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On November 16, the Consumer Financial Protection Bureau (CFPB) released a new Supervisory Highlights report, focusing on the auto servicing industry, consumer reporting, mortgage servicing, and COVID-19 relief funds. The report highlights the CFPB’s continued focus on so-called junk fees and inaccurate credit reporting.

Among other findings from the report, the CFPB says that:

  • Examiners identified unfair and deceptive acts or practices across many aspects of auto servicing, including violations related to add-on product charges, loan modifications, double billing, use of devices that interfered with driving, collection tactics, and payment allocation.
    • Examiners identified instances where consumers paid off their loans early, but servicers failed to ensure consumers received refunds for unearned fees related to add-on products, such as GAP protection, that no longer offered any benefit to the customer.
    • Examiners found that servicers engaged in deceptive acts or practices by representing to consumers that their modifications were preliminarily approved pending a “good faith” payment, when in fact, they denied most of the modification requests.
    • When consumers enter into auto finance agreements, lenders sometimes require consumers to have technologies that interfere with driving (sometimes called starter interrupt devices) installed in their vehicles. These devices, when activated by servicers, either beep or prevent a vehicle from starting. Examiners found that, in certain instances, servicers engaged in unfair acts or practices by activating these devices in consumers’ vehicles when consumers were not past due on payment.
  • Examiners found deficiencies in national credit reporting agencies’ compliance with Fair Credit Reporting Act (FCRA) dispute investigation requirements and furnisher compliance with FCRA and Regulation V accuracy and dispute investigation requirements.
    • CFPB examiners found that one or more of the nationwide consumer reporting companies failed to report to the CFPB the outcome of their reviews of complaints about inaccuracies on consumers’ credit reports.
    • Examiners continued to find that furnishers, specifically auto loan furnishers, are violating FCRA by inaccurately reporting information despite actual knowledge of errors.
    • In reviews of third-party debt collection furnishers, examiners found that furnishers failed to send updated or corrected information to credit reporting agencies after making a determination that information the furnishers had reported was not complete or accurate.
  • In its continued focus on so-called junk fees, CFPB examiners found that mortgage servicers violated federal law by charging sizable phone payment fees — even though consumers were not made aware of these pay-by-phone fees.
    • During calls with borrowers, customer service representatives did not disclose the existence or cost of fees for paying over the phone, yet the borrowers were charged fees anyway.
    • Following these findings, the CFPB required the servicers to reimburse all borrowers who paid phone payment fees when those fees were not properly disclosed.
  • CFPB examiners conducted assessments to evaluate how financial institutions handled pandemic relief benefits deposited into consumer accounts.
    • They identified instances of institutions using protected unemployment insurance or economic impact payments funds to set off a negative balance in the account into which the benefits were deposited (a.k.a. same account setoff) or to set off a balance owed to the financial institution on a separate account (a.k.a. cross-account setoff) when such practices were prohibited by applicable state or territorial protections. They further identified instances of institutions garnishing protected economic impact payments funds in violation of the Consolidated Appropriations Act of 2021.
      • In response to these findings, the CFPB directed the institutions to issue refunds and make process changes to ensure they comply with applicable state and territorial protections regarding garnishments and setoff practices.
    • CFPB examiners identified violations regarding failure to timely provide homeowners with CARES Act forbearances. Examiners also found that servicers unfairly charged some individuals fees, while they were in CARES Act forbearances.

Beyond the series of findings described above, this edition of Supervisory Highlights was notable for the announcement that the CFPB had created a “Repeat Offender Unit” within supervision, the focus of which will be to “enhance the detection of repeat offenses, develop a process for rapid review and response designed to address the root cause of violations, and recommend corrective actions designed to stop recidivist behavior. This will include closer scrutiny of corporate compliance with orders to ensure that requirements are being met and any issues are addressed in a timely manner.” We presume that the “orders” referred to in this description are consent orders, and we note that in the past, monitoring for compliance with consent orders has occurred predominantly within the CFPB’s enforcement division. This announcement may signal that the CFPB intends to use supervisory exams to monitor for consent order compliance to a greater degree in the future.

