Legal Alert

Mortgage Banking Update - March 28, 2024

March 28, 2024

March 28, 2024 – Click on the headlines below to read the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. This week we address pivotal Supreme Court cases, the DOJ’s crackdown on AI misuse, and much more.


March 14 Podcast Episode: U.S. Supreme Court Hears Two Cases In Which Plaintiffs Seek to Overturn Chevron Judicial Deference Framework: Who Will Win and What Does It Mean? Part II

On January 17, 2024, the U.S. Supreme Court heard oral argument in two cases in which the question presented is whether the Court should 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 judicial deference framework”—the two-step analysis that courts typically invoke when reviewing a federal agency’s interpretation of a statute. This two-part episode repurposes our webinar held in February 2024 and brings together as our guests three renowned administrative law professors, Kent Barnett, Jack Beermann, and Craig Green, and a leading Supreme Court practitioner, Carter Phillips, all of whom are experts on Chevron. In Part II, our guests share their reactions to the oral arguments, including their views on what the Justices’ questions and comments reveal about the Justices’ thinking, their predictions for how the Court will rule, and potential implications of the Court’s ruling on existing and future regulations.

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

To listen to Part II, click here.

To listen to Part I, click here.

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March 21 Podcast Episode: Telephone Consumer Protection Act Update: Developments Impacting Consent and Lead Generation

New Federal Communications Commission (FCC) TCPA rules will mean big changes for businesses, particularly comparison shopping websites, lead generators, and other companies that regularly contact consumers via phone or text message. This episode repurposes a recent webinar. After reviewing TCPA consent requirements for calls and texts and exceptions, we look at the impact of the U.S. Supreme Court’s 2021 Facebook decision on TCPA compliance. We then look at post-Facebook TCPA litigation, post-Facebook state law litigation involving unwanted calls and texts, and recent state legislative developments. We follow with a discussion of the FCC’s new TCPA rules addressing (1) how consumers may revoke consent to receive calls or texts and the obligations of callers and texters to honor revocation of consent requests, and (2) the application of TCPA consent requirements to lead generators. We conclude with a discussion of compliance and litigation considerations arising from the new TCPA rules.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion, joined by Michael Guerrero, Daniel McKenna, Jenny Perkins, and Joel Tasca, partners in the Group.

To listen to the episode, click here.

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DOJ Launches Whistleblower Pilot Program and Cracks Down on Artificial Intelligence Misuse

Following a year of new DOJ policies and guidance designed to incentivize companies to self-report misconduct and to cooperate with government investigations, the DOJ has added a new pilot whistleblower rewards program. In their remarks at the American Bar Association’s 39th Annual National Institute on White Collar Crime, Deputy Attorney General Lisa Monaco and Acting Assistant Attorney General Nicole Argentieri both explained that the new whistleblower policy is designed to incentivize individuals to disclose corporate misconduct through financial rewards from any resulting forfeiture of criminal proceeds. Monaco also announced sentencing enhancements applicable to individual and corporate prosecutions for the misuse of artificial intelligence (AI), and warned compliance officers that the DOJ will consider how well a company mitigates the risk of AI when assessing a company’s compliance program.

The New Carrot: The Whistleblower Pilot Program. Monaco began her speech reiterating the DOJ’s focus on investing the most significant resources in the most serious cases, holding individuals accountable, and pursuing tough penalties for repeat offenders. As she has in previous speeches, Monaco again discussed the DOJ’s “carrot-and-stick” approach to combatting corporate malfeasance, announcing a new whistleblower pilot program. Similar to the awards awarded to whistleblowers under the False Claims Act, whereby a whistleblower can receive a portion of the government’s recovery, under the DOJ’s new whistleblower program, if an individual reports new corporate or financial misconduct to the DOJ, that individual could be awarded a portion of recovered forfeiture. Monaco acknowledged the history of successful federal whistleblower reward programs, such as those offered by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), but explained that this initiative is intended to fill gaps in other agencies’ programs. For example, Argentieri highlighted, the DOJ anticipates that the program could prove especially useful in developing foreign corruption cases that are outside the jurisdiction of the SEC, including FCPA violations by non-issuers.

