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On January 3, the Consumer Financial Protection Bureau (CFPB) released its annual report detailing what it characterized as “improvements and deficiencies” in the nationwide consumer reporting agencies’ (NCRAs) responses to complaints. The Fair Credit Reporting Act (FCRA) requires the CFPB to submit this annual report to Congress. While in last year’s report, the CFPB said that it had concluded that, in most instances, the NCRAs did not satisfy their FCRA obligations to review certain complaints and to report outcomes to the CFPB, this year’s report acknowledges that the NCRAs’ complaint responses have improved significantly.

The data used by the CFPB in its report came from two primary sources. First, complaint data collected during the consumer complaint process. From October 2021 to September 2022, the CFPB received nearly one million complaints. Of these, the CFPB sent 488,000 to the NCRAs, of which about 65% were covered complaints, i.e., complaints about incomplete or inaccurate information where a consumer appears to have previously disputed the information with the NCRA. Notably, while consumer reporting complaint volume had increased substantially over the past three years, this year the increase appears to have largely leveled off. The second category of data used in the report was collected from a set of focus groups and interviews conducted by the CFPB with 44 renters from low-to-medium income households to understand their experiences with credit reports and scores.

Among other findings from the report, the CFPB found:

  • The NCRAs’ complaint responses have improved significantly.
    • In 2020 and 2021, the CFPB found most complaints received one of two response types:
      • A response indicating the NCRA was referring the complaint to its dispute channel; or
      • A response indicating the NCRA would not respond to the complaint because it suspected third-party involvement.
    • Recent complaint data show that the use of both response types has declined substantially in recent months. Most complaints now receive substantive responses.
  • The NCRAs are providing more tailored responses.
    • The CFPB’s process allows companies up to 60 calendar days to provide a final response to the CFPB and the consumer. By late 2020, the NCRAs closed most complaints in just a few days, shorter than the CFPB considered feasible for a full investigation. This trend has since reversed. In August 2022, nearly 64% of complaints took 30 days or more to receive a response.
    • The written responses provided by the NCRAs to consumers and the CFPB have also improved. Most responses now describe the outcomes of consumers’ complaints, even when the NCRAs report that relief was not provided.
  • The NCRAs are reporting greater rates of relief in response to complaints.
    • In 2021, the NCRAs reported providing relief in response to less than 2% of complaints. That trend has reversed with one NCRA reporting providing relief in response to nearly half of complaints.

The CFPB report concluded with the following recommendations for NCRAs moving forward:

  • NCRAs should assess whether their efforts to automate processes shifts burden to consumers.
    • When companies consider introducing automated mechanisms into processes that affect consumers, particularly those that relate to a legal right, they should consider what burden they are creating, if any, for consumers.
    • For example, according to the CFPB, NCRAs have sought to evade the obligation to investigate disputes by requiring consumers to submit particular items of information or documentation with a dispute before the entity will conduct its investigation.
  • NCRAs should consider how current processes will need to evolve in light of new technologies.
    • The use of technology, such as automation, is not exclusive to companies. Consumers also increasingly use technology to eliminate or reduce the time spent on burdensome tasks. To the extent that NCRAs have optimized systems based on a certain view of human behavior, as new technology emerges, they will need to reevaluate their systems.
    • One example is third-party screens that block complaints because of their similarity to other complaint narratives. The NCRAs assert that text similarity is an indicator of third-party activity, but it is becoming increasingly difficult to discern whether a human or a machine is the author of a text.
  • Policymakers and market participants should consider how best to give consumers control over their data.
    • According to the CFPB, the landscape is shifting and pointing towards a world where consumers have more control over their data. Policymakers and market participants can shape the future of collecting, using, and sharing consumers’ data in a manner that navigates successfully from surveillance to participation.

Troutman Pepper will continue to monitor important developments involving the CFPB and the consumer reporting industry and will provide further updates as they become available.

