Legal Alert

Mortgage Banking Update - October 13, 2022

October 13, 2022

In This Issue:

For the latest updates on the COVID-19 pandemic visit the Ballard Spahr COVID-19 Resource Center

 

U.S. Chamber of Commerce and Other Trade Groups File Lawsuit Against CFPB Challenging UDAAP Update to Exam Manual

The U.S. Chamber of Commerce, joined by six other trade groups, filed a lawsuit in a Texas federal district court against the CFPB challenging the CFPB’s recent update to the Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) section of its examination manual to include discrimination. The other plaintiffs are American Bankers Association, Consumer Bankers Association, Independent Bankers Association of Texas, Longview Chamber of Commerce, Texas Association of Business, and Texas Bankers Association. 

In July 2022, the Chamber, together with American Bankers Association, Consumer Bankers Association, and Independent Community Bankers of America, sent a letter to Director Chopra calling on the CFPB to rescind the update. The letter was accompanied by a white paper setting forth the legal basis for their position. 

The plaintiffs claim that the manual update should be set aside because it violates the Administrative Procedure Act (APA) for the following reasons:

  • The update exceeds the CFPB’s statutory authority in the Dodd-Frank Act. The CFPB cannot regulate discrimination under its UDAAP authority because Congress did not give the CFPB authority to enforce anti-discrimination principles except in specific circumstances. The CFPB’s statutory authorities consistently treat “unfairness” and “discrimination” as distinct concepts. (To demonstrate the compliance burdens resulting from the update, the plaintiffs allege that the CFPB has provided no guidance for regulated entities on what might constitute unfair discrimination or actionable disparate impacts for purposes of UDAAP. As examples of issues creating confusion, the plaintiffs allege that the CFPB has not identified what are protected classes or characteristics or what activities are not discrimination (such as those identified in the ECOA), and has not explained how regulated entities should conduct the sorts of assessments that the CFPB appears to be contemplating given existing prohibitions on the collection of customer demographic information.)
  • The update is “arbitrary and capricious” because the CFPB’s interpretation of “unfairness” contradicts the historical use and understanding of the term. The plaintiffs allege that the FTC’s unfairness authority does not extend to discrimination and that Congress borrowed the FTC Act’s unfairness definition for purposes of defining the CFPB’s UDAAP authority. They also allege that the CFPB’s contemplated use of disparate impact liability when pursuing UDAAP claims flouts congressional intent and U.S. Supreme Court authority.
  • The update violates the APA’s notice-and-comment requirement because it is a legislative rule that imposes new substantive obligations on regulated entities.

In addition to claiming that the manual update should be set aside due to the alleged APA violations, the plaintiffs allege that the update should be set aside because the CFPB’s funding structure violates the Appropriations Clause of the U.S. Constitution. (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.) As support for their unconstitutionality claim, the plaintiffs cite the concurring opinion of Judge Edith Jones in the Fifth Circuit’s en banc May 2022 decision in All American Check Cashing in which Judge Jones concluded that the CFPB’s funding mechanism is unconstitutional.  

Although the en banc Fifth Circuit did not reach the funding argument, a Fifth Circuit panel is expected to consider that issue in the CFSA lawsuit which challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule. 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. On May 9, 2022, a Fifth Circuit panel heard oral argument in the CFSA lawsuit. 

The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.

The unconstitutionality of the CFPB’s funding structure has also been raised by Populus Financial Group, Inc. in the lawsuit filed by the CFPB in July 2022 against Populus in a Texas federal district court.  Populus has filed a motion to dismiss in which it argues that the CFPB’s enforcement action is invalid because the CFPB’s funding structure violates the separation-of-powers principle embodied in the Appropriations Clause of the U.S. Constitution.

Alan S. Kaplinsky  

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Federal DC Court Overturns Closed-End Loan HMDA Reporting Threshold

In April 2020, the CFPB issued a final HMDA rule increasing the Home Mortgage Disclosure Act (HMDA) reporting threshold for closed-end mortgage loans from 25 covered loans originated in each of the prior two years to 100 covered loans originated in each of the prior two years. The federal district court for the District of Columbia recently invalidated the change, although the court let stand the increase in the permanent threshold for reporting open-end lines of credit made by the April 2020 rule from 100 covered lines of credit in each of the two prior years to 200 covered lines of credit in each of the two prior years. The ruling is relevant for both single-family and multi-family mortgage lenders. 

The reporting triggers of 25 covered closed-end loans and 100 covered open-end lines of credit originated in each of the prior two years were established by an October 2015 HMDA rule. Prior to that rule, for closed-end loans the reporting trigger for non-bank mortgage lenders included a requirement that the lender originated at least 100 home purchase or refinance loans in the prior year, and the reporting trigger for depository institutions focused on non-volume factors. Additionally, prior to that rule, the reporting of open-end lines of credit was optional, so there was no reporting trigger. 

After the adoption of the 2020 rule, the National Community Reinvestment Coalition, Montana Fair Housing, Texas Low Income Housing Information Service, Empire Justice Center, the Association for Neighborhood & Housing Development, and the City of Toledo, Ohio, filed a lawsuit challenging the changes to the closed-end loan and open-end line of credit reporting thresholds. The court noted the plaintiffs asserted “that HMDA data have been invaluable in ‘uncovering and addressing redlining, fair lending violations, and other inequitable lending practices’ over the decades.” The plaintiffs challenged the 2020 Rule as arbitrary and capricious, contrary to law, and in excess of the CFPB’s statutory authority under the Administrative Procedure Act (APA). The court noted that the CFPB based the change in the reporting thresholds on concerns from lower-volume reporting institutions that the burdens of reporting were not justified based on the small amount of data that they report. 

The parties each filed motions for summary judgment, with the court granting the plaintiffs’ motion on the closed-end loan threshold change and granting the defendant’s motion on the open-end line of credit threshold change.

As noted by the court, the October 2015 rule not only changed the threshold to be a HMDA reporting institution for closed-end loans, and made the reporting of open-end lines of credit mandatory, the rule more than doubled the number of data points that institutions must collect and report. Additionally, a number of the new data reporting items are complex. However, a subsequent law enacted by Congress created a partial exemption for lower volume lending depository institutions that basically exempted the institutions from the expanded reporting requirements. 

