Ballard Spahr
Legal Alert

Mortgage Banking Update - September 7, 2023

September 7, 2023
In This Issue:


Alan Kaplinsky to Moderate ABA Program on Pending SCOTUS Case Revisiting Chevron Deference

On September 7, 2023, at the ABA Business Law Section Fall Meeting in Chicago, Alan Kaplinsky, Ballard Spahr Senior Counsel in the firm’s Consumer Financial Services Group, will moderate a program, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC, and Federal Banking Agency Regulations.” The speakers are Professor Jonathan Masur of the University of Chicago Law School and Lauren Campisi of Hinshaw Culbertson. In addition to consumer financial services and banking lawyers, all business lawyers who have a regulatory practice will find the program of interest.

Since the U.S. Supreme Court’s 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., the “Chevron framework” has typically been invoked by courts when reviewing a federal agency’s interpretation of a statute. The Supreme Court has agreed to hear a case next term, Loper Bright Enterprises, et al. v. Raimondo, in which the petitioners are directly challenging the continued viability of the Chevron framework. Under the Chevron framework, a court must use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute is ambiguous or silent, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, the court will ordinarily defer to the agency’s interpretation.

A substantial portion of the program will be devoted to the potential implications of a Supreme Court decision reversing or significantly limiting Chevron, including the implications for regulations that courts have held to be valid based on Chevron.

Background on Loper and more information about the issues that will be discussed during the program is available here. Registration information is available here.

Barbara S. Mishkin

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CFPB Files Opposition to Preliminary Injunction Motion of Intervenors in Texas Lawsuit Challenging CFPB’s Small Business Lending Rule

The CFPB has filed its opposition to the motion for a preliminary injunction filed by the intervenors in the Texas federal court lawsuit challenging the CFPB’s final small business lending rule (Rule). The intervenors are several credit unions, community banks, and credit union and community bank trade associations.

In the Texas lawsuit, the court entered an order on July 31 that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court,” stays the deadlines for compliance with the Rule’s requirements pending the Supreme Court’s decision in CFSA, and extends the deadlines for compliance in the event of a reversal in CFSA. At the CFPB’s urging, the court unfortunately denied the nationwide relief requested by the plaintiffs and only granted relief to the plaintiffs and their members. (The plaintiffs are the American Bankers Association (ABA), Texas Bankers Association (TBA) and Rio Grande Bank.)

The limited relief prompted the credit union and community bank intervenors to file motions seeking leave to intervene and, after those motions were granted, prompted the community bank intervenors to file a preliminary injunction motion in which the credit union intervenors joined. In their preliminary injunction motion, the intervenors have asked the Texas federal court to enter a preliminary injunction prohibiting the CFPB from enforcing the Rule nationwide or, alternatively, as to the intervenors and their members.

In its opposition, the CFPB makes the following principal arguments:

  • The intervenors have not met their burden of showing they are entitled to preliminary relief and, in particular, have not provided specific evidence of compliance costs that they are required to incur now, as opposed to years down the road. For example, two of the bank intervenors appear to be “Tier 3”institutions that will not be required to comply with the Rule until January 1, 2026. None of the trade association intervenors “specifically identify any member institution (other than [the bank and credit union intervenors]) [who are required to currently incur expenses] or establish with specific evidence any particular expense that such member is required to incur at this time.”
  • The CFPB disagrees with the court’s prior conclusion that the balance of harms and public interest favor a stay because there is copious evidence supporting the CFPB’s view that the Rule and the statutory requirements it implements will produce significant benefits for small businesses, the communities they serve, and lenders.
  • Even if the intervenors can show they are likely to succeed on the merits based on the Fifth Circuit CFSA decision, merely establishing a likelihood of success on the merits in not enough, on its own, to justify preliminary relief. The intervenors provide no compelling reason for the court to reconsider its grant of limited relief to the plaintiffs and their members.
  • While the intervenors’ proposed order largely tracks the preliminary relief previously granted by the court, it would seem to sweep in more conduct. It would not only preliminarily enjoin the CFPB from implementing and enforcing the Rule against the intervenors and their members, but would also order the CFPB to “immediately cease all implementation or enforcement” of the Rule. For example, the CFPB’s understanding is that the current injunction against “implementing and enforcing the Final Rule against Plaintiffs and their members” does not prohibit the CFPB from answering implementation questions from regulated entities, including from the plaintiffs or their members, or otherwise providing guidance and information about the Rule. However, the order sought by the intervenors could be understood to bar that conduct.
  • While it is unclear if the intervenors even mean to request broader relief, the CFPB raises this concern out of an abundance of caution due to the potential for confusion about the scope of any additional preliminary relief the court might order. Broader relief is not appropriate because the irreparable injury alleged by the intervenors–having to spend money to prepare to comply with the Rule by the compliance dates–would be fully redressed by an order staying the compliance dates similar to what the court did in its prior order with respect to ABA or TBA members.

It is disappointing that the CFPB continues to argue, after having already lost the argument that preliminary relief is not warranted, that the intervenors’ injunction motion should be denied. Hopefully, the court will recognize that only extending the preliminary relief it has granted to the plaintiffs to the intervenors and their members, rather than now granting nationwide relief to all entities covered by the Rule, will perpetuate disparity in how banks, credit unions, and non-banks are impacted by the Rule. Should the court grant further preliminary relief that benefits only the intervenors and their members, there will likely be more intervention and preliminary injunction motions which will waste the time and resources of the court and the entities that believe it is necessary for them to take that route in order to obtain relief. We would also think that the CFPB’s resources could be better used elsewhere.

