In This Issue:
- CFPB Suffers Significant Defeat in ECOA Lawsuit Against Townstone Mortgage
- CFPB Addresses “Pay-To-Play” Mortgage Loan Digital Comparison-Shopping Platforms Under RESPA
- Podcast Episode: A Close Look at the Federal Trade Commission’s Proposal to Ban Non-Compete Agreements
- Ninth Circuit Holds Mortgage Servicer’s Reporting of COVID-19 Forbearance Plan Complied With FCRA and CARES Act
- Ninth Circuit Vacates and Remands $8 Million CFPB Judgment in Lawsuit Against Mortgage Services Company
- Briefing on CFPB Certiorari Petition Seeking Review of Fifth Circuit Ruling That CFPB’s Funding Is Unconstitutional and CFSA Cross-Petition for Certiorari Distributed to Supreme Court for Consideration at February 17 Conference
- ABA Files Amicus Brief in Support of Bank’s Position That TILA Credit Card Offset Prohibition Does Not Apply to Amounts Owed on a HELOC
- New York Department of Financial Services Issues Final Regulations for Consumer-Like Disclosures for Commercial Financing
- New York Governor’s 2024 Fiscal Budget Proposal Targets Overdraft and NSF Fees
- CFPB Report of Decline in Bank Revenues From Overdraft and NSF Fees Follows President Biden’s Targeting of “Junk Fees” State of the Union Address
- CFPB Issues 2023 Reportable HMDA Data Chart
- Department of Labor Issues New Guidance on Telework Under the Fair Labor Standards Act and Family and Medical Leave Act
- Impact of May 11, 2023 End Of COVID-19 Emergency Declarations
- Bill Proposed in Virginia to Permit Remote Work
- Did You Know?
CFPB Suffers Significant Defeat in ECOA Lawsuit Against Townstone Mortgage
As previously reported, in July 2020 the CFPB filed the first ever redlining complaint against a nonbank mortgage company, Townstone Mortgage (Townstone), under the Equal Credit Opportunity Act (ECOA) and Consumer Financial Protection Act (CFPA). The US District Court for the Northern District of Illinois recently granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants. The court ruled in favor of the position long maintained by mortgage and other credit industry participants that a redlining claim may not be brought under the ECOA because the statute only applies to applicants.
While the ECOA only refers to applicants, Regulation B under the ECOA 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.” (Emphasis added.) The CFPB argued that the court should follow Regulation B, and should defer to its interpretation of the ECOA reflected therein because the regulation is “reasonably related” to the objectives of the ECOA. In support of that position the CFPB cited Mourning v. Family Publications Services, Inc., a Truth in Lending Act case in which the Supreme Court applied that standard to uphold portions of Regulation Z adopted by the Federal Reserve Board. The court rejected that argument and applied the test set forth by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., regarding whether a court should defer to an agency interpretation of a statute.
As explained by the court, the Chevron test is a two-step test. “The first step of Chevron is to determine whether Congress has directly spoken to the precise question at issue. If Congress has spoken to the precise question at issue unambiguously, then that is the end of it: the agency and courts alike are bound by what Congress wrote. However, if Congress has not spoken clearly, the court moves on to step two, in which the court consider[s] whether the agency’s interpretation reflects a permissible construction of the statute.”
The court concluded that the “plain text of the ECOA . . . clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit. The Court therefore finds that Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants. As such, that is the end of it and the Court need not move on to the second step of the Chevron analysis because it is clear that the ECOA does not apply to prospective applicants.” (Internal quotation marks and citations removed.)
The court observed that the CFPB also argued that “it has more expansive enforcement powers than the private right of action [under the ECOA], and moreover, its authority to prohibit discouragement of “prospective applicants” does not require stretching the term “applicant” to encompass “prospective applicants.”” The court disagreed with the CFPB’s position. The court stated that the “CFPB’s authority to enact regulations is not limitless,” and that the “CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term “applicant.””
As previously reported, in 2022 the CFPB revised its unfair, deceptive, or abusive acts or practices (UDAAP) examination manual to provide that discrimination is covered by the unfair element. The CFPB directed its examiners to apply the CFPA’s unfairness standard to conduct considered to be discriminatory whether or not it is covered by the ECOA. That action prompted criticism and a lawsuit from trade groups. Updates on the lawsuit may be found here and here. One has to wonder if the CFPB will now attempt to use this theory against Townstone.
The US Department of Housing and Urban Development (HUD) and the US Department of Justice (DOJ) have the authority to bring claims under the Fair Housing Act (Act). As previously reported, in October 2021 the DOJ announced a major initiative to combat redlining. The Act has language that differs very much from the language in the ECOA. In particular, among other prohibitions, the Act provides that it is unlawful:
- To “refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin.” (Emphasis added.)
- To discriminate in the sale or rental, or to otherwise make unavailable or deny, a dwelling to any buyer or renter because of a handicap.” (Emphasis added.)
- “[F]or any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.” (Emphasis added.)
For purposes of the Act, a “residential real estate transaction is defined as “any of the following:
(1) The making or purchasing of loans or providing other financial assistance -
- for purchasing, constructing, improving, repairing, or maintaining a dwelling; or
- secured by residential real estate.
(2) The selling, brokering, or appraising of residential real property.” Thus, the Act provides an avenue for the pursuit of redlining claims against mortgage lenders, and other providers of services covered by the Act.
The ball is now in the CFPB’s court as to whether it will seek to challenge this ruling by appealing to the US Court of Appeals for the Seventh Circuit. That would appear to be a risky move. The Seventh Circuit could agree with the district court based on the plain text of the ECOA, and the very different language that Congress used in the Fair Housing Act to address redlining. If the Seventh Circuit ruled in favor of the CFPB, then Townstone could seek Supreme Court review, and the CFPB would likely face an uphill battle if the Court took the case.
