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In a recently filed Form 10-K, PayPal Holdings, Inc. (PayPal) announced that it received a Civil Investigative Demand (CID) from the Consumer Financial Protection Bureau (CFPB) on January 21 “related to Venmo’s unauthorized funds transfers and collections processes, and related matters.” PayPal owns and operates Venmo as part of its digital wallet portfolio.

While the CID is not publicly available, The Wall Street Journal reported in March 2019 that “[i]n a bid to curb losses on its platform, Venmo is threatening to sic debt collectors on some users who carry negative balances in their accounts, according to customer-service emails reviewed by The Wall Street Journal. Venmo also recently amended its user agreement to give itself the power to recover money its customers owe by seizing it from their other accounts at PayPal.”

This investigation may be our first sign of a more aggressive CFPB impacting the payments industry. In a recent report titled, “Federal Policy Outlook 2021,” Troutman Pepper Strategies predicts that the “Biden-run CFPB will try to strengthen oversight of lending, credit, and target predatory lending.”

While collection practices may be the primary subject of the CFPB’s CID, keep in mind that these types of federal investigations may create unwanted exposure to similar issues for other digital wallet companies and related products. In addition to the risk of federal inquiries, this type of scrutiny could also draw attention from state attorneys general that actively enforce consumer protection statutes, like debt collection or unfair or deceptive acts and practices laws. We will continue to monitor any developments.

In a statement recently disseminated to all Consumer Financial Protection Bureau (CFPB) personnel, Acting Director Dave Uejio set forth new priorities for the CFPB’s Supervision, Enforcement, and Fair Lending Division (SEFL), specifically around providing COVID-19 relief to consumers and racial equity.

In the statement, Uejio communicated his belief that “strong oversight” can make a “meaningful impact” on helping the country’s efforts to recover from the pandemic. Consistent with this, Uejio outlined two directives he has given to SEFL. First, to “always determine the full scope of issues found in its exams, systemically remediate all of those who are harmed, and change policies, procedures, and practices to address the root causes of harms.” Uejio indicated this change will extend to include active Prioritized Assessments. Second, for “SEFL to expedite enforcement investigations relating to COVID-19” in order to send a “message that violations of law during this time of need will not be tolerated.”

Based on a list of CFPB-identified compliance failures regarding COVID-19 consumer relief, regulated entities engaged in mortgage servicing, student loan servicing, credit reporting, and Paycheck Protection Program loan administration may soon find themselves subject to these heightened supervisory and enforcement activities.

Regarding racial equity, Uejio indicated that he will expand existing exams and add new ones to “have a healthy docket intended to address racial equity” and that fair lending enforcement will serve as “a top priority” at the CFPB. Furthermore, the CFPB will “look more broadly…to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”

Uejio also used the statement to announce that the CFPB will resume supervising lenders for compliance with the Military Lending Act (MLA). This reverses a 2018 decision by Acting Director Mick Mulvaney to cease supervisory MLA activities for lack of explicit statutory authority. This falls under a larger effort by Uejio to reverse “policies of the last administration that weakened enforcement and supervision.” In furtherance of this overarching policy change, Uejio stated that the CFPB plans to “rescind public statements conveying a relaxed approach to enforcement of the laws in our care.”

It’s clear that consumer financial service industries can expect a more proactive and assertive CFPB going forward. Regulated entities should act accordingly to ensure they are equally proactive in developing rigorous compliance management programs designed to identify and remediate potential areas of risk.

The Consumer Financial Protection Bureau (CFPB) signaled Thursday that it may seek to delay implementation of the agency’s recently completed qualified mortgage and debt collection rules. Although the qualified mortgage rule is set to become effective on March 1, 2021 (and the debt collection rule on November 20, 2021), delaying either could lead to a reopening of those rulemakings once President Joe Biden’s permanent appointee is in place.

In a blog post, Acting Director Dave Uejio said he’s asking staff to “explore options for preserving the status quo with respect to QM and debt collection rules.” Those rules from last year revised the agency’s qualified mortgage requirements and finalized changes to the Fair Debt Collection Practices Act (FDCPA).

Both sets of rules were issued by former CFPB Director Kathleen Kraninger, a Trump appointee. Kraninger resigned in January when President Biden took office.

Uejio, who was formerly the CFPB’s chief strategy officer, framed his directive to staff as part of a broader rulemaking and research agenda geared toward advancing dual priorities of COVID-19 relief and affecting racial equity.

