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CFPB charges debt-settlement company with TSR and CFPA violations
On May 17, the CFPB announced a settlement with a Massachusetts-based debt-settlement company for allegedly violating the Telemarketing Sales Rule (TSR) and the Consumer Financial Protection Act (CFPA). As previously covered by InfoBytes, the Bureau alleged the company violated the TSR and/or the CFPA by, among other things, (i) requesting and receiving payment of fees for services before renegotiating, settling, reducing, or otherwise altering the terms of at least one debt pursuant to an agreement or before a consumer had made a payment under their agreement; (ii) misrepresenting to consumers that it would not charge fees for its services until it settled a debt and consumers made payments under the settlement to the creditor; (iii) charging fees based on the amount of debt after enrollment instead of the amount of debt at the time of enrollment; and (iv) failing to disclose the amount of time it would take the company to make a settlement offer or the amount of debt the consumer would need to accumulate to make a settlement offer to each creditor. The CFPB’s original complaint had sought an injunction against the company as well as damages, redress, disgorgement of ill-gotten gains, and the imposition of civil money penalties.
The judgment, ordered by the court on May 19, requires the company to: (i) pay a $7.7 million judgment, which would be partially suspended upon the company paying harmed consumers $5.4 million; (ii) stop its deceptive practices and; (iii) pay a $1 civil money penalty.
Federal regulators discuss Covid-19 responses and priorities
On May 19, the House Financial Services Committee held a hearing entitled “Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions.” Committee Chairwoman Maxine Waters (D-CA) opened the hearing by expressing her concerns about the “harmful deregulatory actions” taken by the previous administration’s appointees to “roll back key Dodd-Frank reforms and other consumer protections.” She noted, however, that she was pleased that the Senate is moving forward to reverse the OCC’s true lender rule and commented that she has asked House leadership to address the related Congressional Review Act resolution as soon as possible.
Fed Vice Chair for Supervision Randal K. Quarles provided an update on the Fed’s Covid-19 regulatory and supervisory efforts, noting that the Fed has “worked to align [the Fed’s] emergency actions with other relief efforts as the economic situation improves” and is maintaining or extending some measures to promote continued access to credit. When Congresswoman Velazquez inquired how government programs like the Paycheck Protection Program helped to stabilize businesses and improve the overall economy, Quarles answered, “We would have experienced a much deeper and more durable economic contraction, and would have had more lasting economic scarring with closed businesses and defaulting obligations [] had those programs not been put in place.”
OCC Comptroller Michael Hsu discussed the agency’s increasing coordination with other federal and state regulators on fintech policy, in addition to OCC efforts to strengthen Community Reinvestment Act (CRA) regulations and address climate change. The OCC has been encouraging innovation, Hsu said, but added that his “broader concern is that these initiatives were not done in full coordination with all stakeholders. Nor do they appear to have been part of a broader strategy related to the regulatory perimeter.” In his written testimony, Hsu emphasized his concerns with providing charters to fintechs, noting that in doing so, it would “convey the benefits of banking without its responsibilities,” but also “that refusing to charter fintechs will encourage growth of another shadow banking system outside the reach of regulators.” Hsu expressed in his oral statement the importance of finding “a way to consider how fintechs and payment platforms fit into the banking system” and emphasized that it must be done in coordination with the FDIC, Fed, and the states. He also explained that “the regulatory community is taking a fragmented agency-by-agency approach to the technology-driven changes taking place today. At the OCC, the focus has been on encouraging responsible innovation. For instance, we updated the framework for chartering national banks and trust companies and interpreted crypto custody services as part of the business of banking.” When Congressman Bill Huizenga (R-MI) asked how the OCC planned to address the “true lender” rule, which would soften the regulations for national banks to sell loans to third parties, Hsu stated that the OCC originally intended to review the rule, but that after the Senate passed S.J.Res. 15 to invoke the Congressional Review Act and provide for congressional disapproval and invalidation of the rule (covered by InfoBytes here), the agency decided to leave it up to congressional deliberation and will monitor it instead.
