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  • OCC, FDIC say some overdraft fees may be unfair or deceptive

    On April 26, the OCC and FDIC issued supervisory guidance addressing consumer compliance risks associated with bank overdraft practices. (See OCC Bulletin 2023-12 and FDIC FIL-19-2023.) The guidance highlighted certain practices that may result in increased risk exposure, including assessing overdraft fees on “authorize positive, settle negative” (APSN) transactions and assessing representment fees each time a third party resubmits the same item for payment after being returned by a bank for non-sufficient funds. The agencies provided guidance for banks that may help control risks associated with overdraft protection programs and achieve compliance with Dodd-Frank’s UDAAP prohibitions and section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices.

    The FDIC’s supervisory guidance expanded on the 2019 Consumer Compliance Supervisory Highlights (covered by InfoBytes here), and warned that APSN overdraft fees present risks of unfairness under both statutes as consumers “cannot reasonably avoid” receiving these fees because they lack “the ability to effectively control payment systems and overdraft processing systems practices.” The FDIC cited the “complicated nature of overdraft processing systems” as another impediment to a consumer’s ability to avoid injury. The FDIC also emphasized that risks of unfairness exist both in “available balance” or “ledger balance” methods of assessing overdraft fees, but cautioned that risks may be “more pronounced” when a bank uses an available balance method. Furthermore, the FDIC warned that disclosures describing how transactions are processed may not mitigate UDAAP and UDAP risk. Banks are encouraged to “ensure customers are not charged overdraft fees for transactions consumers may not anticipate or avoid,” and should take measures to ensure overdraft programs provided by third parties comply with all applicable laws and regulations, as such arrangements may present additional risks if not properly managed, the FDIC explained.

    The OCC’s guidance also warned that disclosures may be deceptive under section 5 if they fail to clearly explain that multiple or additional fees may result from multiple presentments of the same transaction. Recognizing that some banks have already implemented changes to their overdraft protection programs, the OCC also acknowledged that “[w]hen supported by appropriate risk management practices, overdraft protection programs may assist some consumers in meeting short-term liquidity and cash-flow needs.” The OCC encouraged banks to explore other options, such as offering low-cost accounts and low-cost alternatives for covering overdrafts, such as overdraft lines of credit and linked accounts. 

    Bank Regulatory Federal Issues OCC FDIC Consumer Finance Overdraft FTC Act UDAP UDAAP Deceptive Unfair Dodd-Frank Fees Agency Rule-Making & Guidance

  • District Court won’t stay CFPB litigation with credit reporter

    Courts

    On April 13, the U.S. District Court for the Northern District of Illinois denied a credit reporting agency’s (CRA) bid to stay litigation filed by the CFPB alleging deceptive practices related to the marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. The Bureau sued the CRA and one of its former senior executives last April (covered by InfoBytes here), claiming the defendants allegedly violated a 2017 consent order by continuing to engage in “digital dark patterns” that caused consumers seeking free credit scores to unknowingly sign up for a credit monitoring service with recurring monthly charges.

    The CRA requested a stay while the U.S. Supreme Court considers whether the Bureau’s funding mechanism is unconstitutional. Earlier this year, the Court agreed to review next term the 5th Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, where it found that the CFPB’s “perpetual self-directed, double-insulated funding structure” violated the Constitution’s Appropriations Clause. (Covered by InfoBytes here and a firm article here.) While acknowledging that a ruling against the Bureau may result in the dismissal of the action against the CRA, the court concurred with the Bureau that consumers may be exposed to harm during a stay. “Were I to grant the requested stay, it could last more than one year, depending on when the Supreme Court issues its opinion,” the court wrote. “In that time, if the Bureau’s allegations bear out, consumers will continue to suffer harm because of defendants’ unlawful conduct. That potential cost is too great to outweigh the resource preserving benefits a stay would confer.”

    Courts CFPB Consumer Finance Credit Reporting Agency Enforcement Deceptive UDAAP CFPA U.S. Supreme Court Funding Structure Constitution Dark Patterns

  • CFPB defines abusive conduct under the CFPA

    Agency Rule-Making & Guidance

    On April 3, the CFPB issued a policy statement containing an “analytical framework” for identifying abusive conduct prohibited under the Consumer Financial Protection Act. The Bureau broadly defines abusive conduct as anything that obscures, withholds, de-emphasizes, renders confusing, or hides information about the important features of a product or service. The policy statement, which is intended to clarify Congress’s statutory definition of abusive practices, serves as the Bureau’s “first formal issuance” summarizing more than a decade’s worth of precedent on abusiveness.

