Mortgage Banking Update - April 4, 2019
In a precedential opinion, the U.S. Court of Appeals for the Third Circuit concluded that because the named plaintiff in a class action complaint failed to allege a concrete injury, he lacked standing under Article III of the U.S. Constitution to bring an action against a retailer for a violation of the Fair and Accurate Credit Transactions Act (FACTA). The plaintiff alleged that the retailer violated the FACTA provision that limits the digits of a credit card number that can be printed on a receipt to no more than the last five. He claimed that the receipts he received from the retailer included the first six digits of his credit card number.
The decision in Kamal v. J. Crew Group, Inc. is the first in which the Third Circuit has found a lack of standing under the framework established by the U.S. Supreme Court in Spokeo, Inc. v. Robbins. Four times previously, the Third Circuit applied Spokeo and found the plaintiff had established standing based on an alleged technical statutory violation.
The decision is welcomed by the consumer finance industry, but is by no means a cure-all—plaintiffs like the one in J. Crew Group may be able to sue in state court, where Spokeo doesn’t bind standing determinations.
The Spokeo framework, as explained by the Third Circuit, allows a court to find a concrete injury based on a technical violation "if the violation actually harms or presents a material risk of harm to the underlying concrete interest" identified by Congress. A technical statutory violation can constitute concrete injury under Spokeo where the violation has a "close relationship" to a harm that traditionally has been regarded as providing a basis for an action under common law.
Kamal, the named plaintiff in J. Crew Group, pleaded two alleged concrete injuries: the failure to truncate sufficient digits in violation of FACTA's plain text, and the resulting increased risk of identity theft. The Third Circuit rejected Kamal's contention that his injury resulting from the FACTA violation was analogous to common law privacy torts and an action for breach of confidence. According to the Third Circuit, the harm underlying both such actions occurs when a third party gains unauthorized access to a plaintiff's personal information. It concluded that Kamal's injury did not have the requisite "close relationship" with such actions because he pled only that he received FACTA non-compliant receipts but did not allege disclosure of his credit card information to a third party.
The Third Circuit then turned to whether the alleged FACTA violation presented a "material risk of harm," having previously noted that it had “not yet had occasion to review standing where a procedural violation allegedly presents a 'material risk of harm,' because, in past cases, the underlying harm had already materialized or failed to materialize." (In its opinion, the Third Circuit reviews its four prior decisions in which, applying Spokeo, it found the plaintiff had established standing based on an alleged technical statutory violation.)
The Third Circuit found Kamal's "conclusory allegations" that the FACTA violation created a real risk of identity theft to be insufficient because he did not "plausibly aver how printing of the six digits presents a material risk of concrete, particularized harm." More specifically, he did not allege "third-party access of his information, nor that the receipt included enough information to likely enable identity theft." The Third Circuit, agreeing with the district court, found that Kamal's description of a potential scenario in which a receipt that he had lost or thrown away was discovered by a third party who then obtained the remaining digits along with additional information needed to use the card, such as the expiration date, was too speculative to constitute a material risk of harm. (The Third Circuit noted that its analysis would be different if Kamal had alleged that the receipts included his full credit card number.)
The district court had dismissed Kamal's second amended complaint with prejudice. While affirming the district court's judgment that Kamal lacked standing, the Third Circuit vacated the district court’s order dismissing the case with prejudice and remanded to the district court to dismiss without prejudice. According to the Third Circuit, the district court's lack of jurisdiction required the case to be dismissed without prejudice.
The Third Circuit's application of Spokeo to find a lack of standing is clearly a result welcomed by industry and defense attorneys. At the same time, as we have previously observed, Spokeo standing arguments may not be a silver bullet for defeating class claims where the plaintiff's injury was caused by a "bare procedural violation," such as those under FACTA, the Telephone Consumer Protection Act, or the Fair Credit Reporting Act. A dismissal without prejudice creates the potential for such class claims to be refiled in state court, where judges are not bound by Spokeo in making standing determinations.
Attorneys in Ballard Spahr's Consumer Financial Services Group regularly advise clients on compliance with the FDCPA and state debt collection laws and defend clients in FDCPA lawsuits and enforcement matters. The Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance.
The Department of Housing and Urban Development (HUD) has issued a "Charge of Discrimination" against Facebook that charges the company "with engaging in discriminatory housing practices in violation of the [provisions of the Fair Housing Act that prohibit discrimination based on race, color, religion, sex, familial status, national origin or disability.]" HUD's Charge (which initiates an administrative enforcement proceeding) alleges that Facebook designed its advertising platform in a way that shows advertisements for housing and housing-related services "to large audiences that are severely biased based on characteristics protected by the [FHA]." In addition to injunctive relief, HUD seeks damages for "any aggrieved persons" and civil money penalties.
