Mortgage Banking Update - August 5, 2022
In This Issue:
- Podcast: A Close Look at the Justice Department’s Settlement With Meta (Formerly Facebook) to Resolve Alleged Fair Housing Act Violations Arising From Meta’s Targeted Advertising System
- Podcast: The Role of Government Regulation and the CFPB’s Approach, With Special Guest Cary Coglianese, Professor of Law, University of Pennsylvania Law School, and Director of the Penn Program on Regulation
- LIBOR Committee Publishes ‘Playbook’ as a Guide for Final Year of Conversion
- Federal Reserve Board Issues Proposal on Benchmark Replacements for Contracts That Use LIBOR
- Treasury Seeks Comments on Digital Assets, Including Opportunities and Risks for Consumers
- CFPB Adds New Debt Collection Rule FAQs
- California Dept. of Financial Protection and Innovation Responds to OppFi’s Attempt to Block ‘True Lender’ Challenge to Loans Made Through Bank Partnership
- Utah Federal District Court Denies Class Certification in TCPA Lawsuit Filed Against Ballard Spahr Client
- House Oversight and Reform Subcommittee on National Security Holds Hearing on Protecting Military Servicemembers and Veterans From Financial Scams and Fraud
- Federal Judge Says Judicial Approval for Individual FLSA Actions Increases Litigation Costs, Makes Settlement More Difficult and Is Not Required
- California DFPI Issues Draft Text for Second Rulemaking Under Debt Collection Licensing Act
- CFPB Expected to Issue New Guidance Requiring Banks to Repay More Fraud Victims
- Podcast: Takeaways For Banks From the CFPB’s Recent Consent Order on Garnishment Orders
- CFPB to Make Organizational Changes
- FHFA Announces Office of Financial Technology
- State Developments Regarding Work From Home (Non-Depository): UPDATE
- Did You Know? Georgia Department of Banking and Finance Adopts Final Rules
For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center
After reviewing the developments leading up to the settlement, we examine the aspects of Facebook’s advertising delivery system that were alleged to be discriminatory. We then discuss the terms of the settlement, including the variance reduction system that Facebook must develop to address disparities for race, ethnicity, and sex between advertisers’ targeted audiences and the group of Facebook users to whom Facebook’s personalization algorithms actually deliver the advertisements, how variances will be measured, the role of an independent third-party reviewer, and the timetable for implementation.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Richard Andreano, Practice Leader of the firm’s Mortgage Banking Group.
Click here to listen to the episode.
Podcast: The Role of Government Regulation and the CFPB’s Approach, With Special Guest Cary Coglianese, Professor of Law, University of Pennsylvania Law School, and Director of the Penn Program on Regulation
We first discuss the practicalities and potential impact of implementing Director Chopra’s call in a recent blog post for simplification of consumer finance regulations and simple bright-line rules. We then examine the role and objectives of regulation such as predictability and responsiveness to stakeholder input and consider whether the CFPB’s current approach to regulation, including its abandonment of official staff commentary updates, furthers those objectives. (The CFPB’s abandonment of commentary updates was the subject of Alan Kaplinsky’s recent blog post: An Open Letter To Rohit Chopra, CFPB Director: Isn’t It Time for the CFPB To Restart Its Best Vehicle for Interpreting the Federal Consumer Financial Laws–the Official Staff Commentaries?) We also discuss the recent SCOTUS decision in EPA v. West Virginia and consider its implications for future challenges to CFPB actions.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.
To listen to the episode, click here.
In 2017, the United Kingdom’s Financial Conduct Authority (FCA), the regulator that oversees the panel of banks on whose submissions LIBOR is based, announced plans to discontinue LIBOR after 2021. The FCA subsequently announced that no LIBOR indices will be available after June 30, 2023. In anticipation of the elimination of LIBOR, the Federal Reserve Board and the Federal Reserve Bank of New York (FRBNY) convened the Alternative Reference Rates Committee (ARRC) to identify alternative indices to replace LIBOR. In 2019, the FRBNY began publishing a new Secured Overnight Financing Rate (SOFR) index and the ARRC subsequently recommended the use of SOFR to replace LIBOR.
While much already has been done to effect a transition from LIBOR to SOFR, there are still a significant amount of challenging legacy contracts, and the ARRC remains concerned about an operational Armageddon occurring on June 30, 2023. In particular, the ARRC notes that approximately $5 trillion of post-June 30, 2023, LIBOR exposures are in cash products such as loans and securities and will need to be converted on or about June 30 next year, along with approximately $74 trillion in derivatives. The Playbook is designed to both reduce the number of LIBOR contracts outstanding on the conversion date and to help businesses to operationally prepare for conversion.
For more information about the Playbook, see Ballard Spahr’s legal alert.
The Federal Reserve Board issued a proposal that would establish default rules for benchmark replacements in certain contracts that use as a reference rate the London Interbank Offered Rate (LIBOR), which will be discontinued in 2023. The proposal implements the Adjustable Interest Rate (LIBOR) Act, which was enacted in March 2022. Comments on the proposal must be filed no later than 30 days after the date the proposal is published in the Federal Register.
