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District Court: Failure to investigate duplicate reporting dispute could violate the FCRA
On March 10, the U.S. District Court for the Southern District of Illinois ruled a defendant credit union failed to properly report an individual’s debt to a consumer reporting agency or investigate his dispute. Plaintiff obtained a credit card from the defendant but fell behind on his payments. After his account was later sent to a third-party collection agency, the plaintiff obtained a copy of his credit report where he noticed that his credit card debt was listed twice—once as a “individual” and “revolving” account with a balance of $10,145, and another time as an “open” collections account with a different balance. Plaintiff sent identical dispute letters to the three major credit reporting agencies (CRAs), acknowledging the delinquent credit card but expressing confusion as to why the account was listed twice. He submitted additional similar disputes with the CRAs, claiming that the error caused him to be denied the opportunity to rent an apartment and made it difficult for him to obtain a mortgage. During discovery, two corporate witnesses testified on behalf of the defendant—one of whom is responsible for reviewing consumer credit disputes and verified the information being reported was accurate. A second witness also testified that while the defendant understood that the plaintiff was alleging inaccuracies due to the debt being reported twice, it chose to focus its investigation on verifying that the information in the plaintiff’s credit report matched the information in its internal system.
In denying the defendant’s motion for summary judgment, the court noted that while the U.S. Court of Appeals for the Seventh Circuit “has not decided whether double-reporting of a single debt on a credit report is an FCRA violation, district courts across the country have found that whether the practice is misleading and violates the FCRA is an issue of fact.” The court explained that an issue of fact exists as to whether double reporting the debt created a misleading impression that the plaintiff has two separate debts totaling $22,000 rather than a single debt of roughly $10,000. Moreover, even though the plaintiff’s dispute contained the message “duplicate,” the defendant did not address this issue nor did it request that a change be made to the plaintiff’s credit report. “A jury could reasonably conclude [] that [defendant’s] investigation was inadequate under the FCRA,” the court wrote. “[W]hether [defendant’s] investigation or protocol may qualify as a willful violation giving rise to statutory or punitive damages is an issue for a jury as well.”
DOJ, CFPB: Lenders that rely on discriminatory appraisals violate the FHA and ECOA
On March 13, the DOJ and CFPB filed a statement of interest saying that a “lender violates both the [Fair Housing Act (FHA)] and ECOA if it relies on an appraisal that it knows or should know to be discriminatory.” (See also CFPB blog post here.) Pointing out that the case raises important legal questions regarding the issue of appraisal bias, the agencies explained that the DOJ has enforcement authority under both the FHA and ECOA, and the Bureau has authority to interpret and issue rules under ECOA and enforce the statute’s requirements.
The case, which is currently pending in the U.S. District Court for the District of Maryland, concerns whether an appraiser, a real estate appraisal company, and an online mortgage lender (collectively, “defendants”) violated federal and state law by undervaluing plaintiffs’ home on the basis of race and denying a mortgage refinancing application based on the appraisal. Plaintiffs, who are Black, claimed their home was appraised for a lower amount on the basis of race, and maintained that the lender denied their loan even after being told the appraisal was discriminatory. Additionally, plaintiffs claimed that after they replaced family photos with pictures of white people and had a white colleague meet a new appraiser, that appraiser appraised the house for $750,000—a nearly 60 percent increase despite there not being any significant improvements made to the house or meaningful appreciation in the value of comparable homes in the market.
The defendant appraiser filed a counterclaim against the plaintiffs providing technical arguments for why he valued the home at $472,000, including that the property next door was listed for $500,000, but was later reduced to $475,000, only 10 days after he completed the appraisal. He further claimed that the second appraisal failed to include that property as a comparison and relied on home sales that had not happened as of the time of the first appraisal. The lender argued that it should not be held liable because it was relying on a third-party appraiser and that “it can be liable only if it took discriminatory actions that were entirely separate from [the appraiser’s].”
While the statement does not address the issue of vicarious liability, the DOJ and CFPB asserted that lenders can be held liable under the FHA and ECOA for relying on discriminatory appraisals. They explained that it is “well-established that a lender is liable if it relies on an appraisal that it knows or should know to be discriminatory.” The statement also provided that for disparate treatment claims under the FHA and ECOA, “plaintiffs need only plead facts that plausibly allege discriminatory intent.” The agencies also argued that a violation of Section 3617 of the FHA (which includes “a prohibition against retaliating in response to the exercise of fair housing rights”) “does not require a ‘predicate violation’ of the FHA.
FHFA delays effective date of DTI ratio-based fee
On March 15, FHFA delayed the implementation of a new debt-to-income ratio-based fee to August 1, in order to ensure lenders have sufficient time to prepare. In January, FHFA made several changes relating to upfront fees for certain borrowers with debt-to-income (DTI) ratios above 40 percent. The updated and recalibrated pricing grids also include the upfront fee eliminations announced last October to increase pricing support for purchase borrowers limited by income or by wealth, FHFA said. The agency made the decision to delay the effective date by three months based on feedback from mortgage industry stakeholders who raised concerns about the operational challenges of implementing the DTI ratio-based fee. FHFA also confirmed that “lenders will not be subject to post-purchase price adjustments related to this DTI ratio-based fee for loans acquired by [Fannie Mae and Freddie Mac] between August 1, 2023, and December 31, 2023.” The agency explained that this temporary exception “will not alter any other quality control review decisions by [Fannie Mae and Freddie Mac].”
