of all stakeholders.

The CFPB and the New York Attorney General this week filed an action against RD Legal Funding, LLC, two of its affiliates, and their principal (collectively, “RD”), alleging that a litigation settlement advance product offered by RD is a disguised usurious loan that is deceptively marketed and abusive.  In particular, the Complaint alleges that the transactions were falsely marketed as assignments rather than loans, that the transactions violate New York usury laws, and that RD misrepresented when the funding would be provided and falsely claimed that it could “expedite funding and ‘cut through red tape’” associated with the settlements being financed.  The Complaint alleges that the transactions could not be assignments because the underlying settlements expressly prohibit assignment of claimant recoveries.

In the Complaint, both the CFPB and the AG allege several deception claims and an abusiveness claim under Sections 1031 and 1042 of Dodd-Frank.  The AG also alleges state law claims for civil and criminal usury, fraud, and violation of NY UDAP statutes.  Notably, one of the deception claims alleged by the CFPB is predicated on alleged state usury law violations, implicating one of several issues involved in the pending CashCall appeal.

The CFPB and the AG issued press releases and prepared remarks trumpeting the RD Legal Funding action as a defense of 9/11 heroes and NFL concussion victims who were “scammed” through “convoluted contracts.”  The public statements also focus on the cost of the financing, providing examples such as a 9/11 first responder who paid $15,000 on an advance of $18,000 when the settlement funds ultimately were received six months after the advance was made.

Before the lawsuit was filed, on January 4 of this year, two of the RD entities filed separate preemptive actions for declaratory and injunctive relief against the CFPB and the AG.  Among other things, these complaints challenge the CFPB’s jurisdiction over RD and the propriety of the AG’s threatened enforcement activity on the basis that RD does not extend credit, but rather engages in bona fide purchases of receivables.  The complaints quote extensively from the relevant agreements, including the assignment provisions and non-recourse language, neither of which appear to be “convoluted” as the CFPB and AG allege.  The complaint against the CFPB also attaches a prior Civil Investigative Demand served on RD.

While the action filed this week may have been driven primarily by the sympathetic facts alleged in the Complaint, it may foreshadow a broader enforcement effort by the CFPB, state Attorneys General, and other state regulators directed at litigation funding companies, merchant cash advance providers, and other finance companies whose products are structured as purchases rather than loans.  (While the CFPB’s jurisdiction over small business finance is limited, this is not true of other enforcement authorities, such as state AGs.)  Notably, the CFPB previously has taken action against structured settlement and pension advance companies, in the former case leading to a jurisdictional challenge supported by the U.S. Chamber of Commerce.  It therefore is critical for all players in this space to revisit true sale compliance, both in the language of their agreements and in the company’s actual practices.

The CFPB has released its Spring 2016 rulemaking agenda.  The agenda sets the following timetables for key rulemaking initiatives: 

Arbitration.  The Spring 2016 agenda does not reflect the CFPB’s release of its proposed arbitration rule on May 5, 2016, stating only that the CFPB “is preparing to issue a Notice of Proposed Rulemaking this spring.”  The CFPB’s proposed rule would prohibit covered providers of certain consumer financial products and services from using an agreement with a consumer that provides for arbitration of any future dispute between the parties to bar the consumer from filing or participating in a class action with respect to the covered consumer financial product or service.  The proposed rule would also require a covered provider that is involved in an individual arbitration pursuant to a pre-dispute arbitration agreement to submit specified arbitral records to the CFPB.  We do not expect to see a final rule until next year.

Payday and deposit advance loans.  The Spring 2016 agenda also does not reflect the CFPB’s announcement that it will hold a field hearing on small dollar lending in Kansas City, Missouri on June 2, 2016.  We anticipate the field hearing will coincide with the CFPB’s release of its proposed rule which is expected to cover single-payment payday and auto title loans, deposit advance products, and certain high-rate installment and open-end loans.  The Spring 2016 agenda indicates only that the CFPB is “conducting a rulemaking to address consumer harms from practices related to payday loans and other similar credit products” and gives a June 2016 estimated date for issuance of a Notice of Proposed Rulemaking (NPRM).

Prepaid financial products.  In November 2014, the CFPB issued a proposed rule for prepaid financial products, including general-purpose reloadable prepaid cards and certain digital and mobile wallets.  The Spring 2016 agenda estimates the issuance of a final rule in July 2016.  The Fall 2015 agenda had estimated that a final rule would be issued in March 2016.

Overdrafts.  The CFPB issued a June 2013 white paper and a July 2014 report on checking account overdraft services.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that it “is continuing to engage in additional research and has begun consumer testing initiatives related to the opt-in process.”  Although the Fall 2015 agenda had estimated a January 2016 date for further prerule activities, the new agenda moves that date to August 2016.  In light of the fact that most of the banks subject to CFPB supervisory jurisdiction have changed the order in which they process electronic debits, we believe the CFPB feels less urgency to promulgate a rule prohibiting the use of a high-to-low dollar amount order to process such debits.