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

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Plaintiffs in Kentucky Lawsuit Challenging CFPB Final Small Business Lending Rule File Motion for Preliminary Injunction

The Kentucky banks and Kentucky trade association that filed a lawsuit in a Kentucky federal district court challenging the CFPB’s final small business lending rule (Rule) have filed a motion for a preliminary injunction. The court has ordered the CFPB, if it objects to the motion, to file a response by September 5, 2023.

The Kentucky plaintiffs chose to file a separate lawsuit rather than intervene in the lawsuit pending in a Texas federal district court challenging the rule filed by the American Bankers Association(ABA), Texas Bankers Association, and Rio Grande Bank and in which several credit unions, community banks, and credit union and community bank trade associations have already intervened. In the new Kentucky lawsuit, the plaintiffs consist of seven Kentucky state-chartered banks, one national bank with its main office in Kentucky, and the Kentucky Bankers Association (KBA). The first four counts of their complaint substantially track the complaint filed by the Texas plaintiffs. These counts allege that the Rule is invalid because it was promulgated by the CFPB using funding that violates the Appropriations Clause and because the Rule violates the Administrative Procedure Act. It also includes a fifth count that alleges the Rule violates the First Amendment because the Rule’s prohibition on discouraging applicants from responding to requests for data and the CFPB’s Enforcement Statement regarding that prohibition “does not permit the Plaintiff Banks to truthfully advise that an applicant for credit may refuse to provide any information that the [Rule] would otherwise require to be collected.”

In the Texas lawsuit, the court entered an order on July 31 that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court,” stays the deadlines for compliance with the Rule’s requirements pending the Supreme Court’s decision in CFSA, and extends the deadlines for compliance in the event of a reversal in CFSA. At the CFPB’s urging, the court unfortunately denied the nationwide relief requested by the plaintiffs and only granted relief to the plaintiffs and their members. The limited relief prompted the credit union and community bank intervenors to file their motions seeking leave to intervene and, after those motions were granted, prompted the community banks to file a preliminary injunction motion in which the credit unions joined. In their preliminary injunction motion, the intervenors have asked the Texas federal court to enter a preliminary injunction prohibiting the CFPB from enforcing the Rule nationwide or, alternatively, as to the intervenors and their members.

In their preliminary injunction motion, the Kentucky plaintiffs ask the Kentucky federal court to grant the same preliminary relief to the plaintiffs and KBA members as the Texas federal court granted to the plaintiffs in the Texas lawsuit. The Kentucky plaintiffs argue that they satisfy the requirements for a preliminary injunction, including the requirement of irreparable harm absent an injunction. According to the plaintiffs, the irreparable harm they would suffer not only includes the unrecoverable compliance costs they are incurring because of the Rule but also includes the competitive disadvantage they face if they do not receive the same relief already granted by the Texas federal court to ABA members that are located or do business in Kentucky. They assert that “[t]hese competing banks are able to focus their time and resources on competing with the Plaintiffs while Plaintiffs must continue to use staff time and resources on compliance with the Final Rule.”

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

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Nonbank Floorplan Lender and Trade Association for Nonbank Providers of Equipment and Vehicle Financing File Motion Seeking to Intervene in Texas Lawsuit Challenging CFPB Small Business Lending Rule

Yet another unopposed emergency motion for leave to intervene has been filed in the Texas lawsuit challenging the CFPB’s final small business lending rule (Rule). The latest proposed intervenors are XL Funding, LLC d/b/a Axle Funding, LLC (Axle) and the Equipment Leasing and Finance Association (ELFA) (collectively, the Proposed ELFA Intervenors).

The motion filed by the Proposed ELFA Intervenors describes ELFA as a national trade association that represents financial services companies and manufacturers in the equipment finance sector. It states that ELFA’s members are companies that “finance the acquisition of assets, including without limitation, all types of capital equipment; software; agricultural equipment; IT equipment and software; aircraft; manufacturing and mining machinery; rail cars and rolling stock; vessels and containers; trucks and transportation equipment; construction and off-road equipment; motor vehicles; business, retail, and office equipment; and medical technology and equipment.” The motion describes Axle as a floorplan lender that provides financing for motor vehicle dealers. (While the Rule does not cover leases, it does apply to nonbank lenders involved in equipment and vehicle financing and commercial finance companies.)

The Complaint in Intervention that the Proposed ELFA Intervenors intend to file if granted leave to intervene tracks the Appropriations Clause and Administrative Procedure Act violations alleged in the plaintiffs’ complaint. (The plaintiffs are the American Bankers Association, Texas Bankers Association, and Rio Grande Bank.) The Proposed ELFA Intervenors state in their motion that, if granted leave, they intend to immediately file a motion for preliminary injunction to obtain the same preliminary relief the Texas federal court has granted to the plaintiffs. On July 31, the court entered an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court,” stays the deadlines for compliance with the Rule’s requirements pending the Supreme Court’s decision in CFSA, and extends the deadlines for compliance in the event of a reversal in CFSA. At the CFPB’s urging, the court unfortunately denied the nationwide relief requested by the plaintiffs and only granted relief to the plaintiffs and their members.