In response to the discontinuation of LIBOR, Congress enacted the LIBOR Act to provide a uniform, nationwide solution for replacing references to LIBOR in existing contracts with inadequate fallback provisions, meaning inadequate contract provisions for determining an alternative reference rate. For these contracts, the Board’s proposal would replace references to LIBOR in the contracts with the applicable Board-selected replacement rate after June 30, 2023. The proposal identifies separate Board-selected replacement reference rates for different types of contracts, including consumer credit transactions. As required by the LIBOR Act, each proposed replacement reference rate is based on the Secured Overnight Financing Rate (SOFR).
The CFPB has addressed the discontinuation of LIBOR through Regulation Z and Official Staff Commentary amendments issued in December 2021. The final rule became effective on April 1, 2022, with the exception of certain changes to two post-consummation disclosure forms that are effective on October 1, 2023. The mandatory compliance date for revisions to Regulation Z change-in-terms notice requirements is October 1, 2022, and the mandatory compliance date for all other provisions of the final rule was April 1, 2022.
Before the amendments, Regulation Z’s open-end credit provisions only allowed HELOC creditors and card issuers to change an index and margin used to set the APR on a variable-rate account when the original index “becomes unavailable” or “is no longer available” and certain other conditions are met. Having determined that all parties would benefit if creditors and issuers could replace a LIBOR-based index before LIBOR becomes unavailable at the end of 2023, the final rule added a new provision that allows HELOC creditors and card issuers (subject to contractual limitations) to replace a LIBOR-based index with a replacement index and margin on or after April 1, 2021, including an index based on the SOFR.
For closed-end credit, Regulation Z provides that a refinancing subject to new disclosures results if a creditor adds a variable-rate feature to a closed-end credit product but that a variable-rate feature is not added when a creditor changes the index to one that is “comparable.” The final rule added new commentary that provides examples of the types of factors to be considered in determining whether a replacement index is a “comparable” index to a particular LIBOR-based index.
For consumer loans subject to Regulation Z that give the creditor or card issuer authority to replace a LIBOR-based index with a new index that is not based on LIBOR, the LIBOR Act would not require the creditor or card issuer to use a SOFR-based replacement index. However, pursuant to the LIBOR Act, the Fed-selected SOFR-based index will automatically replace a LIBOR-based index if the creditor or card issuer has not selected a replacement index by either the earlier of the date LIBOR is discontinued or the latest date for selecting a replacement index under the terms of the credit contract.
The LIBOR Act provides a number of safe harbor provisions that protect a creditor that selects the SOFR-based rates designated in the Fed’s proposal as a replacement for a LIBOR-based index. For more recent closed-end adjustable-rate notes that use a LIBOR-based index, Fannie Mae and Freddie Mac adopted fallback language that would require the noteholder to replace a LIBOR-based index with the SOFR-based index designated in the Fed’s proposal. Even if not required by the LIBOR Act, Regulation Z, or contract to replace a LIBOR-based index with a SOFR-based index, HELOC lenders and card issuers should consider whether to take advantage of the LIBOR Act’s safe harbor provisions when selecting a replacement index. In addition, the safe harbor provisions should also be considered by noteholders or other creditors before selecting a replacement index for closed-end adjustable-rate mortgages or other closed-end variable-rate credit products that do not contractually require use of a SOFR-based replacement index.
On July 8, with limited fanfare, the Department of Treasury issued a request for public comment regarding the March 9, 2022, Executive Order entitled “Ensuring Responsible Innovation in Digital Assets” (the Order). The request for comment poses five core questions, each with multiple subparts, on a spectrum of topics of great complexity. Nonetheless, the request for comment sets a deadline of only 30 days – August 8, 2022 – for responses.
The complexity of the request for comment flows from the breadth of the Order. According to its press release, the Order outlines “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 seeks a national policy for digital assets across six “key priorities:” consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.” The Order makes no substantive conclusions. Rather, it sets forth requirements for various government agencies to coordinate and submit reports and recommendations regarding the six priorities, which are:
a. Protection of consumers, investors, and businesses in the United States;
b. Protection of United States and global financial stability and the mitigation of systemic risk;
c. Mitigation of illicit finance and national security risks posed by misuse of digital assets;
d. Reinforcement of U.S. leadership in the global financial system and in technological and economic competitiveness, including through the responsible development of payment innovations and digital assets;
e. Promotion of access to safe and affordable financial services; and
f. Support of technological advances that promote responsible development and use of digital assets.
The request for comment seeks input to help Treasury deliver a report required by the Order. Specifically, Treasury, in consultation with other agencies such as the FTC, the SEC, the CFTC, Federal banking regulators, and the CFPB, must report to the President on the development and adoption of digital assets and the associated implications for consumers, investors, and businesses; this report also must address the conditions that might drive “mass adoption” of digital assets and its risks. (The Order requires the report to be delivered in early September 2022, which may explain the short comment period.)
The request for comment therefore focuses on consumer protection. It explains that “the increased use of digital assets and digital asset exchanges and trading platforms may increase the risks of crimes such as fraud and theft, other statutory and regulatory violations, privacy and data breaches, unfair and abusive acts and practices, and other cyber incidents faced by consumers, investors, and businesses.” According to the request for comment, additional protections are needed, particularly for “less informed market participants” and other vulnerable populations.