As discussed here, on October 19, the Fifth Circuit Court of Appeals in Community Financial Services Association of America Ltd. (CFSA) v. Consumer Financial Protection Bureau (CFPB) held that the CFPB’s funding mechanism violates the appropriations clause because the CFPB does not receive its funding from annual congressional appropriations like most executive agencies, but instead, receives funding directly from the Federal Reserve based on a request by the CFPB’s director. In response, on November 15, as discussed here, the CFPB filed a petition for a writ of certiorari to the U.S. Supreme Court, requesting not only that the Court hear the case, but also that it be decided on an expedited basis during the Court’s current term. On December 15, two groups of state attorneys general, with diametrically opposed positions, filed separate amicus briefs, urging the Court to grant the CFPB’s petition and intervene to stave off the “confusion and regulatory chaos” caused by the appellate court’s decision.

Continue Reading State AGs With Opposing Objectives File Separate Amicus Briefs Urging Supreme Court to Grant Cert in CFPB Funding Appeal

As a further reflection of its recent emphasis on “repeat offenders,” on December 12, the Consumer Financial Protection Bureau (CFPB) published a proposed rule with request for public comment that would require certain nonbank covered entities (with exclusions for insured depository institutions and credit unions) that are under certain final public orders issued by a federal, state, or local agency in connection with the offering or provision of a consumer financial product or service to report the existence of such orders to a CFPB registry. The CFPB would then include all final public written orders and judgments (including consent and stipulated orders and judgments) issued by the CFPB or any government agency for violation of certain consumer protection laws on an online registry. Additionally, larger companies subject to the CFPB’s supervisory authority would be required to designate an individual to attest to whether the firm is adhering to registered law enforcement orders. The CFPB states that it is proposing the rule pursuant to its authority under the Consumer Financial Protection Act of 2010.

According to the CFPB, the proposed rule’s objectives include:

  • Establishing an effective system for collecting public orders across different sectors of entity misconduct to allow the CFPB to more effectively monitor for potential risks to consumers arising from both individual instances and broader patterns of recidivism.
  • The CFPB also believes that a comprehensive collection of public agency and court orders would help it identify broader trends.
  • The CFPB further anticipates that making a registry of these orders publicly available would, among other things, allow other regulators at the federal, state, and local level tasked with protecting consumers to realize the same market monitoring benefits.
  • According to the CFPB, requiring certain supervised entities to designate a senior executive officer with knowledge of, and control over, the entity’s efforts to comply with each relevant order, and requiring that executive to submit the proposed written statement, might incentive otherwise reluctant entities to comply with consumer protection laws.

Beyond the stated objectives, the CFPB likely intends to use the information contained in the proposed registry in assessing civil penalties for violations of federal consumer financial laws, given that Congress has provided that such penalties should consider an entity’s “history of previous violations” and “such other matters as justice may require.”

The notice triggers a 60-day comment period (after publication in the Federal Register) for interested parties to submit comments.

On December 7, the Consumer Financial Protection Bureau (CFPB) published a notice of intent to make a preemption determination on whether the Truth in Lending Act (TILA) preempts a New York commercial financing law. The CFPB has made a preliminary conclusion that the law is not preempted by TILA, and is also considering whether to make a preemption determination regarding similar state laws in California,

Utah, and Virginia. The practical effect of the CFPB’s planned position is to remove a potential roadblock to the implementation of new laws in New York and other states requiring lenders to provide disclosures to commercial borrowers of the cost of financing, similar to those required by TILA and other state laws for consumer financing transactions. The CFPB will be accepting comments on its proposal until January 20, 2023.

TILA authorizes the CFPB to determine whether a state law requirement is preempted, upon its own motion or upon the request of a creditor, state, or other interested party. In this instance, the CFPB received a request from a business trade association asking it to determine that TILA preempts certain provisions in New York’s Commercial Financing Law (the New York law). Like TILA, the New York law requires rate and cost disclosures for certain covered transactions, however, the New York law applies to multiple types of commercial financing products instead of consumer credit. It requires providers to issue disclosures when “extending a specific offer” for various types of commercial financing. The request asserted that TILA preempts the New York law with respect to its use of the terms “finance charge” and “annual percentage rate” (APR), notwithstanding that the statutes govern different categories of transactions.