Uejio also signaled possible future action when he stated that he “will be assessing regulatory actions taken by the previous leadership and adjusting as necessary and appropriate those not in line with our consumer protection mission and mandate.” However, Uejio ultimately remains a temporary figurehead who wants to maintain “maximum policy flexibility” for Rohit Chopra, Biden’s nominee to lead the CFPB as its permanent director, pending his confirmation.

Troutman Pepper will continue to monitor these regulatory developments.

On January 21, the CFPB issued a Small Entity Compliance Guide summarizing the October 2020 Debt Collection Rule. The Debt Collection Rule amends Regulation F, 12 CFR Part 1006 and becomes effective on November 30, 2021. The Debt Collection Rule governs the activities of debt collectors under the Fair Debt Collection Practices Act (FDCPA).

The guide does not address the December 2020 final rule addressing and clarifying the consumer disclosure requirement, required actions prior to furnishing, and prohibition regarding the collection of time-barred debt. Eventually the CFPB will update the guide to include the December final rule, but there is no expected release date at this time.

Some notable highlights from the Debt Collection Rule are as follows:

  • Calls to cell phones and electronic communications, such as text messages and emails, are subject to the prohibition on communicating or attempting to communicate with a consumer at an unusual or inconvenient time or place.
  • A debt collector who communicates or attempts to communicate electronically with a consumer must include in each communication a reasonable and simple method that the consumer may use to opt out.
  • There are now procedures debt collectors may follow to raise a bona fide error defense to civil liability for unintentional violations of the rule’s prohibition against third-party disclosures for emails and text messages.
  • A debt collector is presumed to comply with the prohibition against contacting a consumer with intent to annoy, abuse, or harass, if it places telephone calls to a particular person in connection with the collection of a particular debt seven or fewer times within seven consecutive days and not within seven consecutive days after having had a telephone conversation with the consumer about the debt.
  • The rule also provides that a debt collector must not post a message to the public part of a consumer’s social media page, but it may send a private message over social media.

The Debt Collection Rule is a much-anticipated clarification and addition to the present regulation. The Small Entity Compliance Guide is a good reference point for further details on the new requirements.

On January 20, the White House announced the acting agency leadership in the next phase of the transition of government. As part of that transition, President Joe Biden appointed Dave Uejio to serve as the acting director of the Consumer Financial Protection Bureau (CFPB). This news followed on the same day Director Kraninger, appointed by former President Donald Trump, resigned to adhere to the wishes of the new administration.

Earlier this month, then President-elect Joe Biden nominated Rohit Chopra, currently a Federal Trade Commission commissioner, to serve as the third director of the CFPB. The Federal Vacancies Reform Act does not allow Chopra to serve as acting director because he has been officially nominated.

Uejio, a nine-year veteran of the CFPB, will lead the bureau in the interim until Chopra is confirmed by the Senate and sworn in. Uejio currently serves as the chief strategy officer, and he previously served as the acting deputy chief of staff and lead for talent acquisition.

The CFPB has been tasked with making sure that financial rules are followed and safeguarding consumers, as well as regulating the reverse mortgage industry at the national level. Acting Director Uejio has indicated he does not want to be a passive substitute awaiting Chopra’s confirmation. Uejio vocalized that he does not intend to merely function as a steward, but that he plans to serve as the interim CFPB director to work closely with Congress to take all available measures to protect consumers. He also announced that he will focus on the new administration’s priorities ahead of Chopra’s confirmation, including tending to the needs of consumers impacted by the COVID-19 pandemic and racial inequities in lending. Uejio, with his breadth of knowledge of the CFPB and policy issues, is expected to work closely with Chopra during the transition.

Earlier in January, the bureau’s Taskforce on Federal Consumer Financial Law published a list of 100 recommendations in a report intended for the CFPB, along with Congress and state and federal regulators. The recommendations include authorizing the bureau to provide licenses to non-depository institutions that offer lending, money transmission, and payments services; growing access to the payment system to include those who are underbanked or unbanked; and interfacing “with other agencies to create a unified regulatory regime for new and innovative technologies providing services similar to banks.”

The CFPB, under Chopra’s leadership and as part of furthering President Biden’s fight against discrimination, may have an initial concentration on fair lending rules, including rescinding recent guidance that made it harder for the bureau to charge companies with committing abusive practices and strictly enforcing cases for unfair and deceptive acts.

The CFPB under Chopra is also expected to closely examine the COVID-19 response from banks, consumer reporting agencies, debt collectors, and mortgage and student loan servicers. While under Kraninger’s previous leadership, financial services companies would not necessarily face regulatory scrutiny if they showed “good-faith” efforts to provide loan forbearance and consumer relief under the CARES Act; that lenience may end when Chopra takes his position as the next CFPB director.

