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State of the Union Address: President Biden addresses the banking industry
On March 7, President Biden delivered his 2024 State of the Union Address, where he highlighted how his administration is actively working to reduce costs for consumers by addressing issues such as corporate price gouging and alleged “junk fees.” According to a related White House Fact Sheet, the Biden Administration was focusing on corporate practices that may contribute to high prices, urging companies to lower their prices in line with decreasing input costs and stabilize supply chains. Biden highlighted the CFPB’s proposed rule on overdraft fees and the final rule on credit card late fees as progress in reducing alleged “junk fees.”
Furthermore, the fact sheet highlighted the CFPB’s scrutiny of alleged practices by branded retailers and airline credit cards of devaluing points and miles and luring in consumers with misleading deferred interest products.
CFPB blog post tackles mortgage closing costs, seeks consumer feedback
On March 8, the CFPB published a blog post seeking consumer input on experiences with the closing process of consumer mortgages, and in particular, closing costs. The blog post posited that closing costs significantly impact a borrower’s financial commitment and, potentially, monthly payments and identified a “noticeable increase” in closing costs, with median total loan expenses on home purchase loans increasing by 21.8 percent between 2021 and 2022. In particular, the Bureau singled out title insurance fees and credit reporting fees. It labeled title insurance as a fee that borrowers are charged and for which they have no control over the cost, alleging that “the amount that borrowers pay for lender’s title insurance is often much greater than the risk.” With respect to credit reports, the Bureau remarked that the highly concentrated industry dictates the price of credit reports, citing anecdotal evidence of cost increases of 25 to 400 percent.
The blog post also indicated that borrowers with smaller mortgages, including those with lower incomes, first-time homebuyers, and individuals residing in Black and Hispanic communities, are often disproportionately affected by closing costs, because they are typically fixed costs and do not change based on the size of the loan. The Bureau requested that consumers provide input on their experience with mortgage or closing costs, signaling that it will continue to analyze and if necessary “issue rules and guidance to improve competition, choice, and affordability.”
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 limits examiner term limits to five years after concurring with OIG recommendations
On February 26, the Office of Inspector General for the CFPB (OIG) released a report entitled, “The CFPB Can Enhance Certain Practices to Mitigate the Risk of Conflicts of Interest for Division of Supervision, Enforcement and Fair Lending Employees.” The report found that the CFPB’s Office of Supervision Examinations (OSE) does not have a formal policy that requires bank examiners to rotate assignments in a specified time frame, which increases potential conflicts of interest. The OSE examines banks to check for compliance failures in federal consumer financial law and is based out of four regional offices: New York (Northeast), Atlanta (Southeast), Chicago (Midwest), and San Francisco (West). The OIG argued that a formal policy adopted by the OSE would more effectively monitor examiner rotations, promoting “objectivity, cross-training, and broader expertise” and reducing the risk of regulatory capture – or subjecting the same regulated entity to the same examiner and subsequently risking independence and objectivity of exams. The OIG’s report posited two recommendations: (i) that the CFPB implement a formal examiner rotation policy; and (ii) that the CFPB track and document assignments for examiners and its members.
The OIG found that while some OSE offices have informal examiner rotation policies in place, there is no global system in place to track examiner assignments to ensure regular rotation. For example, OSE’s Northeast and West regional offices have written policies that require certain staff members to rotate every five years. However, the Southeast and Midwest offices do not have any written policies in place and stated having a “natural” turnover process based on needs and availability, among others.
The CFPB concurred with both OIG recommendations, stating that it will limit the time for lead examiners and field managers to five years and develop a tool for tracking these assignments.
CFPB warns lead generators, digital comparison-shopping tool operators of potential CFPA violations
On February 29, the CFPB issued a circular to law enforcement agencies and regulators explaining how operators of digital comparison-shopping tools or lead generators can potentially violate the CFPA’s prohibition on abusive acts or practices by steering consumers towards options that best serve the operator or the lead generator. The circular further discussed “how law enforcement agencies and regulators can evaluate operators of comparison-shopping tools… to manipulate results” to appease consumer preferences.
The Bureau explained that while consumers often use these tools to research, compare, and select financial products, some intermediaries also functioned as lead generators that sold consumer information to lenders. These intermediaries may have received compensation, the CFPB said, often termed as “bounties,” from financial providers for preferential treatment or lead generation. The circular recognized that operators of these tools may have engaged in commercial arrangements with financial providers and may have received compensation based on user actions or bids.
The CFPB stated that both digital comparison-shopping tool operators and lead generators can qualify as “covered persons” under CFPA section 1031(d)(2)(C) which prohibits them from engaging in unfair, deceptive, or abusive acts or practices, particularly those that “take unreasonable advantage” of consumers so they may act in the “covered person’s” best interests. The circular outlined elements of CFPA Section 1031(d)(2)(C) and applied the elements including reasonable reliance by consumers on covered entities to act in their interests, to an evaluation of the operator or lead generator activities. Notably, the circular warned that reasonable consumer reliance could be created based on the representations of the tool operator or lead generator, as well as implicit or explicit communications. Further, the Bureau added that steering consumers towards certain products or providers for the financial benefit of the operator or lead generator, rather than consumer interest, constituted unreasonable advantage-taking.
Finally, the circular included a non-exhaustive list of examples of preferencing or steering arrangements and advised law enforcement agencies and regulators to scrutinize bounty or bidding schemes and decision-making processes to identify abusive conduct.
