Legal Alert

Mortgage Banking Update - February 24, 2022

February 24, 2022

In This Issue:

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CFPB and Other Federal Agencies Address Appraisal Discrimination

The CFPB’s Fair Lending Director, together with senior officials from other federal agencies, sent a letter to The Appraisal Foundation (TAF) commenting on proposed changes to the Uniform Standards of Professional Appraisal Practice (USPAP). (TAF is a private, non-governmental organization that sets professional standards for appraisers.) The other agencies joining in the letter are the Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, Department of Housing and Urban Development, Federal Housing Finance Agency, and Department of Justice.

In a blog post about the letter, the CFPB states that it has seen TAF “fail to include clear warnings about the requirements of federal law in the standards it sets, and in the training it provides for appraisers.” According to the CFPB, “TAF has yet to highlight these important laws even though it frequently revises its standards.” The CFPB expresses concern “that some appraisers may be unaware of these federal discrimination bans” and urges TAF “to provide clear guidance on the existing legal standards as they relate to appraisal bias.” The CFPB also states that it is “deeply troubled by the discriminatory statements the Federal Housing Finance Agency recently identified in some home appraisals, and the appraisal disparities for communities and borrowers of color recently found in both Freddie Mac and Fannie Mae studies.”

In the letter, the agencies urge TAF to provide a “full presentation” of the anti-discrimination prohibitions in the Fair Housing Act and the Equal Credit Opportunity Act as they relate to appraisal bias. The agencies claim that while the Appraisal Standards Board Ethics Rule and Advisory Opinion 16 state that an appraiser cannot rely on “unsupported conclusions relating to [protected characteristics],” these items “do not prohibit an appraiser from relying on “supported conclusions” based on such characteristics “and, therefore, suggest that such reliance may be permissible.” As an example of how prohibited discrimination can occur in the appraisal context, the agencies indicate that “an appraiser’s use of or reliance on conclusions based on protected characteristics, regardless of whether the appraiser believes the conclusions are supportable, constitutes illegal discrimination.”

The CFPB notes in its blog post that it is reviewing the findings of a report funded by the Federal Financial Institutions Examination Council’s Appraisal Subcommittee titled “Identifying Bias and Barriers, Promoting Equity: An Analysis of the USPAP Standards and Appraiser Qualifications Criteria.” According to the CFPB, the report “raises serious concerns regarding existing appraisal standards and provides recommendations with respect to fairness, equity, objectivity, and diversity in appraisals and the training and credentialing of appraisers.”

The CFPB also notes its continuing participation in the Interagency Task Force on Property Appraisal and Valuation Equity, which was created by the Biden Administration.

Richard J. Andreano, Jr.

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American Bankers Association and the Bank Policy Institute Weigh In on FinCEN’s Proposed Rules for Corporate Transparency Act

As we recently blogged (here and here), the Financial Crimes Enforcement Network (FinCEN) recently issued a Notice of Proposed Rulemaking (NPRM) regarding the beneficial ownership reporting requirements of the Corporate Transparency Act (CTA). The NPRM is the first in a series of three rulemakings that FinCEN will issue to implement the CTA. It sets forth FinCEN’s proposed reporting requirements, i.e., who must file a report on beneficial ownership information (BOI), what information must be reported, and when reports will be due.

In response, FinCEN received over 230 comments (see FinCEN’s release here).We focus here on comments from two key players: the American Bankers Association] (ABA) and the Bank Policy Institute (BPI), which highlight the industry perspective of banking institutions (These groups also commented previously on FinCEN’s Advance NPRM regarding the CTA’s implementation, which we blogged about here and here).

The CTA, passed as part of the Anti-Money Laundering Act of 2020 (AML Act), requires certain legal entities to report their beneficial owners (BOs) to a database accessible by U.S. and foreign law enforcement and regulators, and to U.S. financial institutions seeking to comply with their own Anti-Money Laundering (AML) compliance obligations, particularly FinCEN’s existing Customer Due Diligence Rule (CDD Rule) for legal entity customers implemented in 2018.

Under the existing CDD Rule, covered financial institutions must collect and verify BOI from certain entity customers and maintain records of such information. But until now, entities did not have to report directly such information to the government. The CTA makes companies (like LLCs and corporations) subject to BOI reporting requirements. The CTA also requires FinCEN to revise the existing CDD Rule to try to make it consistent with the CTA and remove any unnecessary or duplicative burdens.

