Legal Alert

Mortgage Banking Update - August 3, 2023

August 3, 2023
In This Issue:


SCOTUS to Hear Oral Argument on Oct. 3 in Case Challenging Constitutionality of CFPB’s Funding

The U.S. Supreme Court has scheduled oral argument on October 3, 2023 in Community Financial Services Association of America Ltd. v. CFPB. In the case, CFSA has asked the Supreme Court to affirm the Fifth Circuit panel’s decision which held that the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution.

The CFPB and CFSA have filed their briefs on the merits and the CFPB’s reply brief is due by August 2. Numerous amicus briefs have been filed in support of each of the parties. A group of 27 Republican State Attorney Generals who filed an amicus brief in support of CFSA also filed a motion with the Supreme Court asking for leave to participate in oral argument as amicus curiae supporting CFSA. CFSA has filed a response in opposition to the AGs’ motion in which it asserts that “undivided argument would be most appropriate and beneficial for this Court.” The Supreme Court has not yet ruled on the motion.

October 3 will be the second day of the first session of the Supreme Court’s next Term. The early oral argument date creates the potential for a decision from the Court by early 2024. Should the Supreme Court rule that the CFPB’s funding is unconstitutional but stay its decision in order to give Congress time to change the CFPB’s funding (as several amici have urged it to do), the contentious political process that will undoubtedly ensue will take place in the midst of a Presidential election year.

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

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Petitioners File Brief Urging SCOTUS to Overrule Chevron

The petitioners in Loper Bright Enterprises, et al. v. Raimondo have filed their merits brief in the U.S. Supreme Court urging the Court to overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision produced what became known as the “Chevron framework”—the analysis that courts typically invoke when reviewing a federal agency’s interpretation of a statute. Under the Chevron framework, a court will typically use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute is silent or ambiguous, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, the court will ordinarily defer to the agency’s interpretation.

The petitioners are four companies that participate in the Atlantic herring fishery. The companies filed a lawsuit in federal district court challenging a regulation of the National Marine Fisheries Service (NMFS) that requires vessels that participate in the herring fishery to pay the salaries of the federal observers that they are required to carry. The Magnuson-Stevens Act (MSA) authorizes the NMFS to require fishing vessels to carry federal observers and sets forth three circumstances in which vessels must pay observers’ salaries. Those circumstances did not apply to the Atlantic herring fishery.

Applying Chevron deference, the district court found in favor of NMFS under step one of the Chevron framework, holding that the MSA unambiguously authorizes industry-funded monitoring in the herring fishery. The district court based its conclusion on language in the MSA stating that fishery management plans can require vessels to carry observers and authorizing such plans to include other “necessary and appropriate” provisions. While acknowledging that the MSA expressly addressed industry-funded observers in three circumstances, none of which implicated the herring fishery, the court determined that even if this created an ambiguity in the statutory text, NMFS’s interpretation of the MSA was reasonable under step two of Chevron.

A divided D.C. Circuit, also applying the two-step Chevron framework, affirmed the district court. The majority concluded that under step one of Chevron, the statute was not “wholly unambiguous,” and left “unresolved” the question of whether NMFS can require industry to pay the costs of mandated observers. Applying step two of Chevron, the majority concluded that NMFS’s interpretation of the MSA was a “reasonable” way of resolving the MSA’s “silence” on the cost issue. The dissenting judge concluded that Congress had unambiguously not authorized NMFS to require industry to pay the costs of mandated observers other than in the circumstances specified in the MSA.

The Supreme Court granted certiorari to consider the following question:

Whether the Court should overrule Chevron or at least clarify that statutory silence concerning controversial powers expressly but narrowly granted elsewhere in the statute does not constitute an ambiguity requiring deference to the agency.

In their brief, the petitioners argue that the Court should overrule or limit Chevron for the following reasons:

  • Because the question presented seeks to overrule Chevron’s interpretative methodology rather than the Court’s interpretation of the Clean Air Act in that case, Chevron is entitled to little, if any, stare decisis effect. No concrete reliance interests support preserving Chevron because procedural rules do not engender reliance interests and, in reality, Chevron is “a reliance- destroying doctrine [as] [i]t enables agencies to change the import of the U.S. Code and empowers every new administration to change the rules on issues of fundamental importance.” To the extent anyone has attempted to rely on a substantive ruling in a case decided by application of the Chevron framework, under principles of stare decisis, such substantive precedent “would not necessarily” be disturbed if Chevron is overruled.
  • Chevron is “egregiously wrong” because its “rule of judicial deference to the executive’s interpretation of statutes is flatly inconsistent with [the] Constitution, the [Administrative Procedure Act], and centuries of tradition.” It impermissibly transfers both the Article III judicial power to interpret statutes and Article I legislative power to Article II executive agencies and runs afoul of the Due Process Clause by requiring courts to favor the government which is generally a party in cases in which courts apply Chevron. While the Supreme Court has traditionally (as a standard principle of textual interpretation rather than a principle of deference) given respect to contemporaneous and longstanding interpretations of legal text, this does not provide a justification for Chevron. This is because “Chevron and its progeny demand deference to an agency’s non-contemporaneous and inconsistent interpretations of a statute—a rule without any historical pedigree.” Chevron flouts the language of the APA which provides that “the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.” This language should be read to require courts to interpret statutes de novo.
  • Chevron has proven to be unworkable, as evidenced by “this Court’s consistent declination to apply it in cases where the lower courts and parties labored extensively to document that they were on this or that side of Chevron’s hazy doctrinal lines. With the greatest respect, this Court has already voted with its feet…by refusing to apply a test that has proven to be too incoherent or imprecise to serve any function beyond occasionally adding makeweight to a decision reached by other means.” (citations omitted).
  • Chevron has undermined how the political process is supposed to operate because it “incentivizes a dynamic where Congress does far less than the Framers anticipated, and the executive branch is left to do far more by deciding controversial issues via regulatory fiat. Major policy disagreements that should be settled by legislative compromise are instead resolved temporarily by executive actions that change with every administration.”
  • If the Court chooses not to discard Chevron entirely, it should at least narrow the doctrine to clarify that it does not apply merely because a statute is silent on a given issue. Giving deference based on statutory silence “is ultimately a substantive canon of statutory construction: If the statute is silent, the government wins.” It is a bedrock principle that an agency has no power to act unless and until Congress confers power on it. A rule that requires a court “to interpret statutory silence as an agency-empowering delegation” stands this principle on its head. (emphasis included). “[T]he far more obvious inference from statutory silence is that Congress withheld a power from the agency, rather than handing it a blank check.”

The petitioners conclude their brief by arguing that regardless of whether the Court overrules or limits Chevron, it should “reverse the decision below rather than remand in order to provide an example of what statutory interpretation should look like in a post-Chevron (or Chevron-lite) world.”

As noted above, the petitioners argue that, under principles of stare decisis, substantive precedent established in cases decided by application of the Chevron framework “would not necessarily” be disturbed if Chevron is overruled. Accordingly, one cannot dismiss the potential for decisions that have relied on Chevron to uphold an agency’s statutory interpretation (including where the result has been favorable to industry) to be revisited should the Supreme Court overrule or limit Chevron.

Respondents must file their merits brief by September 15, 2023.

Alan S. Kaplinsky

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45 Amicus Briefs Filed With SCOTUS in Support of Petitioners Seeking to Overrule Chevron

45 amicus briefs have been filed with the U.S. Supreme Court in support of the petitioners in Loper Bright Enterprises, et al. v. Raimondo. The petitioners are urging the Court to overrule its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. That decision produced what became known as the “Chevron framework”—the two-step analysis that courts typically invoke when reviewing a federal agency’s interpretation of a statute. In addition, three amicus briefs were filed in support of neither party. All of the amicus briefs can be found here.

It is noteworthy that one of the amicus briefs in support of the petitioners was filed by the Governor of the State of Georgia, Brian Kemp. In his brief, Governor Kemp argues that the Court should overrule or limit Chevron because of Chevron’s implications for the balance of power between the States and the federal government. According to the Governor, “Chevron’s presumption that Congress may implicitly delegate legislative power to federal agencies—including the power to preempt state policies—undermines the Court’s longstanding requirement that when Congress intrudes into the traditional domain of the States, it must do so explicitly.”