The Texas federal court has already granted the motions for leave to intervene filed by community bank and credit union intervenors and the community bank intervenors have filed a preliminary injunction motion in which the credit union intervenors have joined. In their preliminary injunction motion, the community bank and credit union intervenors ask the Texas federal court to enter a preliminary injunction prohibiting the CFPB from enforcing the Rule nationwide or, alternatively, as to the intervenors and their members. Despite having already lost the argument that preliminary relief is not warranted as to the plaintiffs, the CFPB has opposed the intervenors’ preliminary injunction motion.

The motion for leave to intervene filed by the Proposed ELFA Intervenors includes a certification from their counsel stating that he conferred with counsel for the CFPB and the plaintiffs and was advised that they are unopposed to the motion. We assume however, that if the Proposed ELFA Intervenors are granted leave to intervene, the CFPB will also oppose their preliminary injunction motion.

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

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Trade Associations Urge CFPB to Pause Effective Date and Tiered Compliance Dates of Small Business Lending Rule

A group of trade associations has sent a letter to CFPB Director Chopra urging the CFPB to address the disparity that has resulted from the order entered by the Texas federal district court in the lawsuit challenging the CFPB’s small business lending rule that granted preliminary injunctive relief only to the plaintiffs and their members. The letter was sent by the American Financial Services Association, Consumer Bankers Association, CRE Finance Council, Equipment Leasing and Finance Association (ELFA), Mortgage Bankers Association, National Association of Federally-Insured Credit Unions, Truck Renting and Leasing Association, and the U.S. Chamber of Commerce (collectively, Trades).

In that order, the court preliminarily enjoined the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court,” stayed the deadlines for compliance with the Rule’s requirements pending the Supreme Court’s decision in CFSA, and extended the deadlines for compliance in the event of a reversal in CFSA. At the CFPB’s urging, the court unfortunately denied the nationwide relief requested by the plaintiffs and only granted relief to the plaintiffs and their members. (The plaintiffs are the American Bankers Association, Texas Bankers Association, and Rio Grande Bank.)

Since entering its preliminary injunction order on July 31, the Texas federal court has allowed a community bank and community bank trade associations and a credit union and credit union trade associations to intervene in the lawsuit. The community bank intervenors have filed a motion for a preliminary injunction in which the credit union intervenors have joined. In their preliminary injunction motion, the intervenors have asked the Texas federal court to enter a preliminary injunction prohibiting the CFPB from enforcing the Rule nationwide or, alternatively, as to the intervenors and their members. A motion seeking leave to intervene has also been filed by a nonbank floorplan lender and the ELFA, which is a trade association for nonbank providers of equipment and vehicle financing.

In their letter to Director Chopra, the Trades state that the limited preliminary injunctive relief granted by the Texas federal court “poses serious compliance challenges for the membership of the Trades, as institutions that are identically subject to the 1071 Rule are now effectively subject to different compliance and implementation dates.” They urge the CFPB to “act to establish new effective dates and compliance dates for all institutions subject to the 1071 Rule.” They also urge the CFPB to “pause the 1071 Rule’s effective date and tiered compliance dates until the various legal challenges are resolved, which is currently expected to be at the end of the 2023-2024 U.S. Supreme Court term expected in July 2024.” The Trades state that more institutions are likely to seek judicial relief if the CFPB does not act to restore parity among institutions subject to the Rule and observe that “[m]anaging more litigation is not the most efficient use of anyone’s resources when the CFPB has the ability to provide uniform treatment to all covered institutions subject to the 1071 Rule.”

While the Trades do not recommend specific steps for the CFPB to take in response to their letter, there are at least two potential courses of action. First, the CFPB could issue a proposal to delay the Rule’s effective date and tiered compliance dates and allow a 30-day comment period. It could then issue a final rule soon after the comment period ends. The CFPB previously used this procedure in July 2015 to delay the effective date of its TILA-RESPA Integrated Mortgage Disclosure Final Rule and in 2021 to delay the mandatory compliance date for its General Qualified Mortgage Final Rule. Second, the CFPB could change its litigation strategy and agree to the court’s entry of a nationwide preliminary injunction in the Texas case.

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

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DOJ Settles Another Redlining Case

The Department of Justice (DOJ) announced that it has entered into a settlement with American Bank of Oklahoma (ABOK) to resolve allegations that ABOK engaged in unlawful redlining in Tulsa, Oklahoma. The DOJ opened its investigation of ABOK after receiving a referral from the FDIC.

In its complaint, the DOJ alleged that from 2017 through at least 2021:

  • All of ABOK’s branches and loan production offices were located in majority-white neighborhoods;
  • For purposes of the CRA, ABOK designated its Tulsa Metropolitan Services Area (MSA) to exclude all of the majority-Black and Hispanic-census tracts in the MSA;
  • ABOK did not assign a single loan officer to conduct outreach in majority-Black and Hispanic areas and did not market, advertise, or take steps to generate loans from majority-Black and Hispanic neighborhoods;
  • ABOK failed to implement effective fair lending compliance management systems;
  • ABOK significantly underperformed its “peer lenders” in generating home loan applications from majority-Black and Hispanic neighborhoods;
  • ABOK made a smaller percentage of HMDA-reportable residential mortgage loans in majority-Black and Hispanic neighborhoods compared to its peers; and
  • ABOK loan officers and executives sent and received emails via their ABOK email accounts containing racial slurs and racist content.

