Consumer Financial Protection Bureau (CFPB)

As Congress’ emboldened majority has sought to lessen the federal government’s regulatory footprint, the states have not always been quiet, as one summertime example amply shows.

In 2017, two congressmen introduced two bills which, if enacted, would expand the scope of federal preemption to include non-bank entities. Introduced by Rep. Patrick McHenry (R-N.C.), the first of these two bills – the Protecting Consumers’ Access to Credit Act of 2017 (HR 3299) – states that bank loans with a valid rate when made will remain valid with respect to that rate, regardless of whether a bank has subsequently sold or assigned the loan to a third party. A second bill known as the Modernizing Credit Opportunities Act of 2017 (HR 4439), championed by Rep. Trey Hollingsworth (R-Ind.), strives “to clarify that the role of the insured depository institution as lender and the location of an insured depository institution under applicable law are not affected by any contract between the institution and a third-party service provider.” Perhaps most significantly, it would establish federal preemption of state usury laws as to any loan to which an insured depository institution is the party, regardless of any subsequent assignments. In so doing, both bills amend provisions of the Home Owners’ Loan Act, Federal Credit Union Act, and/or Federal Deposit Insurance Act. Such an amendment would invalidate a long-line of judicial precedent barring a non-bank buyer’s ability to purchase a national bank’s right to preempt state usury law, which culminated in the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, and thereby provide non-originating creditors with a potent – and until now nonexistent – shield against liability under certain state consumer laws.

On June 27, 2018, the attorneys general of twenty states[1] and the District of Columbia stated their opposition to both bills in a letter to Congressional leadership. Beginning with an historically accurate observation – “[t]he states have long held primary responsibility for protecting American consumers from abuse in the marketplace” – the A.G.s attacked these legislative efforts as likely to “allow non-bank lenders to sidestep state usury laws and charge excessive interest that would otherwise be illegal under state law.” The cudgel of preemption, they warned, would “undermine” their ability to enforce their own consumer protection laws. The A.G.s went on to argue many non-bank lenders “contract with banks to use the banks’ names on loan documents in an attempt to cloak themselves with the banks’ right to preempt state usury limits”; indeed, “[t]he loans provided pursuant to these agreements are typically funded and immediately purchased by the non-bank lenders, which conduct all marketing, underwriting, and servicing of the loans.” For their small role, the banks “receive only a small fee,” with the “lion’s share of profits belong[ing] to the non-bank entities.” In support of this position, the A.G.s cite to a 2002 press release by the Office of the Comptroller of the Currency (“OCC”) and the more recent OCC Bulletin 2018-14 on small dollar lending, the latter announcing the OCC’s “unfavorabl[e]” view of “an[y] entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).

The A.G.s concluded by arguing that the proposed legislation would erode an “important sphere of state regulation,” state usury laws having “long served an important consumer protection function in America.”

We will continue to monitor this legislation and other developments in the preemption arena, and will report on any further developments.

[1] The signatories come from California, Colorado, Hawaii, Illinois, Iowa, Maryland, Massachusetts, Minnesota, Mississippi, New Mexico, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, and Washington.

The states of most complaint, you ask?  – California, Florida, Texas, New York, and Georgia.

In October, the Consumer Financial Protection Bureau released its Complaint Snapshot, which supplements the Consumer Response Annual Report and provides an overview of trends in consumer complaints received by the Bureau.

The Snapshot revealed that the CFPB has received 1.5 million complaints since January 1, 2015.  Of those complaints, the most come from consumers in California, Florida, Texas, New York, and Georgia.  Conversely, the CFPB received the fewest number of complaints from consumers in Wyoming.

In general, U.S. consumers complain more to the CFPB about credit or consumer reporting (i.e., that there is incorrect information on the report) and debt collection (i.e., that there are attempts to collect on debt allegedly not owed) than any other issues.  The top complaints in the top states are as follows:

State Top Complaint
Georgia Credit or consumer reporting
Florida Credit or consumer reporting
Texas Debt collection
California Credit or consumer reporting
New York Credit or consumer reporting

The report also highlights the financial products that result in the largest number of complaints to the CFPB.  They include student loans, money transfers or services, virtual currency, prepaid cards, payday loans, and credit repair.

Click here to download the full report.

We will continue to monitor and report on developments in this area of consumer financial services and compliance.

