Mortgage Banking Update - November 5, 2020
In This Issue:
- FHFA Further Extends Purchases of Loans in a COVID-19 Forbearance by Fannie Mae and Freddie Mac
- HUD Extends Date to Approve COVID-19 Forbearance and HECM Extension
- CFPB Issues Final Debt Collection Rule; Ballard Spahr to Hold Nov. 13 Webinar
- The CFPB’s Final Collections Rule: Initial Impressions
- The CFPB’s Final Debt Collection Rule: Impacts on Creditors
- Massachusetts Federal Court Stays Effective Date and Enjoins Enforcement of HUD Final Rule Revising FHA Disparate Impact Standards; 2 Other Lawsuits Filed Challenging Rule
- Third Circuit Rules FTC Cannot Obtain Disgorgement Under FTC Act Section 13(b)
- Podcast: A Close Look at the OCC’s “True Lender” Proposal
- CFPB Issues Section 1033 ANPR
- CFPB Files Amicus Brief in Third Circuit FDCPA Case in Support of Debt Collector
- California Expands Translation Requirement for Consumer Contracts
- Massachusetts Attorney General Moves to Dismiss Lawsuit Challenging Its Emergency Debt Collection Regulations
- Podcast: What a Blue Wave Could Mean for the Consumer Financial Services Industry
- OCC Issues Final “True Lender” Rule
- CFPB Announces Significant Reorganization Prioritizing Supervision Over Enforcement
- Did You Know?
- Looking Ahead
On October 21, 2020, the Federal Housing Finance Agency (FHFA) announced the extension of the purchase of loans in a COVID-19 forbearance by Fannie Mae and Freddie Mac through November 30, 2020.
The previously announced extension was through October 31, 2020.
In Mortgagee Letter 2020-34, dated October 20, 2020, the U.S. Department of Housing and Urban Development (HUD) extended the date for approving an initial COVID-19 forbearance with an FHA loan, or a COVID-19 extension with a home equity conversation mortgage (HECM) loan (i.e., a reverse mortgage loan), from October 30, 2020 to December 31, 2020.
The means of communication with borrowers regarding a COVID-19 forbearance, the terms of a COVID-19 forbearance, and the terms of a HECM extension remain the same as established in Mortgagee Letter 2020-06.
The CFPB issued its long-awaited final debt collection rule today. The final rule is adopted pursuant to the Bureau’s authority under the Fair Debt Collection Practices Act and not its UDAAP authority under the Dodd-Frank Act. Accordingly, the final rule only applies to the activities of debt collectors subject to the FDCPA and does not apply to the activities of creditors who are not FDCPA debt collectors. The final rule is effective one year after its publication in the Federal Register.
The final rule and commentary, together with the supplementary information, runs 653 pages. Once we have read the issuance, we will share our thoughts on the rulemaking in subsequent blog posts.
On November 13, 2020, from 12 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar, “The CFPB’s Final Collection Rules– What’s In, What’s Out, and Where To Go From Here?” For more information and to register, click here.
The final rule issued today does not represent the completion of the Bureau’s debt collection rulemaking. In February 2020, the Bureau supplemented its proposed debt collection rule with a proposal that would require debt collectors to make specified disclosures when collecting time-barred debts. In its summary of the final rule issued today, the Bureau indicates that it intends to publish a second “disclosure-focused final rule” in December 2020 that will address time-barred debt, the initial information a collector must provide to consumers, and requirements prior to furnishing consumer reporting information and will include a model validation notice.
- Stefanie Jackman & Christopher J. Willis
On October 30, the CFPB released “part one” of its long-awaited final collections rule, which restated and clarified certain prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors under the Fair Debt Collection Practices Act (“FDCPA”). The release marks one of the most significant developments in the debt collection industry since the FDCPA was enacted in 1977.
The final rule and accompanying commentary released by the CFPB is 653 pages, and there is much to analyze and digest. Several sections – most notably, the process for obtaining consent to use email and text messaging – are significantly revised from the Bureau’s NPRM. The final rule will become effective one year from the date of publication in the Federal Register. The CFPB announced that it would release “part two” of the rulemaking in December 2020, which will contain final rules on certain consumer disclosures (i.e., the validation notice and time-barred debts), as well as debt collector furnishing of consumer repayment information to consumer reporting agencies.
The final rule focuses on clarifying how debt collectors can permissibly engage in various types of debt collection communications and seeks to provide consumers with more control over how often and through what means debt collectors can contact them regarding their debts.
For instance, the final rule establishes a rebuttable presumption that seven or fewer calls within a seven-day period does not constitute harassment. It further provides that the seven-day call cap on communications will continue to be measured on a per-account, rather than a per-consumer, basis (with the exception of student loans serviced under a single account number). However, the Official Commentary also outlines a series of factors that a consumer could use to rebut this presumption when a debt collector did not exceed the call frequency limit. It also outlines a series of factors that a debt collector can use to rebut the presumption that it engaged in harassment if the collector ends up exceeding the cap. Also, although the rule does not impose numerical limits on email and text messages, the CFPB has added a statement to the Official Commentary indicating that communications using these methods can violate the FDCPA, either by themselves or in combination with communications through other channels.
The final rule retains a safe harbor procedure for the use of limited content messages, but that protection now only covers voicemails, and no longer includes emails, text, or live calls with third-parties as previously proposed in the NPRM. The final rule clarifies how FDCPA protections apply to newer communication technologies, such as email and text messages. This includes an entirely revamped process for transferring creditor consent to email but no express mechanism for transferring creditor consent to text. All communications – including email and text messages – remain subject to the final rule’s time of day (8 a.m. to 9 p.m. in the consumer’s time zone, plus any other times designated by the consumer) and inconvenient place restrictions. The final rule further requires that all email and text communications include a clear and simple opt-out method for the consumer to use to stop those communications if the consumer wishes to do so.
