Legal Alert

Mortgage Banking Update - March 24, 2022

March 24, 2022
In This Issue:

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CFPB Updates Examination Manual to Use UDAAP Authority to Target Discriminatory Practices, Including Those Involving Non-Credit Products or Services

Consistent with expectations that the CFPB under Director Chopra’s leadership would take an expansive view of its statutory authorities, the CFPB has announced its intention to use its authority to prohibit unfair, deceptive, or abusive acts or practices (UDAAPs) to target discriminatory conduct, even where fair lending laws may not apply.

Specifically, the CFPB is directing its examiners to apply the Consumer Financial Protection Act’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the Equal Credit Opportunity Act (such as in connection with denying access to a checking account). Under the CFPA, an act or practice is “unfair” if (1) it causes or is likely to cause substantial injury to consumers, (2) the injury is not reasonably avoidable by consumers, and (3) the injury is not outweighed by countervailing benefits to consumers or competition. In its news release, the CFPB states:

The CFPB will examine for discrimination in all consumer finance markets, including credit, servicing, collections, consumer reporting, payments, remittances, and deposits.  CFPB examiners will require supervised companies to show their processes for assessing risks and discriminatory outcomes, including documentation of customer demographics and the impact of products and fees on different demographic groups.  CFPB examiners will look at how companies test and monitor their decision-making processes for unfair discrimination, as well as discrimination under ECOA.

The CFPB’s blog post about the manual update provides an indication of some of the practices the CFPB intends to scrutinize using an “unfairness” analysis. As an example of a discriminatory practice that “fall[s] squarely within our mandate to address and eliminate unfair practices,” the blog post identifies “the widespread and growing reliance on machine learning models throughout the financial industry and their potential for perpetuating biased outcomes,” and specifically mentions “certain targeted advertising and marketing, based on machine learning models, [that] can harm consumers and undermine competition.” 

Observing that “[c]onsumer advocates, investigative journalists, and scholars have shown how data harvesting and consumer surveillance fuel complex algorithms that can target highly specific demographics of consumers to exploit perceived vulnerabilities and strengthen structural inequities,” the CFPB indicates that it “will be closely examining companies’ reliance on automated decision-making models and any potential discriminatory outcomes.”

The updates to the manual intended to implement the CFPB’s use of its UDAAP authority to address discriminatory conduct consist of the following:

  • The manual previously stated that an examination objective is to identify acts or practices that materially increase the risk of consumers being treated in an unfair, deceptive, or abusive matter. The manual is updated to specifically state that such practices include “discriminatory acts or practices.”
  • The materials examiners are directed to review to initially identify UDAAP concerns are expanded to include:
    • Documentation regarding the use of models, algorithms, and decision-making processes used in connection with consumer financial products and services;
    • Information collected, retained or used regarding customer demographics; and
    • Any demographic research or analysis relating to marketing or advertising of consumer financial products or services.
  • The determinations examiners must make based on the review of documents are expanded to include whether:
    • The entity has a process to prevent discrimination in relation to all consumer financial products and services it offers, which includes an evaluation of all policies, procedures, and processes for discrimination prior to implementation or making changes, and continued monitoring for discrimination after implementation; and
    • The entity’s compliance program includes an established process for periodic analysis and monitoring of all decision-making processes used in connection with consumer products and services, and a process to take corrective action to address any potential UDAAP concerns related to their use, including discrimination.
  • In determining through discussions with management and a review of available information whether an entity’s internal controls are adequate to prevent UDAAPs, the issues examiners are directed to consider are expanded to include whether:
    • The entity has established policies and procedures to mitigate potential UDAAP concerns arising from the use of its decision-making processes, including discrimination;
    • The entity’s policies, procedures, and practices do not target or exclude consumers from products or services, or offer different terms and conditions, in a discriminatory manner; and
    • The entity has appropriate training for customer service personnel to prevent discrimination.
  • The process for identifying areas for potential transaction testing is expanded to direct examiners to determine whether:
    • The entity improperly gives inferior terms to one customer demographic as compared to other customer demographics;
    • The entity improperly offers or provides more products or services to one customer demographic as compared to other customer demographics;
    • Customer service representatives improperly treat customers of certain demographics worse or provide extra assistance or exceptions to customers of certain demographics;
    • The entity engages in targeted advertising or marketing in a discriminatory way;
    • The entity uses decision-making processes in its eligibility determinations, underwriting, pricing, servicing, or collections that result in discrimination; and
    • The entity fails to evaluate and make necessary adjustments and corrections to prevent discrimination.
  • When transaction testing is needed:
    • The determinations that an examiner is required to make through a review of marketing materials, customer agreements, and other disclosures are expanded to include whether, before the consumer choses to obtain the products or services, marketing or advertising improperly target or exclude consumers on a discriminatory basis, including through digital advertising.
    • In evaluating whether the products and services consumers are receiving are consistent with disclosures and policies:
      • The elements of the sample that an examiner selects for each product and service reviewed are expanded to include identification of the decision-making processes used to determine approval or denial and the terms of the offer, as well as the corresponding inputs used in the decision-making processes for each account in the sample.
      • The determinations an examiner is required to make are expanded to include whether the entity offers products and services to consumers in a manner that prevents discrimination.
    • In evaluating how an entity monitors the activities of employees and third party contractors, marketing sales personnel, vendors, and service providers to ensure they do not engage in UDAAPs with respect to consumer interactions, the issues examiners are directed to consider are expanded to include whether the entity has a process to take prompt corrective action if the decision-making processes it uses produces deficiencies or discriminatory results.
    • In evaluating whether servicing and collection practices raise potential UDAAP concerns, the factors examiners must consider are expanded to include whether:
      • Call centers effectively refrain from engaging in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis respond to calls from consumers with limited English proficiency; and
      • The entity ensures that employees and third-party contractors do not engage in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis.

The CFPB’s decision to use its UDAAP authority to challenge discriminatory conduct was presaged by an article published last year by the Student Borrower Protection Center titled “Discrimination is ‘Unfair’.” The article argued that the CFPB, FTC, state attorneys general and regulators, and in some cases private individuals, should consider challenging discrimination as an unfair practice covered by federal and state laws prohibiting unfair, deceptive or abusive acts and practices. In its news release and blog post about the manual update, the CFPB does not indicate whether it also plans to use its UDAAP authority to bring discrimination-based claims in enforcement actions. As we indicated in our blog post about the article, we have considerable doubts as to whether a court would uphold the CFPB’s position.

John L. Culhane, Jr., Richard J. Andreano, Jr., Ronald K. Vaske & Heather S. Klein

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CFPB Encourages Mortgage Servicer Participation in HAF Programs

The CFPB published a blog post, stating that it “strongly encourages” mortgage servicers to participate in Homeowner Assistance Fund (HAF) programs. The Bureau asserts that it “remains focused on preventing avoidable foreclosures to the maximum extent possible and expects mortgage servicers to do the same.”

By way of background, HAF is a federal program that provides money to states, tribes, and territories to assist homeowners with housing costs. These funds can be used to pay down delinquent amounts, so that borrowers can avoid foreclosure or be better positioned for loss mitigation assistance. Implementation of HAF programs can be complicated by varying procedures among the states.

The CFPB states that while servicer participation in HAF programs is voluntary, accepting HAF funds can be pivotal in resolving delinquencies and avoiding foreclosures in some instances. The Bureau encourages servicers to train customer service personnel regarding the availability of HAF programs, and reminds the industry of the requirement to provide accurate information to borrowers regarding loss mitigation. For servicers participating in HAF programs, the blog post notes the requirement to maintain policies and procedures reasonably designed to ensure proper loss mitigation evaluation, incorporating HAF procedures as applicable. The CFPB states, in particular, that servicers must ensure that borrowers are not improperly referred to foreclosure, while the servicer is working with a borrower during the HAF application process or waiting for payment of HAF funds.

