Mortgage Banking Update
In This Issue:
- DOJ Announces Major New Initiative Targeting Redlining; DOJ/CFPB/OCC Settle Redlining Lawsuit Against Mississippi-based National Bank
- Ballard Spahr Attorneys Complete White Paper on Bank-Model Lending
- 11th Circuit Vacates Prior Hunstein Opinion but Leaves Door Open for Hunstein Copycat Claims to Continue
- FTC Makes Significant Changes to GLBA Safeguards Rule, Requests Comment on Breach Reporting, and Adopts Final Privacy Rule for Motor Vehicle Dealers
- CFPB Announces Key Leadership Changes
- CFPB Issues Spring 2021 Semi-annual Report; Director Chopra Testifies Before Congress
- CFPB Publishes New Debt Collection Rule FAQs and Guidance Document on Validation Notice
- CFPB Issues Report on Credit Report Disputes
- CA DFPI Issues Fourth Modifications to Proposed Regulations to Implement 2018 Law Requiring Consumer-Like Disclosures for Commercial Financing
- CFPB Seeks Comments to Inform Inquiry Into Large Technology Companies That Offer Payment Services
- Did You Know?
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
The Biden administration’s prioritization of fair lending as a law enforcement focus took center stage with the announcement that the U.S. Department of Justice (DOJ) has launched a new initiative targeting redlining and that the DOJ and CFPB, in cooperation with the OCC, had settled the first lawsuit filed under the Initiative.
New DOJ Initiative. According to the DOJ, its new “Combatting Redlining Initiative” represents its “most aggressive and coordinated enforcement effort to address redlining” and “will seek to address fair lending concerns on a broader geographic scale than the [DOJ] has ever done before.” The initiative will be led by the DOJ’s Civil Rights Division’s Housing and Civil Enforcement Section in partnership with U.S. Attorney’s Offices. DOJ intends to use U.S. Attorneys’ Offices “as force multipliers to ensure that fair lending enforcement is informed by local expertise on housing markets and the credit needs of local communities of color.”
Significantly, the DOJ made clear that it plans to target not only redlining by depository institutions but to also look for potential redlining by non-depository institutions which, according to the DOJ, now make the majority of mortgages in this country and would include “all types of lenders of all sizes.” It is also significant that the DOJ plans to strengthen its partnership with financial regulatory agencies to ensure the identification and referral of fair lending violations to the DOJ and to increase coordination with state Attorneys General on potential fair lending violations.
In his remarks at the joint press conference with the DOJ and OCC announcing these developments, new CFPB Director Rohit Chopra noted that the Bureau would also be “closely watching for digital redlining, disguised through so-called ‘neutral algorithm’.” Although he noted that algorithms can often help eliminate bias, “black-box underwriting decisions are not necessarily creating a more level playing field and may be exacerbating the bias feeding into them,” and that “the speed at which banks and lenders are turning lending and marketing decisions over to these algorithms is concerning to me.”
Trustmark National Bank Settlement. The DOJ, CFPB, and OCC, announced they had entered into agreements with Trustmark National Bank (TNB) to resolve allegations that TNB engaged in lending discrimination by redlining predominantly Black and Hispanic neighborhoods in Memphis, Tennessee. Simultaneously with the filing of a joint complaint by the DOJ and CFPB against TNB in a Tennessee federal district court, the parties filed a consent order with the court and the OCC issued an administrative consent order.
Trustmark is a national bank headquartered in Jackson, Mississippi with 196 branches in five southern states. It currently operates 22 branches in the Memphis metropolitan area. In April 2020, the OCC referred the matter to the DOJ after information gathered during a 2018 fair lending examination suggested that TNB had engaged in unlawful redlining between 2014 and 2016. Investigations were opened by both the OCC and the CFPB.
The joint complaint is brought under the Fair Housing Act (FHA), the ECOA, and the CFPA. (The FHA claim is made only by the DOJ, the ECOA is made by both the DOJ and CFPB, and the CFPA claim is made only by the CFPB.) It alleges that, from 2014 to 2018, TNB engaged in unlawful redlining in the Memphis, Tennessee-Mississippi-Arkansas Metropolitan Statistical Area (Memphis MSA) by structuring its mortgage operations to avoid serving the credit needs of, and discourage those residing or seeking credit in, majority-Black and Hispanic census tracts from obtaining mortgage loans, while acting to serve the credit needs for mortgage loans in majority-white census tracts. The primary specific allegations relating to the relevant time period include that TNB:
- Maintained only three full-service branches in majority-Black and Hispanic census tracts and 15 full-service branches in majority-white tracts
- Assigned all of its mortgage loan officers to its branches in majority-white areas and did not assign a single loan officer to any of TNB’s branches located in majority-Black and Hispanic neighborhoods
- Relied almost entirely on mortgage loan officers to develop referral sources, conduct outreach to potential borrowers, and distribute marketing materials related to TNB’s mortgage lending services.
