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On March 17, the Consumer Financial Protection Bureau ordered all employees – not just those in the most affected regions – to begin working from home given the rapid spread of the coronavirus (“COVID-19”). CFPB Director Kathleen Kraninger sent an email to all CFPB employees in the evening of March 17 stating that a prior telework arrangement that mandated Washington, D.C. and New York regional state employees to work remotely would now apply to all agency employees – and extended that deadline through Friday, April 3.

The Director ordered: “Starting Wednesday, March 18, the mandatory telework policy I first implemented for HQ and New York Regional Office staff will apply to all CFPB employees, regardless of work location.”

In doing so, the CFPB became the first federal agency to require telework for all of its employees, regardless of previous policies and procedures. The Director also permitted those who are unable to telework due to disruptions in childcare, school closures, or caring for relatives to take up to twenty hours of administrative leave per pay period.

On a related note, the Office of Management and Budget issued a memorandum on March 15 on telework flexibility, and the Office of Personnel Management’s current operating status as of March 17 calls for maximum telework. The OMB encouraged agencies to consult with current operating guidance by the Centers for Disease Control and Prevention (linked here) to maximize safe working environments and implement substantial mitigation strategies for the workplace.

Another Circuit Court of Appeals has weighed in on the constitutionality of the Consumer Financial Protection Bureau’s structure, on the very day that the Supreme Court of the United States heard argument on the same question. In CFPB v. All American Check Cashing, Inc., et al, a divided panel of the Fifth Circuit held that the CFPB’s present structure does not infringe on the President’s constitutional authority as head of the executive branch.

At issue are the conditions under which the President can remove the CFPB director. The director is appointed by the President, with the advice and consent of the Senate, to a five-year term. He or she only can be removed for “inefficiency, neglect of duty, or malfeasance in office,” not policy differences or refusal to follow the President’s directives. Proponents of the CFPB say that such protection is critical to the Bureau’s independence and furthers the goal of establishing a consolidated consumer-protection regulator free from political influence. Opponents to the structure point out, however, that a President could find himself stuck with a director appointed by his predecessor, with drastically different ideas about how financial regulation should be carried out, and would have no way to influence a director that he had no authority to remove except “for cause.” This limitation, opponents claim, is an unconstitutional constraint on the President’s authority as head of the executive branch and impairs his ability to “take care that the laws be faithfully executed.”

The majority ruling in All American relied on two key cases where the Supreme Court previously has upheld “for cause” protections. In Humphrey’s Executor v. United States, the Supreme Court allowed such protection for Federal Trade Commissioners. In Morrison v. Olson, it came to the same conclusion for independent counsels. Since the Court has allowed Congress to limit the President’s removal power under some circumstances, and overturned laws only when Congress attempted to give removal authority to someone other than the President, the Fifth Circuit concluded that the CFPB’s structure is “well within the Constitutional lines drawn by the Supreme Court.” The majority also noted that the word “inefficiency” in the statute could be reasonably interpreted to include “policy disagreement.” Thus, the majority noted that it had a sound basis to uphold the statutory structure under the principle of “Constitutional Avoidance” without even addressing the separation-of-powers questions.

The dissent pointed to the broad authority concentrated in the single CFPB director as a “crucial variable in the constitutional equation,” which demanded a different result. Although the FTC is a regulatory agency with broad powers, it is governed by a number of commissioners with staggered terms, making it more difficult for a single president to appoint a long-lasting majority and providing a more bipartisan structure while maintaining independent decision-making authority. Although independent counsels are “solo actors,” the dissent pointed out that counsels had limited power in a much narrower field when compared to the sweeping authority of the CFPB, which is empowered to regulate in virtually every sector of consumer finance. These differences, said the dissent, made Humphrey’s Executor and Morrison less persuasive. Because the CFPB vests sweeping regulatory power in a single individual with a term lasting longer than the President’s, and with minimal other mechanisms for accountability, the dissent was convinced that giving the President the authority to remove the CFPB director at will was necessary to enable him to carry out his constitutional role as head of the executive branch.

The dissent also criticized the majority for not following the Fifth Circuit’s recent en banc decision in Collins v. Mnuchin, in which it found the structure of the Federal Housing Finance Agency to be unconstitutional because it granted “for cause” removal protection to the single director of a powerful agency – the very same situation present in the CFPB. Although the majority distinguished the structures of the FHFA and the CFPB on a factual basis, the dissent asserted that the differences were not legally significant and, thus, the en banc decision in Collins should have controlled the outcome of the case.

