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On November 2, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra released a statement on the Report on Stablecoins issued by the President’s Working Group on Financial Markets, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC).

Stablecoins are virtual coins typically pegged to a sovereign currency. The Report requests that “Congress act promptly to enact legislation to ensure that payment stablecoins and payment stablecoin arrangements are subject to a federal prudential framework on a consistent and comprehensive basis.” The entities recommend that any such legislation require: (1) stablecoin issuers to be insured depository institutions, (2) custodial wallet providers to be subject to federal oversight, and (3) stablecoin issuers to comply with activities restrictions that limit affiliation with commercial entities.

While the CFPB was not a party to the Report, Chopra stated that the CFPB will take steps related to the stablecoin market.

First, the CFPB has solicited public input on how Big Tech companies might scale the use of digital payment networks, including cryptocurrencies. This request for input follows the CFPB’s recent orders to Google, Apple, Facebook, Amazon, Square, and PayPal regarding their payments-related plans and practices.

Second, the CFPB is monitoring for broader consumer adoption of cryptocurrencies. While stablecoins are primarily used for speculative trading, they may be used in connection with consumer deposits, stored value instruments, retail and other consumer payments mechanisms, and in consumer credit arrangements. Consumer protection laws, such as prohibitions on unfair, deceptive, or abusive acts or practices, will apply to the latter use of stablecoins.

Lastly, the CFPB stated it will engage with the Financial Stability Oversight Council to determine whether to initiate designation proceedings and ascertain whether certain nonbank stablecoin-related activities or entities are systemically important.

Our Take. While the Report targets stablecoins, it further emphasizes the gaps in regulation and the need for legislation on virtual currencies as a whole, as we previously discussed in our blog post here. At this time, it is unclear whether the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC), and/or another body will govern virtual currencies.

In a report released on November 2, the Consumer Financial Protection Bureau (CFPB) found that credit report disputes more commonly occur among consumers in majority Black and Hispanic neighborhoods than consumers in majority white neighborhoods. New CFPB Director Rohit Chopra attributed this disparity to alleged “[e]rror-ridden credit reports” that “are far too prevalent and may be undermining an equitable recovery” for minority consumers.

The Fair Credit Reporting Act (FCRA) allows consumers to file a dispute with a credit reporting agency (CRA) if they believe an inaccuracy exists on their credit report. The FCRA then requires the CRA to conduct a reasonable investigation and correct any inaccuracies discovered as a result of its investigation.

The CFPB’s report seeks to “document how disputes can appear in credit data, the characteristics of consumers whose disputes appear on their credit reports, and what happens to accounts that have been reported as being disputed.” The report catalogued the percentage of auto loan, student loan, credit card, and retail card accounts opened between 2012 and 2019 in which a dispute flag appeared on the applicant’s credit report. The report then isolated these statistics by various demographic categories based on census data for the area in which the consumer resided. The resulting numbers showed that credit disputes more commonly occur among consumers residing in areas identified as majority Black or Hispanic by census data. In particular, the research found that consumers residing in majority Black neighborhoods were more than twice as likely to file credit report disputes than those in majority white areas.

The CFPB’s report concluded that this demographic disparity was “striking,” but also noted “a few important caveats to this result.” First, it noted that census data on race and ethnicity strongly correlated with other characteristics that may affect the likelihood of a dispute to appear on the consumer’s record, most notably credit score. The report acknowledged that “[i]t may be that the disparity in dispute flag rates by census tract race in part reflects the patterns in credit score.” Second, the report noted that census data on race is only a proxy for the consumer’s actual race, and therefore it does not necessarily reflect the actual race of each consumer for whom a dispute flag appeared.

In addition to showing a disparity correlating to race and ethnicity, the report also revealed that younger consumers were generally more likely to have disputes appear on their consumer records than older consumers, contrary to the researchers’ expectation that older consumers, “who typically have more experience with the credit system,” would more likely file disputes. Finally, the report showed a strong correlation between a consumer’s credit score and the likelihood of dispute, with consumers with credit scores below 619 being roughly twice as likely to have a dispute on their credit report than not. The report further noted several caveats for this finding, including that consumers with low credit scores may be more likely to experience errors in the first place, or that these consumers are more likely to monitor their credit reports frequently due to experiencing credit denials more often.

The report concluded that the results, “[w]hile providing some key facts, … also raise further questions.” One such question raised was “whether these patterns are driven by differences across groups and credit types in the type or frequency of the underlying issues that result in a dispute flag, or whether they are driven by furnishers’ practices for reporting dispute flags or responding to disputes.”

