Legal Alert

Mortgage Banking Update - November 2, 2023

November 2, 2023
In This Issue:


Texas Federal District Court Issues Preliminary Injunction Enjoining CFPB From Implementing and Enforcing Small Business Lending Rule on Nationwide Basis Against All Covered Entities

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 on a nationwide basis against all entities covered by the Rule. On July 31, the court had denied the request of the plaintiffs in the lawsuit for nationwide preliminary relief and instead issued an order that granted preliminary relief only to the plaintiffs and their members. (The plaintiffs are the Texas Bankers Association, the American Bankers Association, and Rio Bank, McAllen, Texas.) The July 31 order triggered the filing of numerous motions by various trade associations and entities not covered by the July 31 order seeking to intervene in the case and expand the coverage of the preliminary relief granted to the plaintiffs. After those motions to intervene were granted by the Texas court, the intervenors filed preliminary injunction motions asking the court to extend the preliminary relief granted to the plaintiffs on a nationwide basis to all entities covered by the Rule.

After finding that all of the intervenors had satisfied the four requirements for a preliminary injunction, the court gave the following reasons for expanding the preliminary relief:

  • Although the court was not initially persuaded that a need for uniformity merited a nationwide injunction, it determined that while there is no “constitutional command” for uniformity, “there exists a statutory command for uniformity with constitutional implications. While the general application of most laws does not alone justify nationwide relief, the statute underlying the [Rule] does more; its very purpose is the equal application of lending laws to all credit applicants to avoid disparate outcomes, and it presumes uniform application to all covered financial institutions absent exemption by the Bureau.”
  • A judicial exemption from the Rule for only the parties in the case “both undermines the statute… and leaves non-exempted lenders subject to the discretion of an agency whose very ability to act is a matter of constitutional concern pending resolution on a nationwide scale.”
  • A limited injunction “risks omitting those non-member and/smaller financial institutions less able to challenge the rule, and more likely to suffer harm should they continue to incur compliance costs that prove unnecessary and unrecoverable.”

The court also clarified that, in issuing the preliminary injunction, it was ordering the CFPB to “cease implementation and enforcement against Plaintiffs and their members, Intervenors and their members, and all covered financial institutions.” (emphasis included) However, it was not ordering the CFPB not to “answer[] an inquiry or publish[] guidance materials” because this “would not qualify as conduct taken against a financial institution, and does not fall within the conduct proscribed.”

The court’s order also (1) stays all deadlines for compliance with the Rule for Plaintiffs and their members, Intervenors and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and (2) order the CFPB, if the Supreme Court rules that its funding is constitutional, to extend the deadlines for compliance with the Rule to compensate for the period stayed. However, even if the constitutional challenge to the Rule is removed by a Supreme Court ruling in favor of the CFPB, other challenges to the Rule made by the plaintiffs and intervenors will remain for the Texas court to decide, such as whether the Rule violates the Administrative Procedure Act.

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

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Senate Votes to Override CFPB Small Business Lending Rule

Yesterday, by a vote of 53-44, the Senate voted to approve S.J. 32, the resolution introduced under the Congressional Review Act (CRA) to override the CFPB’s final Section 1071 small business lending rule (1071 Rule).

The Senators voting for the resolution included three Democratic Senators (Senators Hinckenlooper, Manchin, and Tester) and the two Independent Senators (Senators King and Sinema). Among the reasons given by Senators for their disapproval of the 1071 Rule were concerns about privacy and the cumbersome nature of the data that institutions would be required to report. The CRA is the vehicle used by Congress to overturn the CFPB’s arbitration rule and the OCC’s true lender rule. While the resolution is likely to also pass in the House once a Speaker is elected, President Biden can be expected to veto the resolution and there is unlikely to be sufficient votes to override his veto.

A more likely source of relief for industry are the two pending lawsuits challenging the 1071 Rule, one in a Texas federal district court and the other in a Kentucky federal district court. In the Texas lawsuit, which was filed first, the plaintiffs are the Texas Bankers Association, the American Bankers Association, and Rio Bank, McAllen, Texas. The court 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. Because of the limited relief granted by the Texas federal court, other trade associations, financial institutions, and non-bank entities have intervened in the lawsuit in an effort to expand the scope of the preliminary injunction.

The Kentucky lawsuit was filed by the Kentucky Bankers Association and several Kentucky banks. The Kentucky federal court also issued an order that preliminarily enjoined the CFPB from implementing the 1071 Rule but unlike the preliminary injunction issued in the Texas lawsuit, the preliminary injunction issued in the Kentucky lawsuit is not limited to members of the plaintiff trade associations and banks.

In addition to raising a constitutional challenge to the 1071 Rule based on the CFPB’s funding mechanism, the plaintiffs in both lawsuits allege that, in promulgating the 1071 Rule, the CFPB violated the Administrative Procedure Act. The plaintiffs in the Kentucky lawsuit also allege that the 1071 Rule violates the First Amendment. If the Supreme Court rules that the CFPB’s funding is constitutional, the district courts will need to address the plaintiffs’ non-constitutional claims in the lawsuits.

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

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FinCEN Renews and Expands GTO

FinCEN announced on October 20 that, once again, it is extending the Geographic Targeting Order, or GTO, which requires U.S. title insurance companies to identify the natural persons behind so-called “shell companies” used in purchases of residential real estate not involving a mortgage. FinCEN also has expanded slightly the reach of the GTOs and the FAQs.

The new GTO is here. FinCEN’s press release is here. FAQs issued by FinCEN on the GTOs are here. This is a topic on which we previously have blogged extensively.

The terms of the new GTO are effective beginning October 22, 2023, and ending on April 18, 2024. The GTO has been expanded, again, to cover the counties of Bristol, Essex, Norfolk and Plymouth in Massachusetts, the counties of Hillsborough, Pasco, Pinellas, Manatee, Sarasota, Charlotte, Lee and Collier in Florida, and the county of Travis in Texas.

The effective period of the GTOs for purchases in these newly added areas begins on November 21, 2023. The GTO will continue to cover certain counties within the following major U.S. metropolitan areas: Boston; Chicago; Dallas-Fort Worth; Honolulu; Las Vegas; Los Angeles; Miami; New York City; San Antonio; San Diego; San Francisco; Seattle; parts of the District of Columbia, Northern Virginia, and Maryland (DMV) metropolitan area; the Hawaiian islands of Maui, Hawaii, and Kauai; Fairfield County, Connecticut; and counties encompassing the Texas cities of Houston and Loredo. The purchase amount threshold remains $300,000 for each covered metropolitan area, with the exception of the City and County of Baltimore, where the purchase threshold is $50,000.

The FAQs were expanded to include this new clarifying item:

9. How has the definition of a Covered Transaction changed from previous GTOs?

Section II.A.2.iii of Real Estate GTOs issued prior to April 2023 defined an element of a Covered Transaction to include where “such purchase is made without a bank loan or other similar form of external financing.” FinCEN has received numerous inquiries from covered businesses about the meaning of “similar form of external financing”, and whether certain real estate purchases qualify. For this reason, and consistent with previous guidance provided in response to such inquiries, the April 2023 GTOs provided a revised definition to reduce confusion and burden for covered businesses. Section II.A.2.iii now includes as an element of a Covered Transaction that “[s]uch purchase is made without a bank loan or other similar form of external financing by a financial institution that has both an obligation to maintain an anti-money laundering program and an obligation to report suspicious transactions under FinCEN regulations appearing in Chapter X of Title 31 of the Code of Federal Regulations.” In other words, if the purchase was made without a loan from a financial institution with AML/CFT program requirements and SAR filing requirements and meets the other criteria in the order, it is a Covered Transaction and a report must be filed.

