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Recently, the Consumer Financial Protection Bureau filed an Amicus Curiae brief in the United States Court of Appeals for the Third Circuit addressing whether a debt collector violates the Fair Debt Collection Practices Act by accurately stating that it is seeking to collect $0.00 in interest and collection fees, including when interest and collection fees are not accruing. Brief for Consumer Financial Protection Bureau as Amicus Curiae In Support of Appellees and Affirmance, Randy Hopkins, Plaintiff-Appellant v. COLLECTO, INC. D/B/A EOS CCA; US ASSET MANAGEMENT, INC.; AND JOHN DOES 1 TO 10, Defendant – Appellees, Case No. 2:19-cv-18661 (2020)(Case No. 20- 1955, Document 36).

In Hopkins, Collecto, Inc. d/b/a EOS CCA (“Collecto”) sent a collection letter to Hopkins on behalf of the debt’s current creditor US Asset Management, Inc. (“USAM”). The letter contained a table that itemized the debt, including the principal amount, interest, collection fees and the balance. The amounts of interest and fees were $0.00 each. Id at 12-13.

Hopkins filed a putative class action complaint against Collecto and USAM alleging that the letter was deceptive in violation of 15 U.S.C.§ 1692e, and unfair or unconscionable in violation of 15 U.S.C. § 1692f, because the $0.00 itemized interest and collection fees implied that such interest and fees could begin to accrue, and thereby increase the amount of his debt over time. Collecto and USAM moved to dismiss for failure to state a claim. The district court granted defendants’ motion and dismissed Hopkins’ claims. Hopkins appealed to the United States Court of Appeals for the Third Circuit. Id at 13-14.

In finding that the letter did not violate the FDCPA, the district court relied on a Second Circuit decision holding that “… the inclusion of lines in a collection letter that reflect $0 in interest or fees and charges had accrued is not misleading.” Id at 14 (citing Dow v. Frontline Asset Strategies, LLC, 783 (2d Cir. 2019)). Arguing that the district court’s holding should be affirmed, the CFPB noted that itemization of a debt – just like an itemized receipt from a store – discloses what has already happened, not what will or may happen in the future. Id at 9 (citing DeGroot v. Client Servs, Inc., No. 20-1089, —F.3d —, 2020 WL 5951360, at *4 (7th Cir. Oct. 8, 2020) (holding that “an itemized breakdown … which makes no comment whatsoever about the future and does not make an explicit suggestion about future outcomes [ ] does not violate the FDCPA”)). Id at 16. Such an itemization “discloses the interest or other charges that have been assessed between a date in the past … and the date of the notice,” and therefore “cannot be construed as forward-looking: Id at 19 -20, citing DeGroot at *3. As a result, “any inference [the DeGroot plaintiff] made about the debt accruing interest or other charges in the future was entirely speculative.” Id at 22 (citing DeGroot at *3); see also Taylor v. Fin. Recovery Servs., 886 F.3d 212, 215 (2d Cir. 2018) (“[A] collection notice that fails to disclose that interest and fees are not currently accruing on a debt is not misleading within the meaning of Section 1692e.”). Id at 16. A plaintiff cannot state a claim under the FDCPA by merely identifying a question that a collection letter does not expressly answer. Id at 16.

The CFPB warned that adopting Hopkins’ argument could result in discouraging debt collectors from providing accurate itemizations, adding that the Bureau has, in fact, proposed requiring collectors to itemize interest and fees applied to a debt; further, its proposal expressly permits collectors to use $0.00 for charges that have not been applied, just as Collecto did in the letter in question. The preamble to the Bureau’s notice of proposed rulemaking explains that itemizing fees and interest could help consumers in a variety of ways. 84 Fed. Reg. at 23341-42. “[C]onsumers may be better positioned to recognize whether they owe a debt and to evaluate whether the current amount alleged due is accurate if they understand how the amount changed over time due, for example, to interest, fees, payments and credits that have been assessed or applied to the debt.”Id at 23341. CFPB’s proposal is consistent with suggestions from the Federal Trade Commission, see Fed. Trade Comm’n Collecting Consumer Debts: The Challenges of Change, at v (Feb. 2009) (suggesting that Congress require itemization), state requirements and judicial decisions. Id at 27-28. Troutman Pepper is monitoring this case and will report on any new developments or decisions.