- Did not monitor or document where its loan officers developed referral sources or to whom they distributed marketing or outreach materials to ensure that such sources or distribution occurred in all neighborhoods in the Memphis MSA
- Used a marketing strategy in the Memphis MSA that was focused on developing commercial business, with the majority of print or digital advertising appearing in business-focused publications distributed primarily in majority-white neighborhoods while knowing that this focus was ineffective in generating mortgage loan applications from majority-Black and Hispanic neighborhoods in the Memphis MSA
- Made a smaller percentage of HMDA-reportable residential mortgage loans in majority-Black and Hispanic neighborhoods compared to its peers
- Had internal fair-lending policies and procedures that were inadequate to ensure that TNB was positioned to provide equal access to credit to majority-Black and Hispanic neighborhoods in the Memphis MSA
The proposed consent order requires TNB to pay a $5 million civil money penalty to the CFPB, with the amount payable to the CFPB to be remitted by $4 million upon TNB’s satisfaction of its obligation to pay a civil money penalty in that amount to the OCC (see below). TNB must also:
- Establish a $3.85 million loan subsidy program that will offer loans to qualified applicants on a more affordable basis when borrowing to purchase properties in majority-Black and Hispanic neighborhoods in Memphis. The subsidies can include closing cost assistance, down payment assistance, and payment of mortgage insurance premiums
- Open a new mortgage loan production office in a majority-Black and Hispanic census tract within the Memphis metropolitan area and fund $200,000 in targeted advertising per year to generate applications for mortgage loans in majority-Black and Hispanic neighborhoods
- Take remedial steps such as fair lending training of employees to improve its fair lending compliance and serve the credit needs of majority-Black and Hispanic neighborhoods in the Memphis metropolitan area
In addition to the proposed consent order filed by the DOJ and CFPB with the federal district court, the OCC issued an administrative Consent Order against TNB. The order assesses a $4 million civil money penalty against TNB for engaging in violations of the FHA. Unlike the DOJ/CFPB consent order which includes no specific findings that TNB engaged in redlining, the Comptroller’s findings set forth in the OCC Consent Order include that TNB engaged in a pattern or practice of violating the FHA by reason of having engaged in redlining.
In Part I of this two-part podcast, we examine the CFPB’s proposed rule implementing Sec. 1071 of the Dodd-Frank Act which would impose significant new data collection and reporting requirements on lenders in connection with credit applications made by women- or minority-owned small businesses. After reviewing the history of Sec. 1071 rulemaking (including the lawsuit that prompted the CFPB to act under a court-imposed deadline), we discuss the proposal’s key definitions and data collection requirements (including timing and related procedures and reuse of previously collected data).
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by John Culhane, a partner in the firm’s Consumer Financial Services Group, Lori Sommerfield, Of Counsel in the Group, and Heather Klein, an associate in the Group.
Click here to listen to the podcast.
In Part II of this two-part podcast, we continue our examination of the CFPB’s proposed rule implementing Sec. 1071 of the Dodd-Frank Act which would impose significant new data collection and reporting requirements on lenders in connection with credit applications made by small businesses, including women- or minority-owned small businesses. We discuss the “firewall provision” restricting employee access to data, the proposal’s intersection with HMDA reporting requirements, the likely timeline for issuance of a final rule and compliance deadlines, the outlook for CFPB supervision and enforcement of the final rule, operational considerations in preparing for implementation, and fair lending risk management implications and mitigants.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by John Culhane, a partner in the firm’s Consumer Financial Services Group, Lori Sommerfield, Of Counsel in the Group, Heather Klein, an associate in the Group, and Richard Andreano, a partner in the firm’s Mortgage Banking Group.
