Mortgage Banking Update - November 16, 2023
In This Issue:
- November 2 Podcast Episode: The U.S. Supreme Court’s Decision In CFSA V. CFBP: Who Will Win and What Does It Mean? Part II
- CFPB Issues Proposal to Supervise Nonbank Providers of Digital Wallets and Payment Apps
- CFPB Removes Changes Regarding Discrimination as an Unfair Practice From UDAAP Exam Manual but Appeals From District Court Order Vacating Changes
- November 9 Podcast Episode: A Deep Dive Into the Consumer Financial Protection Bureau’s Policy Statement on Abusive Acts and Practices Under the Consumer Financial Protection Act
- Nevada Federal District Court Stays CFPB Action to Enforce Civil Investigative Demand Pending SCOTUS Decision in CFSA Case
- Bloomberg Intelligence Analysts Host Alan Kaplinsky on Podcast
- FTC Announces New Safeguards Rule Breach Notification Requirements
- Executive Order on Artificial Intelligence Includes Actions Impacting Consumer Financial Service Providers
- NLRB Expands Joint Employer Rule
- California Court Denies DFPI’s Motion for Preliminary Injunction Against OppFi
- The New CRA: Understanding the Final Rule and Its Impact on Large, Intermediate, and Small Banks; Ballard Spahr to Hold Webinar on Final Rule on December 6
- CFPB Issues Report on State Community Reinvestment Laws
- Republican Senators Urge CFPB and DOJ to Retract Joint Statement on Consideration of Immigration Status Under ECOA
- Trade Groups Seek Extension of Comment Period on CFPB Section 1033 Proposal; Ballard Spahr to Hold Dec. 18 Webinar on Proposal
- Did You Know?
- Looking Ahead
On October 3, 2023, the U.S. Supreme Court held oral argument in CFSA v. CFPB, a case with profound potential implications for the future of the CFPB. 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. Our special guests are six renowned attorneys who filed amicus briefs in the case: Michael Williams, Principal Deputy Solicitor General, Office of the West Virginia Attorney General; Adam Levitin, Professor, Georgetown University of Law Center; Scott Nelson, Public Citizen Litigation Group; Jeffrey Naimon, Orrick, Herrington & Sutcliffe LLP; Joshua Katz, Research Fellow, Cato Institute; and John Masslon, Counsel, Washington Legal Foundation.
This two-part episode repurposes our widely-attended and highly interactive webinar held on October 17. In Part II, each of our guests offers his predictions for how the Court is likely to rule in CFSA v. CFPB. We then discuss each party’s position regarding what remedy the Court should impose if it rules that that the CFPB’s funding mechanism is unconstitutional, including whether the relevant provisions of the Dodd-Frank Act are severable and how a ruling against the CFPB should impact existing CFPB regulations. We conclude with a discussion of the kinds of non-constitutional legal challenges the CFPB is currently facing or is likely to face in the future, including the potential impact of a Supreme Court decision overruling its 1984 Chevron decision dealing with judicial deference to federal agency rules.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion.
To listen to Part II of the episode, click here.
To listen to Part I of the episode, click here.
The CFPB has issued a proposed rule to supervise nonbank companies that qualify as larger participants in a market for “general-use digital consumer payment applications.” Comments on the proposal are due by January 8, 2024 or by the date that is 30 days after the proposal’s publication in the Federal Register, whichever is later.
The proposal is based on the CFPB’s authority to supervise nonbank entities considered to be “a larger participant of a market for other consumer financial products or services.” It would cover providers of consumer financial products and services that are commonly referred to as “digital wallets,” “payment apps,” “funds transfer apps,” and “person-to-person or P2P payment apps.”
Under the proposal, a nonbank would be considered a “larger participant of the general-use digital payment market” if it (1) has an “annual covered consumer payment transaction volume” of at least five million transactions, and (2) during the preceding calendar year, it is not a “small business concern” as that term is defined in the Small Business Act. A nonbank’s “annual covered payment transaction volume” means “the sum of the number of consumer payment transactions that the nonbank covered person and its affiliated companies facilitated in the preceding calendar year by providing general-use digital consumer payment applications.” In aggregating transactions across affiliated companies, an individual consumer payment transaction would only be counted once even if more than one affiliate facilitated the transaction. The CFPB estimates that its proposed threshold would make about 17 entities subject to CFPB supervision, which is about 9% of all known nonbank covered persons in the market for general-use digital consumer payment applications.