The ABA (which represents large banks) and the BPI (which represents universal, regional, and major foreign banks) each submitted lengthy comment letters, showcasing their strong interest in how these reporting requirements shake out. As the ABA observes, it will be difficult to determine how these reporting requirements will fit in with bank responsibilities until FinCEN issues its other rulemakings. Still, both groups recommend making several modifications to the proposed reporting requirements now—mainly aligning the NPRM with the existing CDD Rule—to minimize future burdens on banks and their customers. Both groups propose similar modifications, but there are some differences. We summarize the most salient points in this post.

Overall, these comments make clear that the ABA and the BPI continue to support creation of the FinCEN registry as a way to drive down the cost of regulatory compliance for banks. Both groups suggest, however, that such a benefit could be outweighed if the final reporting requirements stray too far from the existing CDD Rule. As both groups observe, any significant change from the current CDD Rule will require banks to divert significant resources to comply with the new requirements, at the expense of other AML efforts.

Covered Businesses and Exempt Entities

Both the ABA and the BPI weigh in on who should be required to report BO information to FinCEN. In general, neither group takes issue with the NPRM’s proposed definition of “reporting company” or its 23 exemptions (though the ABA does recommend eliminating the distinction between “domestic” and “foreign” entities as unnecessary).

However, both groups recommend exempting the same entities under the NPRM and the CDD Rule to reduce burdens and confusion on banks and customers seeking to comply with both rules. For instance, both groups recommend that FinCEN add exemptions currently included in the CDD Rule, including exemptions for state-chartered banks and trust companies (which are subject to substantial federal or state regulation) and pension plans established under the Employee Retirement Income Security Act of 1974 (ERISA) (which otherwise present low money laundering risks). Both groups also recommend adding the NPRM’s exemption for “large operating companies” to the revised CDD Rule and generally support the proposed “subsidiary exemption,” which would exempt reporting companies owned by one or more exempt entities (with some minor modifications or clarifications).

The ABA nonetheless encourages FinCEN to reassess these exemptions after the rule has been in effect for a period of time. The ABA and the BPI also diverge as to whether exempt entities should be required to report their exemption status to FinCEN. The ABA “opposes” such a requirement because it would burden both filers and registry managers. The BPI, however, “[s]trongly support[s]” such a requirement (at least a voluntary one) because it would enhance the usefulness of the database.

What Information Must Be Provided

Both the ABA and the BPI also weigh in on the types of information reporting companies must provide to FinCEN. Under the CTA, reporting companies must identify each qualifying BO of the reporting company and each company applicant by: (1) “full legal name,” (2) “date of birth,” (3) “current, as of the date on which the report is delivered, residential or business street address,” and (4) “unique identifying number from an acceptable identification document;” or, if this information has already been provided to FinCEN, by a FinCEN identifier. Both groups generally support these requirements with some modifications and clarifications. Each group’s recommendations primarily relate to the NPRM’s proposed definition of “beneficial owner,” and address and identifier requirements.

Definition of Beneficial Owner

Subject to exceptions, the CTA defines the term “beneficial owner” to mean “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (i) exercises substantial control over the entity; or (ii) owns or controls now less than 25 percent of the ownership interests of the entity.”

As noted in our blog post on the NPRM, the NPRM’s definitions of “substantial control” and “ownership interest” do not track the definitions of the same terms in the current CDD Rule—the NPRM’s terms are broader and less clear.  Not surprisingly, both the ABA and the BPI urge FinCEN to harmonize these terms to minimize future burdens and costs on banks and their entity customers.

For instance, the NPRM requires a reporting company to identify any and all individuals who satisfy the “substantial control” prong—a marked expansion of the CDD Rule, which currently requires entity customers to report only one BO under its substantial control prong. Both the ABA and the BPI recommend that FinCEN follow the existing CDD Rule on this point. As both groups explain, banks have borne significant costs to develop operational systems that comply with the CDD Rule’s less complex control prong—which (as the BPI notes) has itself generated “significant implementation challenges” and required substantial guidance from FinCEN. The ABA thus contends that “[a]ny result from FinCEN’s rulemakings that subsequently requires banks to add additional individuals to a bank’s operational systems will require fundamental changes to those systems, which increases cost and burden, while introducing unnecessary complexity and regulatory risk.”

