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FHFA rescinds GSE fee based on DTI ratios
On May 10, FHFA announced it is rescinding a debt-to-income-based loan-level pricing adjustment announced in January. As previously covered by InfoBytes, 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 included the upfront fee eliminations announced last October to increase pricing support for purchase borrowers limited by income or by wealth, FHFA said at the time. The implementation of the DTI pricing adjustment, which would have affected loans acquired by Fannie Mae and Freddie Mac, was delayed to August 1, but after the mortgage industry and other market participants expressed concerns about implementation challenges, FHFA made the decision to rescind the DTI-ratio based fee to provide additional transparency. The agency will issue a request for public input on the single-family guarantee fee pricing framework shortly.
CFPB: Reopening a closed account could be a UDAAP
On May 10, the CFPB released Circular 2023-02 to opine that unilaterally reopening a closed account without a customer’s permission in order to process a transaction is a likely violation of federal law, particularly if a bank collects fees on the account. “When a bank unilaterally chooses to open an account in someone’s name after they have already closed it, this is a fake account,” CFPB Director Rohit Chopra said in the announcement. “The CFPB is acting on all fronts to halt the harvesting of illegal junk fees.”
The Bureau described receiving complaints from consumers about banks reopening closed accounts and then assessing overdraft/nonsufficient funds fees and monthly maintenance fees. Such practices, the Bureau warned, may violate the Consumer Financial Protection Act’s prohibition on unfair acts or practices. Consumers may experience substantial injury including monetary harm by paying fees due to the unfair practice, the Bureau said, explaining that because consumers likely cannot reasonably avoid the injury, “[a]ctual injury is not required; significant risk of concrete harm is sufficient.” Aside from subjecting consumers to fees, when a bank processes a credit through a reopened account, the consumers’ funds may become available to third parties, including those that do not have permission to access such funds, the Bureau warned, adding that there is also a risk that banks may furnish negative information to consumer reporting agencies if reopening the account overdraws the account and the consumer does not quickly repay the amount owed. The Bureau further noted that deposit account agreements typically indicate that a financial institution “may return any debits or deposits to the account that the financial institution receives after closure and faces no liability for failing to honor any debits or deposits received after closure.”
The Circular explained that rather than reopening an account when a third party attempts to deposit or withdraw money from it, banks should decline the transactions. This allows customers the opportunity to update their information with the entity attempting to access a closed account while avoiding potential fees. “Reopening a closed account does not appear to provide any meaningful benefits to consumers or competition,” the Bureau said in the Circular. “While consumers might potentially benefit in some instances where their accounts are reopened to receive deposits, which then become available to them, that benefit does not outweigh the injuries that can be caused by unilateral account reopening.”
CFPB general counsel highlights risks in payments industry
On May 9, CFPB General Counsel and Senior Advisor to the Director, Seth Frotman, discussed the evolution of the payments system and its significant impact on consumer financial protection. Speaking before the Innovative Payments Association, Frotman commented that over the past few years, growth in the use of noncash payments (i.e. ACG, cards, and checks) accelerated faster from 2018 to 2021 than in any previous period, with the value of noncash payments since 2018 increasing nearly 10 percent per year, approaching almost $130 trillion in 2021. The value of ACH transfers and the number of card payments also increased tremendously, Frotman noted, pointing to a rapid decline in ATM cash withdrawals and the use of checks. He observed that the use of peer-to-peer (P2P) payment platforms and digital wallets is also growing quickly, with more traditional financial institutions redoubling their efforts to expand product offerings to capture market shares in this space. Additionally, several large tech firms, drawing on their significant customer bases and brand recognition, are looking to integrate payment services into their operating systems, with some offering payment products used by consumers daily, Frotman said.
Addressing concerns relating to data harvesting and privacy, Frotman said the Bureau is concerned that companies, including big tech companies, are using payment data to engage in behavioral targeting or individualized marketing, while some companies are sharing detailed payments information with data brokers or third parties as a way to monetize data. These behaviors, which he said only increase as payment systems continue to grow, raise the potential for harm, including limiting competition and consumer choice and stifling innovation. Frotman added that these issues are not limited to big tech. Banks, Frotman said, are also rolling out digital wallets as a way to access payment information, and Buy Now Pay later lenders are collecting consumer data “to increase the likelihood of incremental sales and maximize the lifetime value extracted from each current, past, or potential borrower.” Frotman reminded attendees that the Bureau has several critical tools at its disposal to address concerns about how data is bought, sold, used, and protected, and warned the payments industry to comply with applicable legal requirements.