FDIC Chairman Jelena McWilliams discussed, among other things, the FDIC’s policy of granting industrial loan company charters. As previously covered by Infobytes, the agency approved a final rule in December 2020 establishing certain conditions and supervisory standards for the parent companies of industrial banks and ILCs. McWilliams defended the FDIC’s new rule during the hearing, stating it “ensures that the parent company serves as a source of financial strength for the ILC while providing clarity about the FDIC's supervisory expectations of both the ILC and its parent company.”
NCUA Chairman Todd Harper also outlined agency measures taken in response to the pandemic. Among other things, Harper noted that the NCUA is supporting low-income credit unions through the Community Development Revolving Loan Fund and that the agency is working to strengthen its Consumer Financial Protection Program (CFPP) to ensure fair and equitable access to credit. During the hearing, Harper stated, “there is an increased emphasis on fair lending compliance, and agency staff are studying methods for improving consumer financial protection supervision for the largest credit unions not primarily supervised by the CFPP.”
FDIC chairman addresses the importance of innovation
On May 11, FDIC Chairman Jelena McWilliams spoke at the Federalist Society Conference about the Dodd-Frank Act in a post Covid-19 environment and the future of financial regulation. Among other topics, McWilliams emphasized the importance of promoting innovation through inclusion, resilience, amplification, and protecting the future of the banking sector. McWilliams pointed out that “alternative data and AI can be especially important for small businesses, such as sole proprietorships and smaller companies owned by women and minorities, which often do not have a long credit history” and that “these novel measures of creditworthiness, like income streams, can provide critical access to capital” that otherwise may not be possible to access. McWilliams also discussed an interagency request for information announced by the FDIC and other regulators in March (covered by InfoBytes here), which seeks input on financial institutions’ use of AI and asks whether additional regulatory clarity may be helpful. McWilliams also added that rapid prototyping helps initiate effective reporting of more granular data for banks. Additionally, McWilliams addressed agency’s efforts to expand fintech partnerships through several initiatives intended to facilitate cooperation between fintech groups and banks to promote accessibility to new customers and offer new products. Concerning the ability to confront the direct cost of developing and deploying technology at any one institution, McWilliams added that “there are things that we can do to foster innovation across all banks and to reduce the regulatory cost of innovation.”
North Dakota trade associations sue Fed over debit-card interchange fees
On April 29, two North Dakota trade associations filed a complaint against the Federal Reserve Board, claiming the Fed has “failed to properly follow Congress’s instructions to ensure that debit-card processing fees are reasonable and proportional to the costs of debit-card transactions.” The plaintiffs’ suit revolves around interchange fees—currently capped at 21 cents—paid by merchants to card issuer banks to process debit-card transactions. The interchange fees are intended to compensate issuers for their costs in a transaction, but the plaintiffs contend that the fees have become a “lush profit center for issuers.” Among other things, the plaintiffs allege that the Fed has failed to enforce provisions under Dodd-Frank’s “Durbin Amendment,” which amended the EFTA and limited the interchange fees paid to large issuers to an amount “that is ‘reasonable and proportional to the cost incurred by the issuer with respect to the transaction.’” The amendment also directed the Fed to distinguish between incremental, processing costs and other costs “not specific to a particular electronic debit transaction”—a requirement the plaintiffs argue is not reflected in the Fed’s final rule. Moreover, the plaintiffs contend that the Fed’s final rule, Regulation II, creates “a one-size-fits-all fee” that does not tie the maximum allowable fee to a specific transaction, and allows all covered issuers to charge up to 21 cents for any debit-card transaction regardless of the issuer’s actual processing costs (as well as .05 percent of each transaction “to compensate the issuers for fraud losses”). The plaintiffs claim the Fed’s actions are arbitrary and capricious and exceed the Fed’s statutory authority and ask the court to vacate the rule at issue.
