Legal Alert

Mortgage Banking Update - January 19, 2023

January 19, 2023
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CFPB Proposes Registry for Supervised Nonbanks Using Form Contracts Containing Arbitration Provisions, Waivers, or Other Limits

The CFPB has issued a proposed rule to establish a system for the registration of nonbanks subject to CFPB supervision that use “certain terms or conditions that seek to waive consumer rights or other legal protections or limit the ability of consumers to enforce their rights.”  Arbitration provisions are among the terms that would trigger registration.  The CFPB did not issue an Advance Notice of Proposed Rulemaking to seek public input before issuing the proposal.  Comments on the proposal must be filed by March 13, 2023 or 30 days after the date it is published in the Federal Register, whichever is later.

Ever since Rohit Chopra was sworn in more than a year ago as CFPB Director, consumer advocates have been lobbying him to ban the use of arbitration provisions (or at least class action waivers contained therein) in consumer financial services contracts.  Until now, he has wisely resisted that pressure because of the Congressional Review Act (CRA), which prohibits a federal agency from promulgating a regulation that is “substantially the same” as one that Congress has overridden in a CRA resolution.  On November 1, 2017, then President Trump signed into law a joint CRA resolution passed by the House and Senate overriding the CFPB’s final arbitration rule that (1) banned the use of class action waivers in arbitration provisions in consumer financial services contracts, and (2) required companies to report certain information about consumer financial services arbitrations involving such companies.  In the CFPB’s exhaustive report on the study it conducted before proposing the rule, the CFPB had concluded that the record did not support the promulgation of a rule that would ban arbitration altogether.

Unfortunately, Directors Chopra has caved in to the constant pressure of consumer advocates to ban arbitration (or class action waivers contained therein) by proposing a registry for nonbanks supervised by the CFPB that would require reporting to the CFPB and public disclosure about their use of arbitration provisions (and class action waivers contained therein).  Director Chopra is undoubtedly hoping that companies will abandon the use of arbitration provisions (and class action waivers contained therein) rather than run the risk of, at worst, an enforcement action by the CFPB, or public shaming.  To put it bluntly, the CFPB is trying to accomplish its objective of eliminating arbitration through a back door approach.  To avoid the criticism it would face from the industry had the CFPB sought to adopt a new regulation that dealt only with arbitration provisions, the CFPB has broadened the scope of the proposed registry to include other contract provisions that the CFPB Director dislikes.

In issuing the proposal, the Bureau relies on its authority under Consumer Financial Protection Act (CFPA) sections 1022(b) and (c) and 1024(b).  CFPA section 1022(b) authorizes the Bureau to prescribe rules “as may be necessary or appropriate to enable the Bureau to administer and carry out the purposes and objectives of the Federal consumer financial laws, and to prevent evasions thereof.”  CFPA section 1022(c) authorizes the Bureau to prescribe rules to collect information from covered persons for purposes of monitoring for risks to consumers in the offering or provision of consumer financial products or services, including “rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”  Section 1022(c) also authorizes the Bureau to publicly release information obtained pursuant to section 1022, subject to limitations specified therein.  Finally, Section 1024(b) authorizes the Bureau to exercise supervisory authority over certain nonbank covered persons.

Key aspects of the proposal include the following:

Supervised registrants.  Unless covered by one of the proposal’s limited exclusions, any nonbank subject to CFPB supervision that uses “covered form contracts” containing a “covered term or condition” would be a “supervised registrant” required to register.  Among the proposal’s limited exclusions are exclusions for companies with less than $1 million in annual receipts and companies that engage in de minimis use of contracts containing covered terms and conditions.  Another exclusion applies to:

A person that used covered terms or conditions in covered form contracts in the previous calendar year solely by entering into contracts for residential mortgages on a form made publicly available on the Internet required for insurance or guarantee by a Federal agency or purchase by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation (or its successors), or the Government National Mortgage Association.  This exclusion does not apply if the person obtained a court or arbitrator decision in the previous calendar year on the enforceability of a covered term or condition in a covered form contract as described in [the rule].

Nonbanks subject to CFPB supervision consist of:

  • Regardless of its size, a provider of residential mortgage loans or certain related services, payday loans, or private education loans;
  • A provider considered to be “a larger participant of a market for other consumer financial products or services;” and
  • A nonbank as to which the CFPB has exercised its risk-based supervisory authority.

Covered terms or conditions.  A “covered term or condition” is defined as any provision in “a covered form contract” that expressly purports to establish “a covered limitation on consumer legal protections” applicable to the offering of or provision of a consumer financial product or service.  A “covered limitation on consumer legal protections” is defined as any covered term or condition (irrespective of legal validity or enforceability):

  • Precluding the consumer from bringing a legal action after a certain period of time;
  • Specifying a forum or venue where a consumer must bring a legal action in court;
  • Limiting the ability of the consumer to file a legal action seeking relief for other consumers or to seek to participate in a legal action filed by others;
  • Limiting liability to the consumer in a legal action including by capping the amount of recovery or type of remedy;
  • Waiving a cause of legal action by the consumer, including by stating a person is not responsible to the consumer for a harm or violation of law;
  • Limiting the ability of the consumer to make any written, oral, or pictorial review, assessment, complaint, or other similar analysis or statement concerning the offering or provision of consumer financial products or services by the supervised registrant;
  • Waiving, whether by extinguishing or causing the consumer to relinquish or agree not to assert, any other identified consumer legal protection, including any specified right, defense, or protection afforded to the consumer under Constitutional law, a statute or regulation, or common law; or
  • Requiring that a consumer bring any type of legal action in arbitration.

In its discussion of the proposal, the Bureau notes that if an arbitration agreement contains specific express waivers (such as a jury trial waiver), the waiver would trigger separate reporting. It also notes that in the context of auto finance agreements, if a limitation in the sale also purports to establish a covered limitation on legal protections the consumer may have, including recourse, against a finance company purchasing the associated retail installment contract, the limitation may also qualify as a covered term or condition.

