Legal Alert

Mortgage Banking Update - February 2, 2023 

February 2, 2023
In This Issue:

White House Issues Blueprint for Renters Bill of Rights: Will the CFPB and FTC Stay in Their Lanes?

In late January, the Biden Administration released a “Blueprint for a Renters Bill of Rights” (Blueprint), which sets forth five principles intended to “create a shared baseline for fairness for renters in the housing market” and directs various federal agencies, including the Consumer Financial Protection Bureau (CFPB) and the Federal Trade Commission (FTC), to take various actions to further those principles. 

The principles provide that renters should have access to: (1) safe, quality, accessible and affordable housing; (2) clear and fair leases; (3) education, enforcement and enhancement of rights; (4) the right to organize; and (5) eviction prevention, diversion and relief. While the Blueprint does not assign a role to the FTC or CFPB in furthering the principle of clear and fair leases, it is noteworthy that in articulating what is a “fair lease,” the Blueprint states that “[l]eases should not include mandatory arbitration clauses.” 

The CFPB’s efforts to eliminate arbitration provisions in contracts involving consumer financial products and services—and Congress’ rejection of those efforts when it overturned the CFPB’s final arbitration rule under the Congressional Review Act—are well-known to readers of this blog. The only agency assigned a role by the Blueprint regarding leases is the Department of Agriculture (USDA), which is directed to develop a form of lease similar to the model lease used in HUD Section 8 properties. However, the Blueprint does not identify any congressional statute or other federal authority that would permit the USDA (or any other federal agency) to carve out residential leases from the coverage of the Federal Arbitration Act (FAA), which makes written predispute arbitration agreements “valid, irrevocable, and enforceable.” 

In a landmark 2018 decision, Epic Systems, Inc. v. Lewis, the U.S. Supreme Court held that in order for another federal statute to override the FAA, the other statute must “manifest a clear intention to displace” the FAA. In that case, the Court concluded that the National Labor Relations Act (NLRA) did not preclude the enforcement of arbitration provisions with class action waivers in employment agreements because the NLRA “does not express approval or disapproval of arbitration. It does not mention class or collective action procedures. It does not even hint at a wish to displace the Arbitration Act—let alone accomplish that much clearly and manifestly, as our precedents demand.” As the Court emphasized, “when Congress wants to mandate particular dispute resolution procedures it knows exactly how to do so.” 

The Blueprint does not cite any federal statute or authority that “manifests a clear intention” by Congress to authorize the USDA (or any other federal agency) to prohibit the use of predispute arbitration agreements in residential leases. Notably, the Blueprint’s introductory Legal Disclaimer acknowledges that it “is a statement of principles; it is not binding and does not itself constitute U.S. government policy. It does not supersede, modify, or direct an interpretation of any existing Federal, state, or local statute, regulation, or policy …. Adoption of these principles may not meet the requirements of existing statutes ….”

The Blueprint describes the following actions to be taken by the CFPB and FTC to further the principles of “Access to Safe, Quality, Accessible and Affordable Housing” and “Education, Enforcement, and Enhancement of Rights”:

  • Access to Safe, Quality, Accessible and Affordable Housing. This principle includes the concepts that renters “should have access to housing that is safe, decent, and affordable” and “should face minimal barriers when applying for housing and receiving housing assistance, which includes minimally burdensome application and documentation requirements and fair and equal tenant screening.” The roles of the CFPB and FTC are:

    • The FTC will explore ways to expand use of its authority under the FTC Act to take action against acts and practice that unfairly prevent consumers from obtaining and retaining housing.

    • The FTC and CFPB will issue requests for information (RFI) to obtain data to assist in identifying these practices and the harms they cause to housing applicants and those renting for use in enforcement and policy actions. The White House fact sheet on the Blueprint indicates that this will be the first time that the FTC has issued a RFI exploring unfair practices in the rental market. It also indicates that in the RFIs, “[t]he two agencies will seek information on a broad range of practice that affect the rental market, including the creation and use of tenant background checks, the use of algorithms in tenant screenings, the provision of adverse action notices by landlords and property management companies, and how an applicant’s source of income factors into housing decisions.”

  • Education, Enforcement, and Enhancement of Rights. This principle includes the concept that “[f]ederal, state, local governments should do all they can to ensure renters know their existing rights, and to protect renters from lawful discrimination and exclusion that can take many different forms.” It also includes the concept that “[g]overnment bodies at all levels should ensure that rights and protections provided under the Fair Housing Act and other federal laws and regulations, as well as state and local fair housing laws and regulations, are known and enforced.” The roles of the CFPB and FTC are:

    • The CFPB will identify guidance and rules that it can issue to ensure compliance with the law by the background screening companies and coordinate enforcement with the FTC regarding the obligation of tenant background check companies to have reasonable procedures to ensure accurate information in the credit reporting systems.

    • The CFPB will continue to coordinate with federal and local government agencies to ensure that tenant screening companies do not illegally disseminate false and misleading information about tenants and that tenants can challenge erroneous information.

    • The FTC (as well as the Department of Housing and Urban Development, the Federal Housing and Finance Agency, and the USDA) will work with the CFPB to release best practices on the use of tenant screening reports, including the importance of communicating clearly to tenants the use of background checks in denying rental applications or increasing fees and providing tenants the opportunity to address inaccurate information contained within background screening reports.

The Blueprint raises concerns as to whether the two agencies will attempt to push the envelope on the reach of their respective jurisdiction and authorities in carrying out their assigned roles. With respect to the CFPB, the rental of real property outside of the rent to own context is not a “consumer financial product or service” subject to the CFPB’s authority to prohibit unfair, deceptive, or abusive acts or practices (UDAAP). Such rentals are also not “credit” subject to the CFPB’s authority to enforce the Equal Credit Opportunity Act (ECOA). The CFPB does have supervisory authority over “larger participant” consumer reporting agencies (CRAs) and UDAAP enforcement authority as to CRAs. (CRAs include tenant screening companies.) In addition, the CFPB can enforce the Fair Credit Reporting Act (FCRA) against CRAs (such as the FCRA’s requirement for CRAs to have reasonable procedures to ensure accurate information in consumer reports) and against landlords and other users of consumer reports and furnishers of information to CRAs (such as the FCRA’s adverse action notice requirement). The CFPB recently issued two reports on tenant background checks, one discussing consumer complaints received by the CFPB that relate to tenant screening by landlords and the other discussing practices of the tenant screening industry. Much of the Blueprint’s description of the CFPB’s role tracks the CFPB’s planned future actions regarding the tenant screening market that were described in the CFPB’s report on the tenant screening industry. 

With respect to the FTC, the rental of real property is subject to the FTC’s authority under Section 5 of the FTC Act to prohibit unfair or deceptive acts and practices (UDAP). Accordingly, the FTC can issue UDAP regulations regarding rental practices and take enforcement action to enforce Section 5 against landlords and other members of the rental industry. It can also exercise its Section 5 authority as to CRAs and can enforce the FCRA against CRAs and against landlords and other users of consumer reports and furnishers of information to CRAs. Like the CFPB, the FTC cannot not use its ECOA enforcement authority to reach landlords because rentals are not “credit” subject to the ECOA. 

However, the Blueprint’s inclusion of the use of algorithms in tenant screenings and how an applicant’s source of income factors into housing decisions opens the door for the FTC to attempt to use the “unfairness” prong of its Section 5 authority to police discriminatory conduct that is not covered by the ECOA. The FTC recently settled a lawsuit against an auto dealer in which it alleged that the dealer’s discriminatory financing practices not only violated the ECOA but also constituted unfair practices in violation of Section 5. In March 2022, the CFPB updated its UDAAP examination manual to instruct its examiners that discrimination in both the credit and non-credit context can constitute unfair conduct. (The update is the subject of lawsuit.) Accordingly, having already asserted that its Section 5 unfairness authority covers discrimination, it would not be surprising to see the FTC follow the CFPB and take the position that its unfairness authority applies to discrimination in both the credit and non-credit context.

Given the penchant of the CFPB and FTC for weaving out of their lanes to embrace expansive interpretations of their jurisdiction and authorities, it is incumbent on landlords and other industry members impacted by the Blueprint to closely monitor the agencies’ next steps in carrying out their assigned roles.