Notably, in addition to alleging that ABOK’s redlining practices violated the Fair Housing Act, the DOJ alleged that such practices violated the Equal Credit Opportunity Act. The question whether the ECOA applies to prospective applicants is currently before the U.S. Court of Appeals for the Seventh Circuit in Townstone Mortgage. The CFPB appealed to the Seventh Circuit from the district court’s decision in the CFPB’s enforcement action against Townstone in which the district court ruled that a redlining claim may not be brought under the ECOA because the statute only applies to applicants and not to prospective applicants.

The actions that ABOK must take under the proposed consent order include:

  • Hire or designate a full-time director of community lending to oversee the development of ABOK’s mortgage lending in majority-Black and Hispanic census tracts and ABOK’s compliance with the consent order;
  • Establish a community-oriented loan production office in a majority-Black and Hispanic census tract in Osage, Rogers, Tulsa or Wagoner counties within the Tulsa MSA (Tulsa Lending Area) that has a no-fee ATM for ABOK customers and with lower fees for non-customers than what is available at nearby ATMs for non-customers;
  • Assign at least two full-time loan officers to solicit mortgage applications primarily in majority-Black and Hispanic census tracts in the Tulsa Lending Area;
  • Invest at least $950,000 in a loan subsidy fund with the goal of increasing credit for home mortgage loans, home improvement loans, and home refinance loans made in majority-Black and Hispanic neighborhoods in the Tulsa Lending Area (with no more than 25 percent of the fund to be used for refinances);
  • Partner with one or more community organizations that provide residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area with services related to credit, financial education, home ownership, and foreclosure prevention and, through these partnerships, spend at least $20,000 per year ($100,000 over the term of the consent order) on professional services to majority-Black and Hispanic census tracts in the Tulsa Lending Area that increase access to residential mortgage credit;
  • Spend at least $20,000 per year ($100,000 over the term of the consent order) on advertising and outreach directed to residents and prospective residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area;
  • Advertise its mortgage lending services and products to majority-Black and Hispanic census tracts in the Tulsa Lending Area at least to the same extent that it advertises its mortgage lending services and products to majority-white census tracts in the Tulsa Lending Area; and
  • Provide at least six financial education events per year, with translation and interpretation services in Spanish, targeted towards residents of majority-Black and Hispanic census tracts in the Tulsa Lending Area.

In its press release about the settlement, the DOJ indicated that it is part of the DOJ’s initiative to combat redlining, which it announced in October 2021. Other redlining cases that have been part of this initiative include settlements with ESSA Bank & Trust and Park National Bank.

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

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August 24 Podcast Episode: A Look at the Growing Use of Generative Artificial Intelligence and Chatbots in Consumer Financial Services, With Special Guests Ron Shevlin, Chief Research Officer, Cornerstone Advisors, and Reggie Young, Product Counsel, Lithic

We first look at what generative AI is and how it differs from other types of AI and technology such as machine learning. We then look at the ways in which banks and fintech companies can deploy AI tools and the business use case for banks and fintechs considering the addition of chatbots, including how chatbots differ from voice response units. Our discussion considers the potential purposes for which banks and fintechs can use chatbots and the potential benefits to employees and customers. It also considers the potential legal risks in using chatbots for certain purposes such as in connection with deposit accounts, credit products, or consumer complaints. We also look at the potential for more sophisticated use of AI in trend and sentiment analysis. We conclude by looking at how the use of generative AI and chatbots may develop in the future and the regulatory environment these technologies may face.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation.

To listen to the episode, click here.

To listen to our earlier podcast episode, “A close look at generative artificial intelligence and what it means for the consumer finance industry, with special guest Alex Johnson, Founder And Author Of Fintech Takes Newsletter,” click here.

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Ballard Spahr to Hold Special Webinar Roundtable on Oct. 17 on SCOTUS Oral Argument in CFSA v. CFPB

The U.S. Supreme Court will hold oral argument on October 3, 2023 in Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau, a case we have been following closely on Consumer Finance Monitor because of its profound potential implications for the future of the CFPB. In the case, the Court will rule on whether the CFPB’s funding mechanism violates the U.S. Constitution’s Appropriations Clause and, if so, what the appropriate remedy should be.

On October 17, 2023, from 2:00 p.m. to 3:30 p.m. ET, Ballard Spahr will hold a special roundtable, “The U.S. Supreme Court’s Decision in CFSA v. CFPB: Who Will Win and What Does It Mean?” The webinar brings together six attorneys who filed amicus briefs with the Supreme Court. They will share their reactions to the oral argument, important insights into the thinking of the nine Justices, predictions for how and when the Court will rule, and potential implications for the CFPB, the industry, and consumers. Alan Kaplinsky, Senior Counsel and former Practice Group Leader in the firm’s Consumer Financial Services Group, will moderate. To register, click here.

The six attorneys will assess the case from all angles, as three briefs supported the CFPB, two supported the CFSA, and one industry brief supported neither party, taking the position that although the CFPB’s funding is unconstitutional, the Supreme Court should validate other final regulations previously issued by the CFPB so as not to create chaos.

When registering, registrants can submit questions for our speakers to address during the webinar.