In a recent decision dismissing a purported class action against Zillow Group, Inc., launched by disgruntled purchasers of the company’s securities, the United States District Court for the Western District of Washington provided a remarkably thorough—and an eminently useful—distillation of the federal judiciary’s emergent application of the Real Estate Settlement Procedures Act of 1974 (“RESPA”) to today’s increasingly popular co-marketing programs.  To the many defendants potentially subject to this statute, this opinion offers a roadmap for minimizing their legal exposure and defeating liability.


Program at Issue

To this day, Zillow generates the majority of its revenue through advertising sales to real estate professionals. With $150 million in cash in the winter of 2013, Zillow launched a new advertising product, a then-unique co-marketing program (herein referred to as “the Program”). This Program allows participating mortgage lenders to pay a percentage of a real estate agent’s advertising costs directly to Zillow in exchange for appearing on the agent’s listings and receiving some of the agent’s leads. (“Leads” are created whenever a user views an agent’s listing on Zillow and decides to send their contact information to the agent directly.) In return for this payment, the participating lenders appear on the co-marketing agent’s listings as “preferred lenders,” their picture and contact information appended. When a user chooses to provide an agent with their contact information, Zillow automatically dispatches their personal information to the co-marketing lender, unless the user affirmatively opts out. “Because users are able to opt out of sending their contact information,” the Court explained, “lenders receive, on average, 40% of the leads received by their co-marketing agents.”

Prior to 2017, an individual lender could pay up to 50% of a co-marketing agent’s advertising costs, and up to five lenders could collectively pay 90%. If a single lender co-marketed with an agent, that lender appeared on all of the agent’s listings. But when multiple lenders co-marketed with a single agent, each lender appeared randomly on the agent’s listings based on that lender’s pro-rata share of the agent’s overall advertising spend.

Relevant Law

RESPA focuses on consumers in the market for real estate “settlement services,” defined as encompassing “any service provided in connection with a real estate settlement, including, but not limited to” title searches, title insurance, attorney services, document preparation, credit reports, appraisals, property surveys, loan processing and underwriting, and the like. This statute aims to curtail the cost of real estate transactions by promoting the disclosure of “greater and more timely information on the nature and costs of the settlement process” and by protecting consumers from “unnecessarily high . . . charges caused by certain abusive practices.”

RESPA’s eighth section focuses on the elimination of kickbacks and unearned fees. Dealing with “business referrals,” Section 8(a), as codified in 12 U.S.C. § 2607(a), prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.” Courts commonly find a violation of Section 8 when all of the following elements are present: (1) a payment or thing of value was exchanged, (2) pursuant to an agreement to refer settlement business, and (3) there was an actual referral.  Section 8(b) further cabins liability under this provision: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” This part of RESPA concludes with a safe harbor permitting “[a] payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

Instant Case

Plaintiffs’ Relevant Claims

In their amended complaint, Plaintiffs attacked the Program for violating RESPA’s Section 8 in “two overarching ways.” First, they characterized the co-marketing program as an impermissible “vehicle to allow real estate agents to make illegal referrals to lenders in exchange for the lenders paying a portion of the agents’ advertising costs to Zillow.” As Plaintiffs’ alleged, “Defendants created the co-marketing program to allow real estate agents to steer prospective home buyers to mortgage lenders, in exchange for the lenders paying a portion of the agent’s advertising costs to Zillow.”  Second, the Program, they insisted, “allow[ed] lenders to pay a portion of their agents’ advertising costs that was in excess of the fair market value for the advertising services they actually receive.” Either theory, if accepted, would have left Zillow exposed to liability under RESPA.

Court’s Opinion

In trenchant prose, the Court found neither basis to be sufficiently pled under the heightened standard applicable to fraud claims.

The Court discerned no iota of legal or factual viability in Plaintiffs’ first theory: “that the co-marketing program is per se illegal because it allowed agents to make referrals in exchange for lenders paying a portion of their advertising costs.” Although Plaintiffs rested much of this theory on PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1 (D.C. Cir. 2016), the Court noted its rejection of the broad theory of RESPA liability espoused by the Consumer Financial Protection Bureau. Instead, as the Court stressed, the D.C. Circuit had “held that RESPA’s safe harbor allows mortgage lenders to make referrals to third parties on the condition that they purchase services from the lender’s affiliate, so long as the third party receives the services at a ‘reasonable market value,’” an approach pioneered by the Ninth Circuit’s Geraci v. Homestreet Bank, 347 F.3d 749 (9th Cir. 2003).