Frotman also discussed challenges facing “gig” and other non-standard workers when trying to navigate consumer financial markets, particularly with respect to the intersection between how workers are being paid and the EFTA. According to Frotman, the Bureau is concerned about whether gig workers are being improperly required to receive payments through a particular financial institution or via a particular payment product or app. Frotman instructed employers to provide payment options that do not require workers to establish an account with a particular institution to ensure they do not run afoul of the EFTA’s “compulsory use” provision. Consumers who use a personal P2P app for work transactions are also entitled to EFTA protections with respect to fraud and error resolution, Frotman added. Frotman closed his remarks by touching briefly on liquidity and stability in the P2P payment system. He warned that consumers who use P2P payment products to store funds do not have the same level of protection as consumers who use traditional banking products.
FTC obtains TROs to halt student loan debt relief schemes
On May 8, the FTC announced that the U.S. District Court for the Central District of California recently issued temporary restraining orders (TROs) against two student loan debt relief companies that allegedly tricked consumers into paying for nonexistent repayment and loan forgiveness programs. According to the complaints (see here and here), the defendants allegedly made deceptive claims in order to lure low-income consumers into paying hundreds to thousands of dollars in illegal upfront fees as part of a purported plan to pay down their student loans. The defendants allegedly made consumers believe that they were enrolled in a legitimate loan repayment program, that their loans would be forgiven in whole or in part, and that most or all of their payments would be applied to their loan balances. The FTC alleges that, in reality, the defendants pocketed the borrowers’ payments. The FTC also charged the defendants with falsely claiming to be or be affiliated with the Department of Education and stating that they were purchasing borrowers’ debt from federal student loan servicers in order to secure debt relief on their behalf. When consumers realized the debt relief program did not exist, the defendants allegedly often refused to provide refunds.
According to the FTC, these deceptive misrepresentations violated Section 5 of the FTC Act and the Telemarketing Sales Rule (TSR). The FTC also alleges that the companies violated the Gramm-Leach-Bliley Act (GLBA), by using deceptive tactics to obtain consumers’ financial information, and the TSR, by calling numbers listed on the National Do Not Call Registry and by failing to pay required Do Not Call Registry fees for access. In issuing the TROs (see here and here), which temporarily halt the two schemes and freeze the defendants’ assets, the court noted that, upon “[w]eighing the equities and considering the FTC’s likelihood of ultimate success on the merits,” there is good cause to believe that immediate and irreparable harm will occur as a result of the defendants’ ongoing violations of the FTC Act, the TSR, and the GLBA, unless the defendants are restrained and enjoined.
Fed and Illinois regulator take action against bank on capital and management
On May 4, the Federal Reserve Board announced an enforcement action against an Illinois state-chartered community bank and its holding company related to alleged deficiencies identified in recent examinations. While the written agreement (entered into by the parties at the end of April) does not outline the specific deficiencies, it notes that the bank and the holding company have started taken corrective action to address the issues identified by the Federal Reserve Bank of St. Louis (FRB) and the Illinois Department of Financial and Professional Regulation (IDFPR). Among other things, the holding company’s board of directors must take appropriate steps to fully use its financial and managerial resources to ensure the bank complies with the written agreement and any other supervisory action taken by the bank’s federal or state regulator. The board is also required to submit a written plan to the FRB and the IDFPR describing actions and measures it intends to take to strengthen board oversight of the management and operations of the bank. The bank is required to submit a written plan outlining its current and future capital requirements and must notify the FRB and the IDFPR within 30 days after the end of any calendar quarter in which its capital ratios fall below the minimum ratios specified within the approved capital plan. Additionally, the bank is prohibited from taking on debt, redeeming its own stock, or paying out dividends or distributions without the prior approval of state and federal regulators.
