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On April 26, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an advisory opinion reminding the industry that a debt collector who brings or threatens to bring a foreclosure action to collect a time-barred mortgage debt may violate the Fair Debt Collection Practices Act (FDCPA). According to the CFPB, the impetus for issuing the advisory opinion was “a series of actions by debt collectors attempting to foreclose on silent second mortgages, also known as zombie mortgages, that consumers thought were satisfied long ago and that may be unenforceable in court.” While prompted by activity in the mortgage space, the CFPB noted that the prohibition applies to all time-barred debt.

Prior to the 2008 collapse, one common mortgage product, known as an 80/20 loan, involved a first lien loan for 80 percent of the value of the home and a second lien loan for the remaining 20 percent. Since the second mortgage holder only receives proceeds from a foreclosure sale if there are any surplus funds after paying off the first mortgage, some holders, instead of charging off the loans, sold the loans to debt buyers. According to the CFPB, “such sales often occurred unbeknownst to borrowers, who continued to receive no communications regarding the loans.” With home prices rising in recent years, some debt buyers have initiated attempts to collect. In some instances, this debt may be time-barred under applicable state law.

In its advisory opinion, the CFPB affirms that: (1) the FDCPA prohibits a debt collector from suing or threatening to sue to collect a time-barred debt; and (2) this prohibition applies even if the debt collector neither knows nor should know that the debt is time barred. “Accordingly, an FDCPA debt collector who brings or threatens to bring a [s]tate court foreclosure action to collect a time-barred mortgage debt may violate the FDCPA and Regulation F.”

The CFPB also notes in its opinion that debt collection activity is subject to the other prohibitions of the FDCPA whether or not that debt is time-barred. For example, debt collectors are prohibited from falsely representing the character, amount, or legal status of any debt, threatening to take any action that cannot legally be taken, and selling or placing for collection a debt that the debt collector knows or should know has been paid, settled, or discharged in bankruptcy.

In the press release that accompanied the issuance of the advisory opinion, the CFPB concluded by warning, “the CFPB and state attorneys general have the authority in appropriate circumstances to take action against institutions and individuals violating the [FDCPA] and Regulation F. The CFPB will be monitoring the debt collection market for violations related to time-barred mortgages as well as to time-barred non-mortgage debt.”

On April 26, the Texas Bankers Association and Rio Bank, McAllen, Texas filed a complaint in the U.S. District Court for the Southern District of Texas challenging the Consumer Financial Protection Bureau’s (CFPB or Bureau) final rule under § 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule). As discussed here, § 1071 amended the Equal Credit Opportunity Act (ECOA) to impose significant data collection and reporting requirements on small business creditors. The plaintiffs rely heavily on the Fifth Circuit’s decision in Community Financial Services Association (CFSA) v CFPB, finding the CFPB’s funding structure unconstitutional and, therefore, rules promulgated by the Bureau invalid. The plaintiffs also argue portions of the Final Rule violate various requirements of the Administrative Procedure Act (APA).

Continue Reading Texas Bankers Challenge CFPB’s Section 1071 Rule

On April 17, the Consumer Financial Protection Bureau (CFPB or Bureau) released a new blog post, highlighting its current efforts in the credit card market. According to the post, interest rates on credit cards have risen substantially, with average rates over 20%. Implying that high interest rates are solely a result of lack of competition, the CFPB has: (i) published a proposed rule that would amend Regulation Z to decrease the safe harbor for credit card late fees; (ii) launched an update of its credit card database; (iii) and requested public feedback on how the consumer credit card market is functioning. The CFPB does not mention the fact that the Prime Rate has increased more than credit card rates in the last two years.

As discussed here, on February 1, the Bureau proposed a rule that would amend Regulation Z to: 1) decrease the safe harbor for credit card late fees to $8 and eliminate altogether a higher safe harbor amount for subsequent late payments; 2) eliminate the annual inflation adjustments for the late fee safe harbor amount; and 3) mandate that late fees must not exceed 25% of the required minimum payment. Interested parties may submit comments on the proposed rule until May 3, 2023.