The Charge's factual allegations detail a two-phase process used by Facebook to target advertisements to its users. The first phase allows advertisers to select the attributes that users who will see their advertisements must have or may not have. Facebook also offers a "Lookalike Audiences" option under which an advertiser can designate individuals who represent the advertiser's "best existing customers" and have Facebook identify users who share common qualities with those individuals and thereby become the eligible audience to receive an advertisement. HUD alleges that to generate this audience, Facebook considers "sex and other close proxies for the other protected classes." Examples of such proxies according to HUD include "which pages a user visits, which apps a user has, where a user goes during the day, and the purchases a user makes on and offline."
The second phase involves Facebook's selection of the users who will actually receive an advertisement from the pool of eligible users that was created based on the advertiser's selections in phase one. HUD alleges that "even if an advertiser tries to target an audience that broadly spans protected class groups, [Facebook's] ad delivery system will not show the ad to a diverse audience if the system considers users with particular characteristics most likely to engage with the ad." HUD alleges that in creating a "Lookalike Audience" in phase two that will actually receive an advertisement, Facebook uses a process that "inevitably recreates groupings defined by their protected class." According to HUD, "by grouping users who 'like' similar pages (unrelated to housing) and presuming a shared interest or disinterest in housing-related advertisements, [Facebook's] mechanisms function just like an advertiser who intentionally targets or excludes users based on their protected class."
While HUD's Charge does not explicitly allege that Facebook knew or had reason to know that the design of its advertising platform resulted in unlawful discrimination (i.e., that Facebook engaged in intentional discrimination), the Charge does not suggest that HUD is attempting to rely on a disparate impact theory for its FHA claims. Rather, it appears HUD has framed the action as one involving disparate treatment.
HUD's action follows recent reports that, to settle a lawsuit filed by several consumer advocacy groups challenging Facebook’s advertising practice, Facebook has agreed to remove age, gender, and zip code targeting for housing, employment, and credit-related advertisements. In light of that agreement, HUD's motivation for filing the action is unclear. It is possible HUD wants to send a message to others by imposing a large penalty or is seeking more extensive changes by Facebook than those it has already agreed to make.
Should HUD's action result in a settlement, we hope it will offer some guidance to industry, particularly with regard to the use of proxies.
According to a Wall Street Journal report, Facebook has agreed to remove age, gender, and zip code targeting for housing, employment, and credit-related advertisements as part of a settlement of a lawsuit filed by the National Fair Housing Alliance, the Communications Workers of America, and other plaintiffs.
While Facebook reportedly did not permit advertisers to target specifically by race, it did allow advertisers to use "ethnic affinity" criteria. Facebook is reported to also be placing other restrictions on advertisers. For example, geographic targets will need to have a minimum 15-mile radius from any specific address or city center and the "Lookalike Audience" tool, which lets advertisers try to find Facebook users who resemble customers they already know, will not incorporate factors such as age, religious views, or Facebook Group membership.
While it is highly debatable whether the Equal Credit Opportunity Act or other fair lending laws apply to social media advertising of this nature, regulators take the position that they do, and they sometimes explore these issues in examinations. It therefore is critically important for companies to be mindful of fair lending risk when formulating their social media and other advertising plans.
Like his FY 2018 and FY 2019 budgets, President Trump's FY 2020 budget would make the CFPB subject to the regular Congressional appropriations process.
Pursuant to Section 1017 of the Dodd-Frank Act, subject to the Act's funding cap, the Fed is required to transfer to the CFPB on a quarterly basis "the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)"
The FY 2020 budget contains a line item for "Restructure the Consumer Financial Protection Bureau" that shows a $23 million reduction in funding in FY 2020. A document accompanying the budget titled "2020 Major Savings and Reforms" states that the proposed budget would "cap transfers by the Federal Reserve Board to the CFPB during 2020 to $485 million, equivalent to the 2015 level." This would be followed by a $508 million funding reduction in FY 2021 and increasing funding reductions each year up to a $607 million reduction in FY 2029. (The reductions are based on the estimated funding that would be available to the CFPB from the Fed under current law.) Over the 10-year period, total funding reductions are projected to be about $5 billion, which is less than the approximately $6.5 billion in 10-year reductions estimated in the FY 2019 budget.
