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On April 7, the Bureau of Consumer Financial Protection (CFPB) issued a request for comment on proposed amendments to the regulation implementing the Fair Credit Reporting Act (FCRA), intended to assist consumers who are survivors of human trafficking. The proposed amendments would prohibit consumer reporting agencies (CRAs) from reporting adverse information resulting from certain types of human trafficking, as well as establish a method for trafficking survivors to submit documentation to CRAs identifying such information.

The National Defense Authorization Act for Fiscal Year 2022 (NDAA) directed the CFPB to issue a rule that amends Regulation V to include the adoption of a new section (Section 605C) to the FCRA. This new rule is also referred to as the Debt Bondage Repair Act, which the House of Representatives passed in June 2021. Under Section 605C, the CFPB is required to issue implementing regulations within 180 days of the enactment of the 2022 NDAA. Section 605C is effective 30 days after the CFPB issues its final implementing regulations.

In the accompanying press release, the CFPB explained that it is issuing the proposed rulemaking in response to Congress’s directive as part of the recently enacted Debt Bondage Repair Act to enact rules implementing that act’s prohibition against CRA’s providing consumer reports that include “any negative item of information about a survivor of trafficking from any period the survivor was being trafficked.”

CFPB Director Chopra stated in the press release that recovering survivors of human trafficking “shouldn’t be penalized for abuse they have endured” and asserted that the proposed amendments “will help ensure that survivors can work to rebuild their lives, including accessing credit, opening a bank account, and finding a job.”

The CFPB’s proposed amendments to Regulation V, the regulation that implements the FCRA, would create new provisions within Subsection O of the FCRA to implement the trafficking information prohibition and would apply those provisions to any “consumer reporting agency” as defined under the FCRA. The amendments would also add defined terms related to human trafficking and trafficking information, establish procedures for how affected consumers may submit the required documentation, and prescribe recordkeeping requirements for CRAs to ensure compliance.

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.

Wednesday, March 23 • 2:30 – 3:30 p.m. ET

On March 16, the Consumer Financial Protection Bureau unveiled an enormous change to its fair lending philosophy that will have major ramifications for financial services providers of all types. Please join us for a webinar where we will examine this announcement, its enormous practical impacts, and what the Bureau’s new position means for the financial services industry.

On March 16, the Consumer Financial Protection Bureau (CFPB or Bureau) unveiled an enormous change to its fair lending philosophy that will have major ramifications for financial services providers of all types. In a press release, the CFPB announced that it will begin targeting discrimination as an unfair practice under its unfair, deceptive, and abusive acts or practices (UDAAP) authority, vastly expanding the reach of its anti-discrimination enforcement beyond the limits of the Equal Credit Opportunity Act (ECOA). The CFPB also updated its UDAAP Exam Manual to reflect this expansion, providing details about the types of discrimination it intends to address under this new standard.

Background

While this announcement will likely surprise the financial services industry, the idea that discrimination could be enforced under UDAP authority has been simmering for a couple of years now. In May 2020, the Federal Trade Commission (FTC) settled with a motor vehicle dealer regarding discriminatory practices in its sale and financing of motor vehicles. In a concurring statement, then-FTC Commissioner and current CFPB Director Rohit Chopra noted that practices could be both discriminatory (under specific laws like ECOA and the Fair Housing Act (FHA)) and unfair under the FTC Act. Chopra specifically noted that the FTC could “use its unfairness authority to attack harmful discrimination in other sectors of the economy.”

Then, in spring 2021, the Student Borrower Protection Center published an article by Relman Colfax attorneys Stephen Hayes and Kali Schellenberg, titled “Discrimination is “Unfair”: Interpreting UDA(A)P to Prohibit Discrimination.” The article noted that the existing legal framework for discrimination (including ECOA and FHA) is a “patchwork” of laws and that discrimination is “not expressly prohibited or regulated in large swaths of our nation’s economy.” To remedy these gaps, the article argued that discrimination fits squarely within the definition of “unfairness” used by regulators in that discrimination is (1) likely to cause substantial injury to consumers; (2) which is not reasonably avoidable; and (3) that is not outweighed by countervailing benefits to consumers or competition. Notably, the article argued that both disparate treatment and disparate impact should be actionable under a UDAP/UDAAP statute.