To be a participant in the relevant market, a company must be “providing a general-use digital consumer application,” which is defined to mean “providing a covered payment functionality through a digital application for consumers’ general use in making consumer payment transaction(s) as defined in [the rule].” A “consumer payment transaction” is defined as “the transfer of funds by or on behalf of a consumer physically located in a State to another person primarily for personal, family, or household purposes.” Key issues include:
- A “consumer payment transaction” is a payment transaction that results in the transfer of funds by or on behalf of a consumer. In addition to encompassing a consumer’s transfer of their own funds (such as funds held in a linked deposit or stored value account), a “consumer payment transaction” would encompass a creditor’s transfer of funds to another person on behalf of a consumer as part of a consumer credit transaction. For example, if a nonbank’s wallet functionality holds a credit card account or payment credential that a consumer uses to obtain an extension of credit from an unaffiliated bank and the consumer uses that functionality to buy nonfinancial goods or services using the credit card, the credit card issuing bank may settle the transaction by transferring funds to the merchant’s bank for further transfer to the merchant and a charge may appear on the consumer’s credit card account. That transfer of funds can constitute part of a consumer payment transaction for purposes of the rule regardless of whether it is an electronic fund transfer (EFT) subject to Regulation E.
- “Funds” is not limited to fiat currency or legal tender and includes digital assets, such as cryptocurrency.
- Four categories of transactions are excluded from the definition of a “consumer payment transaction.” The first two categories of excluded transactions are (1) international money transfers as defined in the CFPB’s Remittances Rule, and (2) a transfer of funds by a consumer (A) that is linked to the consumer’s receipt of a different form of funds, such as an exchange of fiat currencies or a purchase of a crypto-asset using fiat currency, or (B) for the primary purpose of purchasing or selling a security or commodity that is excluded from the definition of an EFT in Regulation E.
- The third category of excluded transactions is a payment transaction conducted by a person for the sale or lease of goods or services that the consumer selected from an online or physical store or marketplace operated prominently in the name of such person or its affiliated company. This exclusion is intended to clarify that when a consumer selects goods or services in a store or website operated in a merchant’s name and the consumer pays using account or payment credentials stored by the merchant who conducts the payment transaction, such a transfer of funds generally would not be a consumer payment transaction covered by the rule. The exclusion is also intended to clarify that when a consumer selects goods or services in an online marketplace and pays using account or payment credentials stored by the online marketplace operator or its affiliate, such a transfer of funds generally would not be a consumer payment transaction covered by the rule. To qualify for the exclusion, the funds transfer must be for the sale or lease of a good or service the consumer selected from a digital marketplace operated prominently in the name of an online marketplace operator or its affiliate. The exclusion would not apply when a consumer uses a payment or account credential stored by a general-use digital consumer payment application provided by an unaffiliated person to pay for goods on services on the merchant’s website or an online marketplace.
- The fourth category of excluded transactions is an extension of consumer credit made using a digital application provided by the person who is extending the credit or its affiliate. The CFPB indicates that it has proposed this exclusion so that the definition of the relevant market does not cover consumer lending activities by lenders through their own digital applications. A nonbank would not be seen as participating in the relevant market simply by providing a digital application through which it lends money to consumers to buy goods or services. However, a nonbank would be seen as participating in the relevant market if it provides a wallet functionality through a digital application that stores payment credentials for a credit card through which an unaffiliated bank extends consumer credit. In that situation, the nonbank’s role in the transaction is to help consumers to make payments and not to themselves extend credit to consumers.
- To be a participant in the relevant market, a company must provide a “covered payment functionality” through a digital application for a consumer’s general use in making payment transactions. A “covered payment functionality” is (1) a “funds transfer functionality,” or (2) a “wallet functionality.” A “funds transfer functionality” means, “in connection with a consumer payment transaction: (A) Receiving funds for purposes of transmitting them; or (B) Accepting and transmitting payment instructions.” A “wallet functionality” means “a product or service that: (A) Stores account or payment credentials, including in encrypted or tokenized form; and (B) Transmits, routes, or otherwise processes such stored account or payment credentials to facilitate a consumer payment transaction.”
- A “digital application” is defined as “a software program a consumer may access through a personal computing device, including but not limited to a mobile phone, smart watch, tablet, laptop computer, desktop computer.” It would not cover a consumer’s presentment of a debit card, prepaid card, or credit card in plastic, metallic or similar form at the point of sale. In using physical payment cards at the point of sale, a consumer is generally not considered to be relying upon a “digital application” because the consumer is not engaging with software through a personal computing device to complete the transaction.
- The term “general use” is defined as “the absence of significant limitations on the purpose of consumer payment transactions facilitated by the covered payment functionality provided through the digital consumer payment application.” The definition is intended to limit the relevant market to digital payment applications that consumers can use for a wide range of purposes. The definition includes a non-exhaustive list of digital payment applications whose payment functionalities would not be considered to have general use, such as payment functionalities that can only be used to purchase or lease a specific type of goods, services, or property, such as transportation, lodging, food, an automobile, or a consumer financial product or service as defined in the Consumer Financial Protection Act (CFPA). The “general use” definition would also not reach (1) accounts that are expressly excluded from the definition of “prepaid account” in Regulation E, such as many gift certificates or gift cards, (2) a payment functionality provided through a digital payment application that only supports payments of a specific debt or type of debt or repayment of an extension of consumer credit, such as a mortgage lender’s mobile app or website with a functionality that allows consumers to make loan payments, and (3) a payment functionality provided through a digital application that only helps consumers to divide up charges and payments for a specific type of goods or services, such as payment applications focused solely on helping consumers to split a restaurant bill.
