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When the Consumer Financial Protection Bureau (CFPB or Bureau) unveiled its UDAAP exam manual at the end of March 2022, announcing that it had decided to interpret the word “unfair” in Dodd-Frank to prohibit discrimination, even where specific statutes like the Equal Credit Opportunity Act do not apply, we expressed skepticism about the viability of the CFPB’s position if the issue were ever litigated. We thought that the CFPB’s interpretation of UDAAP was beyond its authority “because it seems to ignore the legislative choice made by Congress to explicitly limit the reach of anti-discrimination concepts to specific areas when it passed legislation like ECOA, the Fair Housing Act, Title VII, the Americans with Disabilities Act, and the like. We suspect a court would be suspicious of the CFPB taking this policy judgment into its own hands.”

The Supreme Court released a decision on June 30 that we believe reinforces our view, and puts the CFPB’s announcement in significant jeopardy. In West Virginia v. EPA, the Court held that the EPA lacked congressional authority to make sweeping changes to the country’s energy generation system because Congress did not provide explicit authority for EPA to exert such broad, impactful changes. The Court’s discussion of this issue bears remarkable parallels to the CFPB’s UDAAP announcement:

Nonetheless, our precedent teaches that there are “extraordinary cases” that call for a different approach — cases in which the “history and the breadth of the authority that [the agency] has asserted,” and the “economic and political significance” of that assertion, provide a “reason to hesitate before concluding that Congress” meant to confer such authority.

Such cases have arisen from all corners of the administrative state. In Brown & Williamson, for instance, the Food and Drug Administration claimed that its authority over “drugs” and “devices” included the power to regulate, and even ban, tobacco products. We rejected that “expansive construction of the statute,” concluding that “Congress could not have intended to delegate” such a sweeping and consequential authority “in so cryptic a fashion.” In Alabama Assn. of Realtors v. Department of Health and Human Servs., we concluded that the Centers for Disease Control and Prevention could not, under its authority to adopt measures “necessary to prevent the … spread of” disease, institute a nationwide eviction moratorium in response to the COVID–19 pandemic. We found the statute’s language a “wafer-thin reed” on which to rest such a measure, given “the sheer scope of the CDC’s claimed authority,” its “unprecedented” nature, and the fact that Congress had failed to extend the moratorium after previously having done so.

Our decision in Utility Air addressed another question regarding EPA’s authority — namely, whether EPA could construe the term “air pollutant,” in a specific provision of the Clean Air Act, to cover greenhouse gases. Despite its textual plausibility, we noted that the Agency’s interpretation would have given it permitting authority over millions of small sources, such as hotels and office buildings, that had never before been subject to such requirements. We declined to uphold EPA’s claim of “unheralded” regulatory power over “a significant portion of the American economy.” In Gonzales v. Oregon, we confronted the Attorney General’s assertion that he could rescind the license of any physician who prescribed a controlled substance for assisted suicide, even in a State where such action was legal. The Attorney General argued that this came within his statutory power to revoke licenses where he found them “inconsistent with the public interest.” We considered the “idea that Congress gave [him] such broad and unusual authority through an implicit delegation … not sustainable.” Similar considerations informed our recent decision invalidating the Occupational Safety and Health Administration’s mandate that “84 million Americans … either obtain a COVID–19 vaccine or undergo weekly medical testing at their own expense.” National Federation of Independent Business v. Occupational Safety and Health Administration. We found it “telling that OSHA, in its half century of existence,” had never relied on its authority to regulate occupational hazards to impose such a remarkable measure.

All of these regulatory assertions had a colorable textual basis. And yet, in each case, given the various circumstances, “common sense as to the manner in which Congress [would have been] likely to delegate” such power to the agency at issue made it very unlikely that Congress had actually done so. Extraordinary grants of regulatory authority are rarely accomplished through “modest words,” “vague terms,” or “subtle device[s].” Nor does Congress typically use oblique or elliptical language to empower an agency to make a “radical or fundamental change” to a statutory scheme. Agencies have only those powers given to them by Congress, and “enabling legislation” is generally not an “open book to which the agency [may] add pages and change the plot line.” We presume that “Congress intends to make major policy decisions itself, not leave those decisions to agencies.”