Practical Impacts

The CFPB, through its announcement and exam manual updates, adopted the position that discrimination meets the definition of “unfairness.” We are skeptical that federal courts would endorse this position in contested litigation 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.

Moreover, if discrimination is “unfair” under the Dodd-Frank Act, then it also must be “unfair” under the FTC Act and other state UDAP laws. But those laws reach every aspect of the economy. The logical conclusion of the CFPB’s position is that disparate impact applies to everything in society. Every industry in the economy, from grocery stores to equipment manufacturers to nail salons, would be under a commandment to ensure that all their operations — including marketing and advertising — are free from disparate impact. This is an impossible and unnecessary restriction to impose, but it is what the CFPB’s position would require because it has always aligned the definition of “unfair” under Dodd-Frank with the same term used in the FTC Act.

But our doubts about its legal merits aside, the Bureau signaled that it intends to apply this position in supervision and enforcement matters, and the implications of this position for the financial services industry cannot be overstated.

First, though not explicitly mentioned by the CFPB, the updated UDAAP Exam Manual very strongly indicates that the CFPB plans to use both disparate treatment and disparate impact analyses as a way of establishing “unfair” discrimination. For example, the manual urges its examiners to consider whether a supervised entity has “a process to take prompt corrective action if the decision-making processes it uses produce deficiencies or discriminatory results.” (emphasis added). Further, examiners must consider whether a supervised entity ensures that employees and third-party service providers “refrain from engaging in servicing or collection practices that lead to differential treatment or disproportionately adverse impacts on a discriminatory basis.” (emphasis added). According to the CFPB, this means the disparate impact doctrine now applies to every aspect of every financial services provider over which the Bureau has jurisdiction.

Second, by expanding the reach of its unfair practices authority to include discrimination, the CFPB now has the power to examine potentially discriminatory practices in both new markets and involving activities outside of its authority under ECOA. Under ECOA, discrimination is prohibited only against “applicants” for credit. In its press release, the CFPB specifically noted that it would examine for discrimination in “all consumer finance market,” including noncredit products like payments, remittances, and deposit accounts.

In addition, the CFPB specifically highlighted targeted marketing, which we consider to be outside of the scope of ECOA because viewers of advertisements are not “applicants.” The updated UDAAP Exam Manual states that transaction testing should determine whether a supervised entity “engages in targeted advertising or marketing in a discriminatory way.” The manual also notes that a supervised entity’s polices, procedures, and practices should “not target or exclude consumers from products and services, or offer different terms and conditions, in a discriminatory manner.” Now, for the first time, the CFPB explicitly asserted that targeted marketing is discriminatory or actionable, although how the Bureau intends to assess targeted advertising remains unclear. Nevertheless, the Bureau’s new exam manual clearly signaled that the Bureau will examine targeted advertising.

Conclusion

The CFPB’s announcement is a sea change in how financial institutions need to think about fair lending and fair treatment. By expanding both the product and activity reach of anti-discrimination enforcement, the CFPB will force financial institutions — including those with operations wholly outside the scope of ECOA — to perform comprehensive compliance assessments and establish fair lending concepts like policies, procedures, training, testing, monitoring, and even statistical analyses of their operations.

 

 

On March 23, please join us for a webinar where we will examine this announcement, its enormous practical impacts, and what the Bureau’s new position means for the financial services industry. Click here to register.

*Garrett Kelly is not licensed to practice law in any jurisdiction; his bar application is pending in Virginia.

On March 1, the Consumer Financial Protection Bureau (CFPB) released its “Medical Debt Burden in the United States” report, which questions whether consumer credit reports should include unpaid medical billing data.

According to the report, the CFPB found that medical debt is the most common debt collection tradeline on credit reports in the U.S., totaling $88 billion in medical bills in 2021.

