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CFPB seeks feedback on credit cards
On January 24, the CFPB issued a notice and request for information (RFI) seeking public feedback on several aspects of the consumer credit card market in accordance with Section 502(b) of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted by Congress to establish fair and transparent practices related to the extension of credit within the credit card market, and requires the Bureau to undertake a biennial review of the industry to determine whether regulatory adjustments are needed. The Bureau said it plans to publish its report to Congress later in 2023.
The RFI covers several broad topics ranging from lending practices to the effectiveness of rate and fee disclosures, and seeks comments on the experiences of consumers and credit card issuers in the credit card market, as well as on the overall health of the credit card market. Specifically, the RFI requests feedback on issues related to:
- Credit card agreement terms and credit card issuer practices;
- The effectiveness of issuers’ disclosure of terms, fees, and other expenses of credit card plans;
- The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans;
- The cost and availability of consumer credit cards;
- The safety and soundness of credit card issuers;
- The use of risk-based pricing for consumer credit cards; and
- Consumer credit card product innovation and competition
Comments on the RFI are due April 24. The Bureau noted in its announcement that it also issued market-monitoring orders to several major and specialized credit card issuers seeking information on various topics, including major credit card issuers’ practices related to, among other things, applications and approvals, debt collection, and digital account servicing.
Senators ask FTC, CFPB to investigate deceptive listing agreements
In December, Senate Banking Committee Chairman Sherrod Brown (D-OH), along with Senators Tina Smith (D-MN) and Ron Wyden (D-OR) sent a letter to the FTC and the CFPB requesting a review of a Florida-based real estate brokerage firm’s use of exclusive 40-year listing agreements marketed as a “loan alternative.” The request follows a November press release by the Florida attorney general announcing legal action against the firm for engaging in allegedly deceptive, unfair, and unconscionable business practices. According to the AG’s complaint, the firm offered homeowners $300 to $5,000 as a cash loan alternative in exchange for an agreement to use the firm as an exclusive real estate listing broker for a 40-year period. The complaint claimed the firm informs homeowners that there is no obligation to return the cash, stressing the homeowner will owe the firm nothing unless and until the home is sold. The AG asserted, however, that what is not clearly disclosed is that after accepting the payment, the firm files a 40-year lien on the property so that if at any time within 40 years the home is foreclosed upon or transferred to heirs upon the homeowner’s death, or if homeowners simply wish to cancel the deal, the firm will attempt to take three percent of the home’s value. Further, the AG claimed that the firm also failed to inform customers that the liens are filed in the public record, which can make it difficult for homeowners to refinance or access their home’s equity. The complaint seeks injunctive relief, restitution, and civil penalties.
CFPB and New York say auto lender misled consumers
On January 4, the CFPB and New York attorney general filed a complaint against a Michigan-based auto finance company accused of allegedly misrepresenting the cost of credit and deceiving low-income consumers into taking out high-interest loans on used vehicles. (See also AG’s press release here.) The joint complaint alleges, among other things, that the defendant based the price of a loan (and then artificially inflated the principal amount) and the payment to the dealer on the projected amount that may be collected from the consumer during the life of the loan (without factoring in whether consumers could actually afford the loan).
The Bureau and AG further argued that the true cost of credit is hidden in inflated principal balances in order to evade state interest rate caps. An investigation conducted by the AG found that while the defendant’s loan agreements in New York claimed an APR of 22.99 percent or 23.99 percent (just below the 25 percent usury cap), the defendant actually charged on average more than 38 percent (and on many occasions charged an APR in excess of 100 percent). These high-interest loans, the AG claimed, often caused consumers to accrue additional fees and become delinquent on their loans.
The complaint also alleged the defendant failed to consider consumers’ ability to repay their loans in full, engaged in aggressive debt collection tactics, and created financial incentives for dealers to add on extra products, such as vehicle service contracts. Add-on products generated roughly $250 million in revenue for the defendant in 2020, the complaint said, adding that these alleged deceptive lending practices lowered consumers’ credit scores and cost borrowers millions of dollars. The complaint further maintained that the defendant packaged the consumer loans into securities that were sold to investors on the premise that the underlying loans complied with applicable law. These alleged false representations, the complaint said, constituted securities fraud under New York’s Martin Act.
The complaint — which also alleges violations of the Consumer Financial Protection Act’s prohibition against deceptive and abusive acts or practices, New York usury limits, and other state consumer and investor protection laws — seeks, among other things, injunctive relief, monetary relief, disgorgement, and civil money penalties of $1,000,000 for each day of violations.
The defendant was previously targeted for violating consumer protection laws in 2021 by the Massachusetts attorney general, who announced a $27.2 million settlement to resolve allegations of predatory lending and deceptive debt collection practices. (Covered by InfoBytes here.)