Mark J. LevinAlan S. Kaplinsky & Roger D. Winston

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Jan. 19 Podcast: How the U.S. Supreme Court Will Decide the Threat to the CFPB’s Funding and Structure: Part I, With Adam J. White, a Renowned Expert on Separation of Powers and the Appropriations Clause and a Close Follower of the Supreme Court

The eyes of the consumer finance world are now on the Supreme Court as it decides whether to grant the CFPB’s certiorari petition in Consumer Financial Services Association Ltd. v. CFPB. In the decision, a Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. We first review the background of CFSA’s lawsuit, the mechanism through which the CFPB is funded, and Congress’s policy rationale for the mechanism. We then examine the reasoning behind the Fifth Circuit’s conclusion that the funding mechanism is unconstitutional, the CFPB’s strategy in response to the decision, and the issues CFSA is expected to raise in a cross-petition for certiorari. We conclude with Adam’s predictions on the outcome of the cert petitions, how SCOTUS is likely to rule if it grants the CFPB’s petition, potential remedies if SCOTUS rules the funding is unconstitutional, and the impact of such a ruling on pending and future litigation challenging CFPB actions.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion, joined by John Culhane, Richard Andreano, and Michael Gordon, partners in the Group.

To listen to Part I of the episode, click here.

Alan Kaplinsky, John Culhane, Richard J. Andreano, Jr., Michael Gordon

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Jan. 26 Podcast: How the U.S. Supreme Court Will Decide the Threat to the CFPB’s Funding and Structure: Part II, With Adam J. White, a Renowned Expert on Separation of Powers and the Appropriations Clause and a Close Follower of the Supreme Court

The eyes of the consumer finance world are now on the Supreme Court as it decides whether to grant the CFPB’s certiorari petition in Consumer Financial Services Association Ltd. v. CFPB. In the decision, a Fifth Circuit panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. In Part I, we focused on the legal arguments underlying the Fifth Circuit decision and potential outcomes. In Part II, we discuss the potential practical effects of a Supreme Court decision that holds the CFPB’s funding is unconstitutional on existing CFPB mortgage and other regulations and on pending and future CFPB enforcement actions. In particular, we consider how the current legal uncertainty might factor into the litigation strategy of companies that are the targets of CFPB enforcement activity as well as companies’ compliance strategy. We also consider the uncertainty’s impact on the CFPB’s ongoing operations and conclude with a discussion of how Congress might react if the Supreme Court holds that the CFPB’s funding is unconstitutional.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion, joined by John Culhane, Richard Andreano, and Michael Gordon, partners in the Group.

To listen to Part II of the episode, click here.

Alan Kaplinsky, John Culhane, Richard J. Andreano, Jr., Michael Gordon

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CFPB Files Opposition to CFSA Cross-Petition for Certiorari; Payment Processor Trade Group Files Amicus Brief in Support of Cross-Petition

The CFPB has filed its brief in opposition to the cross-petition for certiorari filed by Community Financial Services Association (CFSA). The CFPB’s certiorari petition seeks review of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB. In that decision, the panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule (Rule). 

In addition to opposing the CFPB’s petition, CFSA filed a cross-petition for certiorari in which it asks the Supreme Court to review the Fifth Circuit’s rejection of the other grounds on which CFSA claimed the Rule was unlawful. CFSA has waived the 14-day waiting period under Rule 15.5 for distributing the cross-petition and the CFPB’s brief in opposition to the Court and has requested that the case be distributed on February 1 for the Court’s February 17 conference. It has also advised the Court that it intends to file a reply brief to the CFPB’s opposition to the cross-petition on or around February 1 and the CFPB has indicated that it intends to reply to CFSA’s opposition to its petition. The Supreme Court is expected to consider whether to grant the CFPB’s certiorari petition and CFSA’s cross-petition at its February 17 conference.

In its cross-petition for certiorari, CFSA urges the Court, if it grants the CFPB’s petition, (1) to also grant its cross-petition to consider the alternative grounds for vacating the Rule that the Fifth Circuit rejected or, (2) instead of granting the cross-petition, to consider the alternative grounds as antecedent questions added to the CFPB’s petition. CFSA frames the alternative grounds as the following questions:

  • Whether the Rule should be vacated because it was promulgated by Director Cordray while shielded from removal by President Trump under a statutory provision this Court later held is unconstitutional.
  • Whether the Rule should be vacated because the prohibited conduct falls outside the statutory definition of unfair or abusive conduct. 

In its opposition to CFSA’s cross-petition, the CFPB argues that the Fifth Circuit correctly rejected CFSA’s arguments that the Rule should be vacated based on the unconstitutional removal provision and because the prohibited conduct did not fall within the CFPB’s UDAAP authority. It also argues that the Fifth Circuit’s holdings neither conflict with any decision of another court of appeals nor otherwise satisfy the Supreme Court’s traditional criteria for discretionary review.

In its cross-petition, CFSA also argued that because the Fifth Circuit’s vacatur of the Rule can be affirmed on these alternative grounds rejected by the Fifth Circuit, constitutional avoidance principles require the Supreme Court to consider those grounds first and only reach the Appropriations Clause question if does not agree with CFSA on either of the alternative grounds. The CFPB, in its opposition to the cross-petition, argues that the Supreme Court has no practice of exercising its certiorari jurisdiction to avoid constitutional questions in the manner that CFSA proposes. It further argues that, in any event, neither of the questions in the cross-petition would actually provide a basis for avoiding the Appropriations Clause question.

With respect to the removal provision question, CFSA has argued that it is entitled to vacatur of the Rule if it can show that President Trump would have fired Director Cordray absent the unconstitutional impediment without regard to whether the President approved or disapproved of the Rule. The CFPB argues that even if the Supreme Court agreed, CFSA would still need to prove that President Trump would have fired Director Cordray but for the removal restriction and on the present record, they have not done so. As a result, “that would lead at most to a vacatur and remand for consideration of new evidence.” Thus, according to the CFPB, since CFSA’s argument would not provide an alternative basis for affirming the Fifth Circuit’s invalidation of the Rule, it would not allow the Supreme Court to avoid the Appropriations Clause issue. (The CFPB also notes that the White House publicly took the position that the removal provision was unconstitutional, and thus unenforceable, even before the Rule was finalized. It states that this “strongly suggests that President Trump refrained from removing Director Cordray for reasons other than a belief that such removal would be unlawful.”)

With respect to the UDAAP question, the CFPB argues that even if the Supreme Court agrees with CFSA that the Fifth Circuit incorrectly held that the Rule’s prohibition of more than two attempted preauthorized withdrawals falls within the CFPB’s authority to prohibit unfair practices, the proper remedy would be to remand to the Fifth Circuit to consider whether the prohibition falls within the CFPB’s authority to prohibit abusive practices. According to the CFPB, this would again not allow the Supreme Court to avoid the Appropriations Clause issue.

The CFPB concludes its brief by arguing that instead of allowing the Supreme Court to avoid the Appropriations Clause issue, taking up the questions in CFSA’s cross-petition “would needlessly complicate the litigation by compelling the parties and Court to address the unusual history of the Payday Lending Rule’s adoption, ratification, and partial rescission, as well as the extensive rulemaking record.” It also suggests to the Supreme Court that to the extent it wishes to review one or both of the questions presented in the cross-petition, it should grant the CFPB’s petition and add the other question(s) presented. According to the CFPB, this would allow a three-brief schedule, as opposed to the four-brief schedule that sometimes applies when a cross-petition is granted. The CFPB asserts that a three-brief schedule would better facilitate the Supreme Court’s review of the case this Term on an expedited briefing schedule and that it is “critical” for the Supreme Court to review the case this Term because waiting until next Term would cause “severe disruption and uncertainty [to] hang over the CFPB, consumers, and the financial industry until sometime in 2024.”

An amicus brief in support of CFSA’s cross-petition was filed by the Third Party Payment Processors Association (TPPPA). In its brief, the TPPPA asserts that the Rule “runs roughshod over the basic functions of our Nation’s critical electronic payment processing systems, requiring payment processors to adopt an entirely different system for collecting certain types of debts—primarily payday loans and other short-term, small-dollar consumer loans that are offered by non-bank lenders—by limiting the number of withdrawal attempts on a consumer’s account to repay those debts.” TPPPA urges the Supreme Court, if it grants the CFPB’s petition, to not only review the two questions presented in CFSA’ cross-petition but to also review the question of whether the Rule is arbitrary and capricious in violation of the Administrative Procedure Act. It argues that the Rule is arbitrary and capricious because it includes debit and prepaid card payments in its two-attempt withdrawal limit despite the fact that the CFPB’s justification for the Rule as allowing consumers to avoid insufficient funds fees does not apply to such payment methods.