CFPB alleges deceptive advertising by NJ reverse-mortgage company
On April 27, the CFPB announced a consent order against a nationwide, New Jersey-based mortgage broker and direct lender for allegedly sending deceptive loan advertisements to hundreds of thousands of older borrowers. According to the CFPB, the respondent’s advertisements and letters violated the Mortgage Acts and Practices Advertising Rule (MAP Rule), TILA, and the CFPA, by, among other things; (i) misrepresenting the costs of reverse mortgages, including fees, associated taxes, and insurance; (ii) failing to inform borrowers that if they did not continue to pay taxes or insurance they were at risk of losing their homes; (iii) creating the impression that consumers had a preexisting relationship with the lender; and (iv) informing consumers that they were preapproved for specific loan amounts and likely to obtain particular terms or refinancing. Under the terms of the consent order, the respondent is required to pay a $140,000 civil money penalty. Additionally, an advertising compliance official must review the respondent’s mortgage advertisement template before it is put into use in an advertisement “to ensure that it is compliant with the MAP Rule, Regulation Z, TILA, the CFPA,” as well as the consent order. The respondent must also develop and provide the CFPB a “comprehensive compliance plan designed to ensure that Respondent’s mortgage advertising complies with all applicable Federal consumer financial laws and the terms of this Order.”
CFPB rescinds abusiveness policy statement
On March 11, the CFPB announced it has rescinded its January 2020 policy statement, which addressed prohibitions on abusive acts or practices. As previously covered by InfoBytes, the Bureau issued the policy statement to provide a “common-sense framework” for how it planned to apply the “abusiveness” standard in supervision and enforcement matters as authorized under Dodd-Frank. Under the 2020 policy statement, the Bureau stated it would only cite or challenge conduct as abusive if the agency “concludes that the harms to consumers from the conduct outweigh its benefits to consumers.” The Bureau also stated it would generally avoid challenging conduct as abusive if it relies on all, or nearly all, of the same facts alleged to be unfair or deceptive, and that it would decline to seek civil money penalties and disgorgement for certain abusive acts or practices, absent unusual circumstances.
The Bureau now states that it is rescinding the 2020 policy statement after reaching the conclusion that the principles set forth do not actually provide clarity to regulated entities. Among other things, the Bureau notes that the 2020 policy statement is counterproductive, “afford[s] the Bureau considerable discretion in its application,” and adds uncertainty to market participants. Moreover, the Bureau claims that after reviewing and applying the 2020 policy statement, it has had “the opposite effect on preventing harm.” Going forward, the Bureau states it intends to “exercise the full scope of its supervisory and enforcement authority to identify and remediate abusive acts and practices” as established by Congress.
CFPB appeals ruling vacating mandatory disclosures and 30-day credit linking restriction in Prepaid Accounts Rule
On March 1, the CFPB filed a notice to appeal a December 2020 ruling, in which the U.S. District Court for the District of D.C. vacated two provisions of the Bureau’s Prepaid Account Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the court concluded that the Bureau acted outside of its statutory authority by promulgating a short-form disclosure requirement (to the extent it provided for mandatory disclosure clauses). The court noted that it could not “presume—as the Bureau does—that Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.” The court further determined that the Bureau also read too much into its general rulemaking authority when it promulgated a mandatory 30-day credit linking restriction under 12 CFR section 1026.61(c)(1)(iii) that limited consumers’ ability to link certain credit cards to their prepaid accounts. The court first determined that neither TILA nor Dodd-Frank vest the Bureau with the authority to promulgate substantive regulations on when consumers can access and use credit linked to prepaid accounts. Second, the court deemed the regulatory provision to be a “substantive regulation banning a consumer’s access to and use of credit” under the disguise of a disclosure, and thus invalid.