The request focused on what it alleged are material differences between how the

New York law and federal law use the terms “finance charge” and “APR,” and alleged that these differences make the New York law inconsistent with federal law for purposes of preemption. For example, the request noted that the New York law defines “finance charge” to include any charge imposed by a “provider,” which includes “a person who solicits and presents specific offers of commercial financing on behalf of a third party.” The request stated that the definition is broader than the federal definition, under which the requester asserted a “finance charge” for non-mortgage transactions includes certain broker fees only if the creditor requires the use of the broker. Additionally, the request asserted that the “estimated APR” disclosure that the New York law requires for certain transactions is less precise than the APR calculation under TILA and Regulation Z, and that the New York law requires certain assumptions about payment amounts

and payment frequencies to calculate APR and estimated APR, whereas TILA does not require similar assumptions. The request stated that these types of differences could lead to variances in the disclosures required under state and federal law, and, thus, the federal law preempts the New York law. Notably, the New York law also requires a closed-end APR calculation method for open-end transactions, which significantly differs from the APR calculation for open-end transactions under Regulation Z.

The CFPB’s preliminary determination is that TILA does not preempt the New York law for two reasons. First, the statutes govern different transactions. TILA requires creditors to disclose the finance charge and APR only for “consumer credit” transactions, which the statute defines as credit that is “primarily for personal, family, or household purposes.” The New York law, on the other hand, requires the disclosures only for “commercial financing,” specifically defined as financing “the proceeds of which the recipient does not intend to use primarily for personal, family, or household purposes.” Second, the CFPB disagrees that the New York law significantly impedes the operation of TILA or interferes with the purposes of the federal scheme. A primary purpose of TILA is to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available and avoid the uninformed use of credit. The differences between the New York and federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit. Therefore, consumers applying for consumer credit should continue receiving only TILA disclosures.

The CFPB concluded by stating it is also considering making determinations regarding whether TILA preempts state laws in California, Utah, and Virginia that prescribe disclosures in certain commercial transactions. The CFPB has conducted a preliminary review of these laws, which are similar to the New York law because they do not apply to consumer credit transactions that are within the scope of TILA. Accordingly, the CFPB’s preliminary conclusion is that TILA does not preempt these state laws. The CFPB is encouraging commenters to provide information about any relevant differences in these state laws that would affect the CFPB’s preemption analysis and final determination.

Notably, the California Commercial Financing Disclosures (California Disclosure Regulations) are set to take effect on December 9 and are already the subject of litigation in the United States District Court for the Central District of California. There, the Small Business Finance Association filed a complaint against the Commissioner of the California Department of Financial Protection and Innovation, in part, on the grounds that the California Disclosure Regulations are preempted by TILA. The stated purpose of the California Disclosure Regulations is to assist small businesses in making informed decisions about the potential costs of various commercial financing options. The industries subject to the regulation include, among others, traditional installment loans and open-end credit, factoring, and merchant cash advances. Providers will be required to disclose metrics such the amount of funding the small business will receive, the APR calculated for the transaction, a payment amount (if applicable), the term, details related to prepayment policies, and (for products without a monthly payment) an average monthly cost.

On December 7, the Consumer Financial Protection Bureau (CFPB) released a report entitled Protecting Those Who Protect Us. The report sought to quantify, for the first time, the use of the Servicemembers Civil Relief Act (SCRA) interest rate reduction benefit. According to the CFPB’s research, between 2007 and 2018, fewer than 10% of eligible auto loans and 6% of personal loans received a reduced interest rate. Additionally, members of the reserve component also infrequently benefit from interest rate reductions for credit cards and mortgage loans. The report identified several strategies (previously “codified” via consent orders) to increase servicemember access to SCRA protections, including automatically applying interest rate reductions and applying reductions for all accounts held at an institution if a servicemember invokes protections for a single account.