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

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CFSA Files Opposition to CFPB’s Certiorari Petition Seeking Review of Fifth Circuit Ruling That CFPB’s Funding Is Unconstitutional and Also Files Cross-Petition for Certiorari

Community Financial Services Association (CFSA) has filed its brief in opposition to the CFPB’s certiorari petition seeking review of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB. In that decision, the panel held the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution and, as a remedy for the constitutional violation, vacated the CFPB’s payday lending rule (Rule). CFSA also filed a cross-petition for certiorari in which it asks the Supreme Court to review the Fifth Circuit’s rejection of the other grounds on which CFSA claimed the Rule was unlawful. The CFPB has indicated that it will reply to CFSA’s cross-petition by January 25 and it appears that the CFPB does not intend to file a reply to CFSA’s brief in opposition to its certiorari petition. The Supreme Court is expected to consider both the CFPB’s certiorari petition and CFSA’s cross-petition at its February 17 conference.

Opposition to certiorari petition. In its opposition to the CFPB’s certiorari petition, CFSA makes the following principal arguments in support of its position that the Court should deny the petition:

As established by legislative history and case law, the role of the Appropriations Clause is to ensure Congressional oversight of federal fiscal matters and restrain the Executive Branch’s exercise of power.

The CFPB’s funding mechanism nullifies Congress’s appropriations authority in an unprecedented manner “by allowing a single Congress to unite purse and sword for an Executive agency that it wishes to permanently shield from political accountability, unless and until the President and both chambers of Congress agree to restore fiscal oversight.” The CFPB has the ability to self-determine the amount of its funding, subject to an “illusory” cap. In addition, the CFPB can retain its unused funds, effectively creating a “‘permanently available’ endowment ‘without any further act of Congress,’” there is no temporal limit on Congress’s ceding of its appropriations power to the CFPB “because it operates in perpetuity,” and there is no limitation on the CFPB functions that are funded. Should “the people’s representatives try to take back the power of the CFPB’s purse, the President or either chamber can unilaterally ‘veto’ that effort.”

The CFPB’s funding mechanism is unprecedented in nature in that “[n]o other agency from the Founding until 2010 appears to have been permanently ceded the power to choose the amount of its own public funding for core executive powers.”

The CFPB’s argument that a statute passed by Congress satisfies the Appropriations Clause ignores the Clause’s text and context. “Deciding the amount that an agency may draw from the government’s accounts is the key legislative function that the Appropriations Clause vests ‘exclusive[ly]’ in Congress…..[U]nder any standard, it is ‘delegation running riot’ to grant a law-enforcement agency perpetual authority to fill in a blank check from the federal fisc every year so long as it does not exceed more than half a billion dollars (plus inflation adjustment).” (emphasis included).

The CFPB is not comparable to other agencies funded outside the appropriations process through sources such as fees, assessments, or investments. “[T]hese agencies are in an entirely unrelated family, given their historical pedigree and compatibility with the political accountability concerns animating the Appropriations Clause.” The practice of funding certain agencies such as the Post Office and National Mint through fees they charge for services they render was authorized by the earliest Congresses, providing evidence of constitutionality. Even if Congress “might be thwarted in taking back the purse-strings from such agencies, [there is political accountability because] the people have some ability to do so directly [by refusing to buy the agencies’ services.]” The practice of funding certain agencies such as the OCC and FDIC through assessments they charge to entities they regulate began in the early 1900s, also making it a practice that is “‘long settled and established.’” This practice also preserves some level of political accountability because these regulators “must consider the risk of losing funding if regulated entities exit their regulatory sphere due to excessive regulation.” The Federal Reserve also fits within this funding tradition and “’is in a totally different league’” from the CFPB because of its limited regulatory and enforcement authority.

Vacatur of the Rule was the appropriate remedy. Because the Bureau could not have promulgated the Rule without the unconstitutional funding, it did not have the power to do so. It does not matter if the Bureau had statutory authority to promulgate the Rule or whether it would have promulgated the Rule if validly funded.

The Fifth Circuit decision does not warrant review because it is poor vehicle for the Appropriations Clause question. The judgment only vacates a single CFPB regulation that has never gone into effect and the vacatur can be affirmed on two independent, alternative grounds that were rejected by the Fifth Circuit. Constitutional avoidance principles require the Supreme Court to consider those grounds first and only reach the Appropriations Clause question if does not agree with CFSA on either one. It makes little sense for the Supreme Court to accept discretionary jurisdiction given the possibility that it will disagree with the Fifth Circuit on the alternative grounds and be unable to reach the constitutional question. In these circumstances, the Court should allow “further percolation on the novel constitutional question.” The alternative grounds for vacating the Rule are:

  • The Rule was promulgated under former Director Cordray, who was unconstitutionally insulated from removal by former President Trump; and
  • The conduct prohibited by the Rule falls outside the statutory definition of unfair or abusive conduct.

CFSA concludes its opposition brief by urging the Supreme Court, if it decides to grant certiorari, to hear the case next term rather than this Term as the CFPB has urged. CFSA argues that it is “neither necessary or appropriate to try to resolve a case of this complexity and importance in just four months during the busy conclusion of a momentous Term.” CFSA comments that despite the Fifth Circuit decision, the CFPB “continues to plow full steam ahead, initiating and pursuing enforcement actions and even recently proposing new regulations.” It also observes that if it is concerned about the decision’s impact on the CFPB’s ongoing activities, the Administration can seek interim appropriations until the Court resolves the Appropriations Clause issue.

Cross-petition for certiorari.  While reinforcing its opposition to the CFPB’s certiorari petition, CFSA urges the Court, if it grants the CFPB’s petition (1) to also grant its cross-petition to consider the alternative grounds for vacating the Rule that the Fifth Circuit rejected or, (2) instead of granting the cross-petition, to consider the alternative grounds as antecedent questions added to the CFPB’s petition. CFSA frames the alternative grounds as the following questions:

Whether the Rule should be vacated because it was promulgated by Director Cordray while shielded from removal by President Trump under a statutory provision this Court later held is unconstitutional.

Whether the Rule should be vacated because the prohibited conduct falls outside the statutory definition of unfair or abusive conduct.

With respect to the first question, CFSA argues that because the unconstitutional removal provision is what allowed Director Cordray to remain in office against President Trump’s wishes and promulgate the Rule by exercising powers of the Director’s office that he did not lawfully possess, the Rule is directly attributable to, and tainted by, the unconstitutional provision. In such circumstances, vacatur is the standard and proper remedy. The Fifth Circuit’s demand that CFSA provide evidence that the President’s hypothetical replacement for Director Cordray would have acted differently with respect to the Rule is at odd with Supreme Court precedent. (The Fifth Circuit did not consider the CFPB’s argument that even if Director Cordray unlawfully promulgated the Rule, former Director Kraninger lawfully ratified the Rule after Seila Law made her removable at will by the President. Nevertheless, CFSA calls the CFPB’s argument “clearly wrong” and asserts that unlike some agency actions, notice-and-comment rulemaking cannot be ratified by a later official.)

With respect to the second question, CFSA argues that the Rule’s provision that prohibits lenders from continuing to attempt preauthorized withdrawals for repayment from consumer’s bank accounts after two failed attempts exceeds the CFPB’s statutory authority to prohibit unfair or abusive conduct. In exercising such authority, the CFPB cannot prohibit conduct where consumers are capable of reasonably avoiding the harm caused by such conduct. Consumers can reasonably avoid additional fees or other harms caused by successive withdrawal attempts in various ways, such as declining loans that preauthorize successive withdrawal attempts, funding their accounts before the repayment date, or revoking access to their accounts if they lack the necessary funds.

Michael GordonJohn L. Culhane, Jr. & Richard J. Andreano, Jr.

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Justice Department Finalizes Compliance Metrics for Meta’s (Formerly Facebook) Targeted Advertising System Pursuant to Settlement

As discussed in our prior post, the Department of Justice (DOJ) entered into a settlement with Meta Platforms Inc., formerly known as Facebook Inc. (Meta), to resolve allegations that Meta engaged in discriminatory advertising in violation of the Fair Housing Act (FHA). A key part of that settlement was Facebook’s agreement to build a new Variance Reduction System (VRS) to address disparities for race, ethnicity, and sex between the housing advertisers’ targeted audiences and the group of Facebook users to whom Facebook’s internal personalization algorithms actually deliver the ads. 