CFPB Addresses “Pay-To-Play” Mortgage Loan Digital Comparison-Shopping Platforms Under RESPA
The CFPB recently issued an advisory opinion entitled Real Estate Settlement Procedures Act (Regulation X); Digital Mortgage Comparison-Shopping Platforms and Related Payments to Operators. The CFPB states that it issued the advisory opinion “to address the applicability of the Real Estate Settlement Procedures Act (RESPA) section 8 to operators of certain digital technology platforms that enable consumers to comparison shop for mortgages and other real estate settlement services, including platforms that generate potential leads for the platform participants through consumers’ interaction with the platform (Digital Mortgage Comparison-Shopping Platforms).” The advisory opinion is effective upon publication in the Federal Register, which is scheduled for February 13, 2023. This blog post is a brief summary of the advisory opinion. For a fuller discussion of the advisory opinion, please click here.
In the advisory opinion the CFPB provides general guidance on how Digital Mortgage Comparison-Shopping Platforms (Platforms) may be operated in a manner that violates RESPA and other laws, and addresses five specific examples of arrangements that it believes to be non-compliant. While the CFPB mainly addresses RESPA, it appears that UDAAP concerns are a significant motivating force behind the issuance of the advisory opinion. Ominously, the CFPB states that “[b]ased on the evolution of business arrangements and technology platforms, the CFPB’s market monitoring, and regulator activity, the CFPB understands that operators of . . . Platforms and participating settlement service providers in some cases may be engaging in activities that violate RESPA section 8.”
CFPB General Guidance
The CFPB sets forth this general interpretation of when the operator of a Platform violates RESPA section 8:
An operator of a Platform receives a prohibited referral fee in violation of RESPA section 8 when:
- The Platform non-neutrally uses or presents information about one or more settlement service providers participating on the Platform;
- That non-neutral use or presentation of information has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity; and
- The operator receives a payment or other thing of value that is, at least in part, for that referral activity.
- The CFPB reflects what appears to be an underlying UDAAP concern when it states that an operator’s non-neutral use or presentation of information “impedes the consumer’s ability to engage in meaningful comparison of options and, instead, preferences certain options over others or presents options for reasons other than presenting them based on neutral criteria such as APR, objective consumer satisfaction information, or factors the consumer selects for themselves to rank or sort the settlement service providers on the platform.” The CFPB then states in these situations, the payment received by the operator for the preferences or presentations of options “is not merely for compensable services; instead, it is, at least in part, for referral activity.” The CFPB also observes that when an operator receives a higher fee for including one settlement service provider than it receives for including other settlement service providers participating on the same Platform, “that can be evidence of an illegal referral fee arrangement, absent other facts indicating that the payment is not for enhanced placement or other form of steering.”
The concept of a referral under RESPA section 8 is very broad. The CFPB states an operator of a Platform makes a referral when it “non-neutrally uses or presents information and that has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, a settlement service provider.” Based on its view that the non-neutral use or presentation of information on Platform by an operator constitutes a referral to a favored lender, the CFPB advises that a RESPA section 8 violation would exist if there is an agreement or understanding between the operator and lender regarding the presentation and the lender provides the operator a thing of value. The CFPB notes that the RESPA regulation, Regulation X, provides that an agreement or understanding can be established through a pattern, practice, or course of conduct.
After explaining how a RESPA section 8 violation can be established in connection with a Platform, the CFPB then addresses the RESPA section 8(c)(2) exemption. Under that exemption, RESPA section 8 does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” The CFPB advises that the exemption “does not provide a defense to payment of referral fees because referrals are not compensable services under RESPA.” The CFPB appears to indicate that the RESPA section 8(c)(2) exemption would not avoid a RESPA section 8 violation in a situation in which (1) a Platform non-neutrally uses or presents information about one or more settlement service providers participating on the Platform, (2) that non-neutral use or presentation of information has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity, and (3) the operator receives a payment or other thing of value that is, at least in part, for that referral activity, because the operator would be receiving a payment that is not merely for compensable services.
Significantly, the CFPB states that even if the operator of a Platform receives the same fees from lenders, the non-neutral use or presentation of information still can constitutes a RESPA section 8 violation. The CFPB explains that “[b]y steering the consumer to particular settlement service providers, even where the fees paid by those providers are the same as one another, the Operator is providing a different—and non-compensable—service from those identified as compensable under the [CLO Statement of Policy].”
CFPB Examples of Platforms That Violate RESPA Section 8
The CFPB sets forth five examples of Platform arrangements that the CFPB would deem to violate RESPA section 8, and the examples are illustrative and non-exhaustive.
Pay-to-Play and Steering to Highest Bidder. A consumer is able to input relevant information on a Platform to aid in the consumer’s search for mortgage options, such as location, anticipated loan amount, and credit score, and the Operator represents that the Platform will use the information to identify the “best match.” The Platform presents a purported “best match” lender to the consumer, or ranks the lenders, but skews the results of the comparison function to ensure that the “best match” is the highest bidding lender participating on the Platform.
The CFPB notes that this situation may also involve a UDAAP violation.
Payments Only From and Promotion of Lenders Who Rotate in Top Spot. In a variation of the prior example, a Platform allows consumers to input information about their needs and then generate lender rankings. All lenders participating on the Platform take turns appearing in the top spot randomly or based on a predetermined schedule. That is, the rankings do not reflect a tailoring to the consumer’s needs based on their inputted information. Additionally, the operator is paid by only the lender appearing in the top spot, or lenders pay in advance for the opportunity to appear in the top spot randomly or based on the predetermined schedule.
The CFPB notes that this situation may also involve a UDAAP violation.