Thus, in certain extraordinary cases, both separation of powers principles and a practical understanding of legislative intent make us “reluctant to read into ambiguous statutory text” the delegation claimed to be lurking there. To convince us otherwise, something more than a merely plausible textual basis for the agency action is necessary. The agency instead must point to “clear congressional authorization” for the power it claims.

(Citations omitted)

With apologies for the long block quote above, it seems self-evident that the Court’s analysis could be readily applied to the CFPB’s assertion that Congress’ enactment of the word “unfair” gave the Bureau the authority to prohibit discrimination in areas never mentioned by Congress, and that the policy judgment of where to prohibit discrimination — surely one of the most consequential economic and political questions facing the country — should be reserved to Congress, not given to an agency based on the use of the word “unfair” in Dodd-Frank.

When the CFPB’s announcement came out in March 2022, we believed that common sense counseled the conclusion that Congress did not give the Bureau the authority to interpret “unfair” to include discrimination. The Supreme Court’s decision in West Virginia v. EPA reinforces that view, and we believe provides a ready avenue for challenge of the Bureau’s position.

On June 29, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an advisory opinion focused on consumer debt collectors and the convenience fees they charge for some payments, such as online or by phone.

Convenience fees — common in many types of financial transactions — have recently been categorized as “junk fees” by the CFPB. (The agency has lumped many fees into this category whether they are credit card late fees, overdraft fees charged by banks, or, now, transaction fees for certain expedited forms of payment.) Another term of art used by the federal agency is “pay-to-pay.”

The CFPB is focusing its charge against convenience fees via Section 808 of the Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from collecting any amount that is not expressly authorized by the underlying agreement or permitted by law.

The CFPB foreshadowed this position five years ago. In 2017, the CFPB issued a compliance bulletin that “provides guidance to debt collectors about compliance with the [FDCPA] when assessing phone pay fees,” and asserted that such fees violated the FDCPA unless they were authorized by the underlying debt agreement or state law. And, the Bureau states that for a fee to be permitted by state law, it must be explicitly permitted — mere silence in state law does not, in the Bureau’s view, equate to the fee being “permitted.”

This advisory opinion affects not just debt collection but will trickle down to the payment processors debt collectors use to facilitate payments: “Debt collectors may violate FDCPA section 808(1) … when using payment processors who charge consumers pay-to-pay fees,” especially if the debt collector receives a portion of the fees from the payment processor.

The CFPB acknowledges that some courts have held that pay-to-pay fees do not violate FDCPA Section 808(1) because such fees are not “incidental to the principal obligation.” However, this reading does not align with the CFPB’s interpretation of Section 808(1).

Notably, the advisory opinion says nothing about convenience fees charged by creditors. Creditors are not subject to the FDCPA, and the 2017 bulletin cited in the advisory opinion (and discussed above) does not take the position that such fees are per se illegal when charged by creditors. Rather, the bulletin warns creditors to make appropriate disclosures about the existence and amounts of fees and to disclose fee-free payment options to consumers. Still, it is difficult to ignore the pejorative language used by the Bureau to describe convenience fees as “junk fees” and “pay-to-pay fees,” and we believe creditors may encounter pressure from the Bureau relating to convenience fees, even though creditors were omitted from the advisory opinion.

The Consumer Financial Protection Bureau (CFPB) Office of Servicemember Affairs released its annual report, detailing over 17,000 complaints filed by servicemembers, veterans, and their families in 2021. The largest number of complaints concerned incorrect information on credit reports; closely related to the first complaint was the failure of credit reporting agencies to swiftly and thoroughly respond to these complaints. For a population with robust government-sponsored health care coverage, servicemembers faced a significant amount of billing issues with private medical companies. Reserve-component soldiers and National Guard members, who may not enjoy health insurance coverage in their civilian status, faced notable difficulties in this respect. In response, the CFPB intends to use its authority to gather additional data to more fully understand the scope of these issues and to ensure medical providers and credit reporting companies do their best to support servicemembers and their families.