The DOJ plans to develop and implement the pilot program in the next 90 days, with a formal start date later this year. Thus far, the basic guiderails to providing payments to whistleblowers, as further outlined by Argentieri, are as follows:

  • The information provided must be original, nonpublic, truthful, and not already known to the government, such that the whistleblower is the “first in the door” providing the information.
  • The whistleblower cannot have participated in the wrongdoing disclosed.
  • Recovery is only available after victims are first compensated for their loss.
  • Recovery is only permitted in cases where there isn’t an existing financial disclosure incentive, including rewards under the False Claims Act or other federal whistleblower program.
  • The program, similar to the SEC and CFTC programs that limit rewards to cases in which the agency orders sanctions of $1 million or more, will have a monetary threshold to focus DOJ resources on the “most significant cases.”

The whistleblower program appears to be the latest tool in the DOJ’s overall strategy to hold individuals accountable, to encourage companies to “step up and own up,” and to promptly report misconduct to the government. Whether viewed as deputizing companies or just seeking active cooperation, through this new tool the DOJ hopes not only to uncover misconduct, but also to push companies to voluntarily self-report. And, like the DOJ’s policy regarding voluntary self-disclosure, the new whistleblower program guidance is clear: only the first one in the door benefits. Accordingly, companies may now be more willing to voluntarily self-disclose conduct for fear that a whistleblower, with a large financial incentive, could beat them to the punch. Monaco also stated that the DOJ will be evaluating the success of the whistleblower pilot programs recently announced by the U.S. Attorney’s Office for the Southern District of New York and the Northern District of California. Those programs incentivize self-reporting by offering non-prosecution agreements, rather than financial awards, to potential whistleblowers that participated in the misconduct.

Combatting the Risk of AI. In addition to the whistleblower program, Monaco also announced that the DOJ is committed to combating the risks posed by AI, which can be used to “supercharge” illegal activity. She specifically mentioned the use of AI in fraud, price fixing, and market manipulation schemes. The DOJ’s focus on AI will manifest in two ways. First, prosecutors will impose stiffer sentences on individual and corporate defendants that deliberately misuse AI to perpetrate white-collar crime. Second, prosecutors will “assess a company’s ability to manage AI-related risks as part of its overall compliance efforts.” This will be part of the DOJ’s Evaluation of Corporate Compliance Programs.

Monaco’s announcement should prompt companies to ensure that they have sufficiently incorporated AI risk management into their compliance program. Companies already using automated trading likely have thought about the risks AI poses. But even for companies that are not engaged in AI-based trading, it is clear that the DOJ expects compliance programs to have tools to detect and combat the potential misuse of AI.

Henry E. Hockeimer, Jr., Emilia McKee Vassallo, Celia Cohen and Lauren Engelmyer

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2023 HMDA Modified Loan Application Data Published

The CFPB recently announced the publication of the Home Mortgage Disclosure Act (HMDA) Modified Loan Application Data for 2023. The data is available on the Federal Financial Institutions Examination Council (FFIEC) website. As was the case with the 2022 HMDA data, in addition to institution-specific modified Loan Application Register (LAR) files, users can download one combined file that contains all institutions’ modified LAR data.

For privacy reasons, certain data in actual LARs of reporting institutions is removed or modified. To assist the public with the review of HMDA data, the CFPB publishes A Beginner’s Guide to Accessing and Using Home Mortgage Disclosure Act Data.

Consistent with additional 2022 HMDA data information provided by the CFPB, the CFPB advises as follows regarding the future release of additional 2023 HMDA data:

“Later this year, the 2023 HMDA data will be available in other forms to provide users insights into the data. These will include nationwide loan-level datasets with all publicly available data for all HMDA reporters; aggregate and disclosure reports with summary information by geography and lender; and access to the 2023 data through the HMDA Data Browser to allow users to create custom datasets, reports, and data maps. The CFPB will later also publish a Data Point article highlighting key trends in the annual data.”

Richard J. Andreano, Jr.

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CFPB Addresses ASC Appraisal Bias Hearings and Structure of The Appraisal Foundation

The CFPB published a blog discussing a few key takeaways from a series of public hearings addressing appraisal bias.

For background, the Federal Financial Institution Examination Council’s (FFIEC’s) Appraisal Subcommittee (ASC) has held four public hearings throughout 2023-2024 to facilitate discussions regarding bias and lack of diversity within the appraisal business. The hearings were held on January 24, 2023, May 19, 2023, November 1, 2023, and February 13, 2024.