As discussed here, on October 19, a three-judge panel of the Fifth Circuit Court of Appeals held that the Consumer Financial Protection Bureau’s (CFPB) 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. Yesterday, 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. Given the importance of the decision and the gravity of the potential implications, the Court may well take the unusual step of granting the petition and agreeing to the requested expedited schedule.

Highlights From the Petition

In its petition, the CFPB argues that the Fifth Circuit erred in holding that the CFPB’s funding through the Federal Reserve unconstitutionally insulates it from congressional oversight and appropriations. In support of its position, the CFPB points to the fact that the Dodd-Frank Act requires the CFPB director to regularly submit reports to and make appearances before Congress to justify the CFPB’s budget requests. The comptroller general also must conduct annual financial audits of the CFPB and submit annual reports to Congress.

The CFPB further argues that its funding mechanism is not meaningfully different from numerous other agencies, such as the Federal Reserve Board, Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC), all of which the CFPB argues are funded outside the congressional appropriations process. Relying on existing Supreme Court precedent, the CFPB argues that the appropriations clause leaves it to Congress to determine the duration, form, source, and specificity of such appropriations to government agencies. By prescribing the source, amount, duration, and purpose of the CFPB’s funding in the Dodd-Frank Act, Congress satisfied these requirements.

The CFPB also took on the Fifth Circuit directly in several places. First, with respect to the Fifth Circuit’s highlighting Dodd-Frank’s provision stating funds transferred to the CFPB “shall not be construed to be Government funds or appropriated monies,” the CFPB argues this merely exempts those funds from statutes that impose limitations. The CFPB highlighted similar provisions in the funding statutes for the Farm Credit Administration, Federal Reserve Board, and the OCC as illustrative.

Further, to the extent the Fifth Circuit was motivated by separation of powers concerns, the CFPB argues such concerns are misplaced. “Where, as here, Congress has enacted a law that expressly authorized the Executive Branch expenditures at issue, ‘the straightforward and explicit command of the [a]ppropriations [c]lause’ is satisfied. And courts have no license to depart from the text and history of the constitutional provisions adopted by the Founders in pursuit of their own views about the proper structure and funding of administrative agencies.”

Lastly, the CFPB challenged the Fifth Circuit’s remedy on two grounds. First, arguing that even if the Fifth Circuit correctly held the CFPB’s funding process violates the appropriations clause, it failed to conduct a severability analysis to see if any defects in the statute could be severed, while leaving the rest intact. Second, arguing that even if the entire funding mechanism were to be found unconstitutional, that would only require that the CFPB halt further spending of funds, but it would not compel courts to unwind already completed actions like the Payday Lending Rule at issue.

Request for Expedited Review

Beyond the asserted errors above and the circuit split on the issue, the CFPB argued the Supreme Court should grant the petition because of the potentially massive implications of the decision. According to the CFPB, the Fifth Circuit’s decision “calls into question virtually every action the CFPB has taken in the 12 years since it was created … [and] threatens to inflict immense legal and practical harms on the CFPB, consumers, and the Nation’s financial sector.” Due to the gravity of the decision, the CFPB requests that the Supreme Court “consider the petition at its January 6, 2023 conference and hear the case during its April 2023 sitting.”

Going Forward

While requesting an expedited review is unusual, given the real-world implications for the financial industry highlighted in the petition if the decision is upheld, we suspect the case will indeed be decided this term, i.e., by June 2023. The CFPB’s decision to highlight just how similar its funding structure is to other agencies could serve to encourage broader challenges in the future with regard to those agencies. One thing is certain — uncertainty will remain with respect to actions taken by the CFPB, and possibly others, for the foreseeable future.