The SCRA applies to active-duty members of the Army, Marine Corps, Navy, Air Force, Space Force, and Coast Guard as well as reservists or members of the National Guard serving for more than 30 consecutive days for the purpose of responding to a national emergency. The law also applies to active duty commissioned officers of the Public Health Service or the National Oceanic and Atmospheric Administration. The SCRA provides multiple legal and financial protections to active duty servicemembers, including: (1) the ability to reduce the interest rate on any pre-service obligations or liabilities to a maximum of 6 percent; (2) protections against repossession of certain property, including motor vehicles, without a court order; (3) protections against default judgments in civil cases; (4) protections against certain home foreclosures without a court order; and (5) the ability to terminate certain residential housing and automobile leases early without penalty.

The CFPB’s report focused only on the interest rate reduction benefit and protection against repossession. To receive the interest rate reduction, a servicemember must notify their lender in writing with a copy of their orders to active-duty service or any other appropriate indicator of military service. Creditors may also proactively grant the interest rate reduction by retrieving information from the Defense Manpower Data Center SCRA website to determine active-duty status in lieu of written notification.

The report used data from the CFPB’s Consumer Credit Panel from 2007 to 2018 matched to activation data from the Department of Defense. Key findings from the report include:

  • Fewer than one in ten members of the reserve component with eligible auto loans, and only 6% of those with eligible personal loans, received an interest rate reduction from 2007 to 2018.
    • These missed interest rate reduction opportunities represent about $100 million in foregone savings.
  • Members of the reserve component also infrequently benefit from the rate reduction benefit for credit cards and mortgage loans.
    • Although the CFPB could not apply the same method to credit cards (in part because they are open-end credit) and home mortgages (in part because their payments often include taxes and insurance), it estimated the foregone savings of these rate reduction opportunities could amount to between $1,890 and $5,670 per activation, which is much larger than the savings for auto and personal loans.
  • Reserve component servicemembers are more likely to obtain a reduced interest rate during longer periods of activation.
    • Even among the longest periods of activation (about a year or more), however, the likelihood of an interest rate reduction remains under 16% for auto and personal loans.
  • Reserve component servicemembers are less likely to experience reported repossessions during an activation.
    • During activated periods, auto loans are two-thirds less likely to be reported in repossession, compared to non-activated periods.

In conclusion, the CFPB recommended that creditors take the following steps, consistent with practices that have been required as a practical matter by consent orders resolving SCRA violations, to increase utilization of the SCRA rate reduction:

  • Apply SCRA interest rate reductions enterprise-wide if a servicemember invokes protections for a single account.
    • If widely adopted, this measure will increase interest rate reduction utilization, reduce the duplication necessary to invoke the SCRA interest rate reduction for multiple accounts, and address complexity that may be hindering utilization.
  • Explore ways to automatically apply the SCRA interest rate reduction.
    • When the SCRA interest rate reduction benefit is automatically applied, as has been done for many student loans, eligible servicemembers are substantially more likely to benefit than if they are required to submit proper written notification.
  • Develop comprehensive and periodic indicators of SCRA benefit utilization.
    • A comprehensive and periodic review of SCRA rate reduction utilization would provide beneficial information to evaluate future efforts to expand servicemembers’ financial protections.

The Consumer Financial Protection Bureau (CFPB) issued a decision denying Nexo Financial, LLC’s petition to modify a civil investigation demand (CID) originally served on the company on December 1, 2021. At that time, Nexo Financial and its affiliates advertised a range of products, including interest-accruing accounts and lines of credit. In its petition, Nexo Financial argued that the CID should be modified to exclude Nexo’s earn interest product, an interest-bearing crypto lending product, because it fell under the Security Exchange Commission’s (SEC) purview and outside of the CFPB’s jurisdiction. The CFPB denied the request and ordered a corporate representative to appear for oral testimony on December 19, 2022.

According to the CFPB, Nexo Financial did not contend that the SEC has determined that the earn interest product is a security or that Nexo was required to register the product with the SEC. “Nexo Financial is trying to avoid answering any of the [CFPB’s] questions about the [e]arn [i]nterest [p]roduct (on the theory that the product is a security subject to SEC oversight) while at the same time preserving the argument that the product is not a security subject to SEC oversight. This attempt to have it both ways dooms Nexo Financial’s petition from the start,” stated CFPB Director Rohit Chopra in the decision.