With help from Ballard Spahr colleagues Mindy Harris and Ron Vaske, I have now completed a months-long project in updating and expanding a 2017 White Paper addressing bank-model lending—programs involving partnerships between banks (or savings associations) and Fintech or other nonbank companies in the interstate delivery of loans.
The new White Paper, which runs 49 pages single-spaced, is designed to serve as a comprehensive survey of laws, cases and regulatory attitudes addressing bank-model lending. It costs $7,500 and covers:
- the statutes and cases providing the legal framework for the nationwide “exportation” of interest charges under bank-model lending programs;
- cases supporting and rejecting “true lender” attacks on bank-model programs;
- Madden and subsequent developments, including OCC and FDIC rules rejecting its conclusion that a nonbank loan purchaser loses the usury authority of the bank selling it loans;
- potential Maryland and other licensing attacks on bank-model programs;
- an analysis of the parties posing risks for these programs, including risk rankings of the states of greatest concern (with explanations); and
- risk factors, risk mitigants and risk reduction measures.
The Table of Authorities in the White Paper contains hyperlinks to all relevant authorities cited in the White Paper.
Banks and companies interested in purchasing the White Paper should contact Jasmine Loftland at 215.864.8610 or email@example.com.
On October 28, 2021, in a 2-1 split panel decision, the 11th Circuit Court of Appeals vacated its prior opinion in Hunstein v. Preferred Collection and Management Services, Inc. (published at 994 F.3d 1341 (11th Cir. 2021)), and substituted a new opinion in its place. The new opinion is published, meaning it has immediate legal effect and is binding on future 11th Circuit judicial panels and district courts within the circuit.
While the members of the three-judge panel that reconsidered Hunstein are the same as those who rendered the prior opinion last spring, the Supreme Court’s intervening decision in TransUnion v. Ramirez, 141 S. Ct. 2190 (2021) resulted in divergence among the panel on the standing issue. This time, as a result of TransUnion, the most senior judge on the panel, Judge Tjoflat, penned a dissenting opinion while the other two members ultimately reached the same conclusions on the plaintiff’s Article III standing and the merits of the plaintiff’s underlying 15 U.S.C. § 1692c(b).
As in its prior opinion, the majority determined that the plaintiff had standing to sue because he had suffered an “intangible injury resulting from a statutory violation.” In determining whether the plaintiff had sufficiently alleged that he had suffered an intangible injury, the majority considered both: (1) the history of the alleged intangible harm; and (2) the judgment of Congress as to the FDCPA’s underlying purpose and protections.
Citing both TransUnion and Spokeo, in evaluating the history prong, the majority held that there is a concrete injury where “the asserted harm has a ‘close relationship’ to a harm traditionally recognized as providing a basis for a lawsuit in American courts.” TransUnion, 141 S. Ct. at 2200 (quoting Spokeo, 578 U.S. at 341). Here, the alleged common law harm was an invasion of privacy – specifically, public disclosure of private facts. The majority noted such claim has been long recognized as a valid tort claim for more than a century. The majority further reasoned that Article III does not require a precise fit between an alleged intangible harm and a tort recognized at common law in order to confer standing. Rather, the majority held that “a plaintiff need only show that his alleged injury is similar in kind to the harm addressed by a common-law cause of action, not that it is similar in degree” to satisfy the history prong of Article III’s standing test for intangible harms.
Applying this standard to the facts at issue, the majority held that the plaintiff satisfied the history prong because his alleged harm was similar in kind to the tort of public disclosure of private facts, even if potentially not similar in degree. The majority reasoned that because the plaintiff’s claim alleged the debt collector “disclosed” his personal information and that of his son to the employees of a third-party letter vendor, taking the allegation on its face as required at this stage of litigation, that mean “some measure of disclosure in fact occurred.”
The majority further reasoned that this alleged disclosure of “intensely private information . . . could clearly offend a reasonable person and is not of legitimate public concern.” While recognizing that the alleged disclosure to the third-party letter vendor’s employees may have been less widespread than the types of disclosures typical of public disclosure of private fact claims, that is a matter of degree rather than “kind.” According to the majority, requiring similarity in the degree of harm would be inconsistent with existing 11th Circuit jurisprudence and some sister circuits.
Turning to consideration of Article III’s second prong, the majority again determined that the judgment of Congress also weighed in favor of holding that plaintiff had alleged a concrete injury. To do so, the majority looked to the FDCPA’s section on Congressional findings and statement of purpose, where Congress identified invasions of individual privacy as one of the harms against which the FDCPA is directed. As a result, both prongs of Article III’s test for intangible harms were satisfied and sufficient to establish Article III standing.