The NPRM also greatly expands the “ownership” prong. Under the CTA, a BO is “an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise . . . owns or controls not less than 25 percent of the ownership interests of the entity.” Unlike the CDD Rule for financial institutions, however, the NPRM does not limit a 25 percent ownership interest to only equity ownership, but instead seeks to account for other, less straightforward legal interests to capture other types of BOs. Both groups suggest that the potential costs and burdens associated with the expanded definition—including updating operational systems and educating employees to navigate the more complex regime—will outweigh any benefit from this change.

In addition, both the ABA and the BPI ask FinCEN to address or devise special rules for situations involving trusts as beneficial owners. For instance, both groups ask FinCEN to clarify who should be listed as a control person when a trust is identified as a beneficial owner, including but not limited to situations where banks serve as trustees or the reporting company is part of a directed trust. On this point, the BPI also queries whether reporting companies with corporate trustee banks should be exempt from reporting requirements under the “subsidiary exemption,” noting that bank trustees “may present a lower illicit finance risk.”

Identifying Information: Address

Both the ABA and the BPI also urge FinCEN to simplify and align the NPRM’s “address” reporting requirements with similar requirements in the current CDD Rule. The NPRM requires reporting companies to identify the BO’s and company applicant’s residential address “for tax residency purposes” or business street address. The current CDD Rule requires reporting companies to provide BO’s and company applicant’s “residential or business street address.”

Both groups suggest that FinCEN should eliminate the term “for tax residency purposes” from the residential address requirement, with the ABA noting that the phrase “is not readily or widely understood,” and the BPI contending that it would “create a dissymmetry with the beneficial ownership information that banks have collected for years.” Both groups also suggest that that FinCEN should clarify what is meant by “business street address,” which could be subject to multiple interpretations, particularly when entities have more than one business location. The ABA also asks FinCEN to provide examples of acceptable residential and business addresses.

Identifying Information: FinCEN Identifier

Both the ABA and the BPI also comment on FinCEN’s proposed use of a FinCEN identifier. Under the CTA, a BIO report must include a “unique identifying number from an acceptable identification documents.” As an alternative, a BO, a company applicant, or a reporting company may use a FinCEN identifier.

Both groups generally support the creation of FinCEN identifiers, though the ABA queries whether FinCEN intends for these identifiers to be temporary or permanent and whether banks will be able to use them. The BPI also recommends aligning the identification numbers that must be reported to FinCEN and the identification numbers that must be collected under the CDD Rule and suggests that FinCEN structure its identifier to include content that complements other beneficial ownership information.

When Must a Reporting Company File a Report

The ABA weighs in on the NPRM’s contemplated reporting deadlines. Under the NPRM, entities that were created before the effective date of the rule will have one year to report their information to FinCEN, while entities created after the effective date will have 14 days to submit their reports. Reporting companies will have 30 days to report any change, and 14 days to correct any inaccuracies in a report without penalty. The ABA recommends that FinCEN adopt a uniform 30-day deadline for new entities, changes, and corrections to simplify compliance. The ABA also recommends giving existing companies two years to register. Either way, the ABA urges FinCEN to provide enough time to notify reporting companies of their obligations and issue additional guidance as needed.

In addition, the ABA recommends adopting an effective date for the registry that matches the effective date for the revised CDD Rule so that banks and their entity companies can more easily comply with both rules.

Validation and Access

In addition to commenting on the substantive reporting requirements, both the ABA and the BPI encourage FinCEN to take steps to validate reported beneficial ownership information, so that the registry remains reliable, accurate, complete, and useful for law enforcement, regulators, and financial institutions.

The BPI also comments on database access and use, echoing many of its comments to the Advance NPRM and likely previewing its comments to FinCEN’s future rulemakings. In general, the BPI maintains that financial institutions should be permitted, but not required, to rely on the database to fulfill their own due diligence requirements under the CDD Rule. Either way though, the BPI generally opposes requiring banks to address discrepancies between the database and their own collection processes, noting instead that banks “should . . . be permitted, if they identify a discrepancy between the beneficial ownership information in the registry and the bank’s information, to determine appropriate actions on the basis of risk, including by leveraging their own risk-based customer due diligence review processes.”

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Laura E. Luisi Gavin

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CFPB Establishes New Process for Submission of Petitions for Rulemaking

The CFPB announced that it has established a new process intended to make “it easier for the public to meaningfully engage with the agency and request regulatory changes.”

