Mortgage Banking Update - May 19, 2022
In This Issue:
- FinCEN Acting Director Das Focuses on Corruption and Transparency During U.S. House Committee on Financial Services Testimony
- En Banc Fifth Circuit Rules CFPB Enforcement Action Can Proceed Against All American Check Cashing, but Concurring Opinion Creates Potential for Further Constitutional Challenge Based on CFPB’s Funding Mechanism
- FTC Seeks Comment on Whether to Continue Telemarketing Sales Rule Business-to-Business Exception and Proposes Amendments
- Eighth Circuit Finds That Class-Action FCRA Plaintiff Lacks Article III Standing Under Spokeo
- CFPB and FTC Urge Second Circuit to Adopt Expansive Interpretation of FCRA Reasonable Procedures for Maximum Accuracy Requirement
- CFPB Issues Advisory Opinion Affirming ECOA’s Application to Existing Borrowers
- Podcast: CFPB Invokes Its ‘Dormant Authority” to Supervise Nonbanks That Present Risks to Consumers: What It Means for Nonbank Providers of Consumer Financial Products and Services
- Podcast: The American Law Institute’s Restatement of the Law, Consumer Contracts: An Introduction for Consumer Financial Services Providers, with Steven O. Weise, ALI Council Member
- ALI Members to Consider Restatement of the Law, Consumer Contracts at May 17 Annual Meeting
- Preparing for the Restatement of the Law, Consumer Contracts
- CFPB Issues Annual Fair Lending Report
- CFPB Fines Bank $10 million for Conduct Related to Bank Account Garnishments and Account Agreements
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On April 28, 2022, the Acting Director of the Financial Crimes Enforcement Network (FinCEN), Himamauli Das, appeared before the U.S. House Committee on Financial Services to provide an update on FinCEN’s implementation of the Anti-Money Laundering Act of 2020 (AML Act), including the Corporate Transparency Act (CTA). You can find his prepared statement here.
In his opening remarks, Das walked through FinCEN’s activities for the year, and applauded the AML Act for putting FinCEN in a position to address current challenges, such as illicit use of digital assets, corruption, and kleptocrats hiding their ill-gotten gains in the U.S. financial system. The speech focused on financial sanctions on Russia, FinCEN’s continued efforts to fight corruption, and effective AML programs. Das also indicated that FinCEN is examining whether to issue proposed AML regulations for investment advisers – an effort that stalled in 2015.
Ukraine and Russia
Das addressed FinCEN’s involvement in the international community’s efforts to place financial pressure on the Russian Federation and its leadership, about which we have previously blogged several times (here, here, and here). Recently, FinCEN has issued alerts, used its public-private FinCEN Exchange program, and issued a statement of intent to form a financial intelligence unit on Russia-related illicit finance and sanctions. Specifically, FinCEN’s alerts focused on sanction evasion and highlighting channels through which oligarchs hide and launder corrupt proceeds (i.e., shell companies, real estate, and the purchase of luxury good, including art).
Next, Das discussed the need to increase transparency to fight corrupt actors who rely on vulnerabilities to obscure ownership of assets and launder proceeds of illicit activities. Das summarized FinCEN’s December 7, 2021 Notice of Proposed Rulemaking (NPRM) regarding the beneficial ownership reporting requirements, about which we have blogged here, and indicated that FinCEN is working on a second NPRM that will propose regulations governing access to beneficial ownership information by law enforcement, national security agencies, financial institutions, and others specified in the statute. Citing to the complexity of the rule and its impact on stakeholders, Das noted that the timing of the final rule has not been set. In addition to its rulemaking efforts, FinCEN is developing the beneficial ownership database—the Beneficial Ownership Secure System (BOSS). Access to BOSS will be tailored to the users’ purpose and role, and to safeguard the security of the system, all users will use strong authentication methods to access the information.
Interestingly, Das suggested that FinCEN may be reissuing proposed regulations for investment advisers (blogged about here and here). Although the BSA already applies to broker dealers, it does not apply (yet) to investment advisers. FinCEN issued a 2015 Notice of Proposed Rulemaking that would have imposed minimum AML program and suspicious activity reporting (SAR) requirements on certain investment advisers, but this 2015 Notice of Proposed Rulemaking stalled. Das stated that FinCEN is “exploring how to use FinCEN’s information collection authorities to enhance transparency in this sector, including regarding how Russian elites, proxies, and oligarchs may use hedge funds, private equity firms, and investment advisers to hide their assets.” Although Das suggested that the 2015 Notice of Proposed Rulemaking may receive a second life, “FinCEN will need to further consider the resource implications of a possible rule imposing AML/CFT obligations on investment advisers that could result in substantial additional supervisory and examination responsibilities.”