On November 10, the Consumer Financial Protection Bureau (CFPB) published a circular, stating that both consumer reporting agencies (CRAs) and furnishers may be held liable under the Fair Credit Reporting Act (FCRA) for failing to investigate disputes, including when they impose what the CFPB views as barriers to the submission of disputes. Specifically, the CFPB advised that federal and state consumer protection regulators, including attorneys general, can bring claims against companies that fail to appropriately investigate and resolve disputes.

Consumer reports are used to evaluate consumers’ eligibility for loans and the interest rates they pay, their eligibility for insurance and the premiums they pay, their eligibility for rental housing, and their eligibility for checking accounts, among other eligibility decisions. The FCRA requires that when CRAs and furnishers are properly notified of a dispute about information contained in a consumer file, both must conduct a reasonable investigation of the dispute.

Between January and September 2021, the CFPB received more than 500,000 complaints about credit reporting, with allegedly incorrect information on a consumer report serving as the most common issue consumers raise.

In noting this volume of complaints, the CFPB advised that regulators may consider bringing an action under the FCRA when furnishers or CRAs require consumers to provide documentation or proof documents, other than as described in the statute or regulation, as a precondition to initiating an investigation. Accordingly, CRAs and furnishers must reasonably investigate disputes they receive directly from consumers that are not frivolous or irrelevant — and furnishers must reasonably investigate all indirect disputes received from CRAs — even if such disputes do not include the entity’s preferred format, preferred intake forms, or preferred documentation or forms.

The CFPB also advised that regulators may bring a claim if a CRA fails to promptly provide to the furnisher “all relevant information” regarding the dispute that the CRA receives from the consumer. After a person disputes the accuracy or completeness of information in his or her consumer report, the CRA must notify the original furnisher of the information of the dispute within five business days. In addition, the CRA must give the furnisher all relevant information the consumer provided. The CFPB went on to state that while there is not an affirmative requirement to specifically provide original copies of documentation submitted by consumers to CRAs, it would be difficult for a CRA to prove it provided all relevant information if it fails to forward even an electronic image of documents that constitute a primary source of evidence.

On November 10, the Consumer Financial Protection Bureau (CFPB) released a new complaint bulletin, highlighting consumer complaints it has received related to crypto-assets. The bulletin suggests that fraud, theft, hacks, and scams pose a significant problem in crypto-asset markets. Also, according to the bulletin, consumers reported issues with executing transactions and transferring assets between exchanges. In response, the CFPB is advising consumers to be aware of common schemes, report suspicious FDIC insurance claims, and continue submitting complaints directly to the CFPB.

In President Biden’s “Executive Order on Ensuring the Responsible Development of Digital Assets” (Order), a number of deadlines were set for numerous federal agencies to submit reports, including a deadline for the Financial Stability Oversight Council (FSOC) to produce a report that identifies “specific financial stability risks and regulatory gaps” from the use of digital currencies and proposes recommendations to mitigate those risks. Also, the Order “encouraged” the director of the CFPB “to consider the extent to which privacy or consumer protection measures within their respective jurisdictions may be used to protect users of digital assets and whether additional measures may be needed.” Subsequently, the White House released a “First-Ever Comprehensive Framework For Responsible Development of Digital Assets,” which noted that the reports encouraged the CFPB to “redouble [its] efforts to monitor consumer complaints and to enforce against unfair, deceptive, or abusive practices.”

Over the past decade, the number of crypto-assets has expanded; indeed, one estimate puts the total at more than 1.8 million. The CFPB also reports a similar rise in the number of complaints. From October 2018 to September 2022, the CFPB received more than 8,300 complaints related to virtual currency, with the majority being submitted in the last two years. The most common issue selected was fraud and scams (40%) followed by transaction issues.