Both the opinion and the dissent provide excellent explanations and thorough analysis of the key arguments over the CFPB’s structure that have been percolating in the appeals courts, albeit supplemented with some discussion about the impact of an en banc decision on a panel in the same circuit. No doubt the Supreme Court heard many of the same arguments on the day this decision was released, as the questions presented in Seila Law LLC v. CFPB were essentially the same as those before the Fifth Circuit: “Does the vesting of substantial executive authority in the Consumer Financial Protection Bureau, an independent agency led by a single director, violate the separation of powers principle?” and “If it does, is 12 U.S.C. § 5491(c)(3) severable from the Dodd-Frank Act?” By June we should have an answer, one which may generate significant waves in consumer finance regulation.

On February 26, the Consumer Financial Protection Bureau added ten FAQs concerning lender credits to its TILA-RESPA Integrated Disclosures (“TRID”) FAQs resource.

The new lender credit FAQs appear to be consistent with the industry’s current practices for managing and disclosing lender credits. They address topics such as:

  • How to define a lender credit for the purposes of TRID;
  • The differences between specific and general lender credits;
  • When are lenders required to disclose lender credit and closing costs on the Loan Estimates and Closing Disclosures;
  • How are lender credits disclosed on the Loan Estimates and Closing Disclosures; and
  • When lenders can change lender credits.

The last topic is potentially the most helpful, as some lenders have questioned when they could reduce previously disclosed lender credits. The FAQ states, “[l]ender credits may decrease only if there is an accompanying changed circumstance or other triggering event under 12 CFR § 1026.19(e)(3)(iv)” and disclosures are timely issued to the consumer. See TILA-RESPA Integrated Disclosure FAQs, Lender Credits, No. 10. On its face, this indicates that a lender can reduce disclosed lender credits in connection with a changed circumstance event.

Despite this, TRID regulations and commentaries only discuss reduction of a lender credit in the context of interest rate dependent charges (i.e., charges that change because the loan’s interest rate changed from floating to lock). See 12 CFR 1026.19(e)(3)(iv)(D) and official comments 1. Furthermore, TRID regulations and commentaries do not provide an example of a valid reduction of lender credits. See 12 CFR 1026.19(e)(3)(i) and official comment 5. Consequently, many lenders may continue the practice of reducing lender credits during a changed circumstance event only if they relate to interest rate dependent charges. To adequately address any such reservation among lenders, the CFPB may need to consider amending TRID regulations and commentaries to expressly match the language presented in the new FAQ.

Despite potential reservations, lenders should welcome this additional guidance on lender credits from the CFPB as it seeks ways to address uncertainties in the industry.

On Friday, the Consumer Financial Protection Bureau (CFPB) published a supplement to its Spring 2019 notice of proposed rulemaking on third-party debt collection. The proposed supplemental rule addresses the collection of time-barred debt, which is debt that has run past any applicable statute of limitations.

Specifically, the proposed supplemental rule requires debt collectors to make certain disclosures if the collector knows or should know that a debt is time-barred. It would also require that debt collectors disclose, if applicable, that a payment made on a debt can revive the statute of limitations and enable the collector to sue to collect.

“The bureau proposes to prohibit collectors from using non-litigation means (such as calls) to collect on time-barred debt unless collectors disclose to consumers during the initial contact and on any required validation notice that the debt is time-barred,” according to a news release from the CFPB.

On May 7, 2019, the CFPB released its initial 538-page Notice of Proposed Rulemaking that would update the FDCPA generally. The proposed rule would be the first major regulatory update to the FDCPA since its enactment in 1977 and gives much-needed clarification on the bounds of federally regulated activities of “debt collectors,” as that term is defined in the FDCPA, particularly for communication by voicemail, email, and texts. Friday’s proposed supplemental rule accompanies, rather than replaces, the bureau’s existing proposed rule. Importantly, it includes four new templates for Time-Barred Debt Disclosure (Model Forms B-4 through B-7).

Troutman Sanders previously prepared a whitepaper reflecting the current best understanding of key provisions of the original proposed rule which can be found here.

The FDCPA does not generally apply to creditors collecting their own debts, and thus would not generally apply to banks or other first-party creditors; however, creditors placing debt with third-party debt collectors must monitor vendor compliance with the FDCPA.

The supplemental proposal is the result of numerous comments made on the original proposed rule concerning the collection of time-barred debt. As we have previously reported, courts across the federal circuits have struggled with what is a sufficient disclaimer regarding the statute of limitations on time-barred debt.

Comments on the supplemental notice will be due 60 days after it is published in the Federal Register, which has not yet occurred.

We will continue to provide updates to the Proposed Rule and its supplement through our Consumer Financial Services Law Monitor blog.

Recently, the Consumer Financial Protection Bureau released its Supervisory Highlights, No. 21 (Winter 2020) (“the Report”). The Report discusses findings related to many of the CFPB’s examinations regarding debt collection, mortgage servicing, payday lending, and student loan servicing that were completed between April and August 2019.