The majority then addressed the merits of the underlying FDCPA claim. Consistent with the reasoning of the court’s prior decision, the majority again concluded that the plaintiff sufficiently alleged a potential claim for an unauthorized disclosure of the debt under § 1692c(b) of the FDCPA. But the majority did not hold there actually was a violation, which is important to recognize. Rather, consistent with its reasoning in the prior panel opinion, the court repeatedly remarked that it had to assume the truth of the allegations in the plaintiff’s complaint at this stage of the litigation. As such, in a nutshell, the parties’ prior stipulation that the transmission of the information about plaintiff’s debt to the letter vendor was a “communication” under the FDCPA, there could not be any doubt the communication was sent “in connection with the collection of any debt” within the meaning of § 1692c(b). The majority reached this holding by relying on the plain text of the FDCPA and broad, plain language meaning of the phrase “in connection with.”
In dissent, Judge Tjoflat argued that the majority’s decision conferred standing too broadly in light of the Supreme Court’s decision in TransUnion LLC v. Ramirez. The dissent argued that the decision in TransUnion stands for the position that:
the Spokeo analysis for intangible harms based on the violation of a statute – that is, looking at history and the judgment of Congress – is individualized for every plaintiff’s injury. Just because some plaintiffs’ injuries will have a common-law analogue and are the very kind of injuries Congress was trying to prevent does not mean that other plaintiffs, who allege a violation of the very same statute, will get a golden ticket to standing without also satisfying what Spokeo requires.
Regarding the history prong of the analysis, the dissent argued that TransUnion requires plaintiffs to allege facts that allow the court to find a common law analogue to the statutory violation. Judge Tjoflat disagreed with the majority opinion that the plaintiff’s alleged statutory violation is analogous to a public disclosure of private facts, noting that other courts hold that an invasion of privacy claims “requires publicity in the broad, general sense of the word ‘public.’” Here, there was no publicity because only the third-party letter vendor received the plaintiff’s information, not the public at large.
Next, the dissent flatly disagreed with the majority’s opinion that “some measure of disclosure” is similar enough to “publicity” to find the facts analogous to the tort of public disclosure of private facts. The dissent further argued that the majority’s opinion lacked analysis of the second two elements of the tort of invasion of privacy: (i) whether the disclosure could offend a reasonable person and (ii) whether it is not of legitimate public concern. Finally, in concluding the history prong of the court’s standing analysis was not satisfied, the dissent observed that at common law, debt notifications to third-parties were not considered highly offensive to a reasonable person.
Regarding the judgment of Congress, the dissent noted that under the FDCPA, “Congress seemed to explicitly envision the role of intermediaries, like mail vendors, in the statutory scheme,” as not all transmission to third parties are prohibited. As support for this position, the dissent noted that the FDCPA provides restrictions around the use of telegrams, which implies that debt collectors can use telegrams even though the information contained in the telegram would necessarily be transmitted through a telegram operator. Additionally, when a consumer incurs debt, they are consenting to receiving information about the debt because the FDCPA requires debt collectors to communicate with consumers. Therefore, it would be odd for Congress to create an impediment to this process, which is affirmatively required by the FDCPA.
Finally, the dissent noted that the damages provision of the FDCPA, 15 U.S.C. § 1692k presumes that there would be actual damages for a violation of the statute. In Judge Tjoflat’s view, this supported the opinion that Congress did not intend for a violation of 15 U.S.C. § 1692c(b) to create standing.
Unfortunately, this substituted opinion is no less problematic for the debt collection industry than the prior one. As the 11th Circuit itself observes:
It’s not lost on us that our interpretation of § 1692c(b) runs the risk of upsetting the status quo in the debt-collection industry. We presume that, in the ordinary course of business, debt collectors share information about consumers not only with dunning vendors like [the defendant’s vendor], but also with other third-party entities. Our reading of § 1692c(b) may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost.
As the entire panel recognized, this decision will likely impact the use of third-parties in the collections process beyond just letter vendors. Even before the court’s substituted opinion, Hunstein-related complaints were already being filed in which the use of other communication and scrub vendors violates § 1692c(b) of the FDCPA. In many instances, such complaints also include parallel claims under state law.
