Consumer Financial Protection Bureau (CFPB)

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The Supreme Court has denied the petition for certiorari filed by State National Bank of Big Spring (“the Bank”) and two non-profit organizations challenging Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Consumer Financial Protection Bureau.  The Petitioners argued that the CFPB violates the Constitution’s separation of powers clause for multiple reasons, including that is “an independent agency that exercises expansive executive authority over private citizens but is led by a single Director that the President cannot remove from office for policy reasons,” it is exempted from Congressional oversight, and it has no internal checks and balances.  Several foundations filed amicus curiae briefs echoing these arguments.  The Court’s order denying certiorari states that Justice Brett Kavanaugh, who heard the case on appeal to the Court of Appeals for the D.C. Circuit, “took no part in the consideration or decision of this petition.”

The appeal arises from a case brought by petitioners and eleven U.S. states against the CFPB, the Department of Treasury, and others in the U.S. District Court for the District of Columbia.  The district court initially dismissed the complaint due to lack of standing, concluding that the petitioners “had not suffered injury in fact from any actions of the Bureau or its Director.”  State Nat’l Bank v. Lew, et al., 958 F.Supp.2d 127, 147-165 (D.C. Cir. 2013).  The circuit court remanded the case back to the district after determining that the Bank had standing to challenge the constitutionality of the CFPB’s structure because it is regulated by it.  State Nat’l Bank v. Lew, at al., 795 F.3d 48 (D.C. Cir. 2015).

On remand, the district court deferred ruling on cross-motions for summary judgment pending the decision by the D.C. Circuit Court in PHH Corp. v. CFPB, 881 F.3d 75 (2018).  In PHH, the circuit court upheld the constitutionality of the CFPB, reasoning that the Supreme Court had previously “sustained the constitutionality of the independent Federal Trade Commission, a consumer-protection financial regulator with powers analogous to those of the CFPB” and “[i]n doing so, the Supreme Court approved the very means of independence Congress used here: protection of agency leadership from at-will removal by the President.” Id., 881 F.3d at 77.  After the en banc circuit court decision in PHH was entered, the parties stipulated to a judgment by the district court against the petitioners, and the D.C. Circuit Court summarily affirmed on the parties’ joint request.

In its response to the petition for certiorari, the Department of Justice, on behalf of the United States, argued in part that this case “would be a poor vehicle for considering the constitutionality of the Bureau’s structure because it is unlikely that the question would be considered by the full Court,” given Justice Kavanaugh’s participation in the case while he was a judge on the D.C. Circuit.  The DOJ further argued that because two of the petitioners are not banks and are not regulated by the CFPB, a significant jurisdictional question would need to be resolved before the Court could reach the merits of the case.

Troutman Sanders will continue to monitor and report on developments involving the CFPB.

The federal government shutdown continues and, in the wake of the President Donald Trump’s Oval Office address in support of the border wall, it appears that it could continue for some time. Press reports say approximately 800,000 federal workers are furloughed or working without pay. Consumer-facing companies are asking: What is the impact of the shutdown on their regulatory and litigation docket, as well as anticipated regulatory matters?

At a high level, from a consumer protection point of view, the most notable emerging impacts are on the federal judiciary, the U.S. Department of Justice and the Federal Trade Commission; on the other hand, the banking regulators are fully operational and open for business. Here’s a summary of the state of the judiciary and the federal regulatory agencies under the shutdown.

Continue reading the article here.

 

 

Earlier this month, the apparent next chair of the U.S. House Committee on Financial Services, along with almost two dozen other Democrats, urged the Consumer Financial Protection Bureau’s new director to proactively supervise firms for compliance with servicemember lending rules. 

In a letter to CPFB Director Kathleen Kraninger, Rep. Maxine Waters (D-Calif.) and twenty-two of her colleagues on the Committee stated that legal authorities and a bipartisan group of lawmakers agree that there is “no question” that the CFPB has the authority and obligation to supervise lenders for violating the Military Lending Act, or “MLA.”  The letter, as a result, requested that Kraninger formally commit to “resuming a consistent supervisory role over consumer protection laws, including the MLA, for the most robust and efficient protection of servicemembers and their families.”  It further warned that members of the military continue to be targets for “unscrupulous actors” and cited statistics showing that the agency handled 47% more servicemember complaints in 2017 than it did in 2016.

Over the summer, The New York Times reported that former CFPB acting director Mick Mulvaney planned to halt the agency’s use of supervisory examinations to check for lenders’ compliance with the MLA.  The MLA places a 36% interest rate cap on loans to military borrowers, bans mandatory arbitration clauses, and restricts other lender practices and loan terms.  Under that new planned policy, the agency would not proactively search for MLA violations on a routine basis, although it would accept and pursue cases against lenders upon receiving complaints.  This move resulted from a determination that the CFPB lacked explicit statutory authority to incorporate MLA compliance checks into its examinations.

