March 14, 2024 – Read the below newsletter for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. This week we discuss Cantero v. Bank of America, as well as a recent challenge to the CTA.
- March 7 Podcast Episode: U.S. Supreme Court Hears Two Cases in Which Plaintiffs Seek to Overturn Chevron Judicial Deference Framework: Who Will Win and What Does It Mean? Part I
- February 29 Podcast Episode: How the Consumer Financial Protection Bureau Can Advance the Use of Artificial Intelligence in Consumer Financial Services
- SCOTUS Oral Argument in Cantero v. Bank of America Provides No Clear Indication of Likely Outcome
- Ballard Spahr To Host Special Webinar Roundtable on April 3 on Cantero v. Bank of America, N.A.
- Federal District Court Ruling: The CTA Is Unconstitutional
- Plaintiffs and Intervenors File Summary Judgment Motion in Texas Lawsuit Challenging CFPB Small Business Data Collection Rule
- New York DFS Issues Guidance on Climate Change Risks for Financial Institutions
- FTC Warns “Quietly Changing” Privacy Policies May Be an Unfair or Deceptive Practice
- More States Mull Interest Rate Preemption and “Anti-Evasion” Legislation
- CFPB Press Release and Circular Cite “Abusive” Steering Practices in Connection With Comparison-Shopping Tools and Lead Generators
- VA Proposes Supplemental Refinance Loan Rule
- Texas Court Strikes Down NLRB Joint Employer Rule
- Diverse Group Expresses Support for Bills to Limit Trigger Leads
- Looking Ahead
On January 17, 2024, the U.S. Supreme Court heard oral argument in two cases in which the question presented is whether the Court should overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision produced what became known as the “Chevron judicial deference framework”–the two-step analysis that courts typically invoke when reviewing a federal agency’s interpretation of a statute. This two-part episode repurposes our webinar held in February 2024 and brings together as our guests three renowned administrative law professors, Kent Barnett, Jack Beermann, and Craig Green, and a leading Supreme Court practitioner, Carter Phillips, all of whom are experts on Chevron. In Part I, we first review the Chevron decision and judicial deference framework and the background of the two cases now before the Supreme Court. We then look at the history of judicial review of agency action culminating with the current challenge to Chevron deference, including the origins of judicial deference to agency action, the political shift away from judicial deference, and key post-Chevron decisions. We conclude with a discussion of the principal arguments made to the Supreme Court for upholding Chevron and for overruling Chevron.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion.
To listen to Part I, click here.
Our special guest is Brad Blower, Principal and Founder of Inclusive-Partners LLC, and author of a recent blog post titled “The CFPB Has An Opportunity to Greatly Advance the Ethical and Non-Discriminatory Use of AI in Financial Services and Should Take It.” We first discuss the lack of clear guidance from the CFPB on the non-discriminatory use of AI and the possible reasons for the CFPB’s apparent reticence to provide more specific guidance. We then identify the specific areas where additional guidance from the CFPB could be helpful and specific steps the CFPB could take to address the lack of clarity. We conclude with a discussion of where industry, in the absence of clear guidance from the CFPB, is heading in its efforts to achieve fairness when using AI without compromising the accuracy of underwriting models and what the CFPB will likely be doing over the next year to address fairness concerns.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation.
To listen to the episode, click here.
SCOTUS Oral Argument in Cantero v. Bank of America Provides No Clear Indication of Likely Outcome
On February 27, 2024, the U.S. Supreme Court heard oral argument in Cantero v. Bank of America, N.A., a case involving the effect of the Dodd-Frank Act on the scope of preemption under the National Bank Act (NBA). The question before the Court is whether, post-Dodd-Frank Act, the NBA preempts a New York statute requiring banks to pay interest on mortgage escrow accounts. The Second Circuit, in the decision under review, ruled that the New York statute is preempted by the NBA. The Second Circuit concluded that in determining the NBA’s preemptive scope, the relevant “question is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.”
Jonathan Taylor argued on behalf of the petitioners and Lisa Blatt argued on behalf of Bank of America. Both are attorneys in private practice. In addition, Malcolm Stewart, Deputy Solicitor General, argued as amicus curiae supporting vacatur of the Second Circuit’s judgment and remand. In its amicus brief, the Department of Justice agreed with the petitioners that the Second Circuit’s preemption analysis was incorrect. The Solicitor General thereafter filed an unopposed motion to participate in the oral argument which the Supreme Court granted. The recording of the oral argument and transcript are available, respectively, here and here.
Rather than providing a clear indication of how a majority of the Justices are likely to rule, the oral argument strongly suggested that a majority of the Justices were still forming their views on how the Dodd-Frank Act’s preemption standard should be applied. Dodd-Frank Section 1044 (12 U.S.C. Sec. 25b) provides that a state consumer financial law is preempted if “in accordance with the legal standard for preemption in the decision of the Supreme Court of the United States in Barnett Bank…, the State consumer financial law prevents or significantly interferes with the exercise by a national bank of its powers.” According to the petitioners and Justice Department, this language requires a court to make a practical, case-by-case assessment of the degree to which a state law will impede the exercise of those powers. According to Bank of America, this language is a shorthand for the traditional legal standard under which a state law is preempted if it attempts to control or hinder the exercise of a national bank’s powers and does not require statute-by-statute or case-by-case fact finding regarding a state law’s practical impact.
Many of the Justices’ questions and comments to Mr. Taylor probed how prior Supreme Court decisions could be reconciled with the petitioners’ position. In particular, the Justices focused on the Court’s 1954 decision in Franklin Nat’l Bank of Franklin Square v. New York which held that a New York law prohibiting banks from using the word “savings” in advertisements was preempted because such a restriction on advertising would impair national banks’ ability to attract deposits. Mr. Taylor rejected Justice Kavanaugh’s suggestion that a law that interferes with the pricing of a product such as the New York law “almost by definition” interferes more with a bank’s operations than a law that affects advertising. Justice Kavanaugh challenged Mr. Taylor’s rejection, asking “Why not? That sounds like significant interference when it’s–when it’s affecting how much– it’s almost putting a tax on the bank to sell the product, which strikes me as a much more significant interference than simply saying you can’t use the word “savings” in your advertising, which was the issue in Franklin.” Similarly, Justice Alito stated that “if any interference that’s greater than the interference [in Franklin] is enough…I don’t see how you can win under that.”
Both Justice Kavanaugh and Justice Jackson probed what evidence would be needed to satisfy a “significant interference” standard, with Justice Kavanaugh asking “would a 10 percent state law [] be significant interference” and Justice Jackson stating that she was “trying to understand whether this really is sort of an unworkable or unusable assignment for the courts.” Justice Barrett focused her questions to Mr. Taylor on whether the preemption analysis is impacted by whether the national bank power to which the state law in question relates is an express or implied power.