District Court dismisses FTC’s privacy claims in geolocation action
On May 4, the U.S. District Court for the District of Ohio issued two separate rulings in a pair of related disputes between the FTC and a data broker. The disputes center around accusations made by the FTC last August that the data broker violated Section 5 of the FTC Act by unfairly selling precise geolocation data from hundreds of millions of mobile devices which can be used to trace individuals’ movements to and from sensitive locations (covered by InfoBytes here). The FTC sought a permanent injunction to stop the data broker’s practices, as well as additional relief. The data broker, upon learning that the FTC planned to filed a lawsuit against it, filed a preemptive lawsuit challenging the agency’s authority.
The court first dismissed the data broker’s preemptive bid to block the FTC’s enforcement action, ruling that the data broker has not identified any “viable cause of action” to support its request for injunctive relief. The court explained that injunctive relief is a “drastic remedy” that is only available if no other legal remedy is available. However, the data broker possesses an “adequate remedy at law,” the court said, “because it can seek dismissal of, and otherwise directly defend against, the FTC’s enforcement action.”
With respect to the FTC’s action, the court granted the data broker’s motion to dismiss the FTC’s complaint, but gave the agency leave to amend. The court agreed with the data broker that the FTC’s complaint lacks sufficient allegations to support its unfairness claim under Section 5 of the FTC Act. While the court disagreed with the data broker’s assertion that it did not have “fair notice that its sale of geolocation data without restrictions near sensitive locations could violate Section 5(a) of the FTC Act” or that the FTC had to allege a predicate violation of law or policy to state a claim, the court determined that the FTC failed to adequately allege that the data broker’s practices created “a ‘significant risk’ of concrete harm.” Moreover, the court found that “the purported privacy intrusion is not severe enough to constitute ‘substantial injury’ under Section 5(n).” The court noted, however that some of the deficiencies may be cured through additional factual allegations in an amended complaint.
FDIC announces Florida disaster relief
On May 5, the FDIC issued FIL-22-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Florida affected by severe storms, tornados, and flooding from April 12 to 14. 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 Atlanta Regional Office if they expect delays in making filings or are experiencing difficulties in complying with publishing or other requirements.
CFPB examines high-cost financings that cover medical expenses
On May 4, the CFPB released a report examining high-cost alternative financing products targeted to patients as a way to cover medical expenses. Products offered by a growing number of financial institutions and fintech companies include medical credit cards and installment loans, which typically carry significantly higher interest rates than those associated with traditional consumer credit cards (26.99 percent annual percentage rate as compared to 16 percent), the Bureau found, adding that these products also often have deferred interest plans which can create significant financial burdens for patients. The report found that between 2018 and 2020, consumers used alternative financing products to pay for nearly $23 billion in healthcare expenses and paid $1 billion in deferred interest. The report further found that companies are primarily marketing their products directly to healthcare providers with promised incentives. While the companies service the credit cards and loans, the Bureau explained that the healthcare providers are responsible for offering the products to patients and disclosing terms and risks. Many of these healthcare providers are unable to adequately explain complex terms, such as deferred interest plans, leaving patients facing ballooned deferred interests and lawsuits, the Bureau warned. According to the Bureau’s announcement, “financing medical debt on a credit card may increase patients’ exposure to extraordinary credit actions that healthcare providers would typically not pursue,” as “there can be a greater incentive for creditors to pursue lawsuits because unlike many healthcare providers, creditors can pursue a debt’s principal plus interest and fees.”
FHA implements provisions for transitioning LIBOR-based ARMs
On May 2, FHA published Mortgagee Letter (ML) 2023-09 to implement provisions of the Adjustable Rate Mortgages (ARM): Transitioning from LIBOR to Alternative Indices final rule that was published in the Federal Register at the beginning of March. (Covered by InfoBytes here.) The final rule replaces LIBOR with the Secured Overnight Financing Rate (SOFR) as the approved index for newly-originated forward ARMs, codifies HUD’s approval of SOFR as an index for newly-originated home equity conversion mortgages (HECM) ARMs, and establishes “a spread-adjusted SOFR index as the Secretary-approved replacement index to transition existing forward and HECM ARMs off LIBOR.” The ML provides interest rate transition directions for mortgagees and announces the availability of updated HECM model loan documents, which have been revised to be consistent with the final rule and the ML. The provisions in the ML have various effective dates.
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.