The GTO renewal is part of FinCEN’s continued focus on the real estate industry. On October 3, 2023, the Director of FinCEN, Andrea Gacki, addressed the issue of real estate, among other topics, at the Association of Certified Anti-Money Laundering Specialists (ACAMS) conference in Las Vegas, Nevada. Director Gacki explained that FinCEN has been examining the money laundering risks and vulnerabilities with certain so-called “gatekeeper” industries, including real estate. Director Gacki stated that, “[f]or too long, the U.S. real estate market has been susceptible to manipulation and use as a haven for the laundered proceeds of illicit activity, including corruption.” Director Gacki noted that FinCEN issued on December 6, 2021 an Advanced Notice of Proposed Rulemaking (ANPRM) to solicit public comment on potential requirements under the Bank Secrecy Act for certain persons involved in real estate transactions to collect, report, and retain information. As we have blogged, the ANPRM envisions imposing nationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold. According to Director Gacki, FinCEN is “currently developing a Notice of Proposed Rulemaking, the contours of which are still being determined. FinCEN aims to issue this ANPRM later this year.”

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team. Please also check out our detailed chapter on these issues, The Intersection of Money Laundering and Real Estate.

Peter D. Hardy

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DOJ Redlining Consent Order With Ameris Bank

Recently the U.S. Department of Justice (DOJ) entered into a proposed consent order with Ameris Bank to resolve allegations of redlining from 2016 through 2021 in majority Black and Hispanic areas in the Bank’s Jacksonville, Florida assessment area under both the Equal Credit Opportunity Act (ECOA) and Fair Housing Act. In conjunction with the announcement of the proposed consent order, Attorney General Merrick Garland provided an update on the DOJ’s Combating Redlining Initiative that was launched in October 2021.

As we noted regarding another recent redlining settlement, the finding by a federal district court that ECOA does not apply to prospective applicants in the Townstone case, and the CFPB’s appeal to the U.S. Court of Appeals for the Seventh Circuit, has created uncertainty in the industry regarding ECOA’s applicability to redlining practices. Despite this uncertainty, the DOJ stated that the Bank’s “acts, policies, and practices as alleged herein constitute unlawful discrimination against applicants and prospective applicants, including by redlining majority-Black and Hispanic communities in its assessment area and engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, or national origin in violation of ECOA and Regulation B.”

The DOJ allegations reflect common themes of recent DOJ redlining settlements, although the DOJ also includes more detailed allegations. DOJ alleges that:

  • The Bank located its branches in its Jacksonville Community Reinvestment Act (CRA) assessment area so as to serve the credit needs of residents in majority-White neighborhoods and avoid serving the credit needs of residents in majority-Black and Hispanic neighborhoods. While this is a common theme, the DOJ included more detailed allegations:
    • The Bank does not have, and has never had, a branch located in a majority-Black and Hispanic census tract in its Jacksonville assessment area, even though the majority-Black and Hispanic census tracts represent nearly 20% of the overall census tracts in the assessment area.
    • In January 2019, as part of an “efficiency initiative” prior to a merger, the Bank closed two branches in census tracts that it had identified as having “minority” populations “higher” than adjacent Bank branch locations. The Bank did not close any branches in White areas of its Jacksonville assessment area as part of the efficiency initiative.
    • One of the branches closed, the “downtown branch,” was located within what the Bank referred to as the “urban core” and was the closest branch to most of the majority-Black and Hispanic tracts in Jacksonville. At the time of its closure, the downtown branch was rated one of the Bank’s “best financial performers” of all of its branches in the United States.
    • The Bank performed an internal CRA analysis to assess the effect of the branch closures on the Bank’s CRA score, and the Bank determined that both branch closures would have a negative impact on its CRA score.
    • At the time of the CRA analysis and when the Bank closed the branches, the Bank already knew that, in years prior, it had originated zero loans in most of what the Bank called the “urban core.” The Bank knew or should have known from its internal CRA analysis that its branch closures would further deprive those same communities of equal access to credit services.
    • After the branch closures, the Bank did not take any action to increase or supplement its outreach or advertising to the affected communities to ensure it was reaching majority-Black and Hispanic communities and serving the credit needs of its entire community, except for one email campaign in 2019 where the Bank sent emails to already-existing customers living in majority-Black and Hispanic communities.
  • The Bank has a policy or practice of relying primarily on its mortgage bankers to generate residential mortgage loan applications by developing referral sources and conducting outreach to build local relationships. The Bank’s mortgage loan officers targeted majority-White areas to generate loan applications and avoided marketing, advertising, and outreach in majority-Black and Hispanic areas. While this is a common theme, the DOJ included more detailed allegations:
    • Mortgage bankers are not assigned to generate applications from specific geographic areas within the Jacksonville assessment area. The Bank’s mortgage bankers have unsupervised discretion to decide from where to solicit applications.
    • The Bank did not monitor or document where its mortgage bankers developed referral sources or to whom mortgage bankers distributed marketing or outreach materials related to mortgage lending services to ensure that such sources or distributions occurred in all neighborhoods throughout the Jacksonville assessment area.
    • In July 2018, the Bank’s Compliance Department recommended to the Mortgage Division that its mortgage bankers build partnerships with local real estate professionals and community partners to improve lending in high-minority communities and low- and moderate-income communities and that the Mortgage Division conduct mortgage banker training.
    • In response to the Compliance Department’s recommendations, the Bank created a CRA mortgage banker position. The Bank’s Chief Executive Officer offered this specialized CRA mortgage banker job to a person who did not apply for or seek out the role, had no banking experience or relevant background knowledge, and no familiarity with or connections to Black or Hispanic neighborhoods in Jacksonville. During his approximately one year and seven months in the role, the CRA mortgage banker did not originate a single loan. Nor did he perform any outreach or distribute any marketing materials to majority-Black and Hispanic communities. In or around March 2020, the CRA mortgage banker was transitioned to an internal lending role. The Bank did not fill the CRA mortgage banker role for the remainder of the relevant time period.
  • The Bank targeted some advertising efforts to majority-White areas but made no or minimal efforts to similarly target advertising to majority-Black and Hispanic areas in its Jacksonville assessment area. While this is a common theme, the DOJ included more detailed allegations:
    • During the relevant time period, the Bank’s corporate marketing division selected some media channels that reached the entire assessment area, including television, radio, and print. However, the Bank also targeted specific majority-White areas within the assessment area but did not target majority-Black and Hispanic tracts.
    • The Bank focused its billboard marketing in white areas. For example, in 2019 and 2020, the Bank placed six advertisements on billboards in the Jacksonville assessment area in majority-White tracts. The Bank did not advertise on any billboards located in majority-Black and Hispanic tracts.
    • In 2020, the Bank sent a “free checking mailer” that the Bank stated was targeted toward low- and moderate-income areas and majority-minority census tracts. The Bank mailed approximately 22,759 postcards with images of white models to 13 zip codes throughout its Jacksonville assessment area, predominantly in areas around its branches. Of those postcards, approximately 96.5% were sent to majority-White tracts and only 3.5% of the postcards were sent to a single majority-minority tract. Not one postcard was sent to a single resident living in a majority-Black and Hispanic tract. None of the postcards were sent to the area that the Bank calls the “urban core.”
  • The Bank’s internal compliance management system was inadequate to ensure that the Bank provided equal access to credit to majority-Black and Hispanic neighborhoods in its Jacksonville assessment area. In particular, the DOJ alleges:
    • As early as 2016, the Bank knew that its internal redlining analysis was insufficient to identify and measure redlining risk, but it did not revise its monitoring practices until 2018. In May 2018, using its revised analysis, a Bank report identified 44 low- and moderate-income or high-minority tracts where other lenders originated loans in 2017, but the Bank originated zero loans.
    • In July 2018, the Compliance Department met with the President of Mortgage Services to discuss the Fair Banking Manager’s recommendations. For the remainder of the relevant time period, the Bank failed to take effective actions to implement these recommendations.
    • In January 2019, the Compliance Department compiled a report on the Bank’s lending in Duval County’s “urban core.” The report stated that, in 2017, of the loans that the Bank did originate in “urban core” high- minority tracts, only two of those loans were made to Black borrowers and zero loans were made to Hispanic borrowers.
  • The Bank significantly underperformed its “peer lenders” in generating home mortgage loan applications from majority-Black and Hispanic areas within the Bank’s assessment area. As is common, the DOJ defined “peer lenders” as similarly-situated financial institutions that received between 50% and 200% of the Bank’s annual volume of home mortgage loan applications in the Bank’s Jacksonville assessment area. In particular, the DOJ alleges:
    • Only 3.5% of applications came from residents of majority-Black and Hispanic census tracts, compared to 10.8% of applications received by peer lenders from these same majority-Black and Hispanic census tracts.
    • Only 2.7% of the Bank’s mortgage loans were made to residents of majority-Black and Hispanic census tracts, compared to 9.5% of mortgage loans made by peer lenders in these same majority-Black and Hispanic census tracts.