The letter from House Democrats rides on the coattails of servicemember groups, consumer advocates, and others who swiftly opposed the change, arguing that dropping the compliance checks could expose active-duty troops and their families to harm from predatory lenders and, in the process, jeopardize military readiness.  Even the U.S. Department of Defense stated that the CFPB failed to consult with it about this change in policy.

As the likely next chair of the House Financial Services Committee, Waters underscored, through her criticism of Mulvaney and his policies, the pledges she has made to prioritize consumer protection during her new term in office.  In a statement, Waters asserted, “Of particular importance is ensuring that the [CFPB] is not dismantled by Trump’s appointees.  This critical agency must be allowed to resume its work of protecting consumers from unfair, deceptive or abusive practices without interference from the Trump Administration.” 

Troutman Sanders will continue to monitor CFPB developments under House Democrats’ leadership in 2019.

 

Consumer financial services companies are hopeful that the Supreme Court’s pending decision in Timbs v. Indiana will provide a Constitutional basis for challenging fines and penalties levied by state attorneys general and regulators.  The Supreme Court heard oral argument on November 28 on the issue of whether the Excessive Fines Clause has been (or should be) made applicable to the states through the Fourteenth Amendment.

Petitioner Tyson Timbs pled guilty to dealing a controlled substance and received a six-year sentence of mixed home detention and probation.  In addition, Timbs agreed to pay fines and court costs.  At the time of his conviction, the State of Indiana allowed a maximum fine of $10,000 for the underlying offense.  However, several months after Timbs’ sentencing, the State filed a case seeking civil forfeiture of a vehicle worth approximately $40,000 that Timbs drove at the time of his arrest.  After an evidentiary hearing on the State’s request, the Indiana trial court determined the forfeiture was grossly disproportionate to the underlying crime and therefore unconstitutional under the Eighth Amendment’s Excessive Fines Clause.  On appeal, the Indiana Supreme Court unanimously reversed on the basis that the U.S. Supreme Court has not held that the Excessive Fines Clause applies to the states.

The questions posed by the justices at oral argument suggest a consensus among the bench that the Excessive Fines Clause of the Eighth Amendment is applicable to the states under the Fourteenth Amendment.  However, the questions during oral argument suggest some disagreement on the scope of the rights protected by the Excessive Fines Clause.

Many state attorneys general and state regulators have heightened their supervisory and enforcement activity over consumer financial services companies in the wake of a perceived slackening of enforcement at the federal level, particularly from the Bureau of Consumer Financial Protection.  The industry is hopeful that a Timbs v. Indiana decision applying the Eighth Amendment Excessive Fines Clause against the states could provide significant protection from fines and penalties sought by states.

On December 10, the Bureau of Consumer Financial Protection issued proposed revisions to its 2016 Policy on No-Action Letters and proposed a BCFP Product Sandbox.

The proposed new policy has two parts: Part I is a revision of a 2016 policy on No-Action Letters, and Part II is a description of the BCFP Product Sandbox. The revised No-Action policy would eliminate the data-sharing requirement of the 2016 Policy, which required applicants to commit to sharing data about the product or service. The revisions to the 2016 Policy would also speed up the time in which the BCFP would grant or deny an application for a No-Action Letter to 60 days.

The BCFP Product Sandbox would grant companies similar relief under Part I of the proposed rule but would also provide two forms of additional exemption relief: “1. Approvals by order under three statutory safe harbor provisions (approval relief); and 2. Exemptions by order from statutory provisions under statutory exemption-by-order provisions (statutory exemptions), or from regulatory provisions that do not mirror statutory provisions under rulemaking authority or other general authority (regulatory exemptions).” The Product Sandbox approval relief and exemption relief would be for a period of two years; however, to take advantage of the Product Sandbox, applicants are required to commit to sharing data with the BCFP with respect to the products or services offered.

The proposed policy has the following goals: “1. Streamlining the application process; 2. Streamlining the BCFP’s processing of applications; 3. Expanding the types of statutory and regulatory relief available; 4. Specifying procedures for an extension where the relief initially provided is of limited duration; and 5. Providing for coordination with existing or future programs offered by other regulators designed to facilitate innovation.” The Product Sandbox will help foster innovation and gain insight into how regulations may need to adapt to allow pro-consumer innovation.

This proposed policy may be of particular interest to the fintech world in the business-to-consumer context, given the innovation and energy to adapt delivery of products and services over the Internet and the sometimes awkward fit between the remote delivery model and some regulations. Comments on the revised policy are due no later than 60 days after the proposals are published in the Federal Register.