Witnesses for the hearings included representatives from the FFIEC’s member agencies, professional appraisers, nonprofit groups and housing advocates, trade associations, Freddie Mac and Fannie Mae, and leaders in the appraisal industry, including The Appraisal Foundation, the Appraisal Institute, the Appraiser Qualifications Board, and the Appraisal Standards Board. Throughout each of the hearings, witnesses provided testimony on the impact of appraisal bias and historic discrimination on minority communities, the difficulties faced by minorities attempting to enter the appraiser profession, the challenges faced by appraisers in determining home values, and the ways in which these things affect the housing market at large. The hearing discussions have also focused on the structure of the appraisal industry, regulatory uncertainty within the industry, and how this structure can allow bias to enter and be compounded within the industry.

The CFPB, in its recent blog post, discussed the operating structure and, in its view, the deficiencies of The Appraisal Foundation (“Foundation”). The blog explains that the ASC has been tasked with reviewing and monitoring appraisal industry practices, including review of the Foundation’s procedures and organizational structure. According to the CFPB, the Foundation’s structure has made it hard for appraisers to meet the needs of the housing market and address appraisal bias.

The blog provides a high level summary of comments submitted by Director Chopra to the ASC regarding oversight of the Foundation. First, the comments describe the structure of the Foundation, which sets qualifications for becoming an appraiser as well as standards for conducting appraisals. Director Chopra advises that the Foundation is funded through fees that appraisers across the country must pay. In particular, appraisers must pay to receive the Uniform Standards of Professional Appraisal Practice (USPAP) published by the Foundation. Witnesses at the hearings testified that the cost to become and remain an appraiser leads to the exclusion of many who are interested in becoming appraisers, worsening the lack of diversity within the industry. (We previously addressed an appraisal bias report issued by the National Community Reinvestment Coalition that provides, citing the Bureau of Labor Statistics, that 97.7% of appraisers are White and 69.6% are men.)

Director Chopra also observes as follows regarding the Foundation: The Foundation is led by a President and a Board of Trustees that is legally responsible for governing the Foundation and its regulatory bodies. The Board of Trustees selects its own members, as well as the members of the Appraisal Standards Board, which issues rules and guidance. The Board of Trustees also appoints members of the Appraiser Qualifications Board, which controls who may become an appraiser.

The CFPB blog post and Director Chopra’s comments address the following regarding the Foundation’s structure:

Deficient conflict of interest policies. The CFPB states the Foundation’s policies and procedures governing conflicts of interest are much narrower and less specific and do not prohibit many types of conduct covered by the conflicts of interest policies applicable to federal agency employees, and do not prohibit many types of conduct covered by the federal policies. Director Chopra states that, despite claiming to have policies similar to those applicable to federal agency employees, the Foundation’s policies do not address matters like accepting gifts from industry stakeholders, working with vendors where there is a financial interest for a Foundation employee or their spouse, or giving preferential treatment to certain individuals or organizations operating within the industry.

Insular governance structure favors private interests. The CFPB states that the Foundation’s governance structure favors parties that are able to pay more, due to the method of selecting the Board of Trustees. Until a recent change in the structure, paying Sponsors selected around half of the BOT members. The remainder were elected by that same Board, and many of these elected trustees were members of Sponsors. The CFPB has found that, even after updates to the bylaws, the process has not changed substantially, and current trustees can still elect a full slate of new trustees from companies contributing financially to the Foundation.

Lack of transparency for processes, including the selection of the Foundation’s President. The CFPB states the Appraisal Foundation has stopped allowing ASC staff to attend closed deliberations of applicants to Foundation boards, and has given shifting explanations for this shift in testimony. Director Chopra states that the Foundation’s President noted that historically ASC staff attended “just about all” meetings, and that the President also conceded at his hearing appearance that . . . “we were concerned about the conduct of some ASC observers.” Both the CFPB and Director Chopra note that the Foundation is in the process of selecting a new President. Director Chopra states that although the Foundation originally sought input from ASC and an outside consultant, it now refuses to respond to feedback offered by ASC and has not given the ASC access to deliberations or any role in reviewing candidates. Director Chopra also states that while the President stated that he was “not involved in” and had “stayed out of” the process of choosing his replacement, he later admitted that he had made suggestions as to who his successor should be. Finally, Director Chopra states that the President opined that the Foundation would not seek ratification of its new President from the ASC.

