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CFPB approves of Illinois’ new regulations on appraisal discrimination
On April 9, the CFPB released a comment letter supporting the Illinois Department of Financial and Professional Regulation’s decision to propose three rules prohibiting discrimination related to appraisals. The CFPB interpreted and issued rules under ECOA and would enforce its requirements. Illinois’ three proposed rules (38 IAC 345.280(c)(1)(A); 38 IAC 185.280(c)(1)(A); and 38 IAC 1055.240(c)(1)) would all update the Illinois code to prohibit discrimination under ECOA or the FHA, including a provision to deny loan applications where they should have been granted due to discrimination. “Discrimination against applications on a prohibited basis in violation, for example of the [ECOA] or [FHA], including… relying on giving force or effect to discriminatory appraisals to deny loan applications where the covered financial institution knew or should have known of the discrimination[.]” The CFPB commented in their letter that these provisions accurately described ECOA. The CFPB also noted that TILA’s Appraisal Independence Rule, which it has rulemaking authority under, does not conflict with a lender’s obligations to comply with civil rights laws including ECOA.
FDIC’s Consumer Compliance report outlines most frequently cited violations and observations
On March 28, the FDIC released its March 2024 version of the Consumer Compliance Supervisory Highlights from the previous year, a report that enhanced transparency regarding the FDIC’s consumer compliance supervisory activities. The FDIC reported 16 formal enforcement actions and another 16 informal enforcement actions to address consumer compliance examination findings. The report highlighted how the FDIC conducted almost 900 consumer compliance examinations. The top five most frequently cited violations of moderate severity (levels two and three out of five of supervisory concern), which represented 74 percent of the total violations, included, in order from most frequently cited to least: TILA, and its implementing regulation, Regulation Z; the Flood Disaster Protection Act (FDPA) and its implementing regulation, Part 339; EFTA, and its implementing regulation, Regulation E; TISA, and its implementing regulation, Regulation DD; and Section 5 of the FTC Act. The report noted how Section 5 of the FTC Act dropped from the second most frequently cited to the fifth.
The FDIC’s report outlined the most significant consumer compliance examination observations including the misuse of the FDIC’s logo, advertising of credit builder products, electronic fund transfer (EFT) error resolutions by third parties, mortgage broker relationships, and fair lending compliance. On the misuse of the FDIC’s logo, the FDIC found “a number of third parties” misrepresented the FDIC’s deposit insurance in violation of Section 18(a)(4) of the FDI Act. On substantiating claims in the advertising of credit builder products, the FDIC found that institutions collaborated with fintech companies on credit builder products and falsely advertised “these products would improve” one’s credit score, in violation of Section 5 of the FTC Act. On EFTs handled by third parties, the FDIC identified an issue with a security program in validating customer transactions in violation of Regulation E of EFTA. On payments for mortgage brokerage services, the FDIC found RESPA Section 8 violations involving mortgage broker relationships. On oversight of third parties, the FDIC identified issues with an institution that partnered with third-party lenders to offer unsecured consumer loans, finding the institution violated Section 39 of the FDI Act. Last and on fair lending, the FDIC found that most of the DOJ’s referral matters pertinent to discrimination related to redlining, automobile financing, and credit underwriting.
State Supreme Court vacates and remands TILA dispute
Recently, the Maine Supreme Judicial Court vacated a judgment in favor of a bank and remanded the decision to re-examine the nature of a loan and consider all relevant evidence to determine if the loan was for commercial purposes. The plaintiffs defaulted on a loan from the defendant, a bank, by securing the loan with a hunting cabin they owned, and a lease for the land on which they had built the cabin. The defendant successfully sued for recovery of the cabin. On appeal, the plaintiffs argued the bank failed to make the requisite disclosures under TILA and thus it was in error to decide in favor of the bank. The bank conceded that it did not make the required disclosures but countered that the credit transaction was not subject to TILA because the loan was for commercial purposes, and if the loan was secured by real property, it was not expected to be used as the principal dwelling of the consumer(s).