Barbara S. Mishkin

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Trade Associations File Amici Brief Supporting Townstone Financial’s Position on ECOA Scope

The Mortgage Bankers Association and Housing Policy Council (the “Associations”) recently filed an Amici Curiae brief supporting the position of Townstone Financial regarding the scope of the Equal Credit Opportunity Act (ECOA) in the case CFPB v. Townstone Financial which is now before the U.S. Court of Appeals for the Seventh Circuit. As previously reported, earlier this year a federal district court granted Townstone’s motion to dismiss the CFPB’s redlining complaint against the company under the ECOA on the grounds that the ECOA applies to applicants and not to prospective applicants. The CFPB then filed an appeal with the Seventh Circuit. The CFPB has filed its brief, and is supported by a number of parties that filed amicus briefs. Townstone also has filed its brief.

At the heart of the matter is the provision under the ECOA regulation, Regulation B, that a “creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” While Regulation B refers to “prospective applicants,” the ECOA only refers to “applicants” and defines an “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”

The Associations support the position of Townstone that the ECOA only applies to applicants in several respects, including the following arguments:

  • The Associations first rebut the position of the CFPB and amici supporting the CFPB that a ruling that upholds the district court’s opinion would eliminate any prohibition on pre-application activity. The Associations correctly point out that mortgage lenders also are subject to the Fair Housing Act (FHA), which “predates ECOA and explicitly prohibits pre-application activity, stating that lenders must not discriminate “in making available” a residential mortgage loan or other financial assistance for dwelling.” The Associations add that while Congress could have chosen to pattern the ECOA after the FHA, it did not do so, nor did Congress grant the CFPB the authority to enforce the FHA. The FHA may be enforced by the U.S. Department of Housing and Urban Development, the U.S. Department of Justice and the federal banking regulators. We view this as a very important point. When Congress wanted to prohibit redlining, it knew how to craft language to do so in the FHA, and it did not include such language, or similar language, in the ECOA.
  • The Associations then turn their attention to the “Chevron framework” set forth by the U.S. Supreme Court in its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. Under the Chevron framework, a court must use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute is ambiguous or silent, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, the court will defer to the agency’s interpretation. (As previously reported, the U.S. Supreme Court recently agreed to hear a case next Term (Loper Bright Enterprises, et al. v. Raimondo) in which the petitioners are directly challenging the continued viability of the Chevron framework. There is considerable speculation that the Court’s conservative majority will curtail, if not overrule, Chevron. Accordingly, the Seventh Circuit might defer any ruling in Townstone pending the Supreme Court’s decision in Loper. (To listen to our recent podcast episode in which we discuss Loper, click here. As previously reported, on September 7, 2023, at the ABA Business Law Section Fall Meeting in Chicago, Alan Kaplinsky, Ballard Spahr Senior Counsel in the firm’s Consumer Financial Services Group, will moderate a program, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC, and Federal Banking Agency Regulations.”)
  • The Associations state that the district court’s decision should be affirmed because the anti-discouragement provision of Regulation B fails Chevron step 1. The Associations assert that “Congress has unambiguously spoken—ECOA extends only to “applicants,” and not “prospective applicants.” Regulation B’s attempt to expand ECOA to reach prospective applicants is thus impermissible.” The Associations note that the ECOA defines “applicant” as “any person who applies to a creditor directly for an extension, renewal or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit” and that courts have interpreted this to mean that a person is an applicant only if they request credit. The Associations also address the claim by the CFPB that Congress evidenced its intent to protect prospective applicants by amending the ECOA in 1991 to add a referral provision that states specified agencies shall “refer [a] matter to the Attorney General whenever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of section 1691(a) of this title.” The Associations state that the amendment “is a procedural, not substantive, amendment, meaning that the purpose of Section 1691e(g) is to grant agencies the procedural authority to refer cases to the Attorney General when applicable, not to expand the substantive reach of ECOA.” The Associations also point out that the section refers to “applications” and not “prospective applications.”
  • The Associations assert that even if the discouragement provision of Regulation B survives step 1 of the Chevron framework, it would fail step 2 because the interpretation of the ECOA is arbitrary and capricious. The Associations point out that Regulation B provides that a creditor cannot “discourage” “prospective applicants” from making or pursuing an application, but does not define what would render any individual a “prospective” applicant. The Associations assert that this is in contrast to the ECOA, which expressly defines an applicant as a “person who applies to a creditor” for credit. The Associations state that combining the ECOA’s definition of “applicant” with the dictionary definition of “prospective” suggests that the anti- discouragement provision of Regulation B would potentially apply to an individual who is “likely to be or become” a person who applies to a creditor for credit. The Associations then raise a number of questions to highlight that such a definition is unclear and could lead to arbitrary and capricious enforcement by the CFPB:

“Is someone a prospective applicant if she hears a message discouraging an application but has no present or future intention of applying for credit? Is she a prospective applicant if she does not have a present intention of applying for credit, but has such an intention to do so in six months? What if there is a thirty percent chance she may want to apply for credit in three years? What if she has an intention of applying for credit, but from her local bank rather than from the lender whose discouraging message she heard? What if the individual does not actually hear or see the purportedly discouraging “oral or written statement”? Because Regulation B leaves so many questions unanswered, potential lenders cannot develop compliance programs to ensure that they are following the law.”