Through its CID, the CFPB is seeking to determine the answer to three related questions: (1) whether subject entities were engaged in conduct that is subject to federal consumer financial law (specifically, the Consumer Financial Protection Act (CFPA) and Regulation E); (2) whether those entities had violated the CFPA and Regulation E; and (3) whether a CFPB enforcement action would be in the public interest. Nexo Financial had met and conferred with staff from the CFPB’s Office of Enforcement on December 14 and 20, 2021, January 5, 2022, February 18, 2022, and March 4, 2022. On March 14, 2022, Nexo Financial filed a petition to modify the CID.

The CFPB’s investigation into Nexo Financial is its first investigation to determine whether a crypto firm is abiding by consumer protection laws. Its investigation comes at a time of keen interest in regulating the crypto ecosystem. As we discussed here, Senate Banking Committee Chairman Sherrod Brown (D-OH) recently sent a letter to Treasury Secretary Janet Yellen requesting that she coordinate with other financial regulators to develop legislation that would provide authority for federal regulators to have visibility into, and otherwise supervise, the activities of the affiliates and subsidiaries of crypto asset entities.

On November 21, the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) filed a joint amicus brief in Louis v. Bluegreen Vacations Unlimited, Inc., No. 22-12217 (11th Cir.) regarding servicemembers’ right to sue under the Military Lending Act (MLA).

The plaintiffs in the case were both covered borrowers under the MLA when they obtained a loan to purchase a vacation timeshare and paid a 10% down payment of $1,150 in addition to an administrative fee of $450. The plaintiffs allege the loan violates the MLA because it includes a mandatory arbitration provision, and there was no statement of the military annual percentage rate (MAPR). The MLA prohibits mandatory arbitration, 10 U.S.C. § 987(e), and the MLA requires that the MAPR must be stated before issuing a loan to a servicemember. 10 U.S.C. § 9877(c)(1)(A). The plaintiffs sought an order declaring the timeshare agreement void, rescission of the agreement, and restitution, as well as statutory, actual, and punitive damages.

Bluegreen Vacations Unlimited, Inc. (Bluegreen) moved to dismiss for lack of Article III standing under Federal Rule of Civil Procedure 12(b)(1) and, in the alternative, for failure to state a claim under Rule 12(b)(6). Bluegreen argued that the plaintiffs lacked standing because they had not suffered any concrete injury, and if they had, whatever injury they suffered was not traceable to the alleged MLA violations.

The magistrate judge in the trial court, the U.S. District Court for the Southern District of Florida, recommended the case be dismissed for lack of standing, reasoning that the plaintiffs had failed to establish any connection between their payment under the contract and the MLA violations. In particular, the plaintiffs had not alleged that proper calculation and presentation of the MAPR would have had any bearing on their accepting the contract. The District Court judge adopted the magistrate judge’s recommendation and dismissed the case, but the District Court’s reasoning slightly differed. The District Court held that there was no concrete injury, but otherwise agreed with the magistrate judge, opining that the two alleged MLA violations did not “impact[] Plaintiffs in any way.”

On appeal to the Eleventh Circuit, the CFPB and FTC argue, as amici, that the plaintiffs have standing because they made a substantial down payment pursuant to the contract that was void as a matter of federal law. They argue it is illegal to extend credit to covered borrowers on terms not in compliance with the MLA and that any such contract is void ab initio. 10 U.S.C. § 987(f)(3). If the contract is void from inception, Congress also intended “that the legality of the contract could be litigated in court and appropriate remedies awarded.”

Moreover, the CFPB and FTC argue the plaintiffs suffered a concrete injury because they made a down payment on the loan. They argue that economic injury has been long recognized by courts as economic injury sufficient for standing and “monetary loss obviously constitutes Article III injury.” They further argue plaintiffs’ injuries are traceable to the challenged conduct. In the CFPB and FTC’s view, the plaintiffs’ injury needn’t be directly traced to Bluegreen’s “procedural violations of the MLA” because, for standing purposes, their injuries may “flow indirectly from the action in question” (emphasis added), which is a “relatively modest” burden. According to their amicus brief, the plaintiffs’ injuries flow indirectly from the conduct in question because the contract’s violation of the MLA rendered it void, and payment on that void contract injured the plaintiffs. In other words, “plaintiffs’ economic injuries were the result of an illegal and void loan.” In the CFPB and FTC’s view, “[t]here is no requirement that [plaintiffs] show a nexus between their injuries and the particular violations that render Bluegreen’s conduct illegal.”