CFPB scrutinizes discharged private student loan billing and collection practices
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.
CFPB issues 2023 HMDA institutional and transactional coverage charts
On March 15, the CFPB released the 2023 HMDA institutional and transactional coverage charts. The charts update the reporting thresholds for transactions that involve a closed-end mortgage loan, pursuant to an order issued last September by the U.S. District Court for the District of Columbia in National Community Reinvestment Coalition v. CFPB. (Covered by InfoBytes here.) As previously covered by InfoBytes, in 2020 the CFPB issued a final rule, which amended Regulation C and permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200.
The 2023 HMDA Institutional Coverage Chart outlines criteria for determining whether an institution is covered by Regulation C. Additionally, the 2023 HMDA Transactional Coverage Chart explains that under HMDA/Regulation C, a transaction is reportable only if it is an application for, an origination of, or a purchase of a covered loan. The chart explains how to determine whether a transaction involves a covered loan and whether it meets the applicable loan-volume thresholds.
CFPB seeks input on data broker businesses
On March 15, the CFPB issued a Request for Information (RFI) seeking public input on data broker business practices in order to inform planned rulemaking under the FCRA and help the agency understand the current state of the industry. “Modern data surveillance practices have allowed companies to hover over our digital lives and monetize our most sensitive data,” CFPB Director Rohit Chopra said in the announcement. He added, “[o]ur inquiry will inform whether rules under the [FCRA] reflect these market realities.” The Bureau explained that the FCRA—which covers data brokers such as credit reporting companies and background screening firms, as well as parties who report information to these firms—provides several protections, including accuracy standards, dispute rights, and restrictions on how data can be used. The RFI seeks feedback on business models and practices used by the data broker market, including information about the types of data being collected and sold and the sources data brokers rely upon. In particular, the Bureau seeks information on consumer harm and market abuses, and wants to understand “whether companies using these new business models are covered by the FCRA, given the FCRA’s broad definitions of ‘consumer report’ and ‘consumer reporting agency.’” The Bureau stated it is also interested in learning about consumers’ direct experiences with data brokers, including when consumers try to remove, correct, or regain control of their data. Comments on the RFI are due by June 13.
CFPB receives FCRA rulemaking petition on debt collection
On March 3, the CFPB received a rulemaking petition from the National Consumer Law Center (NCLC) in response to forthcoming FCRA rulemaking announced in the Bureau’s Fall 2022 regulatory agenda. As previously covered by InfoBytes, the Bureau announced it is considering pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. In January, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). At the time, CFPB Director Rohit Chopra said that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.” (Covered by InfoBytes here.)
The NCLC presented several issues for consideration in the FCRA rulemaking process, including that the Bureau should (i) “establish strict requirements to regulate the furnishing of information regarding a debt in collections by third-party debt collectors and debt buyers”; (ii) “require translation of consumer reports by the [CRAs] into the eight languages most frequently used by limited English proficient consumers”; and (iii) “establish an Office of Ombudsperson to assist consumers who have been unable to fix errors in their consumer reports from the nationwide CRAs and other CRAs within the CFPB’s supervisory authority.”
“Given the level of errors, problems, and abuses by debt collectors in furnishing and resolving disputes, requiring an original creditor tradeline is a reasonable quality control mechanism,” the NCLC said. “Alternatively, if the CFPB continues to permit the furnishing of debt collection information without a pre-existing tradeline by the original creditor, the Bureau should require that the furnisher of debt collection activity (whether a debt collector, debt buyer, servicer or other) provide a complete account history in the tradeline, including positive payments,” the petition added, stressing that “such reporting must require adequate substantiation[.]”
House subcommittee discusses CFPB reform proposals
On March 9, the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy held a hearing to discuss proposals that would alter the structure and authority of the CFPB. The subcommittee heard from several witnesses, including the CEO of the American Financial Services Association (AFSA), the Bureau’s former deputy director, and the Minnesota attorney general.
During the hearing, members discussed legislation that would reform the Bureau, including: (i) the Consumer Financial Protection Commission Act, which would make the Bureau an independent commission; (ii) the Transparency in CFPB Cost-Benefit Analysis Act, which would require the Bureau to include a statement justifying any proposed rulemaking (including “why the private market, State, local, or tribal authorities cannot adequately address the problem”), as well as provide qualitative and quantitative cost assessments and data or studies used in preparing a proposal; (iii) the CFPB-IG Reform Act, which would create a separate inspector general for the Bureau; and (iv) the Taking Account of Bureaucrats’ Spending (TABS) Act, which would make the Bureau an independent agency from the Federal Reserve System called the “Consumer Financial Empowerment Agency” that would be funded through congressional appropriations rather than the Fed.