The five questions posed by the request for comment pertain to:
- The level of current adoption of digital assets, and how mass adoption might be furthered. The request for comment defines “mass adoption” as “a scenario where digital assets are accepted and used by the U.S. public on a large scale. For example, mass adoption of digital assets as a payment method would translate to use and acceptance of cryptocurrencies as a common and regular payment method for goods and services.”
- Opportunities for consumers, investors and businesses, including the potential benefits of decentralized and disintermediated systems, and the potential for improved cross-border payments.
- General risks in digital assets financial markets, including market transparency.
- Risks to consumers, investors and businesses, including frauds, scams, theft, loss of private keys, and losses from the insolvency of wallets, custodians, and intermediaries.
- Impact on the most vulnerable, considering factors such as financial and technical literacy.
These are all important questions. They should draw a considerable range of responses, from digital asset critics to digital asset enthusiasts and everyone in between. However, the 30-day deadline – assuming it remains in place – will curb the utility of the responses, many of which likely will be very general, given the time constraints. Although this request for comment is not directly related to proposed regulations, it will inform an important report to the President that almost surely will drive legislation, regulation, and/or enforcement policy in general.
Last month, the CFPB published additional frequently asked questions on Regulation F, its debt collection rule. The new FAQs address third-party communications, electronic communications, and unusual or inconvenient time and place provisions.
Prohibitions on Third-Party Communications. The FAQs address the following questions:
- What is the Debt Collection Rule’s general prohibition on third-party communications?
- Are there exceptions to the general prohibition against third-party communications?
- Does the general prohibition on third-party communications apply to electronic communications from a debt collector about a debt?
Electronic Communications. The FAQs address the following questions:
- Does the Debt Collection Rule require debt collectors to communicate electronically with consumers?
- Under the Debt Collection Rule, can a person limit debt collector communications?
- What is the Debt Collection Rule’s opt-out notice requirement for electronic communications?
- What are considered reasonable and simple methods for opting out of electronic communications under the Debt Collection Rule?
- Is a debt collector required to honor a consumer’s request to opt out of electronic communications if the request does not conform to the debt collector’s opt-out instructions?
Unusual or Inconvenient Times or Places. The FAQs address the following questions:
- Does the debt collection rule limit where or when a debt collector can communicate or attempt to communicate with a consumer about a debt?
- What does the Debt Collection Rule define as an inconvenient or unusual time?
- What does the Debt Collection Rule define as an inconvenient or unusual place?
- Does an automatically generated electronic communication (such as a payment reminder) that is sent at a time the debt collector knows or should know is unusual or inconvenient to the consumer, violate the prohibition on communicating at an inconvenient time?
- What are the exceptions to the prohibition on communicating at an unusual or inconvenient time or place?
- Does an automatically generated electronic communication (such as a payment confirmation) sent at a time the debt collector knows or should know is inconvenient to the consumer, which is sent in response to a consumer action (such as a payment), meet the limited exception for responding to consumer-initiated contact?
- If a consumer tells a debt collector that Fridays are inconvenient, but later contacts a debt collector on a Friday, can the debt collector respond on the following Friday under the limited exception for responding to consumer-initiated contact at a time or place the consumer previously designated as inconvenient?
The California Department of Financial Protection and Innovation (DFPI) has filed its opposition to Opportunity Financial, LLC’s (OppFi) Demurrer to the DFPI’s cross-complaint. In the Demurrer, OppFi asks the California trial court to reject the DFPI’s attempt to apply California usury law to loans made through OppFi’s partnership with FinWise Bank (Bank) by alleging that OppFi is the “true lender” on the loans.
In 2019, California enacted AB 539 which, effective January 1, 2020, limited the interest rate that can be charged on loans less than $10,000 but more than $2,500 by lenders licensed under the California Financing Law (CFL) to 36 percent plus the federal funds rate. In March 2022, OppFi filed a complaint in a California state court seeking to block the DFPI’s attempt to apply the CFL rate cap to loans made through its partnership with the Bank. OppFi’s 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 in February 2022, the DFPI informed OppFi that because it was the “true lender” on the Program Loans, it could not charge interest rates on the Program Loans that were higher than the rates permitted to be charged by lenders licensed under the CFL.
OppFi’s 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 CFL interest rate caps 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.
In response to the complaint filed by OppFi seeking to block the DFPI from applying California usury law to loans made through the partnership, the DFPI filed a cross-complaint seeking to enjoin OppFi from collecting on the loans and to have the loans declared void. In the cross-complaint, the DFPI alleges that “OppFi is the true lender of [the Program Loans]” based on the “substance of the transaction” and the “totality of the circumstances,” with the primary factor being “which entity—bank or non-bank—has the predominant economic interest.” The DFPI claims that the Program Loans are therefore subject to the CFL and that OppFi is violating the CFL and the California Consumer Financial Protection Law by making loans at interest rates that exceed the CFL rate cap.