The CFPB notes in its discussion of the proposal that the CFPA allows it to supervise all service providers to entities that it supervises. As a result, the proposal would also allow the CFPB to supervise all service providers to “larger participant” nonbank providers of digital wallets and payment apps, regardless of the service provider’s size. In addition, as the CFPB also notes, it can supervise any nonbank provider of digital wallets and payment apps—regardless of its size—that the CFPB has reasonable cause to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.”
The proposal, if finalized, would represent the CFPB’s sixth use of its “larger participant” supervisory authority. The CFPB has previously issued “larger participant” rules for nonbanks engaged in consumer reporting, consumer debt collection, student loan servicing, international money transfers, and automobile financing.
The proposal has received praise from banking industry trade groups, who view the proposal as a step towards leveling the playing field between banks and nonbanks. At the same time, the proposal has met with strong criticism from the Republican Chair of the House Financial Services Committee.
In September 2023, the CFPB updated its UDAAP Examination Manual to remove the changes it made in March 2022 which provided that unfair acts or practices encompassed discriminatory conduct, even in circumstances to which federal fair lending laws, such as the Equal Credit Opportunity Act, did not apply.
It has been suggested that this update means the CFPB has retreated from its position that discriminatory conduct can be the basis of a UDAAP violation. In our view, the update has little significance and was intended only to implement the Texas district court’s order vacating the March 2022 changes. We do not believe it should be seen as an indication that the CFPB has decided to revisit its interpretation that unfairness can encompass discrimination. The CFPB’s continuing adherence to its interpretation is evidenced by the fact that the CFPB has filed a notice with the Texas federal district court that it is appealing its order to the Fifth Circuit. In its briefing in the district court, the CFPB took the position that the source of its authority to interpret the unfairness prong of UDAAP to encompass discrimination is the unfairness prong itself, and its interpretation did not need to be effectuated through the changes it made to the UDAAP Exam Manual. Thus, the CFPB in effect has argued that the changes it made to the Exam Manual were superfluous.
In that regard, there has been some confusion about whether the CFPB’s appeal is timely. Under the Federal Rules of Appellate Procedure, non-governmental parties must file a notice of appeal within 30 days but the government has 60 days in which to file a notice of appeal. The district court’s order was entered on September 8 and the CFPB filed its notice of appeal on November 6. Accordingly, there is no question that the CFPB’s appeal is timely.
The CFPB recently issued a policy statement in which it provided a framework for determining what constitutes abusive conduct under the CFPA. After reviewing the definition of abusive in the CFPA and the historical background of the adoption of an abusive standard in the CFPA, we examine how the policy statement addresses each element of the abusive standard and share our observations as to the policy statement’s implications. We then look at past CFPB enforcement actions and supervisory findings in which conduct was alleged to be abusive. We also look at the overlap between abusive conduct and unfair or deceptive conduct and the relationship between “dark patterns” and abusive conduct and identify conduct that the CFPB might consider to be abusive. We conclude with a discussion of best practices for companies to consider to avoid engaging in conduct that the CFPB might find to be abusive.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the discussion, joined by Michael Guerrero, a partner in the Group, Michael Gordon, Of Counsel in the Group, and Brian Turetsky, Of Counsel in the Group.
To listen to the episode, click here.
A Nevada federal district court has stayed an action filed by the CFPB to enforce a civil investigative demand (CID) issued to a small-dollar lender pending the U.S. Supreme Court’s decision in Community Financial Services Association of America Ltd. v. CFPB. The issue in CFSA v. CFPB is whether the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution.
The CFPB issued the CID in late 2022 and the lender complied with the CID until March 2023, when it asked the CFPB to stay its investigation due to the Supreme Court’s grant of certiorari in CFPB v. CFSA. In June 2022, the CFPB petitioned the court for an order directing the lender to comply with the CID. Thereafter, the lender filed a motion asking the court to stay the case pending the Supreme Court’s decision in CFSA v. CFPB.
In response to the lender’s motion, the CFPB argued that stay was not justified simply because the Supreme Court’s decision might require the dismissal of its enforcement actions and that the public would be damaged by the CFPB’s inability to investigate consumer protection violations. In rejecting the CFPB’s arguments, the district court indicated that it did not find a delay of approximately one year to be prejudicial to the public interest and observed that since briefing and oral argument in CFSA v. CFPB were complete, the Supreme Court would decide the CFSA case within a reasonable time. According to the court, “[a] brief stay to avoid wasteful and unrecoverable investigation efforts and enforcement proceedings on a matter that may be dismissed pending the Supreme Court’s decision is justified.”