The new process allows members of the public to submit petitions for rulemaking (including amendments to or repeals of existing rules) directly to the CFPB either electronically or by mail. Petitions will be posted on public dockets for review and comment unless the CFPB, in its discretion, decides not to do so.

According to the CFPB’s press release, the new process follows recommendations issued by the Administrative Conference of the United States. The Administrative Procedures Act (APA) requires federal agencies to give members of the public the right to petition for the issuance, amendment or repeal of a rule. The APA requires agencies to respond to petitions for rulemaking within a reasonable time, give petitioners  prompt notice when a petition is denied in whole or in part, along with a brief statement of the grounds for the denial. However, the APA does not establish procedures agencies must follow in connection with petitions.

Among the recommendations made by the Administrative Conference was that an agency with rulemaking authority “should have procedures, embodied in a written and publicly available policy statement or procedure rule, explaining how the agency, receives, process, and responds to petitions for rulemaking filed under the [APA].” The CFPB has published its new procedures for submitting petitions on its website.

In the CFPB’s history, three rulemaking petitions have been filed. The only petition that has been granted was filed by the Bank Policy Institute and the American Bankers Association seeking rulemaking by the CFPB to codify the “Interagency Statement Clarifying the Role of Supervisory Guidance” issued in September 2018.  In response to the petition, to codify the Interagency Statement, the CFPB issued a proposed rule on the role of supervisory guidance which was finalized in January 2021.

- Alan S. Kaplinsky

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California Federal District Court Upholds OCC and FDIC ‘Madden-fix’ Rules

A California federal district court judge rejected challenges to the OCC’s and FDIC’s Madden-fix rules brought in two separate lawsuits by state attorneys general.  The OCC rule is codified at 12 C.F.R. Section 7.4001(e) and the FDIC rule is codified at 12 C.F.R. Section 160.110(d). The rules provide that a loan made by a national bank, federal savings association, or federally-insured state-chartered bank that is permissible under applicable federal law (Section 85 of the National Bank Act (NBA) or Section 27 of the Federal Deposit Insurance Act (FDIA)) is not affected by the sale, assignment, or other transfer of the loan.

In People of the State of California, et al. v. OCC, Judge Jeffrey White first rejected the AGs’ argument that the OCC rule is invalid because the OCC had not complied with the NBA provision (Section 25b) that establishes the standard for OCC preemption determinations. Instead, he agreed with the OCC’s argument that rather than preempt state law, the rule interprets the substantive meaning of Section 85 by clarifying the scope of federal authority granted by Section 85.

Judge White also rejected the AGs’ argument that the Second Circuit’s Madden decision had implicitly construed the terms of Section 85, thereby trumping the OCC’s construction. Citing U.S. Supreme Court authority that holds a prior judicial construction of a statute trumps an agency’s construction only when the court has held that its construction follows from a statute’s unambiguous terms, Judge White found that the Second Circuit did not clearly hold that Section 85 was ambiguous. Rather, it had distinguished prior cases extending preemption to non-national banks on the basis that the national banks had not completely divested their interests in the accounts at issue while, in contrast, the national bank in Madden had not retained an interest in the transferred account.

Judge White also found that the OCC rule was entitled to Chevron deference. In conducting the first step of a Chevron analysis, he found that Section 85 did not directly speak to the issue of what happens to the interest rate set by a national bank “once it has been incorporated into a contract, let alone a contract that is subsequently transferred.” In Chevron step two, he found the OCC rule to be a reasonable interpretation of Section 85 that is neither arbitrary nor capricious, nor “manifestly contrary to Section 85.” In doing so, he rejected the AGs’ argument that the OCC’s interpretation was unreasonable because the privilege of preemption cannot be transferred or assigned. According to Judge White, their argument was not persuasive because:

[T]he Final Rule does not grant a non-bank the same most favored status a national bank holds with respect to the power to set interest rates. Instead, commensurate with a national bank’s power to transfer or assign loans, the Final Rule states the national bank has the power to do so without altering the interest rate upon which it and the borrower initially agreed.

He also rejected the AGs’ argument that the rule is arbitrary and capricious because the OCC had not considered the rule’s impact on “rent–a-bank schemes” and the rule was not based on evidence of Madden’s negative effects on credit availability. Judge White found that OCC had considered whether the rule would facilitate predatory lending and had evidence of Madden’s negative effects.