The DFPI also alleged additional CFL violations by OppFi, including the CFL’s “anti-evasion” provisions. One of such provisions is Section 22326 which applies to “any person, who by any device, subterfuge, or pretense charges, contracts for, or receives greater interest, consideration, or charges than is authorized by this division for any loan….” The other provision is Section 22324 which prohibits “contract[ing] for or “negotiat[ing] in this state for a loan to be made outside of the state for purpose of evading or avoiding” California lending law.
In its Demurrer to the cross-complaint, OppFi argues that the DFPI’s “true lender” challenge to the Program Loans has no basis in California statutes or common law. In its opposition, the DFPI cites various authorities in support of its assertion that for more than a century, “California law has recognized the principle of looking at substance over form in evaluating usury claims and does not permit evasion of usury laws through disguise or subterfuge.” It also cites cases from other courts, including a California federal district court’s decision in CashCall, that have used a “true lender” analysis to uphold usury challenges.
OppFi also argues in the Demurrer that the DFPI’s other CFL claims fail as a matter of law. With respect to the DFPI’s CFL claims based on its “anti-evasion” provisions, OppFi asserted that “it is not unlawful to take advantage of [statutory exemptions].” The DFPI asserts in its opposition that, because a true lender analysis should apply, OppFi’s argument “is both incorrect and subject to factual issues inappropriate for demurrer.”
The following consumer advocacy groups have sought leave to file an amicus brief in opposition to OppFi’s Demurrer: Center for Responsible Lending, California Reinvestment Coalition, Consumer Federation of California, National Consumer Law Center, Public Law Center, and UC Berkeley Center for Consumer Law & Economic Justice.
OppFi is also a defendant in a class action lawsuit filed in a Texas federal district court in which the named plaintiff alleges that OppFi engaged in a “rent-a-bank” scheme to purposefully evade state law, including in Texas where the named plaintiff entered into her loan. OppFi has filed a motion to compel arbitration which is opposed by the plaintiff.
Represented by a team of Ballard Spahr attorneys, a seller of consumer products recently defeated the plaintiffs’ motion to certify a class in their lawsuit filed in Utah federal district court alleging violations of the Telephone Consumer Protection Act (TCPA) by the seller and another defendant. My fellow Ballard team members were Jenny Perkins, Will Reilly, and Ashley Waddoups.
In Cunningham, et al. v. Vivint, Inc. and DSI Distributing, Inc., the named plaintiffs alleged that they received unlawful automated telemarketing calls and texts promoting the seller’s products. In addition to the seller, the plaintiffs named as a defendant a vendor that directly or through subvendors handled inbound calls made to the seller.
The plaintiffs sought certification of three nationwide classes involving:
- Persons who received two or more telemarketing calls on behalf of the seller when their numbers were on the National Do Not Call Registry;
- Persons who received telemarketing calls on behalf of the seller using an automatic telephone dialing system; and
- Persons who received telemarketing calls on behalf of the seller when the seller did not maintain any internal procedures to prevent improper calls.
With respect to the vendor, the court found no basis to certify a class because the plaintiffs admitted that the vendor did not directly call or text them. The plaintiffs argued that the calls they received were likely made by a subvendor but were unable to produce any supporting evidence. They also could not show any evidence connecting the vendor to the texts they received.
With respect to the seller, the court found that the plaintiffs had failed to meet the requirements for class certification in Rule 23(a) of the Federal Rules of Civil Procedure. Although it found that the plaintiffs had met the numerosity and commonality requirements, the court found that the plaintiffs had failed to satisfy the requirements of typicality and adequacy.
According to the court, typicality was not satisfied for reasons that included:
- The plaintiffs had not established that the phone number at which one of the named plaintiffs received the allegedly unlawful calls was a residential number.
- There was an unresolved issue as to whether the other named plaintiff’s claims were subject to a previous settlement agreement and waiver with the defendants.
- The plaintiffs were essentially professional litigants based on having filed hundreds of TCPA cases.
The court found that adequacy was not satisfied for reasons that included their failure to vigorously prosecute the case based on their having moved for class certification approximately two and a half years after filing their original complaint in violation of both the District of Utah’s local rules and Federal Rule 23(c)(1). In addition, the court questioned whether the quality of the plaintiffs’ advocacy demonstrated “vigorous” prosecution of the case and found there were potential conflicts between the class sought by the plaintiffs and the potential class in another pending case against the seller for alleged TCPA violations.
On July 13, 2022, the House Committee on Oversight and Reform, Subcommittee on National Security, held a hearing entitled “Protecting Military Servicemembers and Veterans from Financial Scams and Fraud.” A recording of the hearing is available here.
July had been designated as “Military Consumer Month,” a public-private marketing initiative created by state and federal agencies, and military and consumer groups, designed to draw attention to financial issues impacting the military community. Chairman Lynch opened the hearing by citing to a recent AARP survey, which found servicemembers and veterans are 40 percent more likely to be exploited by financial fraud, including robocalls, suspicious texts, and scam offers, than their civilian counterparts. The same survey found four out of every five servicemembers and veterans were targeted in 2021 by scams directly related to their military service or benefits, with one in three reporting they lost money as a result.