  • Finally, the Associations assert that even if Regulation B’s prohibition on discouraging prospective applicants from applying for credit on a prohibited basis is determined to be consistent with the ECOA, that should not end the inquiry. The Associations argue that in such case the court should ensure that the CFPB’s application of Regulation B is consistent with the ECOA by adopting two limiting interpretive principles: (1) The CFPB must plead, and ultimately prove at trial, that the lender has affirmatively discouraged applications on a prohibited basis, and (2) the CFPB must plead, and ultimately prove at trial, that the lender’s affirmatively discouraging statements in fact caused identifiable applicants or prospective applicants to be discouraged from making or pursuing an application.

Other parties filing amicus briefs in support of Townstone include Hamilton Lincoln Law Institute and, jointly, America’s Future, Free Speech Coalition, Free Speech Defense and Education Fund, U.S. Constitutional Rights Legal Defense Fund, and Conservative Legal Defense and Education Fund.

Richard J. Andreano, Jr.

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Ninth Circuit Confirms Discrete Actions in Debt Collection Litigation Can Trigger FDCPA One-Year Statute of Limitations

A panel of the U.S. Court of Appeals for the Ninth Circuit recently held that because of the timing of a filing in a collection action against a student loan borrower, his claim that debt collectors violated the Fair Debt Collection Practices Act (FDCPA) was not time-barred, reversing the lower court’s dismissal.

In Brown v. Transworld Systems, Inc., the panel affirmed in part and reversed in part the lower court’s dismissal, for failure to state a claim, of a lawsuit in which Brown, a student loan borrower who had received a bankruptcy discharge, alleged that the collectors’ attempts to collect discharged debts violated the FDCPA. In pertinent part, the panel held that as long as the date of the action is easy to determine, the FDCPA one-year statute of limitations begins to run when a collection attorney takes the last action that could independently violate the statute. The panel also held that the determination of whether a lawyer’s conduct or communications made during a collection lawsuit violates the FDCPA is a fact-intensive inquiry that requires a case-by-case examination.

From 2003 to 2007, Brown took out 10 student loans. The purchaser of the loans hired Transworld System, Inc. to collect on the defaulted loans and Transworld subsequently filed a series of collection lawsuits in state court on behalf of the purchaser. In support of these collection efforts, the collector filed two separate affidavits purporting to establish the purchaser’s ownership of the debts, with the second affidavit intended to replace the first affidavit after it was questioned by Brown in his summary judgment motion. The state court ruled that the second affidavit declaring that the purchaser owned the underlying student loan debts was hearsay and excluded it. Because the purchaser could not prove its ownership of the debt, the state court granted summary judgment in favor of Brown.

On April 6, 2020, Brown filed a putative FDCPA class action in state court alleging that defendants filed “a knowingly meritless debt collection lawsuit.” The lawsuit was removed to a Washington federal district court which dismissed the action, concluding that the FDCPA claim was time-barred “because more than one year had elapsed between when Defendants served Brown with their debt collection suit and when Brown filed his FDCPA claim.” On appeal, the Ninth Circuit panel reversed the dismissal of the FDCPA claims based on the running of the statute of limitations.

The Ninth Circuit panel confirmed that there is no continuing violation doctrine in the FDCPA context, although a plaintiff can still sue for discrete FDCPA violations. For consumer debt collection lawsuits, to determine whether there has been an independent violation of the FDCPA, which triggers a new statute of limitations period, the panel held that a court must consider (1) the debt collector’s last opportunity to comply with the FDCPA and (2) whether the date of the alleged violation is easily ascertainable. The Ninth Circuit panel made clear that the debtor must allege “specific actions taken by the debt-collector that show more than another attempt to argue that a violation arising from the filing of a debt-collection suit continues as long as the suit remains pending.” The panel reasoned that “to plausibly allege that a litigation act is a violation of the FDCPA, the debtor must aver sufficient facts to show that the debt collector’s act is a new violation of the FDCPA.” (emphasis provided.) The panel drew a distinction between litigating a case and committing independent FDCPA violations in the course of that litigation.

The panel held that the debtor had plausibly alleged an independent violation of the FDCPA during the litigation that fell within the one-year limitations period—submitting a second affidavit in the litigation to prove ownership of the debt. According to the panel, “[b]y filing a new affidavit that attempted to show that the [purchaser] owned the debts, Defendants did more than ‘reaffirm’ the original complaint. Rather, they presented a new basis—not contained in the complaint—to show that the [purchaser] owned the debts.” By ceasing to rely on the first affidavit and moving forward with the second one, the panel found that a discrete event occurred that created a “last opportunity to comply” with the FDCPA. Further, the filing date of the affidavit was easily ascertainable. Accordingly, given that the filing of the affidavit constituted a discrete violation, Brown’s FDCPA claim based on the affidavit was not barred by the FDCPA statute of limitations.

Importantly, in reaching its decision, the panel also considered the distinction between service and filing. Rejecting Tenth Circuit precedent, the panel held, 2 to 1, that when service occurs before filing, filing can constitute an independent violation of the FDCPA, reasoning that service is not a debt collector’s “last opportunity to comply” with many FDCPA prohibitions. In the majority’s view, because filing requires an additional act that can cause new harm to the debtor, filing is the debt collector’s last opportunity to comply. Therefore, “while service alone can constitute an FDCPA violation, the final step of filing presents a ‘last opportunity’ to comply with the FDCPA when the alleged violation is the bringing of a knowingly meritless lawsuit.”