Reid F. Herlihy

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Russian Sanctions: FinCEN Provides Red Flags for Potential Evasion Attempts

On March 7, the Financial Crimes Enforcement Network (FinCEN) issued an alert “advising all financial institutions to be vigilant against potential efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented against potential efforts to evade the expansive sanctions and other U.S.-imposed restrictions implemented in connection with the Russian Federation’s further invasion of Ukraine.” The news release is here. The alert itself is here.

FinCEN’s alert seeks to provide “red flags to assist in identifying potential sanctions evasion activity and reminds financial institutions of their Bank Secrecy Act (BSA) reporting obligations, including with respect to convertible virtual currency (CVC).” The alert stresses the following:

Since February 2022, and in response to Russia’s further invasion of Ukraine, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) has taken several significant sanctions actions related to the Russian financial services sector pursuant to Executive Order (E.O.) 14024,8 including: a determination by the Secretary of the Treasury with respect to the financial services sector of the Russian Federation that authorizes sanctions against persons determined to operate or to have operated in that sector; correspondent or payable-through account and payment processing prohibitions on certain Russian financial institutions; the blocking of certain Russian financial institutions; expanding sovereign debt prohibitions to apply to new issuances in the secondary market; prohibitions related to new debt and equity for certain Russian entities; and a prohibition on transactions involving certain Russian government entities, including the Central Bank of the Russian Federation. OFAC also imposed sanctions on Russian Federation President Vladimir Putin, and Minister of Foreign Affairs Sergei Lavrov. In a related action, OFAC designated certain Belarusian persons, including financial institutions, due to Belarus’ support for, and facilitation of, the invasion. Most recently, OFAC and the U.S. Department of State intensified pressure on Russia by sanctioning numerous Russian elites and their family members, identifying certain property of these persons as blocked, and sanctioning Russian intelligence-directed disinformation outlets and defense-related firms.

FinCEN’s alert therefore observes that, due to these actions, sanctioned Russian and Belarusian actors may seek to evade sanctions. To that end, FinCEN offers the following potential “red flags” regarding such evasive behavior:

  • Use of corporate vehicles (i.e. legal entities, such as shell companies, and legal arrangements) to obscure (i) ownership, (ii) source of funds, or (iii) countries involved, particularly sanctioned jurisdictions.
  • Use of shell companies to conduct international wire transfers, often involving financial institutions in jurisdictions distinct from company registration.
  • Use of third parties to shield the identity of sanctioned persons and/or PEPs seeking to hide the origin or ownership of funds, for example, to hide the purchase or sale of real estate.
  • Accounts in jurisdictions or with financial institutions that are experiencing a sudden rise in value being transferred to their respective areas or institutions, without a clear economic or business rationale.
  • Jurisdictions previously associated with Russian financial flows that are identified as having a notable recent increase in new company formations.
  • Newly established accounts that attempt to send or receive funds from a sanctioned institution or an institution removed from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
  • Non-routine foreign exchange transactions that may indirectly involve sanctioned Russian financial institutions, including transactions that are inconsistent with activity over the prior 12 months. For example, the Central Bank of the Russian Federation may seek to use import or export companies to engage in foreign exchange transactions on its behalf and to obfuscate its involvement.

Moreover, FinCEN offers the following red flags specific to sanctions and convertible virtual currency transactions, and regarding potential Russian-related ransomware campaigns:

  • A customer’s transactions are initiated from or sent to the following types of Internet Protocol (IP) addresses: non-trusted sources; locations in Russia, Belarus, FATF-identified jurisdictions with AML/CFT/[counter-proliferation, or “CP”] deficiencies, and comprehensively sanctioned jurisdictions; or IP addresses previously flagged as suspicious.
  • A customer’s transactions are connected to CVC addresses listed on OFAC’s Specially Designated Nationals and Blocked Persons List.
  • A customer uses a CVC exchanger or foreign-located MSB in a high-risk jurisdiction with AML/CFT/CP deficiencies, particularly for CVC entities and activities, including inadequate “know-your-customer” or customer due diligence measures.
  • A customer receives CVC from an external wallet, and immediately initiates multiple, rapid trades among multiple CVCs with no apparent related purpose, followed by a transaction off the platform. This may be indicative of attempts to break the chain of custody on the respective blockchains or further obfuscate the transaction.
  • A customer initiates a transfer of funds involving a CVC mixing service.
  • A customer has either direct or indirect receiving transaction exposure identified by blockchain tracing software as related to ransomware.