The other amicus briefs in support of the petitioners were filed by:

  • Atlantic Legal Foundation;
  • DRI Center for Law and Public Policy;
  • Pacific Legal Foundation;
  • Lonang Institute;
  • Goldwater Institute;
  • Patent and Trademark Attorneys, Agents, and Applicants for Restoration and Maintenance of Integrity in Government;
  • America First Legal Foundation;
  • American Center for Law and Justice;
  • Manhattan Institute and Professors Richard Epstein, Todd Zywicki, Gus Hurwitz, and Geoffrey Manne;
  • TechFreedom;
  • New England Legal Foundation;
  • Foundation for Government Accountability;
  • Liberty Justice Center;
  • Center for Constitutional Jurisprudence;
  • Landmark Legal Foundation;
  • Cato Institute and Committee for Justice;
  • Mountain States Legal Foundation;
  • Coalition For A Democratic Workplace, Associated Builders and Contractors, International Foodservice Distributors Association, National Retail Federation, Independent Electrical Contractors, International Franchise Association;
  • David Goethel and John Haran David Goethel (Amici are “participants in New England’s commercial fishing industry”);
  • Buckeye Institute and National Federation of Independent Business Small Business Legal Center, Inc.;
  • Christian Employers Alliance;
  • Third Party Payment Processors Association;
  • U.S. House of Representatives;
  • Chamber of Commerce of the United States of America;
  • U.S. Senator Ted Cruz, Congressman Mike Johnson, and 34 Other Members of Congress;
  • Advancing American Freedom;
  • Electronic Nicotine Delivery System Industry Stakeholders;
  • National Right to Work Legal Defense Foundation, Inc.;
  • American Farm Bureau Federation, American Coatings Association, American Forest & Paper Association, Agricultural Retailers Association, National Association of Home Builders, National Cattlemen’s Beef Association, National Pork Producer’s Council, and the North American Meat Institute;
  • National Taxpayers Union Foundation;
  • Ohio Chamber of Commerce;
  • National Sports Shooting Foundation, Inc.;
  • New Civil Liberties Alliance;
  • Washington Legal Foundation and Independent Women’s Law Center;
  • State of West Virginia and 26 Other States;
  • Strive Asset Management;
  • American Cornerstone Institute;
  • FPC Action Foundation and Firearms Policy Coalition;
  • American Free Enterprise Chamber of Commerce;
  • America First Policy Institute;
  • Southeastern Legal Foundation;
  • Gun Owners of America, Inc., Gun Owners Foundation, Gun Owners of California, Heller Foundation, Tennessee Firearms Association, Virginia Citizens Defense League, Grass Roots North Carolina, Rights Watch International, America’s Future,, Downsize DC Foundation, Public Advocate of the United States, U.S. Constitutional Rights Legal Defense Fund, and Conservative Legal Defense and Education Fund;
  • The Little Sisters of the Poor Saints Peter and Paul Home; and
  • Advance Colorado Institute.

The amicus briefs in support of neither party were filed by the following:

  • Professor Thomas W. Merrill;
  • (Professor) Aditya Bamzai; and
  • Professors Kent Barnett and Christopher J. Walker.

Professor Kent Barnett will soon be our special guest for an episode of our Consumer Finance Monitor Podcast. We recently discussed Raimondo in an episode of our podcast for which our special guest was Craig Green, a Professor at Temple University School Of Law. The episode is titled “A look at the current challenges to judicial deference to federal agencies” and is available here.

At the ABA Section of Business Law Annual Meeting in Chicago scheduled for September 7 to 9, 2023, I will be moderating a program titled, “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB/FTC/Federal Banking Agency Regulations.”

Alan S. Kaplinsky

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Texas Federal District Court Issues Limited Preliminary Injunction Enjoining CFPB From Implementing and Enforcing Small Business Lending Rule

The Texas federal district court hearing the lawsuit challenging the validity of the CFPB’s final rule implementing Section 1071 of the Dodd-Frank Act (Rule) has issued an order that preliminarily enjoins the CFPB from implementing and enforcing the Rule “pending the Supreme Court’s reversal of [Community Financial Services Association of America Ltd. v. CFPB], a trial on the merits of this action, or until further order of this Court.” However, the court denied the plaintiffs’ request for nationwide injunctive relief and granted injunctive relief only to the plaintiffs and their members. The plaintiffs are the Texas Bankers Association (TBA), the American Bankers Association (ABA), and Rio Bank, McAllen, Texas. Thus, in addition to Rio Bank, the relief granted by the court extends only to TBA, ABA, and members of TBA or ABA.

The order also (1) directs the CFPB to immediately cease all implementation or enforcement of the Rule against the plaintiffs and their members, and (2) stays all deadlines for compliance with the Rule’s requirements for the plaintiffs and their members until after the Supreme Court’s final decision in CFSA. It further directs the CFPB, if the Supreme Court reverses in CFSA, to extend the deadlines for the plaintiffs and their members to comply with the Rule “to compensate for the period stayed.”

In response to the plaintiffs’ preliminary injunction motion, the CFPB argued that Rio Bank had failed to establish that it would be subject to the Rule and thus had not established standing for preliminary relief. The CFPB also argued that while TBA and ABA could proceed on behalf of their members under the doctrine of associational standing, neither TBA nor ABA had offered any specific facts to establish that at least one identified member had suffered or would suffer harm as a result of the Rule. With respect to Rio Bank, the court found that the bank had “established that it had 409 small business and agricultural loans in calendar year 2022, which under the Final Rule’s broad definition of covered originations makes it likely Rio Bank will be subject to the Final Rule.” Based on Rio Bank’s estimates that its compliance costs “will total $25,000, of which $20,000 will be spent in 2023,” the court concluded that “the [January 1, 2026 compliance date] and costs are not speculative; that lead-time for compliance was built into the Final Rule does not make Plaintiffs’ claims unripe.” Having found that Rio Bank had standing, the court did not address the arguments regarding ABA’s and TBA’s standing.

Based on the Fifth Circuit panel decision in CFSA, the court found a substantial likelihood that the plaintiffs would prevail in asserting that the Rule is invalid because it was promulgated using the CFPB’s unconstitutional funding. In CFSA, 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.

The court also found that (1) the unrecoverable compliance costs alleged by the plaintiffs constituted a substantial threat of irreparable harm, noting that “the Fifth Circuit has accepted projected compliance costs as constituting irreparable harm,” and (2) the balance of harms and public interest favored a stay because the CFPB had not shown any evidence that a stay of the Rule would cause harm.

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

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Happy Twelfth Anniversary CFPB and Consumer Finance Monitor

Last Friday, July 21, 2023, marked the CFPB’s twelfth anniversary. To publicize the occasion, the CFPB published a blog post on July 20 in which it touted its achievements and ongoing initiatives.

July 21 also marked the twelfth anniversary of our award-winning blog, Consumer Finance Monitor. Originally named CFPB Monitor, we launched our blog to coincide with the CFPB’s first day. Since that date, we have focused intensively on all significant CFPB developments (except where a client conflict prevented us from reporting). Unlike most other media reports on a CFPB development, we are not content to just report “the news.” We analyze each development and explain its significance for industry and consumers. Our tradition of best in class thought leadership was expanded nearly five years ago when we launched our podcast, the Consumer Finance Monitor Podcast, and began releasing weekly episodes.

As the CFPB begins its thirteenth year, it does so under another constitutional cloud. Indeed, this cloud potentially presents a greater threat to its future than the challenge to the “for cause” restriction on the President’s authority to remove the CFPB Director that the Supreme Court resolved in its 2020 Seila Law decision. The current threat faced by the CFPB is the challenge to the constitutionality of its funding mechanism in Community Financial Services Association of America Ltd. v. CFPB. In the case, CFSA has asked the Supreme Court to affirm the Fifth Circuit panel decision which held that the CFPB’s funding mechanism violates the Appropriations Clause of the U.S. Constitution. Oral argument is scheduled for October 3, 2023. The early oral argument date creates the potential for a decision from the Court by early 2024. Should the Supreme Court rule that the CFPB’s funding is unconstitutional, the CFPB’s next anniversary could occur in the midst of a contentious Congressional battle about its future.

Perhaps intended to coincide with the CFPB’s anniversary, Director Chopra gave several recent interviews to news organizations, including one with Law360. While much of Director Chopra’s comments echoed previous comments, he did make the following noteworthy comments:

  • Despite acknowledging that “the shift in industry when it comes to cutting down on junk fees has been very promising,” Director Chopra indicated that the CFPB continues to consider possible overdraft and NSF fee rulemaking to prevent the banking industry from backtracking.
  • Director Chopra defended the data and analysis used by the CFPB for its proposed rule that would reduce the credit card late fee safe harbors to $8, asserting that it was “far more rigorous” than the analysis used by the Federal Reserve in establishing the current credit card late fee safe harbors. We would take issue with Director Chopra’s assertion. TILA requires the CFPB to consider “the cost” incurred by the creditor from a violation in determining the amount of the late fee. As indicated in the comment letter on the CFPB’s proposal submitted by Auriemma Roundtables together with First National Bank of Omaha and a group of several other premier consumer financial services firms, the CFPB failed to consider data that was considered by the Board and was conclusory and superficial in its consideration of cost. (Ballard Spahr served as counsel to Auriemma Roundtables in preparing the comment letter.)
  • Director Chopra indicated that the CFPB has been hiring technologists, data scientists, and other technical experts to assist in fair lending examinations that will look at potential discrimination in new technologies and digital design issues related to how companies are offering services online.