The CFPB highlighted the following common issues among consumers:

  • Romance scams and “pig butchering”
    • Romance scams or schemes where scammers play on a victim’s emotions to extract money are increasingly common. Data from the CFPB shows that romance scams are particularly common among older consumers.
    • Some of these scammers combine romance scams with a technique law enforcement refers to as “pig butchering,” where fraudsters pose as financial successes and spend time gaining the victim’s confidence and trust. Even going as far as coaching victims through setting up crypto-asset accounts.
    • Some scammers use social media posts by crypto-asset influencers to trick victims. For example, a scammer may impersonate a celebrity or influencer using verified (sometimes stolen) social media accounts or promotional videos to promote giveaways or “double your crypto” scams.
  • Transaction issues:
    • Consumers reported having trouble executing transactions, especially during times of increasing crypto-asset prices, resulting in losses or the inability to realize profits.
    • Other consumers had issues with compatibility between crypto-assets they owned and those that could be used on a specific crypto-asset platform. Other consumers experienced losses when attempting to transfer incompatible assets between different wallets or crypto-asset platforms.
    • Many crypto-asset platforms offer products marketed by companies as credit, debit, or prepaid cards with various features, including offering rewards in crypto-assets. Consumers submitted complaints, including the inability to make purchases, issues closing their account, rejecting their claims for reimbursement on fraudulent charges, or failing to receive advertised rewards.
    • Consumers also complained that several large crypto-asset platforms have recently either frozen customers’ account withdrawals, filed for bankruptcy protection, or both.
  • Undisclosed or unexpected costs:
    • Some consumers complained about undisclosed or unexpected costs on crypto-asset platforms, or claims there were no fees when, in reality, the consumer noticed a large cost in the form of a large spread, e.g., the gap between the price an asset can be purchased at and the price an asset can be sold at.
  • Customer service issues:
    • Consumers sometimes complained about the difficulties they face in getting in touch with customer service representatives.
    • Lack of customer service options creates opportunities for social media scams where attackers pretend to be customer service representatives to gain access to customers’ wallets and steal crypto-assets.

The CFPB went on to note that in situations where consumers have had assets stolen, or had their account hacked, they are often told there is nowhere to turn for help. In one complaint, a consumer reported a loss of their life savings in a scam, which the company stated was not recoverable. In other situations where consumers are having problems with a crypto-asset platform or wallet that does not involve fraud or technical issues, companies sometimes cite boilerplate user agreement language to absolve themselves of responsibility. Consumers have also reported to the CFPB that some crypto-asset platforms have incorporated arbitration clauses into their terms and conditions that requires consumers to resolve disputes through arbitration.

Our Take

Director Chopra’s recent public statement have focused on the adoption of cryptocurrencies for real-time payments, in particular the risks of hacks, errors and fraud, and consumer protection. To date, the CFPB has not brought any enforcement actions against crypto companies, but the complaint bulletin is another signal of the CFPB’s increased activity in this space.

On November 2, the Consumer Financial Protection Bureau (CFPB) released a blog post, exploring the potential impact of student loan payment reinstatement. The CFPB found that student loan borrowers are increasingly likely to struggle once their monthly student loan payments are reinstated. However, the CFPB also found that student debt cancellation may substantially reduce the number of borrowers at risk when the payment suspension ends. Overall, the CFPB found that “despite worsening credit outcomes … the cancellation of some student loan debt means that fewer student loan borrowers are likely to be at risk of payment difficulties when federal student loan payments resume in January 2023 than they otherwise would be.”

The CFPB’s most recent blog post follows an April 2022 post, which we reported about here, that attempted to identify which types of borrowers may struggle to make their scheduled loan payments based on five potential risk factors: (1) pre-pandemic delinquencies on student loan; (2) pre-pandemic payment assistance on student loans; (3) multiple student loan servicers; (4) delinquencies on other credit products since the start of the pandemic; and (5) new third-party collections during the pandemic. At that time, the CFPB found that about 15 million borrowers had at least one of the potential risk factors, and 5.1 million had at least two. According to the CFPB, since that report, delinquencies on nonstudent-loan products have risen. There has also been a small increase in the share of borrowers with new nonmedical collections reported on their credit records. As a result, the CFPB concludes that this led to an increase in the total number of borrowers with two or more risk factors to 5.5 million.