Chopra testifies at congressional hearings
On December 14, CFPB Director Rohit Chopra testified at a hearing titled Consumers First: Semi-Annual Report of the Consumer Financial Protection Bureau held by the House Financial Services Committee on the CFPB’s most recent semi-annual report to Congress (covered by InfoBytes here). Chopra’s prepared statement focused on: (i) the current state of the economy and household finance; (ii) promoting an open, competitive, and a decentralized market; and (iii) actions by Congress where bipartisan support is expected. Chopra also cited concerns regarding the accuracy of medical debt credit reporting and noted that the CFPB is continuing “to examine how medical debt burdens are impacting household balance sheets.”
House Financial Services Chairwoman Maxine Waters (D-CA) praised Chopra’s leadership in her opening statement, stating that the Bureau has combated “redlining, housing discrimination, illegal evictions, and foreclosures, and has worked tirelessly to root out appraisal bias.” However, Ranking Member Patrick McHenry (R-PA) argued that the Bureau’s “lack of transparency is of grave concern.” McHenry discussed the CFPB’s six compliance bulletins, five advisory opinions, five interpretive rules, and seven circulars published this year, which he considers to have fostered “uncertainty” within the financial services industry. McHenry also warned Chopra that he can expect “much more thorough” oversight next year when Republicans take control of the House and when McHenry becomes the chair of the House Financial Services Committee.
During the hearing, Chopra acknowledged that the Bureau's Section 1071 Rulemaking “is on track to issue a final rule by March 31, 2023”—a deadline established by court order in July as a result of a stipulated settlement reached in February 2020 with a group of plaintiffs, including the California Reinvestment Coalition, related to the collection of small business lending data (covered by InfoBytes here). Chopra added that the Bureau wants to ensure it has “an implementation period that gives the smaller firms more time, and the ability to make sure it’s not duplicative with existing requirements under the Community Reinvestment Act.”
During the hearing, Republican committee members inquired about the agency’s creation and use of the term “junk fees” to describe, among other things, legal fees that banks charge for financial products and services. According to Rep. Blaine Luetkemeyer (R-MO) “there is no such word in financial services lexicon,” and the Bureau is “making up a word and then using it to go out and enforce something that doesn’t exist.” Republican committee members also inquired about the Bureau’s recent updates to its UDAAP exam manual. As previously covered by a Buckley Special Alert, in March, the CFPB announced significant revisions to its UDAAP exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. Rep. Andy Barr (R-KY) commented that “this is not interpretive guidance,” and said Chopra is “trying to change the law.”
Chopra reiterated the Bureau’s priorities in his December 15 testimony before the Senate Banking Committee. During the hearing, Ranking Member Sherrod Brown (D-OH) noted that Republican lawmakers proposed legislation to subject the CFPB to appropriations and to change the CFPB's single-director structure to a commission. Chopra was also questioned by Ranking Member Patrick Toomey (R-PA) who raised concerns regarding the Bureau’s “overreach and pursuit of a politicized agenda.” He further argued that “the Dodd-Frank Act exempted the CFPB from appropriations,” and “empowers the CFPB to simply take funds from the Fed, which is itself also not subject to appropriation, thereby doubly insulating the CFPB from any congressional control.” Other topics discussed during the hearing included, among other things, military lending, credit cards, and overdraft fees.
CFPB proposes registry of nonbank repeat offenders
On December 12, the CFPB announced a proposed rule seeking to identify repeat financial law offenders by establishing a database of enforcement actions taken against certain nonbank covered entities. Specifically, the Bureau proposes to enhance market monitoring and risk-based supervision efforts by including all final public written orders and judgments (including any consent and stipulated orders and judgments) obtained or issued by any federal, state, or local government agency for violation of certain consumer protection laws related to unfair, deceptive, or abusive acts or practices in the database. Additionally, pursuant to Section 1024(b)(7) of the Consumer Financial Protection Act, the Bureau is also proposing that larger supervised nonbanks be required to submit annual written statements regarding compliance with each underlying order that is signed by an attesting executive with “knowledge of the entity’s relevant systems and procedures for achieving compliance and control over the entity’s compliance efforts.” Excluded from the registry will be insured depository institutions and credit unions, related persons, states, natural persons, and certain other entities.
Explaining that protecting American consumers is a shared effort spanning local, state, and federal authorities, CFPB Director Rohit Chopra stated that currently “readily accessible information is lacking about the identity of orders issued against nonbanks subject either to the CFPB’s market monitoring authority or to its supervisory authority across the various markets for consumer financial products and services.” The creation of a central repository of enforcement actions around the country for use in tracking and mitigating risks posed by repeat offenders and monitoring entities subject to agency and court orders will help the Bureau, the law enforcement community, and the public “limit the harms from repeat offenders,” the Bureau said in its announcement. The Bureau noted that it plans to share the database with other regulators and law enforcement agencies by making the registry public.