After addressing the assertions of both parties, the court concluded with regard to the change in the reporting threshold for closed-end loans that while the change did not exceed the CFPB’s statutory authority, the “CFPB failed adequately to explain or support its rationales for adoption of the closed-end reporting thresholds under the 2020 Rule, rendering this aspect of the rule arbitrary and capricious.”

The court appears to have been influenced by the position of the CFPB under Director Cordray regarding reporting. The court noted that under Director Cordray the CFPB concluded that “while higher volume exemption thresholds ‘might not significantly impact the value of HMDA data for analysis at the national level,’ they ‘would have a material negative impact on the availability of data about patterns and trends at the local level,’ which data was ‘essential to achieve HMDA’s purposes.’” The court cited to the preamble to the October 2015 rule in noting that the “CFPB further explained that ‘the loss of data in communities at closed-end mortgage loan-volume thresholds higher than 25 would substantially impede’ the ability of the public and public officials in these locales and others ‘to understand access to credit in their communities.’” However, the portions of the preamble cited by the court provided generalized or conclusory statements as to why the 25 loan reporting threshold is the appropriate level, and not concrete data as to why such threshold is necessary.

Addressing the changes made by the April 2020 rule, the court noted data cited by the CFPB for calendar year 2018 indicating that 1,700 institutions out of 4,680 HMDA closed-end loan reporting institutions ceased to be reporting institutions based on the rule. As previously reported, focusing on the number of HMDA reporting institutions, and not the number of transactions, can misrepresent changes in HMDA data reporting. Significantly, the court also noted that based on 2018 data the April 2020 threshold change would exclude 112,000 closed-end loan applications taken by the 1,700 institutions from reporting. For 2018, a CFPB report indicates that there were 10.3 million closed-end loan applications reported. Based on these numbers, requiring the 1,700 institutions to resume HMDA reporting will increase the number of closed-end loan applications reported by approximately 1.09 percent per year, an infinitesimal increase in the number of reported closed-end loan applications.

As noted, the court let stand the threshold of 200 open-end lines of credit originated in each of the prior two years. Based on an initial action and subsequent action taken by the CFPB, the 100 open-end lines of credit reporting threshold provided for in the October 2015 rule never became effective. The threshold was temporarily increased to 500 open-end lines of credit originated in each of the prior two years in order to provide the CFPB with time to assess if the 100 lines of credit threshold was too low. The CFPB ultimately decided on the threshold of 200 lines of credit originated in each of the prior two years. The fact that the 100 lines of credit threshold never became effective, and that in the end the CFPB was for the first time requiring the reporting of open-end lines of credit, were factors influencing the court in allowing the 200 lines of credit threshold to stand.

The CFPB has not issued a public statement regarding whether it plans to appeal the ruling. Presumably, the current leadership of the CFPB would favor the reduction of the closed-end loan reporting threshold to the 25 originated loans in each of the prior two years level set by the October 2015 rule. If the CFPB does not appeal the ruling, then the CFPB will need to determine how to re-implement the 25 closed-end loan threshold. When the CFPB increased the threshold from 25 to 100 closed-end loans in April 2020, it required the collection of HMDA data through June 30, 2020 for institutions that would no longer be subject to HMDA requirements for closed-end loans. Such institutions no longer had to collect data starting July 1, 2020, and the reporting of any closed-end loan data collected in 2020 was optional for such institutions. A potential approach that the CFPB may take is to re-implement the 25 closed-end loan threshold for the 2023 reporting year, with institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 being subject to HMDA requirements for closed-end loans. 

Richard J. Andreano, Jr.

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DOJ Announces Settlement of Redlining Lawsuit

The Justice Department announced that it has entered into an agreement with Lakeland Bank to settle the DOJ’s claims that Lakeland engaged in unlawful redlining in the Newark, New Jersey metropolitan area. The DOJ’s lawsuit against Lakeland, filed in a New Jersey federal district court, is part of the DOJ’s nationwide “Combating Redlining Initiative” launched in October 2021. According to the DOJ, the settlement represents the third-largest redlining settlement in the DOJ’s history.

The key allegations in the DOJ’s complaint are the following:

  • During the relevant time period (2015-2021), the Newark, New Jersey-Pennsylvania Metro Division (Newark MD) as delineated in 2015, included Essex, Somerset, Union, Sussex, and Morris counties in New Jersey (Newark Lending Area).
  • As of 2021, Lakeland’s Community Reinvestment Act (CRA) assessment area included majority-white areas of Essex, Somerset, and Union counties and excluded the portions of those counties that contain majority-Black and Hispanic neighborhoods. None of the majority-Black and Hispanic census tracts in Somerset and Union Counties were included in Lakeland’s assessment area, and only a small fraction of the majority-Black and Hispanic tracts in Essex County were included.
  • All of Lakeland’s full-service branches in the Newark Lending Area during the relevant time period were located in majority-white census tracts and none of the loan officers at those branches were assigned to target customers within majority-Black and Hispanic neighborhoods.
  • In the majority-white neighborhoods in the Newark Lending Area, residential mortgage services were available at branches to walk-in customers. Those services were not available in majority-Black and Hispanic neighborhoods in the Newark Lending Area.
  • During the relevant time period, Lakeland relied almost entirely on mortgage loan officers, all but one of whom were assigned offices in branches in majority-white neighborhoods, to develop referral sources, conduct outreach to potential customers, and distribute mortgage lending marketing materials.
  • Lakeland took no meaningful steps to supplement the efforts of mortgage loan officers to general mortgage applications from majority-Black and Hispanic neighborhoods in the Newark Lending Area.
  • Based on its own fair lending assessment, Lakeland was aware of shortfalls in applications between itself and its peer lenders in majority-Black and Hispanic neighborhoods and shortfalls in applications from individuals identifying as Black or Hispanic compared to the local demographics and aggregate HMDA averages. 
  • During the relevant time period, Lakeland significantly underperformed its peer lenders in generating home loan applications from majority-Black and Hispanic neighborhoods in the Newark Lending Area and in making HMDA-reportable residential mortgage loans in those neighborhoods.  The disparities between Lakeland’s rate of applications from and home loan volume in majority-Black and Hispanic areas and the rate and volume of its peers were both statistically significant (i.e. unlikely to be caused by chance) and sizeable.