White House orders DOJ and CFPB to better protect citizens’ sensitive personal data
On March 1, the White House released Executive Order 14117 (E.O.) titled “Preventing Access to Americans’ Bulk Sensitive Personal Data and United States Government-Related Data by Countries of Concern” to issue safeguards against Americans’ private information. The E.O. was preceded by the White House’s Fact Sheet which included provisions to protect Americans’ data on their genomic and biometric information, personal health, geolocation, finances, among others. The E.O. shared how this data can be used by nefarious actors such as foreign intelligence services or companies and could enable privacy violations. Under the E.O., President Biden ordered several agencies to act but primarily called on the DOJ. The president directed the DOJ to issue regulations on protecting Americans’ data from being exploited by certain countries. The White House also directed the DOJ to issue regulations to protect government-related data, specifically citing protections for geolocation information and information about military members. Lastly, the DOJ was directed to work with DHS to prevent certain countries’ access to citizens’ data through commercial means and the CFPB was encouraged to “[take] steps, consistent with CFPB’s existing legal authorities, to protect Americans from data brokers that are illegally assembling and selling extremely sensitive data, including that of U.S. military personnel.”
A few days before, the DOJ released its fact sheet detailing its proposals to implement the White House’s E.O., focusing on national security risks and data security. The fact sheet highlighted that our current laws leave open lawful access to vast amounts of Americans’ sensitive personal data that may be purchased and accessed through commercial relationships. In response to the E.O., the DOJ plans to release future regulations “addressing transactions that involve [Americans’] bulk sensitive data” that pose a risk of access by countries of concern. The countries of concern include China (including Hong Kong and Macau), Russia, Iran, North Korea, Cuba, and Venezuela. The DOJ will also release its Advance Notice of Proposed Rulemaking (ANPRM) to provide details of the proposal(s) and to solicit comments.
CFPB claims special, risk-based oversight over lender
On February 23, the CFPB released a supervisory designation over a nonbank, small-loan consumer finance company (the Company). This is the first time the CFPB has used its authority under Section 1024(a)(1)(C) of the Consumer Financial Protection Act (CFPA) to designate a company for supervision based on a determination that the company’s conduct poses “risk to consumers” after a contested proceeding. This provision of the CFPA only required the CFPB to have “reasonable cause to determine” that a covered person’s conduct posed risks to consumers––which the CFPB stated is a “less demanding” legal standard than the preponderance-of-the-evidence standard generally used in civil proceedings.
The CFPB described the relevant statutory framework of the proceeding with particularity since this proceeding was “one of the first” under Section 1024(a)(1)(C). The CFPB found the company to be a covered person and stated that the CFPB had reasonable cause to determine that the Company’s conduct poses risks to consumers, including its alleged bundling of loans with insurance coverage, harmful collection practices, inaccurate credit reporting, and serial refinancing. The CFPB alleged that consumer complaints are sufficient to establish reasonable cause that the Company’s actions put consumers at risk.
FTC provides its 2023 ECOA activities to CFPB
On February 12, the FTC provided the CFPB with an annual summary of its 2023 enforcement, research and policy development, and educational-related initiatives on ECOA, as Dodd-Frank allows the Commission to enforce ECOA and any CFPB rules applicable to entities within the FTC’s jurisdiction. The letter emphasized the commitment of each agency to enforce laws protecting civil rights, fair competition, consumer protection, and equal opportunity in the development and use of automated systems and artificial intelligence. Additionally, the letter stated the FTC continued its involvement in initiatives such as military outreach and participation in interagency task forces on fair lending. Its initiatives focused on consumer and business education regarding issues related to Regulation B and guiding fair lending practices. The Commission also highlighted (1) an enforcement action against a group of auto dealerships alleging ECOA and its implementing Regulation B violations in connection with the sale of add-on products; (2) refund checks sent as a result of the settlement of two enforcement actions against auto dealerships in which it was alleged that the dealerships violated ECOA and Regulation B by discrimination against Black and Latino consumers by charging them higher financing costs; and (3) an amicus brief submitted to an appeals court in support of the CFPB’s appeal to the U.S. Court of Appeals for the Seventh Circuit of the lower court’s decision regarding the applicability of ECOA to individuals other than “applicants.”
CFPB revises its supervisory appeals process
On February 16, the CFPB issued a procedural rule updating its process for financial institutions that appeal the Bureau’s supervisory findings. The CFPB examined financial institutions to ensure they followed federal consumer financial law. After an examination or targeted review, supervised entities may appeal their compliance rating or any other findings.
First, the procedural rule expanded the pool of potential members for the appeals committee within the CFPB. Now, any CFPB manager with relevant expertise who did not participate in the original matter being appealed can be considered, rather than previously only managers from the Supervision department. The CFPB’s General Counsel will assign three CFPB managers and legal counsel to advise them. Second, the revised process introduced a new option for resolving appeals—in addition to upholding or rescinding the original finding, matters can now be remanded back to supervision staff for further consideration, potentially resulting in a modified finding. The Bureau also recommended in its procedural rule that entities engage in “open dialogue” with supervisory staff to discuss their preliminary findings to attempt to resolve disputes before an examination is final.
Third, institutions now can appeal any compliance rating issued to them, not just negative ratings, as was the case previously. Fourth, the updated process included additional clarifications and specifies that it applied to pending appeals at the time of its publication.
CFPB reports larger banks charge higher interest rates on credit cards than smaller banks
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.