This VRS is intended to address the following three issues with Facebook’s ad delivery system raised in the initial DOJ complaint. First, the DOJ alleged that the system engaged in trait-based targeting by encouraging an advertiser to target ads by including or excluding Facebook users based on FHA-protected characteristics that Facebook, through its data collection and analysis, attributed to those users. Second, the DOJ alleged that the system used look-alike targeting, which involved a machine-learning algorithm that an advertiser used to find Facebook users who “look like” an advertiser’s source audience (i.e. an advertiser’s identified audience of Facebook users) based on FHA-protected characteristics. Third, the DOJ alleged that the system made delivery determinations using machine-learning algorithms to help select which subset of an advertiser’s target audience would receive the ad based in part upon FHA-protected characteristics. 

While Meta originally had a December 31, 2022, deadline for implementing the VRS, Meta and the DOJ sought a joint extension to January 9, 2023, which was approved by the court, to finalize the VRS’s compliance metrics. The VRS compliance metrics are Meta and the DOJ’s agreed upon metrics for how much the VRS will reduce variances related to race, ethnicity, and sex. By agreeing to these compliance metrics, Meta is now bound to provide compliance reporting every four months confirming it has met the VRS compliance metrics. Meta is also required to obtain an independent third-party reviewer to verify compliance. And importantly, Meta must provide the independent reviewer with access to information needed to verify compliance. Although the civil penalty was $115,054, which was the maximum under the FHA, the cost of compliance going forward will likely be much higher. While the VRS initially will be used with housing advertisements, over the coming year Meta will extend its use to credit and employment advertisements.

With the VRS finalized along with the terms of the settlement, future parties now have guidance on how to avoid discriminatory ad targeting. The allowable variances outlined in the parties’ letter that confirms finalization of the VRS compliance metrics provide other parties with potential benchmarks for allowable variances going forward not only in the FHA context but also with respect to targeted advertising of products such as consumer credit, which are also covered by anti-discrimination statutes. While this agreement likely provides certainty for advertisers on Facebook going forward, it is a likely sign that regulators will target similar advertising platforms in the future.

In particular, in announcing the agreement on the VRS, U.S. Attorney Damian Williams stated that “[t]his groundbreaking resolution sets a new standard for addressing discrimination through machine learning. We appreciate that Meta agreed to work with us toward a resolution of this matter and applaud Meta for taking the first steps towards addressing algorithmic bias. We hope that other companies will follow Meta’s lead in addressing discrimination in their advertising platforms. We will continue to use all of the tools at our disposal to address violations of the Fair Housing Act.” The last two sentences appear to be a clear warning to similar advertising platforms.

More information on the VRS is available here.

- Chad Jimenez

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HUD Issues Draft Reconsideration of Value Guidance with FHA Loans

The U.S. Department of Housing and Urban Development (HUD) recently issued a draft Mortgagee Letter on reconsideration of value (ROV) policies in connection with appraisals for FHA insured mortgage loans. The draft Mortgagee Letter follows up on action plan items set forth in the Property Appraisal and Valuation Equity action plan jointly issued by HUD and other federal agencies in March 2022. (Although not released until January 2023, it appears that HUD was planning to issue the draft Mortgagee Letter in 2022 based on calendar year 2022 references in the draft letter.)

Comments on the draft Mortgagee Letter are due by February 2, 2023. Comments may be submitted by completing the Feedback Response Worksheet that can be accessed through the FHA Drafting Table, and then emailing the completed Worksheet to

Addressing the draft Mortgagee Letter, HUD Secretary Marcia Fudge stated that “HUD is committed to making the appraisal process fair nationwide. We must eliminate bias in home valuations so that everyone can equally reap the benefit of wealth – and intergenerational wealth – that come along with homeownership,” and that “[t]his announcement is an important step forward in rooting out appraisal bias in this country.”

HUD explains in the draft Mortgagee Letter that current FHA guidance allows an underwriter to request an ROV when the appraiser did not consider information that was relevant on the effective date of the appraisal, and that ROVs under this existing procedure can be initiated at the request of a prospective borrower. However, HUD also notes that FHA has not previously clarified standards for borrower-initiated requests for review of an appraisal. Therefore, FHA is planning to update the existing ROV standards to add specific guidance, set forth in the draft Mortgagee Letter, to process and document a borrower-initiated review of the appraisal results.

HUD also explains in the draft Mortgagee Letter that existing FHA policy permits FHA lenders to obtain a second appraisal in cases where material deficiencies in the appraisal are documented and the appraiser is unable or unwilling to resolve them.  The draft Mortgagee Letter provides that “HUD recognizes that material deficiencies may include instances of illegal bias or discrimination; therefore, the list of examples of material deficiencies in [HUD] Handbook 4000.1 is being expanded to include such occurrences.”

HUD notes that to provide FHA with information on the frequency and outcomes of borrower-initiated ROV requests, FHA Connection is being revised to include mandatory fields in the FHA Connection Insurance Application and home equity conversion mortgage (HECM) Insurance Application screens to collect information on such requests.

The draft Mortgagee Letter would revise existing guidance to provide that an ROV refers to the underwriter’s request for the “[a]ppraiser to review the accuracy and completeness of the [p]roperty information, analysis, or market data” that was relevant on the effective date of the appraisal. The draft Mortgagee Letter also would revise existing guidance to provide that if an ROV is requested, the appraiser’s response must be included in a revised version of the appraisal, which must be uploaded into FHA’s Electronic Appraisal Delivery (EAD) portal and logged in FHA Connection.

Existing guidance also would be revised to add that the underwriter must review all borrower requests for review of appraisal results, and that the underwriter must review the appraisal in accordance with FHA requirements for appraisal review and quality of appraisal.  Further, FHA lenders would be required to (1) retain in the case binder the request for review of appraisal results, the results of the review, and the response provided to the borrower, and (2) complete the information regarding the borrower request for review of appraisal results on the FHA insurance application and FHA HECM insurance application screens in FHA Connection.

The draft Mortgagee Letter also would modify existing guidance to address the appraiser’s obligations when a ROV is requested. If an FHA lender’s underwriter requests a ROV, the appraiser would be required to (1) review all appropriate property information and market data received from the underwriter that is relevant on the effective date of the appraisal, including additional property sales or listings, and (2) summarize the analysis of all additional information provided by the underwriter within a revised version of the appraisal report.

HUD notes in the draft Mortgagee Letter that to increase consumer awareness of the option to request a review of the results of an appraisal, FHA is adding a disclosure to the Homebuyer’s Copy of form HUD-92800.5B Conditional Commitment Direct Endorsement Statement of Appraised Value.

Richard J. Andreano, Jr.

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HUD Addresses Use of Revised Fannie/Freddie Loan Documents With FHA Loans

In Mortgagee Letter 2023-01, the U.S. Department of Housing and Urban Development (HUD) addressed the use of the revised Fannie Mae and Freddie Mac single-family loan documents with FHA Title II forward mortgage loans.  As previously reported, in July 2021 Fannie Mae and Freddie Mac released revised versions of their notes and security instruments for single-family loans. For loans sold to Fannie Mae and Freddie Mac, lenders were able to begin using the revised documents immediately and required to use the revised documents for loans with note dates on or after January 1, 2023.

HUD explains in the Mortgagee Letter that its guidelines require FHA lenders to use a form of note and security instrument that “conforms generally to [Fannie Mae and Freddie Mac] forms in both form and content, but which includes specific modifications required by FHA as set forth in the applicable FHA Forward Model Note and Mortgage and related instructions provided by FHA.” The model Note and Mortgage, and instructions regarding the specific modifications to Fannie Mae and Freddie Mac documents that are required, may be found here.

HUD advises that the revised Fannie Mae and Freddie Mac loan documents no longer align with the FHA instructions on modifications that were issued in 2015, which instructions were based on the prior versions of the loan documents. As a result, FHA has published instructions for modifications required to be made to the revised Fannie Mae and Freddie Mac loan documents, which instructions may be found at the link provided above. However, FHA is not requiring that lenders use the revised Fannie Mae and Freddie Mac loan documents. Lenders may continue to use the prior versions of the loan documents, with the modifications that are required for such versions of the documents. 

HUD reminds lenders that that they must ensure that the note and security instrument comply with all applicable state and local requirements for creating a recordable and enforceable security instrument and an enforceable note.

Richard J. Andreano, Jr.

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VA Eliminates HUD/VA Addendum to Uniform Residential Loan Application

In Circular 26-23-03 the U.S. Department of Veterans Affairs (VA) announced the elimination of the HUD/VA Addendum to Uniform Residential Loan Application (VA Form 26-1802a), as well as the Federal Collection Policy Notice (VA Form 26-0503). The VA advises in the Circular that it has consolidated those forms into VA Form 26-1820, which is used by lenders to report a loan to VA for guaranty upon closing.