In their questioning of Mr. Stewart, the Justices probed some of the same issues that they raised with Mr. Taylor. Justice Thomas questioned Mr. Stewart as to whether express and implied powers should be treated differently and Justices Alito and Sotomayor questioned Mr. Stewart about how significant interference would be quantified or measured. Justices Alito and Kagan also questioned Mr. Taylor about the possibility of conflicting results from different courts when making findings about whether a particular state law “significantly interferes” with a national bank’s powers, with Justice Kagan commenting that “I guess you’re not giving me a whole lot of comfort in this about how peculiar this would be that we could have different rules in different states, we could have different rules depending on the time that the challenge is brought.” Chief Justice Roberts asked only one question during the oral argument, which was a question to Mr. Stewart. The Chief Justice asked whether Mr. Stewart agreed with Mr. Taylor that there could be circumstances in which a significant interference determination could be made without trial evidence. Chief Justice Roberts did not make any comments in response to Mr. Stewart’s answer.
In questioning Ms. Blatt, Justice Thomas continued to probe the relevance of the distinction between express and implied national bank powers for purposes of a preemption analysis. Justices Kagan, Sotomayor, and Jackson focused their questions on the scope of the state laws that would be preempted under a “control” standard and the Bank’s rationale for a preemption standard that did not require a factual showing as to the burden imposed on a national bank by a non-discriminatory state law (i.e. a state law that state banks must also comply with). Justice Gorsuch commented to Ms. Blatt that “we can’t take that argument very seriously, that it’s just too much of an impairment on national banks that they have to deal with the reality that we live in a federal system with 50 states.”
In response to questioning from Justice Sotomayor, Ms. Blatt provided the following basis for determining which state laws are preempted as to national banks and which are not preempted: state laws that dictate the attribute of the product or service are preempted and state laws that dictate the interaction with the consumer are not preempted (such as laws prohibiting discrimination for fraud or setting a legal age to enter into contracts). Both Justices Kagan and Gorsuch questioned Ms. Blatt about how this distinction (which they both noted had not been briefed) would be applied in different scenarios, with Justice Kagan stating that the distinction “works for this case, but you’re asking us to do something that applies to every kind of case.” Justice Alito commented that “I share the difficulty that’s been expressed in understanding the difference between a state law that affects a national bank’s power and a state law that regulates the way in which the bank exercises that power in dealing with its customers.” He also stated that he would have to think about “why [Ms. Blatt’s interpretation doesn’t preempt everything. But there’s the problem on the other side that Mr. Taylor’s argument seems to preempt nothing.” Judge Alito also asked Ms. Blatt to explain how her interpretation was consistent with Dodd-Frank’s text.
While none of the Justices displayed a clear predisposition to vote one way or the other, based on their questions and comments, Justices Sotomayor, Kagan, Jackson, and Gorsuch would seem to be the Justices who are more likely to vote in favor of the petitioners and Justices Alito and Kavanaugh would seem to be the Justices who are more likely to vote in favor of Bank of America. However, the questions and comments of Chief Justice Roberts and Justices Barrett and Thomas provide no obvious clues for how they are likely to vote.
The Supreme Court’s decision could have ramifications well beyond the specific New York law at issue. Those ramifications will depend not only on whether the Court rules in favor of Bank of America, but also on how the Court articulates its basis for concluding the New York law is or is not preempted.
On April 3, 2024, from 1:30 P.M. to 2:45 p.m. EST, Ballard Spahr will host a special webinar roundtable featuring four attorneys who filed amicus briefs with the Supreme Court in Cantero, with two briefs supporting Bank of America and one supporting the plaintiff. Our panelists will discuss the arguments made in favor of and against preemption by both parties and their amici, share their reactions to the oral argument, provide important insights into the thinking of the nine Justices, offer their predictions for how and when the Court will rule, and discuss potential implications for national banks. For more information and to register for the webinar, click here.
Ballard Spahr To Host Special Webinar Roundtable on April 3 on Cantero v. Bank of America, N.A.
On February 27, 2024, the U.S. Supreme Court heard oral argument in Cantero v. Bank of America, N.A., a case involving the effect of the Dodd-Frank Act on scope of preemption under the National Bank Act (NBA). The specific question before the Court is whether, post-Dodd-Frank, the NBA preempts a New York statute requiring banks to pay interest on mortgage escrow accounts. The decision, however, could have ramifications well beyond the specific New York law at issue.
To date, national banks have relied on the Office of the Comptroller of the Currency’s (OCC) preemption regulations, as well as prior U.S. Supreme Court decisions concerning the NBA, to view many state consumer protection laws as preempted. A ruling by the Supreme Court in Cantero that the NBA does not preempt the New York law could implicitly call into the question the validity of the OCC’s preemption regulations and prior caselaw and could have significant compliance, enforcement, and civil litigation implications for national banks.
On April 3, 2024, from 1:30 p.m. to 2:45 p.m., we will host a special webinar roundtable featuring four attorneys who filed amicus briefs with the Supreme Court, with two briefs supporting Bank of America and one supporting the plaintiff. Our panelists will discuss the arguments made in favor of and against preemption by both parties and their amici, share their reactions to the oral argument, provide important insights into the thinking of the nine Justices, offer their predictions for how and when the Court will rule, and discuss potential implications for national banks. For more information and to register for the webinar, click here.
Federal District Court Ruling: The CTA Is Unconstitutional
On March 1, Judge Liles C. Burke of the Northern District of Alabama issued a Memorandum Opinion (“Opinion”) and Final Judgment, finding that the Corporate Transparency Act (“CTA”) is unconstitutional. We blogged on this lawsuit when it was filed in November 2022.
The opening paragraph of the Opinion is worthy of repetition:
The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is foolish, burdensome or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.
Having set the tone, the Opinion proceeds to reject the government’s three arguments that Congress had the authority to enact the CTA under the following enumerated and broad powers:
- Congress’ ability to oversee foreign affairs and national security;
- Congress’ ability to regulate under the Commerce Clause; and
- Congress’ taxing power.
As we will discuss, the Opinion reaches its conclusions by generally taking a broad view of States’ autonomy and a narrow view of the ability of Congress to regulate primarily “local” activity in the name of protecting national security. It also finds that Congress cannot regulate the act of incorporation alone, and that the CTA presumably could pass constitutional muster if it applied only when a reporting entity actually begins to engage in commercial activity. The immediate, nationwide effects of the Opinion are hard to predict at this time, other than to observe simply that the Opinion will have significant impact, and that confusion will ensue.