Among other findings from the blog, the CFPB reported:

  • A growing share of student loan borrowers are 60 days or more past due on a nonstudent-loan credit account since mid-2021.
  • As of September 2022, 7.1% of student loan borrowers who were not in default on their loans at the start of the pandemic were having difficulty repaying other debts, as compared to 6.2% of these same borrowers at the start of the pandemic.
  • Delinquency rates have risen even further for borrowers with defaulted student loans, increasing from 9.8% at the start of the pandemic to 12.5% as of September 2022.
  • More student loan borrowers face higher monthly payments on nonstudent loans. In its April 2022 report, the CFPB reported that 39% of student loan borrowers in its sample had scheduled monthly payments for all credit products — other than their student loans and mortgages — that increased 10% or more relative to the start of the pandemic. This has increased to 46% of student loan borrowers as of September 2022, with automotive loans driving much of that increase.

The CFPB’s post concluded that while many student loans borrowers are increasingly likely to struggle once their monthly payments are reinstated, as many as one-third of borrowers with two or more risk factors may have their balances completely canceled. And many borrowers with multiple risk factors who still have outstanding balances when payments resume may have reduced balances going forward.

The CFPB suggested that at-risk borrowers with loans remaining after current debt cancellation efforts may avoid payment difficulties by enrolling in income-driven repayment plans. Currently, many borrowers can qualify for plans that cap their monthly student loan payments at 10% of their discretionary income each month. The Biden-Harris administration also proposed the Student Debt Relief Plan, which would lower that cap to 5%, while also categorizing more income as nondiscretionary.

Suffice it to say that student loans remain a front and center issue for the CFPB, Department of Education, and a number of state regulators as the country emerges from the pandemic. Student loan lenders and their servicing partners should anticipate ongoing scrutiny of their practices, and in particular, how they work with distressed borrowers in the loss mitigation and collections context.

Five Democratic Senators — Elizabeth Warren (MA), Dianne Feinstein (CA), Brian Schatz (HI), Jack Reed (RI), and Alex Padilla (CA) — recently petitioned the Consumer Financial Protection Bureau (CFPB) to “take action to eliminate hidden fees associated with international remittance payments.”

The Remittance Transfer Rule requires transfer providers to provide prepayment disclosures to consumers prior to paying for a remittance transfer. According to the senators’ letter, though remittance providers are required to display the exchange rate and fees associated with a transaction, some providers collect additional revenue by increasing exchange rates. The senators equated the remittance payment fees to the so-called “junk fees” that the CFPB has been laser focused on eliminating as of late.

The senators contend that, as a result of certain loopholes in the rules, remittance providers may technically comply with the CFPB’s remittance rule requirements, while providing insufficient price transparency to allow consumers to make informed comparisons and choose the lowest-cost provider. For example, they allege some providers may “[take] advantage of the CFPB’s exemption for the “optional disclosure of non-covered third-party fees,” which are fees imposed by the designated remittance recipient’s financial institution for receiving the transfer. Despite technological advances that facilitate near-instantaneous information sharing, the exemption allows remittance providers to continue to estimate non-covered third-party fees, rather than provide accurate, fixed third-party cost.”

The petition urged the CFPB to strengthen the remittance rule to “ensure greater transparency.” Specifically, the senators urged the CFPB to: (1) require remittance providers to display mid-market exchange rates, while only collecting revenue through added costs, including fixed third-party fees openly displayed as “total cost”; and (2) rescind the permanent exemption for noncovered third-party fees and encourage the adoption of new technology that would provide transparent, pre-transfer cost information.

Troutman Pepper will continue to monitor important developments involving the CFPB and the Remittance Transfer Rule and will provide further updates as they become available.