Finally, FinCEN requests that financial institutions reference this alert when filing Suspicious Activity Reports (SARs) by including the key term “FIN-2022-RUSSIASANCTIONS” in SAR field 2.

Peter D. Hardy

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Podcast: The CFPB’s Inquiry Into ‘Junk Fees’: What It Means for Consumer Financial Services Providers

The CFPB’s recently-issued request for information takes aim at what the CFPB labels “junk fees” charged by consumer financial services providers. We discuss the types of fees targeted in the RFI, particularly fees related to deposit accounts and mortgages, and the impact of existing regulatory requirements on the CFPB’s initiative. We also examine the CFPB’s authority to address so-called “junk fees,” consider possible short- and long-term actions the CFPB could take in response to the RFI, offer steps providers can take to prepare for greater scrutiny of ancillary fees and possible legal challenges, and describe the CFPB readiness reviews that Ballard Spahr attorneys are conducting to assist providers in assessing the permissibility and disclosure of fees charged in connection with their consumer products and services.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by John Culhane, Richard Andreano, and Ron Vaske, partners in the firm’s Consumer Financial Services Group.

Click here to listen to the podcast.

Alan Kaplinsky, John Culhane, Richard Andreano, and Ron Vaske 

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Executive Order on Digital Assets Includes Roles for CFPB, FTC, Federal Banking Agencies

President Biden has signed an Executive Order intended to respond to the explosive growth in digital assets, including cryptocurrencies. Titled “Executive Order on Ensuring Responsible Development of Digital Assets,” the Order is described by the White House as “outlining the first ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology.”

The Order sets out the following national objectives with respect to digital assets: consumer and investor protection; protection of financial stability and mitigation of systemic risk; mitigation of illicit finance and national security risks; reinforcement of U.S. leadership in the global financial system and in technological and economic competitiveness; promotion of equitable access to safe and affordable financial services; and promotion of responsible development and use of digital assets. The actions contemplated by the Order include an assessment of the possible benefits and risks of launching a U.S. central bank digital currency (CBDC).

The Order calls for its implementation through the use of an interagency process in which certain specified agencies would participate and in which representatives of other agencies “may be invited to attend interagency meetings as appropriate.” Such other agencies include the CFPB, FTC, Federal Reserve Board, FDIC, and OCC. The provisions of the Order that specifically contemplate roles for these agencies include provisions that:

  • Encourage the FTC Chair and CFPB Director to consider what, if any, effects the growth of digital assets could have on competition policy;
  • Encourage the FTC Chair and CFPB Director to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed;
  • Encourage the Fed Chair, the FDIC Chair, and the Comptroller of the Currency to consider the extent to which investor and market protection measures within their respective jurisdictions may be used to address the risks of digital assets and whether additional measures may be needed; and
  • Direct the Treasury Secretary to convene the Financial Stability Oversight Council (whose members include the CFPB Director, FDIC Chair, Fed Chair and Comptroller of the Currency) and produce a report outlining the specific financial stability risks and regulatory gaps posed by various types of digital assets and providing recommendations to address such risks, including any proposals for additional or adjusted regulation and supervision as well as for new legislation.

CFPB Director Chopra issued a statement on the Executive Order in which he indicated that the CFPB “is committed to working to promote competition and innovation, while also reducing the risks that digital assets could pose to our safety and security” and that the CFPB “must make sure Americans in all financial markets are protected against errors, theft, or fraud.”