Alan Kaplinsky, Senior Counsel in and former Practice Group Leader of Ballard Spahr’s Consumer Financial Services Group and frequent host of the Consumer Finance Monitor Podcast (a weekly podcast episode sponsored by our Consumer Financial Services Group) was recently the special guest of Bloomberg Intelligence analysts Elliott Stein and Nathan Dean on their podcast, Votes and Verdicts. The episode, “Consumer Finance Impact of a CFPB Run Amok,” features a wide-ranging discussion of the CFPB’s past, present and future. The conversation included a discussion of the CFPB’s history, its impact on consumer finance companies, how its directors over time have differed, and the pending Supreme Court case challenging the constitutionality of the agency’s funding.
To listen to the podcast episode, click here.
On October 27, the Federal Trade Commission (FTC) unanimously voted to amend the Safeguards Rule to require non-banking financial institutions, such as mortgage brokers, motor vehicle dealers, and payday lenders, to report data breaches and security events to the Agency. This amendment will become effective 180 days after its publication in the Federal Register.
Under the amended rule, financial institutions subject to the authority of the FTC will be required to notify the Agency as soon as possible, and no later than 30 days after discovery of a “Notification Event” impacting 500 or more consumers. A Notification Event is defined as any acquisition of unencrypted customer information without the authorization of the data subject. Information is presumed unencrypted if the relevant encryption key was accessed by an unauthorized person.
Importantly, there will be a presumption of unauthorized access unless there is “reliable evidence showing that there has not been, or could not reasonably have been, unauthorized acquisition.” This presumption is likely to expand the number of security incidents that qualify as notification incidents and cuts directly against the ‘risk of harm’ exemption present in many state data breach notification laws.
Notice to the Agency will be provided through the FTC’s website. After review by the Agency, notices will be made publicly available through an online database. Notice to the FTC must include:
- The name and contact information of the reporting entity;
- A description of the types of information impacted;
- The date or range of the event, if possible to determine;
- The number of consumers impacted;
- A general description of the event; and
- Whether any law enforcement has requested a delay of public notification.
On October 29, the Biden Administration issued a broad Executive Order (Order) on artificial intelligence (AI). Titled “Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence,” the Order establishes guidelines for AI safety and security, aims to shield Americans’ data privacy, and emphasizes equity and civil rights. As stated by the White House in its Fact Sheet about the Order, the Order “stands up for consumers and workers” while fostering innovation and competition.
Ballard Spahr has issued a legal alert that provides an overview of the Order. In this blog post, we highlight the provisions of the Order that are most noteworthy for providers of consumer financial services that use AI.
Guidelines and Best Practices. For consumer financial services providers that use proprietary AI, the Order includes provisions directed at AI developers and designers. It directs the Secretary of Commerce, acting through the Director of National Institute of Standards and Technology, in coordination with certain other agencies, to “establish guidelines and best practices, with the aim of promoting consensus industry standards for developing and deploying safe, secure, and trustworthy AI systems.”
AI and Civil Rights. Last October, the White House identified a framework of five principles, also known as the “Blueprint for an AI Bill of Rights,” to guide the design, use, and deployment of automated systems and AI. One of those principles is that automated systems should be used and designed in an equitable way to prevent algorithmic discrimination. For instance, measures should be taken to prevent unfavorable outcomes based on protected characteristics. In April 2023, the CFPB, FTC, Justice Department, and Equal Employment Opportunity Commission issued a joint statement about enforcement efforts “to protect the public from bias in automated systems and artificial intelligence.” (CFPB Director Chopra has repeatedly raised concerns that the use of AI can result in unlawful discriminatory practices.)
Building on those developments, the Order encourages the CFPB Director and the Director of the Federal Housing Finance Agency, in order “to address discrimination and biases against protected groups in housing markets and consumer financial markets, to consider using their authorities, as they deem appropriate, to require their respective regulated entities, where possible,” to do the following:
- Use appropriate methodologies including AI tools to ensure compliance with federal law;
- Evaluate their underwriting models for bias or disparities affecting protected groups; and
- Evaluate automated collateral valuation and appraisal processes in ways that minimize bias.
The Order also requires the Secretary of Housing and Urban Development and “encourage[s]” the CFPB Director, in order “to combat unlawful discrimination enabled by automated algorithmic tools used to make decisions about access to housing and in other real estate-related transactions,” to issue additional guidance within 180 days of the date of the Order that addresses:
- The use of tenant screening systems in ways that may violate the Fair Housing Act, the Fair Credit Reporting Act, or other relevant federal laws, including how the use of data, such as criminal records, eviction records, and credit information can lead to discriminatory outcomes in violation of federal law; and
- How the Fair Housing Act, the Consumer Financial Protection Act, or the Equal Credit Opportunity Act apply to the advertising of housing credit, and other real estate-related transactions through digital platforms, including those that use algorithms to facilitate advertising delivery, as well as best practices to avoid violations of federal law.