The Consumer Financial Protection Bureau (CFPB) will soon fall under the leadership of an aggressive consumer advocate. On January 18, President-elect Joe Biden announced that he will nominate current Federal Trade Commission (FTC) Commissioner Rohit Chopra to be the next director of the agency.

A CFPB veteran, Chopra holds a B.A. from Harvard and an MBA from Wharton. In 2011, Sen. Elizabeth Warren, who then served as a special advisor in the Obama administration, tapped Chopra to serve as assistant director of the CFPB, where he led the agency’s student loan agenda. In that role, he became known for his hard-charging style and frequent criticisms of private student lenders.

As an FTC commissioner since 2018, Chopra supported more aggressive rulemaking and enforcement efforts. Indeed, he openly acknowledged his efforts to encourage “vigorous agency enforcement” and to demand “aggressive remedies against lawbreaking companies.”

Consumer advocates have hailed Chopra’s nomination — “Financial predators, watch out,” said Public Citizen. “Rohit Chopra has proven himself a dedicated consumer champion and passionate defender of Main Street Americans against corporate wrongdoing.”

“Commissioner Chopra has long fought for financial markets that are fair for consumers, including student loan borrowers,” said Ashley Harrington, Center for Responsible Lending Federal advocacy director and senior counsel. “We are encouraged that the CFPB will now return to its mission of protecting people’s finances, which has heightened significance in this economic downturn, and which includes a strong fair lending program.”

And, indeed, Chopra’s nomination gives a clear signal that the CFPB will soon take a more aggressive stance in both its rulemaking and enforcement efforts.

On December 30, 2020, Judge Richard J. Leon on the United States District Court for the District of Columbia entered an Order in PayPal, Inc. v. Consumer Financial Protection Bureau, et al., No. 19-3700-RJL, 2020 WL 7773392 (D.D.C. Dec. 30, 2020) invalidating two provisions of the Consumer Financial Protection Bureau (“the CFPB” or “Bureau”)’s “Prepaid Rule” (“the Rule”): (i) the mandatory short-form fee disclosure requirement, and (ii) the requirement for a thirty-day waiting period before linking prepaid products to credit. As detailed below, in granting plaintiff PayPal’s motion for summary judgment, the Court held that the CFPB acted outside of its statutory authority when promulgating these two provisions.

Provisions of the Rule at Issue

The Court’s Order examined two CFPB regulations in the context of digital wallets. First, under the Rule’s short-form disclosure requirement, providers must disclose certain information about the seven most common fees—including periodic fee, per purchase fee, ATM withdrawal fees, and cash reload fee—associated with their prepaid products in a specific form and language as outlined in the Rule. 12 C.F.R. § 1005.18(b). Second, the Rule’s thirty-day credit linking restriction, as relevant here, requires credit card issuers, in limited circumstances, to wait thirty days after a consumer registers a prepaid account before linking credit to that account. 12 C.F.R. § 1026.61(c).

PayPal’s Position

PayPal, a provider of digital wallets, argued the disclosure requirement at issue exceeded the CFPB’s statutory authority because Congress only authorized the CFPB to adopt the model, optional disclosure clauses—not mandatory disclosure clauses. Additionally, PayPal attacked the 30-day waiting-period rule by arguing the CFPB exceeded its statutory authority by creating a substantive restriction on a consumer’s access to and use of credit under the guise of a disclosure rule.

CFPB’s Position

In response, the CFPB argued that its disclosure requirement is lawful because the Electronic Fund Transfer Act (“EFTA”) and the Dodd-Frank Act authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure. Similarly, the CFPB contended that its general rulemaking power, under either the Truth in Lending Act (“TILA”) or the Dodd-Frank Act, provides the statutory authority for such waiting-period restriction.

Court Agrees with PayPal and Strikes Down the Two Provisions of the Rule

First, the Court held that the disclosure requirement at issue exceeded the Bureau’s authority under EFTA and the Dodd-Frank Act reasoning that “[it] is not a model form that providers have the option of utilizing, as required by EFTA. . . . Rather, it is mandatory and provides the specific form, structure, and contents of disclosures that providers must use.” 2020 WL 7773392, at *6 (emphases original).

In so holding, the Court put emphasis on the plain text of the EFTA statute, which requires providers to disclose the “terms and conditions of electronic fund transfers” but does not require that providers adhere to a specific form for these disclosures. Id. at *5. Instead, the statute directs the CFPB to “issue model clauses for optional use by financial institutions.” (emphases original). Further, the Court rejected the Bureau’s attempt to rely on its general rulemaking authority under the Dodd-Frank Act, stating that the specific statute “controls over a general one.” Id. at *6. In the court’s words, the Bureau’s attempt to transform its general rulemaking power into such authority “runs afoul of basic principles of statutory construction.” Id.