A Simple Question
Early on, the Opinion observes that millions of corporations are formed every year for various lawful purposes, including for-profit corporations, benefit corporations, non-profits, holding companies, political organizations, “and everything in between.” The Opinion frames the case as “present[ing] a deceptively simple question: Does the Constitution give Congress the power to regulate those millions of entities and their stakeholders the moment they obtain a formal corporate status from a State?” The Opinion answers this question by finding that “the CTA exceeds the Constitution’s limits on the legislative branch and lacks a sufficient nexus to any enumerated power to be a necessary or proper means of achieving Congress’ policy goals[.]”
Standing
The Opinion first finds that the plaintiffs have standing – that is, the ability to sue in federal court and have the Court even address their claims. The plaintiffs are the National Small Business Association (“NSBA”), which describes itself in the complaint as “an Ohio nonprofit mutual benefit corporation [that] is one of the leading and oldest associations of small businesses in the United States, with members in all fifty States and the District of Columbia,” and an individual member of the NSBA. The government argued in part that the individual plaintiff lacked standing because he lacked any concrete injury which the Court could address because his “injuries aren’t traceable to the CTA or redressable by a favorable decision because he has already disclosed at least some of the [reporting information required by the CTA] while complying with other regulatory requirements, like ‘tax returns, passport forms, and bank account applications.’” The Opinion readily dismisses that argument, finding that standing existed because the CTA requires the plaintiff to disclose sensitive personal information to the Financial Crimes Enforcement Network (“FinCEN”) for law enforcement purposes.”
Congressional Power: Foreign Affairs and National Security
As noted, the government argued that Congress had three grounds for authority to enact the CTA.
First, the government argued that Congress could enact the CTA under its ability to oversee foreign affairs and national security: “Congress concluded that collecting beneficial ownership information ‘is needed to . . . protect vital Unite[d] States national security interests’; ‘better enable critical national security, intelligence, and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity’; and ‘bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards.’”
However, the Court found this argument lacking, because corporations are “creatures” of state law: “So although the CTA does not directly interfere with or commandeer State incorporation practices, the CTA still ‘convert[s] an astonishing amount of traditionally local . . . conduct into a matter for federal enforcement, and involve[s] a substantial extension of federal police resources.'“ (quoting Bond v. United States, 572 U.S. 844, 863 (2014)). Further, the Opinion states that “the CTA’s congressional findings are not enough to conclude that a regulation in the purely domestic arena of incorporation is an “exercise[] of authority derivative of, and in service to” Congress’ foreign affairs powers, especially in light of the States’ historically exclusive governance of incorporation.”
Congressional Power: The Commerce Clause
Second, the government argued that Congress could enact the CTA under its ability to regulate commerce under the Commerce Clause. Specifically, the government argued that Congress could enact the CTA under all three categories of its Commerce Clause powers, that is, the powers to regulate: (1) the channels of interstate and foreign commerce, (2) the instrumentalities of, and things and persons in, interstate and foreign commerce, and (3) activities that have a substantial effect on interstate and foreign commerce.
The Opinion first discusses a seminal case on the Bank Secrecy Act (“BSA”), California Bankers Association v. Shultz, 416 U.S. 21 (1974), in which the Supreme Court rejected an effort by banks and bank customers to enjoin the enforcement of certain reporting and record keeping requirements authorized by, and promulgated under, the BSA. Condensing greatly, the Opinion distinguishes Shultz by finding that “unlike the challenged disclosure requirements in Shultz, the CTA regulates most State entities, not just entities that move in commerce. . . . The reporting and record-keeping requirements at issue in Shultz were upheld largely because they governed negotiable instruments and money actually moving in foreign and interstate commerce.” (emphasis in original).
The Opinion states that Congress could have “easily” written the CTA to pass constitutional muster by “imposing the CTA’s disclosure requirements on State entities as soon as they engaged in commerce,” or by “prohibiting the use of interstate commerce to launder money, ‘evade taxes, hide . . . illicit wealth, and defraud employees and customers.’” However, according to the Opinion, “that is not what the CTA does. Because the CTA doesn’t regulate the channels and instrumentalities of commerce or prevent their use for a specific purpose, it cannot be justified as a valid regulation of those channels.”
Continuing, the Opinion found that the possibility – even “near certainty” – of future economic activity by covered reporting entities was insufficient to justify the CTA as an exercise of Congressional authority under the Commerce Clause. Also critical to the Opinion’s analysis was the finding, and the government’s concession, that the act of incorporation, standing alone, is not enough under the Commerce Clause.
Accordingly, the fact that most, but not necessarily all, covered reporting entities would or do use the channels of commerce could not salvage the CTA. The Opinion describes the following as the “central question”: ”Does Congress have authority under the Commerce Clause to regulate non-commercial, intrastate activity when ‘certain entities, which have availed themselves of States’ incorporation laws, use the channels of commerce, and their anonymous operations substantially affect interstate and foreign commerce?’” The Opinion obviously answers its own question in the negative, stating that “the plain text of the CTA does not regulate the quintessentially economic activities the Government asserts or require entities to engage in those activities to be regulated.” Further, the Opinion states that the CTA lacks any express jurisdiction element – an explicit “jurisdictional hook” – which would limit its reach to a discrete set of activities with an explicit connection with or effect on interstate commerce.
The Opinion compared the CTA with the Customer Due Diligence (“CDD”) Rule, a regulation enacted under the BSA which requires covered reporting entities – defined by the CDD Rule in a manner similar but not identical to the CTA – to report beneficial owners – also defined broadly and in a manner similar to the CTA – to banks and other financial institutions. According to the Opinion, “FinCEN’s CDD [R]ule and the CTA provide FinCEN with nearly identical information, but the CDD [R]ule does so in a constitutionally acceptable manner.” Apparently, the difference is that an entity subject to CDD Rule reporting is already engaged in commercial activity because it is attempting to open an account at a financial institution. The Opinion rejected the government’s argument that failing to regulate corporate entities immediately upon their formation would “leave a gaping hole” in the fight against money laundering.
Congressional Power: Taxing Power
Third, the government argued that Congress could enact the CTA under its taxing power.
Although the government conceded that the CTA’s civil penalties are not a “tax,” it invoked the Necessary and Proper Clause of the Constitution and argued that “the collection of beneficial ownership information [under the CTA] is necessary and proper to ensure taxable income is appropriately reported[.]” However, the Opinion found that providing access to the CTA’s database for tax administration purposes failed to establish a sufficiently close relationship under the Necessary and Proper Clause: “It would be a ‘substantial expansion of federal authority’ to permit Congress to bring its taxing power to bear just by collecting ‘useful’ data and allowing tax-enforcement officials access to that data.”
Finally, having struck down the CTA on the grounds that Congress lacked the power to enact it, the Opinion does not address the plaintiff’s other arguments that the CTA also violates the First, Fourth and Fifth Amendments.
Consequences?
The Court issued a Final Judgment, enjoining the defendants (the Treasury Department, the Secretary of the Treasury, and the then-acting Director of FinCEN), as well as any other agency or employee acting on behalf of the United States, from enforcing the CTA against the plaintiffs.