Covered form contract.  A “covered form contract” is defined as “a written agreement between a covered person and a consumer that was drafted before the transaction for use in multiple transactions and contains a covered term or condition.”  (While the Bureau’s press release announcing the proposal and Director Chopra’s statement about the proposal make numerous references to “non-negotiable” or “take it or leave it” contracts, the Bureau notes in its discussion of the proposal that it “is not proposing to expressly limit the definition of a covered form contract to contracts that do not reflect any negotiation.”)  A “supervised registrant” would be required to register if it “use[s] a covered term or condition,” which is defined as “entering into a covered form contract” or “obtaining a court or arbitrator decision ruling on the enforceability of a covered term or condition in a covered form contract.”  The proposal lists the circumstances under which a company is considered to “enter into” a covered form contract.  In addition to providing a new consumer financial product or service that is governed by a covered form contract, such circumstances include:

  • Adding a covered form contract to a pre-existing consumer financial product or service, such as when a loan servicer or debt collector uses a covered form contract for a payment plan, a payment authorization, or a debt modification or settlement;
  • Providing a new consumer financial product or service that is subject to a pre-existing covered form contract and the provider is a party to the contract; or
  • Acquires or purchases a consumer financial product or service subject to a covered form contract even if the seller is not subject to CFPB supervision or a covered person, such as when a larger participant auto finance lender acquires a retail installment sales contract from an automobile dealer excluded from the Bureau’s supervisory authority.

Registration requirement.  Each calendar year, a supervised registrant would be required to provide “identifying” and “administrative” information to the Bureau, together with information about its use of covered terms and conditions in the previous calendar year.  Such information would include:

  • The consumer financial products and services for which the registrant uses covered terms and conditions;
  • Each state or jurisdiction in which the products or services are offered or provided;
  • For each covered form contract entered into, various items of information that include each type of covered limitation on consumer legal protections and specified information for each type of limitation that varies with the nature of the limitation.  For example, for any limitation on liability to the consumer, waiver of a cause of action by the consumer, or limitation on consumer reviews, the registrant must provide the text of the limitation or waiver; and
  • Whether, as a party to a legal action, the registrant obtained one or more court or arbitrator decisions regarding enforceability of a covered term or condition in a covered form contract and, if so, certain information relating to such decisions, included the type of covered term or condition involved in the decision and whether the decision enforced or declined to enforce the covered term or condition at issue.  

Despite the CFPB’s claim that it should be “straightforward in most cases” for a company to determine whether it must register, the proposal includes an option for a company to file a notice of non-registration.  A company using that option would be required to file a notice with the registration system stating that it is not registering “because it has a good faith basis to believe that it is not a supervised registrant, or that it is not registering terms or conditions contained in a contract that it uses because it has a good faith basis to believe that the contract is not a covered form contract or that the terms or conditions are not covered terms or conditions.  In its discussion of the proposal, the Bureau states that when a company makes a “non-frivolous filing,” it would not bring an enforcement action based on the company’s failure to comply with the registration requirement unless the Bureau first notified the company that it believed the company did qualify as a supervised registrant or that its contract terms or conditions are covered terms or conditions and has provided the company with a reasonable opportunity to comply.

The Bureau’s proposal has quickly drawn criticism as an attempt by the Bureau to both scare and shame companies that use covered terms and conditions, thereby placing pressure on companies to discontinue their use even if legally permissible.  The Bureau’s discussion of how the registry will facilitate its risk-based supervision of nonbanks seems to carry an implicit threat that companies that use covered terms and conditions are more likely to face heightened scrutiny.  According to the Bureau, the registry will inform its prioritization of which entities to examine.  As an example, the CFPB states “when covered terms and conditions violate anti-waiver and other legal prohibitions in Federal consumer financial law, the proposed registry could highlight where this may be a problem, potentially facilitating prioritization of supervisory action or, in some cases, potentially, enforcement action.”  Indeed, the Bureau expresses the view that “a company that uses an unlawful covered term or condition may have a poor compliance management system and thus may be more likely to violate Federal consumer financial law.”  And going a step further, the Bureau warns that “the existence of a covered term or condition in some circumstances may be indicative of a violation of law, since a company that would go to such lengths to include certain terms or conditions in its contracts may be acting in other ways to undermine the underlying rights addressed by the waivers or limitations.”  Moreover, the Bureau indicates that because use of covered terms and conditions would require a company subject to CFPB supervision to register, the registry would allow the CFPB to identify companies subject to its supervision of which it was previously unaware and which it could then examine.

The Bureau also suggests that the registry may drive business to companies that do not use covered terms and conditions (and therefore would not be registered).  It states that “companies that do not include covered terms and conditions in their contracts may consider using their absence from being required to register and other information in the registry from competitors to market their consumer financial products and services as potentially less risky for consumers.”

As we study the proposal in greater depth, an issue that will merit further consideration is whether the proposal is a proper exercise of the various authorities cited by the Bureau.  With regard to the proposal’s inclusion of arbitration provisions, we will also be looking at the proposal in light of the Bureau’s previously-issued final arbitration rule.  As we note above and as the Bureau acknowledges in its proposal, that rule was overturned by Congress under the CRA in late 2017.   The CRA provides that “a new rule may not be reissued in substantially the same form, and a new rule that is substantially the same as [the voided] rule may not be issued, unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule” 

The proposed rule requires reporting of arbitration awards and court orders enforcing or not enforcing the arbitration provision.  Moreover, the Bureau has requested comments on whether it should also require supervised registrants to submit information concerning other terms of the arbitration provision, including the identity of the arbitration administrator. These requirements appear to overlap, at least in part, with the Bureau’s disapproved final arbitration rule insofar as it required the submission of information concerning arbitration proceedings for publication on the Bureau’s website.  The Bureau has described the reporting function of the final rule as follows:

The rule also makes the individual arbitration process more transparent by requiring companies to submit to the CFPB certain records, including initial claims and counterclaims, answers to these claims and counterclaims, and awards issued in arbitration.  The Bureau will collect correspondence companies receive from arbitration administrators regarding a company’s non-payment of arbitration fees and its failure to follow the arbitrator’s fairness standards.  Gathering these materials will enable the CFPB to better understand and monitor arbitration, including whether the process itself is fair.  The materials must be submitted with appropriate redactions of personal information. The Bureau intends to publish these redacted materials on its website beginning in July 2019.

