Ballard Spahr
Legal Alert

Mortgage Banking Update - July 20, 2023

July 20, 2023
In This Issue:

 

July 13 Podcast Episode: What the Biden Administration’s “Junk Fees” Initiative Means for the Consumer Financial Services Industry: A Look at the Fees Under Attack, Part I

The Biden Administration has launched an initiative directed at combatting so-called “junk fees,” with the CFPB and FTC leading the Administration’s efforts. In Part I of this two-part episode, we first discuss the various definitions offered by the White House, CFPB, and FTC for what constitutes a “junk fee” and the types of fees they have labeled “junk fees.” We then discuss the CFPB’s credit card late fees proposal and criticisms of the proposal set forth in comment letters. We conclude with a discussion of guidance on overdraft and non-sufficient funds fees issued by the CFPB, OCC, and FDIC and by state regulators and CFPB enforcement activity related to overdraft and NSF fees.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion, joined by John Culhane, a partner in the Group, and Kristen Larson, Of Counsel in the Group.

To listen to Part I of the episode, click here.

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Ballard Spahr Attorneys Discuss Implications for Diversity, Equity, and Inclusion Programs of SCOTUS Ruling on Affirmative Action

Our Ballard Spahr colleagues have released a new episode of the firm’s Business Better Podcast in which they discuss the recent U.S. Supreme Court ruling in the Students for Fair Admissions Inc.’s lawsuits against Harvard University and the University of North Carolina, which challenged the constitutionality of their race conscious admission policies. Titled “Is DEI at Risk? Considerations on the U.S. Supreme Court Ruling Against Affirmative Action Programs,” the episode looks at the decision’s potential implications across multiple settings, from university admissions policies, to workplace and other DEI programs.

To listen to the episode, click here.

William C. Rhodes, Brian D. Pedrow, Dee Spagnuolo, & Elizabeth Wingfield

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CFPB Issues 2022 Annual Fair Lending Report

The CFPB recently issued its annual fair lending report covering its fair lending activity in 2022.

In the report’s discussion of the CFPB’s risk-based approach for prioritizing fair lending supervisory and enforcement activity, the CFPB indicates that in 2022, much of its supervision efforts focused on mortgage origination and pricing, small business lending, policies and procedures regarding geographic and other exclusions in underwriting, and the use of automated systems and models. The CFPB also identifies the following specific issues:

  • Mortgage origination—redlining (intentional discrimination against applicants and prospective applicants living or seeking credit in minority neighborhoods, including by discouragement); assessing potential discrimination in underwriting and pricing processes; assessing whether lenders are illegally steering applicants on a prohibited basis; and HMDA data integrity and validation reviews (both as standalone exams and in preparation for Equal Credit Opportunity Act (ECOA) exams that follow).
  • Small business lending—assessing whether there are disparities in application, underwriting, and pricing processes, redlining, and whether there are weaknesses in fair lending-related compliance.

In addition, the CFPB noted that in 2022 it investigated potential discrimination in the credit card, payday loan, and student loan markets, although it did not provide specifics, and that more generally it looked into practices targeting vulnerable populations for evidence of ECOA and UDAAP violations.

While it continues to be the CFPB’s position that the ECOA applies to prospective applicants, the CFPB’s position was rejected by a federal district court in the CFPB’s enforcement action against Townstone Mortgage (Townstone). The CFPB’s lawsuit against Townstone represented the Bureau’s first ever redlining complaint against a nonbank mortgage company. The district court ruled in April 2023 that a redlining claim may not be brought under the ECOA because the statute only applies to applicants. The CFPB has appealed the decision to the Seventh Circuit and recently filed its opening brief.

The report’s discussion of fair lending enforcement actions indicates that in 2022, the Bureau announced one fair lending enforcement action which involved alleged discouragement of prospective applicants and redlining by a mortgage lender. The CFPB also referred five matters to the Department of Justice (DOJ) involving alleged ECOA violations, with four matters involving alleged redlining in mortgage lending and one matter involving discrimination in underwriting mortgage loans on the basis of receipt of public assistance income.

The report also indicates that in 2022, four agencies (FDIC, NCUA, FRB, and CFPB) collectively made 23 referrals to DOJ involving alleged discrimination in violation of the ECOA and that this represented a 91 percent in such referrals from 12 in 2020.

In the concluding section of the report titled “Looking forward: the future of fair lending,” the CFPB indicates that it is focused on the risks that the increased use of advanced and emerging technologies in financial services presents to individual consumers, small businesses, communities, and the market as a whole. The CFPB observes that advanced algorithm technologies are now often used throughout the entire life cycle of financial services products, “beginning with the sophisticated digital marketing that targets individual consumers, continuing to the fraud screens and underwriting models that determine who gets offered credit and at what price, and finally to the chatbots and behavioral analytics that increasingly govern consumers’ experience post-origination.” It also indicates that the risks presented by advanced algorithm technologies, “combined with digital marketing techniques that allow firms to target consumers with surgical precision and to leverage dark patterns, can have the potential to create an unfair marketplace that harms consumers and law-abiding institutions.”

The CFPB indicates that it “has increased its expertise in data science and analytics to ensure that [it] can identify fair lending violations at each stage of the credit [cycle.]” It also indicates that it “will continue to dedicate and develop resources to dive deeply into how financial institutions are using, understanding, testing, and improving these [advanced and emerging] technologies throughout the entirety of the credit cycle.”

On August 16, 2023, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “Shining a Bright Light on Digital Dark Patterns.” Click here to register.

John L. Culhane, Jr. & Richard J. Andreano, Jr.

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CFSA Files Brief Urging SCOTUS to Affirm Fifth Circuit Ruling That CFPB’s Funding Is Unconstitutional

Community Financial Services Association of America (CFSA) has filed its brief with the U.S. Supreme Court in which it asks the Court to affirm the Fifth Circuit panel decision in CFSA v. CFPB. In that decision, the panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule (Payday Rule). The CFPB filed its brief with the Supreme Court defending the constitutionality of the Bureau’s funding in May 2023.