In an October 27 letter, the American Bankers Association (ABA) expressed concern regarding a proposal currently being considered by the Consumer Financial Protection Bureau (CFPB) that would shift liability from consumers to banks for scams involving peer-to-peer (P2P) payments. This would include requiring banks to reimburse consumers for P2P payments made but later identified by consumers as payments to a scammer.

The ABA first emphasized the benefits of P2P payment platforms, including:

  • They are a convenient, fast, and usually free way to send money to friends and family. For example, P2P payments make it easy to pay the babysitter, send money to a college student, or to repay a friend for dinner without having to worry about having cash or locating a checkbook.
  • P2P payments are made quickly and cannot be reversed. Sellers who accept a P2P payment do not have to worry that a buyer will cancel the payment after receiving the purchased item.
  • Consumers benefit from the safety of P2P payments. Checks and cash can be stolen. P2P payments allow consumers to avoid this harm and inconvenience.

While acknowledging that scams and fraud do occur on P2P platforms, the ABA highlighted that “[b]anks have made and continue to make significant investments to thwart scams through fraud controls and consumer education.” These fraud controls include, for example: (1) pop-up warnings that require affirmative user confirmation before the transaction may proceed; (2) warnings that the consumer should send money only to people the consumer knows and trusts; (3) requirements for passcode confirmation when new recipients are added or each time money is sent; and (4) text and email verifications of transactions. Consumer education comes in many forms, including “cautions to customers at the time of a transaction and also other communications sent on a periodic basis through various media,” (e.g., warnings describing red flags that identify common and emerging scams and how to avoid them). The ABA also listed the consumer education resources the organization itself makes available to banks free of charge.

But the trade group acknowledged that even with these investments, banks cannot stop all scams as they are not the party in the best position to do so. “[C]onsumers are in the best position to know the reasons they are sending money, the circumstances of the payment, and who the recipient is.” And, according to the ABA, in some instances, even when banks do try to intervene, the consumer falls victim to the scam nonetheless. “[B]anks report cases in which bank employees have warned a customer not to send money because the transaction appears to be a scam, but the customer proceeds to send the money — and later files a claim with the bank and a complaint with the CFPB.” The ABA went on to point out that it is for these reasons that under the Electronic Fund Transfer Act and its implementing regulation, consumers are generally responsible for transactions they initiate on the basis that liability and responsibility for fraudulent transactions lies with the party in the best position to identify and prevent the fraud.

The ABA proceeded to warn the CFPB of the unintended consequences of shifting liability for P2P fraud to banks:

  • Many banks will reconsider whether to offer P2P payments, whether to be more restrictive in access and options, and whether to begin charging for the service.
  • Banks may also have to consider placing “holds” on money sent by P2P, which would lessen the appeal.
  • Some small banks may have to exit the P2P payment business.
  • Fraud will increase because consumers will have little incentive not to send money despite suspicious circumstances.

The ABA concluded by reassuring the CFPB that “[t]he banking industry shares the CFPB’s goal to protect consumers from P2P payments scams, and we understand the agency’s interest in wanting to respond to instances when consumers have suffered losses. However, any CFPB effort to shift liability for authorized P2P transactions should acknowledge the substantial benefits of P2P payments to consumers, the relatively small incidences of fraud, and how consumers are warned about and can avoid scams.”

The ABA has been vocal in its disagreement regarding the perceived prevalence of fraud on P2P platforms. As we discussed here, on October 3, the ABA joined other trade groups in issuing a statement, refuting a report issued by Senator Elizabeth Warren (D-MA) regarding that issue.

For its part, on October 31, the CFPB announced it will re-open the public comment period on this topic for 30 days, specifically seeking feedback “that will broaden our understanding of the risks consumers face and potential policy solutions. In particular, we are seeking additional public input on companies’ acceptable use policies and their use of fines, liquidated damages provisions, and other penalties.” In the coming days, the CFPB will publish a Federal Register notice with additional details on the public comment period.