Last month, the CFPB announced updates to its credit card database. According to the Bureau, the updates are intended to create a neutral data source that can facilitate comparison shopping for those looking to refinance their credit card debt. The neutral data source will display dominant credit card issuers average interest rates next to small banks and credit unions’ rates.

Also discussed here, the CFPB is currently seeking public comment on how the consumer credit market is functioning as part of its biennial review required by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CFPB accepted comments until April 24.

At a U.S. Justice Department (DOJ) interagency event in Newark, New Jersey, Consumer Financial Protection Bureau (CFPB or Bureau) Director Rohit Chopra announced the next phase in the Bureau’s attempt to eliminate what he referred to as modern-day redlining: discriminatory targeting also known as reverse redlining. Since October 2021, the CFPB and DOJ have jointly prioritized digital redlining, including algorithmic bias, and exclusionary conduct by mortgage lenders. According to Director Chopra, “discriminatory targeting is the act of directing predatory products or practices at certain groups, neighborhoods, or parts of a community.” This “reverse redlining” theory has been invoked in enforcement actions in the past, but only very rarely.

The CFPB’s efforts in this area are already underway. As discussed here, on April 14, the Bureau submitted a statement of interest to the U.S. District Court for the Southern District of Florida in Roberson v. Health Career Institute, LLC, et al., arguing that the Equal Credit Opportunity Act’s (ECOA) prohibition on discrimination covers every aspect of an applicant’s dealings with a creditor, not just the specific terms of a loan (like the interest rate or fees). There, a putative class of Black students enrolled at a for-profit nursing school, alleged that after the school arranged for students to take out federal and private student loans to pay for the program, it adopted new policies that increased the amount of time and money it would take students to complete the program. The plaintiffs further alleged that the school intentionally targeted its program to individuals on the basis of race, with the understanding that they were more likely to require an extension of credit to pay for the program.

As Director Chopra sees it, “[t]he law is clear — discriminatory targeting violates [ECOA] when a company targets consumers on a prohibited basis for harmful and predatory loans — and courts have consistently upheld this. While each case is unique, courts have recognized discriminatory targeting claims when creditors target, on a prohibited basis, predatory lending acts or practices, such as equity stripping, bait-and-switch schemes, churning through foreclosures or repossessions, and misrepresenting costs to induce credit applications.”

Notably, earlier this year the CFPB unsuccessfully attempted to expand the scope of ECOA to include prospective applicants. In CFPB v. Townstone Financial, Inc., the Bureau brought a case against a Chicago mortgage lender for purportedly discouraging prospective Black applicants from applying for mortgages. The Illinois federal court dismissed the case, finding that ECOA did not prohibit or discuss conduct prior to the filing of an application. This ruling calls into question the legal basis for much of CFPB’s approach as outlined by Director Chopra. [Townstone and its implications are discussed in our podcast, available here.]

Director Chopra concluded his remarks vowing to continue to work with the DOJ, federal agencies, and states to hold lenders that engage in discriminatory targeting accountable. We will be watching to see if the “reverse redlining” claim becomes more prevalent than the very occasional instances we have observed in the past.

Please join Troutman Pepper Partner Chris Willis and his fellow Partner Julie Hoffmeister as they discuss the Consumer Financial Protection Bureau’s (CFPB) recent request for information about data brokers and the potential interplay with the Fair Credit Reporting Act (FCRA). During this episode, they expand on the CFPB’s potential FCRA rulemaking regarding data brokers, the CFPB’s intent to monitor data brokers and its desire to have greater oversight on the data broker industry, and the steps that the CFPB may take in response to the request for information.

Continue Reading CFPB Request for Information About the Status of Data Brokers Under the Fair Credit Reporting Act

On April 14, the Consumer Financial Protection Bureau (CFPB) submitted a statement of interest to the U.S. District Court for the Southern District of Florida arguing that the Equal Credit Opportunity Act’s (ECOA) prohibition on discrimination covers every aspect of an applicant’s dealings with a creditor, not just the specific terms of a loan (like the interest rate or fees). This statement shows that the CFPB is continuing to press its position for a broad view of the scope of ECOA, notwithstanding that another federal district court recently rebuffed the CFPB’s position.