Under this precedent, the Complaint failed for three reasons. First, the Program, as depicted by Plaintiffs themselves, only “allows agents and lenders to jointly advertise their services without requiring agents to refer business to lenders.” Because it does not “explicitly involve … the referral of mortgage insurance business in exchange for the purchase of re-insurance from the referring business,” it falls beyond RESPA’s purview. Second, the Complaint utterly lacked enough “particularized facts demonstrating that co-marketing agents were actually providing unlawful referrals to lenders.  Third, even if “co-marketing agents were making mortgage referrals, such referrals would fall under the Section 8(c) safe harbor because lenders received advertising services in exchange for paying a portion of their agent’s advertising costs.”

Rather than a trio, one reason alone doomed Plaintiffs’ second theory. To wit, despite “explain[ing] in detail how the . . . [P]rogram is structured,” Plaintiffs had failed to allege, with the requisite specificity, that “specific co-marketing lenders were paying more than fair market value for the advertising services they received from participating in the program.”  As one example, the Court pointed to Plaintiffs’ failure to allege that one co-marketing agent provided a mortgage referral to a specific lender in exchange for that lender paying an amount to Zillow that was above the market value of the advertising services it received. That some lenders refused to pay more than 31% of an agent’s advertising costs, it pointed out, did not render that percentage equivalent to the relevant service’s fair market value. Some more definite and precise allegations, entirely missing from the complaint, were necessary.

Potential Impact

The Decision holds a distinct promise for defendants in RESPA actions based on co-marketing programs similar to Zillow’s own.

Specifically, it shows how potent RESPA Section 8’s safe harbor, as previously construed by the D.C. Circuit in PHH Corp. and the Ninth Circuit in Geraci, can be at the pleading stage. Within this growing line of caselaw, this provision has been read to authorize lenders to pay a portion of their agents’ advertising costs, so long as those payments reflect the fair market value for the advertising services they actually receive. A plaintiff’s failure to allege, with specificity, how precisely a lender’s payment exceeds the market value could thus readily set their complaint up for prompt dismissal.

In short, in the wake of Zillow’s victory, well- and carefully-designed co-marketing programs today stand on firmer legal ground.

On October 24, the Bureau of Consumer Financial Protection entered into a Consent Order with Cash Express, LLC relating to allegations it engaged in deceptive and abusive acts or practices in violation of the Consumer Financial Protection Act, codified at 12 U.S.C. §§ 5531, 5536(a)(1)(B).  Pursuant to the Consent Order, Cash Express agreed to a $200,000 penalty and to pay $32,000 in restitution to resolve allegations it engaged in deceptive and abusive practices.

Specifically, the BCFP alleged that Cash Express engaged in deceptive activity by allegedly sending collection letters on time-barred debts while representing it would take legal action with respect to those debts, even though it was not its practice to do so, and that it would further provide information to credit reporting agencies, when it in fact did not do so.  The BCFP further alleged the company instructed its employees not to disclose at any time during a check cashing transaction that it would deduct previously owed amounts from the check proceeds.  Notably, the company’s complained-of set-off practices were disclosed to consumers, with the consumers being required to sign a written acknowledgment.  However, the BCFP nonetheless alleged the set-off practices were deceptive because the disclosures sometimes occurred long after the consumer presented a check to be cashed and because Cash Express instructed its employees subsequently not to inform consumers that their check proceeds might be set off against any outstanding debt.  The BCFP essentially took the position that these practices nullified the effect of the disclosure and took unreasonable advantage of a consumer’s lack of understanding of the material risks and costs of using the company’s check cashing service.

The action by the BCFP is surprising given that director Mulvaney recently gave a speech noting that abusiveness is not a well-defined legal concept and noting that the Bureau may consider rulemaking to provide further clarity.  The Consent Order suggests that – the BCFP’s current leadership notwithstanding – companies should remain careful to avoid potentially misleading representations or affirmative acts that may be perceived as negating prior disclosures to consumers.

We will continue to monitor this issue and further actions by the BCFP, and will report on any developments.

