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  • CFPB reports larger banks charge higher interest rates on credit cards than smaller banks

    Federal Issues

    On February 16, the CFPB published the results of a report that found, on average, larger banks charged higher credit card interest rates than smaller banks and credit unions. The CFPB’s data suggested larger banks charge interest rates eight to 10 points higher than non-large banks. If a consumer were to pick a large bank credit card over a smaller bank, the consumer would see an estimated difference of “$400 to $500” in additional annual interest.

    Other findings from the report suggested that large issuers offered higher rates across credit scores: e.g., the median interest rate for people with scores between 620 and 719 was 28.20 percent for large banks and 18.15 percent for small ones. The CFPB also found that 15 bank-issued credit cards with interest rates above 30 percent: nine of the largest issuers reported at least one product over that rate. Lastly, the report found that large banks were more likely to charge annual fees, with 27 percent of large banks charging an annual fee, compared to 9.5 percent of small banks. The CFPB published a table between large and small banks that showed median purchase APR by credit tier.

    Federal Issues CFPB Banking Credit Union Interest

  • CFPB reports “all-time high” interest rate margins on credit cards

    Federal Issues

    On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”

    Federal Issues Credit Cards CFPB Interest Rate APR CARD Act Debt Management

  • FFIEC releases statement on examination principles related to discrimination and bias in residential lending

    Federal Issues

    On February 12, the Federal Financial Institutions Examinations Council (FFIEC) released a statement on “Examination Principles Related to Valuation Discrimination and Bias in Residential Lending.” The statement outlined principles that examiners should use to evaluate an institution’s residential property appraisal and valuation practices to mitigate risks that stem from (i) discrimination “based on protected characteristics in the residential property valuation process, and (ii) bias, defined as “a preference or inclination that precludes an appraiser or other preparer of the valuation from reporting with impartiality, independence, or objectivity” as required by the Uniform Standards of Professional Appraisal Practice. Failure to have these internal controls to identify and address discrimination or bias can result in poor credit decisions, consumer harm, increased safety and soundness risk. The principles outlined by the statement are categorized into consumer compliance examination principles and safety and soundness principles. For consumer compliance, examiners should consider an institution’s (i) board and senior management oversight to determine if it is commensurate with the institution’s risk profile; and (ii) consumer compliance policies and procedures to identify and resolve potential discrimination. The principles during a safety and soundness examination should include reviewing the consumer protection issues, governance, collateral valuation program, third-party risk management, valuation review, credit risk review, and training programs. 

    Federal Issues FFIEC CFPB Consumer Finance Mortgages Discrimination

  • CFPB secures $12 million after decade-old complaint against foreclosure relief scam company

    Federal Issues

    On February 8, the CFPB announced the resolution of an enforcement action, begun in 2014, against a foreclosure relief operation that allegedly violated Regulation O. After a decade of court orders, opinions, and appeals, on February 5, 2024, the defendants and the CFPB jointly agreed to the dismissal of their respective appeals and on February 7, 2024, the Seventh Circuit dismissed the parties’ appeals. The final settlement required the defendants to pay $10.9 million in consumer redress and a $1.1 million penalty. The enforcement action notes that the defendants remain “subject to the bans” under the district court’s 2022 order. 

    The CFPB had alleged that the defendants violated Reg. O by taking payments from consumers for (i) mortgage modifications before they signed an agreement from their lender; (ii) failing to make required disclosures; (iii) directing consumers not to contact lenders; and (iv) making deceptive statements to consumers. As previously reported by InfoBytes, the CFPB and the Florida Attorney General obtained a judgment against this group in May 2015 for parallel violations.  

    Federal Issues CFPB Enforcement Foreclosure Regulation O Seventh Circuit Appellate

  • CFPB reflects on 2023 enforcement actions; states upcoming enforcement goals

    Federal Issues

    On January 29, the CFPB released a blog post on its enforcement actions from 2023, as well as its outlook for 2024.  In 2023, the CFPB reportedly filed 29 enforcement actions and resolved six final orders on previously filed lawsuits. Compensation-wise, the Bureau required entities to pay approximately $3.07 billion in compensation to consumers and nearly $500 million in civil money penalties. The CFPB highlights some key enforcement actions from 2023, such as helping protect servicemembers from loan exploitation, as previously covered in Infobytes here, and taking action against the alleged illegal junk advance fees from credit repair services, also covered in Infobytes here.