CFPB files Section 1071 status report, evaluates recommendations
On February 22, the CFPB filed its fourth status report in the U.S. District Court for the Northern District of California as required under a stipulated settlement reached in February with a group of plaintiffs, including the California Reinvestment Coalition. The settlement (covered by InfoBytes here) resolved a 2019 lawsuit that sought an order compelling the Bureau to issue a final rule implementing Section 1071 of the Dodd-Frank Act, which requires the Bureau to collect and disclose data on lending to women and minority-owned small businesses.
Among other things, the Bureau notes in the status report that it has satisfied the following required deadlines: (i) last September it released a Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) outline of proposals under consideration (InfoBytes coverage here); and (ii) it convened an SBREFA panel last October and released the panel’s final report last December (InfoBytes coverage here). The settlement next requires the parties to confer about a deadline for the Bureau to issue a Section 1071 notice of proposed rulemaking (NPRM). According to the status report, the Bureau’s rulemaking staff is in the process of evaluating the panel’s recommendations as well as stakeholder feedback, and has begun briefing new Bureau leadership “on the significant legal and policy issues that must be resolved to implement the Section 1071 regulations” and prepare the NPRM. The Bureau notes that the parties continue to discuss an appropriate deadline for issuing the NPRM, emphasizing that if the parties agree on a deadline, they “will jointly stipulate to the agreed date and request that the court enter that deadline.” As previously covered by InfoBytes, acting Director Dave Uejio stated recently that he has “pledged” the Bureau’s Division of Research, Markets, and Regulations “the support it needs to implement section 1071 of the Dodd-Frank Act without delay.”
Find continuing Section 1071 coverage here.
OCC delays fair access rule
On January 28, the OCC announced it has paused publication of a final rule that would ensure covered national banks, federal savings associations, and federal branches and agencies of foreign bank organizations provide all customers fair access to financial services. Delaying publication in the Federal Register “will allow the next confirmed Comptroller of the Currency to review the final rule and the public comments the OCC received, as part of an orderly transition,” the agency explained. Under the final rule (covered by InfoBytes here), banks would be required to grant fair access to financial services, capital, and credit based on the risk assessment of individual customers, rather than broad-based decisions affecting whole categories or classes of customers. The OCC confirmed, however, that its “long-standing supervisory guidance stating that banks should avoid termination of broad categories of customers without assessing individual customer risk remains in effect.”
As previously covered by InfoBytes, on January 20, the Biden administration broadly directed the heads of executive departments and agencies across the federal government (without specifying which departments or agencies are covered) to “immediately withdraw” or delay action on any pending regulations not yet published in the Federal Register.
Kraninger resigns; Uejio to lead CFPB while Chopra awaits confirmation
On January 20, Kathy Kraninger resigned from her position as CFPB director and newly sworn-in President Biden announced that Dave Uejio would serve as acting director until permanent leadership is confirmed by the U.S. Senate. President Biden officially nominated Rohit Chopra as the permanent director of the Bureau.
Uejio has been with the Bureau since 2012, and prior to his appointment as acting director, he has served as the Bureau’s Chief Strategy Officer since 2015. Chopra, who is currently a Democratic Commissioner of the FTC, previously served as the Bureau’s first student loan ombudsman and assistant director of the Office for Students before leaving the Bureau in 2015.
Kraninger’s resignation is a notable departure from the Bureau’s original structure, as outlined in Dodd-Frank, which called for a single director, appointed to a five-year term and only removable by the president for cause (i.e., for “inefficiency, neglect of duty, or malfeasance in office”). As previously covered by a Buckley Special Alert, in June 2020, the Supreme Court, in a plurality opinion in Seila Law LLC v. CFPB, held that the CFPB’s statutory structure violates the constitutional separation of powers by restricting the president’s ability to remove the director. The Court remedied the constitutional violation by severing the “for cause” removal language from the remainder of the statute. When Kraninger submitted her resignation on President Biden’s Inauguration Day, she stated it was in “support of the Constitutional prerogative of the President to appoint senior officials within the government who support the President’s policy priorities…”