The requirement to obtain E-SIGN consent to send legally required notices to consumers via email remains in the final rule and the NPRM’s prior, alternative approach to “confirming” any E-SIGN consent given to the creditor has been removed in its entirety. However, the final rule does appear to permit sending a debt validation notice via email absent E-SIGN consent (although the CFPB omitted its proposed safe harbor allowing this) so long as the email constitutes the debt collector’s initial communication with the consumer.
The final rule also provides some assurance to creditors and other first-party collectors that they are not subject to the final rule. In addition to expressly stating that the final rule does not apply to those parties, the CFPB removed the Dodd-Frank UDAAP provision as one of the bases for the rulemaking. The Bureau also included a comment in the preamble to the final rule stating that its rulemaking process did not consider whether and how any of the final rule’s provisions should be applied to creditors and other first-party collectors, and specifically commented that its call frequency presumptions were not intended to apply to creditors.
Elsewhere, however, the final rule explicitly leaves open the question of whether activities that would violate the final rule, when undertaken by entities not subject to the FDCPA, may violate UDAAP. The Bureau also declined to clarify whether any particular actions taken by a creditor or first-party debt collector would constitute an unfair, deceptive, or abusive practice under Dodd-Frank Act § 1031. There are also state debt collection laws that may impliedly incorporate the final rule’s provisions as to creditors, and others (like California’s Rosenthal Act) that may do so explicitly. Thus, it remains unclear whether creditors must (or should) adhere to the final rule as a matter of UDAAP or state law compliance.
There are a number of additional, miscellaneous items of note. First, the final rule contains provisions that deal specifically with how the final rule interacts with the CFPB’s mortgage servicing requirements.
Second, although the CFPB declined to finalize the proposed safe harbor for meaningful attorney involvement, it reiterated that it believes the doctrine is alive and well under the FDCPA, and predicted further litigation against debt collection law firms under this theory.
With regard to debt sales and placements, the CFPB removed the prohibition against selling debts subject to identity theft claims because it believes that the FCRA already prohibits such activity, and amended the prohibition involving bankrupt accounts to permit the sale or placement of such accounts when secured by an enforceable lien.
Finally, the CFPB added a new requirement that if a debt collection communication occurs in more than one language, the mini-Miranda disclosure must be provided in all of those languages, which may be operationally cumbersome to implement.
Over the next two weeks, our team will publish a series of blog posts breaking down various portions of the final rule, and will host a deep-dive webinar into the final rule on November 13th from noon to 1 p.m. ET. Click here for more information and to register.
Below is the list of topics that we plan to discuss in further detail moving forward:
- Potential creditor impacts;
- Final contact frequency limits and limited content messages;
- Using text and email in collections;
- Applicable time/place restrictions for all communications;
- E-SIGN requirements for legally-required notices;
- Mortgage servicing impacts;
- Credit reporting impacts;
- Debt sale restrictions and legal collections; and
- Potential impacts of the election on future rulemaking, potential CRA efforts, enforcement of the final rule, and future CFPB leadership.
We hope that this series of blog posts will be useful to you and your colleagues as you review and analyze how the final rule impacts your operations and of course, we hope you will join us on November 13th. Make Ballard Spahr your one-stop source for information about the final rule!
- Stefanie Jackman & Christopher J. Willis
Part 1 of the CFPB’s final debt collection rule, which was released October 30, applies only to “debt collectors” as defined by the FDCPA, as was the case with the proposed rule released in May 2019. Creditors were justifiably concerned about the impacts of the proposed rule on them, but how do they fare under the final rule?
First, let’s discuss creditors’ fears that the rule would be applied to them by the CFPB through the Bureau’s UDAAP authority. The CFPB has done a couple of things to reassure creditors in this regard. While the proposed rule relied on the Bureau’s UDAAP authority for certain provisions, the final rule does not – it is predicated solely on the FDCPA. The Bureau also noted that it “declines to expand the rule to apply to first-party debt collectors who are not FDCPA debt collectors,” and noted that “the Bureau did not solicit feedback on whether or how such provisions should apply to first-party debt collectors.” In addition, in discussing the call frequency restrictions in the final rule, the Bureau drew a distinction between creditors and FDCPA debt collectors:
The Bureau understands commenters’ concerns that conduct the Bureau deemed to be prohibited by the FDCPA and Dodd-Frank when undertaken by FDCPA debt collectors could be construed also to be prohibited when undertaken by other entities collecting debts, even if they are not FDCPA debt collectors. In response to commenters’ concerns, the Bureau notes … that the FDCPA recognizes the special sensitivity of communications by FDCPA debt collectors relative to communications by creditors, and, therefore, the FDCPA provides protections for consumers receiving such communications from debt collectors but not creditors.
But the Bureau stopped well short of promising that it would never apply any aspect of the final rules to creditors, and indeed noted explicitly that it “declines to clarify whether any particular actions taken by a first-party debt collector who is not an FDCPA debt collector would constitute an unfair, deceptive or abusive practice under Dodd-Frank section 1031.” Elsewhere, the Bureau states that where it has identified conduct that violates the FDCPA, the Bureau does not take a position on whether such practices also would constitute an unfair, deceptive or abusive act or practice under section 1031 of the Dodd-Frank Act.”