    Looking forward to 2024, the CFPB stated its intent to increase its capacity. The Bureau’s outlook falls in line with previous comments from a CFPB representative in an FTC panel, covered by InfoBytes here. The blog post provides greater detail, outlining the Bureau’s plans to hire more technology experts to help enforce the law against emerging technologies, as well as expanding its enforcement capacity by adding more attorneys, analysts, paralegals, and economists, among others.

    Federal Issues CFPB Enforcement

  • FTC hosts tech summit on artificial intelligence; CFPB weighs in

    Agency Rule-Making & Guidance

    On January 25, the FTC hosted a virtual tech summit focused on artificial intelligence (AI). The summit featured speakers from the FTC––including all three commissioners––software engineers, lawyers, technologists, entrepreneurs, journalists, and researchers, among others. First, Commissioner Slaughter spoke on how there are three main acts that led to where we are today in creating guardrails for AI use: first, the emergence of social media; second, industry groups and whistleblowers rang the alarm on data privacy and forced regulators to play catch-up; third, regulators must now urgently grapple with difficult social externalities such as impacts on society and political elections.

    The first panel discussed the various business models at play in the AI space. One journalist spoke on the recent Hollywood writers’ strike, opining that copyright law is a poor legal framework by which to regulate AI, and suggested labor and employment law as a better model. An analyst at a venture capital firm discussed how her firm finds investment opportunities by reviewing which companies use a language-learning model, as opposed to the transformer model, which is more attractive to that firm.

    Before the second panel, Commissioner Bedoya discussed the need for fair and safe AI, and said that in order for the FTC to be successful, it must execute policy with two topics in mind: first, people need to be in control of technology and decision making, not the other way around; and second, competition must be safeguarded so that the most popular technology is the one that works the best, not just the one created by the largest companies.

    During the second panel, a lawyer from the CFPB spoke on how the CFPB is doing “a lot” with regards to AI, and that the CFPB gives AI technology no exceptions in the laws it oversees. The CFPB recently issued releases on how the “black box” model in credit decision making needs to be fair and free from bias. When discussing future AI enforcement actions, the CFPB lawyer said in a “high-level” way that AI enforcement is currently “capacity building”; they are building out their resources to be more intellectually diverse, including having recently created their technologist program. 

    Agency Rule-Making & Guidance FTC Artificial Intelligence CFPB Technology

  • District Court denies stay of CFPB case against lender

    Courts

    On January 12, the U.S. District Court for the Southern District of Florida denied a defendant-mortgage lender’s motion to stay a case filed by the CFPB. The defendant argued that judicial economy—the preservation of the court’s time and resources—favored the stay because the defendant’s pending motion to dismiss is premised on the same constitutional issue addressing the CFPB’s funding structure now before the Supreme Court (see continuing InfoBytes coverage here and here). In opposition, the CFPB argued that the Supreme Court may take months to issue a ruling, the public interest in enforcement of consumer protection laws, and the failure to show how an adverse ruling in the Supreme Court case would definitively result in dismissal of this case.

    The District Court sided with the CFPB, stating that as of now, the CFPB “is a valid agency that is entitled to enforce the consumer financial laws.”  With the stay denied, the court will now consider the defendant’s motion to dismiss.    

    Courts CFPB Mortgage Origination Mortgages Consumer Finance Consumer Protection Constitution

  • CFPB proposes rule making certain NSF fees “abusive”

    Agency Rule-Making & Guidance

    On January 24, the CFPB released a proposed rule that would identify the charging of non-sufficient funds (NSF) fees on transactions that financial institutions decline instantaneously or near-instantaneously as an “abusive” act or practice. The rule would prohibit financial institutions from charging such fees. The proposed rule defines a “covered transaction” as a consumer’s attempt to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a “covered financial institution” due to insufficient funds. Further, instantaneously, or near-instantaneously-declined transactions are characterized as transactions that are processed in real-time with “no significant perceptible delay to the consumer when attempting the transaction.” One-time debit card transactions that are not preauthorized, ATM transactions, and certain person-to-person transactions would be covered by the proposed rule. The proposed rule would not cover (i) transactions declined or rejected due to insufficient funds hours or days after a consumer’s attempt; (ii) checks and ACH transactions (given that they are not able to be instantaneously declined); (iii) transactions authorized at first, even if they are later rejected or fail to settle due to insufficient funds. The proposed rule defines “covered financial institution” in line with Regulation E’s definition of “financial institution.”

