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Agencies reiterate illegality of appraisal discrimination
On February 14, CFPB Fair Lending Director Patrice Ficklin joined senior leaders from the FDIC, HUD, NCUA, Federal Reserve Board, DOJ, OCC, and FHFA in submitting a joint letter to The Appraisal Foundation (TAF) urging the organization to further revise its draft Ethics Rule for appraisers to include a detailed statement of federal prohibitions against discrimination under the Fair Housing Act (FHA) and ECOA.
This is the second time the agencies have raised concerns with TAF. As previously covered by InfoBytes, last February, the agencies sent a joint letter in response to a request for comments on proposed changes to the 2023 Appraisal Standards Board Ethics Rule and Advisory Opinion 16, in which they noted that while provisions prohibit an appraiser from relying on “unsupported conclusions relating to characteristics such as race, color, religion, national origin, sex, sexual orientation, gender, marital status, familial status, age, receipt of public assistance income, disability, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value,” the “provisions do not prohibit an appraiser from relying on ‘supported conclusions’ based on such characteristics and, therefore, suggest that such reliance may be permissible.” The letter noted that the federal ban on discrimination under the FHA and ECOA is not limited only to “unsupported” conclusions, and that any discussions related to potential appraisal bias should be consistent with all applicable nondiscrimination laws.
In their second letter, the agencies said that the fourth draft removed a detailed, unambiguous summary covering nondiscrimination standards under the FHA and ECOA, and instead substituted “a distinction between unethical discrimination and unlawful discrimination.” The letter expressed concerns that the term “unethical discrimination” is not well established in current law or practice, and could lead to confusion in the appraisal industry. Moreover, the letter noted that “the term ‘ethical’ discrimination, and reference to the possibility of a protected characteristic being ‘essential to the assignment and necessary for credible assignment results,’ appears to resemble the concept of ‘supported’ discrimination that the agencies previously disfavored and whose removal and replacement with a summary of the relevant law significantly improved the draft Ethics Rule.” The agencies further cautioned that “[s]uggesting that appraisers avoid ‘bias, prejudice, or stereotype’ as general norms” would grant individual appraisers wide discretion in applying these norms and likely yield inconsistent results. The agencies advised TAF to provide a thorough explanation of these legal distinctions.
States support DOE’s overhaul of IDR plans
On February 13, a coalition of state attorneys general led by California and Massachusetts submitted a letter in support of the Department of Education’s (DOE) proposed changes to income-driven repayment plans (IDR) for federal student loan borrowers. As previously covered by InfoBytes, last month the DOE announced a notice of proposed rulemaking (NPRM) designed to reduce the cost of federal student loan payments. According to the NPRM, the DOE is proposing to amend the regulations governing income-contingent repayment plans by amending the Revised Pay as You Earn (REPAYE) repayment plan, and is looking to restructure and rename the repayment plan regulations under the William D. Ford Federal Direct Loan Program, including combining the Income-Contingent Repayment and the Income-Based Repayment (IBR) plans under the umbrella term of IDR plans. The NPRM would ensure that a borrower’s balance would not grow due to accumulation of unpaid interest if the borrower otherwise makes the monthly payments, and would also establish that for individuals who borrow $12,000 or less, loan forgiveness can occur after making the equivalent of 10 years of payments. That period increases by one year for each additional $1,000 that is borrowed.
In their letter, the states expressed support for the DOE’s NPRM, but urged the department to take further steps to support struggling borrowers. The states urged the DOE to expand the scope and reach of the proposed reforms by, among other things, creating a simple path for borrowers in default to enroll in IBR or REPAYE, counting all past forbearance and repayment periods and certain deferment periods towards borrowers’ loan forgiveness, making Parent PLUS loans eligible for REPAYE, and expanding the reach of its reforms to “provide more retroactive relief” to borrowers impacted by widespread servicing errors that prevented them from enrolling in IDR. According to the letter, the DOE should also raise the discretionary income threshold to make debt more manageable for borrowers with the greatest need, eliminate the reverse amortization of IDR loan balances, shorten the period in which borrowers must make payments to receive forgiveness under REPAYE, provide viable repayment options, and automatically enroll delinquent borrowers in IDR plans before they face negative credit reporting and default, among other measures.