The proposed consent order includes common remedies required by the DOJ to settlement redlining allegations, and also remedies tailored to the Bank. In the proposed consent order, the Bank agrees to:

  • Maintain during the five year term of the consent order a Fair Lending Committee that the Bank established in 2022, and a Fair Lending Policy that the Bank adopted in 2021, subject to changes contemplated by the consent order.
  • Submit to the DOJ a detailed evaluation of the Bank’s fair lending program as it relates to fair lending obligations and lending in majority-Black and Hispanic census tracts across its markets, that is conducted by an independent, qualified third-party consultant selected by the Bank, subject to non-objection by the DOJ.
  • Submit a revised Fair Lending Plan to the DOJ for non-objection that explains which of the consultant’s recommendations the Bank will adopt, when and how it will adopt and implement them, and identify the employee(s) responsible for implementation. If the Bank declines to adopt or implement a recommendation, the Bank must include an explanation of the decision.
  • With regard to the community credit needs assessment for majority-minority census tracts in Jacksonville that the Bank commissioned in 2022, submit to the DOJ a remedial plan that details, in light of the recommendations made in the assessment, the actions that the Bank proposes to take to comply with the requirements of the consent order. (It is common for consent orders to require the lender to conduct a community credit needs assessment. As the Bank had already conducted such an assessment, the DOJ required an update to address the consent order requirements.)
  • Open or acquire a new branch in a majority-Black and Hispanic neighborhood in Jacksonville located north of the St. Johns River in the Jacksonville assessment area, with the DOJ having a non-objection right regarding the specific location of the branch. The branch must be a full-service branch in a retail-oriented space in a visible location and have signage that is visible to the general public. The branch must provide the Bank’s complete range of products and services, maintain hours of operation consistent with the range of hours maintained at other Bank branches in the Jacksonville assessment area, and must accept first-lien mortgage loan applications. Unlike some recent consent orders, the consent order does not prohibit the Bank from opening a branch outside of majority-Black and Hispanic neighborhoods in Jacksonville before opening the required branch.
  • Hire a CRA mortgage banker position with the same competitive compensation structure used with the two CRA mortgage bankers that the Bank hired in 2022 to serve its Jacksonville assessment area, and during the term of the consent order maintain no fewer than three full-time CRA mortgage bankers to solicit mortgage applications primarily in majority-Black and Hispanic census tracts in the Bank’s Jacksonville assessment area.
  • Invest $7.5 million in a loan subsidy fund that will be made available to residents of majority-Black and Hispanic neighborhoods in the Jacksonville assessment area. The fund may be used to provide interest rates or points below the otherwise prevailing market interest rate or points offered by the Bank, down payment assistance in the form of a direct grant, closing cost assistance in the form of a direct grant, payment of the initial mortgage insurance premium on loans subject to such mortgage insurance, and any other assistance measures approved by the DOJ.
  • Spend a minimum of $180,000 per year ($900,000 during the term of the consent order) for advertising and outreach targeted toward the residents of the residents of majority-Black and Hispanic census tracts in the Jacksonville assessment area.
  • Spend a minimum of $120,000 per year ($600,000 during the term of the consent order) to develop community partnerships to provide services to the residents of majority-Black and Hispanic census tracts in the Jacksonville assessment area that increase access to residential mortgage credit.
  • Advertise its residential loan products to majority-Black and Hispanic census tracts in its Jacksonville assessment area, and target advertising to generate mortgage loan applications from qualified applicants in these census tracts. The Bank’s advertising may include print media, radio, digital advertising, social media, television, direct mail, billboards, and any other appropriate medium to which the DOJ States does not object. The Bank must advertise its mortgage lending services and products to majority-Black and Hispanic census tracts in its Jacksonville assessment area at least to the same extent that it advertises its mortgage lending services and products to majority-White census tracts in its Jacksonville assessment area.
  • Provide at least six outreach programs per year during the term of the consent order for real estate brokers and agents, developers, and public or private entities engaged in residential real estate-related business in majority-Black and Hispanic census tracts in the Jacksonville assessment area to inform them of its products and services and to develop business relationships.
  • Develop a consumer financial education program and provide a minimum of eight seminars per year, during the term of the consent order, targeted and marketed toward residents in majority- Black and Hispanic census tracts in the Jacksonville assessment area and held in locations intended to be convenient to those residents.
  • Employ a full-time Director of Community Lending who will oversee the continued development of lending in majority-Black and Hispanic neighborhoods in Jacksonville assessment area.

As has been the trend with recent redlining consent orders, there is no civil money penalty.

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

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DOJ Settles Redlining Claims in Rhode Island

The Department of Justice (DOJ) announced a settlement agreement with Washington Trust Company, of Westerly (WTC) to resolve claims that WTC redlined majority Black and Hispanic neighborhoods in Rhode Island.

In its complaint against WTC, DOJ alleged that the following practices were used to discriminate against Black and Hispanic borrowers from 2016 to at least 2021:

  • WTC located and maintained all of its Rhode Island branches and loan officers outside of majority-Black and Hispanic neighborhoods (WTC designated all five counties in Rhode Island as its Community Reinvestment Act (CRA) assessment area);
  • WTC never had a branch in a majority-Black and Hispanic census tract despite the significant presence of majority-Black and Hispanic neighborhoods and census tracts throughout Rhode Island;
  • WTC did not assign a single mortgage loan officer to conduct outreach, market, advertise, or generate loans from majority-Black and Hispanic neighborhoods;
  • WTC failed to conduct outreach, marketing, and advertising of mortgage services in majority-Black and Hispanic areas;
  • WTC received only 2.4% of its mortgage loan applications from residents of, or for properties located in, majority-Black and Hispanic areas in its CRA assessment area, compared to 9.5% for its peer lenders, and on average 46.5% of the applications generated by WTC in those areas were from White applicants, compared to 25% for its peers. (As is common, the DOJ considered the peer lenders to include similarly-situated financial institutions that received between 50% and 200% of WTC’s annual volume of home mortgage loan applications);
  • WTC made only 1.9% of its mortgage loans to residents of, or for properties located in, majority-Black and Hispanic areas in its CRA assessment area, compared to 7.9% for its peer lenders;
  • WTC employed only two mortgage loan officers who spoke Spanish fluently, with one leaving the position after serving less than one year and, as a result, the vast majority of WTC’s mortgage loan officers were unable to provide credit services to Spanish-speaking applicants and prospective applicants; and
  • WTC was aware of its redlining risk because the disparities in its mortgage lending activity were identified in internal and third-party reports.

In the complaint, the DOJ claimed WTC’s actions violated both the Fair Housing Act and the Equal Credit Opportunity Act. The finding by a federal district court that ECOA does not apply to prospective applicants in the Townstone case, and the CFPB’s appeal to the U.S. Court of Appeals for the Seventh Circuit, has created uncertainty in the industry regarding ECOA’s applicability to redlining practices. Despite this uncertainty, the DOJ stated that WTC’s “practices as alleged herein constitute unlawful discrimination against applicants and prospective applicants, including by redlining majority-Black and Hispanic communities in its assessment area and engaging in acts and practices directed at prospective applicants that would discourage prospective applicants from applying for credit on the basis of race, color, or national origin in violation of the Equal Credit Opportunity Act and Regulation B.”

The allegation regarding the inability of WTC to provide credit services to Spanish-speaking applicants and prospective applicants reflects a trend of the DOJ apparently perceiving what it believes are insufficient resources to assist individuals with limited English proficiency (LEP) as presenting a fair lending issue.