In a related development, the Financial Literacy and Education Commission (FLEC) will “form a new subgroup on digital asset financial education, which will operate alongside the FLEC’s current workstream analyzing the impact of climate change on household and community financial resilience. Through this group, the FLEC will work to develop consumer-friendly, trustworthy and consistent educational materials, tools and outreach to help consumers make informed choices about digital assets.” (The FLEC was established by the Fair and Accurate Credit Transactions Act of 2003 and tasked with the development of a national strategy on financial education. It is chaired by the Secretary of the Treasury and the CFPB Director serves as Vice-Chair.)

Ronald K. VaskeMark J. Levin & Alan S. Kaplinsky

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OppFi Files Complaint to Block ‘True Lender’ Challenge by California Department of Financial Protection and Innovation

Opportunity Financial, LLC (OppFi) has filed a Complaint for Declaratory and Injunctive Relief in a California state court against the California Department of Financial Protection and Innovation (DFPI), seeking to block the DFPI from applying California usury law to loans made through OppFi’s partnership with Fin Wise Bank (Bank), a state-chartered FDIC-insured bank located in Utah.

In 2019, California enacted AB 539 which, effective January 1, 2020, limited the interest rate that can be charged on loans of $2,500 to $10,000 by lenders licensed under the California Financing Law (CFL) to 36 percent  plus the federal funds rate. The complaint recites that prior to 2019, the Bank entered into a contractual arrangement with OppFi (Program) pursuant to which the Bank uses OppFi’s technology platform to make small-dollar loans to consumers throughout the United States (Program Loans). It alleges that as soon as AB 539 was signed into law, the DFPI “began touting AB 539 as a weapon to use against nondepositories that contract with state and federally-chartered banks.”

According to the complaint, in 2020 and 2021, OppFi provided documents to the DFPI in response to the DFPI’s request for information relating to its partnership with the Bank. In February 2022, the DFPI informed OppFi “that its Program-related activities were subject to the CFL and violated AB 539 because, according to the Commissioner [of the DFPI], OppFi is the ‘true lender’ on Program Loans, and the interest rate on those loans exceeds the interest rate cap in AB 539.” OppFi was also informed that the interest rate on Program Loans in amounts less than $2,500 violated the CFL rate limit on such loans.

The complaint describes the role and responsibilities of FinWise and OppFi in the Program as follows:

  • “Consistent with its role as lender,” the Bank performs the following functions in connection with its relationship with OppFi:
    • Approves all underwriting criteria applied to Program Loans;
    • Uses only Bank funds to make Program Loans;
    • Retains ownership of all loans made through OppFi’s online platform for their entire lifecycle;
    • Reviews and approves all marketing materials; and
    • Enters into contracts with borrowers for Program Loans which are only between the borrower and the Bank, define the Bank as the lender on Program Loans, and make clear that the Bank is the entity extending credit.
  • “Consistent with its role [as a provider of technology-based services],” OppFi provides the following services to the Bank:
    • Maintains a website for receiving consumer inquiries about loan products;
    • Prepares a marketing strategy and marketing materials which the Bank reviews and approves;
    • Processes applications for Program Loans by applying the Bank’s underwriting model to the information it collects from consumers’ loan applications, using an algorithm approved by the Bank to approve or reject applications; and
    • Services Program Loans for the Bank.

According to the complaint, in addition to servicing fees paid by the Bank, OppFi receives the right to purchase a percentage of the beneficial interest in Program Loans. The Bank, in addition to retaining ownership of Program Loans, retains title to Program Loans and a beneficial interest in a portion of the principal and interest on Program Loans.

The complaint alleges that because the Bank and not OppFi is making the Program Loans and the Bank is a state-chartered FDIC-insured bank located in Utah, the Bank is authorized by Section 27(a) of the Federal Deposit Insurance Act to charge interest on its loans, including loans to California residents, at a rate allowed by Utah law regardless of any California law imposing a lower interest rate limit.  The complaint seeks a declaration that the interest rate caps in the CFL do not apply to Program Loans and an injunction prohibiting the DFPI from enforcing the CFL rate caps against OppFi based on its participation in the Program.