As part of its ongoing initiative to scrutinize so-called “junk fees,” the Consumer Financial Protection Bureau (CFPB) published guidance on two practices that it opines potentially violate the Consumer Financial Protection Act’s prohibition on unfair practices. Specifically, the CFPB published a compliance bulletin, cautioning against charging across-the-board depositor fees to consumers who deposit a check that bounces, as well as a circular on what the CFPB refers to as “surprise” overdraft fees —the CFPB’s way of referring to authorize positive, settle negative practices (APSN).

Compliance Bulletin: Depositor Fees Triggered by Depositing Checks That Are Dishonored:

  • According to the CFPB, when a consumer deposits a check that bounces, banks sometimes charge a fee even when that consumer had no idea the check would bounce or is the victim of check fraud.
  • According to the CFPB, while charging these fees across the board potentially violates existing law, financial institutions may employ more tailored fee policies that charge depositor fees only in situations where a depositor could have avoided the fee, such as when a depositor repeatedly deposits bad checks from the same originator.

Circular: “Surprise” Overdraft Fees:

  • The CFPB asserts that these overdraft fees occur when a bank account shows that a customer has sufficient funds to complete a debit card purchase at the time of the transaction, but the consumer is later charged an overdraft fee because intervening transactions cause the balance to be insufficient to cover the debit card charge. The CFPB’s discussion of this issue references the practice of using APSN methods to assess overdraft fees, and asserts that a recent consent order entered into by the CFPB related to APSN overdrafts is applicable industrywide.
  • The CFPB opined that, under the circumstances described, these “unanticipated” overdraft fees likely violate the Consumer Financial Protection Act as they “are likely to impose substantial injury on consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition.”

American Bankers Association President and CEO Rob Nichols criticized the CFPB’s guidance as an attempt “‘to sensationalize highly regulated fees that are already clearly disclosed to customers’ under existing federal rules.” Specifying that, “Reg DD requires banks to disclose fees charged to recipients of checks that bounce,” and “overdraft fees identified by the bureau are also disclosed under existing rules and are largely triggered by operational issues that have been addressed by technology improvements made by banks and their vendors as far back as three years ago.”

Troutman Pepper will continue to monitor important developments involving the CFPB and its junk fees initiative and will provide further updates as they become available.

Unsurprisingly, defendants in two separate enforcements actions filed by the Consumer Financial Protection Agency (CFPB) have cited the Fifth Circuit’s recent decision in Community Financial Services Association of America, Ltd. v. Consumer Financial Protection Bureau as a basis for having their actions dismissed. As we discussed here, earlier this month, the Fifth Circuit held that the CFPB’s funding violates the Constitution 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 director. The CFPB filed a response to the Notice of Supplemental Authority filed by the defendant in an Illinois action and a letter to the Ninth Circuit responding to the Notice of Supplemental Authority filed in that court characterizing the Fifth Circuit’s decision as “neither controlling nor correct” and “mistaken.”

The main points made in the CFPB’s response filed in the Illinois action are:

  • The Fifth Circuit’s decision is not supported by law.
    • The court cited no case law holding that Congress violates the appropriations clause or separation of powers when it authorizes spending by statute as it did for the CFPB.
  • The court was wrong in finding that the CFPB’s funding through the Federal Reserve System makes it insulated from congressional oversight.
    • In fact, Congress, through provisions in the Dodd-Frank Act, requires regular audits for, reports to, and appearances before Congress concerning the CFPB’s spending.
  • The Fifth Circuit’s holding finds no support in the Dodd-Frank provision that states funds transferred to the CFPB “shall not be construed to be Government funds or appropriated monies.”
    • That clause, like similar ones applicable to the Farm Credit Administration, Federal Reserve Board, and Office of the Comptroller of the Currency (OCC), determines the degree to which various statutory restrictions apply to the CFPB’s use of funds. It has nothing to do with the constitutional requirement that Congress authorize the executive to spend money.
  • Although the Fifth Circuit described the CFPB’s funding as “novel” and “unprecedented,” it is not meaningfully different from numerous other agencies, such as the Federal Reserve Board, OCC, and Federal Deposit Insurance Corporation, that are funded in ways other than annual spending bills.
    • The decision leaves no way to know what statutory spending authorizations count, in the panel’s view, as an “appropriation” compliant with the appropriations clause.