In its brief, CFSA makes the following principal arguments:

  • The Appropriations Clause states that “[n]o Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.” The CFPB can directly requisition from the Federal Reserve Board “the amount determined by the Director to be reasonably necessary to carry out” the CFPB’s functions each year, subject to the statutory cap. As the CFPB rather than Congress decides the amount of its annual funding, the funds are not “drawn…in Consequence of Appropriations made by Law.” At the Founding, an appropriation was a specific sum. The only “appropriation” that determines the “sum” that the CFPB takes each year is made by the CFPB itself, not Congress. The statutory cap is an illusory limit on the CFPB’s ability to decide how much funding to request because the CFPB’s self-assessed needs have never reached the cap. In addition, the CFPB can roll over indefinitely any funds it draws from the Board but does not expend.
  • Congress ceded its appropriations power to the CFPB without any temporal limit. Instead of both chambers of Congress needing to periodically agree to fund the CFPB, the CFPB can set its own funding in perpetuity unless both chambers agree and can persuade or override the President. The CFPB’s financial freedom from Congress creates the possibility for the CFPB to exercise its extensive authorities without Congressional control.
  • The CFPB has argued that the historical and modern meaning of a congressional “appropriation” is “simply a law making a particular source of funding available for particular uses.” According to CFSA, the Appropriations Clause, at a minimum, requires Congress to determine the total amount of funding itself rather than allowing the Executive Branch to choose an amount that it deems “reasonably necessary.” Section 5497 of Dodd-Frank, which established the CFPB’s funding mechanism, is not a “law” for purposes of the Appropriations Clause because it represents an impermissible delegation of Congress’s legislative powers.
  • The CFPB has argued that its reading of the Appropriations Clause’s text is reinforced by longstanding practice, including Congress’s use of fees, assessments, investments, and other similar sources to fund various agencies that include the OCC, FDIC, and Federal Reserve Board. According to CFSA, in contrast to the CFPB’s funding, the use of assessments to fund these agencies preserves some level of political accountability for these agencies “because they must consider the risk of losing funding if entities exit their regulatory sphere due to imprudent regulation.” With regard to the Federal Reserve Board, CFSA notes that its primary functions “are not quintessential executive powers, or even inherently governmental ones. The Board implements monetary policy mainly through traditional banking activities, such as loaning money and directing open-market transactions.” Because of its sweeping powers and unaccountable funding, the CFPB is not remotely comparable to traditional agencies funded by fees or assessments.
  • The CFPB argues that even if its funding mechanism is constitutionally flawed, pursuant to Dodd-Frank’s severability clause, the Fifth Circuit should have conducted a severability analysis of Section 5497 to determine which of its provisions causes the constitutional violation. CFSA argues that the fundamental flaws in Section 5497 cannot be severed, for reasons that include that the Court cannot “re-write” the statute by, for example, replacing the CFPB’s funding mechanism with either a specific sum or assessments from regulated entities.
  • The CFPB also argues that even if its funding mechanism is unconstitutional, vacatur of the Payday Rule was not the appropriate remedy. CFSA argues that the CFPB’s lack of a valid appropriation meant that it did not lawfully have the power to promulgate the Payday Rule because a valid appropriation was a necessary condition to its rulemaking. It argues that it is not necessary for the Court to decide whether the Administrative Procedure Act’s (APA) mandate that a court shall “set aside” unconstitutional agency action requires a court to vacate an invalid regulation. According to CFSA, the APA, at a minimum, means the CFPB cannot enforce the Rule against the plaintiffs.
  • The CFPB argues that vacating the CFPB’s past actions would inflict significant disruption on the Nation’s economy and consumers, financial institutions, and others who have reasonably relied on the CFPB’s past actions. CFSA calls the CFPB’s argument “fear-mongering” and “sky-may-fall rhetoric.” According to CFSA, no harm would result from setting aside the Payday Rule because it has never gone into effect and no one has reasonably relied on it. With respect to the effect of a decision in favor of CFSA on other Bureau actions, CFSA argues that only “timely” claims could lead to relief in past adjudications, and if Congress chooses to appropriate funds for the CFPB, it can simultaneously choose to legislatively ratify any existing CFPB rules. CFSA notes that many of the CFPB’s rules, including substantial portions of the mortgage-related disclosure rules, were issued outside of the six-year limitations period in 28 U.S.C. Sec. 2401(a) for bringing lawsuits against the federal government, and that equitable defenses such as laches would be available for timely challenges.

The CFPB must file its reply brief by August 2 and any amicus briefs in support of the CFSA must be filed by July 10.

Our Consumer Finance Monitor Podcast has already devoted two episodes to this case. In January 2023, we released a two-part episode, “How the U.S. Supreme Court will decide the threat to the CFPB’s funding and structure,” in which our special guest was Adam J. White, a renowned expert on separation of powers and the Appropriations Clause. To listen to the episode, click here for Part I and click here for Part II. In May 2023, we released a second episode, “CFSA v. CFPB moves to U.S. Supreme Court: a closer look at the constitutional challenge to the Consumer Financial Protection Bureau’s funding,” in which our special guest was GianCarlo Canaparo, Senior Legal Fellow in the Heritage Foundation’s Edwin Meese III Center for Legal and Judicial Studies. To listen to the second episode, click here.

John L. Culhane, Jr., Richard J. Andreano, Jr., Michael Gordon & Alan S. Kaplinsky

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16 Amicus Briefs Filed With SCOTUS in Support of CFSA’s Position That CFPB’s Funding Mechanism Is Unconstitutional

Sixteen amicus briefs have been filed with the U.S. Supreme Court in support of the position of the Community Financial Services Association of America (CFSA) that the Court should affirm the Fifth Circuit panel decision in CFSA v. CFPB which held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. As a remedy for the constitutional violation, the panel vacated the CFPB’s payday lending rule (Payday Rule). The CFPB filed its brief with the Supreme Court defending the constitutionality of its funding on May 8, 2023 and CFSA filed its brief asking the Court to affirm the Fifth Circuit panel decision on July 3. The CFPB must file its reply brief by August 2.

Perhaps the most surprising of the amici is former CFPB Acting Director Mulvaney who filed an amicus brief as “John Michael “Mick” Mulvaney.” In explaining his interest in the case, he cites his service as a House member, CFPB Acting Director, and Director of the Office of Management and Budget. He states that he “is the only individual to have served in all three of these capacities” and “[a]s a result, he is uniquely situated to understand how Congress’s appropriations authority disciplines Congress, curbs executive overreach, and promotes liberty in general, and in particular how lack of appropriations affects the conduct of the CFPB.” In his brief, Mr. Mulvaney cites numerous actions by the CFPB that he characterizes as “improper conduct” and that, in his view, are attributable to the CFPB’s lack of accountability to Congress. The “improper conduct” he cites includes “egregious discovery misconduct” by the CFPB, the “numerous enforcement actions [brought by the CFPB] based on novel, extreme interpretations of relevant law” such as its RESPA interpretation in the PHH case, and the CFPB’s actions “to evade explicit statutory limitations on whom it can regulate” such as its attempts to regulate the conduct of auto dealers.