Ultimately, the DOJ settled the case with WTC. Under the consent order, WTC has agreed to:

  • Submit to DOJ for non-objection a Community Credit Needs Assessment for majority-Black and Hispanic census tracts within the Rhode Island lending area that is conducted by one or more independent, qualified third-party consultants selected by WTC and subject to non-objection by the DOJ;
  • Supplement its existing annual third-party assessment of its fair lending program in the Rhode Island lending area, specifically to include fair lending obligations and lending in majority-Black and Hispanic census tracts, which supplement is subject to non-objection by the DOJ;
  • Provide fair lending training to all employees with substantive involvement in mortgage lending, marketing, or fair lending or CRA compliance in the Rhode Island lending area;
  • Designate a full time employee as Director of Community Lending to oversee lending activities in majority-Black and Hispanic areas;
  • Open 2 full services branches, and hire loan officers, in majority-Black and Hispanic census tracks; and
  • Spend $9 million investing in increased access to mortgage loans, community partnerships, advertisement, outreach, and financial education focused on majority-Black and Hispanic neighborhoods in Rhode Island, including a $7 million loan subsidy fund to provide for below market rates, down payment assistance, closing cost assistance and/or payment of the initial mortgage insurance premium.

As is the case with more recent redlining consent orders, the consent order does not provide for payment of a civil money penalty.

Loran Kilson & Richard J. Andreano, Jr.

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Attorney General Merrick Garland Remarks on the DOJ’s Success in Combating Redlining

On October 19, 2023, the Department of Justice (DOJ) announced that its Combating Redlining Initiative has resulted in over $107 million in relief for communities adversely affected by lending discrimination by mortgage lenders. This comes on the same day DOJ announced its $9 million settlement with Ameris Bank, it’s most recent redlining case. Attorney General Merrick Garland remarked on the significance of this initiative’s success.

As background, in October of 2021, the DOJ introduced the “Combatting Redlining Initiative” which was meant to be the “most aggressive and coordinated enforcement effort to address redlining” and which will “seek to address fair lending concerns on a broader geographic scale than the [DOJ] has ever done before.” When the initiative was announced, the DOJ explained that it would target not only redlining by depository institutions but also target potential redlining by non-depository institutions. It was also made clear that the DOJ would coordinate with other financial regulatory agencies, including the CFPB and OCC, to ensure the identification and referral of fair lending violations. In the two years since the initiative was introduced, we have blogged about redlining cases brought against a number of depository and non-depository mortgage lenders. AG Garland noted that in those two years, the Department has secured 10 settlement agreements with mortgage lenders in Houston, Memphis, Philadelphia, Camden, Wilmington, Newark, Los Angeles, Columbus, Tulsa, Rhode Island, and now Jacksonville. He also stated that these settlements have led to meaningful resolutions and often involved lenders making significant financial investments and changes to their business practices to create access to credit and remedy their alleged discrimination.

In his remarks, AG Garland emphasized the efforts being taken by the DOJ and law enforcement to bring redlining claims. He explained that the recent settlements are the result of that dedication to collaboration. AG Garland noted that it is “clear, redlining is not just a relic of the past. Indeed, some of the neighborhoods that we allege Ameris redlined are some of the same neighborhoods that federal agencies originally redlined in the 1930s.” The Attorney General expressed his pride at the current efforts behind the Combatting Redlining Initiative and noted the DOJ will continue these efforts.

Loran Kilson

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This Week’s Podcast Episode: The U.S. Supreme Court’s Decision in CFSA V. CFPB: Who Will Win and What Does It Mean? Part I

On October 3, 2023, the U.S. Supreme Court heard oral argument in CFSA v. CFPB, a case with profound potential implications for the future of the CFPB. The Court will rule on whether the CFPB’s funding mechanism violates the U.S. Constitution’s Appropriations Clause and, if so, what the appropriate remedy should be. Our special guests are six renowned attorneys who filed amicus briefs in the case: Michael Williams, Principal Deputy Solicitor General, Office of the West Virginia Attorney General; Adam Levitin, Professor, Georgetown University of Law Center; Scott Nelson, Public Citizen Litigation Group; Jeffrey Naimon, Orrick, Herrington & Sutcliffe LLP; Joshua Katz, Research Fellow, Cato Institute; and John Masslon, Counsel, Washington Legal Foundation.

This two-part episode repurposes our widely-attended and highly interactive webinar held on October 17. In Part I, we first discuss some of the key questions asked by each of the Justices that could be indicative of how he or she may vote on the case and summarize the positions of each of the parties. We then discuss the major arguments made by each of the parties in support of their positions and examine the strength of those arguments.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion.

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

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Supreme Court Grants Cert for Interest-on-Escrow Preemption Case

The U.S. Supreme Court recently granted certiorari to hear the Second Circuit case of Cantero et al. v. Bank of America, N.A., involving National Bank Act (NBA) preemption of New York’s law requiring that interest be paid to consumers on mortgage escrow account funds. The decision would address a split between the Second and Ninth Circuits on the topic of NBA preemption of state “interest-on-escrow” laws.

In Cantero, the Second Circuit, reversing the district court, agreed with Bank of America that the NBA preempts a New York law that requires “mortgage investing institutions” that maintain escrow accounts to pay interest at a specified rate. (N.Y. Gen. Oblig. Law Section 5-601.) In doing so, the Second Circuit panel indicated that “[i]t is only when state laws control the exercise of powers granted to national banks that those laws conflict with the NBA.” It concluded that the New York law was preempted because “[b]y requiring a bank to pay its customers in order to exercise a banking power granted by the federal government [i.e. the power to create and fund escrow accounts], the law would exert control over banks’ exercise of that power.”

In the 2022 decision in Flagstar Bank, FSB v. Kivett, the Ninth Circuit ruled that the NBA does not preempt a California law that requires financial institutions to pay interest at a specified rate on escrow accounts associated with certain mortgage loans. (Cal. Civil Code Section 2954.8(a).) In doing so, the Ninth Circuit indicated that it was bound by precedent from another panel of the Ninth Circuit in the 2018 case of Lusnak v. Bank of America, N.A. The preemption standard applied by the panel in Lusnak was whether the California law “prevents [the bank] from exercising its national bank powers or significantly interferes with [the bank’s] ability to do so.” We note that in 2019 the Supreme Court denied a petition to hear the Lusnak case.

As we previously noted in March of this year, the Supreme Court invited a brief from the Solicitor General on the topic, while considering the petition for certiorari. Solicitor General Prelogar’s amicus brief argued against granting cert because neither Circuit’s preemption analysis was correct. Solicitor General Prelogar took the position that the “significantly interferes with” standard for preemption found in 12 U.S.C. 25b requires a practical, case-by-base inquiry, which neither Circuit conducted. The brief stated that “a court must make a practical assessment of the degree to which the state law will impede the exercise of those powers”. Because of the flawed analysis, the brief argued that both Cantero and Flagstar are flawed vehicles for the Supreme Court’s resolution of the issue.

Also of note, in June 2021, the Office of the Comptroller of the Currency filed an amicus brief in support of Bank of America’s position in the Second Circuit case. Arguing for the Second Circuit to overturn the district court in Cantero, the OCC asserted that the lower court erred in applying the “significant interference” preemption standard from Barnett Bank of Marion Cty., N.A. v. Nelson, by requiring that a state law must “practically abrogate or nullify” a national bank power in order to be preempted, and that the lower court also erred in not granting any level of deference to the OCC’s regulations on the issue. Further the OCC stated that the lower court’s decision “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the National Bank Act”.