What’s more, the CFPB did not comment on (and really could not comment on) what states may choose to do in terms of incorporating elements of the final rule into state laws that apply to creditors. So where does this leave creditors? Probably somewhat, but not completely, reassured. And still asking the question of what portions of the final rule, if any, they should adopt as a best practice to avoid UDAAP violations.
In addition to the prospect of some portions of the final rule being applied to their internal collection operations, the final rule also has important implications for how creditors interact with debt collection agencies. In particular, the rule provides a safe harbor method for allowing debt collectors to communicate with consumers via e-mail, but a creditor must send a notice to the consumers involved and give them a 35-day opt-out right before providing the email address to the debt collector. And in addition, the email addresses are only transferable (in terms of consent) to the debt collector if they are on a domain that is available to the general public. This means creditors may be required, by practical necessity, to run these notice-and-opt-out campaigns, and to scrub email addresses to identify domains that are generally available to the public, as opposed to others. Both of these will be new processes that creditors do not currently undertake.
Creditors and debt collectors together will also have to make decisions about whether to conduct activities that appear to be permitted by the final rule, but as to which there is no guidance or safe harbor. For example, the rule leaves open the possibility of the creditor transferring consent to text messaging from a creditor to debt collector, but does not provide a safe harbor mechanism for doing so. Likewise, the rule is silent about whether E-SIGN consent given to a creditor could be transferred to a debt collector. The CFPB noted in numerous places in the rulemaking release that debt collectors have the option of operating outside of the safe harbors in the final rule – e.g., “[a]lthough the Bureau is not finalizing notice-and-opt-out or prior-use safe harbor procedures for text messages, the Bureau notes that the final rule does not prohibit debt collectors from communicating with consumers by text message outside of the safe harbor.” It will be interesting to see if creditors and debt collectors are willing to take the risk of experimentation outside these safe harbors.
As we noted in our blog post, the CFPB is planning to release part 2 of the final rule in December, and this part will contain the new provisions relating to validation notices. The proposed rule would impose several obligations on creditors related to validation notices, such as providing itemizations of credits and charges after the “itemization date.” Stay tuned for our coverage of part 2 when it is released later this year.
Finally, of course, creditors will need to incorporate the elements of the final rule into their oversight of debt collectors, including ensuring that e-mails and text messages are sent only at convenient times; monitoring to see if mini-Miranda warnings are given in every language in which a debt collection communication occurs; monitoring call frequency under the presumptive limits in the final rule; and monitoring for the potential for harassment from aggregated contact attempts across all communication channels.
So, although the final rule applies unambiguously only to FDCPA debt collectors, there are significant implications for creditors, both in terms of their internal collection operations and with respect to their relationships with debt collectors. The one-year compliance period for the final rule should be a period of intense effort by creditors to be prepared to handle these impacts.
- Christopher J. Willis & Stefanie Jackman
On October 25, a Massachusetts federal district court entered a preliminary injunction staying and postponing the effective date of the final rule issued by HUD last month (“2020 Rule”) revising its 2013 Fair Housing Act disparate impact standards (“2013 Rule”). The order also enjoins HUD from enforcing the 2020 Rule and keeps the 2013 Rule in place until further order of the court. The 2020 Rule would have become effective on October 26.
The court’s order stays and postpones the 2020 Rule’s effective date pending entry of final judgment on the Administrative Procedure Act (APA) claims of the Massachusetts Fair Housing Center and Housing Works, Inc. in their lawsuit filed against HUD on September 28. The Massachusetts lawsuit is one of three lawsuits challenging the 2020 Rule under the APA.
In Inclusive Communities, the U. S. Supreme Court ruled that disparate impact claims are cognizable under the FHA. Such claims allege that a policy or practice that is neutral on its face nevertheless violates the FHA because it has a discriminatory effect on a prohibited basis. The FHA prohibits discrimination based on characteristics such as race, sex, disability, and familial status. Discrimination claims can be brought under the FHA against lenders, landlords, and others involved in real estate transactions
In their complaint, the Massachusetts plaintiffs contend that contrary to HUD’s assertion that the 2020 Rule “merely brings the 2013 Rule into alignment with the Supreme Court’s decision in Inclusive Communities,” the 2020 Rule “is directly contrary to Inclusive Communities; introduces novel pleading and proof requirements, and new defenses, which upset accepted practice and undermine enforcement of the FHA.” More specifically, the plaintiffs allege:
- Under the 2020 Rule, to state a claim that “a specific, identifiable policy or practice” has a discriminatory effect on a protected class, a plaintiff must sufficiently plead facts to support five elements. It then permits a defendant, at the pleadings stage, to establish that the plaintiff has failed to sufficiently plead facts to support any of the required elements. This, in effect, “requires a plaintiff, without the benefit of discovery, not only to meet the overwhelming demands of the 2020 Rule’s new five-part pleadings requirements, but also to anticipate in their complaint every practical, profit-oriented, policy consideration or requirement of law a defendant might invoke in defense of its discriminatory policy or practice….None of the new elements that a plaintiff must allege under the 2020 Rule’s pleading provisions is required by or consistent with the FHA or Inclusive Communities.”
- The 2020 Rule “invents broad and unjustifiable new defenses” by allowing a defendant to rebut a plaintiff’s allegation that the challenged policy or practice is “arbitrary, artificial and unnecessary” by producing evidence showing that the challenged policy or practice “advances a valid interest.” In contrast, the 2013 Rule requires a defendant to show that the interest is “substantial, legitimate, [and] non-discriminatory.” In addition, even if a plaintiff survives a motion to dismiss at the pleadings stage, the 2020 Rule allows a defendant to “still escape liability by demonstrating that the discriminatory policy or practice is intended to predict an outcome, the prediction represents a valid interest, and the outcome predicted by the policy or practice does not or would not have a disparate impact on protected classes compared to similarly situated individuals not part of the protected class.”