The Bureau of Consumer Financial Protection has continued its series of guidelines specifically addressing servicemembers’ purchases of automobiles.  Recent posts on the Bureau’s blog have provided advice for servicemembers on shopping for auto financing, options for buying new cars versus used cars, as well as recommendations on how to trade in a vehicle.

With regard to auto finance, the BCFP advises servicemembers to shop around for financing terms rather than only considering the financing options offered by dealerships.  Instead, the BCFP suggests that servicemembers contact multiple banks and credit unions, and that they ask about specific military discounts that might be available.  The BCFP also highlights the importance of the annual percentage rate and the length of financing available.

In the new versus used car debate, the BCFP suggests that servicemembers consider buying a used car rather than new.  The BCFP outlined the following factors to consider before buying:

  • How a vehicle responds under varied road conditions;
  • Researching the availability of Certified Pre-Owned (“CPO”) vehicles;
  • The vehicle’s maintenance record;
  • The value of the vehicle based on the Kelley Blue Book, Consumer Reports, and the National Automobile Dealers Association’s guides;
  • Upkeep costs; and
  • Unrepaired recalls.

The BCFP also encourages buyers to rely on the Buyers Guide, required under the FTC’s Used Car Rule.  Notably, the FTC recently updated the Buyers Guide and mandates that all used motor vehicles display the form.  Additionally, the BCFP encourages any servicemember who plans to buy a new car to shop around, negotiate on price, and order a car if a dealership does not have a car that meets their needs.

Finally, for those who intend to trade in their vehicles, the BCFP advises servicemembers to know the value of their cars, noting that dealerships are open to negotiating a trade-in value.  However, the BCFP cautions against trade-ins where a servicemember has negative equity, recommending that they consider postponing purchases until they are in a positive equity position or consider selling their vehicles themselves.  For those members of the military who decide to proceed with a negative equity trade-in, the BCFP suggests that they ask how negative equity would affect their financing and to keep the length of the new financing term as short as possible

Last month, Troutman Sanders reported on the proposed TRACED Act which would instruct the Federal Communications Commission to engage in rulemaking to protect consumers from receiving unwanted calls and text messages from unauthenticated phone numbers.  FCC Chairman Ajit Pai tweeted his approval for the bill, but the FCC is not waiting on Congress to fight robocalls.  On November 21, it released its final report and order on creating a reassigned numbers database.

According to the FCC’s press release, the final draft of the report and order would create a comprehensive database to enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number, thereby helping to protect consumers with reassigned numbers from receiving unwanted robocalls.

More specifically, this proposal changes the existing federal regulatory scheme by:

  • Establishing a single, comprehensive reassigned numbers database that will enable callers to verify whether a telephone number has been permanently disconnected, and is therefore eligible for reassignment, before calling that number;
  • Establishing a minimum aging period of 45 days before permanently disconnected telephone numbers can be reassigned;
  • Requiring that voice providers that receive North American Numbering Plan numbers and the Toll Free Numbering Administrator report on a monthly basis information regarding permanently disconnected numbers; and
  • Selecting an independent third-party administrator, using a competitive bidding process, to manage the reassigned numbers database.

Pai announced the items tentatively included on the agenda for the December Open Commission Meeting scheduled for Wednesday, December 12. Considering that robocalls are the number one basis of complaints filed with the FCC and the speed in which the issue has been addressed, it will come as no surprise if the proposal is passed at the meeting.

Troutman Sanders will continue to monitor this and related FCC’s rulemaking decisions.

On November 14, the Bureau of Consumer Financial Protection filed an amicus brief with the United States Supreme Court, arguing a law firm’s nonjudicial foreclosure actions to enforce a security interest on a mortgage debt fell outside the purview of the Fair Debt Collection Practices Act because the activity did not constitute “debt collection.”

The issue is currently under review before the Supreme Court in Obduskey v. McCarthy & Holthus LLP, No. 17-1307 (2018).

This action originally arose out of a home mortgage loan that petitioner Dennis Obduskey applied for and obtained from Magnus Financial Corporation in 2007, secured by Obduskey’s Colorado home. Wells Fargo Bank subsequently took over as servicer of the loan, on which Obduskey subsequently defaulted in 2009.  Wells Fargo spent the next several years unsuccessfully attempting to foreclose on the home. In 2014, Wells Fargo hired respondent McCarthy & Holthus LLP to initiate non-judicial foreclosure proceedings against Obduskey in accordance with procedures set forth under Colorado state law.