CFPB finds 33 percent decline in collections tradelines on credit reports
On February 14, the CFPB released a report examining debt collection credit reporting trends from 2018 to 2022. The Bureau’s report, Market Snapshot: An Update on Third-Party Debt Collections Tradelines Reporting, is based on data from the agency’s Consumer Credit Panel—a nationally representative sample of roughly five million de-identified credit records maintained by one of the three nationwide credit reporting companies. According to the report, from Q1 2018 to Q1 2022, the total number of collections tradelines on credit reports declined by 33 percent, from 261 million tradelines in 2018 to 175 million tradelines in 2022. The Bureau determined that this decline was driven by contingency-fee-based debt collectors (responsible for primarily furnishing medical collections tradelines), who furnished 38 percent fewer tradelines during this time period. The total number of unique contingency-fee-based debt collectors also declined by 18 percent (from 815 to 672).
In a related blog post, the Bureau estimated that while medical collections tradelines declined by 37 percent between 2018 and 2022, these tradelines still constitute a majority (57 percent) of all collections on consumer credit reports. The Bureau explained that the “decline may be partly explained by structural dysfunctions in medical billing and collections, which increase the risk that debt collectors will not meet their legal obligations” and can result in false and inaccurate information. The Bureau said it will continue to closely examine medical billing and collection practices and highlighted a bulletin published in January 2022, which reminded debt collectors and credit reporting agencies of their legal obligations under the FDCPA and the FCRA when collecting, furnishing information about, and reporting medical debts covered by the No Surprises Act. (Covered by InfoBytes here.)
FTC provides 2022 ECOA summary to CFPB
On February 9, the FTC announced it recently provided the CFPB with its annual summary of activities related to ECOA enforcement, focusing specifically on the Commission’s activities with respect to Regulation B. The summary discussed, among other things, the following FTC enforcement, research, and policy development initiatives:
- Last June, the FTC released a report to Congress discussing the use of artificial intelligence (AI), and warning policymakers to use caution when relying on AI to combat the spread of harmful online conduct. The report also raised concerns that AI tools can be biased, discriminatory, or inaccurate, could rely on invasive forms of surveillance, and may harm marginalized communities. (Covered by InfoBytes here.)
- The FTC continued to participate in the Interagency Task Force on Fair Lending, along with the CFPB, DOJ, HUD, and federal banking regulatory agencies. The Commission also continued its participation in the Interagency Fair Lending Methodologies Working Group to “coordinate and share information on analytical methodologies used in enforcement of and supervision for compliance with fair lending laws, including the ECOA.”
- The FTC initiated an enforcement action last April against an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. In October, the FTC initiated a second action against a different auto dealer group and two of its officers for allegedly engaging in deceptive advertising and pricing practices and discriminatory and unfair financing. (Covered by InfoBytes here and here.)
- The FTC engaged in consumer and business education on fair lending issues, and reiterated that credit discrimination is illegal under federal law for banks, credit unions, mortgage companies, retailers, and companies that extend credit. The FTC also issued consumer alerts discussing enforcement actions involving racial discrimination and disparate impact, as well as agency initiatives centered around racial equity and economic equality.
CFPB reports drop in overdraft/NSF revenue from pre-pandemic levels
On February 7, the CFPB published a “Data Spotlight” reporting that bank overdraft/non-sufficient fund (NSF) fee revenue has declined significantly compared to pre-pandemic levels. According to the Bureau, recent analysis found that overdraft/NSF fee revenue (i) was 43 percent lower in the third quarter of 2022 than in the third quarter of 2019 (representing a suggested decrease of $5.1 billion in fees on an annualized basis); (ii) was 33 percent lower over the first three quarters of 2022 when compared to the same period in 2019; and (iii) has declined each quarter since the fourth quarter of 2021. The report presented snapshots of overdraft/NSF fee revenue by quarter between Q1 2019 and Q3 2022, and discussed changes in banks’ consumer deposit account revenue from other listed fees. The Bureau observed that there has been a lack of correlating increases in other listed checking account fees, which may suggest that banks are not replacing overdraft/NSF fee revenue with other checking account fees such as periodic maintenance fees and ATM fees. The Bureau noted that it will continue to monitor overdraft/NSF fees and said it is considering related rulemaking activities. The agency announced it also intends to track other listed account fees to determine whether and to what extent these fees may be creating barriers to account access.