    Specifically, the policy statement highlights two categories of abusive prohibitions: (i) obscuring critical features that could materially interfere with or impede a consumer’s ability to understand terms or conditions that may prompt a consumer to reconsider signing up for certain products or services (e.g., burying or overshadowing important disclosures, filling disclosures with complex jargon, omitting material terms and conditions, physically preventing consumers from viewing notices, or engaging in digital interference through the use of “dark patterns” aimed at “making the terms and conditions materially less accessible or salient”); and (ii) leveraging a company’s knowledge or market power to take unreasonable advantage of a consumer relating to: gaps in understanding; unequal bargaining power; and consumer reliance (e.g., causing a consumer to face a range of potential harms, including monetary and non-monetary costs, taking advantage of a consumer’s lack of understanding as it relates to whether a debt is legally enforceable or when fees will be assessed, or preventing a consumer from switching service providers).

    Additionally, the Bureau notes that in order to establish liability, the agency would not be required to show that “substantial injury” occurred—it only needs to show that a practice is considered “harmful or distortionary to the proper functioning of the market.”

    Abusive acts or practices will focus on actions, CFPB Director Rohit Chopra explained in prepared remarks at the University of California Irvine Law School, whereas deception claims are more concerned with whether a company’s communications create a misleading net impression. “Congress prohibited companies from leveraging unequal bargaining power, and that includes consumer reporting companies, servicers, and debt collectors who use the fact that their customers are captive to force people into less advantageous deals, extract excess profits, or reduce costs by providing worse service than they would provide if they were competing in an open market,” Chopra added.

    The Bureau will receive comments on the policy statement through July 3.

    Agency Rule-Making & Guidance Federal Issues CFPB Abusive UDAAP CFPA

  • CFPB scrutinizes discharged private student loan billing and collection practices

    Federal Issues

    On March 16, the CFPB released a compliance bulletin discussing student loan servicers’ practice of collecting on private student loans discharged in bankruptcy. The bulletin also notified regulated entities on how the Bureau intends to exercise its enforcement and supervisory authorities on this issue. Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts addressed the treatment of certain private student loans following bankruptcy discharge. The Bureau explained that in order to secure a discharge of a qualified education loan in bankruptcy, a borrower must demonstrate that the loan would impose an undue hardship if not discharged. Loans that do not meet this qualification (“non-qualified student loans”) can be discharged under standard bankruptcy discharge orders, the Bureau said.

    Bureau examiners found, however, that several servicers failed to determine whether a borrower’s loan was qualified or non-qualified. As a result, non-qualified student loans were returned to repayment after a bankruptcy concluded, wherein servicers continued to bill and collect payments on the loans even through the borrower was released from this debt through the bankruptcy discharge. According to the Bureau, many borrowers, when faced with collection activities in violation of a bankruptcy court order, continued to make payments on debts they no longer owed.

    The Bureau explained that servicers who collected on student loans that were discharged by a bankruptcy court violate the prohibition on unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. The bulletin described unfair practices observed by examiners, such as servicers relying entirely on loan holders to distinguish among the loans and not ensuring that such holders had in fact done so. The bulletin also provided examples of student loans that are eligible for standard bankruptcy discharge, including loans made to students attending schools that are ineligible for federal student aid and loans made to students attending school less than half time. Bureau examiners instructed servicers to immediately stop collecting on discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected borrowers.

    Federal Issues CFPB Student Lending Student Loan Servicer Consumer Finance UDAAP Supervision Examination Unfair

  • Online lender asks Supreme Court to review ALJ ruling

    Courts

    A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.

    The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case. 

    However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.

    The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.

    Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”

    The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).

    Courts CFPB U.S. Supreme Court Online Lending Payday Lending Appellate Tenth Circuit Fifth Circuit TILA EFTA CFPA UDAAP Enforcement Constitution Funding Structure ALJ

  • CFPB report looks at junk fees; official says they remain agency focus

    Federal Issues

    On March 8, the CFPB released a special edition of its Supervisory Highlights focusing on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets. The findings in the report cover examinations completed between July 1, 2022 and February 1, 2023. Highlights of the supervisory findings include:

    • Deposit accounts. Examiners found occurrences where depository institutions charged unanticipated overdraft fees where, according to the Bureau, consumers could not reasonably avoid these fees, “irrespective of account-opening disclosures.” Examiners also found that while some institutions unfairly assessed multiple non-sufficient (NSF) fees for a single item, institutions have agreed to refund consumers appropriately, with many planning to stop charging NSF fees entirely.
    • Auto loan servicing. Recently examiners identified illegal servicing practices centered around the charging of unfair and abusive payment fees, including out-of-bounds and fake late fees, inflated estimated repossession fees, and pay-to-pay payment fees, and kickback payments. Among other things, examiners found that some auto loan servicers charged “payment processing fees that far exceeded the servicers’ costs for processing payments” after a borrower was locked into a relationship with a servicer selected by the dealer. Third-party payment processors collected the inflated fees, the Bureau said, and servicers then profited through kickbacks.
    • Mortgage loan servicing. Examiners identified occurrences where mortgage servicers overcharged late fees, as well as repeated fees for unnecessary property inspections. The Bureau claimed that some servicers also included monthly private mortgage insurance premiums in homeowners’ monthly statements, and failed to waive fees or other changes for homeowners entering into certain types of loss mitigation options.
    • Payday and title lending. Examiners found that lenders, in connection with payday, installment, title, and line-of-credit loans, would split and re-present missed payments without authorization, thus causing consumers to incur multiple overdraft fees and loss of funds. Some short-term, high-cost payday and title loan lenders also charged borrowers repossession-related fees and property retrieval fees that were not authorized in a borrower’s title loan contract. The Bureau noted that in some instances, lenders failed to timely stop repossessions and charged fees and forced consumers to refinance their debts despite prior payment arrangements.
    • Student loan servicing. Examiners found that servicers sometimes charged borrowers late fees and interest despite payments being made on time. According to the Bureau, if a servicer’s policy did not allow loan payments to be made by credit card and a customer representative accidentally accepted a credit card payment, the servicer, in certain instances, would manually reverse the payment, not provide the borrower another opportunity for paying, and charge late fees and additional interest.

    CFPB Deputy Director Zixta Martinez recently spoke at the Consumer Law Scholars Conference, where she focused on the Bureau’s goal of reigning in junk fees. She highlighted guidance issued by the Bureau last October concerning banks’ overdraft fee practices, (covered by InfoBytes here), and commented that, in addition to enforcement actions taken against two banks related to their overdraft practices, the Bureau intends to continue to monitor how overdrafts are used and enforce against certain practices. The Bureau noted that currently 20 of the largest banks in the country no longer charge surprise overdraft fees. Martinez also discussed a notice of proposed rulemaking issued last month related to credit card late fees (covered by InfoBytes here), in which the Bureau is proposing to adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type. Martinez further described supervision and enforcement efforts to identify junk fee practices and commented that the Bureau will continue to target egregious and unlawful activities or practices.

    Federal Issues CFPB Consumer Finance Junk Fees Overdraft Supervision Examination Mortgages Student Lending Payday Lending Student Loan Servicer NSF Fees Title Loans UDAAP Auto Finance

  • CFPB orders nonbank title lender to pay $15 million for numerous violations

    Federal Issues

    On February 23, the CFPB entered a consent order against a Georgia-based nonbank auto title lender (respondent) for alleged violations of the Military Lending Act (MLA), the Truth in Lending Act, and the Consumer Financial Protection Act. According to the Bureau, the respondent allegedly charged nearly three times the MLA’s 36 percent annual interest rate cap on auto title loans made to military families. The respondent also allegedly changed military borrowers’ personal information in an attempt to hide their protected status, included mandatory arbitration clauses and unreasonable notice provisions in its loans, and charged fees for an insurance product that provided no benefit to the borrower. The Bureau noted that the respondent has been under a consent order since 2016 for allegedly engaging in unfair and abusive acts related to its lending and debt collection practices (covered by InfoBytes here). While neither admitting nor denying any of the allegations, the respondent has agreed to pay $5.05 million in consumer redress and a $10 million penalty. The respondent must also implement robust measures to prevent future violations.

    Federal Issues CFPB Enforcement Auto Finance Military Lending Act Consumer Finance Nonbank Repeat Offender Title Loans UDAAP CFPA Unfair Abusive

  • 9th Circuit orders district court to reassess $7.9 million civil penalty against payments company

    Courts

    On January 27, the U.S. Court of Appeals for the Ninth Circuit ordered a district court to reassess its decision “under the changed legal landscape since its initial order and opinion” in an action concerning alleged misrepresentations made by a bi-weekly payments company. The Bureau filed a lawsuit against the company in 2015, alleging, among other things, that the company made misrepresentations to consumers about its bi-weekly payment program when it overstated the savings provided by the program and created the impression the company was affiliated with the consumers’ lender. In 2017, the district court granted a $7.9 million civil penalty proposed by the Bureau, as well as permanent injunctive relief, but denied restitution of almost $74 million sought by the agency. (Covered by InfoBytes here.) The company appealed the district court’s conclusion that it had engaged in deceptive practices in violation of the Consumer Financial Protection Act, while the Bureau cross-appealed the district court’s decision to deny restitution. The 9th Circuit consolidated the appeals for consideration.

