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CFPB sues nonbank mortgage lender for alleged HMDA and CFPA violations
On October 10, the CFPB filed a lawsuit against a Florida-based nonbank mortgage originator for allegedly failing to accurately report mortgage data in violation of the Home Mortgage Disclosure Act (HMDA). According to the complaint, in 2019 the Bureau found that the lender violated HDMA by intentionally misreporting data regarding applicants’ race, ethnicity and gender from 2014-2017, which resulted in the lender paying a civil money penalty and taking corrective action. In this action, the Bureau alleges that during its supervision process, it found the lender submitted HMDA data for 2020 contained “widespread errors across multiple data fields” including 51 errors in 159 files and the lender violated a 2019 consent order condition that required it to improve its data practices. The alleged errors include (i) mistakes in inputting data concerning subordinate lien loans and acquired loans; (ii) inclusion of loans in HMDA reporting that did not meet the HMDA criteria for reportable applications; (iii) incorrect characterization of purchaser type for tens of thousands of loans; (iv) erroneous rate spread calculations, leading to errors in interconnected fields; (iv) inaccurate data related to lender credits; and (v) incorrect categorization of specific loan applications as “approved but not accepted” when they were, in fact, withdrawn, resulting in discrepancies in associated fields. Along with the HDMA violations and the violations of the 2019 consent order, the CFPB also alleges violations of the CFPA and requests that the court permanently enjoin the lender from committing future violations of HMDA, require the lender to take corrective action to prevent further violations of HMDA, injunctive relief, and the imposition of a civil money penalty.
FTC settles with bankrupt crypto company and bans asset management
On October 12, the FTC announced it has reached a settlement with a bankrupt crypto company, which will permanently ban the company from managing consumer assets. According to the federal court complaint, the FTC alleged that from at least 2018, respondent attracted customers by promising their deposits would be secure, but when the company failed, consumers lost access to significant assets, resulting in over $1 billion in cryptocurrency asset losses. The FTC alleges violations of the FTC Act and the Gramm-Leach-Bliley Act's prohibition on obtaining financial information through false statements. Respondent allegedly misled consumers by claiming their assets were safe on the platform, stating that "YOUR USD IS FDIC INSURED." However, respondent is not a bank and the deposits were not eligible for FDIC insurance. The FTC complaint also alleged that the FDIC does not insure cryptocurrency assets, and consumers' cash deposits were placed in an account held by respondent at a traditional bank. Consumers' funds were protected only if that bank failed, but their cryptocurrency was not protected at all.
The proposed settlement with respondent and its affiliates permanently bans them from offering, marketing, or promoting any product or service related to depositing, exchanging, investing, or withdrawing assets. Respondent and its affiliates have agreed to a judgment of $1.65 billion, which will be suspended to allow the bankrupt company to return its remaining assets to consumers through bankruptcy proceedings. The proposed settlement also prohibits respondent and its affiliates from managing consumer assets, misrepresenting product benefits, making false representations to obtain financial information, and disclosing nonpublic personal information without consent.
The FTC also announced that it is filing a lawsuit against the respondent’s CEO for making false claims that consumer accounts were FDIC-insured. Respondent’s CEO has not agreed to a settlement, and the FTC's case against him will proceed in federal court. “In a parallel action, on October 12, the Commodity Futures Trading Commission separately charged [respondent’s CEO] with fraud and registration failures,” the FTC added.
HUD expands access to mortgages with ADUs
On October 16, HUD introduced a new policy that aims to make it easier for borrowers to finance Accessory Dwelling Units (ADUs) in their primary residences. ADUs are small living units built inside, attached to, or on the same property as, the main home. This policy change allows lenders to consider ADU rental income when assessing a borrower's eligibility for an FHA mortgage.
The new policies provide:
- Income Flexibility: Borrowers with limited incomes can use 75% of their estimated ADU rental income to qualify for an FHA-insured mortgage for properties with existing ADUs.
- New ADUs: For new ADUs that borrowers plan to attach to an existing structure, such as a garage or basement conversion, 50% of the estimated rental income can be used for qualification under FHA's Standard 203(k) Rehabilitation Mortgage Insurance Program.
- Appraisal Requirements: The policy includes ADU-specific appraisal guidelines to accurately assess the market value of properties with ADUs, making it easier for appraisers to report on ADU characteristics and expected rental generation.
- New Construction: The policy also allows FHA mortgages to finance new homes built with ADUs, expanding ADU production beyond the rehabilitation of existing structures.
The White House concurrently released a statement on the policy, noting that it is allowing rental income from ADUs to qualify for FHA-insured mortgages. HUD added that FHA-approved lenders can start offering borrowers mortgages on properties with ADUs under the new policies effective immediately.
FDIC seeks comments on proposed and stricter governance guidelines for regional banks
On October 11, the FDIC published a request for comment on proposed corporate governance and risk management guidelines that would apply to all insured state nonmember banks, state-licensed insured branches of foreign banks, and insured state savings associations that are subject to Section 39 of the Federal Deposit Insurance Act (FDI Act), with total consolidated assets of $10 billion or more on or after the effective date of the final guidelines.