COVID-19 further increased medical expenses among both insured and uninsured patients, especially in minority communities that were already disproportionately susceptible to medical debt compared to the national average. The CFPB also found that “medical billing data on a credit report is less predictive of future payment than reporting on traditional credit obligations.”

In the press release accompanying the report, the CFPB discussed the “challenging and burdensome nature of the medical system,” and emphasized that the system is supported by a “credit reporting infrastructure where mistakes are common.” In his remarks on the report, CFPB Director Rohit Chopra observed that “it’s hard to call medical debt real debt. Few people choose to take on medical debt, and typically, patients have no idea how much they will be charged for service or a procedure.” Overall, the press release conveys the CFPB’s concern that coercive credit reporting is perpetuating the extraordinary scope of the medical debt burden.

In light of the report, the CFPB intends to prioritize the following steps to curtail coercive credit reporting of medical debt:

  • Closely scrutinize the procedures used by consumer credit reporting agencies to ensure the accuracy of medical billing data and exclude furnishers of inaccurate information from the credit reporting system; and
  • Work with other federal agencies, including the U.S. Department of Health and Human Services and the U.S. Department of Veterans Affairs, to enforce new standards for reporting medical billing data, and to increase access to the financial assistance programs offered by medical providers.

Troutman Pepper will continue to monitor the CFPB activity and other important updates within the consumer financial services industry.

On February 28, the Consumer Financial Protection Bureau (CFPB or Bureau) issued a bulletin and accompanying press release, highlighting an issue that the agency has written about frequently over the past several years: inadvertent repossessions. For the most part, the bulletin reminds the industry of guidance previously issued by the CFPB in several editions of Supervisory Highlights and a 2020 consent order, but it also stands as a clear reminder that inadvertent repossessions remain one of the Bureau’s highest priorities in auto finance.

Inadvertent repossessions are those that occur in error — when a consumer has made a payment or promise sufficient to stop the repossession, but it occurs regardless. Several mistakes can cause this to happen, some of which are highlighted in the bulletin:

  • Applying a payment to the wrong account
  • Failure to process an extension/deferment
  • Failure to cancel a repossession order (or all orders, if the account is placed with more than one repossession vendor)
  • Vendor failures (recovering the vehicle, even though the order had been put on hold or canceled)
  • Failing to cancel active repossession orders when a consumer files for bankruptcy
  • Applying payments to the account in an order different from that represented in consumer communications (i.e., paying fees first, which may prevent the account from become sufficiently paid down to avoid the repossession)

The bulletin also notes instances in supervisory exams in which auto finance companies made representations to consumers about what actions would be sufficient to avoid a repossession, but those statements were inaccurate, leading to repossessions even when consumers performed the actions.

In keeping with the Bureau’s recent focus on fees, the bulletin also asserts that some repossessions were caused by auto finance companies charging “illegal fees” to consumers, but the “fees” referred to were actually force-placed insurance premiums. The Bureau further notes that some auto finance companies improperly charged insurance premiums after repossessions, and (returning to an issue that the Bureau first raised in a 2016 version of Supervisory Highlights) improperly allowed repossession agents to charge fees for the retrieval of personal property from repossessed vehicles.

Having recapped its previous guidance on the issue of inadvertent repossession, the Bureau provides a list of recommended compliance steps regarding the issue. These steps include typical measures like policies, procedures, review of customer communications and payment application processes, monitoring of repossessions and complaints, logging and root cause analysis of inadvertent repossessions, and vendor monitoring of repossession agents. However, it also notes one thing not previously featured in Supervisory Highlights: having a process to “reimburse consumers for the direct and indirect costs incurred as a result of unlawful repossessions when appropriate.” This concept of consumer restitution was present in the CFPB’s 2020 consent order on this issue, but it’s the aspect of the Bureau’s recent guidance that is probably least prevalent in the industry today, and so it merits special attention.