In regards to money laundering risks in the real estate market, Das discussed the issuance of an Advance Notice of Proposed Rulemaking (ANPRM), about which we have blogged here, and which spurred 150 comments that FinCEN is currently reviewing. The ANPRM envisions imposing nationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold. The precise breadth of any rules, when finalized, currently remains an open question.
Effective AML Programs — and the Budget
Das emphasized the many tasks FinCEN is facing – as a prelude to again stress the need for FinCEN’s budget to be increased. He observed that the AML Act imposes more than 40 requirements on FinCEN that are designed to make the AML/CFT framework more effective, including increased transparency, additional training for bank examiners designed to increase understanding of risk profiles and warning signs, and the implementation of the whistleblower provision designed to reward individuals who provide information on violations.
In June 2021, FinCEN published the first government-wide list of national AML/CFT priorities, which was a broad list that focused on threats to the integrity of the U.S. financial system and national security. FinCEN also issued in December 2021 a Request for Information on ways in which FinCEN can streamline, modernize, and update the AML/CFT framework. It has also worked on improving technology to streamline the AML/CFT framework.
The AML Act encourages communication between the private and public sector. In support of transparency and information sharing, FinCEN has held exchanges to share information among FinCEN, law enforcement, and financial institutions on topics such as ransomware, suspicious activity reports, and environmental crimes. FinCEN also engaged in the Bank Secrecy Act Advisory Group (BSAAG), a group designed to find ways to improve the AML/CFT framework.
While Das outlined the progress FinCEN has made this year, it is clear that a significant amount of work still remains to satisfy the obligations of the AML Act. To meet these obligations, Das would like to increase FinCEN’s budget by $49.3 million. According to Das, the increased budget will allow FinCEN to meet staffing needs to help fulfill the requirements of the AML Act.
En Banc Fifth Circuit Rules CFPB Enforcement Action Can Proceed Against All American Check Cashing, but Concurring Opinion Creates Potential for Further Constitutional Challenge Based on CFPB’s Funding Mechanism
The en banc U.S. Court of Appeals for the Fifth Circuit has ruled that the CFPB’s enforcement action against All American Check Cashing can proceed despite the unconstitutionality of the CFPB’s single-director-removable-only-for-cause-structure at the time the enforcement action was filed. However, in a concurring opinion, five judges expressed their agreement with All American’s argument that the unconstitutionality of the CFPB’s funding mechanism requires dismissal of the enforcement action.
The underlying case is an enforcement action filed by the CFPB against All American in 2016 in a Mississippi federal district court for alleged violations of the CFPA’s UDAAP prohibition. In March 2018, the district court denied All American’s motion for judgment on the pleadings based on unconstitutionality of the CFPB’s single-director-removable-only-for-cause-structure. The district court ruled that the CFPB’s structure was constitutional but, on All American’s request, certified for interlocutory appeal the question of whether the CFPB’s structure violated the Constitution’s separation of powers. The appeal was accepted by the Fifth Circuit.
After a Fifth Circuit panel initially ruled (while Seila Law was awaiting decision by the U.S. Supreme Court) that the structure was constitutional, the Fifth Circuit, on its own motion, voted to rehear the case en banc, thereby vacating the panel’s ruling.
In its en banc decision, the Fifth Circuit ruled that the Supreme Court’s decision in Seila Law decided the pure question of law raised by All American in the interlocutory appeal. Because the Supreme Court also held that the unconstitutional removal provision was severable from the rest of the Dodd-Frank Act, the Fifth Circuit determined that dismissal was not warranted despite the district court’s error in finding no constitutional violation.
The Fifth Circuit indicated that the absence of a dismissal left the CFPB free to continue the enforcement action against All American and remanded the case to the district court. It stated, however, that “[w]e place no limitation on the matters that the court may consider, including, without limitation, any other constitutional challenges, and we express no view on the actions it should take in accordance with this opinion or otherwise.”
As an alternative basis for challenging the CFPB’s constitutionality, All American had argued that the CFPB’s budgetary independence from Congress contravenes the Constitution’s separation of powers by violating the Appropriations Clause. Pursuant to Dodd-Frank, the CFPB receives its funding through requests made by the CFPB Director to the Federal Reserve, subject to a cap equal to 12 percent of the Federal Reserve’s budget, rather than through the Congressional appropriations process. In a scholarly concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American’s argument, writing that “[t]he CFPB’s budgetary independence makes it unaccountable to Congress and the people.”