Lenders must use the new VA Form 26-1820 for loans with application dates on or after February 1, 2023, and may no longer use the eliminated forms with loans for which the new VA Form 26-1820 is used. The VA encourages lenders to use the new VA Form 26-1820 for applications received prior to that date. The VA reminds lenders that VA Form 26-1820 should be fully completed and executed by the borrower and co-borrower (if applicable) at the time of loan closing.

Richard J. Andreano, Jr. 

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New York Department of Financial Services Issues Proposed Guidance Relating to Management of Material Financial Risks From Climate Change

The New York Department of Financial Services (DFS) recently issued proposed guidance (Guidance) related to climate change that applies to New York State-regulated banking organizations, New York State-licensed branches and agencies of foreign banking organizations, and New York State-regulated mortgage bankers and servicers. The Guidance is intended to address “material financial risks related to climate change” faced by covered entities in the context of “risk assessment, risk management, and risk appetite setting.” A covered entity’s assessment of materiality may be based on the “nature, scale, and complexity” of the covered entity’s business, and foreign banking organizations can take into account home-country regulators’ requirements as appropriate.

The Guidance underscores that covered entities should be “mindful that changes to their risk management frameworks to account for climate-related financial risks must not unduly harm or disadvantage at-risk communities,” and emphasizes several overarching themes including (1) the need to manage climate-related financial risks while ensuring fair lending to all communities; (2) the need for a proportionate approach to the management of the climate-related financial risks covered entities’ face, appropriate to each entity’s exposure to such risks.

The Guidance directs covered entities to “take a strategic approach to managing material climate-related financial risks, considering both current and forward-looking risks and identifying actions required to manage those risks in a manner proportionate to the nature, scale, and complexity of their businesses,” by implementing:

A corporate governance framework that (i) assesses the “potential impact of climate-related financial risks on businesses and on the environments in which they operate in the short, medium, and long term, to inform the strategy communicated to, and operationalized by, each organization’s business units and product lines”; (ii) effectively implements board and management oversight; and (iii) embeds management of such risks in the policies and procedures across all relevant business units.

An internal control framework that “ensure[s] sound, comprehensive, and effective identification, measurement, monitoring, and control of material climate-related financial risks.”

A risk management framework designed to identify, measure, monitor, and control climate-related financial risks.

Risk data aggregation capabilities and risk reporting practices capable of “monitoring material climate-related financial risks and producing timely information to facilitate board and senior management decision-making.”

A “range of climate scenarios based on assumptions regarding impact of climate-related financial risks over different time horizons to assess the resiliency of their business models and strategies, identify and measure vulnerability to relevant climate-related risk factors, including physical and transition risks, estimate exposures and potential impacts, and determine the materiality of climate-related financial risks,” which can be qualitative and/or quantitative in nature.

DFS has requested comments on the Guidance by March 21, 2023, with particular emphasis on the following questions:

  1. The Guidance does not establish a timeline for implementation. Should a timeline for implementation be established? If yes, what timeline and what is the reasoning supporting that timeline?
  2. Recognizing that there is a wide range of complexity in climate scenario analysis, how can smaller institutions benefit from climate scenario analysis? What does appropriate climate scenario analysis look like for them? Which kind of support do they need in establishing these scenarios?
  3. The Guidance does not contain a provision regarding disclosure of material financial risks from climate change for covered entities. Should existing regulatory reporting requirements be supplemented to capture covered entities’ exposure to material financial risks from climate change and their management of such risks, and if so, what should the supplemental report look like?
  4. Are there other aspects of climate-related financial risks that the Guidance should consider? Or are there other aspects of the Guidance that would benefit from further clarification, context, or reframing?

Michael Fausey

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Texas Federal Court Enforces Arbitration Agreement and Dismisses Class Action Lawsuit Filed Against Fintech Company for Evading Texas Usury Limit; Company Continues to Face “True Lender” Challenge From California DFPI

A Texas federal court has dismissed a class action lawsuit against Opportunity Financial, LLC (OppFi) alleging OppFi violated Texas usury law by charging interest on loans it made through a partnership with a state-chartered bank at rates above the maximum rate permitted by Texas law. The plaintiff alleges that the partnership was a “rent-a-bank” scheme to evade state law and that OppFi, rather than its bank partner, was the “true lender” on the loans. In dismissing the lawsuit, the district court entered an order in which it accepted and adopted the magistrate judge’s report and recommendation concluding that the arbitration clause in the plaintiff’s Note and Disclosure Statement (Note) was enforceable and recommending that the complaint be dismissed with prejudice. The district court also compelled arbitration of the plaintiff’s claims against OppFi.

The district court had referred OppFi’s motion to compel arbitration and dismiss the case to the magistrate judge for findings and recommendations. The plaintiff had argued that the arbitration clause was unenforceable because it prospectively waives her federal RICO claims in violation of federal law. The Note’s choice of law provision states that “This Note is governed by federal law and the laws of the State of Utah, except that the Arbitration Clause is governed by the Federal Arbitration Act (‘FAA’).” The plaintiff argued that because the Note required the arbiter to apply Utah law and the arbitration clause requires the arbiter to “enforce your agreements with us as they are written,” the arbiter must enforce the Note as valid under Utah law. According to the plaintiff, this would bar her RICO claims because a violation of state law is required to show a RICO violation and she would not be able to show a violation of Utah law.

The magistrate judge concluded that the arbitration clause did not bar the plaintiff’s RICO claims. She first observed that the choice of law provision excludes the arbitration clause and that the arbitration clause requires the arbiter to “apply substantive law consistent with the FAA.” She then found that neither the choice of law provision nor the arbitration clause required the arbiter to apply Utah law nor did either bar the plaintiff’s RICO claims. The magistrate judge commented that it was unclear whether an arbiter would apply Utah or Texas law but it would be for the arbitrator to determine whether choice of law principles required the application of Texas law rather than Utah law.

The plaintiff also argued that the arbitration clause was unenforceable under Texas law. According to the plaintiff, the arbitration clause is unconscionable and violates public policy because it requires the arbiter to apply Utah law and thereby gives the arbiter no option other than to find that the loans are valid. The magistrate judge found that the Note and arbitration clause did not waive the plaintiff’s statutory claims under or federal or Texas law, and concluded that her concern with the choice of law provision was not grounds for voiding the arbitration clause and that the merits of the plaintiff’s claims, including choice of law principles, would be addressed by the arbiter.

The magistrate judge also rejected the plaintiff’s argument that although the RICO and state law claims fell within the arbitration clause, her claim for declaratory relief that the arbitration clause is “unenforceable, void, and unconscionable” did not. The magistrate judge concluded that the arbitration clause covered all of the plaintiff’s claims.

The Texas decision enforcing OppFi’s arbitration agreement demonstrates the value of carefully drafted arbitration provisions in defeating class action claims. However, an arbitration agreement does not eliminate the risk of “true lender” challenges by regulators to bank lending partnerships, as illustrated by ongoing litigation in California involving OppFi and the state’s Department of Financial Protection and Innovation (DFPI). In March 2022, OppFi filed a declaratory judgment complaint in response to the DFPI’s stated intent to enforce California interest rate caps against OppFi in connection with loans originated by OppFi’s bank partner. The DFPI responded with a cross-complaint asserting that the California interest rate caps applied to the loans in question because OppFi, not its bank partner, was the “true lender,” based on “the substance of the transaction” and the “totality of the circumstances,” primarily “which entity—bank or non-bank—has the predominant economic interest in the transaction.” OppFi filed a demurrer to the DFPI’s cross-complaint which was overruled.

OppFi subsequently filed a cross-complaint against the DFPI asserting that the DFPI’s reliance on the so-called “true lender doctrine” in order to subject OppFi to California interest rate limits constitutes adoption and enforcement of an “underground regulation”, which is impermissible under California’s Administrative Procedure Act (APA). The cross-complaint explains that “[b]ecause DFPI did not submit its ‘true lender doctrine’ to the APA’s rule making process, it is invalid as an ‘underground regulation’ and cannot be enforced.” Accordingly, OppFi maintains, the court should issue a “peremptory writ of mandate setting aside and rendering invalid use of the true lender doctrine” because the DFPI failed to comply with the rulemaking requirements of the APA; and should declare “that DFPI’s adoption of the true lender doctrine . . . violated the rulemaking requirements of the APA and is therefore invalid.” The DFPI has filed a demurrer to OppFi’s cross-complaint or, in alternative, a motion to strike the pleading.