Credit Reporting and Medical Billing Issues

Like members of the general public, servicemembers complained of inaccurate information on their credit reports and frequent unsuccessful attempts to correct these erroneous reports. Their frustration was often increased based on the unique difficulties faced by military members and their families. For example, recurring deployments and transfers from one base to another — often overseas — increased the chances military families could encounter billing issues with providers for cable, internet, cellular phone, or utility services.

As noted, a significant source of billing issues derived from disputed medical bills and inaccurate credit reporting. While military members and their families have government-provided health care coverage, visits to health care providers at nonmilitary facilities (e.g., to seek care from a private medical specialist) posed unique challenges. Some nonmilitary health care providers billed both the military health insurance provider — Tricare — and the servicemembers themselves. Others failed to bill Tricare altogether and incorrectly billed the servicemember directly.

When servicemembers complained to credit reporting agencies (CRAs), they reported that CRAs and furnishers failed to adequately or rapidly correct errors. Servicemembers, along with their fellow citizens, are entitled to dispute inaccurate information on their credit reports under the Fair Credit Reporting Act (FCRA). And as with their civilians, CRAs and furnishers have often fallen short in their responsibility to take appropriate action. However, the consequences of inaccurate credit reporting for servicemembers are dire because credit problems can impact security clearances and can result in involuntary separation from the armed services.

Citizen Soldiers and Veterans Face Additional Challenges

The dual status of servicemembers who serve as reserve-component soldiers or in the National Guard often creates difficulties not faced by active-duty servicemembers. For example, a reserve-component soldier on an extended military duty assignment might be entitled to government-provided health care. But if they are injured shortly after completing their assignment, they may either not have health insurance at all or could be required to rely on coverage provided by a civilian employer. This adds a significant layer of complexity in identifying the member’s correct status and in ensuring the correct provider pays for the member’s health care expenses.

Likewise, veterans may find themselves caught in a no-man’s land of health care coverage. Many veterans are entitled to no-cost health care at Department of Veteran Affairs (VA) facilities or are entitled to coverage with low or no co-pays at non-VA facilities. However, confusion regarding VA policies on the part of veterans and medical facilities often leads to frustrating disputes. Accordingly, the VA has revised its credit reporting rules and has limited the reporting of medical debts to CRAs only when the VA (1) has taken all steps to collect the debt, (2) has determined the veteran is not catastrophically disabled or entitled to free medical care from the VA, and (3) has confirmed the debt exceeds a minimum threshold of $25.

What the CFPB Intends to Do

To resolve the difficulties faced by servicemembers, their families, and veterans, the CFPB intends to continue to aggressively study the issue and propose appropriate policy changes and regulations. The CFPB’s efforts include educating medical providers, third-party billing companies, and CRAs on their responsibility to correctly bill Tricare or the VA and to work with servicemembers to ensure they are not billed incorrectly. Likewise, the CFPB intends to ensure those responsible meet their FCRA obligations to correct inaccurate information on credit reports. The CFPB also recommends that health care providers, third-party billing companies, and CRAs emulate the steps taken by the VA to limit the negative effects of medical debt reporting on military members and their families.

We’re Here to Help

Since the CFPB has pledged to take action to ensure the rights of servicemembers and to protect their families, it is advisable for health care providers and credit reporting companies adjust their compliance programs to prevent issues rather than wait for an enforcement action to begin after a reported complaint. We have the experience to assist.

Our clients are reminded of the broad protections our servicemembers have earned through their volunteer service, and we encourage them to seek assistance if they have questions about how to best implement these rights. Troutman Pepper’s Military Lending Practice Group includes one of the oldest and most well-respected consumer financial services and regulatory practices in the nation. Let us help you ensure our military members are being rewarded for their valuable service to our nation.