This case has broader implications for the future of NBA preemption, beyond the specific issue of state “interest-on-escrow” laws. This is the first time that the Supreme Court will have the opportunity to determine what changes, if any, were made to NBA preemption by virtue of the enactment on July 21, 2010 of Section 1044 of the Dodd-Frank Act (12 U.S.C. 25b) and the OCC regulations promulgated thereunder. Section 1044 of Dodd-Frank provides, in relevant part, that the NBA preempts state law only to the extent that the law has a discriminatory effect on national banks, or applying the standard from Barnett, the state law prevents or significantly interferes with the exercise by the national bank of its powers. Shortly thereafter, the OCC promulgated regulations which purported to implement Section 1044 of Dodd-Frank. They provide, in relevant part, that a national bank may make real estate loans, without regard to state law limitations concerning, among other things, “Escrow accounts, impound accounts, and similar accounts”. 12 CFR § 34.4(a). Further, the regulations provide that national banks are subject to certain specified types of state laws, and any other law that that the OCC determines to be applicable to national banks, in accordance with Barnett. 12 CFR § 34.4(b). In Cantero, the Supreme Court will need to determine what test to apply in determining whether the NBA preempts state law and the extent to which the Dodd-Frank Act changes the test that existed prior to the enactment of Section 1044 of Dodd-Frank. The Supreme Court may also determine whether the relevant OCC regulations conform with Section 1044 of Dodd-Frank, and the extent, if any, that the Court may defer to such regulations in light of the fact that the Supreme Court is poised to overrule the Chevron Deference Doctrine.

Reid F. Herlihy

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CFPB Issues Proposed Rule Offering Consumers Greater Access to and Control Over Their Financial Data

On October 19, 2023, the Consumer Financial Protection Board (CFPB) released a proposed rule that, if enacted, would grant consumers greater access rights to the data their financial institutions hold. Under the proposed Personal Financial Data Rights Rule (the “Proposed Rule”), bank customers nationwide would have privacy rights similar to what is afforded under the dozen state privacy laws that have been enacted in recent years. Comments on the Proposed Rule are due on or before December 29th of this year, while the Proposed Rule would likely go into effect in the fall of 2024.

The Proposed Rule would provide consumers the right to request information related to their account transactions, balances, and third-party bill payments from their financial institutions. Consumers may also request the information used to initiate ACH transactions, information regarding the terms and conditions of the financial products and services (such as applicable fee schedules, APRs, and rewards program terms), and basic account verification information. Notably, the access right excludes information that would constitute confidential business information. Information concerning mortgages, auto loans, and student loans are similarly out of scope of the Proposed Rule, although the CFPB has indicated its intent to broaden the Proposed Rule’s coverage in future rulemaking. Financial institutions must make covered data available in a readily usable electronic form to the consumer and, if applicable, a third-party authorized by the consumer (such as a competing financial institution) upon request at no cost.

The Proposed Rule signals the first step toward the implementation of regulations aimed at “open banking” that were initially required under the 2010 Dodd-Frank Act and is the first proposal to implement Section 1033 of the Consumer Financial Protection Act (the CFPA). Under the CFPA, the CFPB was tasked with implementing personal financial data sharing standards and protections (refer to Ballard Spahr’s Consumer Finance Monitor articles and podcast regarding Section 1033 rulemaking here, here, here, and here). By facilitating access to consumers’ personal information and removing certain bureaucratic hurdles currently involved with switching to a new financial services provider, CFPB Director Rohit Chopra noted the Proposed Rule “will help accelerate the shift” to a more decentralized financial market structure while guarding consumers’ personal data against abuse and misuse.

Although there will be operational costs, the CFPB believes that the Proposed Rule would actually foster competition by benefitting smaller financial institutions, fintechs, and startups. For example, the ability to transfer consumer transaction history with greater ease, speed, and efficiency may cut down on administrative costs the smaller players in the industry and startups face when onboarding new customers. According to CFPB Director Chopra, “jumpstarting competition in banking and consumer finance” will lead to companies incentivized to provide better customer service and products. Future rulemaking that widens the scope of the Proposed Rule to include other types of covered data will, as CFPB Director Chopra pointed out, “continue to foster more competition and consumer choice throughout the market.”

The Proposed Rule would also prohibit companies from using consumer account data for purposes other than providing the requested services and products. Financial institutions would therefore be prohibited from using the subject data for targeted advertising and marketing purposes or to sell to data brokers. Upon termination of the customer relationship, financial institutions would be required to delete subject data in its possession (subject to applicable law and retention requirements). Screen scraping—a form of data collection used by companies that requires the use of log-in credentials—would also be prohibited.

Not surprisingly, financial institutions reactions are mixed. American Bankers Association President and CEO Rob Nichols issued a statement that simultaneously commended the Proposed Rule for uniting the banking industry’s and the CFPB’s common goal of “enhancing consumers’ access to their financial data and allowing them to share it safely with companies of their own choosing” while also expressing concerns over the scope of the Proposed Rule, whether it adequately addresses liability, and implementation costs. Nichols also questioned whether the CFPB’s parallel efforts at amending the Fair Credit Reporting Act created ambiguity under the Proposed Rule.

Consumer Bankers Association (CBA) President and CEO Lindsey Johnson released a statement noting that the CBA “looks forward to working with” the CFPB to develop a final Section 1033 rule that fosters access to consumers’ own personal financial data and provides uniform protection of such data across banks and non-banks. Similarly, Paige Pidano Paridon, senior associate general counsel for the Bank Policy Institute, a nonpartisan public policy, research and advocacy group representing US banks, issued a statement on the Proposed Rule calling for the CFPB to “prioritize data security in its rulemaking process, put an end to unsafe practices like screen scraping, and require fintechs to adhere to the same data privacy and security standards that already apply to banks.”

While the Proposed Rule attempts to establish a framework by which access to third party financial products and services is easier and the collection practices of consumer financial data is further regulated, whether the Proposed Rule will accomplish all of the goals outlined in Director Chopra’s statement is yet to be determined.

Those who wish to comment on the proposed rule have until December 29, 2023 to do so. The CFPB has indicated its intent to finalize the rule by the fall of 2024. Compliance dates will vary depending on the asset size and type of financial institution.

Ronald K. Vaske, Kristen E. Larson, Sarah B. Dannecker, Gregory P. Szewczyk & Philip N. Yannella

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OCC, Federal Reserve, and FDIC Issue Final Community Reinvestment Act Rule

On October 24, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation issued a final rule amending their regulations implementing the Community Reinvestment Act. Although the final rule is effective April 1, 2024, the compliance date for the majority of the rule’s provisions is January 1, 2026.

We are currently reviewing the nearly 1500-page final rule and will provide further information and analysis in subsequent blog posts.

The agencies also issued a Fact Sheet and an Interagency Overview in which they highlight key elements of the final rule and changes from the proposal. Those key elements and changes include:

Bank Asset Size Categories. Banks are classified as large banks (assets of at least $2 billion as of December 31 in both of the two prior calendar years), intermediate banks (assets of at least $600 million as of December 31 in both of the two prior calendar years and less than $2 billion as of December 31 in either of the two prior calendar years), and small banks (assets of less than $600 million as of December 31 in either of the two prior calendar years). The asset-size thresholds will be adjusted annually for inflation.

Performance Tests, Standards, and Ratings. The evaluation framework for banks other than limited purpose banks includes six tests: Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, Community Development Services Test, Intermediate Bank Community Development Test, and Small Bank Lending Test. The six tests apply as follows:

  • Large banks will be evaluated under the Retail Lending Test, Retail Services and Products Test, Community Development Financing Test, and Community Development Services Test.
  • Intermediate banks will be evaluated under the Retail Lending Test and Intermediate Bank Community Development Test or, at the bank’s option, the Community Development Financing Test
  • Small banks will be evaluated under the Small Bank Lending Test or, at the bank’s option, the Retail Lending Test.

Banks of all sizes retain the option to request approval to be evaluated under an approved strategic plan. For large banks, the final rule reduces the proposed weight assigned to the Retail Lending Test and increases the proposed weight assigned to the Community Development Financing Test so that each test is weighted equally.