Based on these allegations, the DOJ alleged violations of the Fair Housing Act and Equal Credit Opportunity Act by Lakeland. For purposes of its FHA claim, the DOJ alleged:

  • Lakeland’s policies and practices (1) constitute the unlawful redlining of majority-Black and Hispanic communities in the Newark Lending Area on account of the communities’ racial and ethnic composition, (2) were intended to deny, and had the effect of denying, equal access to home loans to residents of majority-Black and Hispanic communities, and (3) were not justified by a business necessity or legitimate business considerations.
  • Lakeland’s actions constitute (1) discrimination on the basis of race, color, and national origin in making available residential real-estate related transactions in violation of the FHA, and (2) a pattern or practice of resistance to the full enjoyment of rights secured by the FHA, and (3) a denial of rights granted by the FHA to a group of persons that raises an issue of general importance.
  • Lakeland’s pattern or practice of discrimination was intentional and willful and implemented with reckless disregard for the rights of individuals based on their race, color, and national origin.

For purposes of its ECOA claim, the DOJ alleged:

  • Lakeland’s policies and practices constitute (1) unlawful discrimination against applicants and prospective applicants, including by redlining majority-Black and Hispanic communities in the Newark Lending Area and engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, and national origin, and (2) a pattern or practice of discrimination and discouragement and resistance to the full enjoyment of rights secured by the ECOA.
  • Lakeland’s pattern or practice of discrimination was intentional and willful and implemented with reckless disregard for the rights of individuals based on their race, color, and national origin.

The DOJ’s claim that redlining violates the ECOA raises the issue of whether such a claim can be brought under the ECOA. The CFPB has also taken the position that redlining violates both the FHA and ECOA. However, the ECOA focuses on the treatment of applicants, and a redlining claim addresses individuals who are not applicants. In alleging that Lakeland violated the ECOA because its policies and practices constitute engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, and national origin, the DOJ is attempting to rely on Regulation B, the ECOA’s implementing regulation, to establish an ECOA violation. Regulation B provides that a creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application. However, the ECOA itself does not set forth such a prohibition. Additionally, ECOA lacks the language in the FHA that prohibits “discrimination against any person in making available” a residential real estate-related transaction. Whether a redlining claim can be brought under the ECOA may well be an issue that will eventually come before the U.S. Supreme Court.

The actions that Lakeland must take under the proposed consent order include the following:

  • Invest at least $12 million in a loan subsidy fund for residents of Black and Hispanic neighborhoods in the Newark area; $750,000 for advertising, outreach and consumer education; and $400,000 for development of community partnerships to provide services that increase access to residential mortgage credit.
  • Open two new branches in majority-Black and Hispanic census tracts in the Newark Lending Area, including at least one in the city of Newark; assign at least four mortgage loan officers to solicit mortgage applications in majority-Black and Hispanic census tracts in the Newark Lending Area; and employ a full-time Community Development Officer to oversee the continued development of lending in majority-Black and Hispanic census tracts in the Newark Lending Area.
  • Conduct using a third-party consultant a Community Credit Needs Assessment for majority-Black and Hispanic census tracts in the Newark Lending Area
  • Conduct using a third-party trainer an annual fair lending training of all employees with substantive involvement in mortgage lending, marketing, or fair lending or CRA compliance, or who have management responsibility over such employees, senior management with fair lending and marketing oversight, and members of the Board of Directors.

Richard J. Andreano, Jr. & John L. Culhane, Jr.

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CFPB Warns Mortgage Lenders That Failure to Have Appraisal Reconsideration Policies Can Violate Federal Law

In a recent blog post the CFPB warned mortgage lenders that “[l]enders that fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value risk violating federal law.”

In the blog post the CFPB states the following:

Accurate appraisals are essential to the integrity of mortgage lending. Overvaluation can decrease affordability, make it harder to sell a home or refinance, and increase the risk of foreclosure. Undervaluation can prevent a homeowner from accessing accumulated equity, whether through sale or a home equity loan. Both over- and under-valuation keep individuals, families, and neighborhoods from building wealth through homeownership.

The CFPB then states that responsible lenders will provide borrowers with “clear, actionable information about how to raise concerns about the accuracy of an appraisal.” The CFPB adds that a “lender’s reconsideration of value process must ensure that all borrowers have an opportunity to explain why they believe that a valuation is inaccurate and the benefit of a reconsideration to determine whether an adjustment is appropriate. While an individual lender’s reconsideration of valuation process may vary, lenders must make sure that their reconsideration of value process is nondiscriminatory and available and accessible to all.”

Clearly, having accurate appraisals that are free from unwarranted bias is important to mortgage lending. Having clear guidance from regulators on this matter would be most welcome. As we have observed, on significant issues it would be appropriate for the CFPB to engage in notice and comment rulemaking. But yet again, it appears that this CFPB simply intends to issue unofficial directives threatening the industry. 

Richard J. Andreano, Jr.

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HUD Announces Consideration of Positive Rental History for FHA Purchase Loans

For forward Federal Housing Administration (FHA) insured purchase mortgage loans made to first-time homebuyers, the U.S. Department of Housing and Urban Development (HUD) recently announced in Mortgagee Letter 2022-17 the consideration of positive rental history in FHA’s Technology Open to Approved Lenders (TOTAL) Mortgage Scorecard. Positive rental history may be considered in TOTAL scoring events that occur on or after October 30, 2022, for loans with case numbers assigned on or after September 20, 2021.

A first-time homebuyer is an individual who has not held an ownership interest in another property in the three years prior to the case number assignment. An individual who is divorced or legally separated and had no ownership interest in a principal residence, other than a joint ownership interest with a spouse, during the three years prior to the case number assignment is considered a first-time homebuyer. A positive rental history is on time payment by a borrower of all rental payments in the previous 12 months, with rental payments being made in the month in which they were due being considered on time.

The following conditions must be satisfied in order to submit positive rental payment history to the TOTAL Mortgage Scorecard:

  • The transaction is a purchase transaction;
  • At least one borrower is identified as a first-time homebuyer;
  • The minimum decision credit score is at least 620; and
  • At least one borrower has a documented positive rental payment history with monthly payments of $300 or more for the previous 12 months.

To verify the borrower’s rental payment history, a lender must obtain a copy of the executed rental or lease agreement, and any one of the following:

  • Written verification of rent from a landlord with no identity of interest with the borrower;
  • 12 months canceled rent checks;
  • 12 months bank or payment service statements documenting rents paid; or
  • Landlord reference from a rental management company.