Finally, the CFPB and FTC argue that upholding the District Court’s ruling would undermine the remedial purpose of the MLA — protecting servicemembers from predatory lending — because Congress intended to allow servicemembers to bring suit to challenge contracts that violate the MLA and seek remedies.

The CFPB and FTC have highlighted that they intend to aggressively enforce the MLA and are taking action to protect servicemembers. Troutman Pepper will continue to monitor the legal landscape for updates regarding servicemember protections.

On November 18, the Consumer Financial Protection Bureau (CFPB) published a blog post outlining its recent initiative to share consumer complaint data with cities and counties so they can, “increase their efforts to protect consumers at the local levels.”

According to the CFPB, one of the major ways it regulates consumer financial products and protects consumers from unfair practices is through collecting and responding to consumer complaints. The complaints it receives informs the CFPB’s regulatory priorities and enforcement activities. The CFPB recently launched an initiative to increase the impact of its complaint data by sharing it with local governments. The CFPB claims this will help protect as many consumers as possible from predatory lending, barriers to credit, and other consumer harms.

Initially, the CFPB chose cities and counties that were best positioned to benefit from the CFPB’s complaint data such as: (1) Local governments with civil or criminal prosecutorial authority; and (2) Local governments with, or that are working to create, financial empowerment offices to improve financial stability for low- and moderate-income households. The CFPB then began onboarding the local governments to its Government Portal, which gives agencies access to more granular information about consumers’ complaints and companies’ responses than is available on the public portal.

The Government Portal allows cities and counties to:

  • See in real-time what consumers are experiencing in the financial marketplace and how companies are responding;
  • Download complaints and supporting documentation to investigate and enforce rules protecting consumers;
  • Compare problems their constituents are facing to other localities and nationwide;
  • Analyze data by time period, company, geography, and more;
  • Securely refer individual complaints to the CFPB;
  • Receive the list of companies responding to complaints.

In less than three months, more than a dozen cities and counties have expressed interest in accessing the Government Portal. Jurisdictions participating in the program include: Los Angeles, California; New York, New York; Austin, Texas; Columbus, Ohio; and Albuquerque, New Mexico.

Given the CFPB’s uncertain future, this initiative may signal that the CFPB is focusing more of its resources into partnering with state and local governments to promote its policies, thereby ensuring the continuation of its work even if its funding or authority is drastically reduced.

On November 17, the Consumer Financial Protection Bureau (CFPB) announced it is seeking public comment on its proposal to develop a new data set to better monitor the auto loan market. According to the CFPB, greater visibility into market trends would allow lenders and investors to spot emerging opportunities, improve risk management practices, and ultimately expand access to credit and refinancing. The CFPB will be accepting comments on its proposal until December 19.

The CFPB explained its main reasoning behind the proposed new data collection as follows: “Financial markets and policymakers have long had access to granular mortgage data that has provided insight into patterns in lending and risk. Because student loans are largely administered by the federal government, we know more about them too. But, despite its size, we know much less about the auto lending market. As a result, the CFPB is announcing an effort to work with industry and other agencies to develop a new data set to better monitor the auto loan market.”

Another reason the CFPB states is behind the proposed data collection is the purported rapid changes in the industry. According to the CFPB, auto lending represents approximately one-third of nonmortgage consumer debt, and the amount of outstanding loans has doubled over the last 10 years. Over the past two years, car prices have risen significantly, leading to larger loan amounts and higher monthly payments. The CFPB states these loan size increases are beginning to negatively impact consumers and households, including an increase in auto loan delinquencies and some consumers being priced out of the market.