Alan S. Kaplinsky

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CFPB Summer 2023 Supervisory Highlights Looks at Auto Origination and Servicing, Consumer Reporting, Debt Collection, Deposits, Mortgage Origination and Servicing, Payday and Small Dollar Lending, Remittances

The CFPB has released the Summer 2023 edition of Supervisory Highlights. The report discusses the Bureau’s examinations in the areas of auto origination and servicing, consumer reporting, debt collection, deposits, mortgage origination and servicing, and payday and small dollar lending, that were completed from July 1, 2022 to March 31, 2023.

In its introduction to the report, the CFPB references its April 2023 policy statement on abusive acts or practices and emphasizes that the report “notes supervisory findings of abusive acts or practices that supervised institutions engaged in across multiple product lines.” These are in addition to findings that supervised institutions engaged in unfair and deceptive acts or practices. The CFPB also notes in the introduction that the new report is the first to include findings from the CFPB’s Supervision information technology program and that such findings include violations of federal consumer financial laws that were caused in whole or in part by insufficient information technology controls. In addition to a section titled “Information Technology,” the new report includes a section titled “Fair Lending.”

On September 14, 2023, from 1:00 p.m. to 2:00 p.m. ET, we will hold a webinar, “Abusive Acts and Practices Under the CFPA: The CFPB’s New Policy Statement.” To register, click here.

Also noteworthy is the report’s discussion of CFPB supervision developments involving nonbanks. In April 2022, the CFPB announced that it planned to invoke its “dormant authority” to supervise nonbanks engaged in conduct that poses risk to consumers. The CFPB adopted a final rule in July 2013 (12 C.F.R. Part 1091) setting forth its procedures for supervising nonbanks engaged in conduct that poses risk to consumers and amended the rule in November 2022. In the report, the CFPB states that since finalizing the amended rule, it “has entered into discussions with several entities across markets regarding the CFPB’s supervision program and its benefits, including identifying potential compliance issues before they become significant.”

The CFPB also states in the report that it “has issued several Notices of Reasonable Cause commencing the risk-based supervision process under the rule” and that “[a]s a result of these activities, several entities have voluntarily consented to CFPB supervisory authority.” Director Chopra, in recent comments reported by media, confirmed that CFPB supervision of several companies using its risk-based supervision authority had already begun but did not reveal the number or type of companies that have consented to supervision. According to media reports, at least three companies—a buy now, pay later company, an earned wage access provider, and a big tech company—have consented to CFPB supervision.

In addition, the CFPB discloses that it is or will be examining “one or more” data aggregators, noting that this group includes a data aggregator or data aggregators that it considers to be larger participants in the consumer reporting marketplace. This may be the result of the market monitoring efforts it conducted earlier this year.

Key findings by CFPB examiners are described below.

Auto origination. Supervised institutions were found to have engaged in deceptive marketing of auto loans by using advertisements that pictured cars that were significantly, larger, more expensive, and newer than the advertised loan offers. Examiners found that these advertisements were likely to mislead consumers because they created a “net impression” that the advertisements applied to a subset of cars to which they actually did not apply.

Auto servicing. Examiners found:

  • Servicers engaged in unfair and abusive acts or practices in connection with retail installment contracts (RIC) for which dealers had fraudulently listed options that were not actually included on the vehicle. Specifically, servicers were found to have collected and retained interest that borrowers paid on loans that included such options in the loan amount. After initial processing of a RIC, servicers attempted to contact consumers to verify that listed options were in fact on the vehicle. If consumers identified discrepancies, servicers reduced the amounts paid to the dealers for the RICs by the amount of the missing options but did not reduce the amounts owed by consumers on the RICs and continued to charge interest on the loan amounts tied to the nonexistent options. Also, after repossession, servicers compared the options actually included with the vehicle to information provided by the dealer and where the options were not actually included, obtained refunds from dealers that were applied to the deficiency balances but did not refund to consumers the interest charged on the nonexistent options. In addition to finding that these practices were unfair, examiners concluded they were abusive because they took unreasonable advantage of a consumer’s inability to protect their interests in the selection or use of the product by charging interest on loan balances that were improperly inflated by the nonexistent options. Servicers were aware that some percentage of their loans had inflated balances but nevertheless collected excess interest on these amounts while seeking and obtaining refunds on the missing options. Consumers were unable to protect their own interests because at the time of loan funding, it was impractical for them to challenge the practice because they did not know that options were missing.
  • Servicers engaged in unfair acts or practices by suspending ACH payments prior to consumers’ final payments without giving consumers sufficient notice that the last payment had to be made in a different manner. The ACH authorizations completed by consumers contained a small print disclosure that servicers would not automatically withdraw the final payment but servicers did not provide any additional notice to consumers before the final payment was required (typically after a period of years during which the consumer made ACH payments). Servicers’ cancellation of the final ACH payment resulted in missed payments and late fees.
  • Servicers engaged in unfair and abusive acts or practices in connection with the use of cross-collateralization clauses in vehicle financing contracts. Examiners found that after repossession, servicers accelerated the amount due on the vehicle and on any other amounts owed by the debtor to the lender. In addition to finding it was an unfair for servicers to have a blanket practice of cross-collateralizing loans and requiring consumers to pay other debts to redeem repossessed vehicles, examiners found this practice to be abusive because it took unreasonable advantage of a lack of understanding of consumers of the material risks, costs, or conditions of their loan agreements.

Consumer reporting. Examiners found:

  • The procedures of consumer reporting agencies (CRAs) relating to ensuring end users of consumer reports have a permissible purpose failed to comply with the FCRA requirement that CRAs maintain reasonable procedures to limit the furnishing of consumer reports to persons with a permissible purpose. CRAs’ procedures created an unreasonable risk of improperly disclosing consumer reports to persons without a permissible purpose by, for example, failing to maintain an adequate process for re-assessing end users’ permissible purpose where indicia of improper use of consumer reports by an end user was present.
  • Furnishers violated the Regulation V duty to periodically review their policies and procedures concerning the accuracy and integrity of furnished information and update them as necessary to ensure their continued effectiveness. Examiners found that auto finance furnishers failed to review and update policies and procedures after implementing substantial changes to their dispute handling processes, such as changes to the software systems used in the investigation of disputes.
  • Furnishers violated the Regulation V duty to conduct a reasonable investigation of direct disputes. Examiners found that mortgage furnishers failed to investigate direct disputes that were received at an address provided by the furnishers to CRAs and set forth on consumer reports and instead responded to the disputes by directing consumers to re-send the disputes to certain other addresses and only investigated disputes re-sent to those addresses.
  • Furnishers violated the Regulation V duty to provide consumers with notices regarding frivolous or irrelevant disputes. Examiners found that third-party debt collector furnishers failed to send any notice to consumers whose direct disputes they determined to be frivolous or irrelevant and therefore did not investigate.
  • Furnishers violated the Regulation V duty, after determining a direct dispute to be frivolous or irrelevant, to include in their notices to consumers the reasons for such determination and to identify and information required to investigate the disputed information. Examiners found that notices sent by mortgage furnishers failed to accurately convey what information was required by, for example, stating that consumers must provide their entire redacted credit report for the furnisher to investigate the dispute even though an excerpt of the relevant portion would have been sufficient.
  • Furnishers were not clearly and conspicuously specifying to consumers an address for notices at which the consumer may notify the furnisher that information is inaccurate, as the FCRA requires for a furnisher not to be subject to the FCRA prohibition regarding the furnishing of information that the furnisher knows or has reasonable cause to believe is inaccurate. Examiners found that, the only notice or dispute address provided to consumers by third-party debt collector furnishers was an address included on the debt validation notices for purposes of disputing the validity of the debt. The notices did not specify an address for, or otherwise specify that the debt validity dispute address could also be used for, notices relating to inaccurately furnished consumer report information.

Debt collection. Examiners found:

  • Debt collectors violated various FDCPA prohibitions by continuing collection attempts for work-related medical debt after receiving sufficient information to render the debt uncollectible under state worker’s compensation law absent written evidence to the contrary, which the collector did not obtain from its client. Collectors made multiple calls during which they implied the consumer owed the debt and asserted that the ambulance ride that gave rise to the debt originated from the consumer’s home despite evidence in their files that it originated form the consumer’s workplace.
  • Debt collectors engaged in a deceptive act or practice by advising consumers that if they paid the balance in full by a certain date, any interest assessed would be reversed. The collectors then failed to credit the consumers’ accounts with the accrued interest, resulting in consumers paying more than the agreed amount.

