In This Issue:
- Podcast: A Look at Key Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) Developments in 2021 and Expectations for 2022.
- CFPB Publishes Report on State of D&I Within Financial Services Industry
- NY Senate Confirms Nomination of Adrienne Harris to Serve as Superintendent of the NY Department of Financial Services
- CFPB Seeks Information from Public on Fees Charged on Consumer Financial Products and Services; Ballard Spahr to Hold Feb. 17 Webinar
- Fourth Circuit Rules Mortgage Servicer Violated Maryland Consumer Debt Collection Act by Charging Convenience Fees for Phone or Online Payments
- Podcast: What Will 2022 Hold for Fintechs in the Consumer Financial Services Industry—A Discussion With Special Guest Todd Baker, Senior Fellow at the Richman Center for Business, Law & Public Policy at Columbia University
- Oklahoma Bill Introduced to Limit Use of Automated Dialing Systems
- Alerts
The topics discussed include the historic changes made to the AML Act at the beginning of 2021, including the Corporate Transparency Act (CTA); the proposed FinCEN rules to implement the CTA’s beneficial ownership reporting requirements; the CTA’s implications for financial institutions’ customer due diligence compliance obligations; FinCEN’s list of priorities for AML and countering the financing of terrorism; potential AML regulation of the real estate industry; and expectations for future BSA/AML regulation and enforcement concerning virtual currency and digital assets.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts a conversation with Peter Hardy, a partner in the firm. A former federal prosecutor, Peter is a co-leader of the firm’s Anti-Money Laundering Team.
Click here to listen to the podcast.
- Alan S. Kaplinsky & Peter D. Hardy
CFPB Publishes Report on State of D&I Within Financial Services Industry
The Consumer Financial Protection Bureau’s (CFPB) Office of Minority and Women Inclusion (OMWI) has released guidance and recommendations for small, midsize, and large organizations to demonstrate their commitment to diversity and inclusion (D&I), taking size and resources into account. The guidance and recommendations are contained in a Report on Diversity and Inclusion (D&I) Within Financial Services (the Report), and are designed to both support the implementation of Section 342 of the Dodd Frank Act as outlined in the Joint Standards for Assessing Diversity Policies and Practices of Entities (the Standards), and reflect the CFPB’s efforts to further the Biden Administration’s Executive Order on Advancing Racial Equality and Support for Underserved Communities.
The Report, which details how effectively CFPB-regulated entities demonstrate their commitment to D&I, is based on the CFPB’s FY2020 study analyzing publicly available D&I information from the websites and annual reports of 270 financial services entities. The CFPB rated the companies reviewed across 20 D&I criteria relating to:
- D&I statements on the website or from senior leadership;
- Published workforce diversity metrics;
- Published D&I recruitment strategies;
- D&I trainings or employee resource groups; and
- Supplier diversity programs.
Each entity reviewed was rated as low, medium, or high, depending on the level of information shared publicly across the indicators, which track the Standards four focus areas: (i) Organizational Commitment to Diversity and Inclusion; (ii) Workforce Profile and Employment Practice; (iii) Supplier Diversity; and (iv) Practices to Promote Transparency of Organizational Diversity and Inclusion.
The Report serves as a means for entities regulated by the CFPB to self-assess the state of their own D&I initiatives, and identify areas for growth. The data trends indicated that most small organizations (with under 1,000 employees) had fewer D&I programs and policies, while large organizations (with over 5,000 employees), and banks in particular, consistently outperformed all other institutions in the industry across the diversity indicators. The Report also identified the greatest opportunity for improvement in the mortgage industry, which likely will be an area of focus for the OMWI moving forward.
Based on the data, the CFPB makes best practices recommendations in the Report for an organization to improve the D&I information that is available to the public. The CFPB’s recommendations take into account access to resources, providing a tailored checklist for organizations of all sizes to implement D&I initiatives. The Report also notes that the CFPB will continue its research into regulated entities and track their progress against these recommendations on an annual basis.