As a part of its foreclosure attempts, McCarthy & Holthus sent Obduskey a letter that contained, among other things, the amount of the outstanding loan, the name of the creditor, and a disclosure regarding the potential imposition of interest and fees, and it stated that McCarthy & Holthus intended to seek non-judicial foreclosure of the home. The letter also included a statement that McCarthy & Holthus “may be considered a debt collector attempting to collect a debt” as well as a disclosure regarding Obduskey’s rights to dispute the debt or seek validation akin to the disclosure required under Section 1692g of the FDCPA.  Although Obduskey disputed the debt, McCarthy & Holthus provided no verification but instead initiated a non-judicial foreclosure proceeding.

Obduskey filed an action against McCarthy & Holthus and Wells Fargo in the United States District Court for the District of Colorado, alleging the defendants violated the FDCPA and Colorado state law. The district court dismissed the FDCPA claims against McCarthy & Holthus and Wells Fargo based on what it perceived as the majority view that foreclosure proceedings do not constitute the collection of a debt. On appeal, the Court of Appeals for the Tenth Circuit affirmed the district court because in Colorado, a non-judicial foreclosure proceeding only allows for the sale of the property but does not automatically entitle the trustee to the collection of the sale proceeds; this must be done through a separate action. In other words, the enforcement of a security interest is not an attempt to collect money from a debtor and in general, the FDCPA only governs entities that attempt to collect money. The Court also found that a contrary decision would create a conflict between the FDCPA and Colorado state law, which requires certain disclosures to borrowers when initiating non-judicial foreclosure proceedings. However, the Court of Appeals noted that there is somewhat of a circuit split with respect to this issue between the Ninth Circuit, along with numerous district courts, and the Fourth, Fifth, and Sixth circuits. Finally, the Court of Appeals found that both defendants were not debt collectors under the FDCPA. Obduskey again appealed and the Supreme Court granted certiorari on June 28, 2018.

In its amicus brief, the BCFP largely echoes the Tenth’s Circuit’s findings. First, the BCFP argues that McCarthy & Holthus’s non-judicial foreclosure action against Obduskey was not “debt collection” under the FDCPA because the FDCPA’s text is clear that enforcement of a security interest, without very specific other prohibited activity mentioned in Section 1692f(6), does not constitute debt collection. Second, the BCFP argues that McCarthy & Holthus’s actions were specifically required by Colorado state law. Therefore, to find its actions in violation of the FDCPA would throw the FDCPA into conflict with state law and would have hindered McCarthy & Holthus from complying with state law. While the BCFP’s argument largely follows the reasoning of the Tenth Circuit, it could also signal the agency taking on an ever-increasing pro-business tilt following Mick Mulvaney’s appointment as acting director of the BCFP one year ago.

Oral arguments have not yet been scheduled. We will continue to monitor this case and provide updates accordingly.

 

Recently, the Consumer Financial Protection Bureau issued revised versions of the small entity compliance guides for the Loan Originator Rule and the Home Ownership and Equity Protection Act (“HOEPA”) Rule.  

Revisions to the Loan Originator Rule Compliance Guide 

The CFPB revised the compliance guide for the Loan Originator Rule in three notable respects. First, the revised guide includes a process for contacting the CFPB with informal inquiries about the rule. Second, the revised guide puts into effect the TILA/RESPA Disclosure rule. Third, and pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was adopted earlier this year, the revised guide includes an exemption from certain rules applicable to loan originators for retailers of manufactured and modular homes and their employees. 

Revisions to the HOEPA Rule Compliance Guide 

The CFPB made two notable revisions to the compliance guide for the HOEPA Rule. First, the revised guide broadens the exemption from the concept of a loan originator. This broader exemption should be taken into account when considering the requirement to include loan originator compensation in points and fees for purposes of the points and fees threshold under the rule. Second, the revised guide includes a process for contacting the CFPB with informal inquiries about the rule.  

The revised compliance guides can be found here.

 

In an ominous sign, Americans’ total debt hit another record high, rising to $13.5 trillion in the last quarter, as student loan delinquencies jumped, according to Reuters. Specifically, flows of student debt into serious delinquency – of 90 or more days – rose to 9.1 percent in the third quarter from 8.6 percent in the previous quarter, reported the Federal Reserve Bank of New York, propelling the biggest jump in the overall U.S. delinquency rate in seven years.  

Total household debt, driven by $9.1 trillion in mortgages, now stands $837 billion higher than its previous peak in 2008, just as the Great Recession took hold and induced massive deleveraging across the United States. In fact, indebtedness has risen steadily for more than four years and sits more than 21% above its 2013 low point, and the $219 billion rise in total debt in the quarter that ended on September 30 amounts to the biggest jump since 2016. 

“The new charts in our report help to better understand how the debt and repayment landscape have shifted in the years following the Great Recession,” Donghoon Lee, research officer at the New York Fed, announced in a press release published on November 16. “Older borrowers now hold a larger share of total outstanding debt balances, while the shares held by younger borrowers have contracted and shifted toward auto loans and student loans.”