- The 2020 Rule requires a plaintiff to prove “not only that a practice with less discriminatory effects exists, but also that the alternative practice serves the defendant’s identified interest ‘in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant.’” By “[r]equiring a victim to identify an alternative that is least costly or burdensome to defendants introduces a profit defense to justify discriminatory practices—a result completely at odds with the language and history of the FHA and civil rights law in general.” HUD has not offered adequate justification “to drastically rewrite the 2013 Rule and create these heightened burdens of proof, which are inconsistent with decades of HUD’s own policies, guidance and decisions,” and has failed to “meaningfully consider the adverse impact of the 2020 Rule on access to fair housing.”
Based on these allegations, the plaintiffs claim that the 2020 Rule violates the APA and should be vacated for the following reasons:
- The 2020 Rule “is contrary to law” because it is inconsistent with the FHA’s text and undermines its core purposes.
- The 2020 Rule is “arbitrary and capricious” for reasons that include HUD’s failure to provide a “reasoned justification for its decisions to abandon the 2013 Rule” or “take adequate account of the adverse impact of its 2020 Rule would have on the ability of aggrieved parties to prosecute valid housing and lending discrimination claims” and because HUD’s “purported reliance on Inclusive Communities as the basis for its radical departure from the 2013 Rule is a pretext.”
- The 2020 Rule was adopted without adequate notice and comment because HUD replaced the “algorithmic model” defense in its proposal of the 2020 Rule with a “new and entirely different,” “outcome prediction” defense in the 2020 Rule “without giving the public notice of, or any opportunity to comment on, the ‘outcome prediction’ defense that was first announced when the 2020 Rule was published.”
In granting the plaintiffs’ motion for a preliminary injunction and stay of the 2020 Rule’s effective date, the district court found that the plaintiffs had shown a substantial likelihood of success on the merits of their claim that that the 2020 Rule is arbitrary and capricious in violation of the APA. It pointed to language in the first of the five elements that a plaintiff must plead facts to support for the plaintiff to state a claim that “a specific, identifiable policy or practice” has a discriminatory effect on a protected class. That element requires a plaintiff to sufficiently plead facts to support “that the challenged policy is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.”
According to the court, the language “‘such as a practical business, profit, policy consideration’—is not, as far as the court is aware, found in any judicial decision.” The court stated further:
The same is true as to other important provisions in the 2020 Rule, including the new “outcome prediction” defense, the requirement at the third step of the burden-shifting framework that the plaintiff prove “a less discriminatory practice exists that would serve the defendant’s identified interest (or interests) in an equally effective manner without imposing materially greater costs on, or creating other material burdens for, the defendant”; and the conflating of a plaintiff’s prima facie burden and pleading burden….These significant alternations, which run the risk of effectively neutering disparate impact liability under the Fair Housing Act, appear inadequately justified. (emphasis included).
In addition to citing the need to bring disparate impact standards into alignment with Inclusive Communities, HUD also indicated that the changes were needed to provide greater clarity to the public. The court stated that HUD’s second explanation “appear[s] arbitrary and capricious” and agreed with the plaintiffs that “the 2020 Rule, with its new and undefined terminology, altered burden-shifting framework, and perplexing defenses accomplish the opposite of clarity.”
It is noteworthy, however, that although the court agreed that the plaintiffs had shown a substantial likelihood of success on the merits based on the provisions in the 2020 Rule referenced above, it rejected the plaintiffs’ argument that there was no judicial support for the 2020 Rule’s requirement that a plaintiff must plead facts showing “[t]hat the challenged policy or practice is arbitrary, artificial, and unnecessary to achieve a valid interest or legitimate objective such as a practical business, profit, policy consideration, or requirement of law.” The court observed that, as pointed out by HUD, the “arbitrary, artificial, and unnecessary” language comes directly from Inclusive Communities.
Finally, the court found that the plaintiffs had demonstrated a significant risk of irreparable harm if the injunction was not issued. According to the court, “the 2020 Rule’s massive changes pose a real and substantial threat of imminent harm to [the plaintiffs’] mission by raising the burdens, costs, and effectiveness of disparate impact liability. Moreover, because the APA does not provide for monetary damages, these harms are not recoverable if the 2020 Rule is allowed to go into effect but later vacated.”
The court also found that the balance of harms and public interest supported a preliminary injunction. It stated that HUD had not “identified any particularized risks of harm the government or the public would face should an injunction issue, especially given the existence of the 2013 Rule, which has been and continues to be workable, for both sides, in the realm of disparate impact litigation.” In addition, the court concluded that it was in the public interest “to require agencies to adequately justify significant changes to its regulations, particularly changes that weaken anti-discrimination provisions.”
The two other lawsuits challenging the 2020 Rule under the APA were filed on October 22 by housing groups in federal district courts in California and Connecticut. Like the Massachusetts lawsuit, these lawsuits call into question the premise that Inclusive Communities required the changes made by the 2020 Rule and allege that the 2020 Rule’s pleading and burden-shifting standard is arbitrary, capricious, and contrary to law. Unlike the other complaints, the Connecticut complaint also alleges that the provision in the 2020 Rule that curtailed HUD’s discretion to seek monetary penalties is arbitrary, capricious, and contrary to law.