Preferencing Platform Participants That Are Affiliates. A Platform is designed and operated in a manner that steers consumers to use settlement service providers that are affiliates of the operator. For example, a mortgage lender develops a Platform permitting consumers to search information about and view rankings of comparable mortgage brokers, and the Platform includes both affiliated and non-affiliated mortgage brokers. However, the mortgage lender/operator manipulates the application of the ranking criteria so that its affiliated mortgage brokers appear higher than the non-affiliated mortgage brokers. The operator receives payments for the higher ranking of affiliated mortgage brokers.
The CFPB notes that this situation may also implicate the RESPA section 8(c)(4) provisions regarding affiliated business arrangements.
Additional Services That Promote Platform Participant. A Platform gathers the consumer’s contact information and permits the consumer to generate a ranking of lender options based on criteria selected by the consumer. The ranking reflects neutral use and display of information. The operator contracts with one of the participating lenders (which is not necessarily the top-ranked lender) to promote that lender by sending a text message or email to any consumer who uses the Platform to generate a ranking of lender options. The text message or email encourages the consumer to submit an application to that lender because it would be a good fit for the consumer’s needs.
Warm Hand-Off. The operator of a Platform presents comparison information on multiple lenders and uses an online long form to gather detailed information from a consumer who is browsing the Platform. The consumer’s information relates to the consumer’s particular borrowing needs, such as credit score and target loan amount. Soon thereafter, the operator calls the consumer to offer an immediate phone or live chat transfer to, or callback from, a lender participating on the Platform and tells the consumer that they will be “in good hands” with that lender. However, the lender that receives the lead is merely the first lender to respond to the operator’s push notification alerting a network of lenders that a consumer is available for an immediate transfer, rather than a lender the operator identified as meeting the consumer’s needs based on the consumer’s inputted information.
With one Republican Commissioner dissenting, the FTC has issued a notice of proposed rulemaking that would ban non-compete agreements between employers and workers nationwide, both prospectively and retroactively. If finalized, the proposal would impact nearly all nonbanks in the consumer financial services industry. We first review the practices that the proposal would prohibit, the types of employers and categories of workers it covers, and the types of agreements it covers, including the proposal’s narrow exceptions. We then discuss the current state law approach to non-compete agreements, existing protections for trade secrets and confidential information, likely policy and legal challenges to the FTC’s proposed exercise of rulemaking authority, and alternative approaches proposed by the FTC. We conclude with a discussion of steps employers should consider taking to be prepared if the FTC finalizes the proposal.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation, joined by David Fryman, a Partner in the firm’s Labor and Employment Group, and Karli Lubin, an Associate in the Labor and Employment Group.
To listen to the episode, click here.
- Alan S. Kaplinsky , David S. Fryman, Karli Lubin
In a win for Ballard Spahr client Specialized Loan Servicing LLC (SLS), the U.S. Court of Appeals for the Ninth Circuit recently held that SLS, a mortgage servicer, properly reported a Covid-19 forbearance plan under the CARES Act amendments to the Fair Credit Reporting Act (FCRA). The amendments require furnishers to “report [a consumer’s] credit obligation or account as current” if the furnisher agreed to provide forbearance or other relief on a consumer’s loan. 15 U.S.C. § 1681s-2(a)(1)(F)(ii)(I).
Importantly, the Ninth Circuit held SLS’s reporting of a “D” in the monthly payment history profile (PHP), in addition to reporting the account status as “current,” complied with the FCRA. This is the first appellate court decision addressing this provision of the CARES Act amendments to the FCRA. After the amendments, there was considerable discussion, including guidance from the CFPB, about the proper way to report Covid forbearances. This holding should provide comfort to those reporting in a similar manner.
Further, the Ninth Circuit held that the plaintiff’s Covid-19 forbearance plan did not create a contract because simply pushing a button indicating financial hardship was not consideration. This should help limit the types of claims borrowers may pursue.
Eric Mitchell, the plaintiff in Mitchell v. Specialized Loan Servicing LLC, applied for a Covid-19 forbearance from SLS for his second mortgage loan using an automated interactive voice response telephone system. Mitchell indicated, by pushing a button, that he was suffering from an “economic hardship” related to the pandemic. SLS did not require Mitchell to provide any documentation or proof of an economic hardship as part of his application for relief. SLS approved the forbearance plan for three months, and at Mitchell’s request, extended it to six months. SLS reported Mitchell’s account status as “current” with no reported date of first delinquency and no past due balance. For the monthly payment history profile (PHP), SLS reported the code “D”, which means no payment history, no data, or unknown.
During the forbearance plan, Mitchell attempted to finance the purchase of a Range Rover for $96,000. When two banks denied Mitchell financing, he blamed SLS’s credit reporting, disputed SLS’s credit reporting with the Credit Reporting Agencies, and then sued SLS. In the lawsuit, Mitchell argued that SLS’s use of the “D” code in the PHP was improper. Instead, Mitchell argued SLS should have used the “0” code in the PHP, for “0 payments due (current account).” Mitchell sued SLS for allegedly violating the FCRA, the California Consumer Credit Reporting Agencies Act (CCRAA), California’s Unfair Competition Law (“UCL”), and for breach of his forbearance agreement. Mitchell also sought to represent a class of other borrowers that entered forbearance plans with SLS.
The trial court granted summary judgment for SLS, dismissed his claims, and denied his motion for class certification. Mitchell appealed. The Ninth Circuit held SLS complied with the CARES Act amendments to the FCRA by reporting Mitchell’s “account status” as a “current account.” SLS’ use of “D” rather than “0” in the PHP field did not change that conclusion. The Ninth Circuit agreed with the trial court that guidance from the Consumer Data Industry Association (CDAI) supports the use of D as “an acceptable option” when reporting the account status as current.