Although disappointing in that these claims will continue to be brought and likely expand in the near-term, there are some potential upsides of this new opinion. First is Judge Tjoflat’s dissent. On one hand, had it been the majority opinion, the industry would likely be litigating even more of these claims in state courts. But on the other, Judge Tjoflat provides useful analysis and a helpful outline that may be instructive to litigants and courts as they encounter, evaluate, and decide these claims moving forward. Additionally, both the majority and the dissent seem to express significant doubt as to whether the plaintiff actually will be able to prove that any alleged unauthorized disclosure occurred.
The FTC’s final rule released last week amending its Standards for Safeguarding Customer Information (Safeguards Rule) under the Gramm-Leach-Bliley Act (GLBA) will require significant changes in data security policies and procedures to be made by non-bank financial institutions covered by the Safeguards Rule. Such institutions include finance companies, mortgage companies and brokers, motor vehicle dealers, small-dollar lenders, and debt collectors.
The amendments were adopted along party lines, with the three Democratic Commissioners (who then included Rohit Chopra before his move to CFPB Director) voting in favor of the amendments and the two Republican Commissioners voting against the amendments (and issuing a joint dissent). As discussed below, the FTC also released last week a Supplemental Notice of Proposed Rulemaking requesting comment on a further amendment to the Safeguards Rule and a final rule amending its Privacy Rule (which implements the GLBA privacy notice requirements for motor vehicle dealers). (These two latter items were approved by a 5-0 vote.)
In this blog post, we provide an overview of the changes to the Safeguards Rule. We will discuss the changes in greater detail and their implications for covered institutions in subsequent blog posts. The final rule is effective 30 days after the date it is published in the Federal Register.
The key changes are:
- Risk assessment and safeguards. The final rule requires a risk assessment to be in writing and adds specific criteria that must be included in an assessment. It also adds (1) requirements for what must be addressed by the safeguards an institution must design and implement to control the risks identified through a risk assessment, and (2) mechanisms intended to ensure the effectiveness of employee training and service provider oversight.
- The final rule requires the designation of a single “Qualified Individual” who is responsible for overseeing and implementing an institution’s information security program and enforcing the program. It also requires the Qualified Individual to provide written reports on the information security program at least annually to the institution’s board of directors or equivalent governing body.
- Small Business Exemption. The final rule exempts financial institutions that collect information on fewer than 5,000 consumers from the requirements of a written risk assessment, incident response plan, and annual reporting to the board of directors.
- Expanded Definition of “Financial Institution.” The final rule amends the definition of “financial institution” to include entities that are “significantly engaged in activities that are incidental to  financial activities.” This change means that finders will be considered financial institutions covered by the Safeguards Rule.
In a Supplemental Notice of Proposed Rulemaking, the FTC requests comment on whether the Safeguards Rule should be further amended to require a financial institution that experiences a security event to report the event to the FTC. The proposed amendment would require an institution to report a security event in which the misuse of customer information has occurred or is likely, and at least 1,000 consumers have been affected or reasonably may be affected. Such notice would need to be provided electronically, using a form on the FTC’s website within 30 days of discovery of the event and include certain specified information. Comments on the proposal are due 60 days after the date it is published in the Federal Register.
The third item released by the FTC is a final rule amending its Privacy Rule. As a result of changes made to the FTC’s GLBA authority by the Dodd-Frank Act, the Privacy Rule applies only to certain motor vehicle dealers. The 2015 FAST Act amended the GLBA to create an exception to the annual notice requirement if an institution only shares nonpublic personal information under certain GLBA provisions that do not trigger any opt-out rights and the institution’s disclosure policies and practices have not changed from its most recent privacy notice. The final rule amends the Privacy Rule for motor vehicle dealers to reflect the FAST Act exception. The final rule is effective 30 days after the date it is published in the Federal Register.
- Kim Phan
On October 30, the CFPB announced changes in two key leadership positions, Assistant Director for the Office of Supervision Policy and Assistant Director for the Office of Enforcement.
Lorelei Salas was named Assistant Director for Supervision Policy and will also serve as the Acting Assistant Director for Supervision Examinations. From 2016 to 2021, Ms. Salas served as Commissioner of the New York City Department of Consumer and Worker Protection. According the CFPB’s press release, under Ms. Salas’s leadership, the New York agency “aggressively pursued corporations that employed unlawful, predatory practices to target low-income and immigrant consumers.” Previously, she was the legal director at Make the Road New York, where she supervised immigration, housing, and employment legal services programs designed to increase access to justice for immigrants and refugees.