Protecting Consumers. The Order encourages independent regulatory agencies, as they deem appropriate, to consider using the full range of their authorities to protect consumers from fraud, discrimination, and threats to privacy, and to address other risks that may arise from AI, including risks to financial stability. The agencies are also encouraged to consider rulemaking, as well as emphasizing or clarifying where existing regulations apply to AI. The agencies are also encouraged to clarify the responsibility of regulated entities to conduct due diligence and monitor any third-party AI services they use, and to emphasize or clarify requirements and expectations related to the transparency of AI models and regulated entities’ ability to explain their use of AI models.
Under the Biden Administration’s influence, the National Labor Relations Board (NLRB or the Board) has proposed a new Final Rule for determining joint employer status under the National Labor Relations Act (NLRA). The Final Rule significantly relaxes the standard for two or more companies to be classified as joint employers who share equal liability for unfair labor practices, legal obligations to negotiate with labor unions, and who may be subject to union picketing or protests in the event of a labor dispute. This Final Rule has implications for unionized and non-unionized employers.
The joint employer Rule has been a controversial topic. The pendulum has swung back and forth between pro-labor and pro-business standards through individual labor cases and NLRB regulations several times over the past decade. In 2020, a Trump-era Board regulation made it more difficult for companies to be joined as joint employers by requiring a showing of “direct and immediate control” over employees. And companies could not be considered joint employers if they did not actually exercise control over the employees’ essential terms and conditions of employment.
Now, under the Biden Administration’s influence, the pendulum has swung towards the pro-labor side on joint employment and other issues. The Board’s Final Rule broadens the joint employer test by expanding the categories of “essential” terms and conditions of employment and expressly rescinds the previous “direct and immediate control” standard and “actual exercise” requirement. The Board repudiates the Trump-era rule as “contrary to the common-law agency principles incorporated into the Act when it was adopted and [an] [im]permissible interpretation of the Act.”
The New Joint Employer Rule
Under the NLRA, two or more employers are joint employers if they “share or codetermine those matters governing employees’ essential terms and conditions of employment.” 29 CFR 103.40(b). The Final Rule enumerates seven exclusive categories of “essential” employment terms and conditions that must be considered to determine joint employer status. The factors are: (1) wages, benefits and other compensation; (2) hours of work and scheduling; (3) the assignment of duties; (4) the supervision of those duties; (5) work rules, directions related to job performance, disciplinary policies; (6) employment tenure; and (7) health and safety working conditions. A company’s control or power to control, whether direct or indirect, in any one of these categories can establish a joint employer relationship.
Under the Final Rule, employers “share or codetermine” employees’ essential terms and conditions when employers have the authority to control (directly or indirectly) or to exercise the power to control (directly or indirectly) one or more of the employees’ essential terms and conditions of employment, even if the company never does so. The Board also expansively states that indirect or reserved and unexercised control, standing alone, is enough to establish joint employer status.
The Effect on Labor Relations
The Board believes that the Final Rule “will more explicitly ground the joint-employer standard in established common-law agency principles” and provide more guidance under the Act as to joint employer rights and responsibilities.
The Final Rule creates uncertainty in labor relations and reshapes the rights and obligations of companies when working with the employees of other companies, such as vendors and staffing agencies; indeed, application of the Rule may lead to illogical results by requiring an employer to go to the bargaining table even where they never actually exercise any control over an essential term.
Companies with franchise relationships will be particularly affected by the Final Rule, and should review their current franchise agreements, operations manuals and actual practices and procedures to limit any unnecessary reserved control in the seven categories of the essential terms and conditions of joint employment enumerated by the Board. Staffing and temporary employee agencies will similarly be affected by this Rule. These agencies and the companies that rely on such agencies should similarly review their agreements and policies and consider amending contracts to expressly disclaim the right to control all seven categories of essential employment terms and conditions.
The Final Rule will also impact non-union employers because even without a labor contract such employers are subject to unfair labor practice charges under the NLRA.
Legal challenges to the Final Rule are highly likely. But assuming that courts do not stay or issue an injunction halting the Final Rule, it will go into effect on December 26, 2023 as to cases filed after that date.
Ballard Spahr regularly represents employers in assessing joint employer liability and in other aspects of managing their workforce. Our clients include private and public sector employers in unionized and in non-union workplace settings.
In a lengthy (65-page) order, the California Superior Court in Los Angeles has issued an extremely important decision upholding the legitimacy of bank-model online lending by denying a motion for preliminary injunction filed by the California Department of Financial Protection and Innovation (DFPI) that sought to force fintech Opportunity Financial LLC (OppFi) to stop facilitating loans to California borrowers from its partner FinWise Bank at interest rates above the interest rate cap (generally 36% plus the Federal Funds Rate) imposed by the California Financing Law (CFL). As indicated in our earlier blog regarding the DFPI’s motion, FinWise Bank, a state-chartered FDIC-insured bank located in Utah, is empowered under Section 27 of the Federal Deposit Insurance Act to charge interest on loans made by it to California residents at the rate permitted by Utah law, notwithstanding the lower interest rate cap under California law.