On October 17, the Office of Information and Regulatory Affairs released the CFPB’s fall 2018 rulemaking agenda.  In the preamble to the agenda, the CFPB notes that the agenda lists the regulatory matters that the agency “reasonably anticipates having under consideration during the period from October 1, 2018 to September 30, 2019.”

Implementing Statutory Directives.  According to the CFPB, much of its rulemaking agenda focuses on implementing statutory directives.  Those statutory directives include:

  • The directive by the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) that the CFPB engage in rulemaking to (1) exempt certain creditors with assets of $10 billion or less from certain mortgage escrow requirements under the Dodd-Frank Act, and (2) develop standards for assessing consumers’ ability to repay Property Assessed Clean Energy (“PACE”) financing; and
  • The Dodd-Frank Act’s directive that the CFPB, prior to any public disclosure, modify or require modification of loan-level data submitted by financial institutions under the Home Mortgage Disclosure Act (“HMDA”) so as to protect consumer privacy interests.

Continuation of Other Rulemakings.  In addition, the CFPB notes that it “is continuing certain other rulemakings described in its Spring 2018 Agenda.”  Those continuing rulemaking efforts include:

  • Anticipated rulemaking to reconsider the 2017 Payday, Vehicle Title, and Certain High-Cost Installment Loans Rule; 
  • Anticipated rulemaking to reconsider its 2015 HMDA rule, for instance, by potentially revisiting such issues as the institutional and transactional coverage tests and the rule’s discretionary data points; and 
  • Anticipated rulemaking to address how to apply the 40-year-old Fair Debt Collection Practices Act (“FDCPA”) to modern collection practices.

Further Planning.  The CFPB also notes that it “has a number of workstreams underway that could affect planning and prioritization of rulemaking activity, as well as the way in which it conducts rulemakings and related processes.”  Those workstreams include:

  • Ongoing efforts to reexamine rules that the Bureau issued to implement Dodd-Frank Act requirements concerning international remittance transfers, the assessment of consumers’ ability to repay mortgage loans, and mortgage servicing;
  • Ongoing efforts to reexamine rules implementing a Dodd-Frank Act mandate to consolidate various mortgage origination disclosures under the Truth in Lending Act and Real Estate Settlement Procedures Act;
  • Ongoing efforts to reexamine the requirements of the Equal Credit Opportunity Act (“ECOA”) concerning the disparate impact doctrine, in light of recent Supreme Court case law and Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations; and
  • Ongoing efforts directed at determining whether rulemaking or other activities may be helpful to further clarify the meaning of “abusiveness” under section 1031 of the Dodd-Frank Act.

On October 17, the Bureau of Consumer Financial Protection issued its Fall Rulemaking Agenda.  The CFPB releases regulatory agendas twice a year in conjunction with a broader initiative led by the Office of Management and Budget to publish a Unified Agenda of Regulatory and Deregulatory actions across all agencies of the federal government.

Of particular note, by March 2019, the CFPB plans to formulate a Notice of Proposed Rulemaking addressing the applicability of the Fair Debt Collection Practices Act to modern debt collection practices.  The CFPB plans to address issues such as communication practices and consumer disclosures, which continue to be leading sources of complaints.

Under interim leadership of Acting Director Mick Mulvaney, the CFPB’s forthcoming regulatory priorities include meeting specific statutory responsibilities, continuing selected rulemakings that were underway, and reconsidering two regulations issued under the prior leadership (the Home Mortgage Disclosure Act and rule for payday, vehicle title, and certain high-cost installment loans).  A prior blog post further addressing the Fall 2018 rulemaking agenda can be found here.

Troutman Sanders will continue to monitor important developments involving the CFPB and the FDCPA and will provide further updates as they are available.

On September 12, the Consumer Financial Protection Bureau issued an interim final rule which provided a model Summary of Rights form, a form that both consumer reporting agencies (CRAs) and employers doing background checks use for compliance with the Fair Credit Reporting Act. CRAs and employers are required to implement revisions to the form by September 21, 2018.   

In May of this year, Congress passed the Economic Growth, Regulatory Relief and Consumer Protection Act, which, among other changes, amended the Fair Credit Reporting Act to require new language to be added to the FCRA Summary of Rights form, published as Appendix K to Regulation V, regarding a consumer’s right to obtain a security freeze. As we previously reported, both consumer reporting agencies and users of consumer reports should take action to update their Summary of Rights forms prior to the September 21 effective date.  