Director Chopra concludes his remarks with the following:

“The Appraisal Foundation is essentially a lawmaking body that is neither accountable to the public nor subject to competitive market forces. These issues are deeply troubling as The Appraisal Foundation is one of the most, if not the most, powerful player in America when it comes to appraisals and plays a controlling role in key issues contributing to appraisal bias. As long as The Appraisal Foundation remains an insular body controlled by a small circle, operating behind closed doors, those issues will continue to go unaddressed.”

The appraisal bias hearing recordings can be found on HUD’s, OCC’s, FHFA’s, and CFPB’s YouTube channels.

Loran Kilson and Richard J. Andreano, Jr.

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Colorado Interest Rate Preemption Opt-Out Challenged in Federal Court

On March 25, 2024, three consumer financial services industry trade groups filed a lawsuit asking the federal district court in Colorado to strike down recent Colorado legislation purporting to opt out of a federal law that allows FDIC-insured state-chartered banks to “export” interest rates on interstate loans to the same extent as their national bank counterparts. This matter raises issues of first impression with signal importance to state banks and non-bank lenders, and the outcome is likely to have widespread significance well beyond its effect in Colorado. The complaint filed to initiate National Association of Industrial Bankers, American Financial Services Association, and American FinTech Council v. Philip J. Weiser, Attorney General of the State of Colorado, and Martha Fulford, Administrator of the Colorado Uniform Consumer Credit Code, Civil Action No. 1:24-cv-00812, U.S.D.C. Colorado (“Complaint”) requests that the court declare that the Colorado opt-out, set forth in Colo. Rev. Stat. § 5-13-106, and the Colorado Uniform Consumer Credit Code (“UCCC”), are invalid, violate federal law, and may not be enforced, with respect to loans that are not “made in” Colorado, as defined by federal law. The Complaint further asks the court to “preliminarily and permanently” enjoin Colorado from taking any action to enforce or give effect to the Colorado UCCC and C.R.S. § 5-13-106 with respect to such loans.

As discussed in our earlier blogs about Colorado’s opt-out here, here, and here, Congress enacted Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (“DIDMCA”) to eliminate the competitive disadvantage suffered by state-chartered FDIC-insured banks (“to prevent discrimination against State-chartered insured depository institutions”) with respect to interest rates. Section 521 gives state-chartered FDIC-insured banks the authority to export interest rates permitted by their respective home states. Binding case law created since DIDMCA’s enactment establishes that such authority is identical to the rate exportation authority enjoyed by national banks. (Sections 522 and 523 of DIDMCA gave similar rights to state-chartered savings and loan associations and credit unions.)

As the Complaint explains, in Section 525 of DIDMCA, “Congress authorized states to opt out of DIDMCA Section 521—meaning that the opting-out state could continue to impose its own interest-rate caps—but it limited that opt-out right to loans “made in” the opting-out state.” Accordingly, “In enacting its opt out, Colorado far exceeded the authority Congress granted it under DIDMCA. Ignoring the federal definition of where a loan is deemed to be “made,” Colorado seeks to impose its state interest-rate caps on any ”consumer credit transaction[] in” Colorado.”

The Complaint provides a thoughtful analysis of the meaning of when a loan is “made in” a state, and why that meaning is determined based on federal law:

Federal courts turn to federal law when interpreting federal statutes such as DIDMCA. . . Accordingly, because Section 525 is a federal statute, and Section 525 does not incorporate any state definitions, a uniform federal definition of where a loan is “made” governs DIDMCA opt outs, not Colorado’s chosen definition found in UCCC Section 5-1-201(1). . . Under the plain text, that opt-out right does not look to where a consumer is located; it turns on where the key functions associated with originating (“mak[ing]”) the loan take place. . . Federal banking regulators and courts have long confirmed this approach to determining where a bank is located and makes its loans. Both the OCC and the FDIC, for example, have consistently explained in related contexts that under federal law a bank is “located” in the state in which it is chartered unless all three ”non-ministerial” functions involved in making a loan all physically occur in another state: (1) loan approval; (2) disbursal of loan proceeds; and (3) communication of the credit decision.

By seeking to expand the opt-out right granted under Section 525 to loans not actually “made in” Colorado as defined under federal law, per the Complaint, the Colorado opt-out is invalid on its face, because it is preempted by DIDMCA and violates the Supremacy Clause of the United States Constitution. Further, the opt-out “violates the Commerce Clause because it will impede the flow of interstate commerce and subject state-chartered banks to inconsistent obligations across different states, creating a significant burden on interstate commerce.”