The Ninth Circuit further rejected Mitchell’s argument that the CFPB guidance regarding Covid-19 forbearance reporting, stating that a furnisher “should consider all of the trade information they furnish that reflects a consumer’s status as current or delinquent”, meant that SLS was required to report “0” in the PHP. The Ninth Circuit noted that the CFPB guidance does not mention the PHP and that the guidance did not persuade it that reporting the PHP as D violated the FCRA. Thus, Mitchell’s FCRA claim failed because he failed to show SLS’s investigation into the dispute notices was unreasonable and because Mitchell failed to make a prima facie case that SLS’s reporting was inaccurate.
The Ninth Circuit further noted that even if it were to assume SLS’s reporting was inaccurate, Mitchell did not show SLS acted willfully or negligently because no appellate court had interpreted the CARES Act amendments to the FCRA. Because the FCRA language at issue is “less than pellucid” and no appellate court has interpreted this amendment to the FCRA, a defendant like SLS will “nearly always avoid liability” under the negligence or willfulness standard.
Moreover, the Ninth Circuit held that even if SLS acted negligently, Mitchell did not show any damages. Specifically, his efforts to finance a $96,000 Range Rover did not show he was damaged because the denials were for reasons unrelated to SLS’s reporting. Instead, the denials appeared to be related, at least in part, to Mitchell’s prior bankruptcy.
The Ninth Circuit also affirmed the trial court’s holding that the CCRAA and UCL claims failed because SLS’s reporting was accurate, complied with the FCRA, and Mitchell did not show any damages.
The panel also affirmed summary judgment for SLS on the plaintiff’s breach of contract claim, holding that the forbearance plan was not an enforceable contract because it lacked consideration. In determining there was no consideration, the Ninth Circuit distinguished Mitchell from other cases in which plaintiffs “expended time and energy and made financial disclosures . . . which they would not have been required to do under the original contract” because Mitchell only chose an option from SLS’s automated telephone system. In short, applying for forbearance under SLS’s process did not amount to consideration because it did not confer a benefit or cause the plaintiff to suffer prejudice, nor was there a bargained-for exchange.
Ballard Spahr partner, Matt Morr, represented SLS in the trial court and before the Ninth Circuit.
The Ninth Circuit Court of Appeals recently issued an Order vacating a nearly $8 million judgment won by the Consumer Financial Protection Bureau (CFPB) in its lawsuit against Nationwide Biweekly Administration, Inc. (Nationwide), an Ohio mortgage services company. The Ninth Circuit remanded the case to the district court for further analysis based on recent rulings related to the constitutionality of the CFPB.
In 2017, a judgment was entered in favor of the CFPB by U.S. District Judge Richard Seeborg, upholding its claims of deceptive marketing and imposing a $7.9 million fine against Nationwide. Nationwide (and its subsidiary Loan Payment Administration, LLC) have spent the last several years challenging the judgment. One of the key issues in Nationwide’s appeal has been the CFPB’s authority to pursue its claims, including whether the CFPB is constitutionally funded, with Nationwide arguing that dismissal of the enforcement action is mandated by the CFPB’s unconstitutional funding as well as the U.S. Supreme Court’s opinion in Seila Law v. CFPB (discussed below). In an unpublished and unsigned decision, a three-judge Ninth Circuit panel declined to take a position on these issues, instead leaving them up to the district court to decide. Specifically, the Ninth Circuit vacated and remanded the judgment to the district court to allow it to “reassess the case under the changed legal landscape since its initial order and opinion.”
Much of the legal landscape in this area of the law has changed significantly in the more than five years since Judge Seeborg ruled for the CFPB. In 2020, the Supreme Court ruled in Seila Law v. CFPB that the CFPB’s director must be removable at will by the president, striking down a statutory tenure protection that dated back to the creation of the CFPB. The Supreme Court held that this protection violated the Constitution’s separation of powers. This decision has created struggles in courts over the validity of past CFPB actions, including lawsuits like the one that the CFPB brought against Nationwide. In Collins v. Yellen, the Supreme Court created some standards for what challengers would need to show to justify voiding past CFPB actions based on Seila Law.
The Ninth Circuit has now held that the survival of Nationwide’s lawsuit will “turn on case-specific factual and legal questions that should be resolved in the first instance by the district court.” Further, the Court directed Judge Seeborg to “provide further consideration” to Nationwide’s argument that the CFPB’s independent funding authority is unconstitutional and requires dismissal of the suit.
Moreover, the Ninth Circuit, in its decision, noted a circuit split on the issue of CFPB’s funding mechanism, citing CFSA v. CFPB, where the Fifth Circuit held that the CFPB was unconstitutionally funded and invalidated the Payday Loan Rule. Notably, the CFPB’s petition for cert to the Supreme Court is to be heard and considered at the February 17, 2023 conference.
The Ninth Circuit’s order also invites the district court to reexamine whether Nationwide should be required to pay restitution in addition to the nearly $8 million fine. The order references intervening restitution-related decisions including Liu v. U.S. Securities and Exchange Commission, in which the Supreme Court addressed the use of certain enforcement remedies. Specifically, in response to the CFPB’s cross-appeal, urging the court to reverse the denial of mandatory restitution in the amount of almost $74 million, the panel remanded the matter to consider the effect, if any, of those previous decisions “and whether the CFPB waived its claim to legal restitution by characterizing it only as a form of equitable relief before the district court.” Moreover, the Court held that the district court may consider other issues raised on appeal and the district court and the parties are “free to reframe the questions as they wish.”
The briefing on the CFPB’s certiorari petition seeking review of the Fifth Circuit panel decision in Community Financial Services Association of America Ltd. v. CFPB was distributed to the Supreme Court yesterday for consideration at its February 17 conference. In that decision, the Fifth Circuit 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). The briefing on the cross-petition for certiorari filed by Community Financial Services Association (CFSA) was also distributed yesterday to the Court for consideration at the February 17 conference. The CFPB has urged the Supreme Court to grant its petition and hear the case this Term while CFSA has urged the Court, should it grant the CFPB’s petition, to hear the case next Term.