Users of consumer reports are required to provide the FCRA Summary of Rights form prior to taking any employment adverse action based upon the use of a consumer report. Consumer reporting agencies are required to provide the form at various times, including, for example, to consumers when making a file disclosure pursuant to 15 U.S.C. § 1681g(c)(2).   

The CFPB has stated that it will deem users of consumer reports and CRAs as being in compliance by using the new form by the September 21 effective date, or by providing a separate statement along with the prior version of the official form that includes the new security freeze disclosure. 

The CFPB will accept comments on the interim final rule for a period of 60 days after the date the rule is published in the Federal Register. 

Troutman Sanders will continue to monitor important developments involving the CFPB and FCRA and will provide updates accordingly.

A Fifth Circuit panel has rejected an administrative subpoena from the Consumer Financial Protection Bureau that sought documents and other information from a Texas-based public records search company, marking only the second time that an appeals court has declined to enforce one of the consumer watchdog agency’s so-called civil investigative demands.

In six-page decision filed Thursday, the three-judge panel said the CID issued to The Source for Public Data LP had failed to give adequate notice of what conduct the CFPB was investigating and what law the agency thought might have been broken.

Click here to read more on Law360

In a case of first impression, the United States District Court for the Western District of Michigan held that direct-to-voicemail messages qualify as a “call” under the Telephone Consumer Protection Act.  The Court’s opinion thus subjects another modern technology to the requirements of express consent and other strictures of the TCPA.

Defendant debt collector Dyck-O’Neal, Inc. delivered 30 messages to plaintiff consumer Karen Saunders’ voicemail using VoApp’s “DirectDROP” voicemail service.  The service did what it was supposed to do by delivering the voicemail messages through the telephone service provider’s voicemail server without actually calling Saunders’ phone number.  Saunders sued under the TCPA, and Dyck-O’Neal filed for summary judgment on the grounds that “ringless voicemails” are not subject to the TCPA.

The Court began its analysis by drawing predictable parallels to traditional voicemails and text messages which are subject to the TCPA.  The Court quoted from the FCC’s infamous 2015 Order, stating that Congress intended to protect consumers from “unwanted robocalls as new technologies emerge” (emphasis added).  The Court examined the technology behind the ringless voicemails, which included the fact that the technology did not call a telephone number assigned to a cell phone account – the statutory prerequisite for applying the TCPA provision at issue.  Nevertheless, the Court gave credence to the calls’ “effect on Saunders” rather than the fact that no call was made to a cell phone number.  According to the Court, that effect was “the same whether the phone rang with a call before the voicemail is left, or whether the voicemail is left directly in her voicemail box.”  The Court reasoned that Dyck-O’Neal did nothing other than reach Saunders on her cell phone through a “back door,” and failure to regulate this “back door” through application of the TCPA would be an “absurd result.”

Many collection agencies and marketing companies have been successfully using the direct-to-voicemail messages, and many others have considered following suit.  The Court’s decision is part of the risk-benefit analysis but, in the age of a quickly-evolving TCPA jurisprudence, another court may reach a different result.  This decision, facially at odds with the statutory text, could turn out to be an outlier or could mark the beginning of a trend.  Troutman Sanders will continue to monitor this line of cases.

With debts rising faster than new graduates’ starting salaries, a student debt crisis has the potential to haunt the nation much in the way the mortgage crisis did 10 years ago. In general, the roots of this problem lie, in part, in the private student loan, or PSL, market created by and in response to the Higher Education Act of 1965, or the HEA. The federal government’s commitment to funding post-secondary education spawned new lenders, borrowers and servicers, all operating within a regulatory regime administered by the U.S. Department of Education for more than 50 years. In the last decade, as borrowers assumed more unsustainable debts, federal actors, from the DOE to the Consumer Financial Protection Bureau, turned their attention to the behavior of private lenders and servicers of both federal and private loans. In this pursuit, federal authorities relied upon numerous consumer protection statutes and aligned themselves with many state-level agencies, including state attorneys general, from across the country.

Beginning in 2016, a new mood dampened the federal bureaucracy’s regulatory pace. The DOE, led by Secretary Elisabeth DeVos displayed decreased enthusiasm for regulation and litigation. Once John Michael “Mick” Mulvaney arrived at the CFPB, he brought a similar wariness for administrative and legal activism, one sure to be continued by any likely successor.

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