Close scrutiny is warranted to ensure that the Bureau is not starting down a path that would accomplish indirectly what Congress prevented it from doing directly when it disapproved the Bureau’s final arbitration rule, i.e., prohibit the enforcement of class action waivers in consumer arbitration agreements.  Throughout its proposal, the Bureau continues to assert its preference for class actions over arbitration, which it characterizes as a “contract term that limits enforcement of consumer rights.”  It laments that the “risks that class actions are not available … remain in particular after the Bureau’s 2017 rulemaking to address them was voided by a joint resolution of Congress signed by the President.”  And, it cites its 2015 empirical study of arbitration as support for its continuing belief that arbitration is inferior to class actions as a procedure for resolving consumer disputes.  Nevertheless, as we have observed on numerous occasions, the data contained in the Bureau’s own study show that individual arbitration is faster, less expensive and more beneficial financially to consumers than class action litigation.

Unfortunately, while the Bureau touts its present proposal as an opportunity to educate consumers on the risks posed by arbitration provisions and other contract terms, it has not spent any resources educating consumers about the benefits of arbitration.  Congress obviously concluded that arbitration provisions are not unfair to consumers when it overturned the Bureau’s final rule.  Close attention must be paid to ensure that the Bureau does not thwart the will of Congress by characterizing arbitration provisions and class action waivers as being unfair to consumers and implicitly threatening companies with enforcement actions or public shaming if companies do not eliminate them from their consumer contracts.

John L. Culhane, Jr.Richard J. Andreano, Jr.Mark J. Levin & Alan S. Kaplinsky

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HUD Issues Draft Reconsideration of Value Guidance With FHA Loans

The U.S. Department of Housing and Urban Development (HUD) recently issued a draft Mortgagee Letter on reconsideration of value (ROV) policies in connection with appraisals for FHA insured mortgage loans.  The draft Mortgagee Letter follows up on action plan items set forth in the Property Appraisal and Valuation Equity action plan jointly issued by HUD and other federal agencies in March 2022.  (Although not released until January 2023, it appears that HUD was planning to issue the draft Mortgagee Letter in 2022 based on calendar year 2022 references in the draft letter.)

Comments on the draft Mortgagee Letter are due by February 2, 2023.  Comments may be submitted by completing the Feedback Response Worksheet that can be accessed through the FHA Drafting Table, and then emailing the completed Worksheet to sffeedback@hud.gov.

Addressing the draft Mortgagee Letter, HUD Secretary Marcia Fudge stated that “HUD is committed to making the appraisal process fair nationwide.  We must eliminate bias in home valuations so that everyone can equally reap the benefit of wealth – and intergenerational wealth – that come along with homeownership,” and that “[t]his announcement is an important step forward in rooting out appraisal bias in this country.”

HUD explains in the draft Mortgagee Letter that current FHA guidance allows an underwriter to request an ROV when the appraiser did not consider information that was relevant on the effective date of the appraisal, and that ROVs under this existing procedure can be initiated at the request of a prospective borrower.  However, HUD also notes that FHA has not previously clarified standards for borrower-initiated requests for review of an appraisal.  Therefore, FHA is planning to update the existing ROV standards to add specific guidance, set forth in the draft Mortgagee Letter, to process and document a borrower-initiated review of the appraisal results.

HUD also explains in the draft Mortgagee Letter that existing FHA policy permits FHA lenders to obtain a second appraisal in cases where material deficiencies in the appraisal are documented and the appraiser is unable or unwilling to resolve them.   The draft Mortgagee Letter provides that “HUD recognizes that material deficiencies may include instances of illegal bias or discrimination; therefore, the list of examples of material deficiencies in [HUD] Handbook 4000.1 is being expanded to include such occurrences.”

HUD notes that to provide FHA with information on the frequency and outcomes of borrower-initiated ROV requests, FHA Connection is being revised to include mandatory fields in the FHA Connection Insurance Application and home equity conversion mortgage (HECM) Insurance Application screens to collect information on such requests.

The draft Mortgagee Letter would revise existing guidance to provide that an ROV refers to the underwriter’s request for the “[a]ppraiser to review the accuracy and completeness of the [p]roperty information, analysis, or market data” that was relevant on the effective date of the appraisal.  The draft Mortgagee Letter also would revise existing guidance to provide that if an ROV is requested, the appraiser’s response must be included in a revised version of the appraisal, which must be uploaded into FHA’s Electronic Appraisal Delivery (EAD) portal and logged in FHA Connection.

Existing guidance also would be revised to add that the underwriter must review all borrower requests for review of appraisal results, and that the underwriter must review the appraisal in accordance with FHA requirements for appraisal review and quality of appraisal.   Further, FHA lenders would be required to (1) retain in the case binder the request for review of appraisal results, the results of the review, and the response provided to the borrower, and (2) complete the information regarding the borrower request for review of appraisal results on the FHA insurance application and FHA HECM insurance application screens in FHA Connection.

The draft Mortgagee Letter also would modify existing guidance to address the appraiser’s obligations when a ROV is requested.  If an FHA lender’s underwriter requests a ROV, the appraiser would be required to (1) review all appropriate property information and market data received from the underwriter that is relevant on the effective date of the appraisal, including additional property sales or listings, and (2) summarize the analysis of all additional information provided by the underwriter within a revised version of the appraisal report.

HUD notes in the draft Mortgagee Letter that to increase consumer awareness of the option to request a review of the results of an appraisal, FHA is adding a disclosure to the Homebuyer’s Copy of form HUD-92800.5B Conditional Commitment Direct Endorsement Statement of Appraised Value.

Richard J. Andreano, Jr.