Thursday, November 12, 2020 • 2:00 – 3:00 p.m. ET

On October 30, 2020, the CFPB released its long-awaited final debt collection rule—also known as Regulation F. This webinar – led by attorneys David Anthony, Jonathan Floyd, John Lynch, Ethan Ostroff, and Alan Wingfield – will discuss important takeaways for the debt collection industry and next steps for interested parties working to understand and comply with its provisions.

On October 13, 2020, the Consumer Financial Protection Bureau (the “CFPB”) announced that it entered into a consent order (the “Order”) with Nissan Motor Acceptance Corporation (“Nissan”) to resolve allegations that the auto finance company violated the Consumer Financial Protection Act (the “Act”). The Order requires Nissan to pay a $4 million penalty and offer $1 million in restitution to affected consumers.

Specifically, the CFPB alleged that Nissan violated the Act in four ways:

  • By repossessing vehicles between 2013 and 2020 even though customers had already made payments or taken action that should have prevented repossession;
  • By requiring customers to pay a $7.95 fee to make payments by telephone and failing to give customers an option to pay by telephone with significantly lower fees;
  • By requiring customers to pay a storage fee to Nissan’s repossession agents for the return of personal property recovered from repossessed vehicles; and
  • By including statements in Nissan’s loan modification agreements that appeared to limit customers’ bankruptcy protections.

The Order imposes a $4 million penalty on the auto finance company and, further, requires Nissan to issue refunds to customers and pay customers for each day Nissan wrongfully withheld vehicles. Nissan also agreed to non-monetary relief as part of the Order. Nissan also agreed to prohibit its repossession agents from charging fees for the return of personal property recovered from repossessed vehicles, to conduct a quarterly review of repossessions, to clearly disclose to consumers the fee for pay-by-phone options, and to refrain from using language in its contracts that suggests consumers have relinquished any rights in bankruptcy.

The Order is the latest in a slew of enforcement actions from the CFPB. In the third quarter of 2020, the CFPB brought 19 public civil and administrative actions, a pace not seen since the CFPB was helmed by Richard Cordray.

Multiple consumer advocacy groups are demanding the Consumer Financial Protection Bureau (“CFPB”) rescind its April 1, 2020, credit reporting guidance regarding the investigation of error disputes vowed at the beginning of the coronavirus pandemic.

In April, the CFPB said it would not hold companies to strict deadlines for investigating disputes that consumers have about information on their credit reports. Under the Fair Credit Reporting Act (“FCRA”), furnishers and consumer reporting agencies have 30 days to investigate a dispute, which may be extended to 45 days once a consumer initiates a dispute. However, the CFPB acknowledged holding the industry to these deadlines during the pandemic was impracticable, given staff shortages and operational disruptions. The CFPB advised it would not take supervisory or enforcement action against companies that make “good faith efforts to investigate disputes as quickly as possible, even if dispute investigations take longer than the statutory timeframe.”

In a letter to CFPB Director Kathleen Kraninger, consumer groups ask the agency to rescind the current policy, arguing that the accommodation is no longer necessary since its enactment nearly six months prior and gives shelter to companies’ delays causing hardship to consumers.

Currently, the CFPB complaint database has more than 13,000 logged complaints since the guidance issued in April. The consumer groups are arguing consumer disputes have not been addressed by the FCRA deadlines, if at all. The consumer groups further argue that the industry has had enough time to adapt to the pandemic’s challenges.

The letter asserts, “[t]here should no longer be a pressing need for relaxing statutorily mandated deadlines due to ‘reductions in staff, difficulty intaking disputes, or lack of access to necessary information,'” the groups wrote, quoting from the guidance. “These issues should have been addressed during the last six months.”

The CFPB has yet to respond. Given the heightened concerns of many national consumer groups, furnishers and consumer reporting agencies should continue to be mindful of the FCRA deadlines and use good faith efforts to resolve disputes in a timely manner. We will continue to monitor any developments regarding the CFPB’s activities and guidance involving the FCRA.

On September 21, 2020, the Consumer Financial Protection Bureau (“CFPB”) announced the settlement of its administrative proceeding against Lobel Financial Corporation (“Lobel”) – a California automobile lender that the CFPB claimed had engaged in unfair practices with respect to its Loss Damage Waiver (“LDW”) product. The action against Lobel alleged multiple violations of the Consumer Financial Protection Act (“CFPA”). A copy of the consent order entered into between the CFPB and Lobel can be found here.