In People of the State of California, et al. v. FDIC, Judge White first addressed the AGs’ argument that the FDIC exceeded its authority in promulgating its “Madden-fix” rule because the rule permits the FDIC to impermissibly regulate the conduct of non-FDIC banks and has the effect of impermissibly preempting state laws. He found that the rule fell within the FDIC’s authority to issue rules it deems necessary to carry out the FDIA and “does not purport to regulate either the transferee’s conduct or any changes to the interest rate once a transaction is consummated.”

Judge White then concluded that the FDIC’s rule was also entitled to Chevron deference. He found that the rule passed Chevron step one because, like Section 85 on which it was modeled, Section 27 did not address what happens to the validity of a loan’s interest rate upon transfer. In conducting Chevron step two, he found that the rule was a reasonable interpretation of Section 27 because the FDIC could reasonably conclude that its interpretation would assist FDIC banks in maintaining liquidity by creating greater certainty about an interest rate’s validity when a loan is transferred. He also found the rule is not arbitrary or capricious because, like the OCC, the FDIC considered the impact of its rule on “rent-a-bank schemes” and based the rule on evidence about the uncertainty created by Madden.

While the two decisions certainly represent a very positive development, it is possible the AGs will appeal the decisions to the Ninth Circuit. The decisions also do not remove the uncertainty that continues to exist for participants in bank-model programs as a result of “true lender” threats. The OCC’s “true lender” rule, which would have provided a clear bright line test for determining  when a bank is the “true lender” in a bank model program, was overturned by Congress under the Congressional Review Act.

In addition, banks participating in such programs should expect their participation to be closely scrutinized by regulators. Within hours of the release of Judge White’s decisions, Acting Comptroller of the Currency Hsu issued the following warning about abuses of the OCC’s Madden-fix rule:

The district court affirmed the validity of the OCC’s rule, which provides that when a national bank or state or federal savings association sells, assigns, or otherwise transfers a loan, the interest permissible before the transfer continues to be permissible after the transfer.

This legal certainty should be used to the benefit of consumers and not be abused. I want to reiterate that predatory lending has no place in the federal banking system. The OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for “rent-a-charter” arrangements.

In addition to “true lender” threats, non-bank participants in bank-model programs will continue to face state licensing threats. Given such continuing threats, bank and non-bank participants would be well-advised to revisit their vulnerability to “true lender” challenges and their compliance with state licensing laws.

Glen P. TrudelRonald K. Vaske & Mindy Harris

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FDIC Acting Chair Announces 2022 Priorities

With Democrats now firmly in control of the FDIC, Acting Chairman Martin Gruenberg released a list of the FDIC’s priorities for 2022. His list of priorities included the following:

  • Community Reinvestment Act (CRA): The FDIC, Federal Reserve, and OCC plan to act jointly on a notice of proposed rulemaking in the near future that would strengthen and enhance CRA. CRA reform will be the FDIC’s top priority. (In December 2021, the OCC issued a final rule that rescinded its June 2020 CRA final rule and replaced it with a rule that is largely based on the OCC’s 1995 CRA rule that was adopted jointly with the Federal Reserve and FDIC.)
  • Financial Risks Posed by Climate Change: In addressing the financial risks that climate change poses to banking organizations and the financial system, the FDIC’s work will include seeking public comment on guidance designed to help banks prudently manage these risks, establishing an FDIC interdivisional, interdisciplinary working group on climate-related financial risks, and joining the international Network of Central Banks and Supervisors for Greening the Financial System.
  • Crypto-Asset Risks: The FDIC and other federal banking agencies must carefully consider the significant safety and soundness and financial system risks a variety of crypto-asset or digital asset products could pose and determine the extent to which banking organizations can safely engage in crypto-asset-related activities. To the extent such activities can be conducted in a safe and sound manner, the agencies will need to provide robust guidance to the banking industry on the management of prudential and consumer protection risks raised by crypto-asset activities.
  • Review of Bank Merger Process: The FDIC and other federal banking agencies intend to review bank merger standards given implications of bank mergers for competition, safety and soundness, financial stability, and meeting the financial services needs of communities. This review of bank merger standards was previously announced in December 2021 by Acting Director Gruenberg and CFPB Director Rohit Chopra, a move that appeared to create friction within the agency between then-Chair Jelena McWilliams and the other FDIC directors.