In denying the DFPI’s motion, the Court laid the groundwork for its analysis with a thorough discussion of California usury law, the CFL as it relates to the litigation underlying the motion, federal preemption of state law, the nature of the loans facilitated by OppFi, and the legal standard when a public agency moves for an injunction.
The Court then proceeded with an analysis leading to a conclusion that the DFPI has not shown a reasonable probability of prevailing on the merits in the litigation at hand. The Court explains that valid-when-made concepts under California’s usury law and Constitution, and “obstacle preemption”, serve as bases for its denial of the DFPI’s motion as follows:
“To summarize, on the present record and for purposes of this motion, according to the FDIC and federal cases cited above, to the extent “FinWise-originated” OppLoans had permissible interest rates at the time the loans were made, the fact that the bank sold, assigned, or otherwise transferred the loans to OppFi should not make the loans usurious. On this motion, this principle is consistent with California’s usury law and Constitution.
Indeed, as stated above, “‘obstacle preemption arises when “‘under the circumstances of [a] particular case, [the challenged state law] stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.’” … “(“federal law may nonetheless pre-empt state law to the extent it actually conflicts with federal law. Such a conflict . . . [can also occur] . . . because the state law stands `as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’” (citations removed)].)
Here, on this motion and the present record, if the court were to interpret the CFL to mean that FinWise was not a “true lender” for exemption purposes because the bank decided to assign, sell, or otherwise transfer OppLoans to OppFi (whether within days of originating the loan or months, or whether in whole or in part), that ruling may stand as an obstacle to the full purposes and objectives of Congress given how courts have interpreted Section 27 and the FDIC’s Interest Provision to allow banks such as FinWise to do so.
Accordingly, on the present record, the court finds that the Commissioner has not established a reasonable probability of prevailing on the merits.”
We will study the Superior Court’s order in the coming days and present our further detailed discussion and remarks on this order and what it portends. For a summary of and links to earlier discussions of the parties’ filings and arguments, see our earlier blog.
On October 24, 2023, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued a final rule amending their regulations implementing the Community Reinvestment Act (CRA) (the Final Rule). The Final Rule marks the first substantial revision to the CRA regulations in nearly 30 years. It provides comprehensive changes to how banks’ performances are assessed under the CRA, and will significantly impact the CRA programs of banks of all sizes.
On December 6, 2023 from 3:30 p.m. to 4:45 p.m. ET, Ballard Spahr will hold a webinar, “Community Reinvestment Act Reform: A Discussion of the Final Rule.” To register, click here.
This is the first of three blog posts discussing the Final Rule. In this blog post, we provide a summary of the major changes impacting large banks (those with assets of at least $2 billion as of December 31 in the two prior calendar years). Click here for an article containing a more detailed discussion of the impact of the Final Rule on large banks.
Our second blog post on the Final Rule will discuss the impact of the Final Rule on intermediate banks (those with assets of at least $600 million as of December 31 in the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years) and our third blog post will focus on the Final Rule’s impact on small banks (those with assets of less than $600 million as of December 31 in either of the two prior calendar years).
The Final Rule is effective April 1, 2024; however, the compliance date for a large portion of the Final Rule’s provisions is January 1, 2026. Until the January 1, 2026 compliance date, the current CRA regulations continue to apply.
Facility-Based Assessment Areas
Under the Final Rule, the areas where a large bank’s main office, branches, and deposit-taking remote service facilities are located (facility-based assessment areas) must consist of a single Metropolitan Statistical Area (MSA), one or more contiguous counties within an MSA, or one or more contiguous counties within the nonmetropolitan area of a State. Facility-based assessment areas that include a partial county must consist of contiguous whole census tracts. Unless located in a multistate MSA, facility-based assessment areas may not extend beyond an MSA boundary or state boundary. Large banks must delineate whole county facility-based assessment areas.
Retail Lending Assessment Areas
Under the Final Rule, only large banks are subject to the retail lending assessment requirements, which must include the surrounding counties where the bank has originated a substantial portion of its loans and may include Loan Production Offices. Large banks that have at least 150 closed-end home mortgage loans or 400 small business loans in a particular area must delineate such area in each of the prior two calendar years.
The CRA Tests
The Final Rule now applies the following four new tests for evaluating a large bank’s performance: (1) the Retail Lending Test; (2) the Retail Services and Products Test; (3) the Community Development Financing Test; and (4) the Community Development Services Test. Under the Retail Lending Test, large banks will be evaluated against two sets of metrics (the Retail Lending Volume Screen and Geographic Bank and Borrower Bank Metrics) in its assessment areas and compared against market and community benchmarks. Under the Retail Services and Products Test, examiners will qualitatively evaluate the availability and accessibility of a large bank’s retail banking services and retail banking products to low- and moderate-income individuals and communities. Under the Community Development Financing Test, examiners will qualitatively review large banks using standardized metrics and benchmarks to evaluate both community development loans and investments in its facility-based assessment areas, states, and multistate MSAs. Under the Community Development Services Test, examiners will qualitatively evaluate a large bank’s record of helping meet the community development needs of, and the impact and responsiveness of those services in, the bank’s facility-based assessment areas, state, multistate MSA, and the nationwide area.