After opening statements from Subcommittee Chairman Stephen Lynch (D-MA) and Ranking Member Glenn Grothman (R-WI), five witnesses offered testimony and responded to questions from the Subcommittee members. The following witnesses appeared at the hearing:
- Malini Mithal, Division of Financial Practices, Bureau of Consumer Protection, FTC
- Jim Rice, Assistant Director, Office of Servicemember Affairs, CFPB
- Brendan Carr, Minority Witness, Commissioner, FCC
- Troy Broussard, Senior Advisor, Veterans and Military Families Initiative, AARP
- Robert Burda, Interim CEO and Chief Strategy Officer, Cybercrime Support Network
Malini Mithal testified that the FTC received over 200,000 reports of military fraud in 2021, totaling over $267 million in losses. She highlighted enforcement actions taken by the FTC to address exploitation of servicemembers, including actions targeting predatory auto sales and finance practices, fraudulent investment schemes, deceptive recruitment methods used by for-profit schools, and bogus charities that falsely promote themselves as helping military causes. Ms. Mithal also discussed the importance of coordinated education and outreach by various government agencies, specifically through www.MilitaryConsumer.gov and the creation of Military Consumer Month with the Department of Defense (DoD) and the CFPB. (Ms. Mithal recently discussed other areas of FTC enforcement focus with Ballard Spahr’s Alan Kaplinsky in an episode of the Consumer Finance Monitor Podcast available here.)
Jim Rice from the CFPB discussed several issues recently highlighted in the CFPB’s Office of Servicemember Affairs Annual Report for 2021, including credit reporting issues and debt collection practices related to medical debt. Mr. Rice described younger servicemembers as prime targets for bad actors, as they are inexperienced financially but have a steady paycheck. He cited frequent relocation and the accompanying need to share personal information as making servicemembers especially vulnerable to scams, and noted the unique harm that fraud presents for servicemembers because of the impact of credit issues on their security clearance.
Mr. Rice highlighted the Military Lending Act (MLA) as a basis of CFPB enforcement actions, and discussed the importance of the MLA and the Servicemembers Civil Relief Act (SCRA) in protecting military customers. According to Mr. Rice, “The market is moving fast and we must ensure servicemember protections keep pace,” calling out Buy Now Pay Later (BNPL), abuses of the military allotment system, and other emerging products and services in the digital space as areas of concern. He did not, however, detail how the Bureau intends to use the MLA or SCRA to address risks it perceives in emerging products, such as BNPL.
In his written testimony, made available by the CFPB, Mr. Rice described in more detail other practices that are of concern to the CFPB and that may well violate the MLA. First, he pointed out that some lenders appear to be structuring loans as purchase money loans to “evade the MLA” by taking advantage of an exclusion for such loans when they are secured by the personal property being purchased. Second, he noted that the CFPB is seeking to determine whether the MLA’s prohibition on mandatory arbitration is working and is “sufficient to protect servicemembers and their families from these provisions in credit contracts.” Finally, he indicated that certain lenders appear to be partnering with banks to create “allotment savings accounts” from which loan payments will be made in an attempt to circumvent MLA prohibitions on the repayment of loans by military allotments, a practice that he asserted might also raise UDAAP questions.
Brendan Carr of the FCC focused his testimony on the unique set of security concerns posed by the video-sharing app TikTok, which is owned by Beijing-based ByteDance Ltd. Mr. Carr testified that TikTok is treated like just another app and not a sophisticated surveillance tool, noting a pattern of misrepresentations by TikTok regarding the amount and extent of personal data collected from users and how much of that data has been accessed within China. Like other topics discussed, he noted the heightened concerns that arise in the context of military users.
Troy Broussard of the AARP identified three fraud-related trends that cut across different scams and demographics – the use of gift cards, cryptocurrency, and internet safety. In discussing gift cards, Mr. Broussard cited their general availability, relatively high limits on the amount of money that can be added to cards, and the ability to access funds instantly as making them a “weapon of choice” for criminal activity. He also called out fake veterans charities, purported VA mortgage loan schemes, and bogus free medical equipment for service-related injuries as the top-three military-specific scams the AARP has identified. Robert Burda from the Cybercrime Support Network also discussed internet safety issues, including online shopping scams and accessing of personal information by fraudsters through social media.
Discussion during the Q&A portion of the hearing included continued efforts to address robocalls, the importance of interagency efforts between the CFPB, DoD, FTC, and others in both outreach and enforcement, and the extent of any foreign actor participation in fraud against servicemembers. Chairman Lynch and Ranking Member Grothman have co-sponsored HR 8321, the Military Consumer Protection Task Force Act of 2022, to establish a joint task force led by the Secretaries of Defense and Veterans Affairs, to combat military consumer fraud.
Plaintiffs in Alcantara v. Duran Landscaping alleged that their former employer violated the Fair Labor Standards Act (FLSA) and Pennsylvania Minimum Wage Act because it failed to pay overtime premiums. Less than a year after filing suit, the parties notified the court that they resolved the claims and requested a phone call with the court to seek approval of the agreed upon settlement without having to spend the money on a formal motion. In response to the parties’ request, the court, sua sponte, raised the question of whether it actually had to approve settlement and invited briefs on the topic.