- Christopher J. Willis, & Richard J. Andreano, Jr.
In FTC v. AbbVie Inc., the U.S. Court of Appeals for the Third Circuit ruled that Section 13(b) of the Federal Trade Commission Act, which expressly gives the FTC authority to obtain injunctive relief, does not allow a district court to order disgorgement. In July 2020, the U.S. Supreme Court agreed to decide whether Section 13(b) allows a district court to order restitution.
In a complaint filed in federal district court, the FTC charged that AbbVie illegally blocked American consumers’ access to lower-cost alternatives to a drug whose patent was held by AbbVie through the filing of baseless patent infringement lawsuits against potential generic competitors. In June 2018, the district court ruled that AbbVie used sham litigation to illegally maintain its monopoly and ordered $448 million in monetary relief to consumers who were overcharged for the drug as a result of AbbVie’s conduct. According to the FTC, the order represented the largest monetary award ever in a litigated FTC antitrust case.
In ruling that the district court erred in ordering disgorgement, the Third Circuit observed that while Section 13(b) authorizes district courts to enjoin antitrust violations, it does not explicitly empower district courts to order disgorgement. It also found support for its interpretation in other FTC Act provisions that address the FTC’s enforcement powers.
The Supreme Court agreed to decide the question of whether Section 13(b) authorizes the FTC to obtain restitution to resolve a circuit split. It granted petitions for certiorari in two cases that reached opposite conclusions. One case is AMG Capital Management, LLC v. FTC, in which the Ninth Circuit, agreeing with six other circuits, held that by authorizing injunctive relief, Section 13(b) also allows a district court to grant ancillary relief, including monetary relief such as restitution.
The other case is FTC v. Credit Bureau Center, LLC, in which the Seventh Circuit reversed its own precedent and created the circuit split by holding that the FTC cannot obtain restitution under Section 13(b) because its plain terms provide solely for injunctive relief.
In its decision, the Third Circuit refers to disgorgement as a form of restitution. It also cites the Seventh Circuit’s decision in Credit Bureau Center as support for its ruling. Curiously, the Third Circuit makes no reference to the Supreme Court’s grant of certiorari.
After reviewing the legal foundation for federal preemption of state law limits on interest, we discuss the OCC’s proposed approach for determining when a bank is the “true lender” in programs with non-bank agents, our arguments in support of the proposal made in our comment letter to the OCC, key arguments made in support of or against the proposal by other commenters, the OCC’s likely next steps, and the 2020 election’s potential impact.
Click here to listen to the podcast.
The CFPB has issued an Advance Notice of Proposed Rulemaking in connection with its rulemaking to implement Section 1033 of the Dodd-Frank Act. Section 1033 requires consumer financial services providers to give consumers access to certain financial information. Comments on the ANPR will be due no later than 90 days after the date the ANPR is published in the Federal Register.
Section 1033 requires that “[s]ubject to rules prescribed by the Bureau, a covered person shall make available to a consumer, upon request, information in the control or possession of such person concerning the consumer financial product or service that the consumer obtained from such covered person, including information related to any transaction, or series of transactions, to the account including costs, charges, and usage data. The information shall be made available in an electronic form usable by consumers.” It also requires the Bureau to consult with the Fed, OCC, FDIC, and FTC to ensure, to the extent appropriate, that any rule implementing Section 1033 imposes substantively similar requirements on covered persons, takes into account conditions under which covered persons do business both in the U.S. and in other countries, and does not require or promote the use of any particular technology in order to develop compliance systems.
The Bureau indicates in the ANPR that its discussion of the issues raised by Section 1033 implementation and the questions on which it seeks comment are informed by the various steps it has previously taken with respect to Section 1033. Those steps include a 2016 request for information, a 2017 statement of principles, and a 2020 symposium.
Highlights of the Bureau’s discussion include the following:
- In recent years, there has been a rapid and substantial growth in the number and usage of products and services that use or rely upon consumers’ ability to authorize third-party access to consumer data. The growth in authorized data access has been accompanied by an expansion of the number of distinct applications for authorized data, such as personal financial management, financial advisory services, assistance in shopping for and selecting new consumer financial products and services, making payments, credit profile improvement and underwriting.
- While data users may access consumer data from data holders without the use of intermediaries, the Bureau understands that currently most authorized data access is effected through data aggregators who access and transmit consumer financial data pursuant to consumer authorization. While the market for data aggregation services has thus far focused primarily on aggregators offering services to data user clients, there has been a shift in recent years towards aggregators performing services for providers in the providers’ capacity as data holders.
- To date, most consumer-authorized third parties have accessed consumer data through data holders’ digital banking portal using digital banking credentials the consumer shared with third parties. Such access generally does not require a formal agreement between data holder and data user or aggregator. Recently, formal, bilateral access agreements between large aggregators and large data holders have emerged. These agreements seek generally to move authorized access away from credential-based access and screen scraping toward tokenized access, commonly through application programming interfaces or “APIs.” Recent developments may signal a broader move towards multilateral standards for data access, similar to how network standard function in two-sided payment card markets.
- It is unclear how evolving access practices and standards will effect competition or innovation in markets in which participants use authorized data or how effectively they will address other consumer protection risks that may arise with authorized access, including risks related to the methods by which consumer data is accessed and the purposes for which data users may use authorized data.
- Other federal laws with potential implications for consumer access to financial records pursuant to Section 1033 include the Gramm-Leach-Bliley Act, the FCRA, and the EFTA.