The complaint references the California Attorney General’s failed attempt to invalidate the FDIC’s Madden-fix rule which is codified at 12 C.F.R. Section 160.110(d). A California federal district court judge recently rejected the California AG’s challenge (in which other states joined) to the FDIC’s rule and, in a separate lawsuit, also rejected a challenge by the California AG and other state AGs to the OCC’s Madden-fix rule codified at 12 C.F.R. Section 7.4001(e). 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.

While the two decisions do represent a very positive development, the 60-day time period for the AGs to appeal the decisions to the Ninth Circuit has not yet expired. Most significantly, as clearly illustrated by the DFPI’s assertion that OppFi is the “true lender” on the Program Loans, the decisions have not removed the uncertainty that continues to exist for participants in bank-model programs as a result of “true lender” threats. (The OCC’s attempt to provide a clear bright line test for determining when a bank is the “true lender” in a bank-model program through a regulation was overturned by Congress under the Congressional Review Act.) In addition to “true lender” threats, non-bank participants in bank-model programs will continue to face state licensing threats. Given such continuing threats, non-bank participants would be well-advised to revisit their vulnerability to “true lender” challenges and their compliance with state licensing laws.

The DFPI is not alone in asserting a “true lender” claim. Other state authorities that have launched or threatened “true lender” attacks against bank-model programs include authorities in D.C., Maryland, New York, North Carolina, Ohio, Pennsylvania, West Virginia, and Colorado. While non-bank participants have been the focus of these state attacks, bank participants could also face increased scrutiny from their regulators. Within hours of the release of the two California decisions, the Acting Comptroller of the Currency issued a warning about abuses of the OCC’s Madden-fix rule in which he stated that “[t]he OCC is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for “rent-a-charter” arrangements.”

Ronald K. VaskeGlen P. Trudel & Mindy Harris

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CFPB Updates Debt Collection Examination Procedures

The CFPB has updated the section of its Supervision and Examination Manual on debt collection examination procedures. The update reflects the requirements of Regulation F, the Bureau’s final debt collection rule that implements the Fair Debt Collection Practices Act. Regulation F became effective on November 30, 2021.

John L. Culhane, Jr.

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Podcast: A Close Look at Lead Generation and the Compliance Risks for Lead Generators and Lead Buyers

We discuss how lead generation works, the roles of the various players in the lead generation marketplace, the key regulatory risks arising under the Fair Credit Reporting Act, Telephone Consumer Protection Act, and Telemarketing Sales Rule, FTC enforcement cases, and CFPB supervisory concerns. We also discuss the impact of the Real Estate Settlement Procedures Act’s referral fee prohibition and fair lending/fair housing laws on lead generation involving mortgage-related services and state licensing issues triggered by lead generation.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Matthew Morr, Richard Andreano, and John Socknat, partners in the firm’s Consumer Financial Services Group.

Click here to listen to the podcast.

Alan S. Kaplinksy, Matthew Morr, Richard Andreano, Jr., John Socknat

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Colorado Attorney General Enters Into Settlements With Credit Unions Requiring Refunds of GAP Fees

Colorado Attorney General Phil Weiser recently announced that three Colorado-chartered credit unions had entered into Assurances of Discontinuance (AODs) with the Colorado Administrator of the Uniform Consumer Credit Code (UCCC) to resolve the issues between the Administrator and credit unions concerning whether the credit unions had failed to make refunds of unearned fees for Guaranteed Automobile Protection (GAP) as required by the Colorado UCCC.  The credit unions that entered into the AODs are Ent Credit UnionPremier Members Credit Union, and Credit Union of Denver.

