InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB and Fed release updated thresholds for Regulations Z and M
On November 13, the CFPB and the Fed released updated dollar thresholds for whether certain credit and lease transactions are subject to Regulation Z (Truth in Lending) and Regulation M (Consumer Leasing) requirements for 2024. The thresholds for both regulations were increased from $66,400 to $69,500, an increase of 4.6 percent. Transactions at or below the 2024 threshold of $69,500 will be “subject to the protections of the regulations.” The CFPB derives its thresholds from the June 1, 2023, report on the Consumer Price Index for Urban Wage Earnings and Clerical Workers (CPI-W). The thresholds for 2023 were previously increased at a rate of 8.8 percent, a larger increase given the rate of inflation during the previous year.
Court infers receipt of validation notice to allow pro se plaintiffs’ FDCPA claim to survive
On September 19, the U.S. District Court for the Eastern District of New York granted in part and denied in part a complaint filed by two pro se plaintiffs who alleged that the defendant’s debt collection efforts related a balance due from a timeshare membership program violated the FCRA, TILA, and FDCPA. In reaching its decision, the court explained that complaints filed by pro se pleadings must be construed more liberally than those drafted by lawyers. Notwithstanding this more liberal approach, however, the court still determined that plaintiffs’ TILA and FCRA claims were insufficiently pled. With respect to the TILA claim, the court stated that plaintiffs failed to specify which provisions were allegedly violated and only alleged that “Defendant has computed and imposed an internal alleged account balance on plaintiff including principal balance, interest rates, fees and terms without property consumer transparency of mode of accounting verification methods,” which was insufficient to allege a TILA violation. The court noted that to the extent it could interpret plaintiffs’ complaint to implicate specific provisions of the FCRA, plaintiffs still failed to state claim under any of the potentially relevant provisions, either because there was no private right of action or there were no facts supporting any alleged claims.
By contrast, plaintiffs did allege specific provisions of the FDCPA that defendant’s conduct purportedly breached. While the court still concluded that plaintiffs failed to state a claim with regard to most of the cited FDCPA provisions, it determined that plaintiffs had plausibly stated a claim under 15 U.S.C. § 1692g, which, among other things, requires a debt collector to cease debt collection efforts if, within 30 days of receiving a validation notice from the debt collector, a consumer disputes the debt or any portion thereof.
Although the record did not reflect whether the defendant had sent plaintiffs a validation notice, the court, in liberally construing plaintiffs’ complaint, found it reasonable to “infer” that such notice had been provided to the plaintiffs. Specifically, the court reasoned that plaintiffs’ notarized letter to defendant, titled “Validation of Debt / Claim” was likely sent in response to a validation notice from defendant, and therefore, under Section 1692g, all collection activity should have ceased following receipt of plaintiffs’ letter.
CFPB adjusts annual dollar amount thresholds under TILA, HMDA regulations
On September 18, the CFPB released a final rule revising the dollar amounts for provisions implementing TILA and its amendments that impact loans under the Home Ownership and Equity Protection Act of 1994 (HOEPA) and qualified mortgages (QM). The Bureau is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) in effect on June 1, 2023. The following thresholds are effective January 1, 2024:
- For HOEPA loans the adjusted total loan amount threshold for high-cost mortgages will be $26,092, and the adjusted points-and-fees dollar trigger for high-cost mortgages will be $1,305;
- For qualified mortgages under the General QM loan definition, the thresholds for the spread between the annual percentage rate and the average prime offer rate will be: “2.25 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $130,461; 3.5 or more percentage points for a first-lien covered transaction with a loan amount greater than or equal to $78,277 but less than $130,461; 6.5 or more percentage points for a first-lien covered transaction with a loan amount less than $78,277; 6.5 or more percentage points for a first-lien covered transaction secured by a manufactured home with a loan amount less than $130,461; 3.5 or more percentage points for a subordinate-lien covered transaction with a loan amount greater than or equal to $78,277; or 6.5 or more percentage points for a subordinate-lien covered transaction with a loan amount less than $78,277”; and
- For all QM categories, the adjusted thresholds for total points and fees will be “3 percent of the total loan amount for a loan greater than or equal to $130,461; $3,914 for a loan amount greater than or equal to $78,277 but less than $130,461; 5 percent of the total loan amount for a loan greater than or equal to $26,092 but less than $78,277; $1,305 for a loan amount greater than or equal to $16,308 but less than $26,092; and 8 percent of the total loan amount for a loan amount less than $16,308.”
With respect to credit card annual adjustments, the Bureau noted that its 2024 annual adjustment analysis on the CPI-W in effect on June 1, did not result in an increase to the current minimum interest charge threshold (which requires “creditors to disclose any minimum interest charge exceeding $1.00 that could be imposed during a billing cycle”).