Ballard Spahr’s Consumer Financial Services Group and Diversity, Equity, and Inclusion Counseling Team have deep experience with assessing, designing, and implementing programs, policies, and initiatives identified in the Report and specific to the Consumer Finance industry.
- Dee Spagnuolo, Brian D. Pedrow & Nikki A. Hatza
The New York Senate has confirmed Governor Hochul’s nomination of Adrienne Harris to serve as Superintendent of the state’s Department of Financial Services. Ms. Harris has been serving as Acting Superintendent since the departure of her predecessor, Linda Lacewell, in August 2021.
Ms. Harris previously served as a Senior Advisor in the Treasury Department during the Obama Administration. Following her time at the Treasury Department, Ms. Harris joined The White House, where she was appointed as Special Assistant to the President for Economic Policy, as part of the National Economic Council. Since leaving the White House in January 2017, Ms. Harris has served as General Counsel and Chief Business Officer for a title insurance and settlement services company. She also has served as a senior adviser at a Washington, D.C. public-relations firm, where she advised financial institutions, fintech companies, and venture-capital firms. Her nomination drew opposition from progressive groups, who claimed her background indicated she was overly “business-friendly.”
The CFPB has published a Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services. Comments on the RFI must be submitted by March 31, 2022.
On February 17, 2022, from 2:30 p.m. to 3:30 p.m. ET, Ballard Spahr will hold a webinar, The CFPB’s Inquiry into ‘Junk Fees’: What It Means for Consumer Financial Services Providers. Click here to register.
The CFPB’s news release about the RFI frames it as “an initiative to save households billions of dollars a year by reducing exploitative junk fees charged by banks and financial companies” and “a chance for the public to share input that will help shape the agency’s rulemaking and guidance agenda, as well as its enforcement priorities in the coming months and years.”
The CFPB describes the fees on which the RFI is focused as “fees that are not subject to competitive processes that ensure fair pricing” and refers to them as “exploitative junk fees.” According to the CFPB, such fees are “hidden” because they “are mandatory or quasi-mandatory fees added at some point in a transaction after a consumer has chosen the product or service based on a front-end price.” As a result, they “can lure customers into making purchasing decisions based on a perceived lower price.” In addition, the CFPB is “concerned about fees that exceed the marginal cost of the services they purport to cover, implying that companies are not just shifting costs to consumers, but rather, taking advantage of a captive relationship with the consumer to draft extra profits.”
The CFPB indicates that these “excessive and exploitative fees” can take many forms, including: penalty fees such as late fees, overdraft fees, non-sufficient funds (NSF) fees, convenience fees for processing payments, minimum balance fees, return item fees, stop payment fees, check image fees, fees for paper statements, fees to replace a card, fees for out-of-network ATMs, foreign transaction fees, ACH fees, wire transfer fees, account closure fees, inactivity fees, fees to investigate fraudulent activity, [and] ancillary fees in the mortgage closing process.
The RFI includes the following examples for “select products and markets”:
- Deposit accounts. Overdraft and NSF fees which, according to the CFPB, make up the majority of total revenue banks derive from deposit accounts.
- Credit cards. Late fees, with the CFPB noting that “nearly every bank charges the same for late fees—the maximum allowed by law of $30 for the first late payment and $41 for subsequent late payment.
- Remittances and payments. “Convenience fees” on payment transfers, return item fees, stop payment fees, check image fees, online or telephone bill pay fees.
- Prepaid accounts. “Add-on” fees for regular activities such as transaction fees, cash reload fees, balance inquiry fees, inactivity fees, monthly service fees, and card cancellation fees.
- Mortgages. Application fees and closing costs, fees for making phone or online payments, fees for a servicer’s bill pay service, delinquency-related fees such as monthly property inspection fees, new title fees, appraisals and valuations, broker price opinions, force-placed insurance, foreclosure fees, and “unspecified corporate advances.”