Both parties took the position that judicial approval was not necessary. At the request of the court, the U.S. Department of Labor (DOL) also weighed in, taking the position that based on the text of Federal Rule of Civil Procedure (FRCP) 41 and judicial precedent “FLSA rights cannot be waived or compromised without supervision by the [DOL] or approval by a court.” The DOL’s letter brief to the court is available here.
After reviewing the submissions, U.S. District Judge Joshua Wolson concluded that neither FRCP 41 nor the FLSA require “a court to approve a settlement between an individual plaintiff and an employer.” The court opined that the settlement approval process is applied under the guise of helping the plaintiff-employees, but in reality, they are represented by counsel and are “equipped to make that decision for themselves.” It reasoned that there is “no support in the FLSA’s text” for judicial approval, describing it as a “judge-made rule that makes litigation slower and more expensive and is at odds with the text of Rule 41.” The court explained that the facts in Lynn’s Food Stores Inc. v. United States, 679 F.2d 1350 (11th Cir. 1982), which is often cited in support of the need for judicial approval of FLSA settlements, are unique because, in that matter, plaintiffs were not represented by counsel and raised concerns that are not present where there are individual (as opposed to class or collective action) claims and the plaintiff is represented by counsel.
The court acknowledged concerns about unfair settlements between employers and employees, but found that public policy weighs against requiring approval of FLSA settlements. In effect, it said that the court’s assistance ultimately “drives up litigation costs in small-value cases, makes settlement more difficult, and delays the disbursement of unpaid wages to FLSA plaintiffs.”
If Judge Wolson’s opinion in Alcantara garners support in other jurisdictions, it may enable parties in FLSA litigation to reach settlement more quickly and reduce the overall cost of litigation. It also raises the possibility that FLSA claims could be resolved without the filing of litigation, which is generally not the case under the prevailing view that release of FLSA claims requires approval of a court or supervision by the DOL. This would make it much easier and cheaper to resolve FLSA claims without the need for any litigation.
The full decision is available here.
As discussed in an earlier blog post, the California Department of Financial Protection and Innovation (DFPI) issued an Invitation for Comments on the Proposed Second Rulemaking under the Debt Collection Licensing Act (DCLA) on August 19, 2021. The Commissioner is now considering draft regulations related to the DCLA’s scope, annual report, and document retention requirements, and has issued an “Invitation for Comments on Draft Text for Proposed Second Rulemaking Under the Debt Collection Licensing Act.”
The draft text amends:
- 10 CCR § 1850 to include a definition of the term “engage in the business of debt collection.” This proposed definition clarifies that “[a] person engages in the business of debt collection and is required to be licensed pursuant to section 100001, subdivision (a) of the Financial Code if the person (A) engages in debt collection for a profit or gain, and (B) the activity is not of a regular, frequent, or continuous nature. Advertising or otherwise offering the service of debt collection for remuneration constitutes engaging in the business of debt collection.”
- 10 CCR § 1850.1 to make clear that the scope of the licensing requirement:
- EXCLUDES employees of debt collectors, when acting within the scope of their employment with a licensed debt collector. The term “employee” is defined in amended 10 CCR § 1850 to mean “an individual whose manner and means of performance of work are subject to the right of control of, or are controlled by, a person and whose compensation for federal income tax purposes is reported, or required to be reported, on a W-2 form of international equivalent, issued by the controlling person.
- INCLUDES parent entities, subsidiaries, and affiliates of licensed debt collectors, to the extent they are not otherwise exempted under the DCLA.
- EXCLUDES an “original creditor” (i.e., a creditor seeking, in its own name, repayment of consumer debt arising from credit the creditor extended), unless it meets one or more of the following criteria:
- Five percent or more of the creditor’s annual profits over the last 12 months, whether contracted for or received, constitute collection fees, late fees, or any other charges added to the original consumer credit transaction that created the debt;
- Within the last 12 months, an average of 10 percent or more of the creditor’s inventory was repossessed at least once, either by the creditor directly or through a third-party; or
- The creditor has a monthly average over the last 12 months of 25 percent or more of the gross amount of its accounts receivables 90 or more days past due.
- EXCLUDES a person solely servicing debts not in default on behalf of an “original creditor. “Default” means more than 90 days past due, unless the contract governing the transaction or another law provides otherwise.
- EXCLUDES a healthcare provider, healthcare facility, or hospital if the only debt it collects is on its own behalf and is payment for medical or other services or products it provided.
- EXCLUDES a local, state, or federal government body of the U.S. when collecting debt owed to a government body. The term “government body” includes a state, county, city, tribal, district, public authority, public agency, judicial branch public entity, state-chartered public college or university, and any office, officer, department, division, bureau, board, or commission thereof.
- EXCLUDES a person whose debt collection activity is limited exclusively to debt collection regulated pursuant to the California Student Loan Servicing Act (Cal. Fin. Code §§ 28100 et seq.).
- EXCLUDES a public utility when acting under the supervision of the California Public Utilities Commission in accordance with its authority under applicable California laws and regulations.