For borrowers renting from a family member, a copy of the executed rental or lease agreement and 12 months canceled checks or bank statements are required to demonstrate satisfactory rental payment history.

FHA Connection and the TOTAL Mortgage Scorecard have been updated with an indicator that lenders may use when a positive rental payment history has been documented and submitted for one of the borrowers.

FHA Commissioner Julia Gordon stated “[w]e hope that adding this positive factor to all of the characteristics currently considered in an FHA credit evaluation will increase access to affordable FHA-insured mortgages for first-time homebuyers.”  HUD Deputy Assistant Secretary for Single Family Housing Julienne Joseph added “[t]his change makes FHA requirements more flexible and can help remove barriers to homeownership, particularly for those with non-traditional credit or thin credit files.”

Richard J. Andreano, Jr.

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Podcast: A Close Look at Open Banking and the Role of Data Aggregators, with Special Guests Julian Alcazar, Payments Specialist, Federal Reserve Bank of Kansas City, and Adam Maarec, Senior Director and Associate General Counsel, Capital One

After reviewing the roles of data aggregators and other key players in the data aggregation market, we discuss the implications of the transition from screen scraping to application programming interfaces (API), how aggregators can enhance consumer financial services, and the risks associated with data aggregators. We also discuss the CFPB’s Section 1033 rulemaking on providing data access to consumers, including the expected timetable and issues the CFPB is likely to address in its proposed rule, and potential larger participant rulemaking for aggregators.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.

To listen to the episode, click here.

To read an article published by the Federal Reserve Bank of Kansas City and co-authored by Mr. Alcazar,  “Data Aggregators: The Connective Tissue for Open Banking,” click here.

- Alan Kaplinsky

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FinCEN Issues Final Rule on Beneficial Ownership Reporting Requirements

First Post in a Two-Post Series on the CTA Implementing Regulations

On September 30, 2022, the Financial Crimes Enforcement Network (FinCEN) issued its final rule, Beneficial Ownership Information Reporting Requirements (Final Rule), implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (CTA). 

FinCEN’s September 29, 2022, press release is here; the Final Rule is here; and a summary “fact sheet” regarding the rule is here. The Final Rule largely tracks the December 8, 2021, Notice of Proposed Rulemaking (the Proposed Rule), on which we blogged here and here

The Final Rule requires many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information (BOI) about their beneficial owners—the persons who ultimately own and control the company—to FinCEN. This information will be housed within the forthcoming Beneficial Ownership Secure System (BOSS), a non-public database under development by FinCEN. 

The Final Rule takes effect on January 1, 2024. In a nutshell, (1) companies subject to the BOI reporting rules (reporting companies) created or registered before the effective date will have one year, until January 1, 2025, to file their initial reports of BOI and (2) reporting companies created or registered after the effective date will have 30 days after creation or registration to file their initial reports. In addition to the initial filing obligation, reporting companies will have to file updates within 30 days of a relevant change in their BOI. And, as we discuss, covered companies also will have to report their “company applicants,” which could include lawyers, accountants or other third-party professionals.

The Final Rule will have broad effect. FinCEN estimates that over 32 million initial BOI reports will be filed in the first year of the Final Rule taking effect, and that approximately five million initial BOI reports and over 14 million updated reports will be filed in each subsequent year. We summarize here the key provisions of the Final Rule. In our next blog post, we will discuss the Final Rule’s broad definition of the “control” prong regarding who represents a “beneficial owner,” which will result in an expansion of the definition of “beneficial owner” under the existing Customer Due Diligence (CDD) rule applicable to banks and other financial institutions (FIs).

Implementation of the Corporate Transparency Act

The CTA, enacted as part of the landmark Anti-Money Laundering Act of 2020, aims to establish a new framework for the reporting, maintenance and disclosure of BOI. Congress passed the CTA because it found that the ability to operate through legal entities without requiring the identification of BOI posed an important anti-money laundering (AML) and countering the financing of terrorism (CFT) risk to the U.S. financial system. The Final Rule addresses only the reporting requirements of BOI. FinCEN still must issue two additional proposed rulemakings under the CTA to (1) address data privacy issues and establish rules for whom may access BOI, and (2) revise and conform FinCEN’s existing CDD rule for covered FIs with the Final Rule.

The Final Rule reflects numerous public comments received by FinCEN in response to the Proposed Rule regarding the broad scope of the regulations, the burdens on reporting companies, including small businesses, and privacy and security concerns with respect to personal identifiable information. The Final Rule largely followed the Proposed Rule, with some changes to the filing requirements discussed below. FinCEN stated that additional guidance via FAQs is forthcoming.

Who Must File a Report?

The Final Rule defines two types of reporting companies: domestic and foreign. Subject to certain exemptions, BOI reporting requirements apply to all domestic entities that are created by filing a document with a secretary of state or other similar office of a State or Indian tribe. FinCEN believes this will exclude many sole proprietorships, general partnerships and trusts, subject to applicable State or tribal law. (FinCEN specifically chose not to expand the definition of “reporting company” to include trusts—despite the urging of some transparency watchdog groups.) The reporting requirements also apply to foreign companies, including corporations, limited liability companies, and other entities formed in a foreign country that have registered to do business in any State or Indian tribal jurisdiction by filing a document with the appropriate office.  

The CTA exempts 23 types of entities from the reporting obligations. The Final Rule does not depart from this number and maintains the same exemptions. The most important exemption is for a “large operating company,” defined as a company with an operating presence at a physical office in the U.S., more than 20 full-time employees in the U.S., and more than $5 million in gross receipts or sales reflected on the company’s prior year federal tax returns, excluding gross receipts or sales from sources outside of the U.S.  This exemption, and what it does not include, highlights the special interest of the CTA in tracking foreign companies operating in the U.S.

Businesses in heavily regulated industries, such as banks, money transmitters registered with FinCEN and securities brokers, are also exempted under the CTA.  Other exemptions include (1) governmental authorities; (2) Section 501(c)(3) tax exempt entities; (3) pooled investment vehicles; (4) inactive entities in existence on or before January 1, 2020, that have no foreign ownership, no assets, no change in ownership during the last 12 months, and have not sent or received funds in excess of $1,000 in the last 12 months; and (5) subsidiaries of most exempted entities—but not, for example, the subsidiary of a licensed money transmitter business.