While all of the trade group amici agree that the Fifth Circuit panel acted properly in vacating the Payday Rule as a remedy for the Appropriations Clause violation, the trade groups take the following differing approaches as to what the other appropriate consequences for the violation should be:

  • Third Party Payment Processors Association. TPPPA argues that the most appropriate remedy is for the Court’s ruling to only apply retroactively to currently challenged CFPB actions and rules funded by the CFPB’s unconstitutional funding mechanism, including the Payday Lending Rule, and leave in place all unchallenged actions, including (but not limited to) those outside of the Administrative Procedure Act’s (APA) six-year statute of limitations. According to TPPPA this approach is necessary “in recognition of the enormous reliance costs that [applying the ruling to all CFPB actions and rules] would inflict on the American economy.”
  • ACA International. ACA argues that the Court “cannot fix the problem and save the Bureau” by severing the funding provision and that, to keep the CFPB, “the Court would have to write a new appropriations statute [which it cannot do].” To minimize the disruption from its ruling, the Court should “stay its judgment for six months and leave the reshaping of the Bureau’s funding structure to the political process.” ACA also asserts that “[e]ven if overhauling the Bureau’s financing structure proves too difficult for the political branches, a reasonable stay would give the Bureau time to transition its affairs with minimal disruption to the markets, consumers, and regulated entities. It would also place the decision to allow the disruption that would necessarily follow the Bureau’s shuttering where it belongs: with the political branches of government.”
  • Credit Union National Association, Inc., National Association of Federally-Insured Credit Unions, and American Association of Credit Union Leagues. Amici argue that the Court cannot use a severance analysis to remove the constitutional defects in the CFPB’s funding. They assert that “[t]he least disruptive remedy is for the Court to stay its judgment in the case for three to six months and leave the appropriations process to Congress.” According to amici, “[a] constitutionally reconstituted agency would have the authority to ratify prior final agency actions (or not) before the mandate issues; reconsider pending enforcement actions; and start readjudicating qualifying prior adjudications, if any.” They also argue that the CFPB should pause any new or ongoing rulemaking activity during the stay period.
  • Chamber of Commerce of the United States of America, National Federation of Independent Business Small Business Legal Center, Inc., American Bankers Association, American Financial Services Association, Consumer Bankers Association, Independent Community Bankers of America, Independent Bankers Association of Texas, Texas Association of Business, Texas Bankers Association, and Longview Chamber of Commerce. Amici argue that an appropriate remedy would be for the Court to sever the unconstitutional funding mechanism, leaving the rest of the CFPB’s enabling act in place. They contend that to give Congress the time to change the CFPB’s funding, the Court should stay its decision for a reasonable but defined period to authorize temporary funding or permanently fix the constitutional defect. In addition to agreeing that the Payday Rule should be vacated, amici state that they “believe they are entitled to vacatur of” any CFPB actions that they have challenged in pending lawsuits based on the CFPB’s unconstitutional funding. They also assert that CFPB enforcement actions should be paused until Congress addresses the funding issues. Amici contend that relief “would be limited to a few pending actions where the parties have raised the argument at issue here.” They reference the APA’s six-year statute of limitations and note that in most cases the 30-day period to appeal from a past agency adjudication or court decision “has long lapsed.”

All of the amicus briefs filed in support of CFSA can be found here. In addition to those filed by Mr. Mulvaney and the trade groups, amicus briefs were filed by:

  • Atlantic Legal Foundation
  • Americans for Prosperity Foundation
  • State of West Virginia and 26 Other States
  • Washington Legal Foundation
  • New England Legal Foundation
  • The Foundation for Government Accountability
  • Former Members of Congress
  • 132 Members of Congress
  • The New Civil Liberties Alliance, the Buckeye Institute, the Manhattan Institute for Policy Research, and Law Offices of Crystal Moroney, P.C.
  • Landmark Legal Foundation
  • America’s Future, U.S. Constitutional Rights Legal Defense Fund, and Conservative Legal Defense and Education Fund

The West Virginia Attorney General and 26 other Republican State Attorney General amici also filed a motion with the Supreme Court asking for leave to participate in oral argument as amicus curiae supporting CFSA. They ask the Court to allow them ten minutes of argument time, with the remaining twenty minutes allocated to CFSA. They indicate that CFSA has opposed their request. According to the Attorneys General, they can provide the Court with additional helpful information on the issues at stake. In addition to their expertise in consumer protection, banking, and financial services, the Attorneys General assert that they can “explain why their consumers actually suffer when the [CFPB] is not kept sufficiently accountable.”

John L. Culhane, Jr., Richard J. Andreano, Jr., Michael Gordon & Alan S. Kaplinsky

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SCOTUS Holds Biden Lacks Authority for $430-Billion Loan Cancellation Plan

On June 30, 2023, the U.S. Supreme Court announced long-awaited opinions in two cases challenging the Biden Administration’s authority to proceed with its plan to forgive approximately $430 billion in federal student loans. Most significantly, in Biden v. Nebraska, the Court held that the state of Missouri had standing to challenge the federal action, and that the Biden Administration’s loan cancellation plan was not authorized under the Higher Education Relief Opportunities for Students Act of 2003 (HEROES Act).

The Court’s 6–3 ruling, authored by Chief Justice John Roberts, tracked the sentiment expressed at oral argument in February 2023, during which members of the Court’s six-member conservative majority expressed skepticism of the Administration’s authority to proceed with its forgiveness plan. The Court first held that Missouri had standing to file suit based on harm to the Missouri Higher Education Loan Authority (MOHELA), a state instrumentality whose revenue stood to be adversely affected by the loan cancellation plan. The Court explained that the Biden plan “harms MOHELA in the performance of its public function and so directly harms the State that created and controls MOHELA,” resulting in an injury-in-fact sufficient to give rise to Article III standing.

On the merits, the Court held that the HEROES Act, which permits the Secretary to “waive” or “modify” elements of federal student lending law during a national emergency, did not authorize the Secretary to “rewrite” the Higher Education Act (HEA) “from the ground up.” Citing precedent, the Court emphasized that “modify” means “to change moderately or in minor fashion”; the Biden plan, by contrast, would create “a novel and fundamentally different loan program.” Noting that the Secretary of Education had also failed to “identify any provision that he is actually waiving,” the Court concluded “that language cannot authorize the kind of exhaustive rewriting of the statute that has taken place here.”

As an additional ground for the holding, the Court noted the applicability of the “major questions” doctrine, as recently discussed in West Virginia v. EPA, which provides that the Court will look for “clear congressional authorization” to justify executive action on questions of substantial economic or social significance. Applying that doctrine here, the majority observed that “the ‘economic and political significance’ of the Secretary’s action is staggering by any measure,” and concluded that the Secretary had not pointed to sufficient clarity under the HEROES Act. Justice Amy Coney Barrett filed a concurring opinion in which she discussed her view that the “major questions” doctrine is not inconsistent with the premises of textualism because it embodies only “the familiar principle that we do not interpret a statute for all it is worth when a reasonable person would not read it that way.”

Justice Kagan, joined by Justices Sotomayor and Jackson, dissented on both questions presented. With respect to standing, the dissent argued that the state attorneys general “are classic ideological plaintiffs: They think the plan a very bad idea, but they are no worse off because the Secretary differs.” Justice Kagan emphasized her view that MOHELA is “a legally and financially independent public corporation,” such that any injury to MOHELA did not lead to standing for the state of Missouri. MOHELA itself, Justice Kagan observed, was “[a]s far from this suit as it can manage”—not “even a rooting bystander.” And as to Missouri, Justice Kagan quipped: “Is there a person in America who thinks Missouri is here because it is worried about MOHELA’s loss of loan-servicing fees? I would like to meet him.”