It is no insight to observe that things are going to be (more) confusing and messy in regards to the CTA. Exactly what will happen, however, is very hard to predict at this moment. Although the Opinion is “limited” to the Northern District of Alabama, it will have immediate and national effects. The extent of the Opinion’s immediate application is a question beyond the scope of this blog post. The NSBA has members in every state, and the organization is presumably going to enjoy a massive surge in membership, because the Final Judgment states that it applies to the NSBA. Other plaintiffs may file “copycat” litigations. Presumably, the government will appeal the Opinion to the U.S. Eleventh Circuit Court of Appeals, although that is not clear at this time. Conceivably, given the importance of the CTA and the pure and broad constitutional issues presented by the Opinion as to the power of Congress, this issue could go to the Supreme Court.
Finally, and although political prognostication can be dangerous, it is difficult to envision the current U.S. Congress passing, at least anytime soon, a new version of the CTA with sufficient “jurisdictional hook” language – or at least a version of the CTA that otherwise matches or strongly resembles the current version. Even though Congress itself of course passed the CTA, some members of Congress nonetheless have been criticizing FinCEN, fairly or not, regarding how it has been implementing the CTA – for example, by stating that “[t]he CTA was created to be a national security tool, not just a tool for the Bureaucratic regime.” Therefore, if Congress were inclined to provide a “legislative fix” – and there would be pressure to do so by law enforcement groups and the international community – the CTA likely would undergo debate and revisions.
Meanwhile, reporting by entities to the CTA database already has begun, and the deadline – at least, the deadline prior to March 1 – for existing covered entities to file reports is December 31. Tens of millions of entities are covered by the CTA. Further, FinCEN has yet to issue proposed regulations on how the existing CDD Rule applicable to banks and other financial institutions will be revised to align with the CTA – a project that apparently just got sidetracked, or at the very least, even more incredibly complicated.
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The plaintiffs and intervenors in the lawsuit filed in a Texas federal district court challenging the CFPB’s final small business lending rule implementing Section 1071 of Dodd-Frank (Rule) have filed a consolidated motion for summary judgment. The plaintiffs in the lawsuit are the Texas Bankers Association, Rio Bank, McAllen, Texas, and the American Bankers Association. The intervenors are: Texas First Bank, Independent Bankers Association of Texas, Independent Community Bankers of America, Texas Farm Credit, Farm Credit Council, Capital Farm Credit, XL Funding, LLC, Equipment Leasing and Finance Association, Rally Credit Union, America’s Credit Union (formerly Credit Union National Association), and Cornerstone Credit Union League
After initially entering a preliminary injunction that was limited to the plaintiffs and their members, the Texas court extended its preliminary injunction to apply on a nationwide basis. The order extending the preliminary injunction was entered following the intervention of several additional plaintiffs in the lawsuit. The court’s extended preliminary injunction (1) stays all deadlines for compliance with the Rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and (2) requires the CFPB, if the Supreme Court rules that its funding is constitutional, to extend the deadlines for compliance with the Rule to compensate for the period stayed. (On October 3, 2023, the U.S. Supreme Court heard oral argument in CFSA v. CFPB, and a ruling is not expected until as late as June 2024.)
In their summary judgment motion, the plaintiffs and intervenors only seek summary judgment on their non-constitutional claims. They do not seek summary judgment on their claim that the Rule is invalid because the CFPB’s funding structure is unconstitutional. They indicate that they will seek leave to amend their filings consistent with any applicable direction provided by the Supreme Court when it rules in CFSA v. CFPB.
The plaintiffs and intervenors argue that summary judgment should be entered in their favor for the following reasons:
- The CFPB exceeded its statutory authority in imposing the additional data points that are not mandated by Dodd-Frank because:
- While Section 1071 directs financial institutions to collect and report 13 specific data points, the Rule massively expands the data points that must be collected. This massive expansion of data points will not facilitate fair lending or otherwise advance the purposes of Section 1071 because the data that lenders will have to collect and submit to regulators under the Rule will not capture the factors that lenders legitimately consider when underwriting and pricing small business loans. Even if the expanded data did capture the actual factors considered by lenders, the anticipated low response rates to demographic questions means that the expanded data will not be reliable, as there is no reason to believe that the loans with demographic data will be representative of all loans. While Congress in Dodd-Frank specified certain required data points, it authorized the CFPB in Section 1071(e)(2)(H) to require “any additional data that the Bureau determines would aid in fulfilling the purposes of . . . section [1071].” In Dodd-Frank, Congress took the same approach with the Home Mortgage Disclosure Act (HMDA) by specifying new data points and authorizing the CFPB to add “such other information as the Bureau may require.” In the 2015 final rule implementing the HMDA amendments, the CFPB more than doubled the data fields added by Congress.
- Rather than expand access to credit for women-owned and minority-owned small businesses, the exponentially increased compliance costs of the Rule will result in less credit being available to all small businesses, thus harming the businesses Congress sought to help through Section 1071. The Rule rests on the faulty assumption that the CFPB had authority to require lenders to collect information other than the information that Section 1071 specifically requires them to collect which they would not otherwise collect as part of the loan application process. For this assumption, the CFPB relies on the language in Section 1071(e)(2)(H) which refers to “any additional data that the Bureau determines would aid in fulfilling the purposes of…section 1071].” However, in reading this language to provide authority for the CFPB to require the Rule’s expanded data points, the CFPB disregards the text of Section 1071 which only allows the CFPB to require lenders to disclose information already obtained by the lender from the application process (along with 13 mandated data points).
- The CFPB acted arbitrarily and capriciously in violation of the Administrative Procedure Act (APA) by failing to consider the significant real world costs of compliance. Rather than give adequate consideration to the warnings from the regulated community on the effects of expanding data collection requirements exponentially, the CFPB “papered over the issue and failed to consider the concerns.” Specifically, the CFPB provided no meaningful response to concerns expressed by commenters on its proposed Section 1071 rule that the exponential increase in compliance costs resulting from the expanded data collection requirements would drive lenders, particularly community banks and non-depository lenders, from the market and thereby injure small business borrowers.
- The CFPB’s cost/benefit analysis of the final rule was arbitrary and capricious in violation of the APA because:
- The CFPB underestimated the costs of the Rule by failing to collect the relevant cost information from lenders, relying instead on a flawed cost survey and on cost estimates that were based on its 2015 HMDA final rule cost estimates. Reliance on the cost estimates was misplaced because the Section 1071 data relates to a more diverse and complex set of products than the mortgage loans for which HMDA requires data collection and much of the information that must be reported under HMDA is already collected and disclosed by mortgage lenders pursuant to the Truth in Lending Act. The CFPB also did not consider the additional costs related to increased fair lending supervision and enforcement (resulting from the false positives suggested by the data) and the reputational injuries to lenders nor did it adequately consider the impact of the Rule on small business borrowers in rural areas.