First, the court found that it was an error not to consider extrinsic evidence when determining the purpose of the loan because the Official Staff Interpretations of Regulation Z outline factors to be considered in such a determination, which should be given great deference. Moreover, it found that most federal courts applied a holistic approach in determining the purpose of the loan. Because the Business and Consumer Docket court in Maine did not consider any extrinsic evidence, it decided to remand. Second, the court held that the TILA exemption for “credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer . . . in which the total amount financed exceeds $50,000” was inapplicable. Although the loan was for $378,698, the loan was secured by a leasehold. According to the court, the leasehold was an interest in real property, and the language in the exemption referencing “principal dwelling” only modified “personal property” and not “real property.”
CFPB lowers most credit card late fees to $8, amending Regulation Z
On March 5, the CFPB announced a final rule that will amend TILA Regulation Z and lower the typical credit card late fees from $30 to $8. According to the final rule, the CFPB determined that the Regulation Z §1026.52(b) $30 discretionary safe harbor for fees (for card issuers that together with their affiliates have at least one million open credit card accounts, i.e., “larger card issuers”) is too high, and therefore “are not consistent with TILA’s statutory requirement that such fees be reasonable [for a] violation.”
For larger card issuers, the final rule will repeal the current safe harbor threshold amount and adopt a late fee safe harbor dollar amount of $8. It also will eliminate late fees for a higher safe harbor dollar amount for repeat violations that occur during the same billing cycle or in one of the next six billing cycles. Larger card issuers will still be able to charge fees above the safe harbor threshold for late fees if they can prove the higher fee is necessary to cover their actual collection costs.
With respect to late fees imposed by larger card issuers, the provision on annual adjustments for the safe harbor dollar amounts (to reflect changes in the consumer price index) will not apply to the $8 safe harbor amount for those late fees. For card issuers that together with their affiliates have fewer than one million open credit card accounts for the entire preceding calendar year (“smaller card issuers”), the safe harbors revised pursuant to the annual adjustments will continue to apply to the late fees imposed by them. The final rule also amended comments and sample forms in Appendix G to revise current examples of late fee amounts to be consistent with the $8 safe harbor amount. Card issuers that meet or exceed the one million open credit card account thresholds, transforming them into larger card issuers, will have 60 days to comply with the requirements of the rule.
Regarding annual adjustments for safe harbor threshold amounts, the rule will adjust safe harbor threshold amounts in §§1026.52(b)(1)(ii)(A) and (B) to $32, and $43 for repeat violations that will occur during the same billing cycle or in one of the next six billing cycles. These two revised threshold amounts will apply to penalty fees other than late fees for all card issuers, as well as late fees imposed by smaller card issuers. The CFPB’s final rule will go into effect 60 days after publication in the Federal Register.
The final rule was highlighted in the White House’s Fact Sheet entitled, “President Biden Announces New Actions to Lower Costs for Americans by Fighting Corporate Rip-Offs,” which announced a new “Strike Force on Unfair and Illegal Pricing” co-chaired by the DOJ and the FTC to strengthen interagency efforts to combat high prices through anti-competitive, unfair, deceptive, or fraudulent business practices.
CFPB proposes new rule on overdraft lending, opens comment period
On January 17, the CFPB issued a proposed new rule to restrict overdraft fees charged by financial institutions. Historically, the Federal Reserve Board exempted banks from credit disclosure requirements when an overdraft was needed to honor checks (for a fee). The proposed rule would recharacterize overdrafts as extensions of credit, which would extend the consumer credit protections in TILA that apply to other forms of credit to overdraft credit.
According to the related Fact Sheet, the proposed rule would only apply to financial institutions with assets of $10 billion or more. The CFPB offered financial institutions two options on deciding how much to charge customers. First, a financial institution may adopt a “breakeven standard,” charging a fee needed to offset losses for written off overdrawn account balances and direct costs traceable to the provision of courtesy overdrafts. Second, a financial institution may employ a “benchmark fee,” of either $3, $6, $7, or $14, derived by the CFPB from analyzing charge-off losses and cost data. Comments to the rule must be received on or before April 1, 2024. In addition, the proposal would prohibit requiring the customer to use preauthorized electronic fund transfers for repayment of covered overdraft fees by these institutions. The final overdraft rule is expected to go into effect on October 1, 2025.