Similarly, the Court struck down the thirty-day credit-linking restriction concluding that the CFPB exceeded its statutory authority under the TILA and the Dodd-Frank Act. Id. at *7. This regulation—which restricts when the credit provider can allow the consumer to access the credit on the prepaid product—“is not merely a disclosure requirement” but “substantive restriction on offering credit” that must be vacated. Id. at *7, 8.

The Court reasoned that the statutory language and legislative history of TILA establish that the Bureau’s authority under TILA is limited to the disclosure of credit terms and does not extend to regulation of a consumer’s access to or use of credit. Again, the Court rejected the CFPB’s reliance on the general rulemaking authority in justifying its position as “the Bureau cannot simply rely on the overarching purpose of the statute without giving credence to how Congress intended the agency to fulfill the statute’s purpose. And the fact that a consumer may have more time to consider credit terms does not transmute an unlawful ban on a consumer’s access to credit into a lawful disclosure requirement.” Id. at *9 (emphasis original).

While many in the prepaid payments industry, including those in the digital wallets business, may cheer this decision, the CFPB’s appeal period does not expire until March 2, 2021. Watch this space to see whether the CFPB decides to take the issue to the United States Court of Appeals for the District of Columbia Circuit.

In anticipation of the “GSE patch” expiring, the Consumer Financial Protection Bureau (“CFPB”) issued several final rules in 2020 to amend Regulation Z (“Reg. Z”). Concerns have existed that the expiration of the GSE patch would restrict consumer mortgage credit unless the CFPB created a permanent version of the GSE patch or revised the General Qualified Mortgage (“QM”) definition. As outlined below, the CFPB has responded by adopting the latter approach.

Since 2014, the GSE patch has allowed certain mortgage loans eligible for purchase or guarantee by Fannie Mae and Freddie Mac (“GSEs”) to qualify as QM loans despite not meeting all requirements of the General QM loan definition. This has been important because QM loans receive certain protections from legal liabilities associated with not complying with Reg. Z’s Ability to Repay/Qualified Mortgage Rule. But the GSE patch was only designed as a temporary measure, and as such was scheduled to expire on January 10, 2021, or would expire for a respective GSE upon it exiting conservatorship.

On December 10, 2020, the CFPB issued the General QM Final Rule which replaces the 43 percent debt-to-income (“DTI”) limit in the General QM loan definition with a price-based threshold that compares a loan’s annual percentage rate to the average prime offer rate for a comparable loan. It appears the CFPB adopted this approach in part because its’ research indicated that removing the DTI limit would help “facilitate a smooth and orderly transition” from the GSE patch. The General QM Final Rule outlines the price-based threshold approach and makes other changes to Reg. Z.

While still requiring a lender to consider and verify borrowers’ income and liabilities, the General QM Final Rule also removes the Appendix Q verification standard and makes it so a lender can receive safe harbor for compliance with the QM verification requirement if it satisfies one or more of the third-party verification standards referenced by Reg. Z.

The CFPB also issued on December 10, 2020, the Seasoned QM Final Rule, which creates a “Seasoned QM” definition. Specifically, certain first-lien, fixed-rate residential mortgage loans become QM loans if, during a defined seasoning period, they meet specific payment performance criteria and are held in portfolio by the originating lender. The Seasoned QM Final Rule does contain some exceptions to the portfolio requirement, including a single transfer of the loan where it is not securitized as part of the transfer or before the end of the seasoning period. The seasoning period is generally 36 months.

Both final rules become effective on March 1, 2021. The General QM Final Rule, however, has a separate mandatory compliance date of July 1, 2021. Because the CFPB extended the GSE patch’s January expiration date to coincide with the General QM Final Rule’s mandatory compliance date, the GSE patch will remain available for loans where a lender receives the application before July 1, 2021. Lenders must, however, comply with the General QM Final Rule on loans where the application is received on or after July 1, 2021.

Lenders should carefully review the final rules to identify all the resulting changes and to determine how those changes will impact their current origination and compliance strategies.

On remand from the United States Supreme Court, the United States Court of Appeals for the Ninth Circuit, in Consumer Fin. Prot. Bureau v. Seila Law LLC, reaffirmed a District Court grant of a petition by the Consumer Financial Protection Bureau, Petitioner-Appellee, to enforce a civil investigatory demand issued to Seila Law LLC, Respondent-Appellant, requiring the production of documents and interrogatory answers.