In a keynote address at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Deputy Director Zixta Martinez squarely took aim at “rent-a-bank schemes” in some of the first (if not the first) such comments by a senior CFPB official. Historically, the CFPB has confined itself to “true lender” litigation against participants in high-rate programs involving Native American tribal parties (and not banks) already challenged by state enforcement authorities. We view Deputy Director Martinez’s comments as potentially signaling more widespread pursuit of this theory by the CFPB.

In her remarks, Ms. Martinez referenced a rise in installment loans and lines of credit with lenders that supposedly “attempt to use [relationships with banks] to evade state interest rate caps and licensing laws by making claims that the bank, rather than the non-bank, is the lender.” Notably, Ms. Martinez seems to have accepted the premise that the nonbank participant in these programs is the “true lender.”

Additionally, Ms. Martinez went on to criticize “unusually high default rates” on these loans, “which raise questions about whether their products set borrowers up for failure.” This comment echoes the philosophy of the “mandatory underwriting provisions” of the CFPB Rule on Payday, Vehicle Title, and Certain High-Rate Installment Loans (provisions revoked by the Trump-era CFPB) and UDAAP claims the CFPB previously asserted in cases involving ITT and Corinthian Colleges, which state attorneys general began making shortly after the subprime mortgage crisis.

Finally, Ms. Martinez added, without specification of the nature or frequency of the complaints, that the CFPB’s database reveals “a range of other significant consumer protection concerns with certain loans associated with bank partnerships.” She promised the CFA that “we are taking a close look” at these partnerships.

We take Deputy Director Martinez’ speech to the CFA as an important indicator of CFPB priorities, and in particular, the shift in emphasis on criticizing “rent-a-bank” arrangements. These comments may suggest that the CFPB is poised to follow in the footsteps of state attorneys general and state financial services regulators in asserting “true lender” claims against the nonbank parties in these relationships.

We will continue to closely monitor these developments and their implications for those in the consumer financial services space, including lenders, servicers, and banks.

In a June 17 blog post, Consumer Financial Protection Bureau (CFPB or Bureau) Director Rohit Chopra announced that the CFPB intends to “move away from highly complicated rules” in favor of “simpler and clearer rules.” As part of this effort, the CFPB will be “dramatically increasing the amount of guidance it is providing to the marketplace” and that it aspires such guidance to be simple and straight forward. Continue Reading CFPB Director Chopra Announces New Approach to Regulations

In a blog post released June 15, the Consumer Financial Protection Bureau (CFPB) continued to show its interest in credit reporting by Buy Now, Pay Later (BNPL) lenders. Recognizing the importance of credit reporting to consumers building credit profiles through payment of BNPL obligations, the CFPB encouraged BNPL lenders to report both positive and negative information and consumer reporting agencies (CRAs) to expeditiously develop uniform reporting standards so that the data can be included in core credit files as soon as possible.

The new blog post follows up on the CFPB’s December 2021 market monitoring inquiry into BNPL, which was followed by orders to five companies offering BNPL products. The orders sought information and data on key areas of consumer impact, including data furnished by BNPL firms to CRAs for inclusion in credit reports. For more information about the CFPB’s inquiry, please see our post covering the inquiry and subsequent orders here.

In the new statement, the CFPB noted the potential negative effects on consumers and the credit reporting system if information regarding timely payments made by BNPL borrowers is not incorporated into their credit reports and credit scores. The CFPB acknowledged plans by the three largest nationwide CRAs to accept BNPL data, but it expressed concern that inconsistent treatment will limit the potential benefits of the furnished data to consumers and the credit reporting system. The CFPB described its preference for a standardized approach for furnishing BNPL data that would ensure the consistency and accuracy of the BNPL payment information. The CFPB further recommended that CRAs should incorporate the BNPL data into core credit files as soon as possible and ensure that the data is accurately reflected on consumer reports.