Scott A. Coleman

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Seventh Circuit Issues Decision on FDCPA Standing and Bona Fide Error Defense

A new decision from the U.S. Court of Appeals for the Seventh Circuit in two consolidated cases analyzes the requirements for Article III standing in a FDCPA case. It also addresses what a debt collector must show to establish that it maintained procedures reasonably adapted to avoid an error as required by the FDCPA’s bona fide error defense. Under the bona fide error defense, a debt collector is not liable for a FDCPA violation if it shows by a preponderance of the evidence that (1) the violation was not intentional, (2) the violation resulted from a bona fide error, and (3) it maintained procedures reasonably adapted to avoid the error.

In Ewing v. MED-1 Solutions, LLC, the plaintiff sought to dispute a medical debt by faxing a letter to MED-1, a debt collector. MED-1’s receptionist misrouted the fax by forwarding it to the client care department rather than the legal department. MED-1’s fax distribution policy provided that any faxed legal communication regarding disputed debts should be forwarded to the legal department. The receptionist received on the same day, and correctly forwarded, five other dispute letters. As a result of the plaintiff’s misdirected fax, her dispute was never recorded. Two years later, she obtained a copy of her credit report and saw that her debt as reported by MED-1 was not marked disputed.

She subsequently filed a lawsuit against MED-1 in which she alleged it had violated the FDCPA (15 U.S.C. Section 1692(e)(8)) by reporting her debt to a consumer reporting agency (CRA) without noting it had been disputed. Having admitted the underlying facts, MED-1 asserted that it was entitled to rely on the bona fide error defense because the failure to report the dispute arose from an unintentional error and it maintained procedures reasonably adapted to ensure that it reported faxed disputes. The district court granted summary judgment to MED-1 based on the bona fide error defense.

In Webster v. Receivables Performance Management, LLC, the plaintiff sought to dispute a debt she discovered on her credit report that she did not believe she owed. Her attorney faxed a dispute notice to Receivables, a debt collector, after verifying that the fax number (which he had used on behalf of other clients) remained listed with the Multistate Licensing System & Registry, the entity through which debt collectors are licensed in Indiana. Receivables had decided several months earlier to stop monitoring its fax inbox after removing the fax number from its website. Receivables had general policies for handling known disputes but no procedure to check the fax inbox periodically for new disputes or to notify senders that the inbox was unmonitored. As a result, Receivables was unaware of the plaintiff’s fax but because it had not disabled the fax number, confirmations continued to be sent upon receipt of faxes, including to the plaintiff’s attorney.

After obtaining an updated credit report that showed her debt but not her dispute, the plaintiff filed a lawsuit against Receivables alleging a violation of FDCPA Section 1692(e)(8). Receivables claimed that even if it violated the FDCPA, the bona fide error defense excused its violation. The district court granted Receivables’ motion for summary judgment based on the bona fide error defense.

On appeal, both debt collectors asserted that under the U.S. Supreme Court’s decision last year in TransUnion LLC v. Ramirez (which was decided while the appeals were pending), the plaintiffs did not have Article III standing because any risk of future harm they faced was not sufficiently concrete to support a suit for damages. According to the Seventh Circuit, TransUnion made clear that a risk of future harm without more is insufficiently concrete to provide standing to sue for damages in federal court.

The plaintiffs argued that the injury was concrete because the dissemination of false information to a CRA bears a close relationship to reputational harms long recognized in U.S. courts and at common law, such as defamation. The debt collectors argued that the plaintiffs could not have suffered a concrete harm because there was no evidence the CRA sent their credit reports to potential creditors. Calling the collectors’ argument “a red herring,” the Seventh Circuit stated that if the plaintiffs’ harm is analogous to defamation, they must show that the debt collectors disseminated false information about them to a third party (i.e. reports to a CRA of debts not being disputed) but do not have to make the further showing that the third party also shared the false information.

Agreeing with the plaintiffs that the harm Congress sought to remedy through Section 1692(e)(8) is analogous to the harm caused by defamation, the court found that the plaintiffs had demonstrated third-party dissemination that constituted “publication” of the false statements. According to the Seventh Circuit, “publication” requires the third party to understand the defamatory significance of the disseminated information.

The court found that the CRA understood the defamatory significance of the reported debts. First, the CRA would have included the disputes with the debts shown on the plaintiffs’ credit reports if the debt collectors had communicated them. Second, by showing that their credit scores rose once the debts were reported as disputed, the plaintiffs provided evidence that the CRA’s assessment of their creditworthiness took into account whether or not a debt was disputed.