Judge Jones also concluded that there was “no other option” for remedying the separation of powers violation arising from the CFPB’s budgetary independence than dismissing the enforcement action against All American. She distinguished cases involving an improper removal restriction because, as the Supreme Court indicated in Collins, an unlawful removal provision does not take away an officer’s power to exercise his or her authority. As a result, for a party challenging a removal provision to establish a right to a remedy, it must show that the unconstitutional provision caused compensable harm. In the case of an Appropriations Clause violation however, Judge Jones concluded that “a government actor cannot exercise even its lawful authority using money the actor cannot spend.” She stated that “a constitutionally proper appropriation is as much a precondition to every exercise of executive authority by an administrative agent as a constitutionally proper appointment or delegation of authority.” Because the separation of powers violation at issue impaired the CFPB Director’s authority to act, she concluded that “the proper remedy is to disregard the government action.”
In a second concurring opinion, Judge Oldham, joined by Judge Englehardt, took the position that the Fifth Circuit had jurisdiction on the interlocutory appeal to decide whether the CFPB’s funding mechanism is constitutional. (Both of these judges had joined in Judge Jones’ concurring opinion.)
As Judge Jones indicated in her opinion, the D.C. Circuit and several district courts have rejected the argument that the CFPB’s funding mechanism is unconstitutional. In addition to noting that none of those decisions bind the Fifth Circuit, she observed that “no decision seriously wrestles with the overwhelming separation of powers problem discussed [in her opinion].” The Appropriations Clause issue could pose a significant threat to the CFPB and It would not be surprising if Judge Jones’ opinion gives rise to a new wave of constitutional challenges in CFPB enforcement actions.
In fact, the trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule have submitted the en banc All American decision as supplemental authority to the Fifth Circuit panel hearing their appeal. They argue that the panel should invalidate the rule based on Judge Jones’ concurring opinion. The trade groups have appealed from the district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021 (which would have been until June 13, 2022). After the appeal was filed, the Fifth Circuit entered an order staying the compliance date of the payment provisions until 286 days after the trade groups’ appeal is resolved.
The Federal Trade Commission issued two notices recently concerning the Telemarketing Sales Rule (TSR)—an advance notice of proposed rulemaking (ANPR) and a notice of proposed rulemaking (NPR). Both notices address the TSR’s exemption of business-to-business (B2B) telemarketing calls. The FTC issued the new notices following its review of comments received in response to the regulatory review of the TSR it initiated in 2014. Comments on each notice will be due no later than 60 days after the date it is published in the Federal Register.
ANPR The TSR currently exempts telephone calls between a telemarketer and “any business to induce the purchase of goods or services or a charitable contribution by the business,” known as the B2B exception. The B2B exception does not apply to calls to market the retail sale of nondurable office or cleaning supplies.
In the ANPR, the FTC seeks comment on whether (1) the B2B exemption should be repealed in its entirety, (2) the exemption should be partially repealed so that only specific provisions of the TSR would apply to B2B telemarketing, or (3) the exemption should be partially repealed so that the TSR applies to a subset of B2B telemarketing based on, for example, the particular good or service offered for sale. To explain why an expansion of TSR coverage to B2B telemarketing calls may be warranted, the FTC points to changes in the digital marketplace that have led to more deceptive marketing schemes targeting small businesses. It also points to the escalating likelihood that B2B telemarketing marketing calls will impinge on the privacy of a consumer’s home as a result of more people working from home.
The ANPR includes a series of questions concerning the possible benefits to people and businesses from repealing the B2B exception and a series of questions concerning the potential burden to telemarketers and sellers from repealing the exception.
The other two issues on which the FTC seeks comment in the ANPR are:
- Whether the FTC should (1) add tech support services to the list of goods or services to which the inbound telemarketing exemptions do not apply, (2) repeal the exemption only for general media advertisements that induce inbound telemarketing of tech support services but retain the exemption for direct mail solicitation, or (3) repeal the exemption in its entirety subject to an exemption for sellers who manufacture the computer at issue and with whom the consumer has an ongoing business relationship. (The TSR generally exempts inbound calls responding to media advertising, with some specific exemptions.)
- Whether the TSR should require negative-option sellers to provide consumers with reminders of negative option programs and simple cancellation methods.
For each of these two issues, the ANPR includes a series of questions.
NPR. In the NPR, the FTC proposes the following revisions to the TSR:
- Requiring sellers and telemarketers to retain the following new categories of information: (1) a copy of each unique recorded message, (2) call detail records of telemarketing campaigns, (3) records sufficient to show that a seller has an established business relationship with a consumer, (4) records sufficient to show a consumer is a previous donor to a particular charitable organization, (5) records of the service providers that a telemarketer uses to deliver outbound calls, (6) records of a seller or charitable organization’s entity-specific do-not-call registries, and (7) records of the FTC’s Do-Not- Call Registry that were used to ensure compliance with the TSR.