The final rule also (1) reduces the proposed Retail Lending Test multipliers used to calculate performance thresholds to make “Outstanding,” “High Satisfactory,” and “Low Satisfactory” more achievable; (2) reduces the proposed number of loan products evaluated under the Retail Lending Test from six to four (closed-end home mortgage loans, small business loans, small farm loans, and automobile loans); (3) only evaluates the automobile lending of large and intermediate banks for which such loans represent a majority of the bank’s lending or of other banks that opt to have their automobile lending evaluated; and (4) for large banks with assets greater than $10 billion, adopts an additional metric for purposes of the Community Development Financing Test to enable examiners to evaluate at the institution level bank investments under the Low Income Housing Tax Credit and the New Markets Tax Credit programs. While the final rule provides that a bank’s CRA rating can be downgraded based on evidence of discriminatory or other illegal credit practices, the final rule does not, as proposed, allow a downgrade to be based on evidence of discriminatory or other illegal practices that do not involve credit practices.

  • Assessment areas. The final rule exempts large banks that conduct more than 80 percent of their retail lending in facility-based assessment areas from the retail lending assessment area requirement. It also (1) increases the proposed loan count thresholds for triggering retail lending assessment areas to at least 150 closed-end home mortgage loans and least 400 small business loans; and (2) modifies the proposed evaluation of a large bank’s retail lending performance in retail lending assessment areas so that only closed-end home mortgage loans and small business loans are evaluated, and only if they exceed the applicable loan count thresholds.
  • Data collection and reporting. The final rule, in a change from the proposal, requires data collection beginning January 1, 2026, with reporting the following year, by April 1, 2027. The final rule’s new data collection and reporting requirements do not apply to small and intermediate banks and certain of such requirements, such as the requirement to annually collect, maintain, and report deposits based on the location of the depositor, apply only to large banks with assets over $10 billion.

Scott A. Coleman

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Federal Reserve Board and FDIC Expected to Approve Final Community Reinvestment Act Rules at Oct. 24 Meetings

Without much fanfare, the Financial Crimes Enforcement Network (FinCEN) published in June its Spring 2023 Rulemaking Agenda, which provides proposed timelines for upcoming key rulemakings projected throughout the rest of 2023. FinCEN continues to focus on issuing rulemakings required by the Anti-Money Laundering Act of 2020 (the “AML Act”) and the Corporate Transparency Act (“CTA”). FinCEN has been criticized for being slow in issuing regulations under the AML Act and the CTA, but Congress has imposed many obligations upon FinCEN, which still is a relatively small organization with a limited budget.

Here are the six upcoming rulemakings and their expected timing. All of these issues are critical. We also discuss the issues for which FinCEN has not provided a proposed timeline.

  • July 2023: Notice of Proposed Rulemaking (NPRM) implementing section 6314 of the AML Act and the Anti-Money Laundering Whistleblower Improvement Act regarding whistleblower incentives and protections. As a reminder, qualifying whistleblowers are entitled to awards between 10 and 30 percent of the value of “monetary sanctions” above $1 million collected through an enforcement action regarding certain violations of the Bank Secrecy Act (BSA) and U.S. economic sanctions. A whistleblower also may be awarded additional monies for related actions. In addition, the Department of Treasury will administer the newly created Financial Integrity Fund to pay whistleblower awards. We previously have blogged about section 6314 here, here and here.
  • August 2023: NPRM regarding real estate transaction reports and records. The release of the NPRM was pushed back by several months. FinCEN released an advanced NPRM in December 2021, which sought comments on potential BSA/AML requirements for persons involved in real estate transactions, particularly non-financed transactions. Critical issues will include the scope of the proposed BSA requirements, and the type of real estate transactions to which they will apply (E.g. Any monetary threshold? Nationwide application? Only residential deals, or commercial deals as well? Who is responsible for any reporting requirements? Etc.)
  • September 2023: Final Rule regarding beneficial ownership information (BOI) access and safeguards and the use of FinCEN Identifiers. The final rule will establish the framework for authorized recipients’ access to BOI as well as instances where reporting companies can use FinCEN Identifiers. As we previously blogged, there was strong push back by the financial services industry, partly because the proposal limited financial institutions’ ability to use BOI, thereby contradicting the CTA’s objectives.
  • November 2023: Final Rule implementing section 6212 of the AML Act that establishes a pilot program permitting financial institutions to share suspicious activity reports (SARs) with their foreign branches, subsidiaries, and affiliates. This final rule has been delayed by several months from FinCEN’s prior rulemaking agenda.
  • December 2023: NPRM implementing section 6101(b) of the AML Act that establishes national exam and supervision priorities. Section 6101(b) requires financial institutions to incorporate a risk assessment and AML/countering financial terrorism (CFT) priorities into their risk-based compliance programs. In June 2021, FinCEN preliminarily released the first set of national AML/CFT priorities but highlighted that these did not have to be incorporated into compliance programs until regulations were promulgated. FinCEN will update these priorities every four years. As we previously blogged, the preliminary list of priorities was extremely broad, to the point of presenting limited utility. The NPRM will be important in regards to whether it provides any greater clarity or precision.
  • December 2023: Lastly, a NPRM revising the existing Customer Due Diligence (CDD) Rule is expected. This is the third required rulemaking in the series to implement the BOI rule under the CTA. Given the current differences between how the CDD Rule and the CTA define “beneficial owner,” as well as differences involving exempted entities and serious questions regarding how financial institutions can or should access BOI under the CTA in order to comply with the CDD Rule, this will be a very important NPRM.

Notable absences from FinCEN’s rulemaking agenda include a NPRM implementing section 6305 of the AML Act, which provides for a no-action letter (NAL) program. FinCEN conducted an assessment, determined that a NAL program was appropriate, and issued an ANPRM in June 2022. FinCEN’s Fall 2022 rulemaking agenda projected a NPRM in November 2023, but this item is missing from the Spring agenda.

Another notable absence from the Spring agenda is a NPRM regarding the voluntary information sharing program under 314(b) of the USA PATRIOT Act. FinCEN’s Fall 2022 and other previous rulemaking agendas have included this item with the only information being that the agency is considering a rulemaking to strengthen the administration of the regulation implementing the voluntary information sharing program. The Fall 2022 agenda indicated that a NPRM was expected last month but this item is missing from the agency’s Spring agenda.

Of course, whether FinCEN will be able to have the Beneficial Ownership Secure System (BOSS) under the CTA to be actually up and running by the January 1, 2024 effective date remains a significant outstanding question. The fact that FinCEN will not even issue a NPRM addressing an proposed “alignment” between the CTA and the CDD Rule until December 2023 suggests that the process of working out real-world implementation of the CTA will extend for quite some time.

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

Kaley Schafer

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Appraisal Subcommittee to Host Public Hearing on Appraisal Bias

The Federal Financial Institutions Examination Council’s Appraisal Subcommittee (ASC) is scheduled to host a public hearing on Wednesday, November 1, 2023. The upcoming hearing on appraisal bias will focus on how residential appraisals are developed and reviewed, the process for reconsiderations of value, and processes for conducting appraisals in rural areas.

This hearing will be the third in a series of hearings discussing appraisal bias and related issues. In January, the ASC hosted a hearing focused on the appraisal industry generally and how personal biases may enter the residential appraisal process. We published a blog about the hearing. In May, the ASC hosted a second hearing focused on appraiser qualifications, the push for increased diversity in the industry, and the challenges in building an inclusive appraiser talent pool. This third hearing will focus on ensuring quality in appraisals.

The following witnesses will share testimony during the hearing:

  • Robbie Wilson, Chief Appraiser, RSDS LLC, and President, National Society of Real Estate Appraisers
  • Dean Kelker, Board of Directors, Real Estate Valuation Advocacy Association
  • Danny Wiley, Senior Director of Single-Family Valuation, Freddie Mac
  • Lyle E. Radke, Senior Director, Single-Family Collateral Risk, Fannie Mae
  • Sharon Whitaker, Vice President, CRE & Mortgage Finance, American Bankers Association

The hearing will be held at the U.S. Department of Housing and Urban Development headquarters, and a livestream will also be available to those who register here. Members of the public can also submit written comments on the topics of the hearing to until November 15.