The CFPB and CFSA have previously filed opposition to each other’s petition. They recently filed replies to each other’s opposition. In its reply brief, the CFPB restates its arguments for why the Fifth Circuit decision is incorrect and challenges the arguments made by CFSA for why the case does not warrant consideration this Term if the CFPB’s petition is granted.
CFSA’s cross-petition for certiorari 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. In its reply brief to the CFPB’s opposition, CFSA restates its arguments for why the alternative grounds each provide a strong basis for vacating the Rule and challenges the arguments made by the CFPB for why constitutional avoidance principles do not require the Court to first consider the alternative grounds and for why adopting the alternative grounds would not actually avoid the Appropriations Clause question.
- John L. Culhane, Jr. & Richard J. Andreano, Jr.
The issue of whether a home equity line of credit (HELOC) that can be accessed using a credit card is a “credit card plan” subject to the Truth in Lending Act’s setoff prohibition is currently before the U.S. Court of Appeals for the Fourth Circuit. The American Bankers Association recently filed an amicus brief in the case in support of the appellee bank’s position that the prohibition does not apply to HELOCs.
TILA prohibits credit card issuers from offsetting a “cardholder’s indebtedness arising in connection with a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.” The plaintiff filed a lawsuit against the bank in which he alleged that the bank violated the TILA prohibition by using funds in his deposit accounts with the bank to repay amounts owed to the bank on his HELOC. The plaintiff had a credit card that he used to access the HELOC. The district court, which dismissed the plaintiff’s lawsuit, ruled that a HELOC is not a “credit card plan” subject to the offset prohibition.
The plaintiff subsequently filed an appeal with the Fourth Circuit. The CFPB filed an amicus brief with the Fourth Circuit “in support of neither party” in which it urges the Fourth Circuit to hold that a HELOC accessible by credit card is a “credit card plan” for purposes of the offset prohibition.
In its amicus brief in support of the bank, the ABA asks the Fourth Circuit to affirm the district court’s ruling and makes the following key arguments for why the district court’s ruling is correct:
The CFPB’s HELOC pamphlet (and HELOC information provided to consumers by banks such as the appellee bank) make clear that HELOCs and credit cards are distinct products that consumers should not confuse.
The phrase “credit card plan” in the TILA prohibition is properly interpreted to refer to the terms governing the use of the product colloquially called a “credit card” in the consumer credit market. The text and structure of the Fair Credit Billing Act that amended TILA to add the offset provision as well as the legislative history make clear that Congress used the phrase “credit card plan” to refer to the terms governing a credit card product and not to the terms governing any type of consumer credit product that can be accessed with a credit card.
Subsequent legislation that amended TILA (i.e. the Home Equity Loan Consumer Protection Act of 1988) to add distinct requirements for HELOCs and its legislative history demonstrate that Congress did not consider HELOCs to be subject to the TILA credit card requirements and believed the unique features of HELOCs merited distinct regulations. Following the 1988 amendments, TILA includes provisions applicable to three distinct types of open-end credit plans: “Open ended credit plans,” “credit card plans,” and “home equity plans.” The terms “credit card plan” and “home equity plan” are properly interpreted to refer to distinct credit products: credit cards and HELOCs, respectively.
The CFPB’s interpretation of the phrase “credit card plan” to include HELOCs accessible by credit card is not entitled to deference because it departs from the Federal Reserve Board’s longstanding practice of regulating credit cards and HELOCs separately and because it purports to benefit consumers when it may harm consumers. Construing the phrase “credit card plan” broadly would not benefit consumers because, if the prohibition were to apply to HELOCs, it could increase the risk of foreclosure by not allowing the lender to offset funds in a deposit account as a way of recovering the funds that are owed.
The New York Department of Financial Services (DFS) has issued final regulations implementing the state’s Commercial Finance Disclosure Law (CFDL) which requires consumer-like disclosures for “commercial financing” transactions of $2.5 million or less. The regulations became effective on February 1, 2023, the date a Notice of Adoption was published in the New York State Register. However, the compliance date for the regulations is six months after the publication date.
Coverage. The CFDL defines “commercial financing” as “open-end financing, closed-end financing, sales-based financing, factoring transaction, or other form of financing, the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.” For purposes of determining whether a transaction is “commercial financing,” a provider can rely on “any statement of intended purposes by the recipient” and the provider “shall not be required to ascertain that the proceeds of a commercial financing are used in accordance with the recipient’s statement of intended purpose.”
The CFDL’s definition of “sales-based financing” encompasses merchant cash advances. “Sales-based financing” means “a transaction that is repaid by the recipient to the provider, over time, as a percentage of sales or revenue, in which the payment amount may increase or decrease according to the volume of sales made or revenue received by the recipient.” The definition also includes “a true-up mechanism where the financing is repaid as a fixed amount but provides for a reconciliation process that adjusts the payment to an amount that is a percentage of sales or revenue.” In connection with comments received on its proposed regulations, DFS specifically rejected requests to carve out from “factoring transactions” transactions that are “true sales” of receivables on an irrevocable, non-recourse basis or to provide an exemption from the CFDL for “forward flow” transactions in which providers sell their notes, financing contracts, acquired receivables, or other interests to others by various means.
A “provider” is “a person who extends a specific offer of commercial financing to a recipient” and also includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.” A “recipient” is “a person who applies for commercial financing and is made a specific offer of commercial financing by a provider.” A “recipient” includes an “authorized representative of such person” but not “a person acting as a broker.” The term “specific offer” means “the specific terms of a commercial financing, including price or amount, that is quoted to a recipient, based on information obtained from, or about the recipient, which, if accepted by a recipient, shall be binding on the provider, as applicable, subject to any specific requirements stated in such terms.”