- Modifications of existing recordkeeping requirements, including changing the time period that sellers and telemarketers must keep records from two years to five years, and clarifying that the failure to keep each record required by the TSR is a separate violation of the TSR.
- Narrowing the B2B exception to require B2B telemarketing calls to comply with the TSR provisions that prohibit misrepresentations and false or misleading statements.
- The addition of a definition for the term “previous donor” and several corrections.
The Eighth Circuit reiterated in a decision last month that trial courts must distinguish between FCRA plaintiffs who have suffered concrete harm and plaintiffs who merely seek to collect statutorily allowed damages as a way to ensure compliance with the law. Under the Supreme Court’s decision in Spokeo, the former have Article III standing to assert FCRA claims but the latter do not.
In Schumacher v. SC Data Center, Inc., plaintiff Ria Schumacher sought a job with defendant SC Data. During the application process, Schumacher responded “no” to a question asking whether she had ever been convicted of a felony. SC Data offered a position to Schumacher and then obtained her authorization to allow a third party to independently investigate her criminal records. SC Data later rescinded its offer to Schumacher when the report that it obtained revealed Schumacher’s 1996 felony conviction.
Schumacher alleged three FCRA violations on behalf of herself and a class: (1) taking an adverse employment action based on a consumer report without first providing the report to the applicant; (2) obtaining a consumer report without providing an FCRA-compliant disclosure form; and (3) obtaining more information about an applicant than allowed by the authorization. Four days after the Supreme Court’s decision in Spokeo, SC Data moved to dismiss Schumacher’s claims for lack of standing. The trial court found that Schumacher had standing to pursue all three claims, but the Eighth Circuit reversed.
The Eighth Circuit began with Schumacher’s adverse action claim. The FCRA provides that before an employer takes an adverse action against a consumer based on a consumer report, the employer must provide a copy of the report to the consumer. 15 U.S.C. § 1681b(b)(3)(A). The Court concluded that SC Data violated the FCRA when it did not provide a copy of the report to Schumacher before rescinding her job offer. Still, the Court noted the split in authority regarding whether an employer’s failure to provide a pre-action report is a bare procedural violation or conduct that causes an intangible harm sufficient to confer standing.
Those courts that have found standing, the Court explained, did so on the premise that an employee has a right to discuss with an employer the information in a report prior to any adverse action. However, the Eighth Circuit agreed with the Ninth Circuit that no such right is found in the FCRA’s text or supported by its legislative history. Instead, the FCRA was intended to protect against the dissemination of inaccurate information. Schumacher did not claim that the information contained in the report was inaccurate, so her adverse action claim was not redressable under the FCRA.
The Court turned next to Schumacher’s improper disclosure claim. When an employer obtains a consumer report for employment purposes, the FCRA requires the employer to provide the applicant with a “clear and conspicuous” written disclosure “in a document that consists solely of the disclosure.” 15 U.S.C. § 1681b(b)(2)(A)(i). Schumacher pointed to several purported statutory defects in SC Data’s disclosure form, including the size of the disclosure’s font. However, the Court held that a technical violation of the disclosure provision, without “something more,” is insufficient to confer standing. Schumacher did not point to any tangible or intangible harm that flowed from the purported technical violations, such as confusion about the consent being given. Thus, she lacked standing to pursue this claim, too.
Finally, the Court turned to Schumacher’s failure-to-authorize claim. The FCRA forbids an employer from obtaining a consumer report without the employee’s written authorization. 15 U.S.C. § 1681b(b)(2)(A)(ii). However, Schumacher indisputably authorized SC Data to obtain a type of consumer report documenting her criminal history. The Court found that the report at issue fit within these parameters. To the extent the report exceeded Schumacher’s authorization, Schumacher failed to plead any facts demonstrating a concrete harm. Thus, regardless of whether the report contained noncriminal information, Schumacher lacked Article III standing.
Because Schumacher lacked standing to assert any of her claims, the Court vacated the trial court’s orders and remanded the case with instructions to return the case to the state court.
The post-Spokeo landscape is still very much in development. Schumacher provides a reminder that employers who find themselves defending against FCRA claims should closely scrutinize whether plaintiffs have alleged mere procedural violations or the kind of concrete harm sufficient to open the doors to the federal courthouse.
The CFPB and the FTC recently filed an amicus brief in an appeal to the Second Circuit, arguing that the Court should reject the District Court’s “unduly narrow” interpretation of the FCRA requirement that consumer reporting agencies (CRAs) follow reasonable procedures to assure accuracy of information included in consumer reports.