Based on these findings, the Seventh Circuit concluded that the plaintiffs suffered an intangible, reputational injury that was sufficiently concrete to provide Article III standing.

Turning to the merits, the Seventh Circuit affirmed the district court’s decision determining that regardless of whether MED-1 violated the FDCPA, its mistake was a bona fide error that shielded it from liability. However, it reversed the district court’s decision determining that Receivables violated the FDCPA but could rely on the bona fide error defense to excuse the violation.

The Seventh Circuit found that MED-1 had implemented procedures reasonably adapted to avoid the error of a misdirected fax by including a step-by-step explanation in its written policies of how a receptionist should properly direct legal faxes. The court rejected the plaintiff’s argument that to have “reasonably adapted” procedures, MED-1 needed to have a policy requiring departments to identify and forward misdirected faxes. In the Seventh Circuit’s view, it was sufficient that the error that gave rise to the case would have been avoided if the step-by-step fax procedures had been followed.

With regard to Receivables, the Seventh Circuit found it did not have reasonably adapted procedures in place to avoid the error that occurred—not reporting a faxed dispute. According to the court, it was not reasonable for Receivables to stop monitoring its fax inbox while allowing the system to continue to send confirmations that faxes had been received. The court rejected Receivable’s attempt to rely on its “unspecified FDCPA training for employees and general policy of reporting disputes,” stating that “[r]egardless of these imprecise policies, Receivables had no reasonable policy in place to ensure that faxed disputes were reported. Nor did Receivables implement any reasonable procedure to ensure that it would no longer receive faxed disputes in the first place.”

The decisions, particularly the decision involving Receivables, should serve as a reminder to debt collectors to consider the impact of operational changes on FDCPA compliance and make sure that their practices and policies for FDCPA compliance are revised appropriately.

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FCC Chair Proposes Ruling Declaring Ringless Voicemails Subject to TCPA Autodialer Prohibition

Although several court decisions have held that ringless voicemails to a consumer’s cell phone constitute “calls” subject to the Telephone Consumer Protection Act (TCPA) autodialer prohibition, the Federal Communications Commission (FCC) has not yet officially weighed in on the question. In 2017, a marketing company filed a petition with the FCC seeking a declaratory ruling that the technology was not subject to the TCPA but the petition was withdrawn.

Earlier this month, the FCC issued a news release announcing that FCC Chair Rosenworcel, in response to the petition, had proposed a ruling that, if adopted by the full commission, would require callers to obtain consent before leaving a ringless voicemail on a consumer’s cell phone. As described in the press release, the proposed Declaratory Ruling and Order would find that ringless voicemails are “calls” requiring prior express consent.

Daniel JT McKenna

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Update on State Small Business Commercial Financing Disclosure Laws

Around the nation, regulators are preparing to implement and enforce new consumer-like disclosure laws for small business commercial finance providers.

New York regulators have yet to issue final regulations implementing the state’s Commercial Finance Disclosure Law (CFDL), which went into effect on January 1, 2022. As we previously reported, the New York State Department of Financial Services (NYDFS) advised that commercial finance providers’ obligations under the CFDL do not ripen until the NYDFS “issues final implementing regulations and those regulations take effect.” The NYDFS is expected to provide an updated proposal prior to March 31, 2022.

Similarly, California regulators have yet to finalize proposed implementing regulations. As we also reported, the California Department of Financial Protection and Innovation (CADFPI) proposed implementing regulations in September 2020, modifications to its proposal in April 2021, second modifications in August 2021, third modifications in October 2021, and fourth modifications in November 2021. As of December 30, 2021, the CADFPI’s proposal is still under review. The NYDFS and CADFPI have indicated they are working together to promulgate consistent disclosure laws.

Connecticut, Missouri, New Jersey, North Carolina, and Virginia previously introduced bills requiring small business commercial disclosures which are in various stages of implementation, with Missouri differing from the other jurisdictions in that its proposed legislation does not require disclosure of the annual percentage rate. On February 1, 2022, Mississippi’s commercial disclosure bill died in committee. During the week of February 7, 2022, bills were introduced in Utah and Maryland that would require disclosures in commercial transactions. The Maryland bill represents the state’s most recent attempt to pass legislation to restrict merchant cash advance programs.

Based on the current status of the proposed rules, we anticipate New York and California’s disclosure laws for commercial finance providers will not go into effect sooner than summer 2022. Compliance obligations are not likely to arise in any of the other states before the third quarter of 2022. Accordingly, lenders in this space should be using this time to develop their compliance programs to avoid investigations, litigation, and fines.