As to the merits, the dissent argued that the majority had engaged in “stilted textual analysis” by “pick[ing] the statute apart piece by piece in an attempt to escape the meaning of the whole.” According to the dissent, Congress authorized the Secretary to take sweeping action in response to national emergencies; the COVID pandemic qualifies; and the loan cancellation plan fell squarely within the scope of modifications and waivers permitted by the statute. Justice Kagan also challenged the majority’s application of the major-questions doctrine, arguing that the holding improperly took the issue of student-loan forgiveness away from the “political branches” and thereby “depart[ed] from the demands of judicial restraint.” Justice Kagan noted her view that if the loan cancellation plan was impermissible under the HEROES Act, so too were the interest waiver and payment pause—a point the majority expressly reserved decision on.

In Department of Education v. Brown, Justice Alito wrote for a unanimous court in holding that two individual plaintiffs—who alleged that the Secretary of Education had announced the loan cancellation program without engaging in a mandatory notice-and-comment period, and lacked authority to promulgate the cancellation plan under the HEROES Act but might have had such authority under the HEA—did not have standing to bring the suit. In a short analysis, the Court observed that “[d]escribing respondents’ claim illustrate how unusual it is.” The Court held that, other potential problems notwithstanding, the plaintiffs failed primarily in establishing traceability, i.e., that any action by the Department on the HEROES Act would affect the benefits delivered to plaintiffs separately under the HEA. In vacating the district court ruling in favor of the plaintiffs, the Court concluded: “Contesting a separate benefits program based on a theory that it crowds out the desired one . . . is an approach for which we have been unable to find any precedent.”

Within hours after the opinions being released, President Biden and Secretary of Education Miguel Cardona addressed the ruling by announcing three initiatives relating to student loan relief. First, they emphasized that although payments would resume in October, borrowers would have a 12-month “on ramp” to start making payments, during which time they will not be reported as delinquent or in default for missing payments (although interest will continue to accrue). Second, they discussed a forthcoming income-driven repayment plan, the SAVE plan, that will, among other things, reduce monthly payments to five percent of discretionary income over specified thresholds and cease interest accruals over amounts actually paid. Third, and perhaps most ambitiously, the Biden Administration committed to pursue widespread loan forgiveness for a second time, now relying on forthcoming regulations to be issued after negotiated rulemaking under the HEA–a structured, time-consuming process in which agency representatives meet with members of affected interest groups to negotiate the terms of proposed administrative rule before publication followed by a standard notice-and-comment period.

The Administration’s effort to forgive loans under the HEA has already been the subject of substantial debate and analysis over the last three years. Senator Elizabeth Warren commissioned an analysis in 2020 from the Legal Services Center at Harvard Law School, which concluded authority for such a plan existed. Months later, in January 2021, the Department of Education’s General Counsel concluded that no such authority existed (and also accurately predicted that such authority did not exist under the HEROES Act). The Administration ultimately opted to develop its initial plan under the HEROES Act, potentially because doing so ostensibly avoided the need for protracted notice-and-comment or negotiated rulemaking. Although this new effort will rely on different statutory authority, one might reasonably expect the initiative to again reach the Supreme Court (potentially in the 2023 Term, for decision in June 2024)—and to face a similarly skeptical audience.

Tomorrow, we will release a new episode of our Consumer Finance Monitor Podcast in which we discuss the Supreme Court’s decisions.

Thomas Burke

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July 6 Podcast Episode: A Close Look at the U.S. Supreme Court’s Decision Invalidating the Biden Administration’s Student Loan Forgiveness Plan and Its Potential Legal Repercussions and Impact on Student Loan Borrowers

Last Friday, the U.S. Supreme Court ruled that the Biden Administration did not have the legal authority to proceed with its plan to forgive approximately $400 billion in federal student loans. After reviewing the background of the two cases, we first look at the majority opinion authored by Chief Justice Roberts and discuss the majority’s legal analysis for concluding that the Missouri Attorney General had standing to challenge the plan, that the HEROES Act’s text did not authorize the Secretary of Education to forgive the loans, and that the “major questions” doctrine should be applied to assess whether Congress had given loan forgiveness authority to the Secretary. We also look at Justice Kagan’s dissenting opinion and the dissent’s rationale for rejecting the majority’s conclusions. We then look at the decision’s potential repercussions for future challenges by state agencies to actions by federal agencies and for the application of the “major questions” doctrine to such challenges. We conclude by discussing the decision’s impact on borrowers, including the ending of the moratorium on federal student loan payments and actions already announced by the Administration or that might be taken to provide relief to borrowers facing the resumption of payments.

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

To listen to the episode, click here.

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Nevada Enacts Amendments Regarding Working From Remote Locations for Installment Loan Company Licensees and Collection of Medical Debt

Nevada’s Governor recently approved amendments to Nevada laws that concern the ability of employees of Installment Loan Company licensees to work from remote locations and the collection of medical debt. The amendments become effective on October 1, 2023.

Senate Bill 355 (“SB 355”) permits employees of Installment Loan Company licensees to work from remote locations. It amends Nev. Rev. Stat. § 675.020 to add a definition of the term “remote location.” The term is defined to mean any location, other than a licensed office or place of business, where an employee of a licensee conducts business.

As amended, Nev. Rev. Stat. § 675.0 also includes specified standards for employees of licensees working from a remote location. Any licensee with remote employees must enter into a written agreement with such employees stating that they will conform to the specified standards, including:

  • Maintaining the confidentiality of borrower data;
  • Maintaining all data electronically and refraining from printing or otherwise storing physical records at a remote location;
  • Completing a privacy and legal compliance training program at the licensee’s place of business prior to working remotely;
  • Reading and complying with the licensee’s data security policy for remote locations;
  • Refraining from representing to a borrower or other person that the lender is working at a remote location or that the lender is working at the licensee’s place of business; and
  • Refraining from conducting any in person interactions with a borrower or potential borrower at the remote location.

Additionally, as amended, Nev. Rev. Stat. § 675.0 requires licensees to conduct annual reviews of remote employees to ensure that such employees comply with the requirements for remote locations. Licensees must also maintain written data security policies ensuring that:

  • Data that is accessible from a remote location is safe from unauthorized or accidental access and is protected by reasonable security measures, such as antivirus software and firewalls;
  • A remote employee can access the licensee’s systems only through a VPN on a licensee-issued computer that is strictly used for licensee-approved activities;
  • Any updates or repairs necessary to keep data and equipment secure are installed or implemented immediately;
  • A risk assessment is performed annually and the security policy is updated to correct any deficiencies identified in the risk assessment;
  • The licensee has procedures in place in the event of a security breach or other emergency that has the potential to impact the storage of or access to data of the licensee;
  • The data of the licensee is disposed of in a timely and secure manner as required by applicable law and contractual requirements; and
  • The licensee is able to remotely disconnect any remote employee from accessing the licensee’s systems and erase any data from a licensee-issued device upon termination of the employee’s employment.