The ANPR contains a series of questions on which the Bureau seeks comment. The questions are grouped into the following nine topics:
- Benefits and costs of consumer data access
- Competitive incentives and authorized data access
- Access scope
- Consumer control and privacy
- Legal requirements other than section 1033
- Data security
- Data accuracy
- Other information
The CFPB filed an amicus brief in Hopkins v. Collecto, Inc., an appeal before the U.S. Court of Appeals for the Third Circuit, in support of the debt collector’s position that it did not violate the FDCPA by sending the plaintiff a letter that included an itemization of the plaintiff’s debt that indicated “$0.00” was owed in interest and collection fees.
The FDCPA prohibits debt collectors from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt” or “unfair or unconscionable means to collect or attempt to collect any debt.” The plaintiff filed a putative class action complaint in which he claimed that the collection letter violated these FDCPA prohibitions. According to the plaintiff, by itemizing interest and collection fees, the letter falsely implied to the least sophisticated consumer that such interest and fees could begin to accrue and thereby increase the amount of the debt. (While not expressly stated, it appears the plaintiff’s account was a “static debt” on which interest and fees could not be added.) The district court dismissed the complaint because it did not state a “plausible claim for relief.”
In its amicus brief, the Bureau asserts that an itemization of a debt “discloses what has already happened, not what will happen or may happen in the future.” According to the Bureau, “[t]he bare statement that $0.00 in interest and collection fees [is owed] says nothing one way or the other about whether such charges may be assessed in the future.” It argues that “it would be unreasonable for an unsophisticated consumer to interpret an itemization showing that no interest and fees had been assessed on her account as raising the prospect that she would be charged fees or interest in the future.”
The Bureau references the proposed model validation notice in its proposed debt collection rule. It states that the model notice would require debt collectors “to include a table showing the interest, fees, payments, and credits that have been applied since the itemization date, even if none of those items had been assessed or applied to the debt. To show that no interest, fees, payments, or credits were assessed, the proposal would allow collectors to use “0” or “N/A” for that component or to state that “no interest, fees, payments, or credits have been assessed or applied to the debt.” According to the Bureau, its proposal is based on the premise that “consumers understand such itemizations to reflect past charges (even $0.00 in past charges) rather than to suggest future charges may accrue.”
In support of its position, the Bureau cites to the Seventh Circuit’s recent decision in Degroot v. Client Services Inc., another FDCPA case in which the Bureau also filed an amicus brief in support of the debt collector. In Degroot, the plaintiff filed a putative class action lawsuit alleging that a debt collector seeking to collect the amount owed on the plaintiff’s charged-off credit card account violated the FDCPA by including an itemization in a collection letter that indicated “$0.00” was owed for interest or other charges. Similar to the argument made by the plaintiff in Hopkins, he argued that the inclusion of interest and other charges in the debt itemization was misleading because it implied that the card issuer would begin adding interest and possibly other charges to previously charged-off debts if consumers failed to resolve their debts with the debt collector.
In affirming the district court’s dismissal of the complaint, the Seventh Circuit indicated that it agreed with the Bureau’s argument in its amicus brief that because “the itemization of a debt is a record of what has already happened…such a breakdown cannot be construed as forward looking and therefore misleading.” It found “unpersuasive” the plaintiff’s “insistence…that the inclusion of a zero balance for interest and fees naturally implies he could incur future interest or other charges if he did not settle the debt.” The Seventh Circuit stated that the plaintiff’s “mere raising of an open question about future assessment of other charges with a speculative answer does not make the breakdown misleading.” According to the Seventh Circuit, the district court had correctly concluded that the debt collector’s “use of an itemized breakdown accompanied by zero balances would not confuse or mislead the reasonable unsophisticated consumer.”
- Stefanie Jackman & John L. Culhane, Jr.
On September 25, 2020, California Governor Gavin Newsom signed several consumer protection bills, including AB 3254, which extends the right to receive a translated version of certain consumer contracts to nonparty signatories, such as guarantors or cosigners.
Under existing law, a business negotiating a covered contract in Spanish, Chinese, Tagalog, Vietnamese, or Korean (the five most common non-English languages spoken in California) must provide the consumer with a translated version of the contract. Covered contracts include auto sales and leases, apartment leases and rental agreements, mortgages, agreements for legal services, and any loans and other extensions of credit meant primarily for personal, family, or household purposes.
The California Senate’s analysis states that AB 3254 merely “[e]xpands the translation requirement . . . to any person signing the contract, not just the parties to the contract,” which would not impose any additional costs because it “simply requires providing additional copies of the already-translated contracts.” However, it is unclear (and the legislature did not address) whether or how the existing law’s provisions related to missing or deficient translations would apply to the bill’s translation requirement. In particular, and without limitation, existing law provides that failure to provide the required translation grants the right to rescind the contract to “the person aggrieved.” Because that term is not defined, it might be read to include nonparty signatories. See Civ. Code § 1632(k).
While existing law provides that the parties’ “rights and obligations” are determined by the English terms of the contract, it makes the translation admissible “[t]o show that no contract was entered into because of a substantial difference in the material terms and conditions of the contract and the translation.” Such differences might also be considered an unfair, deceptive, or abusive act or practice under the recently enacted California Consumer Financial Protection Law, and could, therefore, create a significant risk of an enforcement action by the California Department of Financial Protection and Innovation.