Barr says AI should not create racial disparities in lending
On February 7, Federal Reserve Board Vice Chair for Supervision, Michael S. Barr, delivered remarks during the “Banking on Financial Inclusion” conference, where he warned financial institutions to make sure that using artificial intelligence (AI) and algorithms does not create racial disparities in lending decisions. Banks “should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models,” Barr said, pointing to findings that show “significant and troubling disparities in lending outcomes for Black individuals and businesses relative to others.” He commented that “[w]hile research suggests that progress has been made in addressing racial discrimination in mortgage lending, regulators continue to find evidence of redlining and pricing discrimination in mortgage lending at individual institutions.” Studies have also found persistent discrimination in other markets, including auto lending and lending to Black-owned businesses. Barr further commented that despite significant progress over the past 25 years in expanding access to banking services, a recent FDIC survey found that the unbanked rate for Black households was 11.3 percent as compared to 2.1 percent for White households.
Barr suggested several measures for addressing these issues and eradicating discrimination. Banks should actively analyze data to identify where racial disparities occur, conduct on-the-ground testing to identify discriminatory practices, and review AI or other algorithms used in making lending decisions, Barr advised. Banks should also devote resources to stamp out unfair, abusive, or illegal practices, and find opportunities to support and invest in low- and moderate-income (LMI) communities, small businesses, and community infrastructure. Meanwhile, regulators have a clear responsibility to use their supervisory and enforcement tools to make sure banks resolve consumer protection weaknesses, Barr said, adding that regulators should also ensure that rules provide appropriate incentives for banks to invest in LMI communities and lend to such households.
11th Circuit advances TILA suit weighing agency theory of liability
On February 6, the U.S. Court of Appeals for the Eleventh Circuit reversed a district court’s finding of summary judgment in favor of a financing company concerning alleged violations of TILA. The plaintiff agreed to purchase air conditioning repairs by taking out a loan with a company that finances home-improvement loans for heating and air conditioning products. According to the plaintiff, the repair company lied about the price of the loan and prevented him from viewing the loan paperwork. The plaintiff sued the defendants for violations of TILA and various state consumer protection laws, claiming he was not provided certain required disclosures and maintaining that had he received the disclosures he would not have accepted the loan. The plaintiff eventually decided to cancel the order before the work was commenced and was told he would have to contact the financing company to cancel the loan. The plaintiff was not released from the unpaid loan for work that never happened, and the negative payment history was reported to the credit bureaus.
The financing company argued that the plaintiff’s injuries are not traceable to the disclosure paperwork because the repair company never showed him the paperwork. The plaintiff countered that the repair company was not independent of the financing company because it was acting as the financing company’s agency. Under the “agency theory of liability,” the plaintiff argued that the financing company is liable under TILA for the repair company’s failure to provide the required disclosures. The district court ruled, however that the plaintiff lacked standing based on the finding that his injuries were not traceable to the financing company’s TILA violation, and that the plaintiff had not alleged that the repair company was acting as the financing company’s agent to provide the required disclosures.
On appeal, the 11th Circuit concluded that the plaintiff had standing to raise his agency-based TILA claim against the financing company. As a threshold matter, the appellate court first recognized that the plaintiff suffered a concrete injury (e.g., time spent disputing his debt; the impact on his credit; money spent sending documents to his attorney; and feelings of anxiousness), noting that injury and traceability were separate analyses. With respect to traceability, the appellate court next reviewed whether there was “a causal connection” between the plaintiff’s injuries and the challenged action of the financing company. The 11th Circuit accepted one theory of traceability—a theory of agency. “TILA liability attaches not only to the provision of incorrect disclosures, but also to the failure to provide any disclosures at all,” the appellate court explained, stating that in this case, the plaintiff argued that the repair company was acting as an agent of the financing company for the purpose of providing the disclosures. While expressing no opinion on the merits of the claim, the 11th Circuit concluded that the plaintiff had adequately pled that the financing company contracted with the repair company “who at all times acted as its agent” and that the financing company “is vicariously liable for the harms and losses” caused by the repair company’s misconduct by virtue of this agency relationship.