Deposits. Examiners found that financial institutions engaged in a unfair act or practice by assessing both an NSF fee and a line of credit transfer fee on the same denied transaction. This occurred where the consumer’s checking account did not have sufficient funds to pay a transaction and the consumer’s overdraft line of credit also did not have sufficient funds to cover the transaction. The institutions would assess an NSF fee on the denied checking account transaction. If there were insufficient funds in the consumer’s checking account to pay the NSF fee and the NSF fee overdrew the checking account, the institutions would automatically transfer funds from the line of credit to the checking account and assess a line of credit transfer fee. This practice meant that consumers enrolled in the line of credit program were charged two fees instead of the single fee that would be charged to consumers who were not enrolled, even though the transaction was returned unpaid in both cases. A consumer could not reasonably avoid this injury as the consumer had no notice of the potential for double fees or the ability to avoid the double fees and would not reasonably expect that enrolling in a program meant to prevent overdrafts and decrease fees on denied transactions would instead increase them.

Fair Lending. With regard to pricing discrimination, examiners found:

  • When granting pricing exceptions, mortgage lenders violated ECOA and Regulation B by discriminating on the basis of a range of ECOA-protected characteristics, including race, national origin, sex, or age. Examiners observed that certain lenders maintained policies and procedures that permitted pricing exceptions, including for competitive offers. Examiners identified lenders with statistically significant disparities for the incidence of pricing exceptions at differential rates on a prohibited basis compared to similarly situated borrowers. Examiners did not identify evidence of legitimate, nondiscriminatory reasons that explained the disparities observed in the statistical analysis.
  • Lenders’ policies and procedures were not designed to effectively mitigate ECOA and Regulation B violations or manage associated risks of harm to consumers. Some policies permitted mortgage loan officers to request a pricing exception by submitting a request into the loan origination system without requiring that the request be substantiated by documentation. While those requests were subject to managerial review, there were no guidelines for the bases for approval or denial of the exception request or the amount of the exception. Other policies had limited documentation requirements—and sometimes no documentation requirements for pricing exceptions below a certain threshold. This meant that the lenders could not effectively monitor whether the pricing exception request was initiated by the consumer and/or supported by a competitive offer to the consumer. Other policies granted some loan officers pricing exception authority up to certain thresholds without the need for competitive offer documentation or management approval. As a result, the lenders did not flag those discretionary discounts as pricing exceptions and did not monitor them. While some institutions had policies with more robust documentation and approval requirements, those institutions did not effectively monitor interactions between loan officers and consumers to ensure that the policies were followed and that the loan officer was not coaching certain consumers and not others regarding competitive offer exceptions. In other instances, examiners determined that loan officers were not properly documenting the initiation source of the exception request nor were they retaining and documenting competitors’ pricing information in borrowers’ files as required by the lender’s policy.
  • Weaknesses in training programs included the failure to (1) explicitly address fair lending risks associated with pricing exceptions, including the risks of providing different levels of assistance to customers on prohibited bases in connection with a customer’s request for a price exception, or (2) cover pricing exception risk for employees who have discretionary pricing authority. Examiners concluded that (1) management and board oversight at lenders was not sufficient to identify and address risk of harm to consumers from the lender’s pricing exception practices, (2) some lenders failed to take corrective action based on their statistical observations of disparities in pricing exceptions, and (3) some lenders failed to document whether additional investigation into observed disparities was warranted, review the causes of such disparities, or consider actions that might reduce such disparities.

With regard to discriminatory lending restrictions, examiners found:

  • For several areas of credit, including mortgage origination, auto lending, credit cards, and small business lending, lenders had risky underwriting policies and procedures relating to the treatment of applicants’ criminal records and income derived from public assistance. A common thread found by examiners was that the discovery of criminal records prompted enhanced or second-level underwriting review. However, policies and procedures at several institutions did not provide detail regarding how that review should be conducted, creating fair lending risk around how the reviewing official exercised discretion. The policies and procedures varied as to how the lender identified criminal records and which violations or charges triggered further review or denial. The CFPB cautions that without clear guidelines and well-defined standards designed to meet legitimate business needs, lenders risked violating ECOA and Regulation B by applying these underwriting restrictions in a manner that could discriminate on a prohibited basis.
  • Lenders’ underwriting policies and procedures improperly excluded public assistance income or imposed stricter standards on income derived from public assistance. These included lenders with mortgage lending programs that provided consumers with a benefit in the form of a mortgage credit certificate but did not treat those benefits as income under their underwriting standards and lenders who maintained a policy with a six-year continuity-of-income requirement for applicants relying primarily on public assistance income that was stricter than the three-year requirements applicable to other applicants’ income.

Technology. Examiners found that institutions engaged in unfair acts or practices by failing to implement adequate information technology security controls that could have prevented or mitigated cyberattacks. Specifically, the institutions’ password management policies for certain online accounts were weak, the entities failed to establish adequate controls in connection with log-in attempts, and the same entities also did not adequately implement multi-factor authentication or a reasonable equivalent for consumer accounts. The entities’ lack of adequate information technology security controls caused substantial harm to consumers when fraudsters accessed almost 8,000 consumer bank accounts and made withdrawals of at least $800,000. Consumers were also injured because they had to devote significant time and resources to dealing with the impacts of the incident. Although the CFPB has not issued rules outlining what it considers to be “adequate” data security practices or controls, it has repeatedly indicated its interest in enforcing data security standards, including most recently in an enforcement matter earlier this year.

Mortgage origination. Examiners found:

  • Institutions violated the Regulation Z prohibition on compensating mortgage loan originators in an amount that is based on the terms of a transaction. The report states:

“As part of their business model, institutions brokered-out certain mortgage products not offered in-house. For example, the institutions used outside lenders for reverse mortgage originations, but had their own in-house cash-out refinance mortgage product. Examiners determined that the institutions used a compensation plan that allowed a loan originator who originated both brokered-out and in-house loans to receive a different level of compensation for the brokered-out loans versus in-house loans. By compensating differently for loan product types that were not offered in-house, the entities violated Regulation Z by basing compensation on the terms of a transaction.”

It is common for a mortgage lender that typically originates loans to broker one or more loan products that it does not originate to other lenders. An issue under the Regulation Z loan originator compensation rule is whether it is permissible to pay a loan originator one amount of compensation for an originated loan and a different level of compensation for a brokered loan. Typically, brokered loans generate less revenue than originated loans, so paying a lower level of compensation for brokered loan makes sense from an economic perspective. However, such a practice would appear to present an issue under the loan originator compensation rule as there is the potential that the practice could be viewed as paying different compensation based on different loan products, rather than paying different compensation based on whether a loan is originated or brokered. That potential has now been realized in the report’s findings quoted above.

The CFPB position could actually produce unfavorable consequences for consumers. Before the implementation of the loan originator compensation rule, it was common for lenders to pay loan originators based on the profitability and pricing of a loan product. This created an incentive for a loan originator to place a consumer in a loan product that had higher rates and/or fees, or to set the rates and fees for loans above the levels required by the lender. A goal of the loan originator compensation rule was to reduce the incentive for such steering and pricing by prohibiting the compensation of a loan originator to be based on the loan product or pricing. Typically, when a lender both originates and brokers loans, a consumer is placed in a brokered loan product when that product makes sense for the consumer. In many cases, the consumer may qualify only for the brokered loan product. If lenders must pay the same compensation for originated loans and brokered loans, that makes brokering loans more challenging from an economic perspective and, as a result, creates an incentive to steer consumers to originated products or to cease offering brokered products. Thus, the CFPB position could result in consumers being placed in less than optimal loan products, or even being denied because they do not qualify for an originated product.

  • Institutions violated the Regulation Z requirement that disclosures must reflect the terms of the legal obligation. Examiners found that the institution’s standard adjustable-rate promissory note stated that the result of the margin plus the current index should be rounded up or down to the nearest one-eighth of one percentage point but the institutions’ loan origination system was not programmed to round. As a result, the fully indexed rate that the institutions calculated and disclosed was not consistent with the legal obligation as set forth in the promissory note.