The CFPB will continue to monitor the progress of BNPL lenders, CRAs, and credit scoring companies as the BNPL market grows and BNPL lenders furnish information about repayment.

In a recent post, the Consumer Financial Protection Bureau (CFPB) discussed its ongoing efforts to investigate and curtail alleged abuses of the military allotment system by lenders. The military allotment system is a servicemember benefit dating from the Civil War, which allows servicemembers to automatically pay certain expenses directly from their pay. The importance of this benefit has waned, however, as free automatic bill-pay and other payment options from financial institutions have become widespread. As a result, the CFPB has cautioned servicemembers of the risks of making payments by allotments, including additional costs, loss of some legal protections, and a lack of transparency into fees. The Department of Defense has also imposed further restrictions on the use of allotments, including prohibiting their use to purchase, lease, or rent personal property.

CFPB has continued to scrutinize lenders’ use of the allotment system to identify abuses and efforts to circumvent regulations. In this latest post, the CFPB highlights the following practices and its efforts to halt their use by lenders:

  • Requiring Payment by Allotment. The Military Lending Act (MLA) prohibits a lender from requiring a borrower to establish an allotment to repay an obligation. CFPB contends that certain lenders nevertheless continue to advise servicemembers that they must repay by allotment, prioritizing that lenders’ payments ahead of the servicemembers’ other obligations.
  • Funneling Money to Deposit Accounts to Avoid Prohibitions. As noted above, DOD regulations prohibit the use of allotments to pay for certain obligations, including the purchase of personal property. CFPB asserts that certain lenders create “savings accounts” for servicemembers — to which allotment payments are generally allowed — and use those accounts to make automated payments on prohibited obligations.

While CFPB highlights recent consent orders addressing alleged allotment abuses, CFPB did not announce new regulatory or enforcement initiatives. However, CFPB’s focus on this aspect of military lending emphasizes the importance of confirming the service status of any borrower and ensuring compliance with the MLA and its associated regulations in any transactions with a servicemember.

On May 25, the Consumer Financial Protection Bureau (CFPB or Bureau) published a blog post, examining what it describes as the “practice of suppressing payment data.”

Per the blog post, the CFPB alleges that its research conducted in 2020 “uncovered that only about half of the largest credit card companies contribute data to credit reporting companies about the exact monthly payment amounts made by borrowers.” As a result, the CFPB reported that it has sent letters to the CEOs of “the nation’s biggest credit card companies,” asking them to explain this practice.

The letter alleges that “several large credit card companies have not been populating the actual payment amount field on credit card accounts regularly furnished to the nationwide credit reporting agencies.” Without this information, the CFPB worries it may be more difficult for lenders to price credit and offer the best valued credit offers and loans for consumers.

While there is no statutory obligation under the Fair Credit Reporting Act requiring a company to report consumers’ account data to consumer reporting agencies, the CFPB would like to better understand the reasoning behind the alleged practice of companies choosing not to report monthly payment information. To do this, the CFPB is asking these credit card companies five questions, with a requested 30-day turnaround.

  1. If actual payment was a field your company previously furnished regularly or consistently since 2012, but no longer does, what was the rationale and decision process behind that change?
  2. If actual payment was a field your company has never regularly or consistently furnished, or has not done so since 2012 or earlier, has there been a rationale for that practice? If so, please describe.
  3. If actual payment is a field your company furnishes today for some, but not all, of your card account products, please describe the rationale and circumstances for this practice.
  4. Are there material barriers that would prevent including the actual payment field in the account information your company already furnishes?
  5. Does your company have plans to start furnishing actual payment amount information? How quickly could your company begin furnishing actual payment information consistently and accurately?

On May 26, the Consumer Financial Protection Bureau (CFPB or Bureau) announced that federal anti-discrimination law requires companies to explain to applicants the specific reasons for denying an application for credit or taking other adverse actions, even if the creditor is relying on credit models using complex algorithms.