Finally, amended Nev. Rev. Stat. § 675.0 imposes mandatory notification requirements in the event of a security breach. If a licensee discovers such a breach, the licensee must notify any Nevada resident whose personal information was acquired by an unauthorized person if the breach is reasonably likely to subject such resident to a risk of harm or the acquired information was not otherwise protected through encryption.

SB 355 also amends Nev. Rev. Stat. § 649.366 relating to the collection of medical debt by Collection Agencies. Nev. Rev. Stat. § 649.366 requires Collection Agencies to send written notification by registered or certified mail to a debtor 60 days before taking any action to collect any medical debt. SB 355 removes the requirement in § 649.366 that the mail be registered or certified.

We note that an entity engaged in any business activities covered in SB 355, including those related to remote employees or Collection Agencies, should consult the full text of SB 355 in order to determine how such changes will affect its business operations.

The collection of medical debt has been a focus of the CFPB. On July 11, 2023, the CFPB will host a hearing on medical billing and collections, with a focus on medical payment products, such as medical credit cards and installment loans.

Lisa Lanham

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Nevada Allows Collection Agency Employees to Work From Remote Locations

The Nevada Legislature recently passed Senate Bill 276 (SB 276), which permits employees of Collection Agencies to work from remote locations and exempts certain entities from qualifying as a “Collection Agency.” The provisions of SB 276 relevant to Collection Agencies will become effective on October 1, 2023.

SB 276 amends Nev. Rev. Stat. § 649, which deals with Collection Agencies, to include a provision defining the term “remote location.” As defined in the amendment, any location, other than a Collection Agency’s principal place of business or branch office where an employee of a Collection Agency conducts business, may be considered a remote location.

Amended Nev. Rev. Stat. § 649 also includes specified standards for employees of licensees working from a remote location. Any licensee with remote employees must enter into a written agreement with such employees stating that they will conform to the specified standards, including:

  • Maintaining the confidentiality of debtor data;
  • Maintaining all data electronically and refraining from printing or otherwise storing physical records at a remote location;
  • Reading and complying with the Collection Agency’s relevant security and equipment policies;
  • Refraining from representing to a debtor that the agent is working from a remote location or that the agent is working at the Collection Agency’s place of business;
  • Refraining from conducting any in person interactions with a debtor at a remote location;
  • Refraining from working alongside another agent at the same remote location unless the agents both reside in the same residence;
  • Authorizing the Collection Agency to monitor the agent while working from the remote location;
  • Accessing the Collection Agency’s technological systems exclusively through the usage of unique credentials;
  • Completing a training program on legal compliance and privacy prior to working remotely; and
  • Working under direct oversight and mentorship form a supervisor for at least 7 days prior to working remotely.

Additionally, amended Nev. Rev. Stat. § 649 requires Collection Agencies to develop and implement a written security policy for employees who work from a remote location ensuring that:

  • A remote employee can only access the licensee’s systems through a VPN on an agency-issued computer that is strictly used for agency-approved activities;
  • Any updates or repairs necessary to keep data and equipment secure are installed or implemented immediately;
  • Data that is accessible from a remote location is safe from unauthorized or accidental access and is protected by reasonable security measures, such as antivirus software, firewalls, and designated drives;
  • Data is disposed of in a timely and secure manner as required by applicable law and contractual requirements;
  • The Collection Agency has procedures in place in the event of a security breach or other emergency that has the potential to impact the storage of or access to the Collection Agency’s data;
  • The Collection Agency is able to remotely disconnect any remote employee from accessing the Collection Agency’s systems and erase any data from an agency-issued device upon termination of the employee’s employment; and
  • A risk assessment is performed annually and the security policy is updated to correct any deficiencies identified in the risk assessment.

Finally, SB 276 amends the definition of “Collection Agency” in Nev. Rev. Stat. § 649.020. Amended Nev. Rev. Stat. 649.020 exempts specific individuals and entities from qualifying as a “Collection Agency,” including:

  • Savings banks;
  • Credit unions;
  • Thrift companies;
  • Trust companies;
  • Mortgage servicers except when attempting to collect a claim that was assigned when the relevant loan was in default;
  • Any person collecting in their own name on a claim that they originated;
  • Any person servicing a claim that they originated and sold; and
  • Any person described in 15 USC § 1692(6)(A)-1692a(6)(F).

Importantly, we note that an entity engaged in any business activities covered by SB 276 should consult the full text of SB 276 to determine how such changes will affect its business operations.

Lisa Lanham

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Nevada Enacts Licensing Requirement for Private Education Loan Lenders and Servicers

The Nevada Legislature recently passed Assembly Bill 332 (“AB 332”), which amends Nev. Rev. Stat. Title 55 relating to Banks and Related Organizations to add a new chapter regulating Private Education Lenders and Student Loan Servicers. The provisions of SB 322 will become effective on January 1, 2024.

AB 332 exempts the following entities from its requirements:

  • Banks;
  • Savings and loan associations;
  • Savings banks;
  • Thrift companies;
  • Credit unions;
  • The Nevada System of Higher Education;
  • The Western Interstate Commission for Higher Education; and
  • Any wholly owned subsidiaries of the above.

Pursuant to Section 15 of AB 332, any person or entity responsible for the servicing of any student education loan to any student loan borrower may be considered a Student Loan Servicer. Section 15 requires Student Loan Servicers to obtain a license before engaging in student loan servicing.

Potential licensees must submit an application containing:

  • A financial statement prepared by a certified public accountant;
  • A $1,000 nonrefundable licensing fee;
  • An $800 nonrefundable investigation fee;
  • Any other information requested by the Commissioner;
  • A surety bond in an amount to be determined by the Commissioner;
  • The social security numbers of the applicant if the applicant is a natural persons or of each control person if the applicant is not a natural person; and
  • The statement prescribed by the Division of Welfare and Supportive Services of the Departments of Health Human Services pursuant to Nev. Rev. Stat. § 425.520.

Pursuant to Section 19 of AB 332, the Commissioner will grant a Student Loan Servicer a license if the applicant can demonstrate that:

  • The applicant’s financial condition is sound;
  • The applicant’s business will be conducted honestly, fairly, equitably, carefully, and efficiently within the purposes and intent of SB 332 and in the manner commanding the confidence and trust of the community;
  • The applicant is properly qualified and of good character;
  • No person on behalf of the applicant knowingly has made any incorrect statement of material fact in the application or has otherwise omitted to state any material fact necessary to give the Commissioner any information lawfully required by the Commissioner;
  • The applicant has paid the license fee and the investigation fee and has submitted the surety bond; and
  • The applicant has otherwise met any other requirement set forth by the Commissioner in any regulations adopted pursuant to AB 332.