The new CFPB effort comes in Roberson v. Health Career Institute, LLC, et al., where a putative class of Black students enrolled at Health Career Institute (HCI), a for-profit nursing school, alleged that after HCI arranged for students to take out federal and private student loans to pay for the program, HCI adopted new policies that increased the amount of time and money it would take students to complete the program. The plaintiffs further alleged that HCI intentionally targeted its program to individuals on the basis of race, with the understanding that they were more likely to require an extension of credit to pay for the program, thereby engaging in “reverse redlining” or “discriminatory targeting” in violation of ECOA.

HCI moved to dismiss the plaintiffs’ complaint arguing that the plaintiffs failed to specify any aspect of any credit transaction that was discriminatory based on race and failed to identify any specific loan term that was unfair or predatory based on race. The CFPB submitted a statement of interest to “assist the Court in its evaluation of Plaintiffs’ claim under the [ECOA].”

To state an ECOA claim, a plaintiff must allege that a defendant engaged in discrimination “with respect to any aspect of a credit transaction.” In its statement of interest, the CFPB argues the court should take an expansive view of credit transaction. “Courts have found, for example, that aspects of credit transactions include not just the credit terms in the four corners of the contract — such as interest rates or repayment terms — but also sale prices or down payments; determinations of borrowers’ ability to repay; rates of default, repossession, or foreclosure; and the delivery of services in connection with offering credit.”

In Roberson, the plaintiffs alleged that HCI steered its students into retail installment contracts, even when other, more favorable financing options existed. The plaintiffs also alleged that HCI represented to students that its program would last five semesters and cost $10,000 per semester, but while students were enrolled HCI imposed new grading policies and graduation requirements, which coerced students into repeating semesters they had already taken, which in turn increased the amount of time and money it took for them to complete their program. According to the CFPB, the plaintiffs “allege discrimination with respect to multiple aspects of a credit transaction — including the contract terms (such as repayment terms), the cost of the product and the amount of credit needed to pay for it, the likely ability of students to repay the credit, the consequences of nonpayment, and the performance of goods and services obtained with credit — any one of which is a sufficient ‘aspect of a credit transaction’ under ECOA.”

In conclusion, the CFPB urged the court to find ECOA’s prohibition on discrimination “with respect to any aspect of a credit transaction” extends to discrimination beyond the four corners of the loan contract.

Our Take:

The CFPB recently lost an effort to expand the scope of ECOA to include prospective applicants. In CFPB v. Townstone Financial, Inc., discussed here and here, the CFPB brought a case against the Chicago mortgage lender for purportedly discouraging prospective Black applicants in the Chicago metropolitan area from applying for mortgages. The Illinois federal court dismissed the case, finding that ECOA used the word “applicant” 26 times whereas the statute did not prohibit or discuss conduct prior to the filing of an application. The court found that because the text of the ECOA is unambiguous, it held, “[t]he CFPB cannot regulate outside the bounds of the ECOA, and the ECOA clearly marks its boundary with the term ‘applicant.'”

Roberson appears to us to be another aggressive attempt by the CFPB to expand the scope of ECOA outside of its statutory limits. We also note that while Regulation B protects “prospective” applicants against discouragement based on race, the Roberson case appears to be a case of encouragement based on race.

Financial services industry groups are staunchly opposing a proposal by the Consumer Financial Protection Bureau (CFPB or Bureau) to require supervised nonbank entities to provide information about their use of certain terms and conditions in standard-form contracts. The CFPB would then compile this information into a registry available to the public. In individual letters dated April 3, the U.S. Chamber of Commerce, American Financial Services Association, Independent Community Bankers of America, Online Lenders Alliance, Financial Technology Association, INFiN, Association of Credit and Collection Professionals (ACA International), and National Association of Federally‐Insured Credit Unions, as well as a coalition of 11 other industry associations (the Associations), expressed their collective displeasure with the idea.