CFPB, Maine say loan purpose determines whether TILA applies
On July 12, the CFPB and the State of Maine filed an amicus brief in the Maine Supreme Judicial Court arguing that determining whether a loan is covered by TILA requires an assessment of the borrower’s primary purpose in entering into the transaction. The action involves a couple who obtained a loan from the bank to purchase land for the construction of a home. Due to the 2008 financial crisis, the value of the property depreciated, resulting in insufficient proceeds from the sale of the home to fully pay off the loan. To cover the shortfall, the couple acquired a new loan from the bank and used a cabin they owned as collateral. When the loan’s term ended, the couple defaulted after being unable to make the required balloon payment. The bank sued, seeking to take possession of the cabin. At trial, the couple attempted to present evidence that the bank had not provided them with certain necessary disclosures mandated by TILA and did not assess their ability to repay the loan. The couple maintained “that the bank’s liability under TILA fully offset the amount they owed to the bank under the loan.” The court determined, however, that since the loan documents indicated a commercial purpose, TILA did not apply.
The couple attempted to introduce extrinsic evidence to show that even though the loan was labeled “commercial,” it was actually used for personal, family, or household purposes and therefore was a covered consumer loan. The court relied on a case (Bordetsky v. JAK Realty Trust) holding that, for purposes of determining the applicability of Maine’s notice of default statute for residential real estate foreclosures, “courts should not look to extrinsic evidence to determine whether the loan had a commercial or consumer purpose if the loan document states on its face that the loan has a commercial purpose.”
The brief explained that TILA generally applies to consumer loans (i.e., loans that are primarily for a personal, family, or household purpose) but not to loans made for a commercial purpose, and that the Maine Consumer Credit Code fully incorporates TILA. The brief argued that the borrower’s primary purpose for obtaining the loan should determine whether TILA and the Maine Consumer Credit Code apply, and presented three arguments as to why the trial court erred in concluding that TILA is not applicable on the sole basis that the loan is labeled as a “commercial loan.” First, statutory text provides that a loan is generally covered by TILA if a borrower obtained the loan primarily for a family, personal or household purpose. TILA “requires a substantive and fact-intensive inquiry into the reasons why the borrower entered into the transaction,” the brief explained. Second, judicial precedent has established that “determining whether a loan has a covered purpose requires looking beyond the four corners of the contract.” The trial court erred in relying on Bordetsky because it pertains to a different Maine statute and does not address the judicial precedent or administrative guidance that govern TILA coverage, the brief said. Finally, permitting creditors to evade TILA by labeling a loan as “commercial” is at odds with TILA’s remedial purpose, the brief maintained.
“Why the consumer borrowed the money—not the label that the company sticks on the loan—determines whether the loan is covered by the law,” Seth Frotman, general counsel and senior advisor to the CFPB director, said in a blog post.
CFPB, states sue company over deceptive student lending and collection
On July 13, the CFPB joined state attorneys general from Washington, Oregon, Delaware, Minnesota, Illinois, Wisconsin, Massachusetts, North Carolina, South Carolina, and Virginia in taking action against an education firm accused of engaging in deceptive marketing and unfair debt collection practices. California’s Department of Financial Protection and Innovation is participating in the action as well. Prior to filing for bankruptcy, the Delaware-based defendant operated a private, for-profit vocational training program for software sales representatives. The joint complaint, filed as an adversary proceeding in the firm’s bankruptcy case, alleges that the defendant charged consumers up to $30,000 for its programs. The complaint further alleges that the defendant encouraged consumers who could not pay upfront to enter into income share agreements, which required minimum payments equal to between 12.5 and 16 percent of their gross income for 4 to 8 years or until they had paid a total of $30,000, whichever came first.
The complaint asserts that the defendant engaged in deceptive practices by misrepresenting its income share agreement as not a loan and not debt, and mislead borrowers into believing that no payments would need to be made until they received a job offer from a technology company with a minimum annual income of $60,000. The defendant is also accused of failing to disclose important financing terms, such as the amount financed, finance charges, and annual percentage rates, as required by TILA and Regulation Z. The complaint also claims that the defendant hired two debt collection companies to pursue collection activities on defaulted income share loans. One of the defendant debt collectors is accused of engaging in unfair practices by filing debt collection lawsuits in remote jurisdictions where consumers neither resided nor were physically present when the financing agreements were executed. The complaint further alleges the two defendant debt collectors violated the FDCPA and the CFPA by deceptively inducing consumers into settlement agreements and falsely claiming they owed more than they did.