- Other loans (including student loans, auto loans, installment loans, payday day loans). Fees to reschedule payment dates, fees to make online or phone payments. (Curiously, in connection with “other loans,” the CFPB says it is also interested in origination fees such as application fees and fees to receive loan proceeds in an expedited manner.)
The RFI includes a list of specific questions on which the CFPB is seeking information. Among the CFPB’s questions is what types of fees obscure the true cost of products or services by not being built into the upfront price, what fees exceed the costs to the entity that the fee purports to cover, and what companies or markets are obtaining significant revenue from back-end fees.
In addition to the CFPB’s broad-brush approach to labeling post-origination or post-account opening fees as “junk fees” and “exploitative and excessive,” it is notable that the CFPB does not acknowledge that the permissible amounts of many fees are established by federal and state law. In addition, federally-chartered banks have the right to preempt state limits on certain fees and a bank’s exercise of that right to charge a greater amount does not mean the bank is charging an amount that is “exploitative and excessive.”
Moreover, the suggestion that fees are “hidden” seemingly ignores the extensive disclosure rules promulgated and administered by the CFPB. For example, Regulation DD requires disclosure, on request and before a consumer opens a deposit account, of the amount of any overdraft fee or NSF fee imposed in connection with the account. Regulation Z similarly requires disclosure, on or with in application or solicitation for a credit card account, of any late payment fee. In the case of prepaid accounts, Regulation E requires disclosure, before a consumer acquires an account, of any per-purchase transaction fees, cash reload fees, balance inquiry fees, customer service fees, inactivity fees, and all monthly and other periodic fees. Even when a customer acquires a prepaid account in person at a retail location, these fees have to be disclosed and visible through any packing material.
We particularly are puzzled by the CFPB’s apparent suggestion that credit card issuers are charging excessive late fees by charging $30 for the first late payment and $41 for subsequent late payments. The provisions of Regulation Z that implement the CARD Act require that the late payment fees imposed by credit card issuers be reasonable and proportional to the violation of the account terms. They provide safe harbors that allow a card issuer in 2022 (as recently adjusted based on changes to the Consumer Price Index) to impose a fee of $30 for a first late payment and $41 for a subsequent late payments. (Regulation Z also permits an issuer that can demonstrate that a higher fee is justified as a reasonable proportion of its internal costs to assess a penalty fee that is higher than the safe harbor fees.) Accordingly, card issuers charging $30 for the first late payment and $41 for subsequent late payments are charging fees that are reasonable and proportional to the violation as a matter of federal law.
Also puzzling is Director Chopra’s statement that “when buying a home, there’s a whole host of fees tacked on at closing where borrowers feel gouged.” The TILA/RESPA Integrated Disclosure Rule significantly limits the ability of a lender to add or increase fees at closing, so it is not clear how lenders can tack on a host of fees at closing.
Despite the fact that many of the CFPB’s objections to various fees are unwarranted, there is no doubt that ancillary fees of all kinds will be scrutinized by the CFPB during examinations and possibly become the subject of enforcement investigations. As a result, we believe that this is a propitious time for banks and other consumer financial services providers to undertake a thorough review of their ancillary fees charged on all of their consumer financial services and products to ensure that the charges are lawful under applicable federal and state laws and that they are clearly and conspicuously disclosed. We are assisting several clients in this review.
It is not surprising that industry trade groups have reacted to the RFI with strong criticism. The following statement on the RFI was issued by the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Credit Union National Association, Financial Services Forum, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions and National Bankers Association:
The CFPB’s new Request for Information on fees is a misguided effort that paints a distorted and misleading picture of our country’s highly competitive financial services marketplace. Multiple federal laws and the CFPB’s own rules already require banks, credit unions and other providers of consumer financial services to disclose terms and fees in a clear and conspicuous manner, and our members do so each and every day. Consumers in this country know they have a wide range of choices when it comes to financial services products, and those businesses compete every day, including on fees. We look forward to responding to this Request for Information with facts and perspective sadly lacking from today’s announcement.