All of these terms (other than “sales-based financing”) are more specifically defined in the final regulations. The final regulations also include definitions of terms not defined by or included in the CFDL, such “financer,” “asset-based lending transaction,” “lease financing,” “true up,” and “true up mechanism.”
The final regulations provide that “commercial financing” does not include any transaction that is subject to the Truth in Lending Act for which TILA-compliant disclosures are given. In responding to comments received on its proposed regulations, DFS specifically rejected comments seeking an exemption for transactions not subject to TILA but for which TILA-compliant disclosures are given. As initially proposed, the final regulations would have made a transaction subject to the CFDL “if one of the parties is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.” The final regulations revised this provision in the proposed regulations to provide that a transaction is subject to the CFDL “if the recipient’s business is principally managed or directed from the state of New York, or, in the case of a natural person, the recipient is a legal resident of the state of New York.” Because they do not limit the CFDL’s application to transactions engaged in by New York providers, the final regulations on their face make the CFDL applicable to all providers regardless of their location so long as the recipient has a New York nexus.
Exemptions. In addition to exempting commercial financing transactions in an amount greater than $2.5 million, the CFDL exempts various types of providers and transactions, including:
- A “financial institution” which includes federally- and state-chartered banks, savings banks, credit unions, trust companies, and industrial loan companies authorized to conduct business in New York;
- A person acting in its capacity as a technology services provider, such as licensing software and providing support services, to an exempt entity for use as part of the exempt entity’s commercial financing program, provided such person has no interest, or arrangement or agreement to purchase any interest in the commercial financing the exempt entity extends in connection with such program;
- A real-estate secured commercial financing transaction;
- A lease as defined in UCC Section 2-A-103; and
- A provider that makes no more than five commercial financing transactions in New York in a 12-month period.
The final regulations define the term “financial institution” to include “any corporation, limited liability company, partnership, joint venture, trust or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by a financial institution.”
- Michael R. Guerrero & John Sadler
New York Governor’s 2024 Fiscal Budget Proposal Targets Overdraft and NSF Fees
On February 2, 2023, New York Governor Kathy Hochul released her 2024 fiscal budget proposal, which included banking policy to “Protect New Yorkers from Predatory Banking Fee” in the Executive Budget Briefing Book. The Briefing Book states:
“The Executive Budget includes nation-leading legislation that comprehensively addresses abusive bank fee practices, which tend to disproportionally harm low- and moderate-income New Yorkers, including stopping the opportunistic sequencing of transactions in a way designed to maximize fees charged to consumers, ending other unfair overdraft and non-sufficient funds fee practices, and ensuring clear disclosures and alerts of any permissible bank processing charges.”
This policy statement contemplates legislation that would expand the NYDFS guidance issued this past summer discouraging banks from engaging in certain practices involving “authorize positive, settle negative” transactions that cause overdraft fees, multiple non-sufficient funds (NSF) fees on representments, and so-called “double” overdraft fees in connection with overdraft protection services (as we blogged about here).
Last summer, Governor Hochul signed a bill requiring the NYDFS to conduct a study of overdraft fees and provide a report to the Governor within one year. The report is to be posted on the DFS website (as we blogged about here). Presumably, the proposed legislation will be informed by the results of the study, which has not yet been released.
Assembly Bill A2171 was introduced on January 23, 2023 and would create the “Consumer Overdraft Protection Act.” The bill, which was also introduced in the two prior legislative sessions, has been referred to Assembly Banks Committee. The legislation requires consent for check and debit overdraft coverage, restricts annual overdraft fees to $100, and restricts certain overdraft advertising practices. We will monitor this bill and any new bills related to Governor Hochul’s policy statement.
In 2021, NY also passed a law requiring banks to process checks in the order received or from smallest to largest dollar amount, pay smaller check amounts after dishonoring a larger check if funds are sufficient, and provide written disclosure of the check posting order (as we blogged about here).
Governor Hochul budget’s focus on overdraft and NSF fees aligns with the CFPB’s continued focus on overdraft and NSF fees as evidenced by the CFPB’s Fall 2022 rulemaking agenda (as we blogged about here). Overdraft and NSF fees will continue heightened regulatory attention in the coming year from both federal and state regulators. Financial institutions should continue to review their fee and posting order practices to avoid any potential claims for unfair, deceptive, and abusive practices. Ballard Spahr has previously helped many clients with such reviews.
In a new report titled “Banks’ overdraft/NSF fee revenue declines significantly compared to pre-pandemic levels,” the CFPB reported that its most recent analysis found that bank overdraft/NSF fee revenue was 43% lower in the third quarter of 2022 than in the third quarter of 2019 before the COVID-19 pandemic onset – suggesting $5.1 billion less in fees on an annualized basis. The CFPB noted that both large and small/midsize banks saw a reduction in overdraft/NSF revenues through the first three quarters of 2022 compared to those of 2019.
The CFPB also found that overdraft/NSF fee revenue was 33% lower over the first three quarters of 2022 compared to the same period in 2019, and has trended downward in each quarter since the fourth quarter of 2021. The CFPB indicated that it has not observed correlating increases in other listed checking account fees, which suggests that banks are not replacing overdraft/NSF fee revenue with other fees on checking accounts.
Ironically, the CFPB published its report the day after President Biden’s State of the Union address in which the President announced that his administration “is also taking on ‘junk’ fees, those hidden surcharges too many businesses use to make you pay more” and took credit for “reduc[ing] exorbitant bank overdraft fees.” In characterizing overdraft and NSF fees as “junk fees,” the President adopted the CFPB’s tactic of mischaracterizing a wide range of fees charged by financial institutions as “junk fees.” For example, when the CFPB issued its “Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services,” it described the RFI as “an initiative to save households billions of dollars a year by reducing exploitative junk fees charged by banks and financial companies.”