Michael R. Guerrero & Ronald K. Vaske

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Second Circuit Holds Inclusion on Credit Report of Student Loan Debt Alleged to Have Been Discharged in Bankruptcy Did Not Make Report Inaccurate Under FCRA

The U.S. Court of Appeals for the Second Circuit recently ruled that a plaintiff who alleged that Experian had violated the Fair Credit Reporting Act by including a discharged student loan debt on his credit report had not alleged an inaccuracy for purposes of the FCRA requirement that consumer reporting agencies (CRAs) follow reasonable procedures to assure the accuracy of information included in consumer reports. According to the court, the inaccuracy alleged by the plaintiff was not cognizable under the FCRA because whether the loan had been discharged turned on a legal dispute.

In Mader v. Experian Information Solutions, the plaintiff claimed that his credit report was inaccurate because it listed his outstanding student loan debt following his Chapter 7 bankruptcy. He alleged that the loan was discharged because, as a private loan, it was not exempted from discharge under Section 523(a)(8) of the Bankruptcy Code. That section defines as non-dischargeable, among other debts, “an educational…loan made, insured, or guaranteed by a government unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution.”

The district court concluded that the loan was non-dischargeable based on evidence indicating that the loan was “made under a program that was funded, in part, by non-profit organizations, including governmental units.” Since the loan’s inclusion on the plaintiff’s credit report was not an inaccuracy, the district court granted Experian’s motion for summary judgment.

While the Second Circuit affirmed the district court, it did so on the alternate ground that the plaintiff had failed to allege an inaccuracy within the plain meaning of the FCRA. According to the Second Circuit, there was a genuine dispute in the record whether the plaintiff’s loan was made under a “program” that included governmental funding and therefore non-dischargeable. However, the Second Circuit agreed with Experian’s argument that the FCRA does not require CRAs to adjudicate legal disputes such as the post-bankruptcy validity of the plaintiff’s education loan debt.

Because the FCRA does not define the term “accuracy,” the Second Circuit looked to the dictionary definition which it read to require “a focus on objectively and readily verifiable information.” The Second Circuit concluded that the inaccuracy alleged by the plaintiff did not meet this statutory test because whether the loan was non-dischargeable “evades objective verification.” Because there was no bankruptcy order explicitly discharging the debt, “the accuracy of Experian’s reporting that the debt was still owed depended on whether it is ‘dischargeable,’ which itself depends on whether section 523(a)(8) applies [to the program under which the plaintiff’s loan was made.]” As a result, it would be necessary to resolve the factual dispute over the funding and structure of the plaintiff’s loan program to determine whether his loan was discharged. The Second Circuit concluded that “[t]he bespoke attention and legal reasoning required to determine the post-bankruptcy validity of [the plaintiff’s] debt means that its status is not sufficiently objectively verifiable to render [the plaintiff’s] credit report ‘inaccurate’ under the FCRA.”

The Second Circuit also noted that every other circuit to have considered an analogous question has agreed that inaccuracies that turn on legal disputes are not cognizable under the FCRA. (The Circuits identified were the First, Seventh, Ninth, and Tenth Circuits.) It also noted that its holding did not mean that the FCRA never requires CRAs to accurately report information “derived from the readily verifiable and straightforward application of law to facts.” As an example, the Second Circuit cited to cases holding that misreporting the clear effect of a bankruptcy discharge on certain types of debt is a cognizable inaccuracy under the FCRA. It also noted that “if a legal question is sufficiently settled so that the import on a particular debt is readily and objectively verifiable, the FCRA sometimes requires that the implications of that decision be reflected in credit reports.”

The CFPB and the FTC recently filed an amicus brief in another case pending before the Second Circuit also involving the issue of whether legal inaccuracies are cognizable under the FCRA. In Sessa v. Trans Union, LLC, the plaintiff filed a putative class action alleging that TransUnion reported she owed a “balloon payment” on a vehicle lease, but then inaccurately reported the amount owed as the vehicle’s residual value, which was an optional amount to purchase the vehicle at the end of the lease and greater than the actual amount owed.

The district court granted summary judgment to TransUnion holding that plaintiff failed to make the “threshold showing” of inaccuracy on the consumer report. First, the court drew a distinction between factual and legal inaccuracies and held that a CRA cannot be held liable when the issue requires a legal determination as to the validity of the debt the agency reported. In the court’s view, whether the plaintiff in fact owed a balloon payment at the end of the lease was a “legal dispute” that requires “a legal interpretation of the loan’s terms.” Second, the court concluded that the information in the credit report was factually accurate because TransUnion reported the exact information it received from the data furnisher.

In their amicus brief filed in the plaintiff’s appeal to the Second Circuit, the CFPB and FTC argue that the text of the FCRA makes no distinction between factual and legal inaccuracies, and that importing a distinction between factual and legal inaccuracies into the law is unworkable in practice. They argue that most, if not all, inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule, effectively rendering the reasonable procedures section of the FCRA a nullity. More specifically, debts are creatures of contract and any inaccurate representation pertaining to an individual’s debt obligations could arguably be characterized as a legal inaccuracy insofar as determining the truth or falsity of the representation requires contractual interpretation. Whether an error is defined as factual or legal, a consumer report may still be incorrect.

The Second Circuit has scheduled oral argument in the case for March 3, 2023.

John L. Culhane, Jr.

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Tenth Circuit Dismisses FDCPA Claim for Lack of Standing Where Third-Party Mail Vendor Sent Collection Letters

The U.S. Court of Appeals for the Tenth Circuit recently joined the Eleventh Circuit (and a growing majority of courts) in rejecting the “Hunstein theory” of liability under the Fair Debt Collection Practices Act (FDCPA). In Shields v. Professional Bureau of Collections of Maryland, Inc., the Tenth Circuit affirmed a lower court’s dismissal of FDCPA claims for lack of standing, confirming that a debt collector’s use of an outside mail vendor does not constitute an actionable, concrete injury.

The case involved attempts to collect a consumer’s student loan debt. In 2019, the debt collector sent the consumer three letters to collect a balance that increased over time. None of the letters disclosed that the balance would increase due to accruing interest, fees, and other charges (i.e., the Miller/Avila safe harbor language that accounts for the fact that a debt may increase). All three letters were mailed by a third-party mail vendor.

The consumer brought four claims against the debt collector for various violations of the FDCPA, including (1) a violation of 15 U.S.C. § 1692e(2)(A) for falsely representing the character, amount, or legal status of the plaintiff’s debt; (2) a violation of 15 U.S.C. § 1692e(10) for using false, deceptive, or misleading representations or means in connection with the collection of debt; (3) a violation of 15 U.S.C. § 1692g(a)(1) for failing to meaningfully convey to the plaintiff the amount of debt in its initial communication or within five days thereafter; and (4) a violation of 15 U.S.C. § 1692c(b) for communicating with a third party regarding the plaintiff’s debt without consent or permission.

The debt collector argued that the consumer lacked standing to assert any of these claims. In dismissing the first three claims, the district court held that the consumer’s general confusion resulting from the discrepancy in the letters about the amount owed, and whether it included interest and fees, did not rise to a tangible harm sufficient to confer standing. The court also dismissed the fourth claim, rejecting the consumer’s argument that the harm she suffered was akin to a tort of public disclosure of private facts just because the debt collector transmitted data about the consumer’s account to its third-party mail vendor to generate and send letters directly to her.

On appeal, the consumer argued she had standing because she suffered both concrete tangible and intangible injuries. The Tenth Circuit acknowledged that outside mail vendors are not one of the enumerated exceptions to the FDCPA’s prohibition against disclosing a consumer’s debt to a third party without consent (15 U.S.C. § 1692(b)), but ultimately found that the transmission of data to the mail vendor was not the kind of “publicity” sufficient to constitute harm. In doing so, it relied heavily on the Eleventh Circuit’s recent holding in Hunstein v. Preferred Collection and Management Services. In Hunstein, the en banc court reversed prior findings of standing and found there was no harm without publicity, and no invasion of privacy occurred where (as in Shields) the disclosure of the debt did not extend beyond the third-party mail vendor. We previously discussed Hunstein as it worked its way through the courts in several blog posts (here, here, here, and here) and in an episode of the Consumer Finance Monitor Podcast.

In regards to the plaintiff’s claims based on the substance of the three letters, while noting that the FDCPA prohibits false representations about the character, amount or legal status of any debt (15 U.S.C. § 1692e(2)(A)), or use of false representation or deceptive means to collect debt (15 U.S.C. § 1692e(10)), the court found that the consumer only pleaded that the letters were generally prejudicial and caused confusion, not that they caused her to do anything as a result in reliance on them. The court held that this confusion and misunderstanding was insufficient to confer standing. (It is worth noting that the plaintiff had attached a declaration to her opposition to the debt collector’s motion to dismiss in which she alleged detrimental reliance resulting from the letters, but the district court declined to consider the declaration due to the facial challenge to its subject matter jurisdiction. The Tenth Circuit found that the district court did not abuse its discretion by not considering the declaration.)