The CFPB concluded by requesting that the court reject the Fifth Circuit’s analysis and “instead join every other court to address the issue — including the en banc D.C. Circuit — in upholding the Bureau’s statutory funding mechanism.”

In its letter to the Ninth Circuit, the CFPB focused on the remedy. “The court didn’t consider whether ‘the [CFPB] would have acted differently’ ‘but for’ its statutory funding mechanism. Here, applying Collins yields a straightforward answer: the case should not be dismissed because there is no evidence the [CFPB] ‘would have acted differently’ with different funding.”

Troutman Pepper will continue to monitor these cases — and all CFPB-related decisions — for future developments.

Pursuant to its authority under Section 1022(b)(1) of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) issued an advisory opinion to consumer reporting agencies (CRAs), highlighting their obligation to screen for and eliminate obviously false data from consumers’ credit reports. Specifically, CRAs were instructed to implement policies, procedures, and systems to screen for and remove “logically inconsistent” information.

In its advisory opinion, the CFPB emphasized the negative effects that inaccurate reporting can have on consumers: “[I]naccurate, derogatory information in consumer reports can lead to higher interest rates, ineligibility for promotional offers, or otherwise less favorable credit terms for affected consumers. This in turn may cost consumers hundreds or thousands of dollars in additional interest. Even worse, inaccurate, derogatory information in consumer reports could lead lenders to deny a consumer credit entirely, making it difficult or impossible for that consumer to obtain a mortgage, auto loan, student loan, or other credit.”

The advisory opinion also provided examples of some of the types of logical inconsistencies that the CFPB contends “reasonable procedures to assure maximum possible accuracy” would screen for and eliminate:

  • Inconsistent Account Information of Statuses, which may include:
    • An account whose status is paid in full, and thus has no balance due but nevertheless reflects a balance due;
    • An account that reflects an “Original Loan Amount” that increases over time, an impossibility by definition;
    • Derogatory information being reported on an account, although that derogatory information predates an earlier report that did not include the derogatory information;
  • Illogical reporting of a Date of First Delinquency in connection with an account, which may include:
    • A Date of First Delinquency reported for an account whose records reflect no delinquency, such as through activity reflecting a current account (complete history of timely payments, $0 amount overdue) or through a current account status code;
    • A Date of First Delinquency that post-dates a charge-off date; and
    • A Date of First Delinquency, or date of last payment, that predates the account open date (for non-collection accounts).
  • Illogical reporting of information relating to consumers, which may include:
    • Impossible information about consumers — for example, a tradeline that includes a relevant date for an account that is in the future or for an individual account that either predates that consumer’s listed date of birth or that is impossibly far in the past;
    • Information that is plainly inconsistent with other reported information, such that one piece of information must be inaccurate — for example, if every other tradeline is reporting ongoing payment activity, while one tradeline contains a “deceased” indicator; and
  • Illegitimate credit transactions for a minor.

According to the CFPB, complaints about incorrect information on consumer reports have represented the largest share of credit or consumer reporting complaints submitted to the CFPB each year for at least the last six years. The advisory opinion emphasized that “a consumer reporting agency that does not implement reasonable internal controls to prevent the inclusion of facially false data, including logically inconsistent information, in consumer reports it prepares is not using reasonable procedures to assure maximum possible accuracy under section 607(b) of the Fair Credit Reporting Act.”