According to the CFPB, the available data allows market participants to identify and measure certain trends but is insufficiently granular to fully explore the cause of those trends. For example, publicly available repossession data is based on proprietary estimates and does not provide a level of specificity that allows for deeper analysis. Likewise, while the CFPB’s consumer credit panel (a 1-in-48 sample of consumer credit report data from one of the three nationwide consumer reporting agencies) can fill in some of the gaps, many auto loans are made to consumers with subprime or deep subprime credit scores from lenders that do not furnish data on those loans to credit reporting agencies. The CFPB claims this lack of data could lead to negative consequences for consumers, lenders, and investors, pointing to the lack of visibility into the mortgage market that was a key issue leading up to the Great Recession in 2008.

The proposed data set may include, for example, collecting retrospective data from a sample of lenders that represent a cross section of the auto lending market. Before doing that, the CFPB is gathering input from stakeholders and the public on the current data landscape.

Auto finance continues to be on the top of the CFPB’s radar. As we discussed here, in September 2022, the agency released a blog post, exploring the potential relationship between rising car prices and changes in auto loan performance. Earlier in February 2022, discussed here, it posted about its regulatory priorities in the auto finance market, including steps that the CFPB planned to take to make the market, in its view, more fair, transparent, and competitive.

Troutman Pepper will continue to monitor important developments involving the CFPB and the proposed data collection and will provide further updates as they become available.

On November 15, the Consumer Financial Protection Bureau (CFPB) issued two reports, highlighting what the CFPB perceives to be forms of errors that frequently occur in tenant background checks and the impacts the CFPB believes that those errors can have on potential renters.

The “Tenant Background Check Markets Report” (Market Report) provides a description of the rental housing landscape and an overview of the tenant screening industry, largely drawn from market participants’ own marketing materials, filed lawsuits, and other regulatory enforcement actions. The “Consumer Snapshot: Tenant Background Checks” highlights common consumer complaints, identifying that renters submitted approximately 26,700 complaints related to tenant screening from January 2019 through September 2022, and complaint volumes increased year-over-year. In January 2019, the CFPB received approximately 300 complaints per month and by September 2022, the CFPB received almost 700 complaints per month related to tenant screening. The vast majority of complaints were related to allegedly incorrect information appearing on a prospective renter’s report. This was followed by complaints regarding obstacles faced trying to get companies to fix their alleged errors.

In its press release, the CFPB described its positions on the impact screening reports can have on tenants. “The reports describe how errors in these background checks contribute to higher costs and barriers to quality rental housing. Too often, these background checks — which purport to contain valuable tenant background information — are filled with largely unvalidated information of uncertain accuracy or predictive value. While renters bear the costs of errors and false information in these reports, they have few avenues to make tenant screening companies fix their sloppy procedures.”

As a result, the CFPB pledged, among other priorities, to continue to work closely with the Federal Trade Commission (FTC) to take action on those issues.

Consumer Reports

The Markets Report details how the creation and use of tenant screening reports are regulated by a patchwork of federal, state, and local government laws. While tenant screening companies sometimes access information directly from an original source, such as eviction filings or criminal records, the CFPB notes that such companies often purchase information from third-party vendors. The CFPB noted its view that applicants often have little to no visibility into the information contained in the reports, and applicants may not be provided the full list of data sources used for their report, further limiting their ability to fix errors or inaccuracies. The CFPB also identified what it viewed to be issues with the processing of consumer disputes and the reappearance of disputed information, whether in another company’s screening report or even by the same company.

Probity of Eviction Proceedings, Criminal History, and Credit Information Questioned

The CFPB found that eviction records are one of the most commonly marketed, yet widely criticized, elements of tenant screening reports. The legal basis for an eviction and whether that basis must be stated in the initial court records varies by jurisdiction. The CFPB also noted that many cases may be dismissed or ultimately decided in the tenant’s favor. According to one study cited by the CFPB of 3.6 million eviction court records from an industry advocacy group, 22% of state eviction cases “are ambiguous or false” records.