In its press release announcing the report’s findings, the CFPB emphasized its commitment to conduct further research on these issues and to investigate the underlying reasons for the demographic disparities revealed by the report.

On October 29, the Consumer Financial Protection Bureau (CFPB or Bureau) announced leadership changes in two positions: the assistant director for the Office of Supervision Policy and the assistant director for the Office of Enforcement.

Lorelei Salas joined the Bureau as assistant director for the Office of Supervision Policy and will also serve as the acting assistant director for supervision examinations. Erin Halperin joined the CFPB as assistant director for the Office of Enforcement.

“Lorelei Salas and Eric Halperin are both distinguished public servants with deep expertise in consumer protection,” said Chopra. “Together, they will be effective watchdogs over the financial marketplace, especially when it comes to stopping repeat offenders.”

From 2016 to 2021, Salas served as commissioner of the New York City Department of Consumer and Worker Protection, where she aggressively pursued corporations employing unlawful, predatory practices targeting low-income and immigrant consumers. Previously, Salas was the legal director at Make the Road New York, where she supervised immigration, housing, and employment legal services programs designed to increase access to justice for immigrants and refugees. In 2009, President Obama nominated Salas as the wage and hour administrator at the U.S. Department of Labor. She also worked at the Office of the New York State Attorney General in the Litigation and Labor bureaus and held multiple senior management positions at the New York State Department of Labor.

Salas is the recipient of Open Society Foundations’ Leadership in Government fellowship and has served as a Fulbright specialist with expertise in U.S. consumer and worker protection laws. Before launching her legal career, Salas worked as a private sector auditor, investigating companies’ compliance with federal and state workplace laws, as well as their own codes of conduct. She earned an A.A. from LaGuardia Community College, a B.A. from Hunter College, and a J.D. from Benjamin N. Cardozo School of Law.

Halperin has served in numerous positions in the nonprofit and government sectors. Most recently, Halperin was CEO of Civil Rights Corps. From 2010 to 2014, he served in leadership roles in the Civil Rights Division of the Department of Justice (DOJ), first as special counsel for fair lending and later as acting deputy assistant attorney general overseeing the division’s fair housing, fair lending, and employment enforcement programs. While in those roles, he received the Attorney General’s John Marshall Award, the DOJ’s highest award for excellence in legal performance, and the Attorney General’s Distinguished Service Award. Halperin received his B.A. from Wesleyan University and his J.D. from Harvard Law School.

Our Take. It’s not unusual — it’s indeed expected — that CFPB, an agency whose mission and purpose the previous administration was hostile toward, needed to make leadership changes to align its goals and objectives with the current administration. Chopra’s new picks for the two leadership positions, Salas and Halperin, share similar backgrounds and enforcement objectives with Chopra and the current administration. The CFPB, under Chopra, whose confirmation we reported on here, is expected to continue engaging in aggressive enforcement and expansive regulation. With the two new leadership picks, Chopra will continue focusing on more enforcement, giving particular attention to consumers more prone to abusive practices.

The Consumer Bankers Association (CBA), a trade group of retail financial institutions, recently sent a letter to the Consumer Financial Protection Bureau (CFPB) director, requesting increased supervision of financial technology companies (fintechs). On October 3, just three days after Rohit Chopra was confirmed as the next CFPB director, the CBA urged him to consider expanding the agency’s larger participant rule.

The CFPB has authority to supervise certain “covered persons,” defined in 12 U.S.C. §5481 (6) to include “any person that engages in offering or providing a consumer financial product or service” and any affiliate of such person that acts as a service provider to such person. Fintechs are thus nondepository covered persons, but fall outside of the CFPB’s express, statutory supervisory authority. Under 12 U.S.C. § 5514, the CFPB has express supervisory authority over covered persons in the residential mortgage, private student lending, and consumer payday lending markets. The agency also has supervisory authority of any covered person who “is a larger participant of a market for other consumer financial products or services,” as defined by particular rulemaking.

Under this latter provision, the CFPB could, through additional rulemaking, supervise fintechs that operate in a covered market and meet a relevant test for being deemed a larger participant. 12 CFR 1090 currently provides for CFPB supervision of the consumer reporting, consumer debt collection, student loan servicing, international money transfer, and automobile financing markets, and for each of those markets, it prescribes a test or threshold for determining a person’s status as a larger participant. For example, the threshold for determining whether a nonbank covered person is a larger participant in the automobile financing market is 10,000 aggregate annual originations.

