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FHFA seeks to codify fair lending oversight
On April 19, FHFA issued a notice of proposed rulemaking (NPRM) to codify several existing practices and programs relating to the agency’s fair lending oversight requirements for the Federal Home Loan Banks and Fannie Mae and Freddie Mac (GSEs). Intended to provide increased public transparency and greater oversight and accountability to the regulated entities’ fair housing and fair lending compliance, the NPRM seeks to also formalize requirements for the GSEs to maintain Equitable Housing Finance Plans, which are designed to address racial and ethnic disparities in homeownership and wealth and foster housing finance markets that provide equitable access to affordable and sustainable housing (covered by InfoBytes here). The NPRM will also codify requirements for the GSEs to collect and report homeownership education, housing counseling, and language preference information from the Supplemental Consumer Information Form (SCIF). Lenders are required to use the SCIF as part of the application process for loans with application dates on or after March 1, that will be sold to the GSEs (covered by InfoBytes here). Comments on the NPRM are due 60 days after publication in the Federal Register.
3rd Circuit: No ambiguity in collection dispute notice
On April 18, the U.S. Court of Appeals for the Third Circuit affirmed the dismissal of a putative FDCPA class action debt collection lawsuit concerning allegedly misleading dispute language. A letter the plaintiff received from the defendant debt collector included the following statement:
Unless you notify this office within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will assume this debt is valid. If you notify this office in writing within 30 days after receiving this notice that you dispute the validity of this debt or any portion thereof, this office will obtain verification of the debt or obtain a copy of a judgment and mail you a copy of such judgment or verification. If you request of this office in writing within 30 days after receiving this notice[,] this office will provide you with the name and address of the original creditor, if different from the current creditor.
If you dispute the debt, or any part thereof, or request the name and address of the original creditor in writing within the thirty-day period, the law requires our firm to suspend our efforts to collect the debt until we mail the requested information to you.
The plaintiff argued that the suspended collection language in the second paragraph violated the FDCPA because it led her to believe “that she could suspend collection by disputing all or part of the debt orally outside of the 30-day window.” Doing so, the plaintiff maintained, would conflict with her rights under Section 1692g(b) of the statute, which “guarantees that, if a consumer invokes her § 1692g(a) right to request information about a debt, and the consumer invokes this right in writing and within the thirty-day period prescribed by statute, a debt collector must ‘cease collection of the debt’ until it has provided the requested information to the debtor.” While the defendant was not required to notify the plaintiff about her rights under 1692g(b), the plaintiff claimed that including inaccurate information about those rights gave her “contrary and inconsistent” information.
The district court dismissed the action for failure to state a claim on the premise that, when “read holistically,” the letter did not suggest that the plaintiff could have collection activity suspended by orally disputing the debt outside the 30-day window. On appeal, the 3rd Circuit agreed with the district court that the language that preceded the disputed statement “eliminates any ambiguity” because “it explains that a debtor who wishes to avail herself of her statutory right to validation of a debt must request validation in writing and within 30 days of receiving a collection notice.”
CFPB: ECOA prohibits discrimination in any aspect of a credit transaction
On April 14, the CFPB filed a statement of interest saying ECOA’s prohibition on discrimination applies “to any aspect of a credit transaction,” and therefore covers every aspect of a borrower’s dealings with a creditor, not just specific loans terms such as the interest rate or fees.
The case, which is currently pending in the U.S. District Court for the Southern District of Florida, concerns a putative class of Black students enrolled at a for-profit nursing school who took out credit in the form of federal and private student loans to pay for the program. Plaintiffs alleged that the school adopted new policies while they were enrolled that increased the time and money it would take to complete the program, and asserted the program was intentionally targeted to individuals on the basis of race “with the understanding that they were highly likely to require an extension of credit to pay for the program.” Plaintiffs claimed the school violated ECOA by engaging in “reverse redlining” and brought other claims under state and federal law. The school moved to dismiss, arguing that the plaintiffs failed to specify any aspect of any credit transaction that is discriminatory based on race or another protected class under ECOA, and failed to identify any specific loan term that was unfair or predatory (based on race or otherwise), the Bureau said in a corresponding blog post.