In Sessa v. Trans Union, LLC, Plaintiff-Appellant brought a putative class action alleging that TransUnion reported she owed a “balloon payment” on a vehicle lease, but then inaccurately reported the amount owed as the vehicle’s residual value, which was an optional amount to purchase the vehicle at the end of the lease and greater than the actual amount owed.
The District Court for the Southern District of New York granted summary judgment to TransUnion holding that Plaintiff failed to make the “threshold showing” of inaccuracy on the consumer report. First, the court drew a distinction between factual and legal inaccuracies and held that a CRA cannot be held liable when the issue requires a legal determination as to the validity of the debt the agency reported. In the court’s view, whether Plaintiff in fact owed a balloon payment at the end of the lease was a “legal dispute” that requires “a legal interpretation of the loan’s term.” Second, the court concluded that the information in the credit report was factually accurate because TransUnion reported the exact information it received from the data furnisher.
On Plaintiff’s appeal to the Second Circuit, the CFPB and FTC filed an amicus brief where they argue that the text of the FCRA makes no distinction between factual and legal inaccuracies, and that importing a distinction between factual and legal inaccuracies into the law is unworkable in practice. They argue that most, if not all, inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule, effectively rendering the reasonable procedures section of the FCRA a nullity. More specifically, debts are creatures of contract and any inaccurate representation pertaining to an individual’s debt obligations could arguably be characterized as a legal inaccuracy insofar as determining the truth or falsity of the representation requires contractual interpretation. Whether an error is defined as factual or legal, a consumer report may still be incorrect.
The FTC and the CFPB further argue that the mere fact that a CRA reports the exact same information provided by a furnisher is not a proper basis to reject a reasonable procedures claim. They argue that, although reliance on a furnisher may constitute some evidence of the reasonableness of the CRAs procedures, whether those procedures are reasonably designed to assure the maximum possible accuracy of the information in a consumer report is a fact-intensive question that usually cannot be resolved at summary judgment.
The CFPB has issued a new advisory opinion “to affirm that the Equal Credit Opportunity Act (ECOA) and Regulation B protect those actively seeking credit and those who sought and received credit.”
The ECOA defines an “applicant” to mean “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.” 15 U.S.C. 1691a(b). As defined by Regulation B, an “applicant” includes “any person who requests or who has received an extension of credit from a creditor.”
The CFPB has previously taken the position in amicus briefs that the term “applicant” includes a person who had received credit and is an existing account holder and is not limited to a person in the process of applying for credit. The CFPB took that position most recently in an amicus brief filed in December 2021, jointly with the FTC, DOJ, and Federal Reserve Board in the Seventh Circuit in Fralish v. Bank of America One, N.A. In the brief, the agencies urge the court to reverse a district court ruling that an individual who had already received credit from the defendant and who was not currently applying to the defendant for credit was not an “applicant” for purposes of the ECOA’s adverse action notice requirement.
In October 2020, the CFPB and FTC filed a joint amicus brief with the Second Circuit in Tewinkle v. Capital One, N.A., in which they made similar arguments on behalf of a plaintiff who had alleged that a notice sent to him by the defendant bank that it was terminating his checking account and overdraft line did not comply with the ECOA/Regulation B adverse action notice requirement. In that case, the district court agreed with the bank that the plaintiff was not an “applicant” for purposes of the adverse action notice requirement. The Second Circuit did not issue a ruling because there was a settlement in the case.
In the advisory opinion, as it did in the amicus briefs, the CFPB takes the position that, despite the wording of the ECOA’s definition of the term “applicant,” the “best interpretation” of the ECOA is that the term includes existing borrowers. According to the CFPB, the ECOA’s text, legislative history, and statutory purpose support reading the ECOA to include existing borrowers. For that reason, according to the CFPB, it was reasonable for the Federal Reserve Board and then the CFPB to adopt this reading of the ECOA in Regulation B.
By issuing the advisory opinion, the CFPB may be seeking to bolster its ability to litigate the ECOA issue in other cases (as well as head off adverse decisions in other cases) should the Seventh Circuit reject its interpretation in Fralish. An adverse result in Fralish could also lead to an attempt by the CFPB to use its UDAAP authority to challenge discrimination against existing borrowers.
We first review the scope of the CFPB’s supervisory authority granted by Dodd-Frank and the source of its authority to supervise nonbanks that present risks to consumers. We then discuss how we expect the CFPB to use its risk-based authority, including the types of products it may target and its decision to make public the identities nonbanks. We also look at the practical impact of CFPB supervision for targeted nonbanks and what steps companies can take both to avoid becoming a CFPB target and to prepare for the possibility of a CFPB examination. Finally, we consider how the CFPB’s action could impact the approach of state regulators to nonbank providers of alternative credit products.