The CFPB alleged that, in situations where a borrower had insufficient automobile insurance, Lobel would place its LDW product on the account and charge a monthly premium of approximately $70 for the LDW coverage. This LDW coverage was in lieu of force-placing collateral-protection insurance and had been represented as a product where Lobel would pay for the cost of covered repairs and, in the event of a total vehicle loss, cancel the borrower’s debt.

Instead, according to the CFPB:

  • Lobel charged customers LDW premiums after they had become ten-days delinquent on their auto loans but did not provide them with LDW coverage. When these customers needed repairs or experienced total vehicle losses, Lobel denied their claims.
  • Lobel assessed LDW-related fees against some customers that Lobel had not disclosed in its LDW contract.

Both of these actions were alleged to violate the CFPA. Under the consent order, Lobel will pay $1,345,224 in consumer redress to approximately 4,000 harmed consumers and a $100,000 civil money penalty. The order also prohibits Lobel from failing to provide consumers with LDW coverage or similar products or services for which it has charged consumers or from charging consumers fees that are not authorized by its LDW contracts.

On September 15, 2020, after considerable delay and pursuant to a court settlement, the Consumer Financial Protection Bureau (CFPB) released its Outline of Proposals Under Consideration and Alternatives Considered for small business lending data collection rulemaking. When the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was passed, Section 1071 amended the Equal Credit Opportunity Act (ECOA) to require such small business data collection. Dodd-Frank requires the CFPB to comply with The Small Business Regulatory Enforcement Fairness Act (SBREFA) of 1996, which provided new avenues for small businesses to participate in the federal regulatory arena and created Small Business Advocacy Review panels (SBAR panels, also known as SBREFA panels).

Section 1071 states that “in the case of any application to a financial institution for credit for women-owned, minority-owned, or small business, the financial institution shall – (1) inquire whether the business is a women-owned, minority-owned, or small business, without regard to whether such application is received in person, by mail, by telephone, by electronic mail or other form of electronic transmission, or by any other means, and whether or not such application is in response to a solicitation by the financial institution…” The purpose of Section 1071 was to facilitate the enforcement of fair lending laws. The CFPB is beginning the process of writing regulations to implement Section 1071.

The CFPB’s Outline describes the various proposals that are being considered to implement Section 1071, the relevant law, the regulatory process, and an economic analysis of the potential impacts on small entities that will be directly impacted. Continue Reading CFPB Releases (Finally) Its Small Business Lending Data Collection Rulemaking Proposal

On July 13, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued a study, entitled “Targeting Credit Builder Loans: Insights from a Credit Builder Loan Evaluation” and an accompanying practitioner’s guide – ultimately concluding that a credit builder loan (“CBL”) could increase the likelihood of establishing a credit record for consumers without one, and could help improve the credit scores of those with no current outstanding debt. According to the CFPB, consumers without a credit score may face challenges to accessing credit or qualifying for lower-interest rate loans and credit products. Approximately 26 million U.S. adults (one in ten) lack a credit record and are “credit invisible.” Another 19 million have a credit record but no score because their history is too thin or out-of-date.

The terms of CBLs vary across financial institutions, but the central feature is the requirement that the borrower makes payments before receiving funds – opposite of more traditional loans. As part of the opening of a CBL, the lender moves its own funds into a locked escrow account. The borrower makes payments, including interest and fees, in installments typically over a period of 6 to 24 months, which appear on the borrower’s credit report.

The CFPB report examined 1,531 credit union members offered CBLs. Key takeaways include:

  • Participants without an existing loan experienced a 24% increase in likelihood of having a credit score if he or she opened a CBL.
  • Participants without existing debt saw their credit scores increase by 60 points more than participants with existing debt.
  • The CBL was associated with an average increase in participants’ savings balances of $253.
  • Nevertheless, the CBL appeared to cause a decrease in scores for participants with existing debt; and on average, those with existing loans saw their scores decrease slightly. This may suggest, according to the CFPB, that these consumers had difficulty incorporating CBL payments into existing payment obligations.

A link to the CFPB’s report can be found here. And, a link to the practitioner’s report can be found here.