The majority concluded that service and filing can constitute separate FDCPA violations, each with its own one year statute of limitations. Accordingly, the majority upheld Brown’s claim that the debt collector committed an independent FDCPA violation when it allegedly filed a knowingly meritless collection lawsuit. (Concurring in the judgment, the other member of the panel wrote that this was an “unnecessary conclusion and failed to anticipate the intricacies” that could arise in future cases.)

Notably, while concluding that Brown had sufficiently “alleged a violation” in its reversal, the Ninth Circuit panel emphasized that it did not address the actual merits of his FDCPA claims. This ruling highlights that ongoing collection litigation activity may, by itself, trigger independent violations of the FDCPA that can renew the statute of limitations under the FDCPA and extend well beyond the date a collection lawsuit is filed.

John L. Culhane, Jr. & Erik L. Johnson

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The Fifth Circuit Recently Broadened the Scope for Bringing an Adverse Employment Action

On August 18, 2023, in Hamilton v. Dallas County, the Fifth Circuit Court of Appeals reversed decades of precedent by broadening the standard for what constitutes an actionable adverse employment action.

Previously, an adverse employment action for Title VII discrimination claims consisted of an “ultimate employment decision” such as “hiring, granting leave, discharging, promoting, and compensation.” However, in Hamilton, the Fifth Circuit held that to sufficiently plead an adverse employment action, “a plaintiff need only allege facts plausibly showing discrimination in hiring, firing, compensation, or in the ‘terms, conditions, or privileges’ of his or her employment.” (Emphasis added).

In coming to its conclusion, the appeals court turned to the plain language of Title VII and indicated that the statute does not, explicitly or implicitly, limit liability to ultimate employment decisions. Instead, the statute not only prohibits discrimination in ultimate employment decisions, which includes hiring, refusing to hire, discharging, compensation, but also makes it unlawful for an employer to discriminate against an employee based on his or her “terms, conditions, or privileges of employment.”

This interpretation is consistent with the Supreme Court decision in Hishon v. King & Spalding, where the Court held that an “adverse employment action ‘need only be a term, condition, or privilege of employment.’” Thus, the Fifth Circuit has now made clear that it applies the statute as written to include terms, conditions, or privileges in the standard for adverse employment action.

In Hamilton, nine female detention officers sued the Dallas County Sherriff’s Department alleging the County’s scheduling policy violates Title VII’s prohibition against sex discrimination. The County gives its detention service officers two days off each week. Up until April 2019, the shift schedules were based on seniority. However, the County adopted a new policy where only males can select full weekends off and females cannot. Instead, females can pick either two weekdays off or one weekend day plus one weekday. In applying the new standard, and reversing the district court, the Fifth Circuit concluded that, at least on at the pleadings stage, the Officers plausibly alleged discrimination with respect to the “terms, conditions, or privileges” of their employment as the “days and hours” one works are “quintessential ‘terms or conditions’ of one’s employment.”

This conclusion aligns with the Sixth Circuit’s recent holding in Threat v. City of Cleveland that a “shift schedule is a term of employment” and switching from a seniority based system to a sex-based system “discriminates against employees in the ‘terms, conditions, or privileges of employment.’” Hamilton and Threat will likely influence other circuit courts to expand antidiscrimination laws and result in more demands and lawsuits against employers.

Ballard Spahr counsel employers on avoiding discrimination claims and also defends employers in federal and state administrative agency charges and in litigation brought by former employees and government agencies. The law firm emphasizes keeping updated policies, training managers and taking other steps to prevent and defend against employment law claims.

Nalee Xiong & Brian D. Pedrow

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NLRB Announces New Burden on Employers Faced With a Demand for Union Recognition

On August 25, 2023, the National Labor Relations Board issued its decision in Cemex Construction Materials Pacific LLC (N.L.R.B., Case 28-CA-230115) – upending over 50 years of established law and setting forth a new, union-friendly framework for determining when employers are required to recognize and bargain with unions without a representation election. The Board’s press release on the decision can be found at this link.

Under Cemex, an employer has three options when a union requests recognition on the basis that a majority of employees in a bargaining unit have designated the union as their representative.

First, an employer may immediately recognize and bargain with the union. The Board expects that this will occur within two weeks after the demand for recognition. Second, an employer may file a petition for election within two weeks of the union’s demand. If an employer who seeks an election commits any unfair labor practice that would require setting aside the election, the petition will be dismissed and the Board will order the employer to recognize and bargain with the union. Third, if the employer does not take any action within two weeks, it risks an unfair labor practice (ULP) charge based upon its refusal to bargain.

In each case, the ruling in Cemex places the burden on the employer to challenge a union’s alleged majority status and/or the employer’s obligation to bargain.

The Board’s decision revives some elements of the standard set forth in Joy Silk Mills, a 1949 ruling that required an employer to bargain unless it had a good-faith doubt of the union’s majority status. The decision also overturns the Board’s 1971 ruling in Linden Lumber, which abandoned the Joy Silk Mills doctrine following the U.S. Supreme Court’s decision in NLRB v. Gissel Packing Co., 395 U.S. 575 (1969), and held that employers may refuse to accept evidence of majority support of a union. The Board did not, however, adopt the good-faith doubt aspect of the Joy Silk Mills decision.

Although the Cemex decision may be challenged on appeal, employers must prepare to respond to demands for recognition. Ballard Spahr’s Labor and Employment Group regularly advises clients on navigating the shifting landscape of NLRB decisions and regulations.

