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FDIC releases March enforcement actions
On April 28, the FDIC released a list of administrative enforcement actions taken against banks and individuals in March. The FDIC made public 11 orders including “four prohibition orders, three orders terminating deposit insurance, two consent orders, one order to pay civil money penalty (CMP), and one order terminating consent order.” Included is a civil money order issued against a Missouri-based bank related to alleged violations of the Flood Disaster Protection Act (FDPA). The FDIC determined that the bank had engaged in a pattern or practice of violating the FDPA by increasing, extending, or renewing a loan secured by property located or to be located in a special flood hazard area without timely notifying the borrower and/or the servicer as to whether flood insurance was available for the collateral.
11th Circuit: ECOA anti-discrimination provision against requiring spousal signature does not apply to defaulted mortgage during loan modification offer
On April 27, the U.S. Court of Appeals for the Eleventh Circuit affirmed a lower court’s decision to enter judgment in favor of a defendant national bank following a bench trial related to claims arising from foreclosure proceedings on the plaintiff’s home. The plaintiff executed a promissory note secured by a mortgage signed by both the plaintiff and her husband. After the borrowers defaulted on the mortgage, the defendant filed a foreclosure action and approved the plaintiff for a streamlined loan modification while the foreclosure action was pending. One of the conditions of the streamlined loan modification was that the plaintiff had to make required trial period plan payments and submit signed copies of the loan modification agreement within 14 days. Both individuals were expressly required to sign the modification agreement as borrowers on the mortgage. However, should one of the borrowers not sign, the bank required documentation as to why the signature is not required, as well as a recorded quit claim deed and a divorce decree. The plaintiff acknowledged that she refused to return a fully signed loan modification agreement or provide alternative supporting documentation, and during trial, both individuals admitted that the husband refused to sign. The borrowers eventually consented to final judgment in the foreclosure action and the property was sold.
The plaintiff then brought claims under ECOA and RESPA. The district court granted summary judgment to the defendant on the ECOA discrimination claim and the RESPA claim. After a bench trial on the ECOA notice claim, the district court determined that because the defendant gave proper notice to the plaintiff as required by ECOA (i.e., she was provided required written notices within 30 days after being verbally informed that her modification agreement was not properly completed), plaintiff’s claim failed on the merits.
On appeal, plaintiff argued, among other things, that the district court erred in granting summary judgment in favor of the defendant on her ECOA discrimination claim. The 11th Circuit explained that under ECOA it is unlawful for a creditor to discriminate against an applicant on the basis of marital status. However, ECOA and Regulation B also establish “exceptions for actions that are not considered discrimination, including when a creditor may require a spouse’s signature,” and include additional exceptions to creditor conduct constituting “adverse action” (i.e. “any action or forbearance taken with respect to an account that is delinquent or in default is not adverse action”). The appellate court held that because the plaintiff had defaulted on the mortgage at the time the loan modification was offered, ECOA and Regulation B’s anti-discrimination provision against requiring spousal signatures did not apply to her. Moreover, even if the provision was applicable in this instance, the appellate court held that “the district court correctly concluded that it was reasonable for [defendant] to require either [plaintiff’s] signature or a divorce decree in light of Florida’s homestead laws,” and that such a requirement does not constitute discrimination under ECOA.
As to the notice claim, the appellate court found no error in the district court’s conclusion that the defendant had satisfied applicable notice requirements by timely sending a letter to the plaintiff that (i) specified the information needed from the plaintiff; (ii) designated a reasonable amount of time within which to provide the information; and (iii) informed the plaintiff that failure to do so would result in cancellation of the modification. This letter satisfied the “notice of incompleteness” requirements of 12 C.F.R. § 202.9(c)(2).
FDIC announces Oklahoma disaster relief
On April 28, the FDIC issued FIL-22-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Oklahoma affected by severe storms, straight-line winds, and tornados from April 19 to 20. The FDIC acknowledged the unusual circumstances faced by affected institutions and encouraged those institutions to work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements and instructed institutions to contact the Dallas Regional Office if they expect delays in making filings or are experiencing difficulties in complying with publishing or other requirements.
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.”
CFPB examines removal of medical collections from credit reports
On April 26, the CFPB released a data point report estimating that nearly 23 million American consumers will have at least one medical collection removed from their credit reports when all medical collection tradelines under $500 are deleted. Additionally, the Bureau found that the removal will result in approximately 15.6 million people having all medical collections removed. The reporting change occurred as part of an undertaking by the three nationwide consumer reporting companies announced earlier in April. Examining credit reports that occurred between 2012 and 2020, the Bureau studied the impact of this change and noted that on average consumers experienced a 25-point increase in their credit scores in the first quarter following the removal of their last medical collection. The average increase, the report found, was 21 points for consumers with medical collections under $500 compared to 32 points for those with medical collections over $500. The report further discussed the association between the removal of medical collection tradelines and the amount of available credit for revolving and installment accounts, as well as increases in first-lien mortgage inquiries (attributable, the Bureau believes, to consumers working to remove these tradelines as part of applying for mortgage credit).
FTC, Pennsylvania ban debt collection operation
On April 26, the FTC and the Commonwealth of Pennsylvania announced that the U.S. District Court for the Eastern District of Pennsylvania recently entered an order permanently banning a debt collection firm and two associated individuals from the industry. The FTC and Pennsylvania sued the defendants in 2020 for their involvement in a telemarketing operation that allegedly misrepresented “no obligation” trial offers to organizations and then enrolled recipients in subscriptions for several hundred dollars without their consent (covered by InfoBytes here). The complaint charged the defendants with violating the FTC Act by, among other things, illegally threatening the organizations if they did not pay for the unordered subscriptions and claimed the debt collection firm handled collections nationwide despite not having a valid corporate registration in any state and only being licensed to collect debt in Washington State. In addition to permanently enjoining the defendants from participating in the debt collection industry (whether directly or through an intermediary), the court order requires the defendants’ continued cooperation as the case proceeds against the other defendants.