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CFPB Adds Six New Items to Fall 2022 Rulemaking Agenda, Including Overdraft Fees, Fees for Insufficient Funds, and Credit Card Penalty Fees

The CFPB has published its Fall 2022 rulemaking agenda as part of the Fall 2022 Unified Agenda of Federal Regulatory and Deregulatory Actions.  The agenda’s preamble indicates that “[t]he Bureau reasonably anticipates having the regulatory matters identified [in the agenda] under consideration during the period from December 1, 2022 to November 30, 2023.”

The new agenda includes 6 new active rulemakings that did not appear on the Spring 2022 agenda.  Perhaps some possible “good news” here is that Director Chopra is listening to calls for him to use notice-and-comment rulemaking (including revisions to Official Staff Commentaries) to further his priorities instead of relying primarily on supervision and enforcement as well as a potpourri of other methods that lack the transparency and predictability of rulemaking.  While the agenda does not include any “larger participant” rulemaking, the CFPB is currently considering petitions urging it to engage in rulemaking to define larger participants in the market for personal loans and in the market for data aggregation services.  Other potential areas of rulemaking not included in the agenda are buy-now-later, earned wage access, and liability for peer-to-peer payment fraud.

The six new agenda items are:

  • Registration of nonbanks subject to certain enforcement orders.  In December 2022, the CFPB issued a notice of proposed rulemaking (NPRM) released a proposed rule that would require certain “covered nonbanks” to register with and submit information to the CFPB when they become subject to certain orders from local, state, or federal agencies and courts involving violations of certain consumer protection laws.  The Bureau provides no estimated dates for further action on the NPRM.
  • Registration of nonbanks regarding standard form contract terms and conditions.  The agenda item indicates that the CFPB is developing a proposed rule that would require supervised nonbanks to register with the Bureau and provide information about their use of certain terms and conditions in standard-form contracts.  The proposed rule would be focused on collecting information on non-negotiable standard terms or terms that are not prominently advertised in marketing.  Based on media reports about remarks given by Director Chopra at a September 2022 event, it appears that “forced” arbitration provisions are among the types of non-negotiated consumer contract terms that the CFPB has in mind.  With the Bureau designating the rulemaking to be in the “proposed rule stage” and giving a December 2022 estimate for issuance of a NPRM, it would appear that issuance of a NPRM is imminent. 
  • Overdraft fees.  The agenda item indicates that the CFPB is considering whether to propose amendments to the Regulation Z overdraft rules.  Although the CFPB has continued to make overdrafts a supervisory focus under Director Chopra and he has warned that overdraft practices can result in UDAAP violations, the CFPB has previously been silent on whether it planned to engage in rulemaking on overdrafts.  The Bureau designates the rulemaking to be in the “prerule stage” and estimates pre-rule activity in November 2023.  (In the preamble, the CFPB indicates that it uses the November 2023 date for further activity on prerule stage items as a placeholder.)
  • Fees for insufficient funds.  The agenda item indicates that the Bureau is considering new rules regarding NSF fees (but notes that lately some financial institutions have stopped charging NSF fees.)  Like overdraft fees, the CFPB has continued to make NSF fees a focus under Director Chopra but has not previously indicated that it planned to engage in rulemaking on NSF fees.  The Bureau designates the rulemaking to be in the “prerule stage” and estimates pre-rule activity in November 2023. 
  • Credit card penalty fees.  The agenda item indicates that the CFPB is considering whether to propose amendments to the Regulation Z rules on credit card penalty fees that implement the CARD Act, including the penalty fees safe harbors.  In June 2022, the CFPB issued an ANPR regarding credit card late fees.  As the CFPB gives a January 2023 estimate for issuance of an NPRM, it would appear that issuance of a proposed rule on credit card penalty fees is also imminent.  An annual inflation adjustment for 2023 to the Regulation Z credit card safe harbor amounts was conspicuously missing from the other annual TILA adjustments announced by the CFPB in late December (which, in our view, represented an inexcusable delay).  Because no adjustments for 2023 were announced, the 2022 safe harbor amounts remain in effect.  The CFPB’s addition of rulemaking on credit card penalty fees to the new agenda supports our suspicion that the CFPB’s delay in announcing the 2023 adjustments was tied to the ANPR.
  • Fair Credit Reporting Act rulemaking.  The agenda item indicates only that the Bureau is considering whether to amend Regulation V (which implements portions of the FCRA).  The Bureau designates the rulemaking to be in the “prerule stage” and provides no estimated dates for further rulemaking action.  The CFPB’s press release earlier this week about its annual report on consumer complaints submitted to the CFPB regarding Equifax, Experian, and TransUnion includes a statement from Director Chopra indicating that the CFPB “will be exploring new rules to ensure that the [three companies] are following the law, rather than cutting corners to fuel their profit model.”  We are not aware of any other statements from Director Chopra that shed light on the nature of the new rules he has in mind.  The Bureau designates the FCRA rulemaking to be in the “prerule stage” and estimates pre-rule activity in November 2023. 

As the agenda correctly indicates, this is the first time that the two nonbank registration rulemakings and the credit card penalty fees rulemaking have been included in the CFPB’s rulemaking agenda (which means although now designated as “proposed rule stage” items, the two nonbank registration rulemakings were never included in prior agendas as a “prerule stage” item or a long-term action).  The agenda incorrectly indicates that this is the first time that an overdrafts rulemaking has been included in the CFPB’s rulemaking agenda.  An overdraft fees rulemaking was previously designated as a “prerule stage” item in the CFPB’s rulemaking agendas under former Director Cordray.  In the CFPB’s Spring 2018 rulemaking agenda issued under former Acting Director Mulvaney, it was designated as an “inactive” item.” 