Special Alert: CFPB’s RESPA advisory addresses online mortgage-comparison platforms
The Consumer Financial Protection Bureau (CFPB) issued guidance yesterday making clear that those who operate or participate in online mortgage-comparison shopping platforms will be closely scrutinized for compliance with the prohibition on payments for referrals to mortgage lenders. “Companies operating these digital platforms appear to shoppers as if they provide objective lender comparisons, but may illegally refer people to only those lenders paying referral fees,” the agency said. Here’s what you need to know:
What happened?
The CFPB issued an Advisory Opinion on how the Real Estate Settlement Procedures Act (RESPA) applies to online mortgage-comparison platforms. The agency said platform operators violate RESPA “when they steer shoppers to lenders by using pay-to-play tactics rather than providing shoppers with comprehensive and objective information.” Specifically, the agency said operators receive a prohibited referral fee when they use or present information in a way that steers consumers to mortgage lenders in exchange for a payment or something else of value.
Bipartisan Senate legislation would offer stronger ISA protections
On January 31, Senators Mark Warner (D-VA), Todd Young (R-IN), Marco Rubio (R-FL), and Chris Coons (D-DE) reintroduced legislation to strengthen protections for students who enter into income share agreements (ISAs). The senators explained that ISAs are an innovative way for students to finance postsecondary education and serve as an alternative to high-interest student loans. Under an ISA, students agree to pay a percentage of their income over an agreed upon time period in exchange for tuition payments from nongovernmental sources. When the time period ends, students stop payments regardless of whether they have paid back the full amount.
The ISA Student Protection Act of 2023 would, among other things, (i) prevent ISA providers from requiring payments higher than 20 percent of a student’s income; (ii) exempt students from making payments towards their ISA should their income fall below an affordability threshold; (iii) establish a maximum number of payments and limit payment obligations to the end of a fixed window; (iv) set a minimum number of voluntary payment relief pauses; (v) require ISA providers to give detailed payment disclosures to students who may be considering entering into an ISA (including how payments under an ISA compare to payments under a comparable loan); (vi) provide strong bankruptcy protections for students who enter into an ISA “by omitting the higher ‘undue hardship’ standard for discharge required under private loans”; (vii) prevent funders from accelerating defaulted ISAs; (viii) ensure that ISA obligations end in the event of death or total and permanent disability; (ix) ensure that ISAs fall under federal consumer protection laws, including the FCRA, FDCPA, MLA, SCRA, and ECOA; (x) grant regulatory authority over ISAs to the CFPB; and (xi) clarify how ISA contributions should be treated for tax purposes for both funders and recipients.
New York FY 2024 budget proposes to end unfair overdraft practices
On February 1, the New York governor released the state’s FY 2024 budget proposal, which includes measures for ending certain bank overdraft and insufficient fee practices. Specifically, the proposed legislation would amend section 9-y of the banking law to grant authority to the NYDFS superintendent to promulgate regulations related to (i) supervised banking organizations’ transaction processing practices; (ii) the charges (including overdraft and insufficient funds fees) that banks may impose in connection with dishonored transactions; and (iii) associated disclosures provided to consumers regarding how transactions are processed and any associated fees. In an accompanying budget briefing book, the governor said the proposed measures are part of “nation-leading legislation that comprehensively addresses abusive bank fee practices, which tend to disproportionally harm low- and moderate-income New Yorkers.” Proposed actions include “stopping the opportunistic sequencing of transactions in a way designed to maximize fees charged to consumers, ending other unfair overdraft and non-sufficient funds fee practices, and ensuring clear disclosures and alerts of any permissible bank processing charges.”