Loran Kilson

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CFPB and FTC Announce Settlements With TransUnion

The CFPB and FTC announced last week that they had entered into a settlement with Trans Union LLC (TU LLC) to resolve a lawsuit filed jointly in a Colorado federal district court by the agencies alleging that TU LLC and its subsidiary, TransUnion Rental Screening Solutions, Inc. (TURSS), violated the Fair Credit Reporting Act (FCRA), the FTC Act, and the Consumer Financial Protection Act (CFPA) by failing to ensure the accuracy of tenant screening reports by including inaccurate and incomplete eviction records about consumers. The Stipulated Order will require the companies to pay $11 million in consumer redress and a $4 million civil money penalty to the CFPB.

The CFPB also announced that it had entered into a consent order with TU LLC, another subsidiary, TransUnion Interactive, Inc., and the ultimate parent company, TransUnion (TU Companies) to settle an administrative proceeding in which the companies were charged with FCRA and CFPA violations for allegedly failing to honor security freeze and lock requests. The Consent Order requires the companies to pay $3 million in consumer redress and a $5 million civil money penalty to the CFPB. Both the Stipulated Order and Consent Order require the companies to take actions to remedy and prevent the conduct underlying the alleged violations.

Colorado Lawsuit. The key allegations made by the CFPB and FTC in the joint complaint are:

  • TURSS violated the FCRA by failing to follow reasonable procedures to assure the maximum possible accuracy of eviction-related records in its tenant screening reports such as reasonable procedures to (1) prevent the inclusion of multiple entries for the same eviction case, (2) assure that eviction-related records accurately reflect the true or current status of the public records, such as the final disposition of the case, (3) label the fields in eviction-related records to accurately describe the nature of the information populated in the field, and (4) prevent the inclusion of sealed eviction-related records.
  • TURSS violated the FCRA by failing to disclose to consumers that criminal and eviction records were obtained from third-party vendors.
  • TU LLC also engaged in these FCRA violations because it operates TURSS as a business unit and performs various shared services for TURSS including legal and compliance, accounting and finance, marketing and public relations , data science and human resources. During the relevant time period, TU LLC has been responsible for management and oversight of TURSS’s FCRA compliance and policies and procedures, including monitoring and testing for regulatory compliance training. TU LLC participated in, directed, or authorized the acts and practices of TURSS alleged in the complaint.

Administrative Proceeding. The CFPB’s key findings in the Consent Order include:

  • Since at least 2003, the TU Companies failed to timely place or remove security freezes and locks requested by tens of thousands of consumers. The failures resulted from longstanding issues with the companies’ databases. The TU Companies did not tell consumers that their requests had not been processed and sent standard confirmations reflecting that their requests had been successfully processed.
  • The TU Companies failed to adequately investigate, address, or remediate the causes of these failures although some of the causes were known or suspected by the companies’ employees for years.
  • The TU Companies failed to exclude from pre-screened solicitation lists thousands of consumers whose files contained an alert that they were on active military duty or an extended fraud alert.
  • The TU Companies also failed to timely handle freeze requests because they did not require a third-party vendor handling incoming mail to meet statutory deadlines.

John L. Culhane, Jr. & Michael Gordon

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ABA Releases Recording of Program on Supreme Court Revisiting of Chevron Judicial Deference Framework

Last month, I moderated a live and virtual program at the American Bar Association Business Law Section 2023 Fall Meeting in Chicago. The program was entitled: “U.S. Supreme Court to Revisit Chevron Deference: What the SCOTUS Decision Could Mean for CFPB, FTC and Federal Banking Agency Regulations.” My co-panelists were Professor Jonathan S. Masur from the University of Chicago Law School and Lauren Campisi from Hinshaw & Culbertson.

A recording of the program is now available on the ABA’s website at no charge to members of the ABA Business Law Section and a modest charge for others.

Spoiler Alert: Since granting certiorari in Loper Bright Enterprises v. Raimondo, the Supreme Court has granted certiorari in a second case, Relentless, Inc. v. U.S. Department of Commerce, in which the question presented is also whether the Court should overrule its 1984 decision in Chevron. My co-panelists and I believe that the Supreme Court will overrule Chevron in the two cases (which have been consolidated for purposes of oral argument in January 2024).

Under the “Chevron framework” derived from the 1984 decision, 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.

If the Supreme Court overrules Chevron, it could throw into a cocked hat longstanding Supreme Court and other court decisions that relied exclusively on Chevron to validate a federal agency regulation. An example of such a decision would be Smiley v. Citibank, N.A., 517 U.S. 735 (1996), in which the Supreme Court relied exclusively on an OCC regulation defining “interest” under Section 85 of the National Bank Act to include late fees on credit cards. That decision held that a national bank could charge late fees allowed by the bank’s home state to cardholders throughout the country and ignore limitations on late fees in the laws of the states where the cardholders reside.

Alan S. Kaplinsky

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California DFPI Finalizes Regulations Governing Student Loan Servicers

On October 13, 2023, the California Department of Financial Innovation (DFPI) published final regulations implementing the Student Loan Servicing Act (SLSA) and the Student Loans: Borrower Rights Law. The final regulations are the culmination of two sets of proposed regulations from the DFPI, which we previously covered here. The final regulations become effective January 1, 2024. Along with the text of the final regulations, the DFPI issued a Final Statement of Reasons.

The DFPI notes in the Final Statement of Reasons that the final regulations “strike a balance between protecting California student loan borrowers and avoiding unnecessary compliance burden on servicers.”

The final regulation adds the following new requirements:

Non-licensee filing

A person who does not require a license under the SLSA but is subject to the Student Loans: Borrower Rights law must make a non-licensee filing and provide an address at which the non-licensee receives certified or registered mail.

Reporting Requirements

Licensees are required to maintain a current, aggregate report of “education financing products” that the licensee services. A licensee must produce the report within 10 days of a request by the Commissioner of the DFPI. The regulations set forth the required information the report must contain. The report must include: (1) borrower name; (2) education financing product account number; (3) number of education financing products serviced for each borrower; (4) education financing product types, using the name the product is most commonly called, such as, income share agreements or installment contracts; (5) date of execution; and (6) payoff amount.

Licensees must include additional information for income share agreements and installment loan agreements.

Servicing Records for Education Financing Products

The final regulations require student loan servicers to maintain books, records, and accounts at one or more its licensed locations, for “education financing products.” The final regulations define “educational financing products” to mean all private student loans, which are not traditional student loan. Required records include: all education financing contracts; disclosure statements sent to the borrower; complete loan history; qualified written requests; borrower instructions how to apply overpayments; and statements of account sent to the borrower.

Additional highlights of the final regulation include:

  • No mandated cutoff time for receipt of payment. The proposal included a mandated cutoff time of 11:59 p.m. Pacific Standard Time for receipt of payments, regardless of the servicer’s location.
  • Finalization of the expanded definition of “income share agreement” as proposed. The term “income share agreement” includes any percentage or amount that the student has agreed to pay from future income, regardless if that agreement is for expense related to tuition, fees, books, supplies, room & board, transportation, or miscellaneous personal expenses. As a reminder, the definition goes beyond the advancing of funds and includes any “covering crediting, deferring, or funding” the costs of the student’s education.
  • Requiring servicers to acknowledge receipt of and respond to qualified written requests, in writing. The acknowledgement requirement was finalized as proposed and servicers must use the borrower’s preferred method of communication. Where there is no preferred method specified, servicers must send acknowledgements to the borrower’s last known mailing address on record and to all email addresses on record.
  • Revised definitions to better align with the Truth in Lending Act (TILA) and the Higher Education Act. The term “education financing product” is amended to mean all private student loans which are not traditional student loans (this was previously defined as “all private loans”) to mirror the language in TILA. In addition, the final regulation amends the term “private student loan” to mean a private education loan (as defined by TILA). Lastly, the final regulations defines the term “federal student loan” as a loan made, insured or guaranteed under the Higher Education Act.