The proposed guidelines cover board of director’s obligations, composition, duties, and committee structure that must be met to meet the standard of good corporate governance. The proposed guidelines state that the board will ultimately be responsible for the affairs of the covered institution and each individual member must abide by certain legal duties. Under the proposed guidelines, the board of directors must, among other things: (i) evaluate and approve a strategic plan covering at least a three-year period; (ii) establish policies and procedures by which the covered institution operates; (iii) establish a code of ethics covering legal requirements, such as insider information, disclosure, and self-dealing; (iv) provide active oversight of management; (v) exercise independent judgement; and (vi) select and appoint qualified executive officers. Additionally, the board will be required to maintain a majority of independent directors on the board and should consider diversity of demographic representation, opinion, experience, and ownership level when choosing its board members. The proposed guidelines would also require that the board have an audit committee, a compensation committee, a trust committee (if the covered institution has trust powers), and a risk committee.
Comments must be received by the FDIC by December 11, 2023.
Chopra foreshadows expanding oversight over digital payments
On October 6, CFPB Director Rohit Chopra spoke at a digital payments event where he described the risks posed by private digital currencies and digital payments systems and provided steps that would increase the CFPB oversight so as to help protect consumers from these risks.
Chopra stated that from a consumer regulator’s perspective, it is important to safeguard against the risks of private currencies issued by nonbanks, which include the potential for sudden devaluation of the digital currency, intrusive data surveillance, censorship, private regulations that favor the issuer’s commercial interests, challenges with error resolution, and consumer fraud.
Further, Chopra shared what he believes are warranted steps to ensure that private digital dollars and payments systems do not harm consumers:
- The CFPB will issue supplemental orders to certain large technology platforms to acquire more data and information to better ascertain their business practices, especially with respect to the use of sensitive personal data and any issuance of private currencies.
- To reduce the harms of errors, hacks, and unauthorized transfers, the Bureau will explore providing additional guidance on the applicability of the Electronic Fund Transfer Act with respect to private digital dollars and other virtual currencies for consumer and retail use.
- The CFPB will use appropriate authorities to conduct supervisory examinations of nonbanks operating consumer payment platforms, including the authority over service providers to large depository institutions and the authority over large participants, which would subject nonbanks meeting a particular size threshold to CFPB supervision.
- The Bureau will publish a proposed rule regarding personal financial data rights pursuant to Section 1033 of the Consumer Financial Protection Act, which will seek to accelerate America’s shift to open, competitive, and decentralized banking, while also seeking to safeguard against misuse of personal financial data.
Additionally, Chopra stated the Financial Stability Oversight Council should consider exercising its authority under Title VIII of the Dodd-Frank Act to designate activity as, or as likely to become, a systemically important payment, clearing, or settlement activity so as to provide other agencies with critical oversight and tools to ensure that a stablecoin is actually stable.
Congressional Democrats urge White House to make AI principles mandatory
On October 12, a coalition of more than two dozen Democratic senators and House members urged President Biden to make any anticipated executive order on how the federal government handles artificial intelligence (AI) technology binding on the federal government and those who receive federal funds, and not a mere statement of principles. “By turning the AI Bill of Rights from a non-binding statement of principles into federal policy, your administration would send a clear message to both private actors and federal regulators: AI systems must be developed with guardrails,” the Democrat’s letter states. Additionally, these legislators asked the president to incorporate the White House Blueprint for an AI Bill of Rights, a voluntary roadmap that identifies five principles intended to guide both the government’s and private companies’ design, use and deployment of automated systems fueled by AI (covered by InfoBytes here).
CFPB reports decline in NSF fees by depository financial institutions, saving consumers billions
On October 11, the CFPB’s Offices of Consumer Populations and Markets announced that through its analysis of a number of depository financial institutions it had determined that the imposition of non-sufficient fund (NSF) fee by these entities were on the decline, saving an estimated $2 billion annually for consumers going forward. Specifically, the CFPB determined that “[n]early two-thirds of banks with over $10 billion in assets have eliminated NSF fees,” “[n]early three-fourths of the banks that earned the most in overdraft/NSF fee revenue in 2021, including 27 of the top 30 earners, have eliminated NSF fees” and “[a]mong credit unions with over $10 billion in assets, 16 of 20 continue to charge NSF fees, including four of the five largest.” It was ultimately determined larger banks have been more likely to eliminate NSF fees. Based on the CFPB’s estimates, for banks “with over $10 billion in assets, 97% of NSF fee revenue has been eliminated.”
Automotive management company settles with DOJ to resolve False Claims Act allegations
On October 11, an automotive management company settled claims by the Department of Justice alleging that the company had violated the False Claims Act by knowingly providing false information in support of its Paycheck Protection Program (PPP) loan forgiveness application.