On November 2, 2023, the Consumer Financial Protection Bureau issued a report on the community reinvestment laws of seven states (Connecticut, Illinois, Massachusetts, New York, Rhode Island, Washington, West Virginia), and the District of Columbia that evaluate the record of state-chartered financial institutions and other lenders in meeting the credit needs in their communities.
The report analyzes the history of state community reinvestment laws and recent developments. For example, although most of the states have had a community reinvestment law for some time (New York, for example, passed its law in 1978 and Connecticut, Massachusetts, Washington and West Virginia adopted a community reinvestment law in the 1980s), the Illinois laws was adopted in 2021 and the laws have been amended from time to time to “to cover additional types of financial institutions, collect additional data to better understand financial markets, and address other state-specific needs.”
Among the findings enumerated within the report are the following:
- Although originally applied primarily to state-chartered banks and credit unions, many of the laws have been expanded to cover mortgage companies. The New York and Massachusetts CRAs also apply to wholesale banking and limited purpose institutions, and other state CRAs include the requirement or authority to apply CRA obligations to other types of financial institutions.
- How a state community reinvestment law is enforced differs between the states. For example, Connecticut, Massachusetts, and New York conduct periodic, written performance evaluations, and Illinois has also proposed periodic, written performance evaluations. The District of Columbia, Rhode Island, and West Virginia, by contrast, conduct reviews or performance evaluations in response to a merger, branch or other expansionary application.
- Institutions examined under state community reinvestment act are generally evaluated either under a state assessment area (as is the case in New York and Massachusetts, and as has been proposed for Illinois) or under the geographic assessment area applied to an institution under the Community Reinvestment Act (as is the for Rhode Island, Washington and West Virginia). The District of Columbia has set as the community reinvestment act assessment area under its statute as the entire district.
- All of the states with a state community reinvestment law and the District of Columbia enforce the law by considering compliance in evaluating expansionary proposals such as mergers and acquisition, but some states have adopted additional measures such as limiting the ability of an institution not in compliance with the law to act as a public depositary. Like the federal Community Reinvestment Act, none of the state laws provide for the ability to issue civil monetary penalties or structural remedies for failing to meet state reinvestment requirements.
- Most states rely on existing data, such as Home Mortgage Disclosure Act data for mortgage lending, or federal Community Reinvestment Act data for small businesses or small farms, to complete their evaluations.
The overall conclusion of the Consumer Financial Protection Bureau in the report is that “states play an active and ongoing role in promoting reinvestment by a wide range of institutions and that continued review is necessary to understand these developments.”
Like the Bureau, Ballard Spahr is monitoring developments in state community reinvestment laws. It is yet to be seen whether existing state community reinvestment laws will be amended given the final rule recently issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency to update federal CRA regulations or whether other states will adopt a community reinvestment act law and apply it not only to state-chartered financial institutions, but to other lenders. On December 6, 2023, from 3:30 p.m. to 4:30 p.m. ET, we will hold a webinar on the final federal CRA rule. To register, click here.
A group of eleven Republican Senators who are members of the Senate Banking Committee have sent a letter to CFPB Director Rohit Chopra and Attorney General Merrick Garland to urge the CFPB and DOJ to retract the joint statement the agencies issued last month regarding “the potential civil rights implications of a creditor’s consideration of an individual’s immigration status under the Equal Credit Opportunity Act (ECOA).”
In the statement, the agencies indicated that while ECOA and Regulation B do not expressly prohibit consideration of immigration status, they do prohibit creditors from using immigration status to discriminate on the basis of national origin, race, or any other protected characteristic. They cited the statement in Regulation B that a “creditor may consider [an] applicant’s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment.” However, they cautioned that “Regulation B does not, however, provide a safe harbor for all consideration of immigration status.”
Specifically, the agencies stated that because “immigration status can broadly overlap with or, in certain circumstances, serve as a proxy for [protected characteristics such as race and national origin], [c]reditors should therefore be aware that if their consideration of immigration status is not ‘necessary to ascertain the creditor’s rights and remedies regarding repayment’ and it results in discrimination on a prohibited basis, it violates ECOA and Regulation B.” They warned that “[t]o the extent that a creditor is relying on immigration status for a reason other than determining its rights or remedies for repayment, and the creditor cannot show that such reliance is necessary to meet other binding legal obligations, such as restrictions on dealings with citizens of particular countries, the creditor may risk engaging in unlawful discrimination, including on the basis of race or national origin, in violation of ECOA and Regulation B.”
In their letter, the Senators assert that the joint statement “not only flies in the face of responsible lending standards, risk-based pricing, and sound risk management, but also contradicts and rewrites decades worth of guidance from the CFPB and the federal banking regulators—all without an official rulemaking pursuant to the Administrative Procedure Act, giving financial institutions the chance to comment, or even offering any other semblance of advanced notice.” They also express concern that the joint statement “appears to be at odds with the official guidelines for various federal lending programs, many of which require U.S. citizenship or permanent residency to qualify.”