Mortgage servicing. Examiners found:

  • Servicers violated the Regulation X requirement that if a complete loss mitigation application is received more than 37 days before a scheduled foreclosure sale, the servicer must evaluate the complete application within 30 days of receipt and provide written notice to the borrower stating which loss mitigation options, if any, are available. Examiners found that some servicers failed to evaluate complete applications within 30 days of receipt or evaluated the application within 30 days but failed to provide the required notice to borrowers within 30 days as required.
  • Servicers engaged in an unfair act or practice when they delayed processing borrower requests to enroll in loss mitigation options, including COVID-19 pandemic-related forbearance extensions, based on incomplete applications. These delays varied in length, including delays up to six months.
  • Servicers engaged in deceptive acts or practices when they informed consumers, orally and in written notices, that they would evaluate their complete loss mitigation applications within 30 days, but then moved toward foreclosure without completing the evaluations. Because they received the complete loss mitigation applications 37 days or less before foreclosure, the servicers were not required by Regulation X to evaluate the application within 30 days. However, the servicers informed consumers in written and oral communications that they would evaluate their complete loss mitigation applications within 30 days, and such representations created the overall net impression that foreclosure would not occur until the servicers made decisions on the applications.
  • Servicers violated the Regulation X requirement to maintain adequate continuity of contact procedures for delinquent consumers. Servicers did not maintain policies and procedures that were reasonably designed to ensure that personnel were made available to borrowers via telephone to provide timely live responses if borrowers were unable to reach continuity of contact personnel. The servicers routinely failed to return phone calls from borrowers, and consumers who did speak with personnel were not given accurate information about available loss mitigation options. Also, servicers’ systems did not allow personnel to retrieve, in a timely manner, written information that the consumer had already provided in connection with their loss mitigation applications, causing personnel to ask for information already in the servicers’ possession.
  • Servicers violated the Regulation X requirement to provide borrowers with a written acknowledgment notice within 5 days of receipt of a loss mitigation application that contains a prescribed statement regarding contacting servicers of other mortgages secured by the same property. Servicers failed to include this prescribed statement on Spanish language acknowledgment notices but did include it on English language acknowledgment notices sent to English speaking consumers.
  • Examiners found that servicers violated Regulation X and Regulation Z by failing to provide accurate or complete loss mitigation information in various circumstances. Specifically, servicers did not provide (1) specific reasons for denial in loss mitigation evaluation letters and instead provided vague denial reasons, such as that consumers did not meet the eligibility requirements for the program; (2) correct payment and duration information for forbearance in forbearance offer notices; and (3) information in periodic statements about loss mitigation programs, such as forbearance, to which consumers had agreed.
  • Servicers violated the Regulation X requirement that during the 60-day period beginning on the effective date of a transfer of servicing, servicers not treat payments sent to the transferor servicer as late if the transferor servicer receives them on or before the due date. Servicers treated payments received by the transferor servicer during the 60-day period, but not transmitted by the transferor to the transferee until after the 60-day period, as late.
  • Servicers violated the Regulation X requirement to maintain policies and procedures reasonably designed to achieve the objective of facilitating transfer of information during servicing transfers. For example, transferee servicers’ policies and procedures were not reasonably designed because they failed to obtain copies of the security instruments, or any documents reestablishing the security instrument, to establish the lien securing the mortgage loans after servicing transfers.

Payday and small dollar lending. Examiners found:

  • Lenders engaged in abusive and deceptive acts or practices in connection with short-term, small-dollar loans, by including language in loan agreements purporting to prohibit consumers from revoking their consent for the lender to call, text, or e-mail the consumers. This language implied that consumers could not take action to limit unreasonable collections communications (which communications could be a UDAAP). This implication made the practice of including such language abusive because it took unreasonable advantage of consumers’ inability to protect their interests in selecting or using a consumer financial product or service by limiting such collection communications. The practice was also deceptive because it misled or was likely to mislead consumers as to whether or not they could protect themselves by limiting unreasonable communications by phone, text, or email, and whether the lenders had an obligation to honor such requests. In addition, contrary to the language of the loan agreements, the lenders’ procedures did in fact require the lenders’ representatives to allow consumers to revoke consent to communications.
  • Lenders engaged in deceptive acts or practices by making false collection threats related to litigation, garnishment, and late fees. The lenders sent letters to delinquent payday loan borrowers in certain states stating that they “may pursue any legal remedies available to us” unless the consumer contacted the lender to discuss the delinquency. The representations misled or were likely to mislead borrowers into reasonably believing that the lenders might take legal action to collect the debt if the consumer did not make timely payment when the lenders, in fact, never pursued legal action to collect on payday loans in those states.
  • Lenders engaged in deceptive acts or practices by making false threats related to garnishment in collections communications. Lenders used the term “garnishment” in communications when referring to voluntary wage deduction process. These representations misled or were likely to mislead consumers by giving the false impression they would be subject to an involuntary legal garnishment process if they did not make payment when, in fact, consumers could revoke consent to the voluntary wage deduction process at will under the terms of the loan agreement and prevent deductions from occurring.
  • Lenders engaged in deceptive acts or practices by including in periodic statements the statement “if we do not receive your minimum payment by the date listed above, you may have to pay a $25 late fee.” In fact, the lenders did not assess late fees in connection with the product.
  • Lenders engaged in unfair acts or practices with respect to consumers who signed voluntary wage deduction agreements by sending demand notices to consumers’ employers that incorrectly conveyed that the employer was required to remit the full amount of the consumer’s loan balance to the lenders from the consumer’s wages. In fact, the consumer had agreed to permit the lenders to seek a wage deduction only in the amount of the scheduled payment due. The lenders collected wages from the consumers’ employers in amounts exceeding the payment authorized by the consumer.
  • Lenders engaged in deceptive acts or practices by misrepresenting to borrowers the impact that payment or nonpayment of debts in collection might have on the sale of their debt to a debt buyer and the subsequent impact on the borrower’s credit report. The lenders’ agents asserted or implied that making a payment would prevent referral to a third-party debt buyer and a negative credit impact. However, the agents had no basis to predict the consumer’s credit situation or a potential debt buyer’s furnishing practices, the lender’s contracts with debt buyers prohibited furnishing to a CRA, and the debt was not in fact sold.
  • Lenders created a risk of harm to borrowers protected by the Military Lending Act (MLA) by, before engaging in loan transactions and contrary to their policies, failing to confirm that borrowers were not covered borrowers under the MLA.
  • Lenders violated the Regulation Z requirement to retain for two years evidence that they delivered closed-end loan disclosures in writing before consummation of the transaction in a form that consumers may keep. Specifically, loan files did not include evidence of when or how lenders provided disclosures to borrowers and lenders could not produce evidence that, for electronically signed contracts, disclosures were provided to consumers before loan consummation in a form they could keep.

Remittances. Examiners found that some remittance transfer providers had not complied with the Remittance Rule requirement to develop and maintain written policies and procedures designed to ensure compliance with the error resolution requirements applicable to remittance transfers. For example, some institutions used their anti-money laundering compliance policy in lieu of a specific policy tailored to the Remittance Rule requirements. Other institutions had policies and manuals to cover Remittance Rule compliance but did not develop procedures that would put these policies into effect. Specifically, the manuals recited Remittance Rule requirements but did not provide adequate guidance to employees to resolve error notices in a consistent and compliant manner.

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

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E-Verify Users Now Permanently Able to Verify Employment Eligibility Remotely

As part of a final rule published on July 25, 2023, and in connection with its newly published Form I-9 (which employees may use after August 1), certain employers will be able to permanently verify an employee’s employment eligibility remotely. This final rule continues the pandemic-related flexibility offered to employers to meet their Form I-9 verification requirements.

Employers are required to obtain a completed Form I-9 and inspect employment verification documents from all newly hired employees within three days of their start of employment. Employees can present a passport or permanent resident card (a/k/a “green card”), or a combination of other documents (e.g., a driver’s license or Social Security card) to verify their eligibility to work in the United States.

Before COVID-19, this verification required employers to physically inspect the acceptable documents and determine whether they appeared to be authentic. Unsurprisingly, meeting the physical inspection requirement proved difficult as the world turned toward remote work at the start of the COVID-19 pandemic. As a result, the Department of Homeland Security (DHS) began allowing employers, temporarily, to inspect the documents remotely with certain parameters.

Moving forward, the July 25 final rule issued by DHS allows E-Verify participants in good standing to continue using the alternative (remote) inspection process. The final rule goes into effect August 1, 2023, and applies to all employees hired after the effective date (meaning the ability to remotely inspect verification documents does not apply retroactively).

In addition to enrolling in E-Verify, employers utilizing the remote inspection process must also (1) retain clear and legible copies of all presented documents; (2) undergo training through E-Verify; (3) conduct a live video interaction after the new employee transmits a copy of the document(s) to the employer; and (4) indicate on the Form I-9 that the alternative procedure was used to examine the documentation. For the new Form I-9, effective August 1, employers must check the box in the “Additional Information” field to meet this fourth requirement.

Importantly, if an eligible employer chooses to use the remote inspection process for one employee, it must generally do so for all similarly-situated employees. One exception applies where an employer uses the alternative remote inspection process for remote workers while still physically inspecting documentation of employees who work in person.

Ballard Spahr regularly works with its clients to review compliance with I-9, E-Verify, and other employee onboarding matters, and has previously posted about this issue. We also assist clients with internal I-9 audits to insulate employers from penalties associated with past issues or gaps in record keeping.