John Grugan, a partner in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by Michael Gordon and Lisa Lanham, partners in the Group.
Click here to listen to the podcast.
With ALI’s members poised to approve the new Restatement, providers need to understand the Restatement’s impact on their consumer agreements, particularly those entered into online. After reviewing the rationale for the new Restatement and ALI’s approach to developing the rules it contains, we look at the issues covered by each section, such as the rules that deal with assent to contract terms, change in terms, unconscionability, and deception. We also discuss how businesses can use the Restatement to their benefit and ALI’s next steps for finalizing the draft.
Alan Kaplinsky, Ballard Spahr Senior Counsel and a member of the ALI Board of Advisers to the new Restatement, leads the conversation.
Click here to listen to the podcast.
Our Consumer Finance Monitor podcast continues to cover the most important industry issues. In anticipation of the American Law Institute (ALI) considering the Restatement of the Law, Consumer Contracts (Restatement) at its Annual Meeting in Washington, DC on Tuesday, May 17, we released an episode about the Restatement with guest Steven Weise, a member of ALI’s Council. Mr. Weise was be interviewed by Alan Kaplinsky, former Chair of Ballard Spahr’s Consumer Financial Services Group and a member of ALI’s Board of Advisors to this Restatement project.
The Restatement is the culmination of an 11-year effort by ALI to create a special Restatement focused on selected aspects of consumer transactions, such as when consumers will be bound by online contracts (including changes in terms) and defenses to the enforceability of consumer contracts such as unconscionability. In many instances, the Restatement’s formulation of “law” will differ from the common law of particular states. Because courts will often look to restatements to guide their decision making, all companies that contract with consumers must become intimately familiar with this restatement since it may require immediate changes to consumer contracts. Our podcast is intended to provide a roadmap for industry to use in conforming their contracts to the new Restatement’s requirements.
This ALI project largely has flown under the radar throughout its existence. It has received very little media attention. That is about to change very soon if ALI’s members approve the Restatement on May 17. We are proud to be at the forefront of reporting on this enormously important development.
We also released a podcast on the CFPB’s recent announcement that it plans to invoke its “dormant authority” to supervise nonbanks that present a risk to consumers.
For a more detailed discussion of the new Restatement, we encourage you to also listen to the episode of the Consumer Finance Monitor Podcast with Ballard Spahr’s Alan Kaplinsky (who is on the ALI Board of Advisers to the new Restatement) and guest Steven Weise from the ALI Council.
The American Law Institute (ALI) wa expected to approve the Restatement of the Law, Consumer Contracts (the Restatement) on, May 17, 2022, at ALI’s 2022 Annual Meeting in Washington, DC. The Restatement culminates an 11-year project by ALI to address how contractual terms are adopted, modified, and enforced in contracts between businesses and consumers. The Restatement of the Law, Consumer Contracts, sets forth a series of rules that are intended to represent the current black letter law for consumer contracts. The foundational principal behind the new Restatement is that consumer contracts are asymmetrical in nature, with sophisticated business parties entering into numerous identical transactions with unsophisticated consumers. While acknowledging there are benefits to standard form contracting, the new Restatement diverges from the Restatement Second of Contracts in some key areas, including changes in terms, assent, parol evidence, and defenses to enforceability. The new Restatement only covers these and a few other select common law contract issues, and, will override the Restatement Second of Contracts where there is a conflict between the two. Because courts often look to Restatements of the Law to guide their decision making, all companies that contract with consumers will need to familiarize themselves with the new Restatement as it may require immediate changes to consumer contracts.
According to the ALI, Restatements of the Law are primarily addressed to courts and reflect the common law as it presently stands or might appropriately be stated by a court. In contrast, Principles of the Law, another category of ALI publications, are intended to be aspirational statements of best practices. The distinction is important because the controversy surrounding the new Restatement emanates from numerous instances where many believe the Restatement’s Reporters (the authors) have attempted to set forth black letter authority on issues for which there is a dearth of relevant case law and that goes beyond what most courts have actually held. Some critics have also pointed out that much of the case law relied upon consists of federal court decisions, which are not binding authority on state courts. This is problematic because Restatements are expected to present the common law as developed on the state level.
Interestingly, there has been almost universal criticism of the new Restatement throughout the project from both consumer- and business-affiliated interests. In 2019, 23 State Attorneys General urged ALI members to reject the draft Restatement, concluding it “represents an abandonment of important principles of consumer protection in exchange for illusory benefits.” This past January, a coalition of general counsels of major corporations and representatives of leading trade associations (including those in the financial services industry) wrote to the ALI urging it not to approve the Restatement on the grounds that it is conceptually flawed and riddled with major public policy changes that are completely at odds with the common law that has actually been adopted by courts. Previously-released episodes of our Consumer Finance Monitor Podcast, available here and here, include substantive discussions of many of these criticisms and responses from the ALI. Some of these concerns have been addressed by the ALI in the current draft, including clarifications concerning mutual assent that seem to have appeased criticism from consumer groups.