The GAP coverage in question was purchased by Colorado consumers who had entered into retail installment contracts (RICs) with auto dealers. The credit unions had purchased the RICs from the auto dealers.  UCCC rules require the creditor to refund unearned GAP fees when a consumer prepays a consumer credit sale or consumer loan before maturity or the vehicle is no longer in the consumer’s possession due to the creditor’s lawful repossession and disposition of the collateral and no GAP claim has been made. The Administrator concluded that the three credit unions had engaged in unfair and deceptive trade practices under the Colorado Consumer Protection Act (CCPA) by failing to make the GAP refunds automatically without waiting for a request from the consumer.

The credit unions disputed that they had violated the CCPA. In the AODs, the credit unions represent that they have (1) changed their business procedures to assure that GAP refunds are paid without the need for a request from the consumer, and (2) paid GAP refunds as a result of self-audits in the amounts and to the number of consumers specified in the AODs. (According to the AODs, Ent paid approximately $5.16 million in refunds to 19,011 consumers, Premier Members paid $792,873 in refunds to 2,563 consumers, and Credit Union of Denver paid $122,022 in refunds to 744 consumers.)

Under the AODs, the credit unions agree to comply with the UCCC rule’s GAP refund requirements, be subject to an audit by the Administrator to verify the accuracy of their self-audits, and to send a confirmation letter pre-approved by the Administrator to each consumer to whom a GAP refund was paid as a result of the self-audits.  The letter must state “that the Administrator has been in discussions with the [credit union] about Colorado law that requires creditors to refund unearned GAP premiums if consumers pay off their loans early or their car is repossessed.”

The Colorado AG has been very active in investigating companies to ensure that they are properly providing consumers with their full GAP benefits – with regard both to whether companies are giving consumers their full GAP coverage when a vehicle is totaled and whether companies are refunding GAP fees when a consumer sells a vehicle. Ballard Spahr attorneys have significant experience in dealing with the Colorado AG in matters involving these issues.

Matthew A. Morr

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NY Federal District Court Rules Ratification of CFPB Enforcement Action Against RD Legal Was Unnecessary and Allows Lawsuit to Proceed

In the latest development in the CFPB’s long-running lawsuit against RD Legal Funding, a New York federal district court judge denied RD Legal’s motion to dismiss and held that because the CFPB, under former Director Cordray’s leadership had the authority to initiate the lawsuit, ratification of the lawsuit by former Director Kraninger was unnecessary.  The reinstatement of the lawsuit means the issue of whether the transactions at issue are disguised loans is likely to receive renewed attention.

The ruling follows the Second Circuit’s remand of the case to Judge Preska. The case involves RD Legal’s purchase at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the NFL Concussion Litigation Settlement Agreement (NFLSA) and the September 11th Victim Compensation Fund of 2001 (VCF). The CFPB and NYAG sued RD Legal in federal district court, asserting federal UDAAP claims under the CFPA and state law claims, and RD Legal filed a motion to dismiss based on the alleged unconstitutionality of the Dodd-Frank for-cause removal provision.  In addition to ruling that the provision was unconstitutional, Judge Preska determined that the proper remedy for the constitutional violation was to invalidate Title X in its entirety because the provision was not severable. Having invalidated Title X, she dismissed both the CFPB’s UDAAP claims and the NYAG’s UDAAP claims under Dodd-Frank Section 1042 (which authorizes state attorneys general to initiate lawsuits based on UDAAP violations.) She also dismissed the NYAG’s claims after concluding there was no substantial federal question embedded in the NYAG’s state law claims to provide a basis for federal jurisdiction and declining to exercise supplemental jurisdiction over the state law claims.

Despite dismissing the NYAG’s federal and state claims, Judge Preska determined that the purchase agreements effected assignments of the benefits that, as to the NFLSA benefits, were void under the terms of the underlying settlement agreement and, as to the VCF benefits, were void under the federal Anti-Assignment Act. She then concluded that because the assignments were void, the transactions were necessarily disguised usurious loans. For the reasons discussed in a prior blog post, we believe her logic was erroneous on the loan recharacterization question.