The four agenda items that previously appeared on the Spring 2022 agenda are:

  • Small Business Lending Data.  Section 1071 of Dodd-Frank amended the ECOA, subject to rules to be adopted by the Bureau, to require financial institutions to collect and report certain data in connection with credit applications made by small businesses, including women- or minority-owned small businesses.  The Bureau issued a NPRM in August 2021 and the comment period ended on January 6, 2022.  The Bureau estimates issuance of a final rule in January 2023 (which would be in advance of the court-ordered March 31, 2023 deadline for issuing a final rule). 
  • Personal Financial Data Rights (previously titled “Consumer Access to Financial Information”).  Section 1033 of Dodd-Frank addresses consumers’ rights to access information about their own financial accounts, and permits the CFPB to prescribe rules concerning how a provider of consumer financial products or services must make a consumer’s account information available to him or her, “including information related to any transaction, or series of transactions, to the account including costs, charges, and usage data.”  In November 2016, the Bureau issued a request for information  about market practices related to consumer access to financial information and, after holding a symposium in February 2020, the Bureau issued an ANPR in connection with its Section 1033 rulemaking in November 2020 and issued a SBREFA outline in October 2022.  The CFPB estimates that it will issue a SBREFA report in February 2023.
  • Amendments to FIRREA Concerning Automated Valuation Models.  The Bureau is participating in interagency rulemaking with the Federal Reserve, OCC, FDIC, NCUA and FHFA to develop regulations to implement the amendments made by the Dodd-Frank Act to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) concerning appraisals.  The FIRREA amendments require implementing regulations for quality control standards for automated valuation models.  The Bureau released a SBREFA outline in February 2022 and a SBREFA report in May 2022.  It estimates that the agencies will issue a NPRM in March 2023.
  • Property Assessed Clean Energy Financing.  In March 2019, the CFPB issued an ANPR to extend TILA ability-to-repay requirements to Property Assessed Clean Energy transactions.  The Bureau gives an April 2023 estimate for issuance of a NPRM.

Michael GordonJohn L. Culhane, Jr. & Richard J. Andreano, Jr.

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FTC Seeks to Ban Non-Compete Agreements

Following an announcement last year that the Federal Trade Commission (FTC) would use Section 5 of the FTC Act to aggressively police conduct it deems unfair (see our Legal Alert), the Agency kicked off the new year with two actions aimed at banning non-compete agreements between employers and workers.

On January 5, the FTC issued a Notice of Proposed Rulemaking aimed at categorically banning non-compete agreements nationwide.  This closely followed the FTC’s January 4 announcement that it had reached settlements with three companies charged’ with violating Section 5 of the FTC Act.

The proposed rule would make it illegal for virtually all employers to:

enter into, or attempt to enter into, a non-compete agreement with a worker;

maintain a non-compete agreement with a worker; or

represent to a worker that the worker is subject to a non-compete agreement.

The rule would require employers to rescind existing non-compete agreements and notify workers that those agreements are no longer in effect.

Consistent with this sweeping prohibition, the proposed rule eschews employment definitions contained in state or federal law and would apply to independent contractors, volunteers, interns, and anyone else working for an employer, paid or unpaid.

The proposed rule includes a narrow exception for non-competes between a buyer and seller of a business, where the restricted party is an owner, member, or partner holding at least 25 percent ownership interest in an entity.  The rule also would not apply to other forms of agreements–such as non-disclosure agreements or non-solicitation agreements that may limit what a worker does post-employment–unless they restrain such an unusually large scope of activity that they functionally operate as non-compete clauses.  The rule would not prevent employers from limiting the activities of workers during their employment.

Although the FTC proposes moving forward with the broad rule as outlined above, it offers several proposed alternatives, including:

a categorical ban on non-compete agreements for employees earning below a wage threshold (e.g., $100,000) with no changes to the law of non-compete agreements for employees earning above that threshold; or

no ban on non-compete agreements, but a rebuttable presumption that non-compete agreements are illegal for all employees.

The FTC’s notice also raises for consideration “whether the rule should apply uniformly to all workers or differentiate between categories of workers” and “whether [the FTC] should adopt different standards for non-compete clauses with senior executives.”

The FTC seeks comments on the proposed rule and the alternatives over the next 60 days, after which the FTC will likely adopt a final rule, with compliance mandated 180 days thereafter.  Notably, the Commission adopted the proposed rule with a 3-1 vote with Commissioner Christine S. Wilson dissenting.  Wilson’s dissent calls the proposed rule a “radical departure from hundreds of years of legal precedent” on non-compete agreements, decrying a “lack of clear evidence to support the proposed rule.”  We expect employers and/or industry groups will mount legal challenges to the FTC’s broad exercise of rulemaking authority in this area, as well as its efforts to use Section 5 as an enforcement tool.

In its news release, the FTC notes that the proposed rule and recent enforcement actions “make progress on the agency’s broader initiative to use all of its tools and authorities to promote fair competition in labor markets.”  These actions also are consistent with the recent focus of the U.S. Department of Justice on antitrust violations in the labor space, as we reported here and here.

David S. Fryman & Karli Lubin

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California Expands Co-Signer Notice Requirement

On August 15, 2022, the California governor signed SB 633 into law, expanding the obligations of creditors obtaining the signatures of more than one person on a consumer credit contract, including a motor vehicle lease, who do not receive any of the money, property, or services that are subject to the consumer credit contract.

While a co-signer notice in English and Spanish was previously required, effective January 1, 2023, the amended statute requires all consumer credit contracts and motor vehicle leases to include a co-signer notice in four other languages prior to any person becoming obligated as a co-signer on such a contract or lease.  The statute previously included English and Spanish model versions of the notice.  The amended statute removed the Spanish model notice from the text and tasked the California Department of Financial Protection and Innovation with creating model co-signer notices in five languages in addition to English: Spanish, Chinese, Tagalog, Vietnamese, and Korean.  The model notices can be found here (consumer credit contracts) and here (leases).  Importantly, the statute includes no grace period and to date no guidance from the DFPI has provided for any such grace period.

The notice requirement also applies to a broad range of contracts and leases, given that “consumer credit contracts” are defined as any obligations to pay money on a deferred basis, if the money, property, services, or other consideration provided for in the contract is primarily for personal, family, or household purposes, including: (1) retail installment contracts and accounts under the Unruh Act; (2) conditional sales contracts, as defined under the Automobile Sales Finance Act; (3) loans or extensions of credit for use primarily for personal, family, or household purposes, whether unsecured or secured by collateral other than real property; (4) loans or extensions of credit for use primarily for personal, family, or household purposes, whether secured by real property or not, that are regulated under the Real Estate Law in the Business and Professions Code or the California Financing Law in the Financial Code; and (5) vehicle leases, as defined under the Motor Vehicle Leasing Act.  (There is a limited exception for open-end credit, as defined in Regulation Z, with respect to joint applicants.)