- The CFPB failed to justify the costs in comparison to any supposed benefits of the Rule. Instead, it acknowledged that quantifying and monetizing the benefits of the “enhanced transparency” provided by the Rule “presents substantial challenges” and would require “identifying all possible uses of the data collected under this rule, establishing causal links to the resulting public benefits, and then quantifying the magnitude of those benefits.”
The Rule is also being challenged in two other cases filed in federal district court, one in Kentucky and one in Florida. The plaintiffs in the Kentucky lawsuit are the Kentucky Bankers Association and several Kentucky banks. In January 2024, the court stayed the Kentucky case until the Supreme Court issues its decision in CFSA v. CFPB. The plaintiff in the Florida lawsuit is the Revenue Based Finance Coalition, a trade group whose members include non-banks that provide sales-based financing to businesses. The Florida court has ordered that any dispositive motions must be filed by March 15, 2024.
An attempt by Congress last year to overturn the Rule failed when in late December 2023 President Biden vetoed the joint resolution adopted by the House and Senate to override the Rule under the Congressional Review Act. The vote in the House was 221-202 and the vote in the Senate was 53-44. A Senate effort to override the President’s veto failed by a vote of 54-45, falling short of the necessary two-thirds vote required in both the House and Senate to override a Presidential veto.
John L. Culhane, Jr. & Richard J. Andreano, Jr.
New York DFS Issues Guidance on Climate Change Risks for Financial Institutions
On December 21, 2023, the New York Department of Financial Services (“DFS”) published guidance (the Guidance) to assist regulated institutions in assessing and managing their climate-related financial and operational risks.
This is a follow up to DFS’s previous letter published in October 2020, which highlighted the impact of risks from climate change on its regulated institutions. That letter set forth DFS’s expectation that financial institutions start integrating both financial and operational risks from climate change into their governance frameworks, risk management processes, and business strategies.
The Guidance specifically applies to New York State-regulated banking organizations, New York State-licensed branches and agencies of foreign banking organizations, and New York State-regulated mortgage bankers and mortgage servicers (collectively, “Regulated Organizations”). According to the Guidance, Regulated Organizations that are assessing and managing material climate-related financial and operational risks should account for three key themes: the physical and transition risk channels that give rise to climate-related financial risks, the centrality of operational resilience to an institution’s safety and soundness, and the requirement to ensure compliance with all applicable consumer-protection considerations—including fair lending—in adapting the institution’s risk management framework. Physical and transition risks include impacts of disasters such as hurricanes and fires, re-valuation of assets that turn out to be worth less than originally modeled due to changes affecting certain sectors or businesses, and costs to reinvest in and replace infrastructure affected by impacts of climate change.
Despite indicating that many low- and moderate-income (“LMI”) communities and communities of color are harmed disproportionately by climate change and natural disasters. the Guidance goes into detail about the expectation to provide fair lending to all communities and warned Regulated Organizations to keep watch for trends that may harm communities that are already vulnerable. DFS instructs Regulated Organizations to “not base their risk management response to climate change on the concept or practice of disinvesting from low-income communities or communities of color, or by making credit or banking more difficult or expensive for members of these communities to obtain. To ensure that a Regulated Organization manages its compliance risk appropriately, its board should direct management to incorporate consideration of fair-lending and consumer-protection requirements into the organization’s internal processes for management of climate-related financial risk.” Regulated Organizations should also pay attention to their obligations under the NY Community Reinvestment Act to ensure they continue to meet the credit needs of all of the communities they serve.
Generally, DFS expects Regulated Organizations to make strategic changes to their operations in order to manage potential risks associated with climate change, including the following:
- Corporate Governance. DFS expects that a Regulated Organization’s governance framework will ensure that there is a process in place for identifying, measuring, monitoring, and controlling that organization’s material financial and operational risks associated with climate change, and expects that the organization’s board of directors are appropriately involved in overseeing this framework. A Regulated Origination should consider the types of climate-related financial and operational risks it may be exposed to and analyze which business units or areas would be most affected. The organization can then implement risk-mitigation strategies accordingly. Risk-mitigation strategies should also be reflected in the organization’s policies, procedures, and control plan.
- Internal Control Framework. DFS expects Regulated Organizations to incorporate climate-related risks across three lines of defense: the risk-taking function, the management function, and the internal audit function. An organization should have sound, comprehensive plans for assessing, monitoring, and mitigating climate-related risks to the organization’s business, customers, and environment. Internal policies and procedures should take climate-related risks into account, and audits should include an independent review of the organization’s climate-related internal control framework.
- Risk Management Process. DFS expects Regulated Organizations to implement climate-related risk strategies into existing risk management processes, in accordance with the organization’s risk appetite. This includes processes for the organization to identify, measure, monitor, and control climate-related financial and operational risks. Regulated Organizations should consider the possible physical and transition risks of climate change and determine how these risks would impact the business, including changes to credit risk, liquidity risk, market risk, compliance risk, operational risk, and strategic risk.
- Data Aggregation and Reporting. The Guidance explains that Regulated Organizations should review their data collection and monitoring systems to ensure they are equipped to monitor for climate-related risks.
- Scenario Analysis. When evaluating its resilience against potential market challenges, a Regulated Organization should incorporate a range of climate scenarios based on assumptions regarding impact of climate-related financial and operational risks over different time horizons.
DFS advises that it will not set a timeline for implementation of this guidance, but plans to publish a Request for Information (RFI) soliciting information from Regulated Organizations regarding the steps they are taking, or plan to take to assess and manage their climate-related financial and operational risks. Additionally, DFS plans to coordinate with federal banking regulators to determine when and how to incorporate an assessment of a Regulated Organization’s implementation of this Guidance into supervisory examinations.
FTC Warns “Quietly Changing” Privacy Policies May Be an Unfair or Deceptive Practice
The FTC published guidance warning companies that “[i]t may be unfair or deceptive for a company to adopt more permissive data practices—for example, to start sharing consumers’ data with third parties or using that data for artificial intelligence (AI) training—and only inform consumers of this change through a surreptitious, retroactive amendment to its terms of service or privacy policy.” In other words, the long-standing practice of simply updating the privacy policy may not provide sufficient notice to consumers depending on the nature of the changes.
As companies turn to leverage consumer data to power AI systems, the FTC signaled that such practices constitute material changes to its data practices. These changes require companies to square new business goals with existing privacy commitments. The FTC made clear that companies cannot simply do away with existing privacy commitments by changing its privacy policies and terms to apply retroactively; instead, businesses must inform consumers before adopting permissive data practices such as using personal data for AI training. Therefore, companies seeking to share data with AI developers or process data in-house in ways that aren’t reflected in current privacy policies and terms should update both and notify consumers of such updates as a pre-requisite to taking on new processing activities such as AI.