- Daniel C. Fanaselle
On October 23, 2020, Massachusetts Attorney General Maura Healey filed a motion to dismiss in ACA International v. Maura Healey based on mootness. The lawsuit challenges the state’s emergency regulations that placed a ban on outbound collection calls. The emergency regulations were promulgated in March 2020, ACA International filed its lawsuit in April 2020, and a temporary restraining order restricting the Attorney General’s office from enforcing the ban on outbound collection calls was issued on May 6, 2020.
The emergency regulations specifically provide that they would remain in effect for 90 days from March 26, 2020 or until the State of Emergency Period expires, whichever occurs first. Massachusetts is still in the State of Emergency Period, but the 90-day period lapsed on June 24, 2020. Because the emergency regulations have expired, the Attorney General argues that the lawsuit is moot and should be dismissed.
Although the regulations are no longer in effect even if the court grants the motion to dismiss, a decision on the merits of the case could provide helpful precedent for the industry. In granting the temporary restraining order, the district court found that ACA had shown a likelihood of success on its constitutional claims that the telephone call ban was a limitation on commercial speech protected by the First Amendment and that the regulation restricted access to the courts in violation of the First Amendment, but did not make a final judgment on the merits. If the court denies the Attorney General’s motion to dismiss and reaches the merits, a decision holding that the Attorney General overreached and acted unconstitutionally in promulgating the emergency regulations would be helpful precedent for the industry in combatting similar regulations in other states.
- Christine Emello
We are joined by special guest Isaac Boltansky, Director of Policy Research at Compass Point Research & Trading, for a discussion of the potential implications for the consumer financial services industry should Joe Biden win the Presidency and Democrats win control of the Senate while retaining control of the House. Also participating in our podcast is Tim Jenkins, who leads Ballard Spahr’s Government Relations practice in the firm’s Washington, D.C. office and has more than 25 years of experience lobbying for financial institutions before Congress and federal agencies. Topics include how a blue wave could impact the regulatory agendas of federal and state agencies and the legislative agenda of the next Congress and what risks those agendas could create for the industry.
Click here to listen to the podcast.
The OCC has issued a final rule to address when a national bank or federal savings association should be considered the “true lender” in the context of a partnership with a third party. The final rule, adopted only 54 days after the close of the comment period, is effective 60 days after the date it is published in the Federal Register.
While the OCC’s final “Madden fix” (valid-when-made) rule confirmed that the assignee of a loan made by a national bank or federal savings association may charge the same interest rate that the bank or savings association is authorized to charge under federal law, it did not address when a loan is deemed to made by a bank or savings association in the first place. The “true lender” rule interprets the provisions of the National Bank Act (NBA), the Federal Reserve Act, and the Home Owners’ Loan Act (HOLA) (12 U.S.C. 24, 371 and 1464(c), respectively) that allow national banks and federal savings associations to engage in lending, by clarifying when a bank has exercised its lending authority.
Except for the addition of new subsection (c) that addresses a scenario in which one bank is named as the lender on the loan agreement and another bank funds the loan, the final rule adopts the proposed rule’s text. The final rule provides:
- For purposes of this section, bank means a national bank or a Federal savings association.
- For purposes of [the provisions of the NBA, Federal Reserve Act, and HOLA that authorize national banks and federal savings associations to extend credit and the provisions of the NBA and HOLA that govern the interest permitted on national bank and federal savings association loans (12 U.S.C. 85 and 1463 (g), respectively)], a national bank or Federal savings association makes a loan when the national bank or Federal savings association, as of the date of origination:
- Is named as the lender in the loan agreement; or
- Funds the loan.
- If, as of the date of origination, one bank is named as the lender in the loan agreement for a loan and another bank funds that loan, the bank that is named as the lender in the loan agreement makes the loan.
The final rule provides a bright line test for determining when a bank is the lender for loans made with substantial assistance from a fintech or other non-bank company and/or when the fintech or non-bank company acquired all or a predominant economic interest in the loan. Having submitted a comment letter in support of the OCC’s proposal, we are pleased that the OCC has finalized the rule substantially as proposed. We continue to hope for a substantially similar “true lender” rule from the FDIC.
In its discussion of the final rule, the OCC indicated that the funding prong of its true lender test generally does not include lending or financing arrangements such as warehouse lending, indirect auto lending (through bank purchases of retail install contracts from auto dealers), loan syndications, and other structured finance. This is because such arrangements do not involve a bank funding a loan at the time of origination. The OCC also pointed out that, in contrast, the bank is the true lender in a table funding arrangement when the bank funds the loan at origination. (In table funding arrangements, the bank is not named as the lender in the loan agreement.)
While the OCC’s proposal garnered considerable support, it also met with significant criticism from certain state regulators and consumer groups who filed comment letters opposing the proposal. The core criticism was the claim that the OCC’s proposal would support predatory lending and “rent-a-bank” schemes and therefore would be harmful to consumers and small businesses. The OCC responded by pointing to its intent to use the considerable supervisory and enforcement tools at its disposal to ensure that the participants in bank-nonbank partnerships do not engage in unfair, deceptive or abusive acts and practices.
Ultimately, the final rule’s fate could well turn on the results of next week’s election. If elected President, Joe Biden could appoint a new Comptroller of the Currency who could then initiate new rulemaking to revoke the rule. Also, if the election produces a “blue wave” with Democrats retaining control of the House and gaining control of the Senate and the Presidency, Congress could attempt to use the Congressional Review Act (CRA) to override the final rule. Under the CRA, a joint resolution of disapproval cannot be filibustered in the Senate and can be passed with only a simple majority.