In its letter, the CBA specifically advocated to add the unsecured consumer lending market to the list of defined markets supervised by the CFPB pursuant to its larger participant authority as the mechanism to bring fintechs under CFPB supervision. The CBA put forth a two-pronged argument. First, it highlighted the need for competitive markets and a level playing field, citing statistics suggesting non-supervised fintechs have customer bases that “rival some of the country’s largest supervised banks.” Second, it argued that a lack of supervision puts consumers at risk. As examples, the CBA highlighted recent lawsuits and consent orders against fintechs and statistics about the high rate of suspicious PPP loans from fintech lenders as opposed to traditional lenders.

The approach suggested by the CBA may have unintended consequences. The implications of a larger participant rule for the unsecured consumer lending market would likely extend beyond online nonbank consumer lenders, as such a rule could cover non-fintech companies as well. Also, because the fintech sector is broader than unsecured consumer lending, it would not provide supervision to all types of fintechs.

This will be an issue to watch in the Rohit Chopra era at the CFPB. New rulemaking regarding the larger participant rule was previously designated “inactive,” so an initial indicator will be whether the CFPB will reinstate such rulemaking to active status.

On October 4, the Consumer Financial Protection Bureau (CFPB) announced on its website that the deadline to request initial forbearance for a COVID-19 hardship for loans backed by the Federal Housing Administration (HUD/FHA), the U.S. Department of Agriculture (USDA), or the U.S. Department of Veterans Affairs (VA) has been extended. Specifically, the CFPB tells borrowers that if their loan is backed by one of these agencies, then “your mortgage servicer is authorized to approve initial COVID hardship forbearance requests until the COVID-19 National Emergency is officially over. Previously the deadline was set for September 30, 2021.”

The CFPB announcement also tells borrowers that “[i]f your loan is backed by Fannie Mae or Freddie Mac, there is not currently a deadline for requesting an initial COVID hardship forbearance.”

HUD/FHA announced this policy change in its Mortgagee Letter 2021-24 issued on September 27. Similarly, the USDA announced on September 27 that it was removing the previous “September 30, 2021 deadline for COVID-19 impacted Direct Loan borrowers to request mortgage payment assistance.”

In line with these announcements, the VA issued Circular 26-21-20 on September 29 to instruct servicers to approve forbearance requests throughout the duration of the COVID-19-related national emergency for those “borrowers who have not received a COVID-related forbearance as of the date of this Circular.”

Lenders servicing any of the above loan types are encouraged to review the relevant announcements and make any necessary updates to their policies and procedures.

On September 21, the U.S. Senate voted 49-48 along party lines on a procedural motion to advance the nomination of current Federal Trade Commission (FTC) Commissioner Rohit Chopra to become the director of the Consumer Financial Protection Bureau (CFPB). Commissioner Chopra’s nomination had been in limbo since March, when the Senate Banking Committee failed to overcome a deadlock in advancing the nomination to the Senate floor. The procedural vote clears the way for a vote on the nomination by the Senate. Earlier this month, President Biden nominated privacy advocate Alvaro Bedoya to fill Chopra’s seat at the FTC.

On August 16, the Consumer Financial Protection Bureau (CFPB) filed a proposed settlement to resolve a lawsuit against a debt collection firm, Fair Collections & Outsourcing (FCO), and its owner, Michael Sobota, stemming from FCO’s alleged failure to implement proper policies and procedures, in addition to related Fair Credit Reporting Act (FCRA) and Fair Debt Collections Practices Act (FDCPA) violations. If approved by the court, FCO and Sobota will be ordered to pay a $850,000 civil money penalty and to establish reasonable procedures to prevent future violations.

Background

In September 2019, the CFPB filed its complaint against FCO and Sobota in the U.S. District Court for the District of Maryland. According to the complaint, “FCO and Sobota operate the largest debt collection company in the multiunit housing industry, and they collect debt on behalf of large apartment complexes, including student and military housing, and assisted-living facilities.” The CFPB alleged that FCO regularly furnishes information to consumer reporting agencies (CRAs) regarding approximately 500,000 consumer accounts.

The CFPB alleged FCO violated the FCRA by:

  1. Failing to maintain reasonable policies and procedures regarding the accuracy and integrity of the furnished information, including the handling of consumer disputes. The complaint alleged, for example, that FCO provided limited to no affirmative training or written guidance to its employees about conducting reasonable investigations, and failed to regularly revise its employee policies and procedures to address known shortcomings in information verification processes;
  1. Failing to conduct reasonable investigations of certain consumer disputes. For instance, the CFPB alleged that FCO employees failed to investigate the substance of a dispute before verifying the disputed information as accurate, and in other instances of disputes alleging identity theft, only checked the disputing consumer’s Social Security number and name before verifying the disputed information as accurate; and
  1. Failing to cease furnishing information that was allegedly the result of identity theft before FCO determined whether or not the information was accurate.