The statement of interest addressed two questions concerning ECOA’s applicability raised in the school’s motion to dismiss. First, the Bureau refuted the school’s argument that in order to state a claim for discriminatory targeting under ECOA, the plaintiff must allege that the individual (i) is a member of a protected class; (ii) applied and qualified for a loan; (iii) the loan was made on “grossly unfavorable terms”; and (iv) the lender intentionally targeted the plaintiff for unfair loans or gave more favorable terms to others. Calling this contention “mistaken,” the Bureau explained that to state a claim under ECOA, “a plaintiff need allege only facts to plausibly suggest that a defendant discriminated on a prohibited basis with respect to an aspect of a credit transaction; they need not allege the elements of a prima facie case, which is an evidentiary standard and not a pleading requirement.” The Bureau pointed to allegations showing that the school allegedly targeted Black students by, among other things, engaging in race-targeted advertising and marketing, enrolling a disproportionate number of Black students as compared to the surrounding neighborhoods’ populations, and making a greater percentage of loans in majority Black census tracts, as examples of discriminatory targeting.
Second, the Bureau disagreed with the school’s assertion that plaintiffs failed to identify any aspects of the credit transactions that were discriminatory based on race, or any specific loans terms that were allegedly unfair or predatory. Emphasizing that even if the loan terms are not themselves unfair or predatory, plaintiffs may proceed with a discriminatory targeting claim because ECOA prohibits discrimination “with respect to any aspect of a credit transaction,” which encompasses more than just the loan terms in a contract, the Bureau explained. According to the Bureau, the plaintiffs alleged discrimination in relation to multiple aspects of their credit transactions with the school and have accordingly stated a claim under ECOA.
CFPB Director Rohit Chopra issued a statement emphasizing that courts have consistently upheld that discriminatory targeting violates ECOA when a company targets consumers on a prohibited basis for harmful and predatory loans. The Bureau will continue to work with the DOJ, federal agencies, and the states to ensure lenders that engage in discriminatory targeting are held accountable, Chopra said.
Fed governor outlines CBDC risks
On April 18, Federal Reserve Governor Michelle W. Bowman cautioned that the risks of creating a U.S. central bank digital currency (CBDC) may outweigh the benefits for consumers. Bowman said the Fed continues to engage in exploratory work to understand how a CBDC could potentially improve payment speeds or better financial inclusion, and noted that the agency is also trying to understand how new potential forms of money like CBDCs and other digital assets could play a larger role in the economy. In prepared remarks delivered before Georgetown University’s McDonough School of Business Psaros Center for Financial Markets and Policy, Bowman raised several policy considerations relating to privacy, interoperability and innovation, and the potential for “unintended effects” on the banking system should a CBDC be adopted. She also commented that due to the upcoming rollout of the agency’s FedNow Service in July (covered by InfoBytes here), real-time retail payments will happen without the introduction of a CBDC. With respect to privacy, Bowman cautioned that any CBDC “must ensure consumer data privacy protections embedded in today’s payment systems continue and are extended into future systems.” She added that “[i]n thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested.”
CFPB looks to increase card competition
On April 17, CFPB Director Rohit Chopra said the Bureau is focused on finding ways to increase competition and reduce costs as credit card debt continues to rise and interest rates increase. Chopra discussed a proposal announced in February (comments are due May 3), which would ensure that late fees on credit cards accounts are “reasonable and proportional” to late payments as required under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (covered by InfoBytes here). He also discussed updates made in March to the Bureau’s terms of credit card plans (TCCP) survey and database, which are intended to help consumers comparison shop for credit cards and find the best interest rates and products (covered by InfoBytes here). The refreshed TCCP survey allows issuers to voluntarily submit information about their credit card products and requires the top 25 credit card issuers to provide information on all their credit cards instead of just their most popular products, Chopra explained, stating that the initiative is designed to help smaller credit card issuers reach comparison shoppers and compete with bigger players in the market. Chopra also touched upon other initiatives, such as an ongoing review of the consumer credit card market and an examination focusing on large credit card issuers’ suppression of key data from consumer credit reports.