The Complaint discusses the bases for its assertion that Section 525 permits a state to opt out only as to loans made by banks chartered by that state, including the following detailed information:

The legislative history of DIDMCA confirms that the opt-out was designed to allow states to restore their pre-DIDMCA ability to restrict their own in-state banks from lending above their own state interest-rate limits, without regard for the federal rate. There is no suggestion in the legislative history of Section 525 that Congress intended to allow states to restrict the interest rates that out-of-state banks physically operating outside a state could charge when lending “into” an opting-out state (the rate exportation issue addressed in Marquette). See, e.g., 125 Cong. Rec. 30655 (1979) (Statements of Sens. Pryor and Bumpers) (explaining the goal of DIDMCA preemption was to rescue state-chartered banks that could not compete within their own states against national banks in a high rate environment); 126 Cong. Rec. 6906-07 (1980) (Statements of Sens. Proxmire and Bumpers) (explaining that the opt out would allow states to nonetheless retain control over their own state banks, and that DIDMCA preemption will allow for competitive equality between state-chartered and nationally-chartered banks); 126 Cong. Rec. 7070-71 (1980) (Statement of Sen. Proxmire) (explaining that “[t]he States retain authority to define the power of State-chartered banks[,]” and DIDMCA meets the needs of the national economy by enabling state banks to make loans in a high interest-rate environment).

The Complaint mentions the history of DIDMCA opt-out, explaining that of eight jurisdictions (seven states, including Colorado, and Puerto Rico) that originally opted out pursuant to Section 525 shortly after enactment of DIDMCA, six subsequently rescinded their opt-outs, including Colorado. However, Colorado re-enacted its opt-out in 2023, effective July 1, 2024. As the Complaint explains, while this was characterized as an effort to combat high-cost, small dollar lending, the opt-out actually will harm Colorado consumers by decreasing available sources of credit.

In support of its request that the court enjoin enforcement of Colorado’s opt-out, the Complaint explains that the Plaintiffs’ members as well as Colorado consumers, will suffer irreparable harm if Colorado’s opt-out is enforced as to loans not “made in” Colorado:

Plaintiffs’ members have already begun to incur both compliance costs and the cost of strained relationships with partners in preparing to comply with the opt out. And once the law goes into effect, Plaintiffs’ members will (i) lose revenue as a result of lower interest rates and fees; (ii) lose both revenue and goodwill through strained or lost relationships with customers, retailers, and other partners; (iii) lose opportunities for new customer and retailer relationships, including losing customers and retailers to national banks; (iv) incur ongoing compliance costs; and (v) risk consumer lawsuits and enforcement actions… The balance of equities favors injunctive relief against Colorado’s opt out. Colorado consumers—whom Defendants are duty-bound to protect—will suffer harm themselves if the law goes into effect as intended. Consumers, particularly those at the low end of the credit spectrum, will have reduced access to the responsible, needed consumer credit products offered by Plaintiffs’ members. These products will likely be offered by far fewer financial institutions if state-chartered institutions can no longer profitably offer them to Coloradans. Yet national banks will be able to continue to charge the same rates for these same products. Under Colorado’s new regime, state-chartered banks will simply be unable to compete with them effectively. With reduced competition from state banks, national banks will have less incentive to constrain their rates for these products.

As noted above, this litigation will be highly significant to, and will be closely watched by, the consumer financial services industry, particularly in light of several other state opt-out bills recently introduced and currently pending, as discussed here and here.

Mindy Harris, John L. Culhane, Jr., Ronald K. Vaske & Alan S. Kaplinsky

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CA DFPI Issues Notice of Proposed Rulemaking Under Debt Collection Licensing Act

On February 9, 2024, the Commissioner of the California Department of Financial Protection and Innovation (DFPI or Department) announced a proposed rulemaking limited to certain requirements related to reporting and assessments under the Debt Collection Licensing Act (DCLA). It has not yet responded to the comments it received in connection with a separate proposed rulemaking regarding the scope of the DCLA and its application to creditors (persons who extend consumer credit to a debtor).