Justen R. Barbierri & Shannon D. Farmer

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Second Circuit Rules Whether Alleged Inaccuracy Is “Factual” or “Legal” Does Not Determine If Claim Is Actionable Under the FCRA

The U.S. Court of Appeals for the Second Circuit has ruled that because “there is no bright-line rule that only purely factual or transcription errors are actionable under the [Fair Credit Reporting Act (FCRA)],” the FCRA does not contemplate a threshold inquiry by the court as to whether an alleged inaccuracy is “legal” for purposes of determining whether the plaintiff has stated a cognizable claim under the FCRA. Rather, as the Second Circuit also ruled, a claimed inaccuracy is potentially actionable under the FCRA so long as the challenged information is objectively and readily verifiable.

In Sessa v. Trans Union, LLC, the assignee of the plaintiff’s vehicle lease furnished information to TransUnion that she owed a “balloon payment” at the end of the lease in the amount of the vehicle’s residual value, which was an optional amount to purchase the vehicle at the end of the lease. TransUnion reported the balloon payment as a debt on the plaintiff’s credit report. TransUnion also reported a larger amount as the “high balance” of the plaintiff’s debt, which amount treated the vehicle’s residual value as a debt.

The plaintiff filed a class action complaint in which she alleged that by including the balloon payment as a debt on her credit report and inaccurately reporting the lease information, TransUnion violated the FCRA requirement for a consumer reporting agency (CRA) to follow reasonable procedures to assure the maximum possible accuracy of the information contained in a consumer report. TransUnion moved for summary judgment, arguing that it had reported the information accurately because it reported precisely the information it received from the assignee of the lease and that any purported inaccuracy was the result of legal interpretation rendering it non-cognizable under the FCRA.

The district court granted summary judgment to TransUnion holding that the plaintiff failed to make the “threshold showing” of inaccuracy on the credit 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 reported debt. Second, the court concluded that CRAs can only be liable for FCRA claims when the information in a credit report does not match the information the CRA received from the furnisher.

In vacating the district court’s judgment and remanding the case for further proceedings, the Second Circuit noted that after the district court issued its decision, the Second Circuit ruled in Mader v. Experian Information Solutions that the definition of accuracy under the FCRA requires a “a focus on objectively and readily verifiable information.” In Mader, 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. The final decree of discharge issued by the bankruptcy court stated that the plaintiff was released from all “dischargeable debts,” but had an attachment that stated “debts for most student loans are not discharged.” Explaining its earlier ruling in Mader, the Second Circuit stated that the debt at issue in Mader was not “objectively and readily verifiable” because it “presented an ‘unresolved legal question’ under bankruptcy law.”

The Second Circuit ruled that it was error for the district court to hold that the FCRA incorporates a threshold inquiry as to whether an alleged error is factual or legal in nature. Instead, according to the Second Circuit, “[t]he question of whether a debt is objectively and readily verifiable will sometimes, as it did in Mader, involve an inquiry into whether the debt is the subject of a legal dispute….But that does not mean that any dispute that might arguably turn on a question of law is non-cognizable under the FCRA.” (emphasis included). Quoting Mader, the Second Circuit stated “CRAs may be ‘required by the FCRA to accurately report information derived from the readily verifiable and straightforward application of law to facts.’”

The CFPB and the FTC filed an amicus brief in Sessa in support of the plaintiff.

Joel E. Tasca & John L. Culhane, Jr.

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This Week’s Podcast Episode: What the Biden Administration’s “Junk Fees” Initiative Means for the Consumer Financial Services Industry: A Look at the Fees Under Attack, Part II

The Biden Administration has launched an initiative directed at combatting so-called “junk fees,” with the CFPB and FTC leading the Administration’s efforts. In Part II of this two-part episode, we first look at CFPB supervisory activity relating to auto servicing, mortgage servicing, payday and small dollar loans, and student loan servicing. We then discuss likely CFPB next steps relating to its credit card late fees proposal and potential future actions by the CFPB, FTC, and state regulators to address “junk fees.” We conclude with a discussion of steps providers should consider to reduce compliance risks, including the Ballard Spahr Analytical Framework for identifying fees that the CFPB will not like.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion, joined by John Culhane, a partner in the Group, and Michael Gordon and Kristen Larson, both Of Counsel in the Group.

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

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

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Draft Merger Guidelines Demonstrate Continued Focus of DOJ and FTC on Labor Market


The Federal Trade Commission (FTC) and Department of Justice (DOJ) have taken steps to update the Merger Guidelines and overhaul the premerger notification process, each with a sharpened focus on the effect a merger may have on labor markets.

The Upshot

  • On July 19, 2023, the DOJ and the FTC jointly released the 2023 Draft Merger Guidelines for public comment. The Draft Guidelines include an analysis of the effect of the proposed merger on workers for the first time and make clear that parties to a transaction cannot use a merger’s benefits in a product or service market to offset harm to labor markets.
  • The release of the Draft Guidelines follows on the heels of the recent publication by the FTC, with the concurrence of the DOJ, of a Notice of Proposed Rulemaking (Proposed Rule) aiming to revamp premerger notification filings and the process implementing the Hart-Scott-Rodino (HSR) Act.
  • Among other major changes, the Proposed Rule contemplates new disclosures related to a merger’s competitive impact on labor markets.

The Bottom Line

Companies will need to consider the impact of potential mergers on labor markets. The proposed changes signal the intent of the Agencies to review the impact of proposed transactions on labor markets and could result in additional merger challenges where proposed transactions have the potential to negatively affect worker mobility, wages, and/or benefits, even if the merger may result in benefits for consumers.

* * *

On July 19, 2023, the FTC and DOJ jointly released the long-awaited 2023 Draft Merger Guidelines (Draft Guidelines) for public comment, which signal a number of changes in the merger review process. The Merger Guidelines, which are intended to increase transparency by explaining how the agencies undertake substantive merger review, were first released in 1968 and have been updated several times. The Horizontal Merger Guidelines were most recently updated in 2010 and the Vertical Merger Guidelines were last updated in 2020. The 2023 Draft Guidelines combine the Vertical and Horizontal Guidelines and are the first to identify that the Agencies will analyze the antitrust impact on labor markets when reviewing mergers, stating “[j]ust as they do when analyzing competition in the markets for products and services, the Agencies will analyze labor market competition on a case by case basis.”

FTC Commissioner Alvaro Bedoya, joined by Chair Lina Khan and Commissioner Rebecca Kelly Slaughter, issued a statement highlighting the focus of the Draft Guidelines on labor markets. The statement is unequivocal that the Draft Guidelines “will make the consideration of workers…a priority in merger enforcement” and explains that, if a transaction substantially lessens competition in a labor market, it cannot be saved by purported benefits to a product market. In other words, “a merger that may substantially lessen competition for workers will not be immunized by a prediction that predicted savings from a merger will be passed on to consumers.”

The Draft Guidelines describe labor markets as having characteristics that can exacerbate the competitive effects of a merger between competing companies due to “high switching costs and search frictions due to the process of finding, applying, interviewing for, and acclimating to a new job.” In addition, the match between an employer and an employee can narrow the range of employers competing for workers. Specifically, the employer’s demands for the experience, skills, and availability of an employee must match with the worker’s own desires for a certain wage or salary, benefits, a reasonable commute, and a suitable working environment. The Draft Guidelines explain that these features may put firms in dominant positions and the Agencies will “examine the merging firms’ power to cut or freeze wages, exercise increased leverage in negotiations with works, or generally degrade benefits and working conditions without prompting workers to quit.” The Draft Guidelines note that, where a merger lessens competition for labor, that reduction “may lower wages or slow wage growth, worsen benefits or working conditions, or result in other degradations of workplace quality.”

The Draft Guidelines are open to public comment until September 18, 2023, after which the Agencies will review the comments received and finalize the new Merger Guidelines.

The release of the Draft Guidelines follows last month’s announcement of a sweeping overhaul of the premerger notification process. On June 27, 2023, the FTC, with the collaboration and concurrence of the DOJ Antitrust Division, published a Notice of Proposed Rulemaking (Proposed Rule) proposing significant changes to the premerger notification form and associated instructions, as well as the premerger notification rules implementing the Hart-Scott-Rodino (HSR) Act, that will require filing parties to devote significant additional resources to completing the form. See our full Alert on these changes here.

The HSR Act and its implementing rules require that parties to reportable mergers and acquisitions (generally, transactions that exceed a certain minimum value, currently $111.4 million) submit premerger notification to the Agencies, which involves completing HSR Forms and providing required documents, and waiting a specific period, usually 30 days, before closing the transaction. During the waiting period, the agencies may investigate the transaction for compliance with antitrust laws. Among other significant changes, the Proposed Rule contemplates an entirely new section in which parties to a transaction must provide information regarding the transaction’s impact on the labor market.