Federal court grants California DFPI motion for summary judgment on commercial financing disclosure requirements
Recently, the California DFPI announced it was granted a summary judgment by a federal court to uphold the DFPI’s commercial financing disclosure requirements applicable to small businesses as implemented by SB 1235, including the amount of funding provided, APR, finance charges, and payment amounts. The bill was adopted in 2018 and was previously covered by InfoBytes here, as well as when the California Office of Administrative Law approved the DFPI’s commercial financial disclosure regulations here in June 2022.
In this case, the plaintiff is an advocacy organization that sued the Commissioner of the DFPI, asserting two claims: (i) that the DFPI violated 42 U.S.C. § 1983 based on a violation of the First Amendment; and (ii) that the DFPI’s regulation is preempted by the Truth in Lending Act (TILA). The DFPI disagreed and sought summary judgment on three grounds: (i) the plaintiff lacks the standing to challenge the regulations; (ii) the regulations do not violate the First Amendment; and (iii) the regulations are not preempted by TILA.
The court granted the DFPI’s motion for summary judgment because it found that although the plaintiff had standing to bring suit, the DFPI’s disclosure requirements were lawful under the First Amendment and were not preempted by federal law.
CFPB adjusts asset-size exemption thresholds for Regulations C and Z
On December 18, the CFPB adjusted the asset-size exemption thresholds for Regulation C (as part of the Home Mortgage Disclosure Act) and Regulation Z (as part of TILA), based on a 4.1 percent increase in the average year-over-year CPI-W from November. For Regulation C, the exemption threshold increased from $54 million to $56 million. Accordingly, any financial institution with assets of $56 million or less is exempt from collecting housing-related lending data in 2024.
For Regulation Z, and certain first-lien higher-priced mortgage loans, the exemption threshold increased from $2.537 billion to $2.640 billion. Similarly, but applicable to certain insured depository institutions and insured credit unions, the exemption threshold increased from $11.374 billion to $11.835 billion.
District Court grants motion for summary judgment to DFPI in commercial financing disclosure case
On December 4, the U.S. District Court for the Central District of California granted the California DFPI’s motion for summary judgment which challenged the DFPI’s commercial financing regulations. According to the DFPI’s press release, the proposed regulations would require commercial financing providers to disclose key metrics to small businesses to help them understand their financing options, including the amount of funding provided, APR, finance charge, and payment amounts.
In their complaint, the plaintiffs argued that the regulations violated the First Amendment and were preempted by TILA. The court disagreed, holding that (1) the regulations do not violate the First Amendment under the test for compelled commercial speech since the required disclosures under the Regulations are “reasonably related” to substantial government interest and are not “unjustified or unduly burdensome”; and (2) because the CFPB made a “rational conclusion” that TILA does not preempt commercial financing regulations, the court would defer to the CFPB’s determination.
CFPB obtains stipulated judgment ordering student financing company to pay over $30 million in damages
On November 20, the United States Bankruptcy Court for the District of Delaware entered a stipulated judgment in favor of the CFPB and 11 other state enforcement agencies in connection with an adversary proceeding against a vocational training program. As previously covered by InfoBytes, the complaint alleged that the education firm (company) engaged in deceptive practices by misrepresenting its income share agreement as not a loan and not debt, and misleading borrowers into believing that no payments would need to be made until they received a job offer. According to the CFPB, the company trained consumers to become sales development representatives, an entry-level role that requires “little or no prior sales experience or training,” and made promises it could not deliver on, such as promising a “6-figure” career in software sales. The company also initially priced its services at $2,500 in 2018, and then increased it to $15,000 the following year without any value justification. The company would recoup its payment through income share agreements (ISA). The CFPB alleged multiple causes of action against the company, including violations of the CFPA, TILA, and the FDCPA, among others. The stipulated judgment includes orders requiring the company to refund student borrowers, cancel outstanding loans, and permanently shut down.
Agencies finalize 2024 HPML smaller loan exemption threshold
On November 13, the CFPB, OCC, and the Fed published final amendments to the official interpretations for regulations implementing Section 129H of TILA, which establishes special appraisal requirements for “higher-risk mortgages,” otherwise termed as “higher-priced mortgage loans” (HPMLs). The final rule increases TILA’s loan exemption threshold for the special appraisal requirements for HPMLs. Each year, the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers. The exemption threshold will increase from $31,000 to $32,400 effective January 1, 2024.