Comments on the proposal are due 60 days after publication in the Federal Register. The Bureau said the proposed registry would launch “no earlier than January 2024.”
CFPB releases spring 2022 semi-annual report
On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.
In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.
District Court issues judgment against company for marketing fake high-yield CDs
On December 9, the U.S. District Court for the Southern District of New York entered a final stipulated final judgment and order against a Delaware financial-services company operating in Florida and New York along with its owner (collectively, “defendants”) for engaging in deceptive acts under the Consumer Financial Protection Act related to its misleading marketing representations when advertising high-yield healthcare savings CD accounts. As previously covered by InfoBytes, the Bureau’s 2020 complaint alleged that defendants engaged in deceptive acts or practices by: (i) falsely representing that consumers’ deposits into the high yield CD accounts would be used to originate loans for healthcare professionals, when in fact, the company never used the deposits to originate loans for healthcare professionals, never sold a loan to a bank or secondary-market investor, and never entered into a contract with a buyer or investor to purchase a loan; (ii) concealing the company’s true business model by falsely representing that the consumers’ deposits, when not being used to originate healthcare loans, would be held in an FDIC- or Lloyd’s of London-insured account or a “cash alternative” or “cash equivalent” account, when in reality, consumers’ deposits were, among other things, invested in securities; (iii) misleading consumers into believing that the accounts their funds were being deposited into functioned like traditional savings accounts when in fact, consumers’ deposits were actively traded in the stock market or used in securities-backed investments; and (iv) falsely representing that past high yield CD accounts allegedly paid interest at rates between 5 percent and 6.25 percent prior to 2019 when in fact, the company did not offer CDs until August 2019, and “consumers’ principals was neither guaranteed nor insured.” The complaint noted that since August 2019, the company took more than $15 million from at least 400 consumers.
The settlement provides for a comprehensive consumer redress plan that would require defendants to refund approximately $19 million to approximately 400 depositors. Further, pursuant to the order, the defendants are required to return the money that each affected consumer deposited into a certain account in a manner consistent with the advertised terms of the product, namely, the principal along with an average per year interest rate of about 6 percent. The proposed order also permanently bans the defendants from engaging or assisting others in any deposit taking activities and requires defendants to pay a civil money penalty to the Bureau in the amount of $391,530.
States say student loan trusts are subject to the CFPA’s prohibition on unfair debt collection practices
On November 15, a bipartisan coalition of 23 state attorneys general led by the Illinois AG announced the filing of an amicus brief supporting the CFPB’s efforts to combat allegedly illegal debt collection practices in the student loan industry. As previously covered by InfoBytes, in February, the U.S. District Court for the District of Delaware stayed the Bureau’s 2017 enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” The district court certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit related to (i) whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority; and (ii) whether the case can be continued after the Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert). Previously, the district court concluded that the suit was still valid and did not need ratification because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The district court later acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”
The states argued that they have a “substantial interest” in protecting state residents from unlawful debt collection practices, and that this interest is implicated by this action, which addresses whether the defendant student loan trusts are “covered persons” subject to the prohibition on unfair debt collection practices under the CFPA. Urging the 3rd Circuit to affirm the district court’s decision to deny the trusts’ motion to dismiss, the states contended among other things, that hiring third-party agencies to collect on purchased debts poses a large risk to consumers. These types of trusts, the states said, “profit only when the third parties that they have hired are able to collect on the flawed debt portfolios that they have purchased.” Moreover, “[d]ebt purchasing entities, including entities like the [t]rusts, are thus often even more likely than the original creditors to resort to unlawful tactics in undertaking collection activities,” the states stressed, explaining that in order to combat this growing problem, many states apply their prohibitions on unlawful debt collection practices “to all debt purchasers that seek to reap profits from these illegal activities, including those purchasers that outsource collection to third parties.” The Bureau’s decision to do the same is therefore appropriate under the CFPA, the states wrote, adding that “as a practical matter, these debt purchasers are as problematic as debt purchasers that collect on their own debt. The [t]rusts’ request to be treated differently because of their decision to hire third party agents to collect on the debts that they have purchased (and reap the profits on) should be rejected.”
District Court issues judgment against company bilking 9/11 first responders
On November 23, the U.S. District Court for the Southern District of New York entered a stipulated final judgment and order against a finance company, two related entities, and the companies’ founder and owner (collectively, “defendants”) for engaging in deceptive and abusive acts or practices under the Consumer Financial Protection Act (CFPA) related to the offering of cash advances to people on their settlement payouts from victim-compensation funds established for certain first responders to the World Trade Center attack on September 11, 2001.