The CFPB and NYAG appealed to the Second Circuit and RD Legal filed a cross-appeal from the district court’s conclusion that the transactions were disguised loans and the complaint stated UDAAP claims under the CFPA and claims for usury and misleading conduct under New York law. While the appeal was pending, the Supreme Court ruled in Seila Law that the for-cause removal provision was unconstitutional but could be severed from Title X. Thereafter, the CFPB filed a declaration with the Second Circuit in which former Director Kraninger stated that she had ratified the Bureau’s decision to file the enforcement action against RD Legal and to appeal from the district court’s dismissal of the action.

Based on the Supreme Court’s Seila Law decision, the Second Circuit issued a summary order that affirmed Judge Preska’s holding that the for-cause removal provision was unconstitutional, reversed her holding that the provision was not severable, and remanded the case to the district court to consider the validity of former Director Kraninger’s ratification. The Second Circuit’s order vacated the district court’s judgment dismissing the underlying enforcement action. In October 2021, the U.S. Supreme Court denied RD Legal’s petition for a writ of certiorari.

On remand, ruling on RD Legal’s motion to dismiss in which it argued that former Director Kraninger’s ratification was invalid, Judge Preska concluded that it was unnecessary for her to decide whether the ratification was valid. In Collins v. Yellen, the Supreme Court held that an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed. Relying on Collins, Judge Preska ruled that because former Director Cordray was properly appointed, his decision to file the enforcement action did not need to be ratified. She also ruled that RD Legal was not entitled to dismissal of the enforcement action as a remedy for the constitutional violation because it could not show that the enforcement action would not have been filed but for the President’s inability to remove former Director Cordray.

Since Judge Preska’s dismissal of the CFPB’s and NYAG’s claims was predicated on her ruling that Title X should be invalidated because the for-cause removal provision was not severable, the Second Circuit’s reversal of her severance ruling reinstated the CFPB’s and NYAG’s federal UDAAP claims. Additionally, because the Second Circuit’s order vacated Judge Preska’s judgment dismissing the enforcement action, it would also appear to have reinstated the NYAG’s state law claims (although Judge Preska could again decline to exercise supplemental jurisdiction.)  As a result, the issue of whether the transactions should be recharacterized as loans can be expected to reemerge. In addition to the NYAG’s state law claims, the CFPB’s and NYAG’s UDAAP claims are premised on the argument that the transactions are loans rather than valid assignments or sales of assets as characterized by RD Legal.

In her decision, Judge Preska directed the parties to confer and inform the court by March 30, 2022, how they propose to proceed.

Alan S. Kaplinsky

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New Jersey Issues Bulletin Regarding Ukraine and Impact on Regulated Entities

The New Jersey Department of Banking and Insurance recently issued Bulletin No. 22-05 to address the escalating situation in Ukraine and its impact on regulated entities, including licensees. The Bulletin provides a summary of steps that regulated entities should undertake and reminds regulated entities to fully comply with U.S. sanctions, including those on Russia and Belarus.

Among other items, regulated entities are expected to evaluate systems for cyber risk and report cybersecurity events to law enforcement, including the New Jersey Cybersecurity & Communications Integration Cell (NJCCIC). The Department also reminds regulated entities and licensees that they should have policies, procedures, and processes in place to implement necessary internal controls, with appropriate training, risk assessments, and testing and auditing against their risk profile, and that they should report any suspicious activities timely with FinCEN and applicable law enforcement agencies.

California DFPI Issues Guidance Regarding Russian Sanctions

The California Department of Financial Protection and Innovation (DFPI) recently issued a  to all financial institutions licensed by the DFPI addressing compliance with state and federal regulations with respect to Russian sanctions.  The DFPI strongly encourages licensees to take certain actions immediately to ensure compliance with the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) regulations, such as, monitoring transactions, and identifying and blocking transactions that are subject to sanctions.  The DFPI also reminds licensees that they should adopt measures and procedures to mitigate cybersecurity threats.

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