Key takeaways from the Report are as follows:

Debt Collection

The CFPB found that “one or more debt collectors failed to disclose in their subsequent communications that those communications were from a debt collector.” It further found that debt collectors “failed to send the prescribed validation notice within five days of the initial communication with the consumer regarding collection of the debt, where required.” As a result, “the collectors revised their [FDCPA] policies and procedures, monitoring and/or audit programs, and training.”

Mortgage Servicing

The Report stated “that one or more servicers violated Regulation X, by failing to provide certain required loss mitigation notices, providing incomplete notices, or not providing notices within the time required by the regulation.” Such violations included “failing to notify borrowers in writing that an application was either complete or incomplete within 5 days of receiving the application;” “not provid[ing] a written notice stating the servicers’ determination of available loss mitigation options within 30 days of receiving the complete loss mitigation application;” and, also, “not providing a written notice with the required consumer information when it offered borrowers the short-term payment forbearance program based upon evaluation of an incomplete loss mitigation application.”

The violations regarding a failure to provide the required information after offering short-term loss mitigation took place after automatically granting short-term payment forbearances, based on phone conversations with borrowers in a disaster area who had experienced home damage or incurred a loss of income from the disaster. The CFPB stated that “[t]he borrowers’ conversations with the servicers constituted loss mitigation applications under Regulation X.” However, because the servicers were attempting “to handle an unexpected surge in applications due to natural disasters and occurred during a time period where the servicers were making specific efforts to address borrower needs arising from the natural disasters,” the CFPB did not issue any matters requiring attention. Further, the servicers “developed plans to enhance staffing capacity in response to any future disaster-related increases in loss mitigation applications.”

Payday Lending

The Report also focused on the CFPB finding numerous violations of “Regulation Z, Regulation B, and unfair acts or practices” by payday lenders. These violations included the lenders failing to apply borrowers’ payments to their loans, continuing to assess interest as if the consumers had not made payments, and incorrectly treating the borrowers as delinquent. The violations also included inaccurately disclosing consumers’ APRs and charging borrowers a fee that was not authorized by their loan contracts, and which the contracts stated would be paid by the lenders, as a condition of paying, or settling, delinquent loans. Such a fee was either incorrectly described as a court cost (which the contracts would have required the borrowers to pay) or not disclosed at all. This led to a number of borrowers, ultimately, paying more than they owed.

Student Loan Servicing

The CFPB found that one or more servicers violated Dodd-Frank “by stating monthly amounts due in periodic statements that exceeded those authorized by consumers’ loan notes, where either the servicers automatically debited incorrect amounts or, for borrowers not enrolled in auto debit, the borrowers submitted an inflated payment or were assessed a late fee for failing to submit the inflated payment by the due date.” As a result, the student loan servicers “conducted reviews to identify and remediate affected consumers,” as well as instituted processes to mitigate any future errors.

On January 29, the U.S. House of Representatives passed the Comprehensive Credit Act (“the Act”). Packaging several Democrat-sponsored bills together, the Act garnered the support of all but two of the present House Democrats. If enacted into law, the Act would significantly change the information that credit reports can contain, expand the processes available to consumers to dispute their credit reports, and provide for increased government oversight of the credit reporting system. Specifically, the Act would do the following:

  • Give the Consumer Financial Protection Bureau regulatory oversight of credit scoring models, including authority to review and prohibit new types of credit scoring models in certain circumstances;
  • Establish a new process for consumers to appeal the results of credit dispute investigations with Consumer Reporting Agencies (“CRAs”);
  • Reduce the overall time that certain types of adverse credit events remain on an individual’s credit report;
  • Limit the use of student and medical debts on credit reports in some situations;
  • Prohibit credit reports from containing information related to any mortgage loan that either resulted from, or is related to certain predatory lending activities;
  • Prohibit in general the use of credit scores by employers for hiring decisions; and,
  • Require nationwide CRAs to provide credit scores without cost to consumers when they receive their free annual credit reports.

Having failed to secure a single House Republican vote in favor of its passage, the Act is unlikely to pass in today’s Republican-led Senate. It nevertheless provides a glimpse into the changes that the credit industry may expect if Democrats gain control of the Presidency and both houses of Congress.

We will continue to monitor and report on any developments related to the Act or any others which would impact the credit reporting industry.

This month, the Consumer Financial Protection Bureau and the Department of Education entered into a Memorandum of Understanding intended to enhance their level of collaboration with respect to complaints and concerns raised by student loan consumers.

The agreement provides that the two federal agencies will, to the extent permitted by privacy laws, share consumer complaint information and meet on a regular basis to consider the substance of the complaints.