The CFPB recently published a blog post about the agency’s on-going efforts to monitor industry updates and innovation and how these changes align with regulatory obligations under the CFPB’s consumer protection laws. This post specifically highlighted using artificial intelligence (AI) and/or machine learning (ML) related to the adverse action notices that are required under the Equal Credit Opportunity Act (ECOA) and the Fair Credit Reporting Act (FCRA).

The CFPB acknowledged the two tensions that exist with new technology in this area: the potential for gains in efficiency versus the potential to create or amplify regulatory risks. “In considering AI or other technologies, the Bureau is committed to helping spur innovation consistent with consumer protections.”

It’s worth noting that the CFPB is not the only federal agency grappling with the effects of AI and algorithms in underwriting. The Department of Housing and Urban Development (HUD) has a regulation pending in the related area of fair lending concerns raised by the use of algorithms in underwriting.

In its post, the CFPB highlighted both the flexibility that exists in the current law, which would help foster the use of AI/ML, and also the agency’s interest in engaging with the industry on ways the regulatory scheme could evolve.

First, the CFPB noted that there may be uncertainty in the industry about how to fit AI/ML within the current regulatory framework but explained: “The existing regulatory framework has built-in flexibility that can be compatible with AI algorithms.”

To show this point, the CFPB gives the example that the official comments to Regulation B (which implements ECOA) state that when disclosing a factor, a creditor is not required to describe how a factor adversely affected an application or how a factor relates to creditworthiness, stating “[t]hus, the Official Interpretation provides an example that a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant. This flexibility may be useful to creditors when issuing adverse action notices based on AI models where the variables and key reasons are known, but which may rely upon non-intuitive relationships.”

The CFPB also emphasized that ECOA and Regulation B do not require a creditor use a particular list of reasons or limit the reasons that can be included, noting that under the current regulation creditors must accurately describe the factors, even if those factors are not on the current sample forms available.

Next, the CFPB highlighted some of the tools it offers to help reduce regulatory uncertainty with AI/ML, explaining that it wants to promote innovation while also facilitating compliance with the agency’s consumer protection laws. Specifically, it highlighted three new policies the agency previously announced in September 2019 (see the CFPB’s announcement here, as well as our previous coverage):

  1. A revised Policy to Encourage Trial Disclosure Programs (TDP Policy);
  2. A revised No-Action Letter Policy (NAL Policy); and
  3. The Compliance Assistance Sandbox Policy (CAS Policy).

The CFPB encouraged companies to make use of these tools and highlighted in particular that the TDP Policy and the CAS Policy provide for legal safe harbor, which could help reduce the regulatory uncertainty companies may fear with AI/ML and adverse action notices.

The agency noted that they are particularly interested in exploring three areas:

  1. The methodologies for determining the principal reasons for an adverse action. (As the official comments that give examples were issued in 1982.)
  2. The “accuracy of explainability methods, particularly as applied to deep learning and other complex ensemble models”.
  3. How to convey the principal reasons in a way that is understandable and accurately reflects the factors used in the model, including “how to describe varied and alternative data sources, or their interrelationships, in an adverse action reason.”

The agency’s statement stressed their hope that by providing these tools that stakeholders would be encouraged to explore using AI/ML – and to engage with the CFPB regarding the impact of current regulations. Specifically, the CFPB encouraged companies to use the TDP Policy to “test disclosures that may improve upon existing adverse action disclosures, including in ways that might go beyond the four corners of the regulations without causing consumer harm.”

The statement hinted that it is gauging the need for regulatory updates, to better match innovations in industry, saying that “applications granted under the innovation policies, as well as other stakeholder engagement with the Bureau, may ultimately be used to help support an amendment to a regulation or its Official Interpretation.”

The Consumer Financial Protection Bureau (CFPB) issued a final rule on July 7, 2020 rescinding the mandatory ability to repay underwriting provisions on small dollar loans that it had previously announced under 12 C.F.R. § 1041 (the Final Rule). The Final Rule has left the payments provisions intact.

The CFPB first finalized regulations governing small dollar lending – including vehicle title and payday loans – in November 2017 pursuant to the Dodd Frank Act (the 2017 Rule). The 2017 Rule imposed rules governing underwriting, and also established requirements and limitations with respect to attempts to withdraw payments on the loans from customers’ accounts.