According to the DOJ’s allegations, the automotive management company certified it was a small business with fewer than 500 employees when in fact it shared common operational control with dozens of automobile dealerships with more than 3,000 employees in total.
CFPB issues guidance on “excessive” account information fees, returns $140 million to consumers
On October 11, the CFPB issued an advisory opinion concerning consumers’ requests for information regarding their accounts with large banks and credit unions (financial institutions). According to the Bureau, Section 1034(c) of the Consumer Financial Protection Act (the “law”) requires insured depository institutions that offer consumer financial products or services and that have total assets of more than $10 billion, as well as their affiliates, to “comply in a timely manner with consumer requests for information concerning their accounts for consumer financial products and services, subject to limited exceptions.” The advisory opinion includes the following guidance and interpretations:
- Requirements of the law apply even if a customer does not expressively invoke the law.
- Requirements of the law apply to consumer requests for information including information that appears on periodic statements or in online portals including: (i) the amount of the balance in a deposit account; (ii) the interest rate on a loan or credit card; (iii) individual transactions or payments; (iv) bill payments; (vi) recurring transactions; (vii) terms and conditions; and (viii) fee schedules.
- The term “supporting written documentation” in the law requires financial institutions to provide, upon request, “written documents that will substantiate information provided in response to consumer questions, or that will assist consumers with understanding or verifying information regarding their accounts.”
- Financial institutions must provide account information and documentation that is in their “control” and “possession.” This excludes (i) confidential commercial information; (ii) information collected to prevent fraud or money laundering or detecting or making any report regarding unlawful conduct; (iii) information required by law to be kept as confidential; and (iv) supervisory information and nonpublic information.
- The law does not contain language stating or suggesting that financial institutions cannot impose unreasonable conditions on consumer information, but there is no reason Congress intended for the law to allow financial institutions to do so. Generally, the Bureau believes requiring fees and obstacles that impede a consumer’s ability to access their rights granted by the law is a violation of the provision. A financial institution could violate this law by imposing “excessively long wait times to make a request to a customer service representative, requiring consumers to submit the same request multiple times, requiring consumers to interact with a chatbot that does not understand or adequately respond to consumers’ requests, or directing consumers to obtain information that the institution possesses from a third party instead,” among other things.
- There is no fixed time limit for an institution to respond to a consumer’s request, but the CFPB does not view the timing requirements of this law to differ from the timing requirements of other applicable federal laws or regulations.
- Responses must provide all information requested accurately to be considered compliant.
CFPB Director Rohit Chopra delivered remarks on a press call, in which he emphasized that the Bureau’s investigations have uncovered many examples of junk fee-related misconduct by large financial institutions. He reminded consumers that financial institutions should not charge them excessive fees when trying to manage their finances. “Congress passed a law a decade ago requiring heightened customer service standards," said Chopra. "To date, this law has not been enforced. We are changing that.” Chopra also announced that later this month, the CFPB will propose rules to create more competition in banking to make switching financial institutions for better rates and less junk fees, more accessible.
The CFPB additionally issued the results of its recent oversight inspections of major financial institutions, which resulted in financial institutions refunding $140 million in junk fees, $120 million of which were for “surprise overdraft fees and double-dipping on non-sufficient funds fees.”
FTC announces second request for public comment on rule to ban “junk fees”
On October 11, the FTC released a notice of proposed rulemaking meant to prohibit unfair and deceptive, costly fees, also known as “junk fees.” After announcing its Advance Notice of Proposed Rulemaking last year (covered by InfoBytes here), and after considering more than 12,000 public comments, the FTC determined that some businesses misrepresent overall costs by omitting mandatory fees from advertised prices until consumers are “well into completing the transaction,” and fail to adequately explain the nature and amount of fees. The Commission is seeking another round of comments for its proposed rule, which, for any entity that “offers goods or services” to consumers, would prohibit:
- Offering, displaying, or advertising an amount a consumer may pay without “clearly and conspicuously” disclosing the “total price,” which must be displayed “more prominently than any other pricing information.”
- Misrepresenting “the nature and purpose of any amount a consumer may pay.”
- Disclosing “any other pricing information” besides the total price “more prominently” than disclosures of the total price in an “offer, display, or advertisement.”
The proposed rule would also grant the FTC more robust enforcement authority to seek refunds for harmed consumers and impose monetary penalties of up to $50,120 per violation. The proposed rule also requires businesses to include any mandatory costs for ancillary goods or services in their price disclosures.
The FTC is working alongside the CFPB, OCC, FCC, HUD and the Department of Transportation to develop and implement rules banning junk fees. The CFPB has also issued guidance emphasizing that large banks and credit unions are prohibited from imposing unreasonable obstacles on customers, such as charging excessive fees, for basic information about their accounts. Further, the White House has called on federal agencies “to reduce or eliminate hidden fees, charges, and add-ons for everything from banking services to cable and internet bills to airline and concert tickets.”
The Commission is seeking public input on 37 questions, with comments due 60 days after publication in the Federal Register.