Debt collection.  In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking concerning debt collection.  In the Spring 2016 agenda, as it did in the Fall 2015 agenda, the CFPB states that “it is in the process of analyzing responses to a survey seeking information from consumers about their experiences with debt collectors and is engaged in qualitative testing to determine what information would be useful for consumers to have about debt collection and how that information should be provided to them.”  The agenda estimates that further prerule activities, which are expected to involve the convening of a SBREFA panel, will occur in June 2016.  The CFPB had estimated in its Fall 2015 agenda that further prerule activities would occur in February  2016.

Larger participants.  As it did in its Fall  2015 agenda, the CFPB states in the Spring 2016 agenda that it is considering  “larger participant” rules for “consumer installment loans and vehicle title loans.”  It also repeats the statement in the Fall 2015 agenda that the CFPB is “also considering whether rules to require registration of these or other non-depository lenders would facilitate supervision, as has been suggested to the Bureau by both consumer advocates and industry groups.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  While the prior agenda estimated a September 2016 date for prerule activities, the new agenda estimates a December 2016 date.

Small business lending data.  Dodd-Frank Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The Spring 2016 agenda estimates a December 2016 date for prerule activities.  We recently reported that the CFPB had filled the position of Assistant Director for the Office of Small Business Lending Markets.  The CFPB’s job posting indicated that the Assistant Director would head the CFPB’s team involved in developing rules to implement Section 1071.  In the Spring 2016 agenda, the CFPB states that it “will focus on outreach and research to develop its understanding of the players, products, and practices in the small business lending market and of the potential ways to implement section 1071.  The CFPB then expects to begin developing proposed regulations concerning the data to be collected and appropriate procedures, information safeguards, and privacy protections for information-gathering under this section.”

Mortgage rules.  In November 2014, the CFPB issued a proposal to amend various provisions of its mortgage servicing rules.  The Spring 2016 agenda estimates issuance of a final rule in July 2016.  The previous agenda had estimated a June 2016 date.  The new agenda also estimates a September 2016 date for issuance of a proposed interagency rule to implement Dodd-Frank amendments to FIRREA concerning appraisals.  The previous agenda had estimated an April 2016 date.  In April 2016, the CFPB announced its intention to reopen the rulemaking for the TILA/RESPA Integrated Disclosure rule.  At that time, the CFPB indicated that a NPRM would likely be issued in late July and, consistent with that timetable, the Spring 2016 agenda estimates a July 2016 date for a NPRM.

Student Loan Servicing and Consumer Reporting.  As they were in the Fall 2015 agenda, both of these topics continue to be listed as “long-term action” items in the Spring 2016 agenda.

 

Much of Director Cordray’s testimony in his appearance before the Senate Banking Committee yesterday consisted of his predictable defense of various CFPB positions.  While the hearing was much less contentious than last month’s hearing of the House Financial Services Committee at which Director Cordray appeared, the questions raised by Republican Senators focused on many of the same areas of concern as those of Republican House members.

In response to criticism of the CFPB’s enforcement actions against auto finance companies, Director Cordray continued to defend the CFPB’s reliance on disparate impact liability.  As he did in the House hearing, Director Cordray pointed to the U.S. Supreme Court’s Inclusive Communities decision as vindicating the CFPB’s position despite the fact that the decision did not address whether disparate impact claims are cognizable under the Equal Credit Opportunity Act.  According to Director Cordray, the Supreme Court had “resoundingly reaffirmed” the validity of using disparate impact to prove discrimination.  He also defended the CFPB’s methodology for establishing disparate impact as well as its method for identifying consumers entitled to relief under the auto finance company settlements.

Director Cordray also gave no ground on the CFPB’s reliance on enforcement in place of rulemaking.  Indeed, he appeared to embrace the phrase “regulation by enforcement” used by industry to criticize the CFPB’s approach.  Director Cordray cited to his remarks last month to the Consumer Bankers Association in which he called it “compliance malpractice” for companies not to look at CFPB consent orders with others to assess their own compliance.

In addition to his continued defense of CFPB positions, Director Cordray did provide some noteworthy information in response to Senators’ questions:

  • In response to a question regarding the CFPB’s activities related to small business lending, Director Cordray appeared to acknowledge that the CFPB’s role is limited to its enforcement of the Equal Credit Opportunity Act and implementation of the expanded small business lending data collection requirements of Dodd-Frank Act Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.)  As we previously reported, the CFPB has been seeking to hire a new “Assistant Director, Small Business Lending,” who will be charged with leading its Section 1071 team.  Based on Director Cordray’s comment that he would welcome recommendations from Senators of candidates for the position, it appears that the position has not yet been filled.
  • In response to a question asking how consumers will be able to access small dollar loans in the wake of anticipated CFPB restrictions on payday loans, Director Cordray indicated that he envisions three categories of outlets: a “reformed” payday loan industry, community banks and credit unions, and Fintech companies.  With regard to Fintech, Director Cordray indicated that he envisions “real opportunities” for online lending but commented that small-dollar lending is “tricky” for Fintech companies.  He also commented that the CFPB will be “mindful” and “watchful” of the need for Fintech innovations “to be consumer friendly.”  He indicated that while Fintech companies should not have an advantage in the marketplace over banks because they are not complying with same rules, the CFPB would seek to enforce the laws without stifling innovation.
  • When questioned about the criticism directed at the CFPB’s policy on no-action letters for its restrictiveness, Director Cordray acknowledged that legitimate questions have been raised about the policy.  He indicated that he was “not satisfied” with the policy and that further thought would be given to it (while also noting that the CFPB was “leery” of the burden that would result from a high volume of requests for no-action letters).

Evidence of CFPB interest in small business lending continues to mount.  While it was not surprising to see federal regulators attending the American Banker’s Marketplace Lending +Investment conference in New York City two weeks ago since many marketplace lenders make consumer loans, the CFPB also had several representatives attend the American Banker’s Small Business Banking conference in Nashville earlier this week.  I attended the conference and spoke on class action and regulatory risk in small business lending.

In a surprise address, made possible by a scheduled speaker’s travel difficulties, Dan Sokolov, the CFPB’s Deputy Associate Director for Research, Markets & Regulations, explained the CFPB’s interest in the conference.  He indicated that, while the CFPB’s focus is on consumer lending, the Bureau also has some jurisdiction over small business lending, such as the authority to enforce the Equal Credit Opportunity Act (“ECOA”).  He discussed the expanded small business lending data collection requirements of Dodd-Frank Section 1071, and indicated that the CFPB is in the process of standing up an interdisciplinary team to implement Section 1071.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data include the race, sex, and ethnicity of the principal owners of the business.)  Mr. Sokolov indicated that the CFPB was attending the conference for research purposes, to prepare for its work in the small business area.

Mr. Sokolov asked for help in identifying an industry veteran to serve as the Bureau’s “Assistant Director, Small Business Lending,” who will be charged with leading the Section 1071 inter-disciplinary team.  He distributed a flyer about the position.  Notably, the flyer hints at a broader role for the CFPB in small business lending than its jurisdiction permits.  In addition to other responsibilities, the new Assistant Director will “[m]onitor, analyze, and interpret developments in small business loan products”; and he or she will have a “once-in-a-career opportunity to make the market for small business finance fairer and more transparent.”

In August 2015, Ballard Spahr attorneys conducted a webinar: “Pushing the Envelope: Are There Limits to the CFPB’s Jurisdiction?” in which we discussed the CFPB’s continuing “jurisdiction creep” and explored the limits of the CFPB’s jurisdiction.

 

 

Congresswoman Nydia Velázquez, ranking Democratic member on the House Small Business Committee, has sent a letter to Director Cordray and Mary Jo White, SEC Chair, seeking information about the roles of the CFPB and SEC in regulating online lending to small businesses.

In her letter, Ms. Velázquez raises concerns that “small business consumers and retail investors that participate in the online lending market may face undue risks, and lack basic consumer protections, as a result of the current regulatory environment.”  She references the Treasury Department’s July 2015 Request for Information (RFI) regarding marketplace lending.  Among the RFI’s objectives is to help the Treasury Department become better informed about the impact of marketplace lending on small businesses.

Ms. Velázquez wants the CFPB and SEC to respond to five questions that ask (1) which federal laws under each agency’s jurisdiction apply to small business borrowers and investors participating in the online lending marketplace, (2) what is the current role of each agency in regulating or overseeing such marketplace, (3) what resources has each agency devoted to regulating such marketplace, (4) whether the  agencies believe they have the necessary authority to protect small business borrowers and investors participating in the online lending marketplace, and (5) what statutory changes, additional legal authority, and resources are necessary to support the agencies’ roles in regulating online lending as it relates to small businesses.

We recently blogged about the CFPB’s apparent interest in small business lending and noted that the CFPB has authority to enforce some statutes that apply to small businesses, such as the ECOA and FCRA.  We will be interested to see whether, in responding to Ms. Velázquez’s letter, the CFPB suggests that it has broader authority in the area of small business lending.  If so, it may portend yet another attempt by the CFPB to aggressively test the limits of its jurisdiction.  In August 2015, Ballard Spahr attorneys conducted a webinar: “Pushing the Envelope: Are There Limits to the CFPB’s Jurisdiction?” in which we discussed the CFPB’s continuing “jurisdiction creep” and explored the limits of the CFPB’s jurisdiction.

There has been growing pressure on the CFPB from lawmakers and consumer groups to expedite rulemaking to implement the small business lending data requirements of Dodd-Frank Section 1071.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.  Such data includes the race, sex, and ethnicity of the principal owners of the business.