Eric Halperin was named Assistant Director for the Office of Enforcement. Most recently, Mr. Halperin was CEO of Civil Rights Corps. From 2010 to 2014, Mr. Halperin served in leadership roles in the Civil Rights Division of the Justice Department, first as Special Counsel for Fair Lending, and later as Acting Deputy Assistant Attorney General overseeing the Division’s fair housing, fair lending, and employment enforcement programs.
Ms. Salas and Mr. Halperin will both report to the Associate Director of Supervision, Enforcement and Fair Lending (SEFL). It has been reported that Dave Uejio, former CFPB Acting Director, will lead SEFL on a temporary basis while his nomination to serve as Assistant Secretary for Fair Housing and Equal Opportunity at HUD is pending.
It has also been reported that Seth Frotman is returning to the CFPB to serve as Acting General Counsel and Senior Advisor. Until 2018, Mr. Frotman served as CFPB Student Loan Ombudsman. He resigned while the Bureau was under the leadership of former Acting Director Mulvaney. In his letter to Mr. Mulvaney tendering his resignation, Mr. Frotman was highly critical of the CFPB’s actions in the student loan arena. Most recently, Mr. Frotman served as Executive Director of the Student Loan Borrower Protection Center.
Additionally, according to reports, Jean Chang will serve as Acting Chief Operating Officer. Ms. Chang has worked at the CFPB since 2014, serving most recently as the Acting Deputy Chief Operating Officer and Chief of Staff for Operations.
In advance of Director Chopra’s appearances before the House Financial Services Committee and the Senate Banking Committee, the CFPB issued its Spring 2021 Semi-Annual Report to Congress covering the period October 1, 2020, through March 31, 2021.
With former Director Kraninger having resigned on January 20, 2021, the report primarily reflects CFPB activity under her leadership. Except as noted below, neither the report nor former Acting Director Uejio’s introductory message provide new insight into the plans of the “new CFPB.” However, in his first appearances before Congress as CFPB Director, Director Rohit Chopra did share some noteworthy information about his priorities and plans for the Bureau.
The new report indicates that the Bureau had 1,532 employees as of March 31, 2021, representing an increase of 28 employees from the number of employees as of September 30, 2020 (1,504). Given the expected ramp up in CFPB enforcement under Director Chopra’s leadership, an increase in CFPB staffing can also be expected over the coming months. Indeed, it has been clear since Mr. Uejio’s initial days as Acting Director that fair lending enforcement would be a priority of the “new CFPB.” Significantly, the new report indicates that fair lending supervision will also be a priority. It states:
During this reporting period, Supervision began to develop additional fair lending supervision strategic priorities, informed by the Acting Director’s priority to advance equity using all of the tools Congress gave it. As a result of this prioritization process, the Bureau plans to focus additional fair lending supervision efforts on various product lines, especially mortgage origination and small business lending.
Although Director Chopra’s appearances before the House and Senate were officially billed as discussions of the semi-annual report, his responses to questions from lawmakers provided information and insights not found in the report, including the following:
- CFPB enforcement activity can be expected to focus on “the largest firms that are engaged in nationwide harm.” In Director Chopra’s view, a focus on large companies “is one of the best ways we can accomplish our mission.”
- Director Chopra expressed significant reservations about the creation of a government-run credit bureau, a concept floated by the Biden administration.
- The use of payments data by large technology firms will be a major CFPB focus, as reflected in the orders that the CFPB sent last week to six technology platforms offering payment services that directs the companies to provide information to the Bureau.
- The CFPB can be expected to rely primarily on enforcement, rather than rulemaking or written guidance, to define what is an “abusive” act or practice. Director Chopra indicated that he hopes “to create a durable jurisprudence” on the meaning of abusiveness.
On October 29, the CFPB published additional frequently asked questions on Regulation F, its final debt collection rule, as well as a guidance document. The new FAQs address validation notice requirements (including for residential mortgage debts) and the guidance document deals with how to disclose the validation information on the itemization table on the model validation notice. Regulation F is effective November 30, 2021. (Last month, the CFPB published FAQs on the rule’s limited-content message and call frequency provisions.)