Shields is consistent with the overall trend of federal courts relying on Spokeo and TransUnion to dismiss FDCPA claims for failure to plead sufficient injury to confer Article III standing to invoke federal court jurisdiction. See Spokeo, Inc. v. Robins, 578 U.S. 330, 338 (2016); TransUnion, LLC v. Ramirez, 141 S. Ct. 2190, 2200 (2021) (“Importantly, this Court has rejected the proposition that ‘a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.’” (internal quotation and citation omitted); Pennell v. Glob. Tr. Mgmt., LLC, 990 F.3d 1041, 1045 (7th Cir. 2021) (holding stress and confusion do not suffice for FDCPA standing).

Among the takeaways from Shields is an emerging consensus by federal appellate courts that the administrative use of a third-party mail vendor to send collection notices does not constitute a communication about the debt to a third party without consent under the FDCPA. As the Eleventh Circuit has observed, the use of vendors involves a transmission of data, not necessarily “disclosure” as the letter vendors typically use automated systems that populate templates and print and send letters without a person ever seeing the contents. Additionally, Shields confirms that confusion and misunderstanding alone, without more, does not rise to a cognizable injury.

Brian Turetsky & Abigail S. Pressler

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Federal Reserve Board Final Rule on Benchmark Replacements for Contracts That Use LIBOR Published in Federal Register; Fannie Mae and Freddie Mac Instruct Servicers on LIBOR Replacement Indices

The final rule issued by the Federal Reserve Board to implement the LIBOR Act by establishing default rules for benchmark replacements in certain contracts that use LIBOR as a reference rate was published in today’s Federal Register and will become effective on February 27, 2023.

On January 25, Fannie Mae and Freddie Mac issued instructions to servicers on replacement indices for their legacy single-family mortgage loans with 1-month, 6-month, and 1-year LIBOR indices. The instructions include a table that lists the Term Secured Overnight Financing Rate (SOFR) plus transition tenor spread adjustment that replaces each of the three LIBOR indices. The spread adjusted term SOFR is administered by the CME Group Benchmark Administration, LTD. and published by Refinitiv Limited. The transition to the replacement indices will occur on July 1, 2023.

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

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CFPB Hosts Hearing on Appraisal Bias

The CFPB recently hosted the first hearing of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council (ASC) on appraisal bias. The hearing was led by CFPB Deputy Director Zixta Martinez and ASC Executive Director Jim Park. HUD Secretary Marcia L. Fudge, CFPB Director Rohit Chopra, and FHFA Director Sandra Thompson also participated in the hearing. Panel witnesses included: Dr. Junia Howell, Visiting Assistant Professor of Sociology at the University of Illinois Chicago; Paul and Tenisha Tate-Austin, homeowners from Marin, California; Michael Fratantoni, Senior Vice President of Research and Technology and Chief Economist, the Mortgage Bankers Association; and Craig Steinley, President, the Appraisal Institute.

HUD Secretary Fudge began the hearing by sharing her concern with ongoing bias and discrimination in the housing market. She stated that owning a home should provide a clear path to stability and equity, but many times this is not the case for minority borrowers and homeowners. She also expressed excitement about the Property Appraisal and Valuation Equity (PAVE) task force, which is the first of its kind. She touched on PAVE’s work in researching appraisal bias and working with stakeholders to create streamlined processes for borrowers seeking recourse. Lastly, Secretary Fudge spoke about her own experiences with facing bias in the mortgage industry throughout her homeownership journey.

During the hearing, witnesses explained the impact of appraisal bias and historic discrimination on minority communities and the importance of collecting data to monitor these trends. Dr. Howell explained that through years of studying appraisal bias, she has found homes in majority-white neighborhoods are consistently valued significantly higher than homes in majority-minority neighborhoods, even after controlling for factors such as lot size, crime rates, and access to schools. She also noted that the disparity seems to have increased over the past few years. Dr. Howell emphasized that although these trends are not favorable to the industry, having access to appraisal data puts the industry in a position to identify issues and start to remedy them.

Mr. Fratantoni agreed with Dr. Howell that the use of publicly available data is essential to efforts to study and quantify the disparities in home valuations. He went on to explain that automated valuation models (AVMs) can be used not only to track and analyze historical valuation data, but to flag and address ongoing disparities. FHFA Director Thompson encouraged the panelists to continue to study publicly available data and send suggestions to the FHFA for building the appraisal dataset and creating tools that would be helpful to industry stakeholders. (See our discussion of the FHFA’s Uniform Appraisal Dataset (UAD).

The panel went on to discuss strategies for increasing diversity and decreasing bias in the home appraisal industry. Executive Director Park and Mr. Steinley remarked on the lack of diversity among appraisers and expressed excitement about the new initiates to address this issue. For example, the Appraisal Institute has created a diversity scholarship that provides funding to traditionally excluded communities and applicants for appraiser training and education. The goal is to remove some of the financial barriers that exist for entering the appraiser industry. Additionally, Mr. Steinley discussed the implementation of the Practical Applications of Real Estate Appraisal (PAREA) training program, designed to provide online training opportunity as a supplement or replacement to the traditional supervisor or apprenticeship model of obtaining the required training hours. The goal of this program is to expand opportunities to those who may be interested in appraiser licensure, but lack access to an in-person network of qualified appraiser supervisors, a challenge that is especially faced by those in rural, tribal, or other underserved areas.

In addition to industry professionals, the witness panel included Mr. and Mrs. Tate-Austin, a Black couple who made headlines when they accused their appraiser of discrimination in undervaluing their home. In 2020, the couple received a surprisingly low appraisal when they sought to refinance their home. After removing all family photos, they asked a white friend to stand in as the homeowner for a second appraisal, which came back almost $500,000 higher than the first. The Tate-Austins discussed this experience, and suggested that regulators step in on behalf of consumers and hold appraisers accountable for discrimination. They also suggested rulemaking that would require lenders and appraisers to provide notice to borrowers about their recourse options if they suspect an issue with their appraisal. Currently, ECOA and Regulation B require borrowers be provided with a copy of their appraisal, but there is no requirement to include information about options for recourse. HUD plans to increase consumer awareness of the ability to obtain a reconsideration of value in connection with FHA loans, and has issued draft guidance on reconsiderations of value in connection with such loans.

The panelists remarked on the hypothetical implications of using a valuation system not dependent on comparable home purchase sales as a metric for determining the fair value of a listed home. Dr. Howell remarked that the use of sales records only serves to perpetuate the disparities between white and non-white neighborhoods, and that the industry should consider an entirely new framework for valuation. Mr. Fratantoni explained that the use of comparable home sales is a reasonable strategy, but that the information being used must be accurate and free of bias. He noted that using AVMs will produce much more accurate estimates of value because many homes can be compared at once, in contrast to the handful that can be compared by a single appraiser. Additionally, he noted that AVMs can be used as a quality control measure to flag particularly high or low valuations and provide information that can be used in addition to notes made by an appraiser. Mr. Steinley commented on the difficulty of valuing a property, and noted the need for better training and more guidance for appraisers, to decrease the level of variation between how appraisers choose comparable homes. He also agreed with the Tate-Austins that there should be a uniform process for explaining to borrowers how to request a reconsideration of value.

All of the panelists agreed that appraisal bias is harmful to consumers, and that the industry would benefit from rules or guidance for borrowers seeking a reconsideration. The CFPB addressed this issue, stating that responsible lenders will provide borrowers with “clear, actionable information about how to raise concerns about the accuracy of an appraisal.” CFPB rulemaking on this topic does not appear to be imminent, but the CFPB has asserted that “lenders that fail to have a clear and consistent method to ensure that borrowers can seek a reconsideration of value risk violating federal law.” However, the CFPB is participating in a joint rulemaking on the use and quality control standards of AVMs. The hearing was recorded and is available on the Bureau’s events archive page. On the event page, the Bureau has requested that public comments on personal or industry experience with appraisal bias be submitted to by February 8, 2023.

Loran Kilson

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Third Circuit Rejects TCPA Claim in “Junk Fax” Putative Class Action

On January 19, 2023, the U.S. Court of Appeals for the Third Circuit unanimously affirmed a district court’s dismissal of a Telephone Consumer Protection Act claim arising from allegedly illegal faxes about a free educational seminar.