- 10 CCR § 1850.2 to clarify the following points about “consumer credit transactions” and “consumer debt:”
- Residential rental debt does not constitute “consumer debt” for the purposes of the DCLA. While the draft text did not initially exclude a debt owed to a Homeowners’ Association, it was subsequently revised to provide that a debt owed pursuant to a Homeowners’ Association Declaration of Covenants, Conditions, and Restrictions or other equivalent written agreement also does not constitute a “consumer debt.”
- Debt arising from a consumer’s acquisition of healthcare or medical services, where payment is deferred, is presumed to be “consumer debt.”
- The failure of a personal check to clear does not create a consumer credit transaction under the DCLA.
- 10 CCR § 1850.70 to enumerate the exact information that must be included in each licensee’s annual report, which must be filed with the DFPI on or before March 15 of each year pursuant to Cal. Fin. Code § 100021.
- 10 CCR § 1850.71 to detail the document retention requirements that each licensee must adhere to when engaging in the business of debt collection.
Interested parties are invited to submit comments, including comments describing the potential financial impact of the draft regulations by Monday, August 29, 2022. The DFPI asked that questions regarding the Invitation for Comments be directed to Emily Gallagher, Senior Counsel, at firstname.lastname@example.org.
According to a WSJ report, the CFPB is preparing to release new guidance that would require banks to make refunds to victims of scammers who defraud consumers into sending money to a third party using an online money-transfer platform. The WSJ indicates that the CFPB’s possible action is being driven by an increase in consumer complaints to the CFPB about such scams.
Under the Electronic Fund Transfer Act (EFTA) and Regulation E, an unauthorized electronic fund transfer (EFT) is an EFT from a consumer’s account initiated by a person other than the consumer without actual authority to initiate the transfer and from which the consumer receives no benefit. The existing Official Staff Commentary specifically states that an unauthorized EFT includes a transfer initiated by a person who obtained the access device from the consumer through fraud or robbery, stopping well short of covering transactions initiated by the consumer as the result of fraud.
Under the EFTA and Regulation E, consumers who provide a bank with timely notice of an error that the bank determines to be an unauthorized EFT are entitled to EFTA/Regulation E liability protection. Based on the WSJ article, the new guidance, in conflict with the statutory text, would require banks to treat fraudulently induced transactions as unauthorized EFTs even when they are initiated by the consumer with the result that banks would be required to repay the amount of such transactions to consumers.
The WSJ article also reports that banks and industry trade groups have reacted critically to such an interpretation by the CFPB, for reasons that include the potential for abuse through “friendly fraud.” In addition, banks could find it unduly risky to offer money transfer services, thereby reducing consumer access to such services.
The issuance of such an interpretation would represent a significant change in the application of EFTA/Regulation E liability protections. Accordingly, such a change should be the subject of notice-and- comment rulemaking procedures, either as an amendment to Regulation E or to the Official Staff Commentary, or both.
In a recent consent order with a national bank, the CFPB found that the bank committed UDAAP violations in its process for handling garnishment orders and by including certain waiver language in its deposit account agreements. We discuss the specific aspects of the bank’s process that the CFPB found to be improper and what banks should consider when reviewing their own garnishment procedures in light of the consent order. We also look at what the consent order means for how banks can address liability concerns arising out of the handling of garnishment orders in deposit account agreements.
Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Mike Gordon, a partner in the firm’s Consumer Financial Services Group, and Jessica Simon, Of Counsel in the firm’s Bankruptcy and Restructuring Group.
To listen to the episode, click here.
According to media reports, CFPB Deputy Director Martinez sent a memo to staff recently announcing the following organizational changes:
- The work of the Students team and the Private Education Loan Ombudsman will be consolidated into a single Office for Student and Young Consumers that will be led by an Assistant Director for Students.
- To prepare for the likelihood of increased oversight demands from a Republican-controlled House and/or Senate following the mid-term elections in November, the Legal Division will divide the Office of Litigation and Oversight into two separate offices: an Office of Litigation and an Office of Oversight. All of the Office of Litigation and Oversight’s current staff will remain in the Office of Litigation and continue to work on litigation matters. The Office of Oversight will be staffed by new personnel.
- The CFPB’s docket management function has been moved from the executive secretary’s office into the Legal Division. This function includes the management of both the CFPB’s docket and public notice process and its ex parte participation in rulemaking.
Of the three changes, the most significant is undoubtedly the creation of a new Office of Oversight. This Office will likely be staffed by new hires, presumably persons with deep experience working on the Hill or lobbying Congress. If Republicans take control of the House and/or Senate during the midterm elections, Director Chopra likely will be invited to appear at more than the hearings about the CFPB’s semi-annual reports at which he would ordinarily testify. Those hearings are likely to be much more contentious than the hearings at which he has testified so far since the Democrats control both the House and Senate.
Director Chopra’s actions have already generated strong criticism from one of the most powerful industry groups, the U.S. Chamber of Commerce, which has sent a letter to him identifying several of his actions that the Chamber opposes. The Chamber also has joined with several financial institution trade associations in sending a White Paper to Director Chopra in which they urge him to rescind the recent revisions to the UDAAP section of the CFPB’s Exam Manual which re-defined a UDAAP violation to include discrimination in connection with non-credit products and services. We have argued that this type of dramatic and impactful change should only be made by adhering to APA requirements, including notice and comment. And, we have chronicled many other actions by the CFPB under Director Chopra that push the envelope in ways that have provoked industry criticism.