For the most part, the bulletin summarizes existing guidance as previously seen from the Bureau, and it confirms the kind of compliance steps adopted by many auto finance companies over the past several years. But the release of the bulletin, and the now-typical strongly worded press release comparing inadvertent repossessions to having a car “stolen” and asserting that “[a]uto loan servicers need to ensure that every repossession is lawful,” should serve as a reminder that the topic of inadvertent repossessions will remain an area of intense scrutiny by the CFPB.

On February 23, the Consumer Financial Protection Bureau (CFPB) issued an outline of proposals and alternatives (Outline) under consideration related to an automated valuation model (AVM) rulemaking. Despite the lack of imminency on a final rule, the Outline serves as further proof that fair lending and its application to algorithmic systems is a top priority for the CFPB, as well as other regulators at both the federal and state levels.

The Dodd-Frank Wall Street Reform and Consumer Protection Act added Section 1125 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). Section 1125 requires that AVMs meet quality control standards designed to:

  • ensure a high level of confidence in the estimates produced by automated valuation models;
  • protect against the manipulation of data;
  • seek to avoid conflicts of interest;
  • require random sample testing and reviews; and
  • account for any other such factor that the agencies determine to be appropriate.

Section 1125 also provides that the CFPB, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency (FHFA) “shall promulgate regulations to implement the quality control standards required” under Section 1125. The CFPB prepared the Outline for use in the Small Business Regulatory Enforcement Fairness Act (SBREFA) Small Business Review Panel process, during which the panel will solicit feedback and assess the impact of the potential rule on small entities.

Among other things, the Outline covers the scope of potential eventual rule requirements. In regard to the first four standards listed above, the CFPB appears to be set on requiring regulated institutions to maintain policies and procedures to ensure that AVMs used for covered transactions adhere to the specified quality control standards. However, the CFPB is weighing whether to (1) provide regulated institutions flexibility in developing these policies and procedures, or (2) impose prescriptive requirements that would be more detailed and specific.

For the fifth standard, the CFPB is considering specifying “nondiscrimination quality control criteria” as an additional standard. Noting that the use of algorithmic systems, such as AVMs, are subject to the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA), the CFPB states that it is considering the potential positive and negative consumer and fair lending implications of the use of AVMs. In its discussion of fair lending concerns, the CFPB reiterates several points that have become the hallmark of CFPB Director Rohit Chopra’s views on algorithmic systems. The Outline provides the following:

The “black box” nature of many algorithms, including those used in AVMs, introduces additional fair lending concern. The complex interactions that machine learning algorithms engage in to form a decision can be so opaque that they are not easily audited or understood. This makes it challenging to prevent, identify, and correct discrimination.

The Outline goes on to note that algorithmic systems can “replicate historical patterns of discrimination or introduce new forms of discrimination because of the way a model is designed, implemented, and used.”

A final rule is not on the immediate horizon. The CFPB is requesting all small entity feedback on the Outline by April 8, and then feedback from other stakeholders by May 13. From there, the CFPB will still need to issue a notice of proposed rulemaking, which will go through its own comment process, before issuing a final rule. In the Outline, the CFPB notes that it is looking at a 12-month implementation period once the final rule is issued.

The Outline’s comments about the fair lending concerns arising from the use of algorithmic decision-making are part of a larger regulatory and consumer advocacy effort to address perceived algorithmic bias. In November 2021, House Financial Services Committee Chairwoman Maxine Waters sent a letter to the leaders of multiple federal regulators, asking them to monitor technological development in the financial services industry to ensure that algorithmic bias does not occur (see our blog post here). Then, in December 2021, the D.C. attorney general transmitted the “Stop Discrimination by Algorithms Act of 2021” for consideration and enactment by the Council of the District of Columbia (see our blog post here).

We know that algorithms can be transparent in their decision-making, fairer than models built using traditional techniques, and can make credit decisions both more accurate and more inclusive. We will continue to monitor developments related to regulation of algorithmic models at both the federal and state level.