- John L. Culhane, Jr., Ronald K. Vaske & Richard J. Andreano, Jr.
The U.S. Court of Appeals for the Fourth Circuit recently ruled that a mortgage servicer violated the Maryland Consumer Debt Collection Act (MCDCA) by charging a $5 convenience fee to borrowers for monthly payments made by phone or online.
In Alexander v. Carrington Mortgage Services, LLC, the plaintiffs filed a class action complaint against Carrington, their mortgage servicer, challenging the convenience fees in which they alleged that the servicer had violated Section 14-202(11) of the MCDCA by engaging in conduct that violates the Fair Debt Collections Practices Act (FDCPA) (Sec. 14-202(11) Claim) and Section 14-202(8) of the MCDCA by attempting to enforce a right with knowledge that the right does not exist (Sec. 14-202(8) Claim). With regard to the Sec. 14-202(11) Claim, the plaintiffs argued that the servicer violated the FDCPA provision that prohibits a “[t]he collection of any amount (including any interest, fee, charge or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law.”
The district court dismissed the MCDCA claims, finding that the servicer was not a “collector” for purposes of either of the MCDCA claims. As to the Sec. 14-202(11) Claim, it also held that the servicer was not a “debt collector” under the FDCPA, the plaintiffs’ choice to make on-line payments was “permitted by law,” and the convenience fees were not “incidental” to the plaintiffs’ mortgage debt. As to the Sec. 14-202(8) Claim, the district court held that the servicer had the “right” to collect the convenience fees, since the mortgage documents did not expressly prohibit the fees and the plaintiffs voluntarily chose to make on-line payments.
In reversing the district court, the Fourth Circuit first found that the servicer was a “collector” under the MCDCA which defines a “collector” as “a person collecting or attempting to collect an alleged debt arising out of a consumer transaction.” Among the servicer’s arguments rejected by the Fourth Circuit was its argument that the plaintiffs had to show that the servicer was also a “debt collector” under the FDCPA to establish a violation of Sec. 14-202(11). The Fourth Circuit then held that the servicer’s imposition of the convenience fee qualified under the FDCPA as the collection of an “amount” that was “incidental” to the plaintiffs’ mortgage debts. It also held that the convenience fees were not “permitted by law.” In so holding, the Fourth Circuit rejected the servicer’s argument that a fee is “permitted by law” so long as there is no express legal prohibition. It also rejected the servicer’s argument that under common law contract principles, the convenience fees were “permitted by law” by virtue of the plaintiffs’ manifestation of assent in the online clickwrap agreements. According to the Fourth Circuit, for a fee to be “permitted by law,” it must be expressly permitted or authorized by law.
The Fourth Circuit also reversed the district court’s dismissal of the plaintiffs’ Sec. 14-202(8) Claim. According to the Fourth Circuit, in charging the convenience fees, the servicer had asserted rights that do not exist for purposes of Sec. 14-202(8) because such fees are prohibited by Sec. 14-202(11).
In their complaint, the plaintiffs also alleged that by violating the MCDCA, the servicer had violated the Maryland Consumer Protection Act (MCPA) which makes an MCDCA violation a per se violation of the MCPA. Having held that the servicer had violated the MCDCA by engaging in conduct that violated the FDCPA, the Fourth Circuit also reversed the district court’s dismissal of the plaintiffs’ derivative MCPA claim.
The Fourth Circuit’s decision could lead to similar lawsuits challenging convenience fees charged by mortgage servicers and other consumer financial services providers under the debt collection laws of other states that broadly apply the FDCPA’s prohibitions to first-party collections and other persons engaging in collection activity who are not “debt collectors” under the FDCPA. In addition, the CFPB has placed a spotlight on a wide array of fees charged by mortgage servicers and other providers of consumer financial services with its announcement last week that it was launching an inquiry into “junk fees.” As a result, mortgage servicers and other providers should expect many of their fees to also receive increased scrutiny from state regulators and attorneys general as well as from plaintiffs’ lawyers.