In its 2022 Fall Rulemaking Agenda published in early January, discussed here, the CFPB announced it was developing a proposal to collect standard terms used in contracts that are not subject to negotiation or are not prominently advertised, including arbitration clauses, forum-selection clauses, limitations periods, and class action bans. Notably, the proposed rulemaking does not regulate or prohibit any of the covered terms and conditions, it instead requires covered entities to report publicly when they are used.

But industry groups see the CFPB’s current proposal as an end run around its Congressionally-overridden arbitration rule. In 2017, the CFPB issued an arbitration rule that, while it did not ban arbitration clauses outright, forbade financial firms from using customer contract terms to block consumers from pursuing class actions. As discussed here, the rule never went into effect because the day after it was promulgated, Congress enacted a joint resolution of disapproval under the Congressional Review Act, which was later signed by the President.

As ACA International pointedly stated in its letter, instead of banning arbitration clauses, it sees the “fine print” registry as an attempt by the CFPB, “to use the glare of public pressure and the threat of public enforcement measures and private litigation to pressure individuals and entities to no longer include arbitration clauses.”

Similarly, INFiN lodged its concerns, stating in its letter: “There is little distinction between the nonbank registry the CFPB is proposing to create now, and its intention to publish information, and the now-disapproved Arbitration Rule. Moreover, the intent of each CFPB rule is the same — to discourage the use of arbitration agreements.”

In addition to the arbitration rule objections, many industry groups objected to the cost of complying with the proposed rule. The U.S. Chamber of Commerce noted in its letter, “the Bureau’s discussion of the costs of the Rule downplays the significant burdens of requiring covered entities to submit detailed information to the agency.”

Similarly, in their joint letter, the Associations pointed out that the costs of compliance by an entity would be more than just monetary. “The Bureau simply ignores the most serious costs associated with the Proposed Rule: the potential reputational costs and increased risks of being subject to enforcement action, supervisory burdens, and private litigation after being branded a “risky” company by the Bureau. These are meaningful costs for any business that might find itself on the public registry — potentially just because it uses lawful contract terms approved of by courts and Congress.”

Troutman Pepper will continue to monitor important developments involving the CFPB and the “fine print” registry and will provide further updates as they become available.

As discussed here, in 2016 the Central District of California granted judgment in favor of the Consumer Financial Protection Bureau (CFPB) in its long-running challenge to CashCall, Inc.’s tribal-lending operation. Specifically, the court found that CashCall engaged in unfair, deceptive, and abusive acts or practices in violation of the Consumer Financial Protection Act (CFPA) when it serviced and collected on loans made by Western Sky Financial, a lending operation owned by an enrolled member of the Cheyenne River Sioux Tribe. Invoking a contested doctrine, the court found that CashCall was the “true lender” of the loans and, therefore, had deceived consumers by creating the false impression that the loans were enforceable and that borrowers were required to repay them.

However, in the damages phase of the litigation, the court rejected the CFPB’s request for $236 million in restitution, finding that the CFPB failed to present any evidence that CashCall “set out to deliberately mislead consumers” or “otherwise intended to defraud them.” The court also rejected the CFPB’s request for a $52 million penalty finding that the CFPB failed to prove that CashCall knowingly engaged in any misconduct. The CFPA imposes penalties in three tiers depending on the defendant’s level of culpability. Applicable in this case, a first-tier penalty requires no showing of scienter whereas a second-tier penalty applies to “any person that recklessly engages in a violation” of the CFPA. Each penalty tier provides a maximum penalty for each day during which a violation continues. Ultimately, the court awarded the CFPB a tier-one civil money penalty of $10,283,886. Both parties appealed.

The Ninth Circuit affirmed in part and reversed in part, concluding that the court correctly found liability but erred in determining the penalty. The appellate court determined that CashCall’s conduct was reckless beginning in September 2013, which would require a tier-two penalty award for violations beginning that month. The Ninth Circuit remanded the action instructing the court to: (1) reassess the civil penalty; and (2) re-evaluate whether restitution is appropriate in a manner consistent with the CFPA.