Within a proposed new “Competition and Overlaps” section of the HSR Form, parties to the transaction would have to provide information about employee job categories and geographical information where workers may overlap post-merger as well as worker and workplace safety information. Parties would be required to sort employees into job categories based on Bureau of Labor Statistics criteria and disclose their five largest classifications of workers. They would also be required to identify the top geographic zones where their workforces operate, based on the Economic Research Service of the Department of Agriculture (ERS), a system for delineating local economies. Specifically, for the five largest employee job categories, parties would be required to list the overlapping ERS-defined commuting zones from which employees commute and the total number of employees within each commuting zone. This disclosure requirement is intended to capture sufficient information to identify any potential labor market concerns. In other words, agency review of labor market conditions would focus primarily where both worker classification and geographic location overlap. In addition, parties would have to identify any penalties or adverse findings issued by the U.S. Department of Labor’s Wage and Hour Division, the National Labor Relations Board, or the Occupational Safety and Health Administration in the previous five years as well as any pending matters before those bodies.

This attention to labor markets is consistent with increasing attention to labor markets within antitrust law, as we’ve reported here and here. These proposed changes would allow the Agencies to review the impact of proposed transactions on the labor market with heightened scrutiny and could result in additional merger challenges where proposed transactions have the potential to negatively impact worker mobility, wages, and/or benefits. Consequently, a transaction’s impact on workers should be top of mind for companies contemplating a covered merger or acquisition.

Attorneys in Ballard Spahr’s Antitrust and Competition Group and Labor and Employment Group are available to advise businesses on the effects of these developments.

Leslie E. John, Jason A. Leckerman, Brian D. Pedrow, & Karli Lubin

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Minnesota Omnibus Bill Includes Consumer Loan Law Amendments for All-In APR Cap and Anti-Evasion, New Money Transmitter Laws, and More

Minnesota recently enacted the Commerce Omnibus Finance Bill, which includes amendments to several provisions of Minnesota law related to consumer loans and financial institutions.

Interest Rate Caps on Consumer Small Loans and Short-Term Loans

Minnesota laws related to consumer small loans and consumer short-term loans (as those terms are defined under Minnesota law) are amended to define the annual percentage rate (APR) for the covered loans to be an all-in rate including all fees and charges, as follows:

“Annual percentage rate” means a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made. Annual percentage interest rate includes all interest, finance charges, and fees. The annual percentage rate must be determined in accordance with either the actuarial method or the United States Rule method.

APR was previously undefined in these laws. (We assume that the term “annual percentage interest rate” used in the second sentence is a typographical error and meant instead to state the term being defined: “annual percentage rate.”)

The new law establishes a 50% cap on the all-in APR that “consumer small loan lenders” and “consumer short-term lenders” may charge, and requires any such lender that charges an all-in APR exceeding 36% to make an ability to repay determination. A “consumer small loan” is a consumer loan in which $350 cash or less is advanced to a borrower, and a “consumer short-term loan” is a consumer loan with a principal amount or advance on a credit limit of $1,300 or less and requires a minimum payment within 60 days of loan origination or credit advance of more than 25% of the principal balance or credit advance. The amendments also require industrial loans and thrift companies to comply with these requirements. These amendments become effective January 1, 2024.

Anti-Evasion Requirements for Consumer Small Loans and Short-Term Loans

Additionally, the new laws prevent evasion with these all-in APR cap requirements by “making, offering, assisting, or arranging for a debtor to obtain a loan with a greater rate or amount of interest, consideration, charge, or payment than is permitted by this section through any method, including mail, telephone, Internet, or any electronic means, regardless of whether a person has a physical location in Minnesota.” The anti-evasion provision codifies the predominant economic interest test and the totality or the circumstances, as follows:

A person is a consumer small loan lender subject to the requirements of this section notwithstanding the fact that a person purports to act as an agent or service provider, or acts in another capacity for another person that is not subject to this section, if a person: (1) directly or indirectly holds, acquires, or maintains the predominant economic interest, risk, or reward in a loan or lending business; or (2) both: (i) markets, solicits, brokers, arranges, or facilitates a loan; and (ii) holds or holds the right, requirement, or first right of refusal to acquire loans, receivables, or other direct or interest in a loan.

A person is a consumer small loan lender subject to the requirements of this section if the totality of the circumstances indicate that a person is a lender and the transaction is structured to evade the requirements of this section. Circumstances that weigh in favor of a person being a lender in a transaction include but are not limited to instances where a person:

(1) indemnifies, insures, or protects a person not subject to this section from any costs or risks related to a loan;

(2) predominantly designs, controls, or operates lending activity;

(3) holds the trademark or intellectual property rights in the brand, underwriting system, or other core aspects of a lending business; or

(4) purports to act as an agent or service provider, or acts in another capacity, for a person not subject to this section while acting directly as a lender in one or more states.

Minnesota is not the first state to enact anti-evasion legislation seeking to curb bank-model lending. Within the past three years, consumer lending laws, including broad anti-evasion language intended to recharacterize non-bank facilitators of bank-made loans as the “true lenders,” have been adopted in

  • Illinois, signed and effective in March 2021;
  • Maine, approved by the Governor June 21, 2021 and effective 90 days after the end of the legislative session;
  • Hawaii, effective January 2022; and
  • New Mexico, effective January 1, 2023.

Other states with earlier forms of anti-evasion laws on the books include Georgia, Nevada, and New Hampshire.

Some state regulators are pursuing “true lender” recharacterization even in the absence of statutory authority. For example, the California Department of Financial Protection and Innovation (DFPI) is taking an enforcement position attempting to recharacterize a non-bank as the “true lender” of loans made through a bank-model partnership; and complaints recently brought against fintechs involved in bank-model lending by the Attorney General of the District of Columbia have resulted in at least two settlements (See here and here).

On the federal front, the CFPB has decried ”rent-a-bank schemes”, and the prudential regulators recently have taken steps indicating a heightened focus on bank-fintech partnerships, including the FDIC’s consent order with Cross River Bank and interagency guidance on risk management in third-party relationships.

Other Significant Changes in the Omnibus Bill

The Omnibus Bill also amends the following laws:

  • Money transmitter laws, replacing existing laws in their entirety (effective August 1, 2023);
  • Mortgage originators and servicer licensing laws, adding new definitions, exclusions, financial condition, and corporate governance provisions (effective August 1, 2023);
  • Student loan borrower bill of rights, adding student loan advocate (effective August 1, 2023);
  • Collection and credit services laws, adding several new sections to prohibit coerced debt, require debtors to provide notice to a debt collector of the coerced debt, and provide related debtor and creditor remedies (effective January 1, 2024); and
  • Banks and credit unions with more than $1 billion in assets to submit an annual climate risk disclosure survey (beginning in July 2024).

We are working with state agencies and clients to navigate the impact of these revised laws.

Kristen E. Larson

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“True Lender” Class Actions Against OppFi Filed in Multiple States

In January 2023, a federal district court in Texas dismissed Michael v. Opportunity Financial, LLC, a putative class action filed in June 2022 claiming that fintech Opportunity Financial, LLC (OppFi), not its out-of-state, state-chartered bank partners, is the “true lender” on loans with interest rates permitted under the laws of the banks’ home states, but higher than allowed in the plaintiffs’ states. OppFi’s marketing and servicing arrangements on behalf of the state banks that made the loans were characterized in the complaint as a “rent-a-bank scheme.” The complaint also raised Racketeer Influenced and Corrupt Organization Act (RICO) claims and other claims against OppFi. The court compelled individual arbitration and dismissed the action based on the arbitration clause.

In March 2023, in Johnson v. Opportunity Financial, LLC, a second federal district court (this time in Virginia) also compelled individual arbitration and dismissed a putative class action filed by the same plaintiffs’ counsel that asserted the same claims as in Michael. As in Michael, the Virginia court held that the arbitration clause was neither substantively nor procedurally unconscionable. In particular, it disagreed with the plaintiff’s argument that the length of the agreement and its font size rendered it unconscionable, agreeing instead with OppFi’s position that the documents were provided electronically and the plaintiff could have zoomed in on her computer to see the wording of the arbitration clause:

This argument is really an attempt to excuse the fact that Johnson did not read the contract before signing.… Virginia courts are not sympathetic to parties who do not read contracts before signing them. A party “having the capacity to understand a written document” is “bound by his signature” unless he can prove “fraud, duress, or mutual mistake.” This applies even if the complaining party did not read the contract. In this case, Johnson had access to the contract by way of her computer and could have read the contract, but she chose not to read it. The [arbitration clause] is referenced in numerous places throughout the contract, including in bold text. The [arbitration clause] is hardly hidden—it takes multiple pages and is formatted as a table. Each of the [arbitration clause’s] provisions are defined in plain English. Though the text is small, the questions and plain English answers are bolded. The fact that Johnson did not read the contract does not mean that she could not read it.