As previously covered by InfoBytes, in 2017, the CFPB and the New York attorney general filed a complaint alleging that the defendants engaged in deceptive and abusive acts by misleading consumers into selling expensive advances on benefits to which they were entitled by mischaracterizing extensions of credit as assignments of future payment rights, thereby causing the consumers to repay far more than they received. In March 2022, the district court ruled that the CFPB could proceed with its 2017 enforcement action against the defendants (covered by InfoBytes here) two years after the U.S. Court of Appeals for the Second Circuit vacated a 2018 district court order dismissing the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company (covered by InfoBytes here).
The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v. CPFB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. The appellate court further noted that following Seila, former Director Kathy Kraninger ratified several prior regulatory actions (covered by InfoBytes here), including the enforcement action brought against the defendants, and as such, remanded the case to the district court to consider the validity of the ratification of the enforcement action. The defendants later filed a petition for writ of certiorari, arguing that the Bureau could not use ratification to avoid dismissal of the lawsuit, but the Supreme Court declined the petition. (Covered by InfoBytes here). In 2021, the defendants filed a motion to dismiss the Bureau’s enforcement action on the grounds that “it was brought by an unconstitutionally constituted agency” and that the Bureau’s “untimely attempt to subsequently ratify this action cannot cure the agency’s constitutional infirmity.” (Covered by InfoBytes here). The district court turned to the Supreme Court’s June 2021 majority decision in Collins v. Yellen, which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[.]’” Accordingly, the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” (Covered by InfoBytes here).
In the amended complaint, filed in July 2022, the Bureau and the New York AG alleged that, among other things, the defendants engaged in deceptive acts by misrepresenting to consumers that the company’s contracts created valid and enforceable assignments of their payment proceeds when, in fact, the assignments were not valid and enforceable. The amended complaint also alleged that the company misrepresented to consumers when they would receive funds from the company, often promising consumers an earlier date of disbursement than the actual disbursement. Additionally, the joint complaint alleged that the defendants violated state law by collecting on purported assignments that are void, unenforceable, and uncollectable, or alternatively, by collecting on contracts that functioned as loans with interest rates that exceed usury limits under state law, which are also void and on which no payment is due.
Under the terms of the final judgment, defendants must pay a $1 civil money penalty to the Bureau and must not take any action to collect any unpaid or future amounts owed by the harmed responders, which totals at least $600,000. Under the order, defendants must also refrain from participating in offering, brokering, or providing credit or advances of funds to individuals entitled to payments from governmentally created funds established to compensate victims of 9/11.
District Court: Defendants cannot use CFPB funding argument to dismiss deceptive marketing lawsuit
On November 18, the U.S. District Court for the Northern District of Illinois ruled that the CFPB can proceed in its lawsuit against a credit reporting agency, two of its subsidiaries (collectively, “corporate defendants”), and a former senior executive accused of allegedly violating a 2017 enforcement order in connection with alleged deceptive practices related to their marketing and sale of credit scores, credit reports, and credit-monitoring products to consumers. According to the court, a recent decision issued by the U.S. Court of Appeals for the Fifth Circuit, which found that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by a Buckley Special Alert), is a persuasive basis to have the lawsuit dismissed.
As previously covered by InfoBytes, the Bureau sued the defendants in April claiming the corporate defendants, under the individual defendant’s direction, allegedly violated the 2017 consent order from the day it went into effect instead of implementing agreed-upon policy changes intended to stop consumers from unknowingly signing up for credit monitoring services that charge monthly payments. The Bureau further claimed that the corporate defendants’ practices continued even after examiners raised concerns several times, and that the individual defendant had both the “authority and obligation” to ensure compliance with the 2017 consent order but did not do so.
The defendants sought to have the lawsuit dismissed for several reasons, including on constitutional grounds. The court disagreed with defendants’ constitutional argument, stating that, other than the 5th Circuit, courts around the country have “uniformly” found that Congress’ choice to provide independent funding for the Bureau conformed with the Constitution. “Courts are ill-equipped to second guess exactly how Congress chooses to structure the funding of financial regulators like the Bureau, so long as the funding remains tethered to a law passed by Congress,” the court wrote. The court also overruled defendants’ other objections to the lawsuit. “[T]his case is only at the pleading stage, and all the Bureau must do is plausibly allege that [the individual defendant] was recklessly indifferent to the wrongfulness of [the corporate defendants’] actions over which he had authority,” the court said, adding that the Bureau “has done so because it alleges that because of financial implications, [the individual defendant] actively ‘created a plan to delay or avoid’ implementing the consent order.”
The Bureau is currently seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.)