Based on the context, the CFPB stated that landlords may place too much weight on eviction history, despite the nuances and complexities of eviction proceedings. These practices may also exacerbate concerns about the discriminatory impact of tenant screening reports on certain demographic groups. Some jurisdictions have recently considered or passed laws to seal or limit access to eviction filings in certain instances, such as situations in which the landlord does not follow through with an eviction or the matter is not decided in the landlord’s favor. California, Oregon, Florida, Massachusetts, Connecticut, and Ohio, for instance, all have passed or considered legislation to seal or expunge eviction records. The CFPB also reported many examples of tenant screening reports appearing to include statutorily prohibited obsolete information, such as eviction records that are more than seven years old.

The CFPB also concluded that there is limited evidence that individuals with criminal records, including arrests, are categorically more problematic tenants. In response to these concerns, the CFPB noted that a handful of jurisdictions have recently passed “ban-the-box” laws that either prohibit the collection and use of criminal history information in rental decisions, or only permit collection and use for individualized assessments after the landlord has determined the tenant otherwise qualifies. A growing number of jurisdictions around the country, such as New Jersey, San Francisco, and Cook County, IL (which includes Chicago), have limited the ability of landlords to screen prospective tenants based on their criminal records. New York City continues to consider legislation in this area too. The CFPB endorsed those processes.

The CFPB also identified that tenant screening reports often include a third-party credit score or portions of a person’s credit report. The CFPB report concluded that credit history is a limited predictor of one’s likelihood to pay rent, given that the majority of tradelines furnished to the national credit reporting agencies are from financial services providers and related to bank loans, credit cards, and insurance.

The CFPB further stated the opinion that the one credit reporting variable it considers to be most relevant for rental housing — rent payment history — is not well-populated since the CFPB estimated that only 1.7% to 2.3% of adults who live in rental housing have rent tradelines in their credit files. That statement also could be seen as an endorsement of the greater population and use of that data and similar data (e.g., utility payment data).

Risks of Relying on Computer Generated Tenant Risk Scores Highlighted

The CFPB also focused on algorithmic processes that are used during the tenant screening process. The CFPB noted that some tenant screening companies generate overall tenant risk scores based on their own proprietary models that purport to estimate the likelihood of an eviction, missed payment, or lease renewal. The CFPB found that while rental risk scores and decision recommendations can simplify the landlord’s decision-making process, they can also conceal inaccuracies in the underlying data. The CFPB also stated the concern that automated scoring and algorithmic screening can obfuscate the underlying reasons for adverse rental application decisions and create risks for landlords. As a result, landlords may reject qualified applicants and may not be able to provide enough information to allow applicants to challenge the results, correct inaccurate information, or provide relevant mitigating information. The CFPB believes that these algorithmic processes can result in further legal risk to landlords, including through violations of the Fair Housing Act.

The CFPB’s Focus on Consumer Reporting and Its Pledged Action Going Forward

The CFPB concluded its report by pledging to continue to monitor and conduct research to understand the tenant screening market and its impacts on prospective renters, including to: (1) identify guidance or rules that that CFPB can issue to ensure that the background screening industry adheres to the law; (2) determine how to require the background screening industry to develop and maintain appropriate and accurate consumer reporting practices in accordance with applicable law; (3) coordinate law enforcement efforts with the FTC to hold tenant screening companies accountable for having reasonable procedures to “assure accurate information in the consumer reporting system”; and (4) coordinate with federal and local government agencies to ensure tenants receive information about potential inaccuracies in their reports in a timely fashion and that adequate adverse action notices are provided.

The FTC also weighed in on the issue in the press release regarding the CFPB’s publications: “FTC enforcement investigations have identified serious problems with tenant background check reports. We will continue to work with the CFPB to ensure that firms compiling these reports are following the law,” said FTC Bureau of Consumer Protection Director Samuel Levine.

These latest CFPB publications represent a continued emphasis by the FTC and CFPB on issues relating to credit reporting and tenant screening. Under the Biden administration, the FTC and CFPB have issued multiple advisory statements, reports, and opinions critical of certain aspects of the consumer reporting process, often without giving any weight to the interests of users of consumer reports, without providing any specific direction to consumer reporting agencies, and without any formal opportunity for notice and comment by industry actors. The CFPB’s publications in this regard will also be of specific interest to housing providers and property managers as they consider the use of tenant screening tools.

Troutman Pepper will continue to monitor these regulatory development and publications as they are made.