FinCEN declined to depart from the exemptions in the Proposed Rule even though the CTA allows FinCEN to do so upon approval of the Secretary of the Treasury and the Attorney General. FinCEN stated that it lacks the authority to address concerns regarding unfairness or inherent risk and noted that it would consider additional guidance to clarify specific factual circumstances.

What Information Must be Provided in a Report?

Domestic entities formed or foreign entities registered after January 1, 2024, must file an initial report with FinCEN within 30 days after formation or registration. The Final Rule requires the reporting of both BOI and “company applicant” information of reporting companies.

1.  Reporting Companies

The initial report must include the following information about the reporting company:

  • Full name and address;
  • Trade or fictitious names used;
  • Address of the principal place of business;
  • Jurisdiction of formation or, in the case of a foreign company, jurisdiction in which first registered; and
  • Taxpayer Identification Number (TIN), or where a foreign reporting company has not been issued a TIN, a tax identification number issued by a foreign jurisdiction. The requirement for the TIN is a departure from the Proposed Rule, which encouraged, but did not require that reporting companies provide the TIN.
  • Beneficial Owners and Company Applicants

The initial report must include the following information about each beneficial owner and the company applicant:

  • Full legal name;
  • Date of birth;
  • Current address;
  • A unique identifying number from a non-expired passport, driver’s license, government-issued ID, or identification document issued by a State or local government or tribe; and
  • An image of the document showing the unique identifying number.

A FinCEN identifier is a unique number issued by FinCEN to individuals and reporting companies. An individual may submit an application for a FinCEN identifier that contains all of the information that otherwise must be set forth in the initial report about that individual. An individual who has obtained a FinCEN identifier may provide it to the reporting company and the reporting company can include the FinCEN identifier in lieu of the information otherwise required. FinCEN identifiers are subject to the same timelines and requirements regarding updates or corrections to the BOI. Obtaining a FinCEN identifier may reduce the burden of keeping BOI up to date and correct, and mitigate privacy concerns inherent in document retention.

2. Beneficial Owners

Similar to the CDD rule, the Final Rule defines a “beneficial owner” as any individual who, directly or indirectly, owns or controls at least 25 percent of the ownership interest of the reporting company, or who exercised “substantial control” over the company. The Final Rule includes five exceptions to these two categories, which generally include minor children; agents on behalf of other individuals; employees that are not senior officers; individuals holding future interests through inheritance rights; and creditors.

For purposes of determining whether an individual owns or controls 25 percent or more of the ownership interests of a reporting company, the Final Rule defines “ownership interest” to include only equity interests, capital or profit interests, proprietorship interests, and instruments convertible or exercisable for the foregoing interests. An individual may own or control an ownership interest through joint ownership with other persons; through a nominee, intermediary, custodian, or agent; through certain trust arrangements; or through ownership or control of intermediary entities that separately or collectively own or control ownership interests of the reporting company.  

We will focus on the broad “substantial control” prong of the definition of “beneficial owner” in our next blog post, and its relationship to the existing CDD rule applicable to banks and other FIs.

3. Company Applicants

In addition to beneficial owners, the reporting company’s “company applicant” must also be reported. A company applicant is defined as the individual who directly files the document that creates or registers a domestic or foreign reporting company respectively, as well as the individual who is primarily responsible for directing or controlling such filing. Departing from the Proposed Rule, the requirement to provide BOI for company applicants applies only to reporting companies created or registered on or after the effective date of the Final Rule, January 1, 2024, in order to avoid reporting companies having to track down applicants from many years ago, some of whom may be deceased. To further reduce burdens on reporting companies, the Final Rule requires newly created entities to report applicant information, but they will not be required to update it.

Notably, FinCEN anticipates that lawyers, accountants or other third-party professionals may constitute applicants whose information must be reported: “In many cases, company applicants may be employed by a business formation service or law firm. For example, there may be an attorney primarily responsible for overseeing the preparation and filing of incorporation documents and a paralegal who directly files with a state office to create the reporting company.” According to FinCEN, both the lawyer and the paralegal are “company applicants.”

Certification

Each person filing a report must certify that the report is accurate and complete. FinCEN rejected comments to the Proposed Rule that the certification standard should include a requirement regarding knowledge or other such qualification: e.g., persons certifying “to the best of their knowledge after reasonable and diligent inquiry.” This is because FinCEN wants to stress that reporting companies are responsible for accurately identifying their beneficial owners. Persons and companies certifying reports should consider that violations of the CTA carry civil penalties of up to $500 for each day of continuing violations, and up to two years of imprisonment for criminal violations. FinCEN states that it “does not expect that an inadvertent mistake by a reporting company acting in good faith after diligent inquiry would constitute a willfully false or fraudulent violation.” Indeed, it is a given that a good-faith mistake is the antithesis of willfulness or fraud.

Initial Reporting Timeline

A domestic reporting company formed, or a foreign reporting company registered, after January 1, 2024, must file the initial report within 30 calendar days of its actual notice that its creation or registration has become effective. A domestic reporting company formed, or a foreign reporting company registered, prior to January 1, 2024, has one year, until January 1, 2025, to file. Exempt entities that no longer qualify as exempt under the regulation must file a report within 30 calendar days of the date it no longer meets the exemption criteria.

Updating Reports

The CTA requires reporting companies to update information in a timely manner, as well as to promptly correct any inaccurate information filed in BOSS. According to the Final Rule, an updated report must be filed within 30 days after there is any change in the information reported to FinCEN, including any change with respect to who is a beneficial owner and any change in the information previously reported for any beneficial owner or company applicant. Additionally, a corrected report must be filed within 30 days after the reporting becomes aware of any inaccuracies. This updating requirement is very broad and likely will create administrative and compliance headaches for reporting companies. As noted, FinCEN estimates that after the first year of the Final Rule taking effect, over 14 million updated reporting forms will be filed annually.

Burden on the Reporting Company

Certain commentators to the Proposed Rule stressed the disparate cost impact the regulations could have on small businesses. Although the Final Rule fails to reduce the scope of covered entities, FinCEN nonetheless claims that it sought to minimize burdens on reporting companies, including small businesses, while providing important beneficial ownership transparency to law enforcement, the intelligence community, regulators, and FIs. 