The CFPB also alleged that FCO violated the FDCPA by collecting debt without providing a valid reason for its collection. “FCO has not obtained or reviewed additional information that would provide a reasonable basis to continue to assert that the active debts in the portfolio are owed,” the complaint stated.

The Bureau brought the complaint against both FCO and Sobota, alleging that Sobota owned 100% of FCO and that, as a result, was responsible for “determining, implementing, and ensuring” FCO’s policies and procedures, while receiving personal financial gain for the alleged illegal practices.

After the complaint was filed, the parties litigated the case for almost two years.

Proposed Settlement

On August 16, the CFPB filed a joint motion with the court to approve the parties’ proposed settlement. Under the settlement, FCO and Sobota must pay a civil money penalty of $850,000 and implement a series of changes focused primarily on FCO’s policies and procedures. Specifically, the proposed settlement directs FCO to modify or update existing written policies and procedures, or establish new written policies regarding:

  1. The accuracy and integrity of the information FCO furnishes to consumer reporting agencies. Those policies and procedures must, at a minimum, “set forth detailed instructions for conducting investigations of all consumer disputes,” “require a documented description of the steps taken to investigate each dispute,” and “require retention of supporting documentation that accompanies disputes.”
  1. A system of internal controls regarding the accuracy and integrity of the information FCO furnishes to consumer reporting agencies. Those internal controls must assess whether FCO’s furnishing of information and responses to disputes comply with the FCRA. FCO must also “take prompt corrective action to address any failures to comply with the FCRA.”
  1. Establishing a new identity theft report review program to review identity theft reports FCO receives, to confirm that the handling of those reports complies with the FCRA.

Conclusion

In the press release announcing the proposed settlement, CFPB Acting Director Dave Uejio commented: “As we recover from the economic devastation caused by COVID-19, credit reports play a huge role in consumers’ financial lives. Inaccurate information, such as information related to tenant debt, can be devastating for someone who’s applying for a loan, seeking a new place to live, or trying to get a new job.” Uejio continued: “We will not tolerate companies that put inaccurate data on consumers’ credit reports or fail to investigate consumers’ disputes.”

The FCO settlement and Uejio’s comments make clear that furnishers must have written policies and procedures to safeguard against the furnishing of inaccurate information and to ensure the proper handling of consumer disputes. Otherwise, those furnishers should prepare for CFPB scrutiny.

On August 11, the Consumer Financial Protection Bureau (CFPB) published a notice and request for comment in the Federal Register on its information collection initiative, “Electronic Disclosure on Mobile Devices.” The CFPB issued the request for comment in advance of seeking formal approval for the initiative from the Office of Management and Budget (OMB).

The CFPB intends to conduct several studies using methodologies rooted in psychology and behavioral economics to understand electronic disclosure on mobile devices. In these studies, the CFPB will show information akin to financial disclosures to participants and collect information, such as demographics, psychological measures around reading electronic disclosures, and information on how consumers currently engage with their finances on different electronic devices. The CFPB is specifically seeking comments on matters related to the actual performance of the data collection, as opposed to the subject matter of the studies themselves.

Comments are due by September 10, 2021. The comments received will be submitted to OMB as part of the CFPB’s overall submission.

A federal district court judge in Massachusetts denied a credit repair company’s motion to dismiss a case brought by the Consumer Financial Protection Bureau (CFPB) and the state of Massachusetts alleging that the company made false representations about customers’ ability to improve their credit rating and requested payment in advance of full performance, in violation of Telemarketing Sales Rule (TSR), 16 C.F.R. § 310 et. seq., the Consumer Financial Protection Act (CFPA), 12 U.S.C. §§ 5531, 5536, and state law. Consumer Financial Protection Bureau and Commonwealth of Massachusetts v. Commonwealth Equity Group, LLC d/b/a Key Credit Repair and Nikitas Tsoukales, Case No. 1:20-cv-10991-RWZ (Mass. August 10, 2021)

Defendant Tsoukales’ company, Key Credit Repair, offers assistance in removing negative information from customers’ credit reports and improving their credit rating. Customers learn about their services through the company website and advertising and call the company if they choose to engage in these services. Customers are required to pay a monthly fee before obtaining the promised results. On its website, the company promises to “fix unlimited negative terms” from a credit report, achieve an average “90 point increase in 90 days,” and to “dramatically increase credit scores.” Plaintiffs allege that these representations are false. They allege further that, from 2016 through 2019 alone, Key Credit Repair enrolled nearly 40,000 consumers nationwide, and since 2011, collected at least $23 million in fees from consumers.