CFPB warns debt collectors on “zombie mortgages”
On April 26, the CFPB issued an advisory opinion affirming that the FDCPA and implementing Regulation F prohibit covered debt collectors from suing or threatening to sue to collect time-barred debt. As such, a debt collector who brings or threatens to bring a state court foreclosure action to collect a time-barred mortgage debt may violate federal law, the Bureau said. The agency stated that numerous consumers have filed complaints relating to “zombie second mortgages,” where homeowners, operating under the assumption that a mortgage debt was forgiven or was satisfied long ago by loan modifications or bankruptcy proceedings, are contacted years later by a debt collector threatening foreclosure and demanding payment of the outstanding balance along with interest and fees.
The Bureau explained that, leading up to the 2008 financial crisis, many lenders originated mortgages without considering consumers’ ability to repay the loans. Focusing on “piggyback” mortgages (otherwise known as 80/20 loans, in which consumers took out a first lien loan for 80 percent of the value of the home and a second lien loan for the remaining 20 percent of the home’s valuation), the Bureau stated that most lenders did not pursue payment on the second mortgage but instead sold them off to debt collectors. Years later, some of these debt collectors are demanding repayment of the second mortgage and threatening foreclosure, the Bureau said, adding that for many of the mortgages, the debts have become time barred. The Bureau commented that, in most states, consumers can raise this as an affirmative defense to prevent a debt collector from recovering on the debt using judicial processes such as foreclosure. Additionally, because “Regulation F’s prohibition on suits and threats of suit on time-barred debt is subject to a strict liability standard,” a debt collector that sues or threatens to sue “violates the prohibition ‘even if the debt collector neither knew nor should have known that a debt was time-barred,’” the Bureau said. The advisory opinion clarified that these restrictions apply to covered debt collectors, including individuals and entities seeking to collect defaulted mortgage loans and many of the attorneys that bring foreclosure actions on their behalf.
CFPB Director Rohit Chopra delivered remarks during a field hearing in Brooklyn, New York, in which he emphasized that the Bureau will work with state enforcement agencies to take action against covered debt collectors who break the law. He reminded consumers that they can also sue debt collectors themselves under the FDCPA.
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.
Washington enacts credit repair regulation
On April 20, the Washington governor signed HB 1311 to enact provisions relating to credit repair services performed by a credit services organization. Among other things, the Act outlines new requirements, including that a credit services organization must provide consumers with a monthly statement that details the services performed, as well as “an accounting of any funds paid by a consumer and held or disbursed on the consumer’s behalf and copies of any letters sent by the credit services organization on the consumer’s behalf,” if applicable. Additionally, a credit services organization is prohibited from sending any communications to a consumer reporting agency, creditor, collection agency, or regulatory entity unless the consumer has provided prior written authorization. Credit services organizations must also comply with specified written communication requirements and provide disclosures addressing consumers’ rights to review their files. Modifications to certain provisions relating to notices of cancellation have also been made. The Act is effective July 23.
Federal agencies reaffirm commitment to confront AI-based discrimination
On April 25, the CFPB, DOJ, FTC, and Equal Employment Opportunity Commission released a joint statement reaffirming their commitment to protect the public from bias in automated systems and artificial intelligence (AI). “America’s commitment to the core principles of fairness, equality, and justice are deeply embedded in the federal laws that our agencies enforce to protect civil rights, fair competition, consumer protection, and equal opportunity,” the agencies said, emphasizing that existing authorities apply equally to the use of new technologies and responsible innovation as they do to any other conduct. The agencies have previously expressed concerns about potentially harmful AI applications, including black box algorithms, algorithmic marketing and advertising, abusive AI technology usage, digital redlining, and repeat offenders’ use of AI, which may contribute to unlawful discrimination, biases, and violate consumers’ rights.
“We already see how AI tools can turbocharge fraud and automate discrimination, and we won’t hesitate to use the full scope of our legal authorities to protect Americans from these threats,” FTC Chair Lina M. Khan said. “Technological advances can deliver critical innovation—but claims of innovation must not be cover for lawbreaking. There is no AI exemption to the laws on the books, and the FTC will vigorously enforce the law to combat unfair or deceptive practices or unfair methods of competition,” Khan added.
CFPB Director Rohit Chopra echoed Khan’s sentiments and said the Bureau, along with other agencies, are taking measures to address unchecked AI. “While machines crunching numbers might seem capable of taking human bias out of the equation, that’s not what is happening,” Chopra said. “When consumers and regulators do not know how decisions are made by artificial intelligence, consumers are unable to participate in a fair and competitive market free from bias,” Chopra added. The Director’s statements concluded by noting that the Bureau will continue to collaborate with other agencies to enforce federal consumer financial protection laws, regardless of whether the violations occur through traditional means or advanced technologies.
Additionally, Assistant Attorney General Kristen Clarke of the DOJ’s Civil Rights Division noted that “[a]s social media platforms, banks, landlords, employers and other businesses [] choose to rely on artificial intelligence, algorithms and other data tools to automate decision-making and to conduct business, we stand ready to hold accountable those entities that fail to address the discriminatory outcomes that too often result.”