However, although the announcement focused on the use of data to train AI, the FTC’s warning went noticeably broader by specifically referencing sharing personal data with third parties.
It is worth noting that the FTC’s stance is generally in line with some state privacy laws that require notification to consumers of any material change in their privacy policies. For example, under the Colorado Privacy Act, certain types of changes require notice to consumers beyond simply updating the privacy policy—even if the policy states that changes are effective upon posting. Similarly, if the change constitutes a secondary use, affirmative consent may be required.
Given the changing landscape, companies should be particularly diligent in assessing what type of notice must be given—and when it must be given—before engaging in a new processing activity with data that has already been collected. Or as the FTC punnily puts it, “there’s nothing intelligent about obtaining artificial consent.”
Gregory P. Szewczyk, Kelsey Fayer & Madison Etherington
More States Mull Interest Rate Preemption and “Anti-Evasion” Legislation
Rhode Island, Minnesota, and Nevada have joined the list of jurisdictions considering proposals to legislatively opt out of federal interest rate preemption established under the federal Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA). Although the legal effect remains unclear, the apparent objective of these proposed laws is to prevent interest rate “exportation” by state-chartered financial institutions.
As discussed in earlier blogs here and here, Sections 521 through 523 of DIDMCA were enacted to enhance competitive equality for FDIC-insured, state-chartered banks and credit unions by affording them the same interest rate authority as national banks. However, DIDMCA Section 525 gives states authority to opt out of Sections 521 through 523 “with respect to loans made in such State.” A handful of states enacted opt-out legislation shortly after DIDMCA went into effect. With the exception of Puerto Rico and Iowa, these states have all since repealed their original opt-out legislation, or allowed it to expire.
Now, over 40 years later, revived interest in the concept of DIDMCA opt-out is developing in an increasing number of jurisdictions. In 2023, Colorado enacted a law effective July 1, 2024 countermanding federal interest rate authority otherwise available to state-chartered banks and credit unions with respect to consumer credit transactions. In November 2023, District of Columbia Council Bill B 25-0609, which would opt out of DIDMCA Sections 521 through 523 with respect to loans made in Washington D.C., was introduced and referred to the Council’s Committee on Business and Economic Development, where it remains under consideration and is scheduled for public hearing on March 13, 2024.
S 2275, introduced in the Rhode Island Senate on February 12, 2024, would also opt-out of DIDMCA Sections 521 through 523, although credit extended pursuant to credit cards appears to be carved out of the rate limitations set forth in the referenced statutes. If adopted as proposed, S 2275 would be effective August 1, 2024.
H.F.3680, introduced in the Minnesota House of Representatives on February 13, 2024, would amend Minnesota law by opting out of sections 521 through 523 of DIDMCA with respect to consumer loans made in the state. Proposed language included in the bill apparently would allow out-of-state banks and credit unions to charge the rate allowed by their respective home states for open-end credit pursuant to a credit card. As proposed, H.F. 3680 would be effective August 1, 2024.
In Nevada, a newly formed non-profit corporation, “Stop Predatory Lending NV,” is seeking to opt-out of federal interest preemption and impose an all-in APR cap of 36% on certain consumer loans and similar transactions through a statewide ballot initiative. The proposed APR calculation would exclude fees charged in connection with “network-branded” credit cards if such fees “collectively each year” do not exceed 15% of the credit line. Should a sufficient number of signatures be obtained in 2024, the Nevada legislature would have the opportunity to adopt the amendments set forth in the ballot initiative in 2025. If the legislature fails to pass the proposed amendments, they would be presented to Nevada voters in 2026.
The legislation proposed in Washington, D.C. and the ballot initiative proposed in Nevada also would include additional provisions designed to prevent “evasion” of state usury laws, similar to laws recently adopted by other states, as noted in earlier blogs.
We will continue to follow and report on the status of these latest proposals. As we have explained in past blogs, the legal effect of a state’s opt-out is uncertain. In our view, loans by out-of-state financial institutions should be deemed to be “made in” the main office or branch location where core lending functions are performed. Consequently, a state’s opt-out should only impact institutions that are physically located in the state that has opted out, but it remains to be seen how these laws will be applied in the courts.
John L. Culhane, Jr., Mindy Harris, Joel E. Tasca & Ronald K. Vaske
On February 29, 2024, the Consumer Financial Protection Bureau (“CFPB”) issued Consumer Financial Protection Circular 2024-01, Preferencing and steering practices by digital intermediaries for consumer financial products or services. The Circular advised that: “[o]perators of digital comparison-shopping tools can violate the [Consumer Financial Protection Act (CFPA)] prohibition on abusive acts or practices if they distort the shopping experience by steering consumers to certain products or services based on remuneration to the operator;” and “lead generators can violate the prohibition on abusive practices if they steer consumers to one participating financial services provider instead of another based on compensation received.” Digital comparison shopping tools are defined as “tools that overtly recommend certain products as well as tools that have the effect of affirmatively influencing consumers’ likelihood of selecting or engaging with information about various consumer financial products and services.”
The Circular addresses the varying types of comparison-shopping tools and the use of algorithms to rank recommendations, and focuses on financial arrangements for preferential treatment or advantageous placement in the comparison-shopping tool. (The Circular notes that banner or pop-up advertising on operators’ websites are not affected by this guidance.) With respect to lead generation, the Circular focuses on whether certain compensation schemes cause lead generators to steer consumers to lenders that pay the highest bounty.
Under the CFPA, an act or practice in connection with the provision of a consumer financial product or service is abusive if it “takes unreasonable advantage” of certain circumstances, including “the reasonable reliance by the consumer on a covered person to act in the interests of the consumer.” Many comparison-shopping tools hold themselves out as providing unbiased and objective advice, and as a result, may influence a consumer’s selection of a financial product. When compensation to the operators of these tools affect the results, the Circular states that this may be abusive and take unreasonable advantage of a consumer. The Circular suggests that consumers are reasonably relying on the tool operator or lead generator to act in the consumer’s best interests, and the tool operators and lead generators are taking unreasonable advantage of consumers when they give preferential treatment to certain products or steer consumers to more costly products to increase the operator’s own financial gain.
The Circular provides the following illustrative examples of abusive practices:
- A tool operator presents a product (or set of products) that is preferred because of financial considerations in a placement that is more likely to be seen, reflects a preferential ordering, has more dynamic design features, requires fewer clicks to access product information, or otherwise increases the likelihood that a consumer will consider or select the preferred product.
- A tool operator presents certain options as “featured” because they are provided by the operator or a third-party provider that paid for enhanced placement.
- A tool operator directs consumers to the products that pay higher fees within a product category—for example, an operator routinely matches consumers with a loan provider because it pays the highest fee per application.