John Sadler & Gerard Belfort

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Delaware Federal District Court Certifies Questions Regarding CFPB’s Enforcement Authority and Constitutionality to Third Circuit for Interlocutory Appeal

In CFPB v. National Collegiate Master Student Loan Trust et al., the district court rejected the Trusts’ arguments that they were not “covered persons” under the CFPA and that because the enforcement action was filed by an unconstitutionally structured CFPB, it was void when filed and could not stop the statute of limitations from running. The district court has now certified two questions to the Third Circuit for interlocutory appeal: whether the Trusts are “covered persons” and whether the filing of the enforcement action by an unconstitutionally structured CFPB made the filing invalid, thereby requiring the Bureau to ratify the lawsuit before the statute of limitations ran out.

The CFPB first filed the enforcement action in 2017, alleging that the Trusts engaged in unlawful debt collection practices. The enforcement action was among the CFPB lawsuits ratified by former Director Kraninger following the U.S. Supreme Court’s decision in Seila Law that held that the CFPB’s Director was unconstitutionally insulated from removal by the President. The district court ruled that because CFPB enforcement actions must be filed within three years of the CFPB’s discovery of a violation and the CFPB admitted that the ratification occurred more than three years after it filed the lawsuit against the Trusts, the ratification was ineffective to save the lawsuit. However, the court dismissed the CFPB’s lawsuit without prejudice, thereby allowing the CFPB an opportunity to refile. The CFPB subsequently amended its complaint and the Trusts moved to dismiss, arguing that the amended complaint was untimely for the same reason as the original complaint. They also argued that the enforcement action was invalid because they were not “covered persons” under the CFPA.

Sitting by designation in the district court, Third Circuit Judge Stephanos Bibas denied the motion to dismiss and ruled that, based on the amended complaint, the lawsuit was not time-barred. According to Judge Bibas, the U.S. Supreme Court’s decision in Collins v. Yellen undercut the argument that the lawsuit was void because the ratification occurred too late to save it. In Collins, the Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed. Judge Bibas interpreted this to mean that actions taken under a properly appointed agency head are not void and do not need to be ratified unless the plaintiff can show that the action would not have been taken but for the President’s inability to remove the agency head.

Judge Bibas also rejected the Trusts’ argument that they were not “covered persons” under the CFPA because they were “passive securitization vehicles” that could not be held liable for the actions of their subservicers. The CFPB argued that the Trusts “engaged in offering or providing a consumer financial product or service” within the meaning of the CFPA’s definition of “covered person.” Judge Bibas concluded that the Trusts engaged in servicing loans because “[the] definition [of ‘engage’] is broad enough to encompass actions taken on a person’s behalf by another, at least where that action is central to his enterprise.”

The Trusts subsequently filed a motion asking Judge Bibas to certify the following two questions to the Third Circuit for interlocutory appeal:

  • Whether the Trusts are “covered persons” subject to the CFPB’s enforcement authority
  • Whether the Bureau needed to ratify the enforcement action before the statute of limitations ran out, having first filed the lawsuit while the CFPB’s director was improperly insulated from presidential removal.

In granting the Trusts’ motion, Judge Bibas indicated that both questions were novel and “the stakes are high—if I am wrong about either issue, this litigation must end now.” With regard to the question whether the Trusts are “covered persons,” Judge Bibas stated that “there is room for reasonable disagreement” whether the Trusts “engage in” collecting debt or servicing loans for purposes of the definition of “covered person.” He also stated that he was “the first judge to decide whether the Bureau may bring enforcement actions against creditors like the Trusts who contract out debt collection and loan servicing.”

With regard to the constitutional question, Judge Bibas indicated that Collins, on which he had relied for his constitutionality ruling, was “a very recent Supreme Court decision and lower courts have not yet hashed out its scope.” While observing that Collins made clear that, under Seila Law, ratification is not always necessary when an agency director is insulated from presidential removal, he stated that “one can reasonably disagree about the scope of Collins.” More specifically, according to the Trusts, Collins was distinguishable from the CFPB’s enforcement action because the action was marred by a constitutional defect from its inception while, in Collins, the challenged agency action was initiated by an acting director removable at will by the President and only later implemented by improperly insulated successors. As a result, the Trusts argued that Seila Law should apply and require ratification.

John C. Grugan & Thomas Burke

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