Stating that it expects the majority of reporting companies to have “simple” structures, FinCEN estimates that reporting companies will spend over 126 million hours on compliance during the first year that the Final Rule is in effect, creating estimated compliance costs of almost $23 billion. FinCEN estimates that subsequent years will require reporting companies to spend approximately 35 million hours on compliance, creating approximately $5.6 billion in annual costs. FinCEN justifies this significant cost by stating that the BOI collected will improve law enforcement investigations and, in turn, strengthen national security and financial system integrity. In the words of FinCEN, the Final Rule “has significant benefits that currently are not quantifiable.”

What Is Next?

FinCEN must engage in two additional rulemakings to (i) establish rules for who may access beneficial ownership information, for what purposes and what safeguards will be required, and (ii) revise FinCEN’s CDD rule to confirm with the Final Rule. Additional FAQs and guidance should be forthcoming to assist reporting companies in complying with the beneficial ownership reporting requirements.

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

Peter D. HardyBeth Moskow-SchnollMichael RobottiTerence M. Grugan, & Kelly A. Lenahan-Pfahlert

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FinCEN Issues Final Rule for Beneficial Ownership Reporting: The ‘Substantial Control’ Prong

Second Post in a Two-Post Series on the CTA Implementing Regulations

As we just blogged, the Financial Crimes Enforcement Network (FinCEN) has issued a final rule (Final Rule) regarding the beneficial ownership information (BOI) reporting requirements pursuant to the Corporate Transparency Act (CTA). The Final Rule will require tens of millions of corporations and limited liability companies registered to do business in the United States to report their BOI to FinCEN. FinCEN views this development as a “historic step in support of U.S. government efforts to crack down on illicit finance and enhance transparency.”

The Final Rule defines a “beneficial owner” whose information must be reported as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.” In this post, we focus on the “substantial control” prong of the beneficial ownership definition: “any individual who, directly or indirectly, exercises substantial control over such reporting company.” The Final Rule generally adopts the language of the proposed rule issued by FinCEN in December 2021, with some minor adjustments.

FinCEN expects reporting companies to always identify at least one beneficial owner under the “substantial control” prong, even if all other individuals are subject to an exclusion or fail to satisfy the “ownership interests” prong. As we will discuss, the Final Rule contemplates that a covered reporting company may need to report multiple individuals under the “substantial control” prong. Further, and although FinCEN still needs to issue proposed regulations regarding the following, the Final Rule’s broad definition of the “substantial control” prong under the CTA presumably will lead to FinCEN expanding the definition of “beneficial owner” under the existing Customer Due Diligence (CDD) rule applicable to banks and other financial institutions (FIs).

Substantial Control

FinCEN believes the definition of “substantial control” in the Final Rule strikes an appropriate balance. According to FinCEN, the definition of “substantial control” is based on established legal principles and usages of the term in different contexts, while also being flexible enough to account for the several ways that individuals may exercise substantial control over an entity.

As with the 2021 proposed rule, the Final Rule sets forth three specific indicators of substantial control: (1) service as a senior officer of a reporting company; (2) authority over the appointment or removal of any senior officer or majority of the board of directors (or similar body) of a reporting company; and (3) direction, determination, or decision of, or substantial influence over important matters of a reporting company. As the Final Rule explains, these indicators support “the basic goal of requiring a reporting company to identify the key individuals who stand behind the reporting company and direct its actions.” While the first indicator aims to identify individuals with nominal or de jure authority, the latter two indicators identify individuals with functional or de facto authority. The definition is broad, and reflects FinCEN’s desire to collect information on all true beneficial owners, and to avoid true beneficial owners hiding behind a designated nominee. However, the breadth of the definition certainly will create compliance headaches as covered reporting companies attempt to draw lines regarding who precisely exercises “substantial control.” Further, and as we will discuss, FIs likely will need to adjust their requests for BOI from companies covered by the CDD rule in order to obtain BOI on all persons exercising substantial control.

First Indicator: Senior Officers

The first indicator of “substantial control” is an individual who “serves as a senior officer of the reporting company.” A “senior officer” is defined as “any individual holding the position or exercising the authority of a president, chief financial officer, general counsel, chief executive officer, chief operating officer, or any other officer, regardless of official title, who performs a similar function.” FinCEN describes this language as “provid[ing] clear, bright-line guidance on one category of persons who exercise a significant degree of control over the operations of a reporting company through executive functions.” Contrary to the 2021 proposed rule, the Final Rule omits corporate secretaries and treasurers from the definition of a “senior officer.”

Second Indicator: Authority to Appoint or Remove

The second indicator of “substantial control” is “authority over the appointment or removal of any senior officer or a majority of the board of directors (or similar body).” Based on comments received by FinCEN in response to the 2021 proposed rule regarding perceived ambiguities, the Final Rule deleted language about the ability to appoint or remove a “dominant minority” of the board of directors.” To “ensure clarity,” FinCEN deleted this reference. 

Third Indicator: Direction Over Important Matters

The third indicator of “substantial control” broadly includes an individual who “directs, determines, or has substantial influence over important decisions made by the reporting company,” including the following lengthy list of decisions:

  • The nature, scope, and attributes of the business of the reporting company, including the sale, lease, mortgage, or other transfer of any principal assets of the reporting company;
  • The reorganization, dissolution, or merger of the reporting company;
  • Major expenditures or investments, issuances of any equity, incurrence of any significant debt, or approval of the operating budget of the reporting company;
  • The selection or termination of business lines or ventures, or geographic focus, of the reporting company;
  • Compensation schemes and incentive programs for senior officers;
  • The entry into or termination, or the fulfillment or non-fulfillment, of significant contracts; [or]
  • Amendments of any substantial governance documents of the reporting company, including the articles of incorporation or similar formation documents, bylaws, and significant policies or procedures.

Importantly, FinCEN has replaced the phrase “important matters affecting” the reporting company in the 2021 proposed regulations with “important decisions made by” the reporting company. FinCEN made this change to address uncertainty identified by commenters that external events, customer actions, or actions beyond the reporting company’s control theoretically could “affect” the reporting company. The Final Rule is meant to focus on important internal decisions.