The accompanying document describes the "restructure" to which the FY 2020 budget is referring is as "limit[ing] its mandatory funding in 2020, and provid[ing] discretionary appropriations beginning in 2021." Of course, legislative action would be required to implement the President’s proposed "restructuring." During former Director Cordray's tenure, numerous bills were introduced by Republican lawmakers that sought to make the CFPB subject to the regular appropriations process. At Director Kraninger's recent appearance before the House Financial Services Committee, several Republican Senators were critical of the CFPB's insulation from the appropriations process.
The appropriations bill signed into law by President Trump in February that ended the partial government shutdown includes a provision dealing with CFPB funding requests. It provides that during FY 2109, when the CFPB Director requests a funds transfer from the Fed, the CFPB "shall notify the Committees on Appropriations of the House of Representatives and the Senate, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate of such request." Such notification must also be posted on the CFPB's website.
The CFPB and New York Attorney General (NYAG) have filed their opening briefs in their appeals to the U.S. Court of Appeals for the Second Circuit in RD Legal Funding. The CFPB filed an appeal from Judge Preska's June 21, 2018, decision, as amended by her September 12 order, in which she ruled that the CFPB's single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case. The NYAG filed an appeal from Judge Preska's dismissal on September 12, 2018, of all of the NYAG's federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG's claims under Dodd-Frank Section 1042 were dismissed "with prejudice." (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)
Both the CFPB and NYAG argue that the CFPB's structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank Act's for-cause removal provision that limits the President's authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.
The NYAG makes the following two additional arguments:
- Even if the Second Circuit concludes that the for-cause removal provision cannot be severed from Title X, it should not invalidate Dodd-Frank Sections 1041 or 1042. As noted above, Section 1042 authorizes state AGs to enforce the CFPA's UDAAP prohibition. Section 1041 preserves state consumer protection laws to the extent they are not inconsistent with the provisions of Title X. The NYAG argues that these provisions are "wholly unrelated" to the for-cause removal provision.
- Even if the Second Circuit concludes that the CFPB's structure is unconstitutional and strikes Title X in its entirety, the Second Circuit must nevertheless reverse the district court’s dismissal of the NYAG's state law claims for lack of subject matter jurisdiction. According to the NYAG, the district court has jurisdiction because such claims involve an embedded federal issue, namely whether the federal Anti-Assignment Act (AAA) voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract. (RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the September 11th Victim Compensation Fund of 2001 (VCF). The district court concluded that the assignments of VCF benefits were void under the AAA.)
The CFPB's defense of its constitutionality is at odds with the position of the Department of Justice. In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), the Department of Justice argued that while it agreed with the bank that the CFPB's structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue. If the CFPB's structure is found to be unconstitutional, and severing the for-cause removal provision is determined to be the appropriate remedy, a Democratic president might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.
The Bureau's constitutionality is also currently before two other circuits, the U.S. Courts of Appeal for the Ninth and Fifth Circuits. On January 9, 2019, the Ninth Circuit heard oral argument in Seila Law. On March 12, 2019, the Fifth Circuit heard oral argument in All American Check Cashing's interlocutory appeal.
The CFPB has issued its eighth annual Fair Debt Collection Practices Act report covering the CFPB's and FTC's activities in 2018.
While the new report incorporates information from the FTC's annual letter to the CFPB describing its FDCPA activities during the year covered by the report, the report continues the practice begun with last year's report (issued under former Acting Director Mulvaney's leadership) of not including the text of the FTC's letter as an appendix. (Annual FDCPA reports issued under former Director Cordray's leadership included the FTC's letter as an appendix.) In addition, like last year but unlike prior years, the FTC did not issue a press release about its annual letter concurrently with the issuance of the letter. Instead, the FTC’s letter on its 2018 FDCPA activities (which is dated February 19, 2019) is linked to a later press release issued by the FTC about the CFPB's report.
With regard to the CFPB's debt collection rulemaking, Director Kraninger states in her opening message that "[t]he Bureau will issue a Notice of Proposed Rulemaking related to debt collection in spring 2019. The Notice of Proposed Rulemaking will address such issues as communication practices and consumer disclosures." We continue to expect the CFPB's NPRM to only cover third-party debt collectors and not cover first-party collections.
Other information set forth in the report includes the following:
- According to the report's section on complaints, the CFPB handled approximately 81,500 debt collection complaints in 2018 (which was 3,000 less than in 2017 and 6,500 less than in 2016). As in 2017, the most common complaint was about attempts to collect a debt that the consumer claimed was not owed (but with more such complaints involving identity theft than in 2017). Also as in 2017, the second and third most common complaint issues were, respectively, written notifications about the debt and communication tactics.