According to the Bureau and the states, after the Delaware Department of Justice and Delaware courts began scrutinizing the debt collection lawsuits, the defendant unilaterally changed the terms of its contracts with consumers to force them into arbitration even though none of them had agreed to arbitrate their claims. Additionally, the complaint contends that settlement agreements marketed as being “beneficial” to consumers actually released consumers’ claims against the defendant and converted income share loans into revised “settlement agreements” that obligated them to make recurring monthly payments for several years and contained burdensome dispute resolution and collection terms.
The complaint seeks permanent injunctive relief, monetary relief, consumer redress, and civil money penalties. The CFPB and states are also seeking to void the income share loans.
FTC submits annual enforcement report to CFPB
On June 7, the FTC announced that it submitted its 2022 Annual Financial Acts Enforcement Report to the CFPB. The report covers FTC enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include, among other things:
- Automobile purchase and financing. The report discussed an April 2022 settlement with a car dealership group, which resolved claims that the dealership group added on unwanted fees to consumers and allegedly failed to include details on repayment and annual percentage rates in advertising mailers. The settlement led to a redress sent to consumers.
- Payday lending. The report highlighted a settlement reached with a payday lending enterprise for allegedly overcharging consumers millions of dollars. The FTC claimed the enterprise made deceptive statements about the terms of their loan agreements and payments and withdrew funds from consumers’ accounts without consent. The order resulted in consumers receiving refunds.
- Credit repair and debt relief. The report included a settlement with the operators of a student loan debt relief scheme, who were charged with “falsely promising consumers it could lower or eliminate student loan balances, illegally imposing upfront fees for credit repair services, and signing consumers up for high-interest loans to pay the fees without making required loan disclosures in violation of the FTC Act and TILA.” The order also resulted in consumers receiving refunds.
- Other credit. The report detailed the first case involving the Military Lending Act, where a jewelry company was charged with allegedly charging military families illegal financing and using deceptive sales practices. Specifically, the company was charged with deceptively claiming that financing jewelry through the company would increase the consumer’s credit score, misrepresenting that their protection plans were required, and adding plans without the consumer’s consent. The company was also charged with failing to provide clear terms for preauthorized electronic fund transfers. The settlement required the company to provide refunds, stop collecting debt, and cease operations and dissolve.
Additionally, the FTC addressed rulemaking that is underway. The agency highlighted an impending ban on junk fees and bait and switch advertising tactics, and briefly discussed two advance notices of proposed rulemaking issued last October that would crack down on junk fees and fake reviews and endorsements. The FTC also highlighted the Military Task Force’s work on consumer protection issues.
OCC releases enforcement actions
On May 18, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Among the enforcement actions is a consent order against an Indiana-based bank for allegedly engaging in unsafe or unsound practices relating to, among other things, its strategic and capital planning, risk management processes, audit program, and consumer compliance program (including alleged violations of TILA and Regulation Z). In addition to complying with measures to address the alleged deficiencies, the bank (which neither admits nor denies the allegations) is also required to submit written consumer compliance policies and procedures designed to ensure compliance with TILA and Regulation Z. The bank also must undergo an independent compliance review and audit and ensure bank officers and employees are appropriately trained.
Fintech fined over interest charges billed as tips and donations
A California-based fintech company recently entered separate consent orders with California, Connecticut, and the District of Columbia to resolve allegations claiming it disguised interest charges as tips and donations connected to loans offered through its platform. The company agreed to (i) pay a $100,000 fine in Connecticut and reimburse Connecticut borrowers for all loan-related tips, donations, and fees paid; (ii) pay a $30,000 fine in the District of Columbia, including restitution; and (iii) pay a $50,000 fine in California, plus refunds of all donations received from borrowers in the state. The company did not admit to any violations of law or wrongdoing.
The Connecticut banking commissioner’s consent order found that the company engaged in deceptive practices, acted as a consumer collection agency, and offered, solicited, and brokered small loans for prospective borrowers without the required licensing. The company agreed that it would cease operations in the state until it changed its business model and practices and was properly licensed. Going forward, the company agreed to allow consumers to pay tips only after fully repaying their loans. The consent order follows a temporary cease and desist order issued in 2022.
A consent judgment and order reached with the D.C. attorney general claimed the company engaged in deceptive practices by misrepresenting the cost of its loans and by not clearly disclosing the true nature of the tips and donations. The AG maintained that the average APR of these loans violated D.C.’s usury cap. The company agreed to ensure that lenders accessing the platform are unable to see whether a consumer is offering a tip (or the amount of tip) and must take measures to make sure that withholding a tip or donation will not affect loan approval or loan terms. Among other actions, the company is also required to disclose how much lenders can expect to earn through the platform.