With regard to assessments made by licensees, the DCLA requires a licensee to pay the Department annually its pro rata share of all costs and expenses reasonably incurred in the administration of the DCLA, with the first assessment to be imposed in 2024. The calculation of the pro rata share is based, in part, on the amount of net proceeds generated by California debtor accounts in the preceding year. The term “net proceeds” is not currently defined by statute. The proposed regulation seeks to amend the definitions found in Cal. Code Reg. Tit. 10 § 1850 to define net proceeds generated by California debtors accounts:

“‘Net proceeds generated by California debtor accounts’ means the amount retained by a debt collector from its California debt collection activity. (1) For a debt buyer as defined in Civil Code section 1788.50, this is equal to the amount it collects on a debt minus the prorated amount it paid for that debt, before deducting costs and expenses. (2) For a purchaser of debt that has not been charged off or debt that is not in default, this is equal to the amount it collects on a debt minus the prorated amount it paid for that debt, before deducting costs and expenses. (3) For a third-party collector, this is equal to the amount a collector receives from its clients, regardless of fee structure, before deducting costs and expenses. For purposes of this section, “client” means the company on whose behalf the third-party collector has been contracted to collect on an account. (4) For a first-party collector, this is equal to the amount it receives in fees and other charges from debtors that it would not have received had the debt been paid on time, before deducting costs and expenses. For purposes of this section, a first-party collector means a person or entity that collects a debt owed directly to it.”

With regard to annual reporting, the DCLA requires a licensee to file an annual report with the Commissioner and sets forth certain information that must be disclosed in the report. This rulemaking clarifies terms and establishes additional annual reporting requirements, such as a requirement to submit reports electronically. The rule clarifies that companies must report the total number of California debtor accounts collected on in the preceding year, which means “the sum of the following: (1) The total number of California debtor accounts collected in full. (2) The total number of California debtor accounts collected on that were resolved for less than the full amount of the debt. (3) The total number of California debtor accounts collected on where less than the full amount of the debt was collected, and a balance remains due.” The proposed rule also includes detail on reporting purchased accounts, portfolio accounts, and unsuccessful collection attempts.

The DFPI’s notice of proposed rulemaking activity can be found here. Any interested party may submit comments to the DFPI until March 27, 2024.

Loran Kilson

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CFPB Encourages New York to Ban Unfair or Abusive Conduct

On March 19, 2024, the Consumer Financial Protection Bureau (CFPB) published a blog touting letters it has sent to New York Governor Kathy Hochul, New York State Senate leaders, and New York State Assembly leaders to highlight the importance of a ban on abusive or unfair conduct that is being considered in pending New York legislation.

In the 2023 legislative session, State Senator Leroy Comrie and Assemblywoman Helene Weinstein introduced companion bills titled the “Consumer and Small Business Protection Act” in the Senate and Assembly that would expand Section 349 of the state’s general business law (which currently only prohibits deceptive acts) to prohibit unfair, deceptive, or abusive acts. The bills would allow any individual or nonprofit organization entitled to bring an action under Section 349 “on behalf of himself or herself and such others to recover actual, statutory and/or punitive damages or obtain other relief as provided for in this article.” Currently, private actions can only be brought under Section 349 for injunctive relief. The bills would allow statutory damages of $1000 plus actual damages to be awarded in private actions and make the award of reasonable attorneys’ fees and costs to a prevailing plaintiff mandatory rather than discretionary. As we previously blogged, the New York legislature adjourned on June 10, 2023 without any action on two bills but the bills were automatically reintroduced when the legislature reconvened in January. We assume that the CFPB’s letters were directed at the bills since the letters failed to cite the bill numbers or identify the name of the proposed Act.

The CFPB letters, which are signed by Assistant Director Brian Shearer of the Office of Policy Planning and Strategy, urge the NY legislature to follow Congress’s “careful and deliberate multi-part prohibition” and include the “reasonable reliance” component in the proposed abusive conduct ban. Assistant Director Shearer also comments that the inclusion of an unfairness standard has been important to the CFPB and FTC in their efforts to combat junk fees and deficient data security and that the clarification in the bills that an act or practice may be deceptive even when the representation is not directed at a consumer would align with the CFPA’s deceptive conduct prohibition.