In his prepared testimony, the AFSA CEO alleged several examples of regulatory overreach taken by the Bureau, including: (i) imposing limits on arbitration, despite the Bureau’s own finding that arbitration benefits consumers; (ii) releasing guidance, instead of legislative rulemaking, which creates ambiguity for companies and consumers; (iii) using “regulation by enforcement” to change TILA and creating an ability to repay standard that does not exist in any consumer financial law or regulation; (iv) issuing press releases that serve as regulations and provide recommendations inconsistent with the plain language of laws such as the SCRA; and (v) creating potential harm to servicemembers through misinterpretations of the Military Lending Act. He further explained that a press release issued by the Bureau last year on junk fees (covered by InfoBytes here) “goes beyond its authority” and creates confusion for both depository institutions and finance companies who are unsure what the rules are. He emphasized that “the best way to protect consumer is to protect access to credit,” and the best method for achieving this “is to have clearly defined terms and conditions that both industry and the regulatory community can understand and follow.”
The former CFPB deputy director also asserted in his prepared testimony that the agency is prone to exceeding statutory limits or requirements. He commented that “[w]hile one or two of these actions could perhaps be dismissed as over-exuberance, the frequency with which these issues arise suggests that the agency lacks adequate internal or external controls to ensure it operates within the law,” and that in “the absence of these controls . . . [it] compels the conclusion that the CFPB is ripe for reform.” He also maintained that having the Bureau go through the annual appropriations process would help the agency “focus its priorities” and “improve its effectiveness and efficiency.” He further noted that expanding the Bureau’s UDAAP authority to cover conduct it observes in the marketplace (such as applying UDAAP credit discrimination laws to any decision making by a financial institution) is “a decision fundamentally for Congress.”
The Minnesota attorney general, however, highlighted joint enforcement actions taken with the Bureau in his prepared testimony, stating that by serving “as a critical enforcement partner,” the agency is operating as Congress intended when it created the Bureau in response to the 2008 financial crisis. “The CFPB’s destruction would topple the whole system like dominos,” he stressed, adding that the funding arguments fall short as several federal agencies are not funded by Congress.
Senators Sherrod Brown (D-OH), Chair of the Senate Banking Committee, and Representative Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, issued a statement strongly disagreeing with the introduced legislation. “We will continue to work with our colleagues to stop any anti-consumer bill and protect the CFPB so that consumers can continue to have an agency solely dedicated to protecting their hard-earned money,” the lawmakers said.
HUD establishes 40-year loss-mit option
On March 8, HUD published a final rule in the Federal Register to allow mortgagees to increase the maximum term of a loan modification from 360 to 480 months for FHA-insured mortgages after a borrower defaults. HUD explained that “[i]ncreasing the maximum term limit will allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” The change also aligns FHA with modifications made available to borrowers with mortgages backed by Fannie Mae and Freddie Mac, both of which provide a 40-year loan modification option. HUD considered public comments in response to a proposed rule published last April (covered by InfoBytes here), and noted that commenters said a 40-year loan modification option would provide significant relief to struggling borrowers. Concurrently, HUD published Mortgagee Letter 2023-06 to establish the standalone 40-year loan modification policy. The final rule is effective May 8.
Biden administration urges states to join fee crack down
On March 8, the Biden administration convened a gathering of state legislative leaders to hold discussions about so-called “junk fees”—described as the “unnecessary, unavoidable, or surprise charges” that obscure true prices and are often not disclosed upfront. While the announcement acknowledged actions taken by federal agencies over the past few years to crack down on these fees, the administration recognized the role states play in advancing this effort. The Guide for States: Cracking Down on Junk Fees to Lower Costs for Consumers outlined actions states can take to address these fees, and provided several examples of alleged junk fees, including hotel resort fees, debt settlement fees, event ticketing fees, rental car and car purchase fees, and cable and internet fees. The guide also highlighted “the banking industry’s excessive and unfair reliance on banking junk fees.” The administration pointed out that a number of businesses have changed their policies in response to the increased scrutiny of junk fees and said several banks have ended fees for overdraft protection. The same day, the CFPB released a new Supervisory Highlights, which focused on junk fees uncovered in deposit accounts and the auto, mortgage, student, and payday loan servicing markets (covered by InfoBytes here).
Additionally, HUD Secretary Marcia L. Fudge published an open letter to the housing industry and state and local governments, encouraging them to “limit and better disclose fees charged to renters in advance of and during tenancy.” Fudge noted that “actions should aim to promote fairness and transparency for renters while ensuring that fees charged to renters reflect the actual and legitimate costs to housing providers.”
California Attorney General Rob Bonta also issued a statement responding to the administration’s call to end junk fees. “Transparency and full disclosure in pricing are crucial for fair competition and consumer protection,” Bonta said, explaining that in February the state senate introduced legislation (see SB 478) to prohibit the practice of hiding mandatory fees.