The new Restatement is broken down into nine sections and also includes an appendix summarizing the black letter law. Section 1 provides definitions used throughout the document, a statement regarding the scope of the project, and an outline of the substantive issues. The other sections, like other Restatements of the Law, begin with a succinct statement of the black letter law on a particular issue, followed by commentary from the Reporters and “illustrations” presenting various use cases. Each section concludes with detailed Reporters’ Notes, with include citations to the cases underlying their conclusions and analysis. The sections include:
§ 2. Adoption of Standard Contract Terms
§ 3. Adoption of Modification of Standard Contract Terms
§ 4. Discretionary Obligations
§ 5. Unconscionability
§ 6. Deception
§ 7. Affirmations of Fact and Promises that Are Part of the Consumer Contract
§ 8. Standard Contract Terms and the Parol Evidence Rule
§ 9. Effects of Derogation from Mandatory Provisions
Potential issues abound for any company that contracts with consumers. Just a few examples include:
- The need to ensure clear notice to consumers of key contractual terms and any subsequent modifications of those terms in clickwrap or other online agreements §§ 2, 3).
- The elevation of deception (§ 6) as a universal, black letter common law defense to a consumer contract term. While many businesses are already subject to state and federal consumer statutes prohibiting deceptive acts or practices, the Restatement holds that material terms of a contract may be unenforceable even where the actions of the business do not satisfy the elements of fraud.
- While the common law of many states considers a contract or term unconscionable only where it is both substantively and procedurally unconscionable (with the degree of each determined on a sliding scale), the new Restatement holds that it is sometimes sufficient to only prove one of these factors to challenge a contract (§ 5b). This opens the door for consumers to strike down contracts and terms on the grounds that they are unsophisticated and didn’t understand what they were agreeing to, thereby rendering the contract or term procedurally unconscionable.
- In addressing contract terms that are substantively unconscionable in limiting consumer redress (§ 5), the Reporters acknowledge that the Supreme Court held in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), that the Federal Arbitration Act preempts state law and allows arbitration agreements with class action waivers, but then state they take no position on preemption and cite to a handful of cases in concluding that arbitration clauses can be unconscionable under state common law.
- In § 8, the Restatement dilutes the parol evidence rule in holding that standard consumer contract terms that contradict or unreasonably limit prior affirmations or promises of a business do not constitute a final expression of the agreement. While the Reporters state in the comments that the parol evidence rule still applies, the black letter law and illustrations open the door for courts to entirely ignore merger and integration clauses in striking down contract terms on the basis of prior written or oral understandings of the parties.
It remains to be seen how the new Restatement will be received by courts in light of the controversy surrounding it and the apparent paucity of case law supporting some of its conclusions. However, once adopted, the Restatement will create new potential defenses for consumers and a litigation risk for any business that has not reviewed its consumer contracts for compliance with the black letter law as formulated by the Restatement. Beyond reviewing specific forms of contracts, companies should review their entire process for entering into consumer contracts, as well as the methods used for modifying them. The good news is that the use cases provided in the illustrations should be helpful in developing and refining best practices to address these risks. Additionally, the case citations throughout the various sections represent a generally comprehensive collection of precedent, useful for any litigator addressing claims or counterclaims that are colored by the Restatement’s formulation of the black letter law of consumer contracts.
The CFPB recently issued its annual fair lending report covering its fair lending activity in 2021.
In the report’s discussion of its risk-based approach for prioritizing fair lending supervisory and enforcement activity, the CFPB indicates that much of its enforcement and supervision efforts were focused on advancing its priorities of advancing racial and economic equity and promoting economic recovery related to the COVID-19 pandemic. It also identifies the following additional fair lending supervisory areas of focus: “mortgage origination and pricing, small business lending, student loan origination work, policies and procedures regarding geographic and [income types] exclusions in underwriting, and on the use of artificial intelligence (AI) and machine learning models [in evaluating applicants for credit].” For these areas, the CFPB identifies the following specific issues:
- Mortgage origination—redlining (and whether lenders intentionally discouraged prospective applicants living in, or seeking credit in, minority neighborhoods from applying for credit); assessing whether there is discrimination in underwriting and pricing processes such as steering; and HMDA data integrity and validation reviews (both as standalone exams and in preparation for ECOA exams that follow).
- Small business lending—assessing whether there are disparities in application, underwriting, and pricing processes, redlining, and whether there are weaknesses in fair lending-related compliance.