The Senators point to the “longstanding interpretation of Reg. B [in the Official Staff Commentary that] states an ‘applicant’s immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment.’” They also cite “the CFPB’s longstanding interpretation that ‘a denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin’” and assert that this “also appears to explicitly rebut the CFPB and DOJ’s joint statement.”
According to the Senators, “[f]inancial institutions have long relied on this guidance in their assessment of credit risk.” They observe that before an institution can assess an applicant’s credit history and other financial risk factors, it “needs to ensure that an applicant will be not only in their community for the length of the loan, but also be located somewhere where they can recoup potential unpaid debts.” They observe further that “[a] borrower’s likelihood of repayment significantly falls if there is no guarantee that they will be residing in the same community let alone the same country or legal system.”
The Senators conclude their letter by asserting that the joint statement “poses serious risks to financial stability—encouraging financial intuitions to ignore critical dispositive factors in their calculation of risk and by calling on the agencies to retract the statement and “instead endorse risk-based lending practices that promote safety and soundness in the banking sector.”
In the blog post we published last month when the policy statement was issued, we criticized the lack of clear guidance in the policy statement. In particular, we observed as follows:
While we do not take issue with the agencies for reminding creditors about the ECOA and Regulation B rules regarding immigration status, we find it troubling that the agencies have done so without providing any clear guidance about how creditors may appropriately use immigration status in their credit decisions. Regulation B allows a creditor to consider the amount and probable continuance of any income in evaluating an applicant’s creditworthiness for credit. Most notably, the joint statement does not address how creditors can use immigration status in assessing the likelihood of continuation of income in the context of specific ability to repay determination requirements, particularly the requirements of the Regulation Z ability to repay (ATR) rule for mortgage loans. This omission is particularly glaring because of the significant liability that mortgage lenders can face for violating the ATR rule.
We recommend that the CPFB and DOJ focus their efforts on providing clear guidance to the industry that is consistent with existing ECOA and Regulation B precedent.
Trade Groups Seek Extension of Comment Period on CFPB Section 1033 Proposal; Ballard Spahr to Hold Dec. 18 Webinar on Proposal
Fifteen trade groups have joined in a letter to the CFPB requesting an extension of the comment period on the CFPB’s proposed rulemaking on personal financial data rights. The proposal implements Section 1033 of the Dodd-Frank Act which authorizes the CFPB to issue rules requiring “a covered person [to] make available to a consumer, upon request, information in the control or possession of such person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related to any transaction, or series of transactions, to the account including costs, charges, and usage data.” The proposal was published in the Federal Register on October 31, 2023 and the 60-day comment period ends on December 29, 2023. The trade groups ask the CFPB to extend the comment period by an additional 30 days.
On December 18, 2003, from 1:00 p.m. to 2:00 p.m. ET, Ballard Spahr will hold a webinar, “Navigating the Future: Understanding the CFPB’s Proposed Personal Financial Data Rule.” To register, click here.
The reasons given by the trade groups for the extension include the following:
- The CFPB has previously provided a 90-day comment period for other steps in the 1033 rulemaking process such as the Advance Notice of Proposed Rulemaking and the SBREFA Outline.
- The complexity of the issues involved in the rulemaking merit additional time for the proposal to be considered by affected entities, particularly where the comment period and deadline fall during the November and December holidays.
- Small business entities who could be disadvantaged by the requirements adopted by the CFPB need additional time to comment due to their limited resources and competing commitments.
- Additional time is needed to allow industry to understand how the 1033 rulemaking may intersect with the CFPB’s forthcoming consumer reporting rulemaking in which the CFPB is considering a revised definition of consumer reporting agency that may encompass what would be considered data providers, data recipients, and data aggregators under the Section 1033 rule. In particular, industry needs further time to consider how the consumer reporting rulemaking will impact the rights and obligations of entities like data aggregators.
Nevada Commissioner of Mortgage Lending Revises Nevada Mortgage Regulations
On November 10, 2023, the Commissioner of Mortgage Lending adopted final regulations, effective immediately, affecting Chapters 645A, 645B, 645E, and 645F of the Nevada Administrative Code.
Per the Legislative Review Informational Statement, the adopted regulations:
- amend the terms mortgage broker and mortgage bankers and adds the new term “mortgage company”;
- amend the term mortgage agent to the term “mortgage loan originator”;
- revise the provisions of existing law that applied primarily to the mortgage brokers to apply to mortgage companies instead;
- repeal as redundant provisions of law that applied to mortgage bankers.
The full text of the amendments are available here.
A Ballard Spahr Webinar | November 28, 2023, 1:00 PM – 2:00 PM ET
A Ballard Spahr Webinar | November 30, 2023, 1:00 PM – 2:00 PM ET
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