In addition to the expansion of the notice requirement to a wide range of consumer contracts and leases, the amended statute now requires the co-signer notice to be provided in all six languages in which there are model notices, regardless of the language in which the contract was primarily negotiated.  But if the contract or lease is written in a language other than English and such language is not one in which there is a model notice, the co-signer notice must be provided in English and in the language in which the contract or lease is written.  Also, the amendment deleted the existing provision waiving the requirement for creditors and lessors to provide the notice to cosigners who are married to the primary signer.

Finally, the co-signer notice must be provided on a separate sheet to the consumer, dated and acknowledged by the consumer, and attached to and precede the consumer credit contract or lease.  Failure to provide the required co-signer notice is now an affirmative defense to an action to enforce the contract or lease.

John L. Culhane, Jr. & Chad Jimenez

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Podcast Episode: Is the U.S. Payments System Failing Business and Consumers? A Discussion With Special Guest Dan Awrey, Professor of Law, Cornell Law School

After discussing the core features of the U.S. payments systems, we look at how those features have impacted the experience of U.S. business and consumers and why Professor Awrey believes they have resulted in a payments system that is worse, more expensive, and slower than payments systems in other large, developed countries.  We also explore the types of changes that are needed to improve the U.S. payments system, including how the Federal Reserve System can take a more proactive approach to spurring the development of new payments technologies, assess the likely impact of the FedNow real-time settlement service on the payments system, and consider the overall prospects for improvements to the payments system.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Ron Vaske, a partner in the Group.

To listen to the episode, click here.

Alan KaplinskyRon Vaske

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CFPB Annual Report on Consumer Complaints About “Big 3” Consumer Reporting Agencies Flags Concerns With Use of Automated Processes

The CFPB has issued its “Annual report of credit and consumer reporting complaints” that reports on consumer complaints submitted to the CFPB regarding the three largest nationwide consumer reporting agencies (NCRAs)—Equifax, Experian, and TransUnion.  The annual report is required by the Fair Credit Reporting Act.

The CFPB’s press release about the report includes a statement from Director Chopra indicating that the CFPB “will be exploring new rules to ensure that the [NCRAs] are following the law, rather than cutting corners to fuel their profit model.”  In its Fall 2023 rulemaking agenda, the CFPB has included “Fair Credit Reporting Act Rulemaking” as a prerule stage item with an estimated date of November 2023 for prerule activity.

The new report is based on the approximately 488,000 consumer complaints that the CFPB transmitted to the NCRAs from October 2021 through September 2022 and analyzes how the NCRAs responded to those complaints.  In its January 2022 report, the CFPB had cited certain failures by the NCRAs in responding to consumer complaints and reporting outcomes to the CFPB.  For example, the CFPB found that the NCRAs failed to review most complaints based on unsubstantiated conclusions of suspected third-party involvement.  In the new report, the CFPB finds that the NCRAs have taken steps to remedy some of these failures.  Such steps include:

Less frequent use of non-substantive complaint responses (i.e. responses indicating that the NCRA was referring the complaint to its dispute channel or would not respond to the complaint because third-party involvement was suspected).  Most complaints now receive responses that are more substantive and tailored.

Greater rates of monetary or non-monetary relief in response to complaints.

Despite the report’s focus on the NCRAs, the CFPB uses the report’s discussion section “to discuss consumer reporting more broadly.”  Also, while noting that the NCRAs handling of consumer disputes is outside the report’s scope, the CFPB suggests that because there are similarities between the handling of complaints and the handling of disputes, “market participants and policymakers should consider the extent to which the [report’s discussion section] applies to consumer experiences with credit reporting more broadly, including consumer attempts to have problems with their credit reports resolved.”

A substantial portion of the CFPB’s discussion is devoted to the use of automation by the NCRAs, particularly the use of third-party screens.  In the report, the CFPB uses the term “third-party screen” to refer to the NCRAs’ practice of using the absence or presence of certain characteristics in the complaint submission to identify complaints that they suspect-but do not confirm-were submitted by a third party and then using this identification as the basis for not responding to the merits of the complaints.  The CFPB found that in 2022, the NCRAs significantly decreased their use of third-party screens.  After analyzing complaint data, the CFPB also found that the changes in screening policies were responsible for greater rates of consumer relief.  In addition to concluding that the screening policies harmed consumers by decreasing relief rates, the CFPB concluded that consumers were harmed because, by failing to review and substantively respond to complaints, inaccurate information may have stayed on consumers’ reports longer.

While observing that automated decision-making processes can improve customer experiences and reduce burdens for consumers and companies, the CFPB cites the NCRAs’ screening process as an example of how automation “can decrease burden for companies at the expense of increasing burden to consumers who attempt to invoke substantive rights.”  It cautions market participants to consider what burden, if any, they are creating for consumers before introducing automated mechanisms into processes that affect consumers, particularly those that relate to legal rights.  The CFPB notes that one such burden is undue demands on consumers’ time.

The CFPB also advises market participants to consider how current processes will need to evolve in light of new technologies.  The CFPB cautions that “[t]o the extent that market participants have optimized systems based on a certain view of human behavior, as new technologies emerge, they will need to reevaluate their systems to ensure that consumers are afforded their rights protected by law.”  As an example, the CFPB points to third-party screens that block complaints because of their similarity to other complaint narratives.  The CFPB observes that it is becoming increasingly difficult to discern whether a human or machine is the author of a text because advances in communications technologies can generate letters for consumers and may create similar-sounding complaints that are, in fact, from discrete individuals.  As a result, the assumption that similar-sounding letters are from third parties will increasingly be wrong.