Debt Collection Rule FAQs Update
Debt collectors may use Model Form B-1 in Appendix B to Regulation F to comply with the validation information content and form requirements of § 1006.34(c) and (d)(1). The CFPB’s new FAQs on validation information address the following questions:
- What information is required?
- Is there a model validation notice?
- Is use of the model validation notice required?
- Can the model validation notice be changed?
The CFPB’s model validation notice (in both English and Spanish) contains five categories of validation information: (i) debt collection communication disclosures; (ii) debt-related information; (iii) itemization-related information; (iv) information about consumer protections; and (v) consumer-response information.
The CFPB expects a validation notice to contain all such required information—this is a communication from a debt collector; information about the debt; amount owed and itemization; where consumers can go for information about protections; and a way to respond—in the required format. Debt collectors who use the Bureau’s model validation notice have a “safe harbor” for compliance with the content and format requirements.
The CFPB explicitly states that the final rule “does not require a debt collector to use the model validation notice” and that use of the model notice “is one way to comply to comply [with the content and format requirements in Regulation F.]” It states further that debt collectors who choose “not to use the model validation notice” or who make “changes that are not specified in the Rule,” resulting in a notice that is not substantially similar to the model validation notice, do not necessarily violate the final rule. They will not, however, be able to avail themselves of the safe harbor protection in a lawsuit or a supervisory context.
The Bureau also published new FAQs on validation information for residential mortgage debt that address the following questions:
- Is there a special rule for residential mortgage debt when disclosing itemization information?
- What information may be omitted?
- Is there safe harbor protection for residential mortgage debt?
- What is the “most recent periodic statement” for purposes of the Mortgage Special Rule?
- What itemization date is used for the Mortgage Special Rule?
An itemization of the debt is generally a required component of a validation notice. However, under the final rule’s special rule for certain residential mortgage debt in § 1006.34(c)(5) (Special Rule), debt collectors can instead provide the most recent periodic statement required by Regulation Z as a substitute for the itemization-related information. The CFPB indicates that the statement can be one that was provided by the debt collector (as long as that periodic statement was required by Regulation Z at the time it was provided). The statement must be included in the same communication as the validation notice. In the space on the validation notice where a debt collector would have put the omitted itemization information, the debt collector could provide the statement, “See the enclosed periodic statement for an itemization of the debt.”
The itemization-related information that debt collectors using the Special Rule are permitted to omit from the validation notice consists of the (i) itemization date; (ii) amount of the debt as of the itemization date; and (iii) itemization of the current amount of the debt. However, the Bureau does explicitly (and emphatically) point out that “while the Itemization Table on the model validation notice includes the validation information that may be omitted, it also includes the current amount of the debt, which is validation information that may not be omitted from the validation notice under the Special Rule. A debt collector who uses the Special Rule must still disclose the current amount of the debt on the validation notice.” The CFPB also points out that although a debt collector using the Special Rule does not need to disclose an itemization date on the validation notice, it still needs to determine the itemization date to disclose the other date-dependent validation information.
Although confirming that the safe harbor remains available to a debt collector who uses the model validation notice but also complies with the Special Rule, the CFPB stated that the safe harbor is limited to compliance with validation information and format requirements for the information provided in the actual model validation notice only. The debt collector does not receive a safe harbor for the content and format requirements for the content included in the periodic statement.
Debt Collection Rule: Disclosing the Model Validation Notice Itemization Table
In addition to its new FAQs, the CFPB also published a guidance document, “Debt Collection Rule: Disclosing the Model Validation Notice Itemization Table.” The Bureau indicates that one way a debt collector using the model validation notice may, but is not required to, complete the Itemization Table is by using the following four steps:
- Select the itemization date.
- Determine the amount of the debt as of the itemization date.
- Determine the Itemized Amounts since the itemization date.
- Determine the amount of the debt.
In the guidance document, the CFPB provides a detailed discussion of each of these four steps. It also provides example itemization tables illustrating how a debt collector could complete the Itemization Table when collecting various types of debts. The types of debts illustrated in the examples are credit card debt, residential mortgage debt, medical debt, and multiple medical debts owed by the same consumer.
The CFPB recently published a new report, “Disputes on Consumer Credit Reports.” Using data on auto loan, student loan, general purpose credit card, and retail card accounts opened between 2012 and 2019, the report looks at the demographic characteristics of disputers and the outcomes for accounts with dispute flags. The report is yet another signal of a likely CFPB focus on potential violations of anti-discrimination laws not only by servicers of mortgage loans, but also by servicers of all types of consumer credit accounts.