Finally, AB 332 creates specified standards for Private Education Lenders. Section 7 of AB 332 provides that any person or entity engaged in the business of securing, making, extending, or holding private education loans may be considered a Private Education Lender. A Private Education Lender must adhere to the specified standards, including:

  • Complying with notice and cosigner release requirements relating to borrowers and cosigners;
  • Refraining from including provisions in loans made after January 1, 2024 which allow the private education lender to accelerate payments except in cases of default
  • Refraining from accelerating payments on loans made before January 1, 2024 unless the loan explicitly authorizes an acceleration and only for the reasons stated in the relevant note or agreement;
  • Refraining from placing any private education loan or account into default or accelerating a private education loan while a private education loan borrower is seeking a loan modification or enrollment in a flexible repayment plan until 90 days following the private education loan borrower’s default;
  • Releasing and refraining from collecting from any cosigner of a private education loan if notified of the total and permanent disability of a private education loan borrower or cosigner;
  • Complying with disclosures and procedural requirements regarding refinancing and flexible repayment of private education loans;
  • Refraining from engaging in any unfair, deceptive, or abuses acts or practices and making false, misleading, or deceptive statements;
  • Refraining from making a private education loan secured by wages or other compensation for services earned or to be earned; and
  • Complying with all relevant recordkeeping requirements.

Importantly, we note that an entity engaged in any business activities covered in AB 332 should consult the bill’s full text to determine how such changes will affect its business operations.

Lisa Lanham

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FinCEN Provides Key Updates on Rulemaking Agenda Timeline

Without much fanfare, the Financial Crimes Enforcement Network (FinCEN) published in June its Spring 2023 Rulemaking Agenda, which provides proposed timelines for upcoming key rulemakings projected throughout the rest of 2023. FinCEN continues to focus on issuing rulemakings required by the Anti-Money Laundering Act of 2020 (the “AML Act”) and the Corporate Transparency Act (“CTA”). FinCEN has been criticized for being slow in issuing regulations under the AML Act and the CTA, but Congress has imposed many obligations upon FinCEN, which still is a relatively small organization with a limited budget.

Here are the six upcoming rulemakings and their expected timing. All of these issues are critical. We also discuss the issues for which FinCEN has not provided a proposed timeline.

  • July 2023: Notice of Proposed Rulemaking (NPRM) implementing section 6314 of the AML Act and the Anti-Money Laundering Whistleblower Improvement Act regarding whistleblower incentives and protections. As a reminder, qualifying whistleblowers are entitled to awards between 10 and 30 percent of the value of “monetary sanctions” above $1 million collected through an enforcement action regarding certain violations of the Bank Secrecy Act (BSA) and U.S. economic sanctions. A whistleblower also may be awarded additional monies for related actions. In addition, the Department of Treasury will administer the newly created Financial Integrity Fund to pay whistleblower awards. We previously have blogged about section 6314 here, here and here.
  • August 2023: NPRM regarding real estate transaction reports and records. The release of the NPRM was pushed back by several months. FinCEN released an advanced NPRM in December 2021, which sought comments on potential BSA/AML requirements for persons involved in real estate transactions, particularly non-financed transactions. Critical issues will include the scope of the proposed BSA requirements, and the type of real estate transactions to which they will apply (E.g. Any monetary threshold? Nationwide application? Only residential deals, or commercial deals as well? Who is responsible for any reporting requirements? Etc.)
  • September 2023: Final Rule regarding beneficial ownership information (BOI) access and safeguards and the use of FinCEN Identifiers. The final rule will establish the framework for authorized recipients’ access to BOI as well as instances where reporting companies can use FinCEN Identifiers. As we previously blogged, there was strong push back by the financial services industry, partly because the proposal limited financial institutions’ ability to use BOI, thereby contradicting the CTA’s objectives.
  • November 2023: Final Rule implementing section 6212 of the AML Act that establishes a pilot program permitting financial institutions to share suspicious activity reports (SARs) with their foreign branches, subsidiaries, and affiliates. This final rule has been delayed by several months from FinCEN’s prior rulemaking agenda.
  • December 2023: NPRM implementing section 6101(b) of the AML Act that establishes national exam and supervision priorities. Section 6101(b) requires financial institutions to incorporate a risk assessment and AML/countering financial terrorism (CFT) priorities into their risk-based compliance programs. In June 2021, FinCEN preliminarily released the first set of national AML/CFT priorities but highlighted that these did not have to be incorporated into compliance programs until regulations were promulgated. FinCEN will update these priorities every four years. As we previously blogged, the preliminary list of priorities was extremely broad, to the point of presenting limited utility. The NPRM will be important in regards to whether it provides any greater clarity or precision.
  • December 2023: Lastly, a NPRM revising the existing Customer Due Diligence (CDD) Rule is expected. This is the third required rulemaking in the series to implement the BOI rule under the CTA. Given the current differences between how the CDD Rule and the CTA define “beneficial owner,” as well as differences involving exempted entities and serious questions regarding how financial institutions can or should access BOI under the CTA in order to comply with the CDD Rule, this will be a very important NPRM.

Notable absences from FinCEN’s rulemaking agenda include a NPRM implementing section 6305 of the AML Act, which provides for a no-action letter (NAL) program. FinCEN conducted an assessment, determined that a NAL program was appropriate, and issued an ANPRM in June 2022. FinCEN’s Fall 2022 rulemaking agenda projected a NPRM in November 2023, but this item is missing from the Spring agenda.

Another notable absence from the Spring agenda is a NPRM regarding the voluntary information sharing program under 314(b) of the USA PATRIOT Act. FinCEN’s Fall 2022 and other previous rulemaking agendas have included this item with the only information being that the agency is considering a rulemaking to strengthen the administration of the regulation implementing the voluntary information sharing program. The Fall 2022 agenda indicated that a NPRM was expected last month but this item is missing from the agency’s Spring agenda.

Of course, whether FinCEN will be able to have the Beneficial Ownership Secure System (BOSS) under the CTA to be actually up and running by the January 1, 2024 effective date remains a significant outstanding question. The fact that FinCEN will not even issue a NPRM addressing an proposed “alignment” between the CTA and the CDD Rule until December 2023 suggests that the process of working out real-world implementation of the CTA will extend for quite some time.

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.

Kaley Schafer

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Join Us at the 2023 HR Legal Summit – Register Today!

Please join us for the 11th Annual HR Legal Summit, co-sponsored by Ballard Spahr and SEPA SHRM. This year’s HR Legal Summit will be held on Thursday, September 21, 2023 from 8:00 AM – 4:30 PM. The Summit is relevant for HR professionals, employment attorneys, and ANYONE who performs, or advises on, HR-related tasks. The Summit will include:

  • Keynote session on the topic of Mental Health Strategies for the Workplace, led by Michael Towers, a Counselor, Leadership Speaker, and Empathy Expert.
  • 4 concurrent sessions and two large group sessions led by Ballard attorneys on issues you deal with daily: Legal Updates, State and Local Legal Trends, Post-employment Covenants, Practices for Separating Employee, Dissecting Internal Investigation, Parental Leave, Lactation and Accommodations, and more.
  • Sponsor and Exhibitor Hall full of companies with tools and resources to help you and your organization!