The report concludes with a recommendation that market participants consider how best to give consumers control over their data so that the market can transition “from control and surveillance to consumer participation.”  According to the CFPB, the increasing number of consumer complaints over the past several years coupled with an apparent increase in the number of consumer disputes suggests that the credit reporting system is not serving consumers.  It states that there are alternatives to the current system, such as systems that allow consumers to initiate the flow of payment history data to credit bureaus or individual lenders.  The Bureau also notes that “[c]ompetitive pressures from startups using alternative data is challenging the status quo” and “[s]ome financial firms are considering ways of lending without credit scores.”  The CFPB suggests that increased consumer participation on the data side of consumer reporting has the potential to create a fairer market and states that “[p]olicymakers and market participants can shape the future of collecting, using, and sharing consumer data in a manner that navigates successfully from surveillance to participation.”

John L. Culhane, Jr. & Michael Gordon

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Podcast Episode: An Update on Diversity, Equity, and Inclusion in the Consumer Financial Services Industry, With Special Guest Naomi Mercer, Senior Vice President for Diversity, Equity, and Inclusion, American Bankers Association

We first discuss the multiple benefits of diversity, equity, and inclusion (DEI) for financial institutions, the challenges and opportunities institutions face in implementing a DEI strategy, and how DEI applies beyond an institution’s workforce.  We then consider the risk of discrimination claims arising from DEI programs and the role of legal counsel in the development and implementation of DEI strategies.  We also discuss diversity self-assessments and the role of Offices of Minority and Women Inclusion and the potential impact on DEI programs of a ruling by the U.S. Supreme Court that the higher education affirmative action programs at issue in the cases pending before it are unlawful.  We conclude by looking at the characteristics of a successful DEI program.

Dee Spagnuolo, a partner in Ballard Spahr’s White Collar Group moderates the discussion, joined by Brian Pedrow, a partner in the firm’s Labor and Employment Group.  Dee and Brian are co-leaders of the firm’s DEI Counseling Team.

Naomi is our latest podcast guest to come to our attention through the database created by Devina Khanna, a Congressional staffer, that identifies women in the financial services area (lawyers and non-lawyers) who are interested in speaking opportunities.  Devina’s database has been a vital component of our new initiative to feature more women as guests on weekly episodes of our Consumer Finance Monitor Podcast.

To listen to the episode, click here.

Dee Spagnuolo & Brian D. Pedrow

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New CFPB Report Highlights Increase in Servicemember Identity Theft Incidents

On January 12, 2023, the Consumer Financial Protection Bureau (“CFPB”) issued a report highlighting an increase in reported incidents of identity theft by servicemembers.  The report, titled “Servicemember reports about identity theft are increasing,” cited to data from the Federal Trade Commission (“FTC”) that showed nearly 50,000 cases of identity theft involving military consumers (including servicemembers, veterans, and their family members) in 2021.  According to a 2020 FTC report, active duty servicemembers were 76% more likely than their civilian counterparts to report that identity theft occurred on an existing account and 22 percent more likely than their civilian counterparts to report that their stolen information was used to open a new account.

The CFPB report mentions some specific attributes of the servicemember population that make them attractive targets to identity thieves, including steady income and frequent relocation that may increase the risk of exposure of their personal information through housing searches, spousal employment searches, and other application processes.  It also details the unique and heightened repercussions of identity theft on servicemembers, who are subject to continuous evaluation of their credit history and ability to meet their financial obligations in order to maintain their security clearance.  As the report states, “[i]f identity theft results in fraudulent credit accounts and past-due bills showing up on a servicemember’s credit report, it can swiftly derail the servicemember’s career, undermining military readiness and national security.”  According to the CFPB, military consumer complaints about identity theft increased nearly fivefold in the past 8 years, from just over 200 annually in 2014 to more than 1,000 in 2022.

Like other consumers, many servicemembers only learn that they have been victims of identity theft after it occurs, when they see a debt they do not recognize on their credit report or receive collection calls.  The report concludes that financial institutions and creditors must be the first line of defense against identity theft.  Citing to obligations under the “Red Flags Rule,” the Bureau instructs financial institutions and creditors “to identify possible signs of identity theft in day-to-day operations, have a process to detect red flags of identity theft when they occur, design a course of action for use when they detect these red flags, and provide a plan to stay current on new threats.”  The Red Flags Rule, which sets forth duties regarding the detection, prevention, and mitigation of identity theft, is not enforced by the CFPB, but is implemented and enforced by other regulators, including the FTC (16 C.F.R. § 681.1(d)), the Office of Comptroller of the Currency (12 C.F.R. § 41.90), the Federal Reserve (12 C.F.R § 222.90), the Federal Deposit Insurance Corporation (12 C.F.R. § 334.90), and the National Credit Union Administration ( 12 C.F.R. § 717.90).

The Red Flags Rule is not specific to servicemembers, but financial institutions and creditors should also be particularly mindful of consumer requests and complaints from servicemembers involving identity theft based on their unique vulnerability and reputational risk considerations.

The CFPB’s primary focus in the report is on steps military consumers can take to protect themselves from identity theft, including:

Requesting an active duty alert or security freeze when they are about to deploy.  This protects servicemembers by alerting businesses through Experian, TransUnion, or Equifax that a servicemember is probably out of the country and that the business must take reasonable steps to verify the servicemember’s identity before granting new credit in the servicemember’s name.  Active duty alerts are free, last for 12 months, and are renewable for the length of a servicemember’s deployment.  A request for an active duty alert made to one credit reporting agency will apply to all three credit reporting agencies.  A request for a security freeze, on the other hand, must be made separately to each of the three agencies, but a security freeze is also free and prevents prospective creditors from accessing a servicemember’s credit.

Reviewing their credit reports regularly and disputing inaccurate information.

Signing up for free credit monitoring services.  Active duty military, reservists on active duty, and members of the National Guard can get free credit monitoring from each of the three credit reporting agencies (but must place a separate request with each one).

Finally, the report encourages military consumers to report any incidents of identity theft to IdentityTheft.gov and to contact their base’s Personal Financial Manager or Legal Assistance Office for assistance in fixing problems resulting from identity theft.