The report’s key findings are:
- Consumers who had one or more account opened between 2012 and 2019 and had a dispute flag on at least one account of a given type of credit (disputers) were generally younger than consumers who had an account opened between 2012 and 2019 but had no dispute flags (non-disputers). The one exception to this pattern is for student loans, with student loan disputers more likely to be in the 30 to 44 age group than the 18 to 29 age group. The likely explanation offered by the CFPB is that consumers with a student loan opened in their 30’s are more likely to have refinanced or consolidated a loan and such loans may be more likely to have reporting issues that lead to disputes.
- For all four types of credit, disputers were much more likely than non-disputers to have low credit scores when the disputed account was opened. The CFPB offers several possible explanations. One is that consumers with deep subprime and subprime credit scores are more likely to experience errors. Another is that such consumers are more likely to check their credit reports more frequently than consumers with higher credit scores because they are more likely to have a credit application denied and thus also more likely to take advantage of the right to obtain a free credit report disclosed in an adverse action notice.
- Dispute flags were significantly more common from consumers residing in majority Black census tracts compared to consumers residing in majority White census tracts. The CFPB suggests that the disparity in dispute flags rates by census tract race in part reflects the patterns in credit scores.
- After a dispute flag first appears, outcomes vary substantially across different types of credit. For example, a substantial share of auto loans with dispute flags is ultimately closed, a large share of student loans with disputed flags is ultimately deleted, and a large share of general purpose credit cards has the dispute flag removed with the account remaining open. Retail cards are significantly less likely to remain open with the dispute flag removed compared to general purpose credit cards and instead are more likely to be closed or deleted
The CFPB concludes the report by commenting that an important subject for further research is whether the patterns observed in the report are driven by differences across groups and credit types in the type or frequency of the underlying issues that result in a dispute flag or whether they are driven by furnishers’ practices for reporting dispute flags or responding to disputes.
The California Department of Financial Protection and Innovation has published a fourth round of modifications to implement SB 1235, the bill signed into law on September 30, 2018, that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. The law contains exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property. Compliance with the new disclosure requirements is not required until the DFPI’s final regulations become effective.
The small number of changes made by the DFPI in the fourth modifications suggests that the DFPI is close to finalizing its proposal. The most significant changes in the fourth modifications concern the definitions of “Average monthly cost” and “Estimated monthly cost,” items which must be included in the disclosures for certain products.
Comments on the fourth modifications are due by November 22, 2021.
At the end of last month, the CFPB sent orders to six large technology platforms offering payment services that directs them to provide information to the Bureau about their payments products and services and their collection and use of personal payments data.
On November 5, 2021, the CFPB published a notice in the Federal Register seeking public comments to inform its inquiry. The notice states that the Bureau invites comments from “any interested parties, including consumers, small businesses, advocates, financial institutions, investors, and experts in privacy, technology, and national security.” Comments must be received on or before December 6, 2021.
Texas Adopts Provisions Regarding Residential Mortgage Loan Companies
The Texas Finance Commission, on behalf of the Department of Savings and Mortgage Lending, adopted provisions relating to licensees under the Residential Mortgage Loan Companies rules that include, among other items: (1) clarifying how a mortgage company may sponsor individual mortgage loan originators (MLOs); (2) clarifying the role of an appointed qualifying individual for a company; and (3) updating advertising, books and records, and examinations requirements.
The provisions became effective on November 4, 2021. The publication in the Texas Register (pages 7387-89) is available here.
Texas Adopts Provisions Regarding Mortgage Bankers and Residential Mortgage Loan Originators
The Texas Finance Commission, on behalf of the Department of Savings and Mortgage Lending, adopted provisions relating to licensees under the Mortgage Bankers and Residential Mortgage Loan Originators rules that include, among other items: (1) clarifying how an individual MLO may be sponsored by a mortgage company or mortgage banker; (2) clarifying the rules relating to an MLO’s temporary authority to operate in another jurisdiction; and (3) updating advertising, books and records, and examinations requirements.
The provisions became effective on November 4, 2021. The publication in the Texas Register (pages 7392-96) is available here.
November 15, 2021, 2 PM EST
Speaker: Richard J. Andreano, Jr.