- In the report's section on the CFPB's supervision of debt collection activities engaged in by banks and nonbanks subject to CFPB supervision, the CFPB described only one type of FDCPA violation found by its examiners, a violation of the FDCPA requirement for a debt collector, upon receipt of a consumer's written debt validation request, to cease collection until it obtains verification of the debt. CFPB examiners found that one or more debt collectors routinely failed to mail verifications before engaging in further collection efforts. Instead, the collectors forwarded the validation requests to their relevant clients, who mailed responses directly to consumers. The collectors accepted their clients' determinations (as reflected by a code entered by the client into a shared record system) that the debt was owed by the relevant consumer for the amount claimed without taking any steps to verify the debt and without mailing the required verification to consumers. The collectors then continued collection activities in violation of the FDCPA. (These examination findings appear to be taken from the Bureau's Summer 2018 Supervisory Highlights.)
- In 2018, the CFPB brought one new FDCPA action that resulted in the payment of a total of $800,000 in civil money penalties. The report lists five other pre-2018 FDCPA enforcement actions. One of those actions is the Weltman case, where a law firm defeated the lawsuit filed against it by the CFPB that alleged the law firm's debt collection letters violated the FDCPA and CFPA. The four other cases remain pending.
In 2018, the FTC brought or resolved seven debt collection cases, obtained more than $58.9 million in judgments, and permanently banned 32 companies or individuals from working in the debt collection industry. In addition to the FTC's enforcement actions involving "phantom debt collection," the report describes three other FTC debt collection cases that were initiated or resolved in 2018. One of these cases involved a debt collection business that alleged falsely threatened to have people arrested if their debts were not paid. The two other cases were brought jointly with the New York Attorney General, with one case involving the alleged use of false threats and abusive language by the defendants and the other involving alleged demands by the defendants for more money than consumers allegedly owed.
The CFPB announced the release of the 2019 version of A Guide to HMDA Reporting: Getting it Right. The Guide addresses the collection of data under the Home Mortgage Disclosure Act (HMDA) during 2019 that must be reported in 2020.
The Guide incorporates the amendments to HMDA made by the Economic Growth, Regulatory Relief, and Consumer Protection Act (also known as S.2155). We previously reported on the partial exemption from HMDA reporting for lower-volume depository institutions made by the Growth Act, and a related CFPB interpretive rule.
Appendices to the Guide include charts addressing HMDA coverage, reporting categories and other items.
The CFPB recently released modified Home Mortgage Disclosure Act (HMDA) loan application registers of approximately 5,400 financial institutions for calendar year 2018.
Calendar year 2018 is the first year that the mortgage industry collected HMDA data under the modified, and significantly expanded, data reporting requirements under the revised HMDA rule adopted in October 2015 by the CFPB. As we previously reported, the CFPB modifies loan application registers by removing or altering certain data points to protect the privacy of consumers. Unfortunately, the CFPB's approach to modifying the loan application registers emphasizes public disclosure over consumer privacy concerns. The CFPB plans to engage in rulemaking to address the October 2015 amendments to the HMDA rule, as well as the CFPB's approach to the public release of HMDA data. This will provide interested parties with another opportunity to voice consumer privacy concerns.
In announcing the release of the HMDA data, the CFPB also advised that later this year additional information will be published related to HMDA, including a complete loan level dataset, HMDA aggregate data reports and HMDA individual institution disclosure reports.
The CFPB has announced a number of changes to its advisory committee charters, publishing notices in the Federal Register on March 22 pertaining to each advisory committee: the Consumer Advisory Board (CAB), Community Bank Advisory Council (CBAC), Credit Union Advisory Council (CUAC), and Academic Research Council (ARC).
The Bureau describes these changes as "enhancements" resulting from Director Kraninger's "engagement with current and former advisory committee members during her three-month listening tour." In the Bureau's press release, Director Kraninger was quoted as saying, "I've seen firsthand how the Bureau benefits from the valuable input provided by committee members. I have also seen how the joint committee meeting is resulting in members sharpening their ideas by engaging in a thorough dialogue." Such comments would seem to signal a revitalized role for the Bureau’s advisory committees. This announcement is especially notable given the steps that the Bureau had taken last year under former Acting Director Mulvaney to reconstitute the committees, a move that was met with much criticism from consumer advocates and former committee members.
The newly announced changes, which become effective in Fiscal Year 2020, are as follows:
- The various advisory committees will "expand their focus to broad policy matters"
- The frequency of in-person meetings will increase from two times a year to three times a year;
- CAB, CBAC, and CUAC will continue their joint public meetings;
- ARC, which is being elevated to a Director-level advisory committee, will meet separately, in-person, two times per year;
- Membership terms for all committees will be extended from one-year terms to staggered two-year terms;
- The one-year terms of all existing members expires in September 2019, but due to the introduction of staggered terms, one-year term extensions will be provided to half of current members; and
- Each committee will be assigned a Vice-Chair (in addition to the Chair), and both the Chair and the Vice-Chair will serve a one-year term in their respective positions, with the Vice-Chair assuming the Chair the following year.