- A tool operator receives different payment based on whether the digital comparison-shopping tool meets a certain threshold volume allocation of leads generated within a set period of time, and uses steering practices to increase the likelihood the operator will satisfy volume allocation requirements. For example, in a 14-day period, a provider pays fees only if at least 1,000 applications are generated, and, on day 13, the operator is more likely to steer consumers to that provider’s products until the allocation is met.
- A tool operator or lead generator uses dynamic bidding or a bounty system to determine which offers are presented to consumers with certain demographic or other characteristics.
- A tool operator expressly or implicitly presents the total set of options featured on the tool as relatively comprehensive or based on criteria such as price, terms, quality of service, or security, when in fact the operator determines which options to include based on financial or other benefits obtained by the operator.
- A tool operator presents a preferred product as a “match” that is not the participating product that is most consistent with the expressed interests of a consumer.
- A lead generator guarantees a certain number and quality of leads to multiple participating lenders and divides customers meeting those criteria up without regard to the fact that consumers with similar characteristics are receiving different offers.
The Circular does not address whether a tool operator/lead generator can avoid an abusive practice finding by disclosing its interest or compensation, and therefore it is unclear whether the CFPB would find that such a disclosure would eliminate the consumer’s reliance that the tool operator/lead generator is acting in the consumer’s best interest. In the overdraft fee context, the CFPB’s guidance suggests that the CFPB would view overdraft fees charged for authorize positive settle negative (APSN) transactions as unfair even if a financial institution were to clearly disclose to consumers that an overdraft fee applies to APSN transactions. As a reminder, Consumer Financial Protection Circulars are solely policy statements issued to advise enforcement authorities and do not have the full force and effect of laws or regulations.
In its press release announcing the Circular, CFPB Director Rohit Chopra stated: “The CFPB is working to ensure that digital advertisements for financial products are not disguised as unbiased and objective advice.” The press release also referred to prior guidance on abusive conduct, addressed “dark patterns” in comparison shopping, and discussed increasing credit card competition. See our blog post addressing credit card competition here. See our legal alert describing dark patterns here.
Prior Guidance
In January 2023, the CFPB issued a circular that addresses the circumstances under which “negative option marketing practices” can violate the CFPA prohibition of unfair, deceptive, or abusive acts or practices. In April 2023, the CFPB issued a policy statement setting forth a framework for determining what constitutes abusive conduct. In the statement, the CFPB indicated the use of so-called “dark patterns” can constitute abusive conduct if they have the effect of making the terms and conditions of a transaction materially less accessible or salient. In January, the CFPB issued its proposed rule on non-sufficient funds fees, which adopts a significantly expanded view of abusive conduct. In February, CFPB issued an advisory opinion entitled Real Estate Settlement Procedures Act (Regulation X); Digital Mortgage Comparison-Shopping Platforms and Related Payments to Operators to address “pay-to-play” mortgage loan digital comparison-shopping platforms under RESPA.
Dark Patterns
While the press release covered “dark patterns in comparison shopping,” the Circular only addressed dark patterns in a footnote to one of the illustrative examples. The “dark patterns” guidance has been more of a prominent focus for the Federal Trade Commission (“FTC”) than the CFPB. In September 2022, the FTC released a report showing how companies are increasingly using sophisticated design practices known as “dark patterns” that can trick or manipulate consumers into buying products or services or giving up their privacy. In September 2022, the FTC announced a settlement with Credit Karma for engaging in deceptive acts and practices in violation of Section 5 of the FTC Act by making false or misleading claims that consumers were pre-approved for certain credit products. In April 2022, the CFPB filed a lawsuit against TransUnion alleging that the company had “used an array of dark patterns” and engaged in deceptive marketing of credit-related products in violation of the CFPB’s 2017 consent order with the company. In October 2022, the CFPB filed lawsuit against online event registration company ACTIVE Network, LLC alleging unlawful practices in connection with fees charged for a membership club. In November 2022, the FTC announced that it has entered into a consent order with internet phone service provider Vonage to settle allegations that it imposed “junk fees” on consumers and used “dark patterns” that prevented them from cancelling their service. In June 2023, the FTC announced that it had entered into a settlement with Publishers Clearing House to settle charges involving the use of “dark patterns” and filed a civil case against Amazon alleging that the company used “manipulative, coercive, or deceptive user-interface designs known as ‘dark patterns’ to trick consumers into enrolling in automatically renewing Prime subscriptions.” In November 2023, the FTC announced a settlement with Bridge It, Inc., an operator of personal finance mobile app alleged to have used “dark patterns” in connection with negative option. We have released three Consumer Finance Monitor podcast episodes on “dark patterns,” which are available here, here, and here.
In February, we hosted a webinar “The Federal Trade Commission: Looking Back at 2023 and Looking Ahead to 2024 and Beyond” with special guest, Malini Mithal, Associate Director of the Federal Trade Commission’s Division of Financial Practices, in which we discussed the highlights of FTC regulatory and enforcement activity in 2023 and what to expect from the FTC in 2024 and beyond.
Kristen E. Larson, Edward D. Rogers, John L. Culhane, Jr. & Michael R. Guerrero
VA Proposes Supplemental Refinance Loan Rule
As previously reported, in November 2022 the Department of Veterans Affairs (VA) issued a proposal to update its rules for interest rate reduction refinancing loans (often referred to as “IRRRLs”) to conform with VA loan refinance provisions in the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was enacted in 2018, and the Protecting Affordable Mortgages for Veterans Act of 2019. The VA recently issued a supplemental proposal to change the start date of the maximum 36-month period for the veteran to recoup the cost of the refinancing. Comments are due by May 6, 2024.
The U.S. Code section that sets forth the cost recoup requirement (38 USC § 3709(a)(2)), and related VA loan refinancing requirements, provide that “all of the fees and incurred costs are scheduled to be recouped on or before the date that is 36 months after the date of loan issuance.” The statute does not define the term “date of loan issuance,” and the VA notes in the preamble to the supplemental proposal that “[b]efore 38 U.S.C. 3709 was signed into law, the term ‘‘loan issuance’’ was not mentioned within chapter 37 or commonly used by VA in the VA home loan program.” The VA also notes that the legislative history of the Public Law that imposed new VA loan refinance requirements “does not include a definition of the term or provide sufficient context from which to infer the intended meaning.”
In the November 2022 proposal, the VA proposed to use the note date as the date of loan issuance. The VA is now proposing that the date of loan issuance be the first payment due date of the refinance loan. Thus, the 36 month maximum recoupment period would be measured from a later point than as originally proposed. The VA was not prompted to make the change based on public comments, as the VA notes in the preamble to the supplemental proposal that it did not receive comments specific to what “date of loan issuance” means. Rather, the VA advises that in preparation for the final rule it “re-examined the text of [U.S. Code] section 3709, VA’s proposed recoupment formula, comments of internal VA staff, potential outcomes for Veterans, ongoing industry implementation of the statutory recoupment standard, and a range of other sources, and identified reasons why the initial proposal may not have reflected the best interpretation.” (Footnote omitted.)