The procedural history of the case evidences a climb up and down the jurisprudential ladder. In August 2017, the United States District Court for the Central District of California granted a petition by the CFPB to enforce a CID issued to Seila earlier that year. The United States Court of Appeals for the Ninth Circuit affirmed the District Court’s decision. On appeal, however, the United States Supreme Court held that “the structure of the CFPB violate[d] the separation of powers. . . [but] the CFPB Director’s removal protection is severable from the other statutory provisions bearing on the CFPB’s authority.” It held that, while the CFPB could “continue to operate,” its Director “must be removable by the President at will.” The Supreme Court vacated the Ninth Circuit’s prior judgment and remanded the case.

At issue on remand was whether, in light of the Supreme Court’s holding,

CFPB Acting Director Mick Mulvaney validly ratified the CID issued by the CFPB to Seila. During his time in office, Acting Director Mulvaney had been “improperly insulated from the President’s removal authority.”

The Ninth Circuit held that the CID was validly ratified, and reasoned that it need not determine whether Acting Director Mulvaney validly ratified the CID, as Kathleen Kraninger, the current director of the CFPB, “expressly ratified the agency’s earlier decisions ‘to issue the [CID] to [Seila], to deny [Seila’s] request to modify or set aside the CID, and to file a petition requesting that the district court enforce the CID.’”

Seila contended that Director Kraninger’s ratification was invalid for the following reasons: (1) the CFPB was exercising unlawful executive power prior to Supreme Court’s invalidation of the for-cause removal provision, and Director Kraninger did not have authority to ratify prior unlawful actions; and (2) Director Kraninger’s ratification was barred by the applicable statute of limitations for bringing enforcement actions. The Ninth Circuit rejected both of Seila’s contentions in turn.

First, the Ninth Circuit reasoned that precedent set forth in Consumer Fin. Prot. Bureau v. Gordon and Federal Election Commission v. Legi-Tech, Inc. affirmed that “ratification is available to cure both Appointments Clause defects and structural, separation-of-powers defects.” The Ninth Circuit emphasized that while the Supreme Court held that the “CFPB’s ‘structure’ violated the separation of powers,” the only constitutional defect the Supreme Court found was “the Director’s insulation from removal,” and the Supreme Court did not find that all prior CFPB actions were void. Therefore, the Ninth Circuit held, as Director Kraninger knew she could be removed by the President at-will at the time she ratified the CID, the ratification of the CID was effective. Second, it held that the statute of limitations period for enforcement actions was not applicable in the case at hand, as Director Kraninger had merely ratified “the issuance and enforcement of the CID…determining whether [Seila] ha[d] engaged in violations that could justify bringing an enforcement action.”

We reported in September of this year on a demand from multiple consumer advocacy groups to the Consumer Financial Protection Bureau (“CFPB”) to rescind its April 1, 2020, credit report guidance that relaxed the Fair Credit Reporting Act’s (“FCRA”) deadlines to investigate consumer-initiated direct disputes. In a letter dated November 9, 2020, CFPB Director Kathleen Kraninger told the National Consumer Law Center that the CFPB would not drop the FCRA relief for furnishers and credit reporting agencies.

In April, at the onset of the coronavirus pandemic, the CFPB advised that it would ease the deadlines for furnishers and consumer reporting agencies (“CRAs”) to investigate consumers’ disputes regarding the information on their credit reports. Under the FCRA, businesses have 30 days to investigate a dispute, extending to 45 days in some circumstances. The CFPB stated it would not take supervisory or enforcement action against companies that try but fail to meet these deadlines, attributing the policy to the potentially “significant operational disruptions” then facing the industry due to the pandemic.

Consumer advocacy groups argue that furnishers and CRAs are ignoring many disputes given the rise since April in consumer complaints about investigation delays. Moreover, consumer groups contend furnishers and CRAs have had ample time to adapt to the pandemic and respond to complaints timely.

In response, Kraninger stated, “I want to make clear that all companies continue to remain responsible for FCRA compliance with dispute resolutions in a timely fashion,” Kraninger wrote. “However, during the extraordinary times in which we find ourselves, the bureau does not intend to cite in an examination or bring an enforcement action against firms who exceed the deadlines to investigate such disputes — but only as long as efforts are made in good faith to do so as quickly as possible.”

According to the letter, the CFPB maintains it will keep looking at the administration of consumer-initiated disputes on a company-by-company basis and whether firms are exercising good-faith efforts.

Consumer reporting agencies and furnishers should be aware of the heightened concerns surrounding the reporting deadlines for consumer-initiated disputes and use their best efforts to resolve them promptly. We will continue to monitor any developments regarding the CFPB’s activities and guidance involving the FCRA.