Don’t miss the chance to earn SHRM and HRCI recertification credits and connect with other HR professionals.

Early bird registration deadline for the HR Legal Summit is now through August 18, 2023. Seats are limited so register today!

 

Brian D. Pedrow

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Plaintiffs in Lawsuit Challenging CFPB UDAAP Update to Exam Manual Seek Status Conference to Discuss Need for Interim Relief

Asserting that irreparable harms to their members “are piling up,” the U.S. Chamber of Commerce and the other plaintiffs have filed a motion for a status conference with the Texas federal district court hearing their lawsuit challenging the CFPB’s update to the Unfair, Deceptive, or Abusive Acts or Practices section of its examination manual to include discrimination. The other plaintiffs are American Bankers Association, Consumer Bankers Association, Independent Bankers Association of Texas, Longview Chamber of Commerce, Texas Association of Business, and Texas Bankers Association.

In January 2023, the parties completed briefing on cross-motions for summary judgment. The plaintiffs assert that since the completion of briefing, “the CFPB announced in its June 2023 Fair Lending Report that it is pursuing enforcement actions based on the expansive interpretation of its unfairness authority—expressed in the manual update—that Plaintiffs challenge in this case.” As support for this assertion, the plaintiffs quote the following sentence in the Report:

The CFPB is looking into potential discriminatory conduct, including under ECOA and the statutory prohibition on unfair acts or practices targeted at vulnerable populations and leading to bias in automated systems and models.

According to the plaintiffs, “[n]ow that the CFPB has revealed that it is actively pursuing enforcement investigations on this theory, the need for relief is particularly acute.”

The plaintiffs assert that waiting until Spring 2024, when the U.S. Supreme Court will likely issue its decision in the CFSA case, would impose significant unrecoverable costs on their members. They indicate that in their discussions with the CFPB prior to the filing of the summary judgment motions, the CFPB “floated the idea of temporarily enjoining the update and freezing this case while the CFPB litigates [the CFSA case] in the Supreme Court.” The plaintiffs state that, in view of the growing harm to their members, they are now “considering a version of the [CFPB’s] suggestion, where they seek interim relief in the near term.” However, since they “do not want to rush” the district court or start another round of briefing that might prove unnecessary, they seek a status conference to discuss this issue.

John L. Culhane, Jr., Michael Gordon & Alan S. Kaplinsky

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Andrea Gacki, Former Director of OFAC, Appointed Director of FinCEN

Yesterday, the Department of the Treasury announced that Andrea Gacki, who had been serving as the Director of the Office of Foreign Assets Control (OFAC), has been appointed as the Director of the Financial Crimes Enforcement Network (FinCEN).

FinCEN, which faces a daunting agenda and associated timelines courtesy of the Anti-Money Laundering Act and the Corporate Transparency Act, has been without a Director for some time. The fact that the (now former) Director of OFAC was appointed to head FinCEN says a lot about the critical importance of sanctions — particularly the unfolding sanctions relating to Russia — to the Treasury Department and the Biden Administration in general.

The Treasury Department’s press release sums everything up. It is set forth below.

Ms. Gacki presently serves as the Director of [OFAC] at the Treasury Department, where she has played a leading role in the United States Government’s implementation and enforcement of economic sanctions during critical national security challenges facing the United States. She also performed the functions of the Treasury Department’s Under Secretary for Terrorism and Financial Intelligence (TFI), giving her deep experience and expertise on the unique role that TFI, including FinCEN, plays in combatting illicit finance threats.

“I am honored and excited to serve as the Director of FinCEN. FinCEN plays a vital role in safeguarding the U.S. financial system, and I look forward to leading the FinCEN team in these important efforts,” said Director Gacki. “I also look forward to continuing FinCEN’s critical efforts to implement the Anti-Money Laundering Act of 2020, including the Corporate Transparency Act.”

“Andrea is an outstanding and widely respected leader, and I am confident that she will excel as the Director of FinCEN during this critical time in FinCEN’s history,” said TFI Under Secretary Brian Nelson. “Her deep experience leading significant national security initiatives on behalf of the Treasury Department and the broader U.S. Government will be key assets to FinCEN and TFI in her new role.”

Acting FinCEN Director Himamauli “Him” Das will continue in his role during the transition period and assist Ms. Gacki in her onboarding process. “Treasury is deeply appreciative of Him for his dedication, professionalism, and leadership these past two years. He steered the Bureau through unprecedented times where the demands increased exponentially, and he achieved remarkable accomplishments during his tenure, including overseeing the Bureau’s implementation of the Corporate Transparency Act,” said Under Secretary Nelson.

Prior to her service as Director of OFAC, Ms. Gacki served in multiple senior leadership roles at OFAC, including Deputy Director, Associate Director for Compliance and Enforcement, and Assistant Director for Licensing. Prior to OFAC, Ms. Gacki served as a trial attorney in the Federal Programs Branch of the Civil Division of the U.S. Department of Justice (DOJ), where she litigated a range of matters implicating key TFI legal authorities. Ms. Gacki began her career as an associate at a large international law firm following a clerkship for the Honorable Avern Cohn on the U.S. District Court for the Eastern District of Michigan. She earned her undergraduate and law degrees at the University of Michigan.

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

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CFPB Partners With State of Maine in Amicus Brief on Truth in Lending Act Coverage

The CFPB has filed an amicus brief jointly with Maine’s Attorney General, Bureau of Financial Institutions, and Bureau of Consumer Credit Protection in the Maine Supreme Judicial Court in a case, Franklin Savings Bank v. Bordick, involving whether the Truth in Lending Act (TILA) applied to the defendants’ loan. Although Maine was granted an exemption from certain parts of TILA, the Maine Consumer Credit Code incorporates TILA and Regulation Z.

The factual background set forth in the CFPB’s brief states that the defendants took out a loan from the Bank in 2008 to purchase land and then built a second home on the land. They sold the home in 2014, but the sale proceeds were not sufficient to pay off the loan. To cover the shortfall, the defendants obtained a second loan from the Bank which was secured by a hunting cabin owned by the defendants. The defendants subsequently defaulted on the second loan.

The procedural history set forth in the CFPB’s brief states that after the defendants defaulted, the Bank filed a complaint seeking to take possession of the hunting cabin. At trial, the defendants asserted that the Bank had not complied with TILA in connection with making the second loan because it did not give them TILA disclosures or make a reasonable determination that they had the ability to repay the loan. They argued that the Bank’s TILA liability offset the amounts they owed on the loan.

The trial court did not allow the defendants to present evidence relevant to their TILA claims. It determined that TILA did not apply to the loan because the loan documents stated that the loan had a commercial purpose. In rejecting the defendants’ attempt to introduce extrinsic evidence showing the loan was actually issued for consumer purposes, the court relied on a Maine Supreme Judicial Court opinion dealing with the application of Maine’s notice of default statute for residential real property foreclosure. In that case, the court held that to determine if the statute applies, courts should not look to extrinsic evidence to determine whether the loan had a commercial or consumer purpose if the loan documents state on their face that the loan has a commercial purpose. The trial court thereafter denied the defendants’ motion for reconsideration.