In a corresponding Consumer Financial Protection Circular published the same day, the CFPB started with the question, “When creditors make credit decisions … do these creditors need to comply with the Equal Credit Opportunity Act’s (ECOA) requirement to provide a statement of specific reasons to applicants against whom adverse action is taken?”

Yes, the CFPB confirmed. Per the Bureau’s analysis, both ECOA and Regulation B require creditors to provide statements of specific reasons to applicants when adverse action is taken. The CFPB is especially concerned with something called “black-box” models — decisions based on outputs from complex algorithms that may make it difficult to accurately identify the specific reasons for denying credit or taking other adverse actions.

This most recent circular asserts that federal consumer financial protection laws and adverse action requirements should be enforced, regardless of the technology used by creditors, and that creditors cannot justify noncompliance with ECOA based on the mere fact that the technology they use to evaluate credit applications is “too complicated,” “too opaque in its decision-making,” or “too new.”

The Bureau’s statements are hardly novel. Regulation B requires adverse action notices and does not have an exception for machine learning models, or any other kind of underwriting decision-making for that matter. It’s difficult to understand why the Bureau thought it was necessary to restate such a basic principle, but what is even more difficult to understand is why the Bureau has not provided any guidance on the appropriate method for deriving adverse action reasons for machine learning models. The official commentary to Regulation B provides specific adverse action logic applicable to logistic regression models, but the Bureau noted in a July 2020 blog post that there was uncertainty about the most appropriate method to do so with a machine learning model. That same blog post even stated that the Bureau would consider resolving this uncertainty by amending Regulation B or its official commentary. A few months later, the Bureau hosted a Tech Sprint on adverse action notices during which methods for deriving adverse action reasons from machine learning models were specifically presented to the Bureau. Now, a year and half later, the Bureau has still declined to provide any such guidance, and the May 26 announcement simply emphasizes — and perpetuates — the same uncertainty that the Bureau itself recognized in 2020, without offering any guidance or solution whatsoever. It is disappointing, to say the least.

On May 19, the Consumer Financial Protection Bureau (CFPB or Bureau) issued an interpretive rule, describing states’ authorities to pursue companies and individuals that allegedly violate any of the federal consumer financial laws enforced by the CFPB.

CFPB Director Rohit Chopra described this action as “promoting state enforcement, not suffocating it.” It openly invites states to exercise their authority under Section 1042, “Preservation of Enforcement Powers of States,” of the Consumer Financial Protection Act of 2010 (CFPA) to not only bring lawsuits in federal court for unfair and deceptive acts and practices (UDAAP) violations under the CFPA, but also bring federal actions for any violations of the “enumerated consumer laws” enforced by the CFPB.

The CFPB alleges that while some states have joined the Bureau in alleging violations of enumerated federal consumer financial laws, few have pursued non-UDAAP claims in their own CFPA actions. Hence the interpretive rule.

This reminder comes almost six months after Chopra’s remarks in December 2021 to the National Association of Attorneys General (NAAG). At the NAAG meeting, Chopra spoke about how federal preemption of strong state consumer protections led to “disastrous consequences” in the lead up to the financial crisis a decade ago. This sentiment is echoed in the recent announcement by Chopra:

“In the years leading up to the financial crisis, federal regulators undermined states seeking to protect families and businesses from abuses in the mortgage market. [The CFPB’s] action today demonstrates our commitment to promoting state enforcement, not suffocating it.”

This latest announcement from the CFPB reminds states that:

  • States can enforce all statutes and regulations under the Consumer Financial Protection Act, even without the CFPB.
  • States can pursue claims and actions against a broad range of entities.
  • CFPB enforcement actions do not put a halt to state actions.

In short, the continuing uptick in state-level consumer protection enforcement does not appear poised to abate anytime soon. Rather, we anticipate that the current trend of increasing state legislation and regulatory scrutiny will continue and be further bolstered by the CFPB. Companies must be prepared to navigate the increasingly complex overlay of federal and state compliance requirements, particularly as one frequently begets the other.