In late January, the Consumer Financial Protection Bureau (CFPB) released its 2022 “List of Consumer Reporting Companies.” This list purports to give consumers “the details [they] need to take action” against companies that collect consumer information and prepare consumer reports. According to the CFPB’s accompanying press release, the list is intended to allow consumers to “exercise their right to see what information these firms have, dispute inaccuracies, and file lawsuits if the firms are violating the Fair Credit Reporting Act.”

In announcing the annual list, the CFPB asserted that the list is crucial for families recovering from the financial impact of the COVID-19 pandemic and seeking new jobs and places to live. CFPB Director Rohit Chopra remarked that “Americans have limited legal rights they can use to keep tabs on these surveillance companies,” and touted this list as a tool for holding consumer reporting companies accountable. Overall, the press release incorporates a negative tone regarding consumer reporting and data collection companies, without reference to the benefits provided and interests served by these companies to enable affordable and efficient consumer transactions. The press release conveys the CFPB’s concern that not enough Americans are aware of or enabled to enforce their rights under the FCRA, despite the fact that FCRA filings have seen a steady increase year after year, even outpacing other consumer protection statutes.

The list includes the three nationwide consumer reporting companies, as well as many other companies that provide consumer reporting, background screening, and other consumer information services across a wide variety of industries. Although it is labeled a list of “consumer reporting companies,” the list contains more than just traditional consumer reporting agencies (CRAs) and included resellers and other companies that collect consumer data to assist companies in providing various financial and identification verification services.

For each company listed, the CFPB provides a description of their activities, information on how to obtain a copy of the consumer’s information maintained by the company, and the company’s contact information. The list shows which companies provide copies of consumer information for free and categorizes companies by specific markets, including employment, tenant, insurance, and medical.

Troutman Pepper will continue to monitor CFPB activity and other important updates within the consumer financial services industry.

On February 24, the Consumer Financial Protection Bureau (CFPB or Bureau) released a blog post, outlining multiple auto lending topics in the wake of rising vehicle prices. According to Bureau of Labor Statistics data, the consumer price index has risen 40% for used cars and trucks and 12% for new cars since January 2021. As a result of these increases, the CFPB expects the total amount of debt and average loan size to continue to rise.

The blog post outlines three primary ways the CFPB seeks to ensure a fair, transparent, and competitive auto lending market in the wake of the significant price changes:

  • Ensuring affordable credit for auto loans;
  • Monitoring practices in auto loan servicing and collections; and
  • Fostering competition among subprime lenders.

Specifically, the CFPB:

  • Plans to monitor lending structures and consumers outcomes, particularly those where lenders rely on high interest rates and fees — even in the event of consumer failure;
  • Is concerned that loan-to-value ratios will begin to rise as they did prior to the global vehicle shortage;
  • Wants servicers to make accommodations available to all consumers;
  • Intends to work with other federal agencies to ensure proper treatment of servicemembers;
  • Is concerned that the use of technologies, such as GPS location devices and license plate recognition technology, may disproportionately impact certain communities and also cause privacy issues; and
  • Wishes to understand potential barriers to entry in the subprime market and seeks to work with the Federal Trade Commission and the Federal Reserve Bank Board of Governors to address issues in the market.

The CFPB’s blog post serves as a reminder that auto finance is still very much on the Bureau’s radar. It also provides a glimpse into the types of items the CFPB will be looking at in auto finance under Director Rohit Chopra.

On February 14, the Consumer Financial Protection Bureau (CFPB) updated its Supervision and Examinations Manual to reflect changes it made to the Remittance Transfer Rule (Rule) in a final rule published on June 5, 2020. The changes made to Subpart B of Regulation E, effective July 21, 2020, (1) increased the Rule’s safe harbor for compliance from 100 remittance transfers to 500 remittance transfers annually and (2) created two new permanent exceptions that permit insured institutions to disclose estimates of particular fees and exchange rates if certain conditions are met.