FHFA rule targets GSE eligibility in colonias
On April 12, FHFA published a final rule amending its Enterprise Duty to Serve Underserved Markets regulation. The final rule, which was adopted without change from the proposed rule issued last year (covered by InfoBytes here), allows Fannie Mae and Freddie Mac (GSE) activities in all colonia census tracts to be eligible for Duty to Serve credit. Specifically, the amendment adds a “colonia census tract” definition to serve as a census tract-based proxy for a “colonia” (as generally applied to “unincorporated communities along the U.S.-Mexico border in California, Arizona, New Mexico, and Texas that are characterized by high poverty rates and substandard living conditions”). The final rule also amends the “high-needs rural region” definition by substituting “colonia census tract” for “colonia,” and revises the definition of “rural area” to include all colonia census tracts regardless of their location, in order to make GSE activities in all colonia census tracts eligible for duty to serve credit. The final rule takes effect July 1.
FDIC announces California and Tennessee disaster relief
On April 13, the FDIC issued FIL-15-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of California affected by severe winter storms, straight-line winds, flooding, landslides, and mudslides that began February 21 and continue to affect the region. 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 instructs institutions to contact the San Francisco Regional Office for consideration. The same day, the FDIC issued FIL-16-2023 to provide similar regulatory relief to financial institutions and help facilitate recovery in areas of Tennessee affected by severe storms, straight-line winds, and tornadoes between March 31 and April 1.
3rd Circuit: Card renewal notices not subject to TILA itemization requirements
On April 11, the U.S. Court of Appeals for the Third Circuit upheld the dismissal of a putative class action suit claiming a national bank’s failure to itemize fees in its credit card renewal notices violated TILA and Regulation Z. Plaintiff alleged that his 2019 card renewal notice listed the annual membership fee as $525, but did not separate the fee into itemized amounts: $450 for the primary cardholder and $75 for an additional authorized user. Stating that the annual membership fee later appeared in his 2020 renewal notice as two separate fees, he claimed that he would have only paid the $450 fee for his own card if he had known it was an option in 2019. Plaintiff sued claiming the 2019 renewal notice violated TILA and Regulation Z, which require creditors to make disclosures before and during a creditor-borrower relationship, including the existence of any annual and periodic fees. The district court rejected the bank’s argument that the plaintiff lacked standing after finding that he suffered an economic injury by paying the full $525. However, the court granted the bank’s motion to dismiss after determining that the plaintiff failed to allege a TILA violation because neither the statute nor its implementing regulation expressly require banks to itemize fees in a renewal notice.
On appeal, the 3rd Circuit issued a precedential opinion finding that while the plaintiff had standing, he failed to plead an actual TILA violation. “While there is an itemization requirement in the statutes and regulations governing periodic disclosures,” the court clarified that “the same requirement is not included in the statutes and regulations applicable to renewal notices.” The 3rd Circuit stated that “[r]enewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship,” explaining that because “the creditor does not yet know whether the consumer will add an authorized user to the account” during the solicitation or application period, it “must disclose ‘optional’ additional card fees.” However, during the account renewal stage, TILA and Regulation Z only require creditors to “disclose terms ‘that would apply if the account were renewed.’”
Credit reporter must face FCRA suit on hard-inquiry reinvestigation
On April 10, the U.S. District Court for the Eastern District of Pennsylvania denied a credit reporting agency’s (CRA) motion for summary judgment in a certified class action suit accusing the CRA of willfully violating the reinvestigation provision in the FCRA. Plaintiff claimed that he disputed an alleged inaccurate hard inquiry on his credit report, and argued that not only did the CRA fail to remove the hard inquiry from his credit file, he was given a sales pitch for an identity theft product. The CRA conceded that it did not reinvestigate the dispute and argued, among other things, “that hard inquiries do not necessarily decrease a consumer’s credit score and, even if they did, such diminutions do not necessarily result in the denial of credit.” Experts for both parties debated the extent to which a hard inquiry affects a consumer’s credit score.
The court disagreed with the CRA’s position concerning the impact of hard inquiries on consumers’ credit scores, noting the conflict with federal regulators’ cautionary advice that “[t]hese inquiries will impact your credit score because most scoring models look at how recently and how frequently you apply for credit.” Moreover, the CRA’s own expert opined that hard inquiries usually do have a “minor impact” on consumers’ credit scores. Additionally, the court rejected the CRA’s argument that it did not willfully violate the FCRA because its process for handing hard-inquiry disputes was in line with industry-wide practices. The court cited Third Circuit precedent requiring CRAs to reinvestigate any information a consumer claims is inaccurate if the CRA does not deem the information frivolous or chooses not to delete it from the customer’s file. “When industry practices are contradicted by clear statutory language and case law giving force to that language, common practice does not save a defendant from a finding of willfulness,” the court wrote. With respect to the decertification request, the court said class members established that the time and resources spent trying to resolve disputes over inaccurate hard inquiries, and their lowered credit scores, amounted to concrete injury that can be fairly traceable to the CRA’s statutory violation.