Appellee Millennium Health LLC operated a laboratory providing drug testing and medication monitoring services to healthcare professionals, including Appellant Dr. Robert Mauthe, MD. In exchange for Millennium performing drug testing, among other things, Dr. Mauthe provided Millennium his practice’s fax number. On May 2, 2017, Millennium faxed all of its customers, including Dr. Mauthe’s office, a single-page flyer promoting a free educational seminar, which explained that the seminar would “highlight national trends in opioid misuse and abuse . . . and discuss the role of medication monitoring as a valuable tool that provides objective, actionable information during the care of injured workers.” Neither the flyer nor the seminar provided any pricing information, discounts, coupons, or product images.

Dr. Mauthe, who has filed more than ten similar TCPA lawsuits since 2015, sued Millennium on behalf of a putative class for violating the TCPA, 47 U.S.C. §§ 227(a)(5) and (b)(1)(C), by sending unsolicited advertisements by fax. After the close of discovery, Millennium moved for summary judgment, which was granted by the District Court. Dr. Mauthe appealed.

The Third Circuit unanimously affirmed the District Court’s opinion granting Millennium summary judgment concluding, “under an objective standard, no reasonable recipient of Millennium[]’s unsolicited free-seminar fax could view it as promoting the purchase or sale of goods, services, or property. The fax itself makes no mention whatsoever of goods, services, or property. Instead, the fax mentions a seminar. Nowhere in the fax is a discussion of anything that can be bought or sold – the fax speaks only about a free event. The fax does not contain testimonials, product images, or coupons – things commonly associated with an advertisement. It does not provide any email, phone number, or direct internet link to purchase a Millennium [] product or service. The fax is purely educational – it describes research about opioids, invites attendance at an academic event, and introduces the event speaker. For these reasons, the fax does not promote the purchase or sale of goods, services, or property.”

Although non-precedential, the Mauthe decision should serve as a reminder to the industry to keep abreast with the latest developments under the TCPA, in particular because the Third Circuit, in a split decision, reached a different conclusion in Fischbein v. Olson Research Group, Inc., 959 F.3d 559 (3d Cir. 2020) (holding that a fax inviting the recipient to take a survey in exchange for money constitutes an “advertisement” under the TCPA). So often, these decisions turn on the use of just a few words. As a result, the industry would be well served by having their template correspondence, as well as their policies and procedures, periodically reviewed and updated with the assistance of both in-house and outside counsel in order to ensure strict compliance with the TCPA.

Michael Fausey

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Banking Trade Groups Highlight CFPB SBREFA Obligations for Credit Card Penalty Fees Rulemaking

In a letter to Director Chopra, five banking trade groups address the CFPB’s obligation to comply with the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) before proposing a rule on credit card late fees and late payments. The groups are theAmerican Bankers Association, Credit Union National Association, Independent Community Bankers of America, National Association of Federally-Insured Credit Unions, and National Bankers Association.

In its Fall 2022 rulemaking agenda, the CFPB indicated that it is considering whether to propose amendments to the Regulation Z rules on credit card penalty fees that implement the CARD Act, including the penalty fees safe harbors, and gave a January 2023 estimate for issuance of a Notice of Proposed Rulemaking. The CFPB had issued an Advance Notice of Proposed Rulemaking regarding credit card late fees in June 2022.

The trade groups’ letter reflects the concerns of industry that the CFPB intends to eliminate the penalty fee safe harbors or substantially reduce the safe harbor amounts in the near future. In the letter, the trade groups assert that any reduction in, or elimination of, the late fee safe harbor would have a significant adverse impact on a substantial number of community banks and credit unions with assets below $850 million. Under SBREFA, the CFPB must convene a Small Business Review Panel if it is considering a proposed rule that could have a significant economic impact on a substantial number of small entities. The trade groups state that of the approximately 805 credit card-issuing banks, more than half (451) have assets less than $850 million, and of the 3,127 credit card-issuing credit unions, 85 percent (2,670) have assets less than $850 million.

In addition to potentially changing the competitive position of small depository institutions overall, potential significant adverse impacts of a regulatory change to late fees identified in the letter are card issuers exiting the market altogether and an increase in the cost of, and a reduction in access to, credit by small businesses, as many small business owners use personal credit cards for business purchases. The trade groups state that because of the potential for any rulemaking to have a significant impact on a substantial number of small institutions, the CFPB must convene a SBREFA panel to consider the effects of any proposed amendments on small entities.

John L. Culhane, Jr. 

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D.C. Circuit Takes on NLRB Rule Impacting Union Election Process

In a divided decision handed down January 17, the United States Court of Appeals for the D.C. Circuit partially affirmed the decision of a federal District Court eliminating, in part, aspects of an employer-friendly 2019 Rule put in place by the National Labor Relations Board (NLRB) to “ensure fair and accurate voting, transparency, uniformity, certainty and finality, and efficiency” in the union election process by, in effect, slowing some of the Obama-era NLRB’s “quickie election” procedures. More specifically, in the 2019 Rule, the Board, among other measures, lengthened the amount of time employers had to provide eligible voter lists, required certification of union election results only after the time for a review process had passed, and tightened eligibility parameters for union election observers. These moves undid a slate of changes related to representation elections that the Board had promulgated in 2014 (the “2014 Rule”).  The Board had issued the 2019 Rule without notice or comment, asserting that it fell within the Administrative Procedure Act’s (APA) exception for “rules of agency organization, procedure or practice.”  

The AFL-CIO filed suit challenging the 2019 Rule in the District Court as arbitrary and capricious. In doing so, it focused on five provisions of the 2019 Rule, including those related to:

  • Voter lists: providing an employer 5 business-days to provide a union and the Board with the names, job details, and contact information for all eligible employee-voters (as opposed to the 2 business days previously provided by the 2014 Rule);
  • Delayed certification: allowing a Regional Director to certify union election results only after she has “resolved any requests for review concerning the decision and direction of election or objections to the conduct of the election or, in the absence of such filings, after the time for seeking Board review has passed.” This is in contrast to the 2014 Rule allowing a Regional Director to certify election results regardless of whether a request for review was pending or could still be filed;
  • Election observers: providing that for manual or in-person elections “a party shall select a current member of the voting unit as its observer, and when no such individual is available, a party should select a current nonsupervisory employee as its observer.” The 2014 Rule stated that “any party may be represented by observers of its own selection . . . .”
  • Pre-election litigation of voter eligibility, unit scope and supervisory status: stating that “[d]isputes concerning unit scope, voter eligibility and supervisory statutes will normally be litigated and resolved by the Regional Director before an election is directed,” whereas the 2014 Rule said that such disputes did not need to be litigated or resolved before an election; and
  • Election scheduling: building in a presumptive waiting period of 20 business days immediately following the direction of an election to allow the Board to rule on disputes between the parties (in contrast to two weeks under the 2014 Rule). 

The District Court ruled that none of the challenged provisions fell within the APA’s procedural exception and were therefore all invalid. On appeal, the DC Circuit disagreed with the District Court with respect to two aspects of the 2019 Rule that it deemed “procedural” and, therefore, could remain in place – i.e., the provisions of the 2019 Rule requiring certain disputes be resolved before an election and lengthening the election time line. 

With respect to the remaining provisions of the 2019 Rule related to eligible employee-voter lists, delayed certification of election results, and election-observer eligibility, the Circuit agreed with the lower court ruling that these aspects of the 2019 Rule fell outside the APA’s limited exceptions to its notice and comment requirements because they govern or directly affect the substantive rights of employers, unions and employees “in relation to one another during representation elections.”

What this means for employers: Employers dealing with union election issues should be aware that this ruling means that the 2014 Rule remains in place with respect to voter lists, delayed certification and election observers, and employers should proceed pursuant to the requirements set forth in the 2014 Rule. Current election procedures thus include some of the NLRB’s “quickie election” requirements alongside more employer-favorable timeframes from the 2019 Rule. 

Ballard Spahr routinely advises employers on union organizing and union elections matters.

Louis L. Chodoff & Elizabeth McManus

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Did You Know?

Effective as of January 1, 2023, Washington State has adopted final regulations which permit a MLO to work from their residence without the need for a branch license, as long as the company that sponsors the MLO is licensed to do business in Washington.

John Georgievski

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Looking Ahead

ACES Quality Management's QC Now: Hot Topics on Mortgage Servicing and Originations Compliance Webinar on February 8th, 2023 at 2:00PM - 3:15PM EST

Speakers: Rich Andreano, Reid Herlihy, Mandy Phillips

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