The Dodd-Frank Act amended the Electronic Fund Transfer Act (EFTA) and created a new system of consumer protections for remittance transfers sent by consumers in the United States to individuals and businesses in foreign countries. On February 7, 2012, the CFPB published Subpart B (Requirements for Remittance Transfers) to Regulation E to implement the new remittance protections set forth in the Dodd-Frank Act (77 Fed. Reg. 6194). Under Regulation E, a financial institution subject to the remittance transfer requirements must provide the sender with both a pre-payment disclosure (when the consumer first requests a transfer and before the sender is required to pay for the remittance transfer) and a receipt (after the sender makes payment for the remittance transfer). These disclosures include the exchange rate, fees charged by a third party in connection with the transfer, etc.

The safe harbor states that only entities that have provided 500 or fewer remittance transfers in both the current calendar year and the prior calendar year will not be subject to remittance transfer requirements.

The first permanent exception allows insured institutions to estimate the exchange rate and other disclosures that depend on the exchange rate, provided several conditions are met: (1) The sender is requesting to send the remittance transfer from her account at the insured institution; (2) the exact exchange rate for the remittance transfer cannot be determined by the insured institution at the time the disclosures must be made; and (3) in the prior calendar year, the insured institution sent 1,000 or fewer remittance transfers to the particular country to which the remittance transfer in question is being sent.

The second permanent exception permits insured institutions to estimate covered third-party fees and other disclosures that depend on covered third-party fees in connection with a remittance transfer only if (1) the sender is requesting to send the remittance transfer from her account at the insured institution; (2) the insured institution cannot determine the exact third-party fees required to be disclosed at the time of the remittance transfer; and (3) in the prior calendar year, the insured institution sent 500 or fewer remittance transfers to the particular country to which the remittance transfer in question is being sent.

Issues of CFPB constitutionality and structural deficiencies remain after the 2020 U.S. Supreme Court decision in Seila Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). In recent oral argument before the U.S. Court of Appeals, Fifth Circuit, counsel for All American Check Cashing and the CFPB argued broader contours of the agency’s structural issues: Whether the agency director defects (as identified in Seila) and/or the agency’s financial independence are constitutional defects that compel dismissal of the agency’s 2014 civil investigative demand. See Consumer Finance Protection Bureau v. All American Check Cashing, Inc., Case No. 18-60302, 953 F. 3d 381 (5th Cir. 2021).

In Seila, the CFPB acknowledged that the agency’s creation, pursuant to Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, now codified at 12 U.S.C. §5491, violated the separation of powers doctrine due to the director’s insulation from executive branch removal, except for cause. The Court ruled the unconstitutional director removal provision could be severed from the rest of the law, remanding for consideration of how the unconstitutional provision affected the agency’s enforcement action against Seila. On remand, the Ninth Circuit found that the Seila enforcement action had been validly ratified by the current director, which remedied any constitutional injury. See Consumer Finance Protection Bureau v. Seila Law LLC, 984 F. 3d 715 (9th Cir. 2020), as amended and superseded on denial of rehearing en banc, 997 F. 3d 837 (9th Cir. 2021).

In the Fifth Circuit case, the question presented — which was not decided by the Seila Court — was whether a final agency action should be set aside when done while the agency was unconstitutionally structured. Previously, the Fifth Circuit court had ruled the restrictions on presidential removal powers are valid and constitutional; see CFPB v. All American Check Cashing, Inc., 952 F. 3d 591 (5th Cir. 2020). After Seila, the court vacated its decision and set the case for rehearing en banc. At the January 19, 2022 rehearing en banc, All American argued ratification means there is no remedy for unconstitutional agency action. The court and the parties discussed the agency’s financial independence, and whether that constitutes a fatal constitutional defect. Concern was expressed for the agency’s broad authority over the American economy. All American argued the unconstitutional nature of the CFPB compels remand for dismissal of the CFPB civil investigative demand. The CFPB argued that any element of unconstitutionality did not affect the action against All American. The court queried, whether there is any remedy for an agency that is unconstitutionally structured. (Interested parties can listen to the January 19, 2022 oral argument at www.ca5.uscourts.gov.)