    During the pendency of the cross-appeals, the U.S. Supreme Court issued a decision in 2020 in Seila Law LLC v. CFPB, in which it determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau (covered by a Buckley Special Alert). Following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the company. At issue in the company’s appeal is whether the Bureau has authority to pursue its claims, including whether the agency’s funding mechanism is unconstitutional and whether its case is distinguishable from other actions and is entitled to dismissal for the Bureau director’s unconstitutional for-cause removal provision.

    The appellate court declined to offer a position on these issues, and instead left them for the district court to consider. The 9th Circuit noted that since the district court’s 2017 order, “sister circuit courts have split” on the funding issue. “We vacate the district court’s order and remand, allowing it to reassess the case under the changed legal landscape since its initial order and opinion,” the appellate court wrote, directing the district court to “provide further consideration to [the company’s] argument on the constitutionality of the Bureau’s funding mechanism.” With respect to the Bureau’s appeal of the restitution denial, the 9th Circuit remanded the case to allow the district court to consider the effect CFPB v. CashCall and Liu v. SEC may have on the action (covered by InfoBytes here and here), as well as whether the agency “waived its claim to legal restitution by characterizing it only as a form of equitable relief before the district court.”

    Courts Appellate Ninth Circuit CFPB Payments Constitution Enforcement CFPA UDAAP Deceptive U.S. Supreme Court Consumer Finance

  • CFPB seeks feedback on credit cards

    Agency Rule-Making & Guidance

    On January 24, the CFPB issued a notice and request for information (RFI) seeking public feedback on several aspects of the consumer credit card market in accordance with Section 502(b) of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted by Congress to establish fair and transparent practices related to the extension of credit within the credit card market, and requires the Bureau to undertake a biennial review of the industry to determine whether regulatory adjustments are needed. The Bureau said it plans to publish its report to Congress later in 2023.

    The RFI covers several broad topics ranging from lending practices to the effectiveness of rate and fee disclosures, and seeks comments on the experiences of consumers and credit card issuers in the credit card market, as well as on the overall health of the credit card market. Specifically, the RFI requests feedback on issues related to:

    • Credit card agreement terms and credit card issuer practices;
    • The effectiveness of issuers’ disclosure of terms, fees, and other expenses of credit card plans;
    • The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans;
    • The cost and availability of consumer credit cards;
    • The safety and soundness of credit card issuers;
    • The use of risk-based pricing for consumer credit cards; and
    • Consumer credit card product innovation and competition

    Comments on the RFI are due April 24. The Bureau noted in its announcement that it also issued market-monitoring orders to several major and specialized credit card issuers seeking information on various topics, including major credit card issuers’ practices related to, among other things, applications and approvals, debt collection, and digital account servicing.

    Agency Rule-Making & Guidance Federal Issues CFPB Consumer Finance Credit Cards CARD Act UDAAP

  • Senators ask FTC, CFPB to investigate deceptive listing agreements

    State Issues

    In December, Senate Banking Committee Chairman Sherrod Brown (D-OH), along with Senators Tina Smith (D-MN) and Ron Wyden (D-OR) sent a letter to the FTC and the CFPB requesting a review of a Florida-based real estate brokerage firm’s use of exclusive 40-year listing agreements marketed as a “loan alternative.” The request follows a November press release by the Florida attorney general announcing legal action against the firm for engaging in allegedly deceptive, unfair, and unconscionable business practices. According to the AG’s complaint, the firm offered homeowners $300 to $5,000 as a cash loan alternative in exchange for an agreement to use the firm as an exclusive real estate listing broker for a 40-year period. The complaint claimed the firm informs homeowners that there is no obligation to return the cash, stressing the homeowner will owe the firm nothing unless and until the home is sold. The AG asserted, however, that what is not clearly disclosed is that after accepting the payment, the firm files a 40-year lien on the property so that if at any time within 40 years the home is foreclosed upon or transferred to heirs upon the homeowner’s death, or if homeowners simply wish to cancel the deal, the firm will attempt to take three percent of the home’s value. Further, the AG claimed that the firm also failed to inform customers that the liens are filed in the public record, which can make it difficult for homeowners to refinance or access their home’s equity. The complaint seeks injunctive relief, restitution, and civil penalties.

    State Issues State Attorney General Florida FTC CFPB Consumer Finance Senate Banking Committee Listing Agreement UDAP UDAAP

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