The CFPB’s primary arguments are:

  • Case law provides that contractual language is not determinative of whether a loan is covered by TILA. There is “a strong, national consensus that courts must ‘look at the entire transaction and surrounding circumstances to determine a borrower’s primary motive.’”
  • The Maine Supreme Judicial Court opinion on which the trial court relied involved a different state statute and thus does not speak to how a loan’s purpose should be determined under TILA.
  • Allowing contractual language to control whether TILA applies to a transaction would undermine TILA’s remedial purpose because it would allow a creditor to circumvent TILA by merely labeling loan documents “commercial.”

The CFPB argues that the trial court’s judgment should be vacated and the case should be remanded so the trial court can consider evidence relevant to the loan’s purpose. We note, however, that the CFPB never offers any facts to indicate that the defendants ever actually occupied the second home that was built on the property purchased with the first loan, which strongly suggests that it was non-owner occupied rental property, and thus that the first loan was a business loan. Likewise the CFPB never mentions the proceeds of the second loan being used for any purpose other than to pay off the first loan. Thus it seems quite possible that both loans were business purpose credit under TILA.

John L. Culhane, Jr.

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CFPB and 11 States File Lawsuit Against Companies Engaged in Origination and Collection of Income Share Agreements

The Consumer Financial Protection Bureau, the California Department of Financial Protection and Innovation (CA DFPI), and ten state Attorneys General have filed a lawsuit against Prehired, LLC (Prehired) and two related companies, Prehired Recruiting, LLC and Prehired Accelerator, LLC, alleging that the companies violated the Consumer Financial Protection Act (CFPA), the Truth in Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA) in connection with offering and collecting on income share agreements (ISAs). The CFPA claims are brought by the CFPB and the state plaintiffs, who rely on the provision of the CFPA that authorizes state attorneys general and state regulators to bring lawsuits to enforce the CFPA. The TILA and FDCPA claims are brought only by the CFPB.

Prehired operated an online training program for consumers seeking entry-level positions as software sales development representatives and offered consumers enrolled in its program the opportunity to enter into ISAs to finance the cost of the program. Prehired Recruiting and Prehired Accelerator acquired defaulted ISAs originated by Prehired and engaged in collection activities. Because the three companies have filed for Chapter 7 bankruptcy relief, the lawsuit was filed as an adversary proceeding in the bankruptcy cases.

A central allegation of the complaint is that the ISAs were “credit,” thereby making Prehired a “covered person” under the CFPA, and that such “credit” was subject to TILA. Prehired Recruiting and Prehired Accelerator are also alleged to be “covered persons” based on their collection activities. The complaint includes the following claims:

  • Prehired engaged in deceptive practices in violation of the CFPA by (1) misrepresenting to consumers that the ISAs were not loans or credit and did not create debt, and (2) misleading consumers to believe that no payments would be due on an ISA unless and until the consumer had a job making at least $60,000 per year when the terms of the ISAs in fact required consumers to make payments when they were making at least $30,000 per year.
  • Prehired violated TILA and Regulation Z by not providing TILA-required disclosures for the ISAs and, by violating TILA and Regulation Z, Prehired violated the CFPA.
  • Prehired Recruiting engaged in unfair practices in violation of the CFPA by filing debt collection lawsuits in a distant forum when consumers did not live in that forum and were not physically present in that forum when they executed the ISA.
  • Prehired Recruiting and Prehired Accelerator engaged in deceptive practices in violation of the CFPA in attempting to collect on ISAs by inducing consumers to enter into settlement agreements providing for monthly payments for several years by deceptively describing such agreements as beneficial to the consumers without disclosing that the true purpose of the agreements was to avoid consumers’ defenses to the ISAs and impose more onerous dispute resolution and collection terms.
  • Prehired Recruiting and Prehired Accelerator violated the FDCPA by making false or misleading representations in connection with the collection of ISAs including falsely representing the amount of debt owed by consumers and deceptively describing the settlement agreements. By violating the FDCPA, Prehired Recruiting and Prehired Accelerator violated the CFPA.

The relief sought in the complaint includes the following:

  •  A declaration that the ISAs originated by Prehired were void ab initio because they were procured by misrepresentation;
  • An order directing the defendants to make restitution to all consumers who suffered losses as a result of the conduct alleged in the complaint or, in the alternative, an order allowing an unsecured creditor claim on behalf of the plaintiffs for the full restitution amount;
  • An injunction permanently enjoining the defendants from selling or assigning, transferring, conveying, collecting or causing to be collected any portion of an ISA;
  • An order directing defendants to disgorge and forfeit all money it has collected as a result of the conduct alleged in the complaint; and
  • An order directing payment of civil penalties, or in the alternative, an order allowing an unsecured creditor claim for civil penalties.

The CFPB and the CA DFPI have previously taken the position that ISAs are extensions of credit. In September 2021, the CFPB issued a consent order against an ISA provider in which it concluded that the provider’s ISAs were extensions of credit under the CFPA and TILA. In August 2021, the CA DFPI announced that it had entered into an agreement with a company that acts as a program manager of ISAs that included the CA DFPI’s finding that ISAs made solely for the purpose of financing a postsecondary education were “student loans” under the California Student Loan Servicing Act.

As indicated above, in asserting CFPA claims against the defendants, the state plaintiffs rely on the provision of the CFPA that authorizes state attorneys general and state regulators to bring lawsuits to enforce the CFPA. We note, however, that this provision only authorizes state attorneys general to bring such lawsuits in a federal district court in the attorney general’s state or in a state court located in the attorney general’s state. Even assuming the Delaware Bankruptcy Court would be considered the Delaware federal district court for purposes of the Delaware Attorney General’s participation in the lawsuit, it is unclear whether the other state Attorneys General have authority under the CFPA to file a lawsuit in a Delaware venue.

John L. Culhane, Jr.

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Did You Know?

As of June 30, 2023, the Indiana Department of Financial Institutions will now accept new applications via the NMLS for its “Exempt Company Registration - Third Party Loan Processing.” This registration applies to companies who solely engage in mortgage loan processing and/or mortgage loan underwriting, and are not required to be licensed under Indiana law. Please see Indiana’s NMLS state licensing requirements page here for more information.

John Georgievski

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Looking Ahead

MBA’s Human Resources Symposium 2023

Remote Work Super Session: Legal, Operational, and Tax and Accounting Perspectives, September 6, 2023 - 9 AM EST

Speaker: Meredith S. Dante

Fair Labor Standards Act Update, September 6, 2023 - 11:15 AM EST

Speaker: Meredith S. Dante

Loan Originator Compensation and Other Mortgage-Specific Legal Issues Affecting HR Managers, September 6, 2023 - 1 PM EST

Speaker: Richard J. Andreano, Jr.

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