The court denied summary judgment for two reasons. First, the court did not find that the CRA’s actions were “objectively reasonable” based on the CRA’s reliance on a “contorted and inconsistent” reading of the FCRA and its interpretation of § 1681i (which “requires a reasonable reinvestigation when consumers raise a dispute of inaccuracy”). The court also denied summary judgment “[b]ecause a jury could find that [the CRA’s] blanket policy of refusing to reinvestigate disputes of hard inquiries is not reasonable under the law.”
Divided 4th Circuit: Including GAP coverage does not eliminate auto loan exemption from MLA
On April 12, a split U.S. Court of Appeals for the Fourth Circuit held that loans borrowed in part to finance the purchase of a car are not governed by the Military Lending Act (MLA), even when the loan covers additional related costs. While the MLA’s requirements apply to the extension of consumer credit to covered members, loans procured “for the express purpose of financing” the purchase of a car (and are secured by the car) are excluded from many of the statute’s protections. Plaintiff purchased a car with an auto loan that included guaranteed asset protection coverage (GAP). The plaintiff then filed a putative class action against the defendant claiming the loan violated the MLA because it mandated arbitration (which is prohibited under the MLA) and failed to disclose certain information. The plaintiff argued that the loan should be protected under the MLA because part of his “bundled” loan went to GAP coverage. The district court disagreed and dismissed the case, ruling that the plaintiff’s contract was exempt from the MLA because GAP coverage and other add-on charges were “inextricably tied” to his purchase of the car.
On appeal, the majority concluded that loan, which was used for both an MLA-exempt and non-exempt purpose, can be treated together under the statute, because “[i]f a loan finances a car and related costs, then it is for the express purpose of financing the car purchase and the exception can apply.” The key issue was how to interpret the MLA exception that covers loans made for the “express purpose” of financing a car. “If that phrase, as used in the [MLA], means merely ‘for the specific purpose,’ [the defendant] wins. If it means ‘for the sole purpose,’ [plaintiff] wins,” the majority wrote. “We do not care and we do not ask” if the loan also financed GAP coverage, provided the loan was made for the specific purpose of financing a car, the court said, explaining that the loan is exempted from the MLA, “no matter what else it financed.”
The dissenting judge warned that the majority’s conclusion undermines the purpose of the MLA. “There is no reason to suspect that Congress regulated the marketing of financial products to service members, only to allow them to be smuggled in through a vehicle-loan back door,” the dissenting judge wrote, criticizing the majority’s conclusion and noting that opening up the MLA’s exception to include additional loans “permits lenders to piggyback virtually any financial product onto an exempt vehicle loan” at the expense to service members.
Notably, the CFPB, DOJ, and Department of Defense (DOD) filed an amicus brief last year on behalf of the United States in support of the plaintiff’s appeal, in which the agencies argued that the “hybrid” loan at issue must comply with the MLA. As previously covered by InfoBytes, the agencies wrote that GAP coverage “is not needed to buy a car and does not advance the purchase or use of the car.” The agencies noted that GAP coverage is identified as a “debt-related product that addresses a financial contingency arising from a total loss of the car” and that the coverage can be purchased as a standalone product. According to the brief, the plaintiff’s loan is a “hybrid loan—that is, a loan that finances a product bundle including both an exempt product (such as a car) and a distinct non-exempt product (such as optional GAP coverage),” and the district court erred in failing to interpret the MLA consistent with guidance issued in 2016 and 2017 by the DOD suggesting that such “hybrid loans” are consumer credit subject to the protections in the MLA. The 2017 guidance explained that “a credit transaction that includes financing for [GAP] insurance … would not qualify for the exception,” and the agencies argued that although the 2017 guidance was withdrawn in 2020, the “withdrawal did not offer a substantive interpretation of the statute that would alter the conclusion” that the plaintiff’s loan was not exempt from the MLA.