The enactment of a CRA joint resolution disapproving a final rule would prevent the rule from taking effect. If a rule has already become effective, it no longer continues in effect and “shall be treated as though such rule had never taken effect.” A joint resolution’s enactment would also bar an agency from reissuing the rule “in substantially the same form” or issuing a “new rule that is substantially the same” as the disapproved rule “unless the reissued or new rule is specifically authorized by a law enacted after the date of the joint resolution disapproving the original rule.”
If a successful CRA resolution is not forthcoming, we would expect one or more lawsuits challenging the Rule under the Administrative Procedure Act. (Two lawsuits have been filed challenging the OCC’s “Madden fix” rule.) Of course, we will report on all significant developments as they come down the pike.
In an internal memorandum recently circulated at the CFPB, Bryan Schneider, who leads the Bureau’s Division that houses its supervision, enforcement, and fair-lending functions, announced a major internal reorganization.
The reorganization would take away the Office of Enforcement’s autonomy to open investigations and issue civil investigative demands. It would also significantly reduce Enforcement’s role in deciding whether potential violations uncovered during examinations should be transferred to enforcement attorneys. Under the new structure, these critical decisions will be made by a new unit—the Office of SEFL (Supervision, Enforcement, Fair Lending) Policy and Strategy—while the two other Offices in the SEFL Division (Office of Enforcement and Office of Supervision), will focus on the execution of their respective functions.
Peggy Twohig, who currently heads SEFL’s Office of Supervision Policy (which will be eliminated in the reorganization), will be promoted to lead the new unit. In her new role, Ms. Twohig will determine strategic planning for all Offices within SEFL and control the Office of Enforcement’s investigation pipeline.
Because the changes shift power from the Enforcement Director to a new position to be filled by the highest-ranking official in the Office of Supervision (Ms. Twohig), these changes align with Kathy Kraninger’s public remarks favoring supervision as the CFPB’s primary regulatory tool. In an April 2019 speech, Director Kraninger said, “I have reiterated my view that supervision is the heart of this agency.” She has also expressed her belief that enforcement should be employed as a last resort. It is not surprising, therefore, that Director Kraninger has approved the restructuring, according to Mr. Schneider’s memorandum.
Alan Kaplinsky, the Chair of Ballard Spahr’s Consumer Financial Services Group, applauds the announced changes:
As the long-time head of SEFL’s Office of Supervision Policy, Peggy Twohig is already deeply involved in deciding whether a bank or company supervised by the CFPB should be referred to enforcement or whether violations of law are best handled within the supervision division. For there to be consistency in how the CFPB decides when to use enforcement for a company not subject to CFPB supervision, it makes sense that Peggy should be the primary decision maker. I have known Peggy for many years. She was with the FTC Bureau of Consumer Protection until the CFPB was created by Dodd-Frank. She was then hired by the Obama Treasury Department to stand up the CFPB. When the CFPB became operational in July, 2011, Peggy was one of the first senior officers hired. Based on her experience, consumer financial services expertise and bipartisanship, I can’t think of anyone better suited to hold this position.
Because the reorganization is expected to take approximately six months, if not longer, the upcoming Presidential election could ultimately modify or scuttle the proposed changes. If the restructuring is implemented, we will monitor how it impacts use of the enforcement tool, whether it reduces the number of enforcement investigations, and whether it changes the scope of the investigations.
We will be discussing the reorganization in an upcoming Consumer Finance Monitor podcast.
- James Kim
Tennessee Suspends Certain MLO Requirements for 2021 License Renewals
The Tennessee Department of Financial Institutions recently issued a memorandum stating that, due to the COVID-19 pandemic, the Department is suspending criminal background checks and credit report authorization requirements for mortgage loan originators (MLOs) renewing their licenses for 2021.
Under typical circumstances, MLOs who have not completed a criminal background check or authorized a credit report within the immediately preceding three-year period are required to complete a new criminal background check or authorize a new credit report prior to December 31 as a condition of renewal. However, the memorandum is not applicable to any MLO required to complete such requirements under a Consent Agreement with the Department. Additionally, the Department intends to resume this requirement for renewals in 2022.
Updates to the NMLS Policy Guidebook
The NMLS Policy Guidebook was recently updated to address changes relating to work-from-home due to COVID-19. As a result of the pandemic and individuals working remotely, the NMLS Policy Guidebook was updated to clarify that the work location stated in the NMLS record should remain a licensed or registered location. However, an individual working remotely under executive order, state guidance, laws, regulations, or any other pronouncement that has the effect of law, need not change his/her work location in the NMLS record.
The updated NMLS Policy Guidebook is available here.
NMLS Annual Renewal Period Begins
The 2021 NMLS annual renewal period began on November 1, 2020, and will end on December 31, 2020. Individuals and businesses are encouraged to renew their licenses early.
For additional information regarding renewals, the NMLS Annual Renewal page is available here.
RESPRO 2020 Virtual Fall Seminar
If You Think the CFPB Stepped Back From Supervision and Enforcement, You’re Not Paying Attention
Online Only | November 5, 2020
Speakers: Richard J. Andreano, Jr., Amanda Phillips
Moderator: Kim Phan
MBA’s Regulatory Compliance Conference 2020
Online Only | November 9-10, 2020
Breakout: Pandemic Fallout - Navigating Practical Operational Challenges
Speaker: Meredith S. Dante
Applied Compliance – LO Comp
Speaker: Richard J. Andreano, Jr.
WHF/WHFF Partner Series
Webinar | November 12, 2020
Speaker: Richard J. Andreano, Jr.
Practising Law Institute’s 25th Annual Consumer Financial Services Institute
December 7-8, 2020
Speakers: Alan Kaplinsky, Christopher J. Willis
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