    Although the CFPB noted that currently financial institutions do not typically charge NSF fees on the proposed covered transactions and acknowledged that it was proposing the “rule primarily as a preventive measure,” it expressed concern that financial institutions who do not currently charge NSF fees for “covered transactions” may have an incentive to do so as other regulatory interventions reduce other sources of fee income. Further, the CFPB considered whether its concerns could be addressed through certain disclosures, but declined to pursue that course of action, citing challenges in implementation across diverse payment channels and interfaces. Even if feasible, the CFPB added, such disclosures might be costly and may not fully prevent abusive practices.

    Moreover, the proposed rule clarifies the CFPB’s current interpretation of the prohibition on abusive acts or practices and distinguish prior views set forth in the preamble of a separate rule—the CFPB’s 2020 rule rescinding certain provisions of the 2017 Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans’ (2020 Rescission Rule). Abusive practices are defined to include, among other things, acts or practices that take “unreasonable advantage” of a consumer’s “lack of understanding . . . of the material risks, costs, or conditions” of a consumer product or service. The CFPB proposes to “clarify” its prior interpretation of this prohibition, by articulating its view that a “lack of understanding” need not be “reasonable” to form the predicate of an abusive act or practice.  In the CFPB’s view, this distinguishes the abusiveness prohibition from the longstanding prohibition on “unfair” practices, which requires showing that consumers could not “reasonably avoid” consumer injury by, for example, reading disclosures or understanding that a particular transaction would overdraw the balance in their account and result in fees.  The Bureau’s current view is that the 2020 Rescission Rule conflated “reasonable avoidability” and “lack of understanding,” contrary to the text and purpose of the abusive conduct prohibition. In addition, the CFPB proposes clarifying that, notwithstanding the 2020 Rescission Rule’s emphasis on the “magnitude” and “likelihood” of harm, the “materiality” requirement pertains to understanding “risks,” not necessarily “costs” or “conditions.” The CFPB explained that a consumer’s lack of understanding of costs does not always align with the analysis of harm likelihood and magnitude, for example, it suffices to demonstrate that a company exploits consumer ignorance about a fee (“cost”) in a specific situation, even if consumers generally understand the “risk” of fees. The CFPB has preliminarily determined that consumers charged NSF fees on covered transactions would “lack understanding of the material risks, costs, or conditions of their account at the time they are initiating covered transactions.”

    In the CFPB’s view, financial institutions are taking “unreasonable advantage” of consumers when they impose NSF fees on covered transactions because the financial institution: (i) profits from a transaction but provides no service in return; (ii) chooses to impose NSF fees when instantaneously declining a transaction at no cost or negligible cost is an option; (iii) benefits from negative consumer outcomes caused by their lack of understanding; and (iv) profits from economically “vulnerable” consumers’ lack of understanding or hardship, instead of providing services to alleviate it.

    Among other things, the CFPB seeks comments on the proposed parameters of covered transactions, whether the practices identified in the proposed rule are broad enough to address the “potential consumer harms,” and submission of data on covered financial institutions’ cost to decline covered transactions. Comments must be received by March 25. Finally, the CFPB is proposing an effective date of 30 days after publication of the final rule in the Federal Register.

    Agency Rule-Making & Guidance CFPB CFPA NSF Fees Federal Issues Bank Supervision

  • CFPB proposes new rule on overdraft lending, opens comment period

    Agency Rule-Making & Guidance

    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.

    Agency Rule-Making & Guidance CFPB Junk Fees TILA Regulation E Regulation Z

  • Fed’s OIG report on CFPB says training improvements needed to meet enforcement goals

    Federal Issues

    Recently, the Office of Inspector General of the Federal Reserve Board released a report assessing the CFPB’s process for conducting enforcement investigations.  The report makes two key recommendations.  First, noting that the CFPB has not met its stated goal to file or settle 65 percent of its enforcement actions within two years, the OIG recommended that the CFPB Office of Enforcement incorporates the timing expectations for key steps in the enforcement process into the tracking and monitoring of matters. In addition, the Office of the Inspector General also recommended improvements to enforcement staff training on document maintenance and retention requirements for the CFPB’s matter management system. The report states that the recommendations were accepted by the CFPB, with a follow-up to ensure full implementation.

    Federal Issues OIG CFPB Enforcement

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