In addition to these changes, the Bureau announced that it would begin accepting new applications for committee membership. A notice appeared in the Federal Register on March 22. Specifically, the Bureau is looking for:
- Experts in consumer protection, community development, consumer finance, fair lending, and civil rights;
- Experts in consumer financial products or services, including consumer reporting, debt collections, and debt relief;
- Representatives of banks and credit unions that primarily serve underserved communities
- Representatives of communities that have been significantly impacted by higher priced mortgage loans;
- Current employees of credit unions and community banks; and
- Academics (experienced economists with a strong research and publishing or practitioner background, and a record of involvement in research and public policy, including public or academic service).
We are pleased to announce that Kim Phan, an attorney noted for her work on privacy and data security issues for a variety of industries, including consumer financial services, retail, and higher education, has returned to Ballard Spahr as a partner after a short absence. She will be based in the firm's Washington, D.C., office.
A frequent contributor to Consumer Finance Monitor during the more than four years she previously spent at Ballard as of counsel, Kim will play an integral role in the firm's plan to bolster its privacy and data security practice. She will also employ her familiarity with e-commerce/mobile payments, data analytics, and other Fintech areas in our Consumer Financial Services Group.
To learn more about Kim, click here to read the firm's press release.
Did You Know?
Temporary Authority Update
- Both Virginia and Utah have enacted legislation to permit temporary authority to operate as a mortgage loan originator in their respective states pursuant to the SAFE Act.
- Separately, the VA amendments provide for expiration of pre-licensure education consistent with "rules as may be established by the Registry" [NMLS], and prohibit expired courses from counting towards pre-licensure education requirements. (A March 1, 2019, guide to state-specific education requirements is available on the NMLS resource center.
Amendments to the Montana Mortgage Act
Effective October 1, 2019, the Montana Mortgage Act is amended to include the following:
- Subject to certain exceptions:
- For approved servicers by a government sponsored enterprise (GSE), a requirement that it meet the highest standard for which it is approved for liquidity, operating reserves, and tangible net worth.
- For mortgage servicers with portfolios of only non-GSE loans, a requirement to maintain a minimum tangible net worth ($1 million net worth or a $1 million surety bond).
- For mortgage services with portfolio of non--GSE loans, a requirement to maintain liquidity, including operating reserves, of 0.00035 times the unpaid principal balance of the portfolio.
- For approved servicers by a government sponsored enterprise (GSE), a requirement that it meet the highest standard for which it is approved for liquidity, operating reserves, and tangible net worth.
- A $250,000 minimum net worth requirement for mortgage lenders.
- Authority to investigate and examine "service providers," to provide information about service providers to a licensee, and to obtain penalties or restitution from service providers. "Service providers" are persons who perform activities relating to the business of mortgage origination, lending, or servicing on behalf of a licensee. These activities include: providing data processing services; activities in the support of residential mortgage origination, lending, or servicing, and internet-related services (web services, processing electronic borrower payments, developing and maintaining mobile applications, system and software development and maintenance, and security monitoring). "Activities relating to the business of mortgage origination, lending, or servicing" do not include providing an interactive computer service or a general audience internet or communications platform, except to the extent that the service or platform is specially designed or adapted for the business of mortgage origination, lending, or servicing.
- For mortgage brokers or lenders, the ability for a designated manager to be responsible for more than one location.
- Revised surety bond requirements for mortgage servicers, calculated on the mortgage servicer's total unpaid balance of residential mortgage loans as of December 31, ranging from $75,000 to $350,000, depending on the amount of the unpaid principal balance of residential mortgage loans.
- Requiring mortgage brokers, mortgage lenders, mortgage servicers, and mortgage loan originators to provide the 15-day notice of an investigation or the entry of a judgment in a criminal or civil action via the NMLS (versus via certified mail).
- Requiring mortgage servicers to update the current schedule of costs and fees as often as such schedule is amended.
- Removes an affirmative obligation on mortgage servicers, at the time it accepts assignment of servicing rights for a mortgage loan, to disclose to the borrower a schedule of costs and fees.
- Permitting the Department to comply with service of process by methods by common courier with tracking capability.
- Expressly authorizing the Department to adopt regulations regarding: mortgage servicer capital requirements, supervisory requirements for designated managers, false, deceptive, and misleading advertising, and internet and electronic advertising.
Copyright © 2019 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.