On February 17, 2022, from 2:30 p.m. to 3:30 p.m. EST, Ballard Spahr will hold a webinar, The CFPB’s Inquiry into “Junk Fees”: What It Means for Consumer Financial Services Providers. Click here to register.
Rising interest rates and inflation are two key factors that are expected to create a more challenging business environment in 2022. Based on his work at the intersection of technology and financial services, Mr. Baker shares his perspective on how this new environment is likely to impact providers of various types of consumer financial services, particularly non-bank fintech companies. We also discuss the new environment’s likely impact on earned wage access products, income share agreements, and buy-now-pay-later products and expectations for regulatory scrutiny of those products.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.
Click here to listen to the podcast.
Oklahoma Bill Introduced to Limit Use of Automated Dialing Systems
A bill was recently introduced in the Oklahoma legislature that would impose new limits on the use of automated dialing systems. If enacted, the bill would become effective November 1, 2022.
Titled the Telephone Solicitation Act of 2022, the bill would prohibit the use of an “automated system” to make a “telephonic sales call” without the “prior express written consent” of the “called party.”
Like Florida’s mini-version of the federal Telephone Consumer Protection Act (TCPA) which became effective last July, the bill would apply to telephonic sales calls that involve “an automated system for the selection or dialing of telephone numbers or the playing of a recorded message when a connection is completed to a number called.” Thus, the systems that can qualify as an “automated system” for purposes of the bill are not limited to equipment that would qualify as an automatic telephone dialing system (ATDS) under the TCPA. The TCPA defines an ATDS as “equipment which has the capacity (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” In Facebook v. Duguid, the U.S. Supreme Court held that automatic dialing technology only qualifies as an ATDS if it has the capacity to store numbers “using a random or sequential number generator” or produce numbers “using a random or sequential number generator.”
The bill defines the “called party” as “a person who is the regular user of the telephone number that receives a telephonic sales call.” Unlike the Florida law which limits the term “telephonic sales call” to calls related to consumer-purpose transactions, the bill does not define the term “telephonic sales call.” Thus, unless an exemption applies, the bill would cover calls related to non-consumer purpose transactions. Among the bill’s exemptions is one for calls involving a “business-to-business sale” that satisfy certain conditions such as calls made a seller who “has been lawfully operating continuously for at least three (3) years under the same business name and has at least fifty percent (50%) of its dollar volume consisting of repeal sales to existing businesses.”
The bill does, however, track the Florida law in a number of additional ways including:
- A rebuttable presumption is created that any call made to a number with an Oklahoma area code is made to an Oklahoma residence or to a person in Oklahoma at the time of the call. (This would suggest that the law is only intended to cover calls to Oklahoma residents.)
- The prohibition on using automated systems is not limited to calls to cellular phones.
- To obtain a consumer’s “prior express written consent” to receive calls made using an automated system, a caller must provide a specified disclosure and satisfy other requirements.
- Calls are prohibited before 8 a.m. or after 8 p.m. (in the called person’s time zone).
- No more than three calls can be made from any number to a person over a 24-hour period on the same subject matter or issue.
- Calls are prohibited that use technology that alters the caller’s voice to conceal the caller’s true identity.
- There are numerous exemptions, including an exemption for a “supervised financial institution or parent, subsidiary, or affiliate thereof operating within the scope of supervised activity.”
- There is a private right of action for violations and a called party can recover the greater of actual damages or $500, which can be trebled for willful or knowing violations.
QC Now Webinar: 2022 Mortgage Compliance Outlook. Feb. 17, 2022, with ACES Quality Management's EVP of Compliance, Amanda Phillips and Richard J. Andreano, Jr. of Ballard Spahr.