In the California consent order, the Department of Financial Protection and Innovation (DFPI) claimed that the majority of consumers paid both a tip and a donation. A pop-up message encouraged borrowers to offer the maximum tip in order to have their loan funded, DFPI said, alleging the pop-up feature could not be disabled without using an unadvertised, buried setting. These tips and/or donations were not included in the formal loan agreement generated in the platform, nor were borrowers able to view the loan agreement before consummation. According to DFPI, this amounted to brokering extensions of credit without a license. Additionally, the interest being charged (after including the tips and donations) exceeded the maximum interest rate permissible under the California Financing Law, DFPI said, adding that by disclosing that the loans had a 0 percent APR with no finance charge, they failed to comply with TILA.
CFPB announces $9 million settlement with bank on credit card servicing
On May 23, the CFPB announced a settlement to resolve allegations that a national bank violated TILA and its implementing Regulation Z, along with the Consumer Financial Protection Act. The Bureau sued the bank in 2020 (covered by InfoBytes here) claiming that, among other things, when servicing credit card accounts, the bank did not properly manage consumer billing disputes for unauthorized card use and billing errors, and did not properly credit refunds to consumer accounts resulting from such disputes. At the time, the bank issued a response stating that it self-identified the issues to the Bureau five years ago while simultaneously correcting any flawed processes.
The bank neither admitted nor denied the allegations but agreed under the terms of the stipulated final judgment and order filed in the U.S. District Court for the District of Rhode Island to pay a $9 million civil penalty. In addition to amending its credit card practices, the bank is prohibited from automatically denying billing error notices and claims of unauthorized use of cards should the customer fail to provide a fraud affidavit signed under penalty of perjury. The bank must also (i) credit reimbursable fees and finance charges to a customer’s account when unauthorized use and billing errors occur; (ii) provide required acknowledgement and denial notices to customers upon receipt or resolution of billion error notices; and (iii) provide customers who call its credit counseling hotline with at least three credit counseling referrals within the caller’s state. The bank must also maintain procedures to ensure customers are properly refunded any fees or finance charges identified by valid error notices and unauthorized use claims. The bank issued a statement following the announcement saying that while it “continues to disagree with the CFPB’s stance with respect to these long-resolved issues, which were self-identified and voluntarily addressed years ago,” it is pleased to resolve the matter.
CFPB proposal would apply ATR requirements to PACE financing
On May 1, the CFPB announced a proposed rule which would prescribe ability-to-repay (ATR) rules to residential Property Assessed Clean Energy (PACE) financing and apply TILA’s civil liability provisions for violations. The proposal, required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, would amend Regulation Z to address how TILA applies to PACE transactions to account for the unique nature of PACE loans. PACE loans are designed to finance clean energy improvements on a borrower’s home and are secured by that residence. The Bureau explained that the loans are repaid through a borrower’s property tax payments, which increase over time and which remain with the property even if the borrower sells the property.
If finalized, the proposed rule would require lenders to assess a borrower’s ability to repay a PACE loan and would (i) clarify an existing exclusion to Regulation Z’s definition of credit relating to tax liens and tax assessments to provide that this specific exclusion “applies only to involuntary tax liens and involuntary tax assessments”; (ii) make several adjustments to PACE financing loan estimate and closing disclosure requirements, including providing new model forms specifically designed for PACE transactions, and exempting PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans and from the requirement to provide periodic statements; (iii) prescribe ATR requirements for residential PACE financing that account for the unique nature of these transactions; (iv) provide that a PACE transaction is not a qualified mortgage; (v) extend TILA Section 130’s ATR requirements and liability provisions to any “PACE company” with substantial involvement in making credit decisions for a PACE transaction; and (vi) clarify how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.
The proposed effective date is at least one year after the final rule is published in the Federal Register (“but no earlier than the October 1 which follows by at least six months Federal Register publication”), with the possibility of a further extension to ensure compliance with a TILA timing requirement. Comments on the proposed rule are due July 26 or 30 days after publication in the Federal Register, whichever is later.
To accompany the proposed rule, the Bureau released several fast facts breaking down and clarifying proposed coverage and the suggested changes. The Bureau also released a data point report documenting research findings on PACE financing in California and Florida from July 2014 through June 2020. Among other things, the report found that PACE loans create an increase in negative credit outcomes for borrowers, particularly with respect to mortgage delinquency. Additionally, PACE borrowers were more likely to have higher interest rates and increased credit card balances and were more likely to live in census tracts with higher percentages of Black and Hispanic residents relative to the average for their states. The report noted that “PACE outcomes improved significantly in California after that State began requiring PACE companies to consider ability to pay before making a loan.”