- Student loan origination—lender’s policies and practices in underwriting or pricing.
The report’s discussion of fair lending enforcement actions indicates that in 2021, the Bureau announced four fair-lending enforcement actions. One of those actions is an action brought jointly with the DOJ and OCC against Trustmark National Bank (TNB) which alleged TNB engaged in lending discrimination by redlining predominantly Black and Hispanic neighborhoods in Memphis, Tennessee. Another is the CFPB’s lawsuit against online lender LendUp that included allegations that LendUp violated the ECOA and Regulation B by failing to provide timely and accurate adverse action notices to consumers whose loan applications were denied.
The other two enforcement actions that the CFPB labels “fair lending” actions are the CFPB’s lawsuits against Libre by Nexus and JPay. The Libre lawsuit targeted activities directed at immigrants seeking to obtain bonds in order to be released from federal detention centers, the majority of whom were alleged to be “Spanish-speakers, most of whom do not read or write English and many of whom cannot read or write in any language.” The immigrants’ limited English proficiency was the basis of a claim by the CFPB that the defendants engaged in abusive acts and practices in violation of the CFPA’s UDAAP prohibition.
The JPay lawsuit involved prepaid cards that JPay issued to formerly incarcerated individuals upon their release from prison. The cards contained the balance of funds owed to former inmates upon their release, including their commissary money, and any “gate money” to which they were entitled under state or local law. The CFPB alleged that JPay engaged in unfair, deceptive, and abusive acts and practices in violation of the CFPA’s UDAAP prohibition through conduct that included causing fees to be imposed on consumers who were required to get a JPay debit release card to access money owed to them at the time of their release from prison and misrepresenting fees. Neither the CFPB’s press release nor Director Chopra’s statement about the lawsuit mentions concerns about vulnerable populations or discrimination. However, in her introductory message to the report, Fair Lending Director Patrice Ficklin stated: “In the United States, incarcerated individuals and individuals reentering society are overwhelmingly men of color. The CFPB will continue to fight discrimination that manifests as unfair, deceptive, or abusive acts and practices.”
Ms. Ficklin’s comment would appear to confirm that the CFPB’s decision to include these lawsuits in the report and characterize them as “fair lending enforcement actions” despite the absence of any apparent “lending” or “credit” in either case is tied to the CFPB’s recent announcement that it intends to use its UDAAP authority to challenge discrimination even when fair lending laws do not apply, even though that announcement occurred some months after these lawsuits were filed. While the report does not directly reference the CFPB’s announcement in the section on pending fair lending enforcement investigations, the CFPB states that it “is looking into potential discriminatory conduct, including ECOA and unfairness, as well as unlawful conduct targeted at vulnerable populations.”
The CFPB recently ordered a bank to cancel garnishment fees, review its system for processing garnishment orders, cease using contracts which limit consumer rights, and pay a $10 million penalty to the CFPB’s Civil Penalty Fund.
The garnishment process is a method for creditors to recover amounts that a judgment debtor owes from a third party that holds the judgment debtor’s assets, such as a deposit account held by a bank. Typically garnishments follow a court order, and a bank, upon receipt of a garnishment notice, may freeze accounts, garnish funds, collect fees, and send payments to creditors. State and federal laws impose restrictions on the garnishment process, including exemptions for certain assets, such as benefit payments.
According to the CFPB, the bank committed UDAAP violations both in its garnishment procedures and by including certain waiver language in its deposit account agreements. The CFPB contends that the bank wrongly applied the garnishment exemption laws of the state that issued the order, rather than the consumer’s state of domicile. In addition, the CFPB claimed that the bank mishandled garnishment orders issued from states that prohibit garnishment of out-of-state accounts.
The CFPB also found violations based upon the bank’s inclusion in the account agreement of a waiver provision purporting to limit a consumer’s rights during the garnishment process. The CFPB claimed that the waiver was improper because under federal and state law certain exemption rights cannot be waived. Inclusion of the waiver language therefore constituted a deceptive practice that was likely to mislead consumers about their rights and potentially dissuade consumers from seeking available protections. The CFPB further claimed that the provision constituted an unfair practice by purportedly allowing the bank not to contest improper garnishment orders, thus preventing consumers from asserting their rights.
The Bureau’s action should cause banks to review their garnishment procedures and account agreements in light of the Bureau’s criticisms. Because state laws vary in this area, this may require a careful analysis of the bank’s practices. Ballard Spahr can help banks assess their garnishment procedures and understand the legal issues surrounding the domicile of bank accounts, extra-territorial garnishment orders, governing exemption rules, and the validity of waiver provisions in account agreements. Please reach out to us with questions about how the CFPB’s action impacts your institution.
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