On July 18, the Federal Housing Finance Agency (FHFA) announced the launch of a new Office of Financial Technology with the goal of advancing effective risk management as it evaluates fintech developments in the housing finance space. The FHFA also issued a request for information (RFI) seeking public input on how to facilitate responsible innovation, identify barriers or challenges to implementing fintech into housing finance, support equity for homeowners and renters, and increase efficiency and effectiveness in the compliance and regulatory processes. In the introduction to the RFI, the FHFA noted President Biden’s March 2022 executive order. While the executive order focused on cryptocurrency and digital assets, it also more broadly directed agencies to take concrete steps to study and support technological advances and promote equitable access to safe and affordable financial services.
Similar financial technology offices have been established by other financial regulators, including the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and Consumer Financial Protection Bureau. The FHFA indicated that its new Office of Financial Technology will:
- Support the Agency in developing strategies for FHFA’s regulated entities to advance housing finance fintech and innovation in a safe and sound, responsible, and equitable manner;
- Engage with market participants, industry, nonprofits, consumer groups, and academia to facilitate the sharing of best practices of housing finance fintech and innovation;
- Establish ongoing outreach through the regulated entities, promoting awareness and understanding of housing finance fintech and innovation;
- Facilitate interagency collaboration with other regulators to enable information sharing and partnership opportunities; and
- Serve as an Agency resource for innovations, general trends, and emerging risks in housing finance fintech.
In the RFI, the FHFA noted the dramatic growth of fintech within the mortgage industry, and identified technological advances, including artificial intelligence (AI) and machine learning, distributed ledger technology, and smart contracts that are changing housing finance in both the primary and secondary markets.
The RFI focuses on four areas: (i) the role of fintech in the ecosystem in which residential mortgages are originated (or “mortgage tech”), (ii) the role of fintech in the secondary market, (iii) the risks associated with the use of fintech, and (iv) the application of fintech to compliance and regulatory activities (or “regtech”). It also solicits feedback on how to maximize stakeholder engagement. The FHFA appears to share the CFPB’s concerns that the use of technology in the mortgage industry may present fair lending risk. In the RFI, the FHFA states that “[t]he opaque nature of some fintech methods such as artificial intelligence and machine learning highlights the need to ensure appropriate compliance measures are taken to mitigate the risk of violating fair lending laws.”
The establishment of the Office of Financial Innovation and the RFI appear to present an opportunity to engage with the FHFA on the technological developments that are driving the industry. In the RFI, the FHFA confirms the regulatory concerns regarding the use of AI and identifies several categories of risk, including inadequate regulation of the fintech sector. However, the FHFA also recognizes the efficiencies and advancements fintech provides in loan origination, servicing, and capital market activities and the transparency that technology can bring to the customer experience. (A recent discussion of the use of AI in underwriting consumer loans on the Consumer Finance Monitor Podcast can be found here.)
The deadline to submit comments in response to the RFI is October 16, 2022.
Following up on our previous article reporting on recent state developments regarding work from home:
On July 22, 2022, the South Carolina Department of Consumer Affairs noticed its intent to rescind interim regulatory guidance issued during the Covid emergency regarding mortgage loan originators working remotely from unlicensed locations. Per the notice, effective January 1, 2023, “all mortgage loan originators licensed in South Carolina by the Department of Consumer Affairs must work from licensed locations, in accordance with South Carolina law.”
On July 7, 2022, the Georgia Department of Banking and Finance (DBF) filed final rules which will become effective on July 27, 2022. Among the impacted rules were rules regulating Residential Mortgage Brokers, Lenders, and Loan Originators.
Specifically, Chapter 80-11 was revised to address, among other things:
- Circumstances when a licensee must provide notice to the department of a security incident involving unauthorized access to personal information (or of a data breach). Failure of a mortgage broker or lender licensee to provide notice of unauthorized access to customer information subjects the licensee to a fine of $1,000 per day until the notice is provided;
- Requirements for licensees to create and maintain an information security program to safeguard nonpublic personal information of consumers;
- Requirements for, and providing examples of, documentation showing that a sale or other transfer of closed mortgage loans to an unlicensed entity who is not otherwise exempt from licensure is for the sole purpose of securitization of the loans in the secondary market and that the historical practices and documented intent of the unlicensed entity is to hold such loans for not more than seven days as required by O.C.G.A. § 7-1-1001(a)(19). Failure to maintain such documentation subjects the licensee to a fine of $1,000 per loan transferred to the unlicensed entity;
- A requirement for information security program materials, including, but not limited to, any risk assessment and incident response plan;
- A requirement for various written notifications (including but not limited to the notice of unauthorized access to personal information) be filed via NMLS.
- The legislation relating to felony convictions which took effect in May. (For more information on that topic, see our article here).
A copy of the Notice of Final Rulemaking is available here.
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