Brian Turetsky

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FinCEN Requests Comment on Proposed Beneficial Ownership Reporting Form

The Financial Crimes Enforcement Network (“FinCEN”) has issued a notice and request for comment (“Notice”) on the proposed form to collect and report to FinCEN the beneficial ownership information (“BOI”) for entities covered by the Corporate Transparency Act (“CTA”).  We have blogged extensively on the CTA and FinCEN’s final and proposed regulations (here, here and here), and will not repeat our analysis of these regulations – other than to note that the stated primary goal of the CTA was to enable law enforcement and regulators to obtain information on the “real” beneficial owners of so-called “shell companies,” including foreign entities registered in the United States, in order to “crack down” on the misuse of such companies for potential money laundering, tax evasion and other offenses.

The Notice dutifully references the Paperwork Reduction Act and walks the reader through FinCEN’s various (very) detailed estimates of hours to be spent on compliance by filers.  But, the Notice then sets forth – without any comment or analysis – the actual proposed reporting form (“Form”), on which we focus here.  Because the Federal Register is not always user friendly, we have created this separate document clearly setting forth the Form and its questions.

As other commentators have observed (for example, see the comment by Jim Richards to FinCEN regarding the Form, here), the Form seemingly provides its filers with opportunities to avoid the statutory dictates of the CTA by not actually answering any of the core questions for beneficial owners and company applicants, and instead simply state that required information is “unknown” or not available.  This includes basic information under the CTA regarding names, addresses and other identifying information.  This problem appears to be an oversight by FinCEN.  Perhaps, it is a function of the fact that the CTA did not address the issue of good-faith filers encountering difficulty in obtaining complete information – which is a legitimate and real-world issue.  Although this situation is arguably analogous to sections of the Suspicious Activity Report form where a filer can put “N/A” for some “critical” fields, this situation seems distinguishable, because the filer of the CTA Form presumably should have direct access to BOI information, as opposed to a financial institution filling out a SAR regarding a third party.

Thus, the Form appears to invite, unwittingly, widespread game-playing by bad actors, both in the U.S. and abroad, who may claim that key BOI, unfortunately, just could not be attained.  Nor does the Form ask filers to describe the efforts made to obtain purportedly non-obtainable BOI.  Further, the Notice – just like other final and pending CTA regulations – does not discuss how to address filers who simply respond, “I don’t know” or “I can’t figure it out.”

Given the fact that FinCEN estimates that over 30 million Forms will be filed in the first effective year of the CTA, it is easy to imagine that obfuscation by bad actors will be lost within the data haystack – a phenomenon on which bad actors can rely.  The Form also appears to not appreciate the practical problems that financial institutions (“FIs”) will face when they attempt to access the BOI database to verify information already provided to FIs by entity customers under the CDD Rule, and the entity customer has told FinCEN “I don’t know” on the Form.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.  Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Peter D. Hardy & Siana Danch

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As we have blogged, the Anti-Money Laundering Act of 2020 (“the AMLA”) amended the Bank Secrecy Act (“BSA”) to expand whistleblower incentives and strengthen whistleblower protections.  At a high level, the AMLA amended 31 U.S.C. § 5323 to provide that if the government recovers more than $1 million through an AML enforcement action, any qualifying whistleblower will receive a mandatory reward of up to 30% of the collected amount.  Although this amendment was heralded as a major change, whistleblower attorneys and watch dog groups bemoaned the fact that there was no guaranteed monetary floor for an award (i.e., it could be zero to 30%), and that Congress had not actually provided for funding of awards.

Congress addressed these perceived deficiencies by passing the “Anti-Money Laundering Whistleblower Improvement Act” (“the Act”), which was signed into law on December 29, 2022.  The Act presumably will motivate both would-be whistleblowers and the plaintiffs’ bar to pursue AML-related claims more vigorously, now that Congress has sweetened the pot.

First, the Act entitles whistleblowers to an award of between 10 and 30 percent of the value of “monetary sanctions” above $1 million collected as a result of an enforcement action (importantly, “monetary sanctions” do not include forfeiture).  For “related actions” in which the whistleblower may be paid by another whistleblower award program for his or her information, awards can dip below these percentages.

Second, the Act creates a “Financial Integrity Fund” to pay for whistleblower awards, which can hold up to $300 million.  The Department of Treasury can administer this fund independently of Congress, without the need for legislative appropriation.  The Fund will receive monetary sanctions collected by the Secretary of the Treasury or the Attorney General through BSA enforcement, or through enforcement of certain provisions of the International Emergency Economic Powers Act, the Trading with the Enemy Act, and the Foreign Narcotics Kingpin Designation Act.

As we have blogged, the Acting Director of the Financial Crimes Enforcement Network (“FinCEN”) has emphasized the fact that FinCEN recently created an “Office of the Whistleblower,” hired “key personnel” to build and supervise the whistleblower program, and now accepts whistleblower tips while FinCEN develops a “more formal” system.  Moreover, FinCEN is drafting proposed regulations to implement the AMLA’s whistleblower provisions.

The potential importance of AML whistleblowers is highlighted by the recent guilty plea entered by Danske Bank in the Southern District of New York to bank fraud, based on alleged AML failures.  This massive case arose because of concerns raised by former Danske Bank employee and whistleblower Howard Wilkinson.  Danske Bank was sentenced yesterday to forfeiture of $2 billion and three years of probation, with the bank to receive credit for $851 million in combined prior monetary penalties paid to the SEC and Danish criminal authorities.  Ironically, the Act would not provide for a whistleblower award based on the forfeiture payment by Danske Bank.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch.  Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Peter D. HardyMeredith S. Dante & Shannon Attalla

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The NMLS reinstatement period, which began on January 2, 2023, will end on February 28, 2023 at midnight EST. To check if a state participates in the reinstatement period, please see the NMLS Annual Renewal page, select your license type, and review the section marked “Is Reinstatement allowed for this license type?”

For the first time since 2020, the NMLS conference will take place in person. This year’s conference will take place in Phoenix, Arizona from April 3rd through the 6th. Ballard Spahr will be in attendance and we look forward to meeting with you!

John Georgievski

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