Despite changes in bank overdraft and NSF fee practices and declining revenues, the CFPB announced in its Fall 2022 rulemaking agenda that it is considering whether to propose amendments to the Regulation Z overdraft rules and new rules on NSF fees. Although the CFPB has continued to make overdraft and NSF fees a supervisory focus under Director Chopra and he has warned of potential UDAAP violations arising from such fees, the CFPB had previously been silent on whether it planned to engage in rulemaking on overdraft or NSF fees.
The significant decline in overdraft and NSF fee revenues shown in the data reported in the CFPB’s new report serves as powerful new evidence of wide-spread changes in overdraft and NSF fee practices in the banking industry. Indeed, the CFPB expressly acknowledges in the report that the decline in revenues is “likely due to changes in bank policies.” This clearly calls into question the need for new regulations on overdraft or NSF fees. However, because the Biden Administration has now made “junk fees” an overtly political issue, the CFPB could face significant pressure from the White House to engage in rulemaking.
CFPB Issues 2023 Reportable HMDA Data Chart
The CFPB recently issued a chart entitled Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart for HMDA Data Collected in 2023.
The chart was updated from the 2022 version to reflect the 2022 court decision in NCRC v. CFPB invalidating the part of an April 2020 final Home Mortgage Disclosure Act (HMDA) rule issued by the CFPB that increased the 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. As previously reported, the CFPB then issued a technical rule reinstating the 25 closed-end loan threshold for the 2023 reporting year, with the result being that institutions that originated at least 25 covered closed-end mortgage loans in both 2021 and 2022 are subject to HMDA requirements for closed-end loans for calendar year 2023.
The Department of Labor’s Wage and Hour Division (“WHD”) recently issued Field Assistance Bulletin (FAB) No. 2023-1 to address breaks for employees who telework under the Fair Labor Standards Act (“FLSA”), and application of the Family and Medical Leave Act (“FMLA”) to teleworking employees.
The FLSA requires covered employers to pay nonexempt employees for all hours worked, including work performed in their home or otherwise away from the employer’s premises or job site. 29 C.F.R. § 785.11-.12. When it comes to breaks taken during the workday, the FLSA’s general principle that short breaks of twenty minutes or less are generally counted as compensable hours worked. 29 C.F.R. § 785.18. The WHD’s latest guidance explains that this principle applies regardless of an employee’s location.
Similarly, the FLSA’s protections for employees who are breastfeeding apply to covered employees who telework. Under the FLSA, employers must provide covered employees “reasonable break time” to express breast milk for one year after the birth of the employee’s child. 29 U.S.C. § 218d(a). Employers are not required to compensate nursing employees for breaks taken for the purpose of expressing milk under the FLSA unless the employer provides compensated breaks to all employees as a matter of course (although compensation may be required under applicable state law). But if an employee is not completely relieved from duty during these breaks, the time must be compensated as work time, just like any other breaks where the employee is not completely relieved of duty. 29 U.S.C. § 218d(b). For example, a remote employee who attends a video meeting or conference call while pumping – even if off camera – is generally not relieved from duty and must be paid for that time.
For FMLA eligibility purposes, an employee must be employed at a worksite where 50 or more employees are employed by the employer within 75 miles of that worksite. Under the FMLA, an employee’s personal residence is not a worksite. 29 C.F.R. § 825.111(a)(2). The WHD’s FAB No. 2023-1 explains that when an employee works from home or other remote location, their worksite for FMLA eligibility purposes is the office to which they report or from which their assignments are made.
WHD also recently issued opinion letter FMLA2023-1-A, which explains that an eligible employee may use available FMLA leave to limit their workday when they have a serious health condition requiring a reduced work schedule indefinitely.
Ballard Spahr’s Labor and Employment Group regularly advises clients on managing a remote workforce and are available to assist employers in complying with federal and state law requirements.
- Shannon D. Farmer & Shae Randolph
Impact of May 11, 2023 End Of COVID-19 Emergency Declarations
On January 30, 2023, the Biden Administration said that it will end COVID-19 emergency declarations on May 11, 2023. The federal government has been paying for COVID-19 vaccines, some tests, and certain treatments under the public health emergency declaration. Many of those costs now will be transferred to private insurance and government health plans. For example, people with private insurance or Medicare coverage have been eligible for eight free over-the-counter COVID-19 tests per month. Once the emergency ends on May 11, 2023, those individuals may end up paying out of pocket costs for COVID-19 tests going forward. Further, Pfizer and Moderna have already announced that the commercial prices of their COVID-19 vaccines will likely be between $82 and $140 per dose, although the Affordable Care Act will require most plans to continue providing vaccines at no cost to participants.
The end of the national emergency declaration will bring other changes affecting group health plans, including the termination of certain deadline extensions. During the national emergency, plan participants have had as much as one year longer to elect and pay for COBRA coverage, enroll for coverage as a result of a special enrollment event, and submit health plan claims and appeals. We will be describing more these deadline extensions and other health plan changes more thoroughly in an upcoming alert.
Increases in Medicare payment rates for hospital inpatient services related to COVID-19 will expire along with the public health emergency period. The federal government will also phase out enhanced Medicaid funding and will no longer condition certain federal matching funds on states’ continuous coverage of Medicaid beneficiaries and maintenance of pre-COVID premium levels and eligibility standards. As a result, a number of states will likely discontinue Medicaid coverage for millions of beneficiaries. A host of state-specific Medicaid (and CHIP) initiatives approved by the federal government via waiver authority will also expire at the end of, or just after, the public health emergency. These include waivers related to application processes, eligibility criteria, deductibles, other cost sharing, enrollment fees and premiums, drug coverage, provider qualifications (including authority for out-of-state providers to provide various services) and other benefits.