The Final Rule contains an important exception to the definition of “beneficial owner” applicable to third-party nominees, intermediaries, custodians and agents, which should be read in conjunction with the above language that persons with “substantial influence” over important decisions made by the reporting company represent beneficial owners.  As FinCEN explains:

FinCEN does not envision that the performance of ordinary, arms-length advisory or other third-party professional services to a reporting company would provide an individual with the power to direct or determine, or have substantial influence over, important decisions of a reporting company. In such a case, the senior officers or board members of a reporting company would remain primarily responsible for making the decisions based on the external input provided by such third-party service providers. Moreover, if a tax or legal professional is designated as an agent of the reporting company, the exception to the ‘‘beneficial owner’’ definition provided in 31 CFR 1010.380(d)(3)(ii) with respect to nominees, intermediaries, custodians, and agents would apply.

The Catch-All: Everyone Else, and Indirect Means

The Final Rule retains the catch-all provision of the “substantial control” definition from the proposed rule: substantial control can include someone exercising “any other form of substantial control over the reporting company.” This provision, which is vague at best and circular at worst, aims to recognize that control exercised in novel and less conventional ways nevertheless can be “substantial.” Additionally, it could apply to the existence of different governance structures, like series limited liability companies and decentralized autonomous organizations. For these types of organizations, FinCEN notes that different indicators of control could be more relevant. 

This provision is broad because FinCEN wants to prevent sophisticated bad actors from structuring their relationships to exercise substantial control over reporting companies without the formalities usually associated with such control in ordinary companies. It is similar to the final provision on substantial control, now set forth in 31 C.F.R. § 1010.380(d)(2), which states that a person “may directly or indirectly, including as a trustee of a trust or similar arrangement, exercise substantial control over a reporting company through” (emphasis added) the following mechanisms:

  • Board representation;
  • Ownership or control of a majority of the voting power or voting rights of the reporting company;
  • Rights associated with any financing arrangement or interest in a company;
  • Control over one or more intermediary entities that separately or collectively exercise substantial control over a reporting company;
  • Arrangements or financial or business relationships, whether formal or informal, with other individuals or entities acting as nominees; or
  • Any other contract, arrangement, understanding, relationship, or otherwise.

Relationship with Existing CDD Rule for FIs

Finally, FinCEN considered comments urging a definition of “substantial control” comparable to the approach laid out in FinCEN’s existing CDD rule applicable to FIs. Under the “control” prong under the CDD rule, covered new legal entity customers of FIs must provide BOI for only a single individual “with significant responsibility to control, manage, or direct a legal entity customer.” FinCEN concluded, however, that adopting the CDD rule’s definition would be inconsistent with the CTA’s broad objective of creating a comprehensive BOI database for all beneficial owners of reporting companies. According to FinCEN, limiting the reporting of individuals exercising substantial control to one person would create an “artificial” ceiling presenting opportunities for evasion or circumvention by bad actors. Instead, FinCEN believes, requiring reporting companies to identify all individuals who exercise substantial control will provide law enforcement with a more comprehensive picture of who makes “important” decisions at reporting companies.

FinCEN concluded that this expansion of persons whose BOI must be reported was appropriate despite the fact that commentators “contended that FinCEN’s [expanded] definition would impose significant burdens on financial institutions that spent years updating systems, procedures, and controls to implement the [existing] CDD Rule.” Although FinCEN still needs to issue proposed regulations “conforming” the CDD rule to the new CTA BOI regulations, it is reasonable to expect that FinCEN indeed will require FIs to change their systems and require covered entity customers to report BOI for all persons exercising substantial control, rather than just one person. 

Perhaps in anticipation of potential litigation, FinCEN took pains to claim defensively that the CTA did not prevent FinCEN from taking this approach, even though the CTA defines “beneficial owner” as “an individual” who exercises “substantial control or owns or controls at least 25% of a reporting company’s ownership interest.” (emphasis added). Specifically, FinCEN stated, in part, that “the CTA does not mandate a single-individual reporting approach with respect to substantial control. The statute’s reporting requirement specifically calls for the identification of ‘each beneficial owner of the applicable reporting company,’ not just one.” Further, according to FinCEN, “[m]any definitional provisions in the U.S. Code use formulations comparable to the CTA’s reference to ‘an individual’ in contexts where the plural is clearly indicated by the overall structure of the statute.” 

Time will tell whether industry groups will launch lawsuits challenging the Final Rule, or, downstream, challenging the likely expansion of the existing CDD rule under the CTA.

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

Peter D. HardyMichael RobottiTerence M. GruganBeth Moskow-Schnoll, & James Mangiaracina

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Tenth Circuit Affirms CFPB Order Requiring Payment of Restitution and Civil Penalties by Lender and Its CEO

In Integrity Advance LLC v. Consumer Financial Protection Bureau, a panel of the U.S. Court of Appeals for the Tenth Circuit affirmed a CFPB Order requiring Integrity, a lender making short-term loans, and its CEO, James Carnes, to pay $38.4 million in legal and equitable restitution and imposing civil penalties against Integrity ($7.5 million) and Carnes ($5 million), for alleged violations of the Consumer Financial Protection Act, the Truth in Lending Act, and the Electronic Fund Transfer Act. 

The initial Notice of Charges was filed against Integrity and Carnes (collectively, the “Petitioners”) in 2015, and an Administrative Law Judge (“ALJ”) from the U.S. Coast Guard, importantly not a CFPB ALJ, heard the case and recommended to the CFPB Director that Petitioners be ordered to pay $38 million in restitution, jointly and severally, plus civil penalties against Integrity ($8.1 million) and Carnes ($5.4 million).

In 2016, Petitioners appealed the initial ALJ decision to the Director, but the appeal was held in abeyance pending the Supreme Court’s decision in Lucia v. SEC, 138 S. Ct. 2044 (2018). This case would ultimately determine the constitutional status of Securities & Exchange Commission administrative law judges. When Lucia ruled ALJs were constitutional officers and, thus, required to be appointed under the Appointments Clause, the Director remanded the case in 2019 to be reviewed by the CFPB’s ALJ—by the time Lucia was decided, the CFPB had its own constitutionally appointed ALJ.

A second review was conducted by a new ALJ properly appointed under the Appointments Clause. Although Petitioners requested an entirely new hearing, the second ALJ stated she would review the record de novo, and weigh the parties’ arguments with respect to whether the record needed to be supplemented or whether portions of the record should be struck. The ALJ declined to conduct additional pre-hearing discovery or to conduct a new evidentiary hearing, and both parties moved for summary disposition on the existing record.

The ALJ subsequently recommended Petitioners be held liable on all counts, and recommended the Director hold Integrity liable for $132.5 million in equitable restitution, with Carnes jointly and severally liable for $38.4 million. The ALJ also recommended the imposition of civil penalties against Integrity ($7.5 million) and Carnes ($5 million).