On remand, the district court assessed the maximum tier-one penalty from the time period beginning on July 21, 2011 and ending on August 31, 2013 and the maximum tier-two penalty for the time period beginning on September 1, 2013 and ending on August 31, 2016, resulting in a civil penalty of $33,276,264. The court further ordered restitution in the amount of $134,058,600 to ensure that consumers are made whole and protected from deceptive practices. “As the Ninth Circuit held, ‘CashCall harmed consumers by deceiving them about a major premise underlying their bargain: that the loan agreements were legally enforceable.’ Accordingly, consumers paid interest and fees to Defendants that they had no legal obligation to pay.”

Notably, both before the Ninth Circuit and on remand CashCall, relying on the Fifth Circuit’s decision in Community Financial Services Association of America v. CFPB, requested the court enjoin prosecution of the case on the grounds that the CFPB’s funding structure violates the Appropriations Clause. Both courts denied Cashcall’s motion. The Ninth Circuit determining that the constitutional challenge had been forfeited and the law of the case doctrine binding the district court. Notwithstanding, the district court noted that it would still reject the Fifth Circuit’s ruling as inconsistent with “‘every other court to consider’ the validity of the CFPB’s statutory funding provisions.”

A copy of the district court’s decision can be found here.

The U.S. PIRG Education Fund (PIRG) released a report analyzing consumer complaints submitted to the Consumer Financial Protection Bureau (CFPB) in 2021 and 2022. The report noted that consumer complaint totals set a new record in 2021 (496,000), only to have that record broken by a considerable margin in 2022 (800,394). According to PIRG, complaints against national consumer reporting agencies (CRAs) were the largest category, nearly doubling from 2021 to 2022. However, complaints against the debt collection industry fell by 15% during that same time period.

Highlights from the report include:

Top Five Complaint Issues in 2022:

  • Incorrect information on your consumer report (229,638);
  • Improper use of your consumer report (210,792);
  • Problem with a CRA’s investigation into an existing problem (153,539);
  • Attempts to collect a debt not owed (31,112); and
  • Managing an account (22,769).

Complaints by Top-Level Product Category in 2021-2022:

  • Checking or savings account (29,555 in 2021 and 37,585 in 2022);
  • Credit card or prepaid card (31,823 in 2021 and 39,883 in 2022);
  • Credit reporting or credit repair services (307,548 in 2021 and 604,221 in 2022);
  • Debt collection (70,339 in 2021 and 59,493 in 2022);
  • Money transfer, virtual currency, or money service (13,895 in 2021 and 13,537 in 2022);
  • Mortgage (26,531 in 2021 and 23,291 in 2022);
  • Payday loan, title loan, or personal loan (4,352 in 2021 and 5,771 in 2022);
  • Student loan (4,131 in 2021 and 7,957 in 2022); and
  • Vehicle loan or lease (7,826 in 2021 and 8,656 in 2022).

Fraud and Scams Complaints on the Rise:

  • Fraud or scams was the 10th most reported issue in 2022 with 6,681 complaints; and
  • Fraud or scams in the mobile or digital wallet sub-product increased by 68% from 2021 to 2022 and by 52% in the virtual currency sub-product in that same timeframe.

PIRG’s findings showing a rise in complaints involving consumer reporting issues, but a decline in debt collection complaints, align with litigation trends discussed here. Federal court filings under the Fair Credit Reporting Act (FCRA) increased by 3.5% from 2021 to 2022, but filings under the Fair Debt Collection Practices Act (FDCPA) decreased by 31% during that same timeframe.

As discussed here, on March 30, the Consumer Financial Protection Bureau (CFPB) issued its final rule under Section 1071 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Final Rule). Section 1071 amended the Equal Credit Opportunity Act (ECOA) to impose significant data collection and reporting requirements on small business creditors. Concurrently, the CFPB published materials and tools to help small businesses navigate the 888-page Final Rule.

Continue Reading CFPB Issues Tools to Help Small Businesses Navigate Section 1071 Final Rule