Shannon D. Farmer & Monica Nugent

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U.S. DOL Proposes Rule to Extend Overtime Pay for Millions of Workers

On August 30, 2023, the U.S. Department of Labor proposed revisions to section 13(a)(1) of the Fair Labor Standards Act FLSA), which would result in millions of workers who are now exempt from overtime requirements being entitled to time and one half pay when they work more than 40 hours in a workweek. The DOL proposal would raise the salary test from its current $35,568 level, up to $55,000 as annual salary threshold below which otherwise exempt from overtime workers would receive overtime pay. The proposed revisions are expected to meet with resistance from industry groups who are already voicing concerns about how this will impact their members’ businesses.

The Fair Labor Standards Act (FLSA) requires employers to pay employees the minimum wage (currently $7.25 an hour) for all hours worked, and overtime premium pay of one and one-half times the employee’s regular rate of pay for all hours worked over 40 in a workweek. Section 13(a)(1) of the FLSA provides an exemption to the requirement for employees who are “in a bona fide executive, administrative, or professional capacity” (EAP exemption or white-collar employees). In order to fall under the EAP exemption, each of the following tests must be met: (1) the employee must be paid a predetermined and fixed salary not subject to reduction (the salary basis test); (2) the amount of salary paid must meet a minimum specified amount (the salary level test); and (3) the employee’s job duties must primarily involve executive, administrative, or professional duties defined by the regulations (the duties test).

The DOL’s proposal would increase minimum exempt salary level to $1,059 per week or $55,068 annually, which is the 35th percentile of weekly earnings of full-time salaried workers in the lowest-wage Census Region, and the highly compensated total annual compensation to $143,988, which is the 85th percentile of full-time salaried workers nationally. The DOL also proposes to adopt a regulatory provision that will automatically update the salary levels to ensure that EAP exemption earnings thresholds “keep pace with changes in the employee pay” and maintains effective in determining exemption status

The DOL argues states that the proposed standard salary level will, in combination with the standard duties test, “better define and delimit which employees are employed in a bona fide EAP capacity.” Unquestionably, the new proposed salary level will allow for fewer lower-paid white-collar employees who perform significant amounts of nonexempt work to be included in the exemption.

The DOL estimates that 3.4 million currently exempt employees who earn at least the current salary level of $684 per week, but less than the proposed standard salary level of $1,059 per week, would receive overtime payments in the first year of the proposal’s enactment. In addition, 248,900 employees who are currently exempt under the highly compensated test would be affected by the proposed increase. The Department estimates the total annualized direct employer costs to be $664 million with a 7 percent discount rate in the first 10 years.

Pursuant to the Administrative Procedures Act, the DOL will receive written comments on the proposal 60 days after publication in the Federal Registry. Employers are using this opportunity to review their classifications of employees as exempt and non-exempt and how the proposed increase in the minimum salary for EAP white-collar workers would impact their business.

Ballard Spahr regularly defends wage and hour lawsuits and represents employees in DOL investigations and preventatively reviews employer’s classification of employees as exempt or non-exempt from overtime, as well as other wage payment policies and practices to assist clients in complying with state and federal wage and hour laws.

Nalee Xiong & Jay A. Zweig

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August 31 Podcast Episode: Should Section 5 of the FTC Act Be Amended to Add a Private Right of Action?

Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices, does not include a private right of action. Our special guest, Professor Myriam E. Gilles of Cardozo Law School, has written a law review article in which she makes the case for adding a private right of action to Section 5. We begin with a discussion of the origins of federal consumer protection law, including the connection to the rise of private antitrust enforcement, the legislative debate regarding the creation of a private right of action in connection with the FTC Act’s enactment and later addition of a UDAP prohibition to Section 5, and the FTC’s role in the enactment of state UDAP laws. We then discuss the arguments advanced by Prof. Giles in support of private enforcement of the FTC Act, including the need to counter efforts to limit state UDAP laws and the effects of political polarization on government enforcement, and issues relating to class actions that legislators would need to address in creating a private right of action.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation.

To listen to the episode, click here.

Prof. Giles’ recent article, “The Private Attorney General in a Time of Hyper-Polarized Politics,” published in the Arizona Law Review, is available here.

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Did You Know?

On August 28, 2023, a new draft of the NMLS Guidebook was released. Changes include requiring a company to disclose the basis for a MLO relationship termination from a dropdown menu, which includes selections such as “reduction in force” and “voluntary resignation.” Additionally, the changes now specify that individual accounts in NMLS must reflect an individual’s middle name, if it is part of their full legal name.

John Georgievski

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Looking Ahead

MBA’s Compliance and Risk Management Conference
COMPLIANCE ROUNDTABLE: State Licensing and Examination Trends, September 10, 2023 – 2:15 PM EST
Speaker: John D. Socknat
TRENDING COMPLIANCE ISSUES TRACK: Servicing – Key Compliance Considerations, September 12, 2023 – 9:15 AM EST
Speaker: Reid F. Herlihy
CLOSING SUPER SESSION: Regulatory Compliance, September 12, 2023 – 11:45 AM EST
Speaker: Lisa M. Lanham

 

Abusive Acts and Practices Under the CFPA: The CFPB's New Policy Statement
A Ballard Spahr Webinar | September 14, 2023, 1:00 PM – 2:00 PM EST
Speakers: Alan S. Kaplinsky, Michael R. Guerrero, Michael Gordon, & Brian A. Turetsky

 

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