On appeal in 2021, the Director (now former Director Kraninger) reduced the award against Integrity to $38.4 million but agreed the entire reduced restitution amount was joint and several as between Petitioners, and also affirmed the full award of civil penalties against Integrity and Carnes. While the ALJ characterized the restitution amount as equitable, the Director concluded restitution was warranted under “equity or law”. Because the CFPB’s Notice of Charges was filed in 2015 before the U.S. Supreme Court ruled in Seila Law that the CFPB was unconstitutionally structured, the Director also ratified the Notice of Charges to cure the constitutional defect.  

Petitioners raised several arguments before the Tenth Circuit, but two are particularly noteworthy. The first is the Petitioners’ argument that the Order should be set aside because the CFPB was unconstitutionally structured when the charges were filed. Even though the ratification occurred after the three-year limitations period for filing the Notice of Charges had expired, the Court declined to set aside the enforcement action, essentially endorsing the ratification process used by the CFPB. The Court noted that a party could assert a claim for “compensable harm” caused by the CFPB’s unconstitutional structure. But the Court concluded Petitioners had not directed the Court to any such compensable harm. Also noteworthy was Petitioners’ argument that Lucia required a new hearing before a constitutionally appointed ALJ as the remedy for an Appointments Clause violation. Again, the Court approved the CFPB’s actions in this case, and held that the second ALJ’s de novo review satisfied the requirement of a “new hearing”.   

In a separate concurrence, Judge Phillips raised concerns about “legal restitution” under 12 U.S.C. § 5565(a). While noting the issue was not properly preserved in this case, Judge Phillips explained that “legal restitution” was questionable for three reasons: (1) restitution is generally an equitable remedy; (2) a claim to “legal restitution” could render superfluous “payment of damage or other monetary relief” separately listed under the statute; and (3) allowing the CFPB to obtain “legal restitution” in an administrative proceeding raises Seventh Amendment concerns because of guaranteed jury trial rights to parties sued for legal remedies.

- Chad Jimenez

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Populus Financial Group Moves for Dismissal of CFPB Lawsuit and Stay Pending Fifth Circuit Decision

Populus Financial Group, Inc., which does business as ACE Cash Express, has filed a motion to dismiss the lawsuit filed by the CFPB in July 2022, against Populus in a Texas federal district court in which the CFPB alleges that Populus engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers and making unauthorized debit-card withdrawals.  Populus also filed a motion to stay all proceedings in the case pending the Fifth Circuit’ decision in Community Financial Services Association of America Ltd. v. CFPB.

In its motion to dismiss, Populus argues that the CFPB’s enforcement action is invalid because the CFPB’s funding structure violates the separation-of-powers principle embodied in the Appropriations Clause of the U.S. Constitution. 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.  Populus argues:

  • This structure shields the CFPB from Congressional oversight in violation of the Appropriations Clause, which mandates that Congress alone wields the power of the federal purse.
  • The CFPB is “doubly insulated” from the appropriations process because the Federal Reserve itself is insulated from the appropriations process due to its own self-funding mechanism. 
  • The U.S. Supreme Court’s decision in Seila Law, which invalidated the CFPB Director’s for-cause removal protection, makes Congress’s abdication of its power over the purse even more dangerous because it puts that power in the President’s hands without any Congressional oversight.
  • No other federal agency is doubly insulated from the appropriations process and wields the Bureau’s range of legislative, executive, and judicial power. Populus contrasts the narrower missions and authority of the Federal Reserve, FDIC, and OCC, which are also self-funded. With regard to the OCC, Populus distinguishes the OCC’s reliance on fees from the entities it regulates which it asserts creates political accountability for the OCC. With regard to the Federal Reserve and FDIC, Populus distinguishes their multimember, bi-partisan leadership structure.

In challenging the constitutionality of the CFPB’s funding structure, Populus places substantial reliance on the concurring opinion of Judge Edith Jones in the Fifth Circuit’s en banc May 2022 decision in All American Check Cashing. The en banc Fifth Circuit ruled that that the CFPB’s enforcement action against All American Check Cashing could 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 scholarly concurring opinion in which four other Fifth Circuit judges joined, Judge Edith Jones agreed with All American Check Cashing’s argument that the CFPB’s funding mechanism is unconstitutional. (The majority opinion did not consider the funding argument but indicated that the district court could consider other constitutional challenges on remand.)

Although the en banc Fifth Circuit did not reach the funding argument, a Fifth Circuit panel is expected to consider that issue in the CFSA lawsuit which challenges the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule. 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. On May 9, 2022, a Fifth Circuit panel heard oral argument in the CFSA lawsuit. 

The trade groups’ primary argument on appeal continues to be that the 2017 Rule was void ab initio because the CFPA’s unconstitutional removal restriction means that the Bureau did not have the authority to promulgate the 2017 Rule. However, the trade groups submitted the concurring opinion in All American Check Cashing as supplemental authority to the Fifth Circuit panel hearing their appeal and have argued that the panel should adopt the reasoning of the concurring opinion and invalidate the 2017 Rule.

In its stay motion, Populus argues that, because the Fifth Circuit panel is poised to rule on the constitutionality of the CFPB’s funding structure in the CFSA lawsuit, the district court should stay all proceedings in the CFPB’s enforcement action pending the panel’s decision.

Populus argues that a stay would be efficient for the court and the parties because a decision on the constitutionality issue would substantially simplify the issues in the enforcement action and potentially resolve it outright. It also argues that a stay will avoid inconsistent outcomes by ensuring that the district court’s orders do not conflict with the forthcoming Fifth Circuit decision, Populus would be prejudiced if a stay is not granted because it could be forced to unnecessarily expend substantial resources defending an enforcement action that could soon be found to be invalid, and the CFPB would not be prejudiced by a stay.

Alan S. Kaplinsky

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Did You Know?

Effective October 1, 2022, the South Carolina Department of Consumer Affairs and the Texas Department of Savings and Mortgage Lending adopted the use of electronic surety bonds (ESBs) through the NMLS for their respective South Carolina Mortgage Broker License and Texas Residential Mortgage Loan Servicer Registration. You can review which states will allow for mortgage licenses and registrations to use ESBs on the NMLS website.

John Georgievski

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