Nevertheless, the same plaintiffs’ counsel had better success in Carpenter v. Opportunity Financial, LLC, in which a California federal district court, later in March 2023, denied OppFi’s motion to compel arbitration in another putative class action raising the same claims as in Michael and Johnson. Unlike the Michael and Johnson courts, the Carpenter court found the arbitration clause to be “procedurally unconscionable due to legibility and technological issues, and substantively unconscionable because it impermissibly waives Plaintiff’s substantive rights under the California Financial Code.”

In support of its unconscionability findings, the Carpenter court cited the small font and length of the arbitration clause, coupled with the plaintiffs’ declaration that “they accessed the Agreements through their smartphones, and when they tried to “zoom in” to read the small font, the website glitched, refreshed, and reset the application to the beginning.” OppFi argued that the plaintiffs did “not dispute they could read the agreement despite the purported technical glitches” and that the plaintiffs appeared to have “simply decided it was not worth their effort to zoom in” and “decided to just sign it without reviewing it in full or asking for technical assistance.” The court rejected OppFi’s argument and held:

That Plaintiffs may have been able to read the terms after making multiple attempts to overcome technological glitches and/or seeking technical assistance does not overcome the fact that they were presented with the arbitration clause in a form that challenged the limits of legibility and could not be easily and readily viewed. Accordingly, the court finds this factor establishes a strong degree of procedural unconscionability.

OppFi has appealed the denial of its motion to compel arbitration to the Ninth Circuit Court of Appeals.

In April 2023, the same plaintiff’s counsel filed a fourth putative class action, Fama v. Opportunity Financial, LLC, in federal district court in Washington state stating the same claims against OppFi. Once again OppFi filed a motion to compel arbitration, which summarizes the status of the other three “materially identical actions” discussed above. In particular, in commenting on the Carpenter opinion, OppFi argues:

The plaintiffs in Carpenter claimed, in opposition to OppFi’s motion to compel arbitration, that their arbitration agreements were in 4.5 size font. Those allegations, which the Carpenter court accepted as established fact, are untrue and meaningless in the context of an electronic document where the size of the text scales to the size of the viewing window and can be enlarged or shrunken. Should Plaintiff in this case make similar allegations, OppFi will establish that they are meritless.

We will continue to monitor developments in these actions since an outcome favorable to the plaintiffs on the merits would pose serious concerns for bank-fintech partnerships and the enforceability of consumer arbitration clauses in electronic contracts – subjects we have counseled clients about and published articles on for many years.

Mindy Harris, Ronald K. Vaske & Mark J. Levin

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Sixth Circuit Rules Plaintiff’s Receipt of One Ringless Voicemail Provides Standing for TCPA Claim

A unanimous panel of the U.S. Court of Appeals for the Sixth Circuit has ruled that a plaintiff who received only one ringless voicemail (RVM) had alleged a concrete injury sufficient to provide Article III standing to assert a claim under the Telephone Consumer Protection Act (TCPA).

In Dickson v. Direct Energy LP, the plaintiff alleged that the defendant delivered multiple RVMs to his cell phone voicemail box in which the defendant advertised its services. He also alleged that he never consented to receiving these communications. The plaintiff filed suit individually and on behalf of all others similarly situated alleging that the defendant violated the TCPA’s automated calling prohibition and that he was harmed by the RVMs because they tied up his phone line, cost him money, disturbed his solitude and invaded his privacy. The TCPA generally prohibits calls to a cell phone number “using any automatic telephone dialing system or an artificial or prerecorded voice” without the recipient’s prior express consent.

At his deposition, the plaintiff testified that he received eleven RVMs from the defendant. The defendant’s expert witness, based on an analysis of the plaintiff’s phone records, concluded that of the eleven voicemails the plaintiff produced in discovery, only one was from the defendant. The plaintiff testified that “while he could not remember precisely what he was doing when he received that message, he was ‘sure it interrupted something’ in his routine.”

The district court granted the defendant’s motion to dismiss, finding that the plaintiff suffered no concrete harm and therefore lacked standing. According to the district court, the plaintiff’s receipt of a single RVM did not constitute a concrete harm sufficient for Article III purposes because (a) he could not recall what he was doing when he received the RVM, (b) he was not charged for the RVM, (c) the RVM did not tie up his phone line, and (d) he spent an exceedingly small amount of time reviewing the RVM.

The Sixth Circuit panel concluded that the district court erred in dismissing the plaintiff’s complaint for lack of standing, reversed its judgment, and remanded the case for further consideration. The panel first observed that the Sixth Circuit had not previously considered whether receipt of a single RVM for commercial purposes presented a concrete harm sufficient to confer standing to assert a TCPA claim. Relying on the U.S. Supreme Court’s TransUnion and Spokeo decisions, the panel stated that to determine whether the plaintiff’s alleged injury under the TCPA constituted a concrete harm, it would look to “history and tradition” and “Congress’s judgment in enacting the law at issue.”

With regard to the first prong of the standing analysis, the panel concluded that, regardless of the number of RVMs received by the plaintiff, he had alleged an intangible harm that bore a close relationship to the traditional common law tort of intrusion upon seclusion. The panel observed that “[t]he kind of harm vindicated by the intrusion-upon-seclusion tort is relatively broad” and that “at its core,” the tort is concerned with “the right to maintain a sense of solitude in one’s life and private affairs.” According to the panel, by placing an unsolicited call to the plaintiff’s phone to advertise its services, the defendant had “interject[ed] itself into [the plaintiff’s] private sphere,” thereby implicating his “common-law right to seclusion—that is, his right to be left alone from others, including by means of telephonic communications.” In the panel’s view, “telephones are logically part of one’s private domain to which the right to be left alone extends.”

The panel labeled “inapt” the defendant’s argument that there was no invasion of privacy because there was no evidence that the plaintiff “‘was in a private place [e.g., his home] or state of seclusion that could have been intruded upon.’” The panel stated that an invasion of privacy can occur even when someone is in a public place and that “cell phones are, by their nature, private—regardless of whether they are carried in public places.” The panel also rejected the defendant’s argument that an intrusion upon seclusion occurs only when someone’s tranquility is disturbed by an audible sound like a ringing phone, or when a person’s attention is otherwise distracted from what they are doing. According to the panel, the level of disruption attendant to the defendant’s conduct was irrelevant to the question of whether the plaintiff’s alleged harm “was similar in kind to an intrusion into his private affairs.” (emphasis included). In the panel’s view, the plaintiff “suffered such a harm when [the defendant] deposited an unsolicited RVM into his phone.”

We regard to the second prong of the standing analysis required by Spokeo and TransUnion, the panel found that the defendant had caused the plaintiff “precisely the type of harm Congress sought to address through the TCPA.” The panel observed that “Congress enacted the TCPA after finding that unrestricted telemarketing practices harm consumers.” Thus, according to the panel, because the plaintiff alleged that he received an unsolicited marketing call from the defendant and that the call invaded his privacy, “[h]is injury therefore falls within the ambit of what Congress deemed to be an actionable harm when it enacted the TCPA.”

Daniel JT McKenna

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Did You Know?

The annual NMLS license renewal period is 3 months away! The renewal period opens on November 1st and concludes on December 31st. For more information about what will be required for a specific license and how to prepare, please see the NMLS renewal page.

John Georgievski

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Looking Ahead

Shining a Bright Light on Digital Dark Patterns

A Ballard Spahr Webinar | August 16, 2023, 12:00 PM – 1:00 PM EST

Speakers: Alan S. Kaplinsky, Edward Rogers, & Michael Gordon

MBA’s Human Resources Symposium 2023

Remote Work Super Session: Legal, Operational, and Tax and Accounting Perspectives, September 6, 2023 - 9 AM EST

Speaker: Meredith S. Dante

Fair Labor Standards Act Update, September 6, 2023 - 11:15 AM EST

Speaker: Meredith S. Dante

Loan Originator Compensation and Other Mortgage-Specific Legal Issues Affecting HR Managers, September 6, 2023 - 1 PM EST

Speaker: Richard J. Andreano, Jr.

MBA’s Compliance and Risk Management Conference

COMPLIANCE ROUNDTABLE: State Licensing and Examination Trends, September 10, 2023 – 2:15 PM EST

Speaker: John D. Socknat

TRENDING COMPLIANCE ISSUES TRACK: Servicing – Key Compliance Considerations, September 12, 2023 – 9:15 AM EST

Speaker: Reid F. Herlihy

CLOSING SUPER SESSION: Regulatory Compliance, September 12, 2023 – 11:45 AM EST

Speaker: Lisa M. Lanham

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