Through at least 2024, the Medicare program will continue its coverage of expanded telehealth: services (such as mental health and audio-only), eligible practitioners (such as physical therapists, occupational therapists and speech language pathologists), geographic areas and originating sites. States retain flexibility to expand Medicaid coverage for similar telehealth services.
Ballard Spahr regularly works with its employer and health care clients to assist them with COVID-19 related regulations and other aspects of labor and employment laws at the federal, state and local government levels.
- Denise M. Keyser, Edward I. Leeds, D. Finn Pressly & Kyle I. Platt
On January 17, 2023, House Bill No 2389 was offered to re-enact sections 6.2-1600 (Definitions) and 6.2-1607 (Licenses; places of business; changes) of the Code of Virginia with proposed amendments that would permit employees of licensed mortgage lenders and brokers to work from an unlicensed “remote location,” provided certain conditions are satisfied. Bill details:
- A “[R]emote location” means: a location, other than a licensee's principal place of business or office, at which the employees of a licensee may conduct business if the requirements set forth in subsection F of § 6.2-1607 are met.
- “Office" means a location, other than a licensee's principal place of business or a remote location, where (i) the licensee negotiates, places, finds, or makes Virginia mortgage loans; (ii) the licensee meets with Virginia consumers, excluding a consumer's home or place of business or public locations such as coffee shops or restaurants; (iii) the licensee's name, advertising or promotional materials, or signage indicates that the licensee negotiates, places, finds, or makes Virginia mortgage loans from the location; or (iv) the licensee maintains books, accounts, or records of Virginia mortgage loans.
The requirements for working from a “remote location” set forth in proposed Subsection F of § 6.2-1607 are as follows:
- The licensee has written policies and procedures for the supervision of employees working from a remote location;
- Access to the licensee's platforms and customer information is in accordance with the licensee's comprehensive written information security plan;
- No in-person customer interaction occurs at an employee's residence, unless such residence is a licensed location;
- Physical records are not maintained at a remote location;
- Customer interactions and conversations about consumers comply with federal and state information security requirements, including applicable provisions under the Gramm-Leach-Bliley Act and the Safeguards Rule established by the Federal Trade Commission, set forth at 16 C.F.R. Part 314, as such requirements may be amended from time to time;
- Employees working at a remote location access the licensee's secure systems directly from an out-of-office device, including a laptop, phone, desktop computer, or tablet, via a virtual private network (VPN) or comparable system that ensures secure connectivity and requires a password or other forms of authentication to access;
- The licensee ensures that appropriate security updates, patches, or other alterations to the security of all devices used at remote locations are installed and maintained;
- The licensee has the ability to remotely lock or erase company-related contents of any device or otherwise remotely limit access to a licensee's secure systems; and
- The Nationwide Mortgage Licensing System and Registry record of a licensee working from a remote location designates the principal place of business as the licensee's registered location, unless such licensee elects a licensed branch office as a registered location.
The bill was referred to the House Committee on Commerce and Energy, which proposed a substitute version of the bill on February 2. The bill proposed by the House Committee on Commerce and Energy provides:
- "Remote location" means a location, other than a licensee's principal place of business or office, at which the employees or independent contractors of a licensee may conduct business if the requirements set forth in subsection F of § 6.2-1607 are met.
- "Office" means a location where (i) the licensee negotiates, places, finds, or makes Virginia mortgage loans; (ii) the licensee's name, advertising or promotional materials, or signage indicates that the licensee negotiates, places, finds, or makes Virginia mortgage loans from the location; or (iii) the licensee maintains books, accounts, or records of Virginia mortgage loans. "Office" does not include a remote location.
- Licensees may allow employees or independent contractors to work from a remote location if:
- The licensee has written policies and procedures for the supervision of employees or independent contractors working from a remote location. Such written policies and procedures shall include all the requirements of this subsection;
- Access to the licensee's platforms and customer information is in accordance with the licensee's comprehensive written information security plan;
- The licensee employs appropriate risk-based monitoring and oversight processes;
- All employees or independent contractors who work from a remote location agree to comply with the licensee's established processes;
- No in-person customer interaction occurs at an employee's residence, unless such residence is a licensed location;
- Physical records are not maintained at a remote location;
- Customer interactions and conversations about consumers comply with federal and state information security requirements, including applicable provisions under the Gramm-Leach-Bliley Act and the Safeguards Rule established by the Federal Trade Commission, set forth at 16 C.F.R. Part 314, as such requirements may be amended from time to time;
- Employees or independent contractors working at a remote location access the licensee's secure systems directly from an out-of-office device, including a laptop, phone, desktop computer, or tablet, via a virtual private network (VPN) or comparable system that ensures secure connectivity and requires a password or other forms of authentication to access;
- The licensee ensures that appropriate security updates, patches, or other alterations to the security of all devices used at remote locations are installed and maintained;
- The licensee has the ability to remotely lock or erase company-related contents of any device or otherwise remotely limit access to a licensee's secure systems; and
- The Nationwide Mortgage Licensing System and Registry record of a licensee working from a remote location designates the principal place of business as the licensee's registered location, unless such licensee elects a licensed branch office as a registered location.
- Stacey L. Valerio & Lisa Lanham
Did You Know?
California Residential Mortgage Lending Act licensees must file their 2022 annual report electronically by March 1 through the DFPI self-service portal. The DFPI notes in its February monthly bulletin that no extensions will be granted for this filing.
- John Georgievski
Subscribe to Ballard Spahr Mailing Lists
Copyright © 2024 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording, or otherwise, without prior written permission of the author and publisher.
This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.