The 2017 Rule made it an “unfair and abusive practice” for a lender to make small dollar loans without “reasonably determining” that consumers had the ability to repay the loan and imposed a series of underwriting requirements and exemptions to prevent this from occurring. It also required lenders to furnish disclosures to “registered information systems” and required certain practices in recordkeeping.

While the payment provisions of the 2017 Rule remain intact under the Final Rule, lenders are released from the mandatory underwriting provisions. The CFPB removed these restrictions in response to industry concerns that it would effectively eliminate most short- and long-term balloon payment loans and reduce consumer access to credit. The Bureau further noted in its publications that, contrary to the CFPB’s prior rulemaking announcement and the comments of consumer advocacy groups, it found little evidence that the mandatory underwriting provisions had much effect in protecting consumers.

The Final Rule will likely make it more palatable for certain financial institutions to engage in short term lending. It significantly lessens the threat that an institution could be held liable for committing an unfair and deceptive practice by failing to review a consumer’s ability to repay a loan before originating a short-term loan. Financial institutions that have reduced or eliminated small dollar lending after the implementation of the 2017 Rule may now find it advantageous to consider revitalizing their small dollar lending programs.

The Supreme Court ruled yesterday that the Consumer Financial Protection Bureau (CFPB) can carry on, despite its unconstitutional leadership structure. The ruling gives the President the freedom to replace a CFPB Director at will. In a 5-4 decision, the Court held that the CFPB’s leadership by a single director removable only for cause was an unconstitutional restraint on the president’s executive powers. Writing for the majority, Chief Justice John Roberts, explained that the limitation on the President’s authority to remove the CFPB Director is out of step with historical and legal precedent and “is incompatible with our constitutional structure.”

Speaking to historical precedent, the Court noted that other instances where Congress has “provided good-cause tenure to principal officers who wield power alone rather than as members of a board of commission” shed little light, describing most of the examples as “modern and contested.” As to prior case law addressing limitations on the President’s removal powers, the Court stressed that two of the most prominent of those cases, Humphrey’s Executor v. United States and Morrison v. Olson, are factually inapposite because neither of those cases dealt with an official or agency who wielded “regulatory or enforcement authority remotely comparable to that exercised by the CFPB.” Indeed, instead of extending the rationale of those decisions, the Court limited its prior decisions to their facts, thereby clarifying the boundaries of Presidential removal authority and potentially raising questions about the power of removal as to other agencies.

The Court explained that, unlike the President, who wields immense authority but is subject to regular, national elections, the CFPB’s single-Director structure contravenes the Constitution’s “carefully calibrated system by vesting significant governmental power in the hands of a single individual accountable to one.” Because authority of executive officials must remain subject to supervision and control of a President and, accordingly, the electorate, the Court held the Director’s insulation from removal to be unconstitutional.

Despite the Court’s ruling on the CFPB’s leadership structure, the CFPB remains intact. The Court decided on a 7-2 vote, with only Justices Thomas and Gorsuch dissenting, that the section of the Dodd-Frank Act providing for the “for cause” removal may be severed from the rest of the Act. The immediate effect of this decision is that the CFPB may carry on business as usual, with the difference now being that President Trump, and future Presidents, may fire the CFPB Director without cause. Essentially, the CFPB Director now serves at the will of the President.

From its inception, the CFPB has been the subject of rigorous debate. While it was led by former Director Richard Cordray, supporters heralded the agency’s aggressive enforcement actions and policy making, while opponents argued that the agency was upending constitutional and statutory restraints on its authority. Indeed, in late 2018, Troutman Sanders obtained a significant appellate victory again the CFPB, with the United States Court of Appeals for the Fifth Circuit noting that the agency had behaved as if it had “unfettered authority to cast about for potential wrongdoing” and holding that it “must comply with statutory requirements” governing its investigatory powers. (See Client Alert.)

But the Supreme Court’s decision may end the debate on the constitutionality of the CFPB, as its enforcement activities and policy making will now be subject to political oversight, and potentially to bipartisan political oversight. Anticipating that Congress would be more open to reworking the CFPB’s leadership structure following a decision of this nature, Senator Deb Fischer of Nebraska introduced a bill last week that would replace the CFPB’s single director with a five-member commission. The Supreme Court’s ruling could spur Congress to replace the single director model with a more traditional Commission structure akin to other agencies such as the Federal Trade Commission and the Securities and Exchange Commission.