The VA focuses on the section 3709 requirement that the recoupment be calculated through lower monthly payments, and addresses potential adverse consequences of using the note date as the date of issuance. One such consequence is that because after a refinance a VA borrower may not make one or two monthly payments, using the note date as the date of issuance could mean that only 34 or 35 monthly payments are used to calculated the recoupment, and not a full 36 monthly payments. The VA also noted a concern that any interest in advance payments that a veteran may need to make at closing with regard to any missed payments could be an additional cost that would need to be recouped.
The VA advises that the date of the first payment due on the note would be the date of issuance regardless of whether the veteran actually makes the payment. The VA does not propose a change in the recoupment calculation set forth in the original proposed rule. Under the original proposal the sum of the fees, closing costs and expenses incurred by the veteran to refinance the existing loan, whether paid in cash or financed, is divided by the dollar reduction in the monthly principal and interest payment, with the result reflecting the number of months it will take to recoup the refinancing costs. For example, if the applicable costs are $3,600 and the monthly principal and interest payment is reduced by $100, the result would be 36, and the maximum recoupment period would be satisfied. The costs to refinance would not include (1) the VA funding fee, (2) prepaid interest and amounts held in escrow, and (3) taxes and assessments on the property, even when paid outside of their normal schedule, that are not incurred solely due to the refinance transaction, such as property taxes and special assessments.
Texas Court Strikes Down NLRB Joint Employer Rule
On March 8, 2024, a Texas federal district court vacated the National Labor Relations Board (“NLRB” or “the Board”) 2023 joint employer rule (“2023 Rule), and restored the 2020 joint employer rule (“2020 Rule”).
As we previously reported, the NLRB proposed the 2023 Rule for determining joint employer status under the National Labor Relations Act (“NLRA”). Under this new standard, an entity could be deemed a joint employer, whether or not control is exercised over the alleged employees and without regard to whether such exercise of control is direct or indirect. In response, the US Chamber of Commerce, on behalf of business advocacy groups, filed a lawsuit in the US District Court for the Eastern District of Texas challenging the 2023 Rule.
In vacating the 2023 Rule, Judge J. Campbell Barker initially criticized the two-step test of the 2023 Rule. The first step required that an entity qualify as a common law employer, and, second, only if it is a common law employer, the entity must also have control over one or more essential terms and conditions of employment. Judge Barker agreed with the Chamber that the second test is always met if the first test is met, because under the common law, an employer of a worker must have the power to control the material details of how the work is done. Thus, the 2023 Rule has “just one step for all practical purposes.”
Further, Judge Barker held that the 2023 Rule was unlawfully broad, arbitrary and capricious because it classified many aspects of work as essential terms and conditions of employment, such as, “wages,” “hours of work,” and “working conditions related to the health and safety of employees.” Thus, if an entity exercises — or has the power to exercise — control (even indirect control) over at least one essential term, the entity is an employer, jointly with the undisputed employer. This essentially treats every entity that contracts for labor as a joint employer because virtually every contract for third-party labor has terms that impact, at least indirectly, an “essential term and condition of employment.” Therefore, Judge Barker reasoned, the 2023 Rule’s “reach exceeds the bounds of the common law and is thus contrary to law.” As a result, the Court vacated the 2023 Rule and indicated that it will issue a final judgment declaring that the Rule is unlawful.
The 2023 Rule had an original effective date of December 26, 2023. However, due to the legal challenges, the Board postponed the effective date to February 26, 2024, and then the district court postponed the effective date further to March 11, 2024. The Court’s March 8, 2024 decision means that the 2023 Rule will not go into effect, and, instead, any joint-employer issue will continue to be governed by the 2020 Rule adopted during the Trump Administration.
Although, for now, the 2023 Rule will not be implemented, it is unlikely that this is the last we will hear of this issue from the Board, as, in recent years, the issue of joint employment has repeatedly drawn the attention of the Board and other government regulators. The NLRB has several options to address the issue in the aftermath of this ruling. The Board may appeal the ruling, or it may “go back to the drawing board” and promulgate a new rule, or it may choose to address the issue through its own case by case decisions. Ballard Spahr’s Labor and Employment Group regularly advises clients on navigating the shifting landscape of decisions and regulations relating to the NLRB.
Diverse Group Expresses Support for Bills to Limit Trigger Leads
As previously reported, bills were introduced in the U.S. House of Representatives (H.R. 7297) and U.S. Senate (S. 3502) to amend the Fair Credit Reporting Act (FCRA) to curtail the practice of trigger leads with mortgage loans. Recently, a diverse group sent a letter to the Chairs and Ranking Members of the House Committee on Financial Services and the Senate Committee on Banking, Housing & Urban Affairs expressing support for the bills. The letter provides that if enacted into law, the bills “would stop the abusive use of trigger leads – while narrowly preserving them for legitimate uses such as existing customer relationships.” The group includes financial industry trade associations, consumer groups and mortgage lenders.
Navigating the New Era of Bayh-Dole March-In Rights: Practical Application Strategies and Insights
A Ballard Spahr Webinar | March 19, 2024, 1:00 PM – 2:00 PM ET
Speakers: Scott D. Marty, Ph.D., Kate A. Belinski, Margaret Bolce Brivanlou, Ph.D., D. Brian Shortell, Ph.D., & Kenneth H. Sonnenfeld, Ph.D.
Has The CFPB's Final Credit Card Late Fees Rule Dealt Cardholders A Winning Or Losing Hand?
A Ballard Spahr Webinar | March 21, 2024, 1:00 PM – 2:15 PM ET
Speakers: Alan S. Kaplinsky, John L. Culhane, Jr., Kristen Larson, & Ronald K. Vaske
Webinar: Who Will Win Cantero v. Bank of America, N.A. And What Does It Mean For You?
Webinar Roundtable | April 3, 2024, 1:30 PM – 2:45 PM ET
Moderator: Alan S. Kaplinsky
MBA Legal Issues and Regulatory Compliance Conference
May 5-8, 2024 | Manchester Grand Hyatt, San Diego, CA
APPLIED COMPLIANCE TRACK: Loan Originator Compensation
Speaker: Richard J. Andreano, Jr.
KEY UPDATES TRACK: Changes to State Reporting Requirements and State Licensing
May 6, 2024 – 4:00PM PT
Speaker: John D. Socknat
EMERGING ISSUES TRACK: Labor Law – Best Practices for Compensation and Recruiting in a Changing Landscape
Speaker: Meredith S. Dante
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