In support of its motion to dismiss, the defendants argued that the TSR is secondary to the Credit Repair Organizations Act (CROA) and any conflict between the statute and the regulation should result in conflict preemption, such that the TSR should not apply. Concluding that the TSR and CROA did not actually conflict, the court found this argument unpersuasive. Id., at 2.

Next, the defendants contended that the TSR violates the Due Process Clause because its definition of “telemarketing” is vague and fails to provide fair notice as to who is covered by the regulation. Id., at 4. The rule defines telemarketing as “a plan, program, or campaign which is conducted to induce the purchase of … services … by use of one or more telephones and which involves more than one interstate telephone call.” Id at 4 citing 16 C.F.R. §310.2 (gg). Defendants claimed that the terms “plan”, “program,” and “campaign” would apply to all vendors and service providers who communicate with customers over the telephone yet acknowledged that TSR exempts liability for the vast majority of businesses, but expressly declines to exempt credit repair organizations like Key Credit. Id. at 5 citing 16 C.F.R. §310.6 (b)(5). In rejecting this argument, the court relied on Hoffman Estates v. Flipside, Hoffman Estates, 455 U.S. 489, 495 (1992) which held “[a] party who engages in some conduct that is clearly proscribed cannot complain of the vagueness of the law as applied to the conduct of others.” Id.

Defendants further asserted that TSR’s definition of telemarketing placed a content-based restriction of speech by burdening credit service providers with a restriction as to when they collect payment for their services. The court disagreed, opining that the restriction is on conduct — the timing of the payment, not on speech. Id., at 6.

Defendants also claimed that the Federal Trade Commission (FTC) exceeded its authority in promulgating rules targeting their conduct, arguing that Congress intended for only unsolicited telemarketing calls to be addressed by the FTC’s regulations. The court found the defendants’ interpretation narrow, holding that the definition does not require that the calls be unsolicited but only requires the use of a telephone — which can both make and receive calls. Id., at 6 (citing 15 U.S.C. § 6016(a)(1)).

Finally, the defendants argued that the CFPB overstepped its authority following the Supreme Court’s ruling in Sella Law LLC v. Consumer Financial Protection Bureau, 140 S. Ct. 2183 (2020). The court rejected this argument, quoting Bureau of Consumer Fin. Prot. v. Citizens Bank, N.A., 504 F. Supp. 3d 39, 51 (D.R.I. 2020), which held, “[t]hough the Seila Law decision is still young, the two courts to address this issue thus far have determined that a CFPB enforcement action pending at the time of Seila Law may continue if the action is ratified by the Director.” The court concluded that the amended complaint, filed after the Seila Law decision, served as ratification of the action, and accordingly there was no basis for dismissal on this ground.

This case highlights CFPB’s close oversight of the credit repair industry and potential deceptive and abusive telemarketing practices. Troutman Pepper will continue to monitor this case.

On June 17, the president signed legislation designating “Juneteenth National Independence Day, June 19” as a federal holiday. Because the legislation took effect immediately, it raised compliance questions for residential mortgage lenders, which must take federal holidays into account when calculating waiting periods for rescissions of closed-end loans under the Truth in Lending Act (TILA) and disclosures under the TILA-RESPA Integrated Disclosure (TRID) rule. To further complicate the situation, June 19 fell on a Saturday and, therefore, was observed on June 18.

In response, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rule on August 5 to “assist the mortgage industry in determining whether to treat June 19, 2021, as a federal holiday or a business day for purposes of compliance with certain time-sensitive borrower protections.” The interpretive rule clarifies that lenders did not need to treat June 19 as a federal holiday if the relevant time period began on or before June 17. The interpretive rule further notes that “nothing prohibits creditors from providing longer time periods,” and therefore, they could have treated June 19 as a federal holiday for such a time period. If the relevant time period began after June 17, the interpretive rule states that lenders should have treated June 19 as a federal holiday.

In a statement issued the day after designating June 19 as a federal holiday, Acting Director Dave Uejio stated that “[t]he CFPB understands that some lenders may delay closings to accommodate the reissuance of disclosures adjusted for the new Federal holiday. The CFPB notes that the TILA and TRID requirements generally protect creditors from liability for bona fide errors and permit redisclosure after closing to correct errors.” While it appears that the CFPB will not take issue with lenders that adjusted time periods beginning on or before June 17, it’s clear that lenders will need to show that all relevant time periods that began after June 17 accounted for the new holiday to show compliance with TILA and TRID.

We will continue to monitor this topic for additional developments.