Lisa Lanham & Kaley Schafer

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AFSA Raises Concerns About Sufficiency of CFPB’s Supervisory Highlights

In a comment letter sent last week to Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, a key financial industry trade group raised concerns that a recent edition of the CFPB’s Supervisory Highlights did not provide sufficient details about the facts or analysis behind the Bureau’s conclusions regarding certain exam findings. The letter from the American Financial Services Association (AFSA), dated October 25, 2023, asked the CFPB to withdraw portions of the Summer 2023 edition of the Supervisory Highlights regarding an auto industry practice known as “powerbooking” absent further factual information identifying the nature of any actual consumer harm arising from what the Bureau described as “fraudulent loan charges.”

We previously discussed the Summer 2023 edition of Supervisory Highlights, which covered the CFPB’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. One of the issues identified in Section 2.2.1, titled “Collecting interest on fraudulent loan charges,” discussed “powerbooking,” which refers to instances in which an auto dealer misrepresents the model, features, or equipment on a vehicle to the finance source in order to induce the finance source’s decision to purchase the motor vehicle retail installment sales contract (RISC) or to purchase it on more favorable terms.

According to the CFPB, examiners found:

  • Servicers engaged in unfair and abusive acts or practices in connection with RISCs 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 RISC, 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 RISCs by the amount of the missing options but did not reduce the amounts owed by consumers on the RISCs 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.

In its comment letter, AFSA acknowledges that powerbooking is a fraudulent practice, but points out that there is no injury to the consumer because neither the total sale price nor the amount financed are inflated in the RISC. In other words, according to AFSA, the price paid by the consumer for the vehicle does not reflect the “inflated” features. Rather, AFSA maintains that it is the finance source that is misled about the value of its collateral to induce the finance source to purchase the RISC.

Thus, according to AFSA, the injury is to the finance source, which has no first-hand knowledge of the vehicle and agrees to purchase the RISC based on the misrepresentations. As such, AFSA argues that the CFPB’s findings mischaracterize (i) where the fault lies in this practice when identifying it as an “abusive act or practice,” and (ii) its authority over the practice given that it is unrelated to the consumer transaction and causes no consumer injury. In light of this, AFSA contends that the CFPB’s guidance in the Supervisory Highlights that auto lenders and servicers should review the findings to implement changes to avoid similar violations is misguided.

We agree with AFSA that, based on its description of “powerbooking,” such a practice is a fraud on the finance source rather than on the consumer. We encourage the CFPB to review this finding and provide a revised Supervisory Highlights entry with additional facts to support its finding — or to reconsider and retract the finding itself.

Brian Turetsky

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CFPB Appoints New Members to Advisory Committees

On October 5, the CFPB published the list of new members appointed to serve on the Consumer Advisory Board and each Council group.

As background, Dodd-Frank requires the CFPB to maintain and work with a Consumer Advisory Board, comprised of industry leaders who are recommended by the presidents of each Federal Reserve Bank across the country. In addition to the Consumer Advisory Board, the CFPB collaborates with each Council group: the Community Bank Advisory Council, Credit Union Advisory Council, and Academic Research Council. The council groups are made up of executives of financial institutions, leaders of consumer advocacy groups, housing organizations, and other stakeholders. The members act simply in an advisory role, and are not representatives of the CFPB or the Federal Reserve.

Below are the newly appointed members of each group:

Consumer Advisory Board

  • Scott E. Dewald, President and Chief Executive Officer, REI Oklahoma (Durant, OK) [10th District – Kansas City]
  • Chelsie Evans Enos, Executive Director, Hawaiian Community Assets (Honolulu, HI) [12th District – San Francisco]
  • Thomas Okuda Fitzpatrick, Executive Director, Housing Opportunities Made Equal of Virginia – HOME of VA (Richmond, VA) [5th District – Richmond]
  • Stephen A. Gardner, President and Executive Director, Clarifi (Philadelphia, PA) [3rd District – Philadelphia]
  • Cashauna Hill, Executive Director, The Redress Movement (New Orleans, LA) [6th District – Atlanta]
  • Nick Mitchell-Bennett, Executive Director, cdcb | come dream. come build (Brownsville, TX) [11th District – Dallas]
  • Amy Nelson, Executive Director, Fair Housing Center of Central Indiana (Indianapolis, IN) [7th District – Chicago]
  • Denise Notice-Scott, President, Local Initiatives Support Corporation (LISC) (New York, NY) [2nd District – New York]
  • Fern Orie, Chief Executive Officer, The Matriarch Group (Green Bay, WI) [9th District – Minneapolis]
  • Angeles Ortega, CEO, Mi Casa Resource Center (Denver, CO) [10th District – Kansas City]
  • Juan Bonilla Santiago, Vice President, Economic Inclusion and Wealth Building, United Way of Massachusetts Bay (Boston, MA) [1st District – Boston]
  • Shanelle Smith Whigham, SVP, National Community Engagement Director, KeyBank (Cleveland, OH) [4th District – Cleveland]
  • Sam Walls III, CEO, Arkansas Capital Corporation (Little Rock, AR) [8th District – St. Louis]

Community Bank Advisory Council

  • Derek Henderson CPA CAMS, Chief Compliance Officer, DR Bank (Darien, CT)
  • Sergio S. Ora, President & Chief Executive Officer, Citizens Savings Bank and Trust Company (Nashville, TN)
  • Victor M. Ramirez, SVP, CRA and Fair & Responsible Banking, Beneficial State Bank (Oakland, CA)

Credit Union Advisory Council

  • Sharon Grieger, MBA, MS, CCEP, CIA, CISA, CFE, CRMA, CSE, C.U.D.E., Chief Risk Officer, Vantage West Credit Union (Tucson, AZ)
  • Andrew C. Grimm, President/CEO, Apple Federal Credit Union (Fairfax, VA)
  • Kimberly Jones, Vice President, Director of Partnerships & Community, Self-Help Federal Credit Union (Chicago, IL)

Academic Research Council

  • Neale Ashok Mahoney, Professor of Economics and George P. Shultz Fellow at SIEPR, Stanford University (Stanford, CA)
  • Katja Seim, Sharon Oster Professor of Economics and Management, Yale University (New Haven, CT)
  • Suzanne Bliven Shu, Dean of Faculty and Research, John S. Dyson Professor in Marketing, SC Johnson College of Business (Ithaca, NY)
  • Abigail Sussman, Professor of Marketing, University of Chicago Booth School of Business (Chicago, IL)

Loran Kilson

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Did You Know?

On October 30, 2023, the Tennessee Department of Financial Institutions announced its annual supervision fee for non-depository financial institutions for fiscal year 2023-24.

Effective November 1, 2023, the fee is:

  • $1,025.00 for mortgage licensees and flexible credit licensees;
  • $625.00 for check cashing licensees, deferred presentment licensees, premium finance licensees, industrial loan and thrift registrants, and title pledge licensees.
  • Money transmission licensees will continue to pay licensing and examination fees as required by statute (a separate announcement will address the applicable supervision fee under Public Chapter 115, effective January 1, 2024).
  • Mortgage loan originators will continue to pay a licensing and renewal fee of $100.00 and a sponsorship fee of $100.00.

The full text of the announcement, including a description of the purpose and the process for paying the supervision fee, is available here.

On October 24, 2023, CSBS published and posted to the NMLS Resource Center an article setting forth state regulator tips to prepare for annual renewal. These include:

  • Updating your NMLS record
  • Resetting your NMLS password
  • Providing a current email address
  • Reviewing state-specific renewal requirements
  • Accessing free, on-demand renewal training

It was noted that effective October 16, 2023, both licensees and federal registrants are able to submit an online support request form to resolve certain NMLS access issues to facilitate the renewal process.

Stacey L. Valerio

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Looking Ahead

The Biden Administration’s “Junk Fees” Initiative Continues: What the Latest Actions Mean for the Consumer Financial Services Industry

A Ballard Spahr Webinar | November 28, 2023, 1:00 PM – 2:00 PM ET

Speakers: Alan S. Kaplinsky, John L. Culhane, Jr., Michael Gordon, Reid F. Herlihy, & Kristen Larson

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