Section 1036 of the Consumer Financial Protection Act (CFPA) prohibits unfair, deceptive, or abusive acts or practices. An act or practice is unfair when: (1) it causes or is likely to cause substantial injury to consumers that is not reasonably avoidable by consumers; and (2) the injury is not outweighed by countervailing benefits to consumers or to competition. Section 1042(a) of the CFPA authorizes “the attorney general (or the equivalent thereof) of any State” to bring “a civil action…to enforce the provisions of [the CFPA] or regulations issued under [the CFPA] and to secure remedies under provisions of [the CFPA] or remedies otherwise provided under other law.” It also authorizes “[a] state regulator” to bring “a civil action or other appropriate proceeding to enforce the provisions of [the CFPA] or regulations issued under [the CFPA] with respect to any entity that is State-chartered, incorporated, licensed, or otherwise authorized to do business under State law…and to secure remedies under provisions of [the CFPA] or remedies otherwise provided under other provisions of law with respect to such an entity.” Section 1042(a) includes limits on such authority, including with respect to actions against national banks and federal savings associations, and establishes conditions that a State Official must satisfy to exercise such authority, including notifying the CFPB before filing a CFPA claim and providing a description of the action. It also gives the CFPB a right to intervene in the state’s lawsuit. Despite the existing authority to enforce Section 1036, the CFPB believe the State of New York needs its own state law prohibiting unfair, deceptive and abusive practices.

Acting Outside of CFPB’s Statutory Authority

A review of the CFPA does not reveal a clear source of authority for the CFPB to advocate for state legislation. The CFPA provides the following authority to the CFPB:

  • Section 1021 (b) authorizes the CFPB to “exercise its authorities under Federal consumer financial law for the purposes of ensuring that, with respect to consumer financial products and services … consumers are protected from unfair, deceptive, or abusive acts and practices and from discrimination.”
  • Section 1021 (c) sets forth the CFPB’s primary functions as the following; “(1) conducting financial education programs; (2) collecting, investigating, and responding to consumer complaints; (3) collecting, researching, monitoring, and publishing information relevant to the functioning of markets for consumer financial products and services to identify risks to consumers and the proper functioning of such markets; (4) subject to sections 1024 through 1026, supervising covered persons for compliance with Federal consumer financial law, and taking appropriate enforcement action to address violations of Federal consumer financial law; (5) issuing rules, orders, and guidance implementing Federal consumer financial law; and (6) performing such support activities as may be necessary or useful to facilitate the other functions of the Bureau.”
  • Section 1031 of the CFPA gives the CFPB the authority to “prescribe rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”

This is not the first time the CFPB has sought to act outside of its statutory authority to influence actions taken by other regulatory bodies. In July 2023, Director Chopra issued a press release announced the start of an informal dialogue between the European Commission and the CFPB on a range of critical financial consumer protection issues. In August 2023, U.S. Representative Young Kim (CA-40) along with 18 members of Congress wrote a letter to CFPB Director Rohit Chopra expressing their concern with his “informal dialogue” with the European Commission without an explicit authorization from Congress and asked Director Chopra to terminate the dialogue.

New York’s Consumer Protection Agenda

Earlier this year, New York Governor Hochul announced “a sweeping consumer protection and affordability agenda”, including proposed actions to “strengthen consumer protections against unfair business practices” and “establish nation-leading regulations for the Buy Now Pay Later loan industry.” In December 2023, New York enacted two new consumer protection laws, which aim to protect consumers from (1) unwanted subscriptions by requiring notice to consumers for upcoming automatic renewals with clear instructions for canceling, and (2) confusion over prices by requiring merchants to post the highest price a consumer may pay for a product regardless of payment method.

Kristen E. Larson

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Looking Ahead

Webinar: Who Will Win Cantero v. Bank of America, N.A. And What Does It Mean for You?

Webinar Roundtable | April 3, 2024, 1:30 PM – 2:45 PM ET

Moderator: Alan S. Kaplinsky

MBA Legal Issues and Regulatory Compliance Conference

May 5-8, 2024 | Manchester Grand Hyatt, San Diego, CA

May 5, 2024 – 3:30 PM PT
Speaker: Daniel JT McKenna

APPLIED COMPLIANCE TRACK: Loan Originator Compensation
May 6, 2024 – 2:30 PM PT
Speaker: Richard J. Andreano, Jr.

KEY UPDATES TRACK: Changes to State Reporting Requirements and State Licensing
May 6, 2024 – 4:00 PM PT
Speaker: John D. Socknat

EMERGING ISSUES TRACK: Labor Law – Best Practices for Compensation and Recruiting in a Changing Landscape
May 7, 2024 – 1:00 PM PT
Speaker: Meredith S. Dante

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