It also defines their respective responsibilities for consumer complaints, to avoid overlap. For example, complaints related to the origination of federal student loans will be referred to the Department of Education, whereas complaints about private student loans and loan servicing will be directed to the CFPB.

The CFPB also is developing technology to share its complaint analytical tools with the Department of Education, so that the Department will have access to all complaints that involve a federal student loan.

The Memorandum of Understanding is a renewed effort at collaboration between two federal agencies with a rocky history and significant subject matter overlap. In 2017, United States Secretary of Education Betsy DeVos publicly criticized the CFPB for overreaching beyond its intended scope and refused to continue sharing certain information with the CFPB. The CFPB has, in turn, complained that this lack of information from the Department inhibits its ability to regulate and investigate student loan servicers.

This recent Memorandum of Understanding also comes only a few days after two Democratic senators publicly criticized the CFPB director, contending that the agency was delinquent in its duty to oversee student loan servicers due to a “failure to stand up to Secretary DeVos.” It remains to be seen whether the recent Memorandum of Understanding will mollify vocal critics of both agencies and their handling of student loan complaints.

The Eastern District of New York recently decided a motion to dismiss, denying Defendant’s motion as to Plaintiff’s claims under the FCRA and dismissing Plaintiff’s claims under the FDCPA. A copy of the Court’s opinion can be found here. This case involved claims concerning a disputed tradeline on Plaintiff’s credit report. The Court found that Plaintiff, as he submitted his credit dispute through the Consumer Financial Protection Bureau’s (CFPB) portal, which then could have been transmitted to a consumer reporting agency, sufficiently alleged that he submitted his credit dispute to a consumer reporting agency. The Court further found that, as Plaintiff failed to show any communication from Defendant to a consumer reporting agency that failed to report the debt as disputed, Plaintiff failed to sufficiently allege a claim under the FDCPA.

Plaintiff filed a complaint against Defendant alleging a violation of the FCRA for failing to reasonably investigate Plaintiff’s credit dispute, and violations of the FDCPA due to Defendant failing to notate the account as in dispute and attempting to collect a debt not owed. The dispute arose in December 2018, when Plaintiff filed a dispute through the CFPB online dispute portal concerning a tradeline on his credit report for Defendant’s collecting an obligation. On January 24, 2019, Defendant sent correspondence to Plaintiff indicating that the debt was owed and that the letter was an attempt to collect a debt. Defendant contended that the tradeline was subsequently updated prior to Plaintiff filing the Complaint to remove the disputed tradeline. Plaintiff further sought damages under the FDCPA for emotional distress and time spent addressing the disputed tradeline.

Plaintiff alleged that Defendant violated the FCRA by failing to reasonably investigate the dispute and by failing to report the account as disputed. In its Motion to Dismiss, Defendant argued that, as Plaintiff initiated his dispute through the CFPB portal, and not directly with a consumer reporting agency, the FCRA does not apply. The Court looked to the relevant sections 1681s-2(b) and 1681i(a)(2) of the FCRA, which provide a private right action against any furnisher who receives notice of a credit dispute directly from a consumer reporting agency. In its opinion, the Court found that the FCRA could apply to Plaintiff’s claims, as the Court noted that further discovery would be needed into how the CFPB portal works. Namely, the Court found that the FCRA could apply to Plaintiff’s claims if his dispute submitted through the CFPB portal then went directly to a consumer reporting agency, akin to the dispute being filed by Plaintiff with a consumer reporting agency, rather than through the CFPB. The Court accordingly denied Defendant’s motion as to Wexler’s FCRA claim.

The Court did grant Defendant’s motion as to Plaintiff’s FDCPA claim. Plaintiff asserted that Defendant violated the FDCPA by failing to note that the account was in dispute, and acted to collect a debt not owed, in violation of § 1692e(8). The Court, looking at the timeline, found that Plaintiff disputed the debt in December 2018. The Court further found that, on January 18, 2019, the consumer reporting agency wrote to Plaintiff stating that the tradeline was being investigated, and on January 24, 2019, Defendant sent the requested information concerning its investigation to Plaintiff. Based on the relevant dates of Plaintiff’s dispute and Defendant’s response, it was difficult for the Court to conclude that Defendant reported the trade line delinquent to the consumer reporting agency after Defendant had learned of the dispute. By the time the Complaint was filed, Plaintiff conceded that the delinquent trade line was no longer appearing on his credit report. The Court further found that Plaintiff failed to point to any communication from Defendant stating that the account was not in dispute after the January 24, 2019 letter, which the Court noted was not sent to a consumer reporting agency. The Court concluded that, as Plaintiff failed to show which communication from Defendant failed to show the debt as disputed, and further found that, as the negative trade line was removed at some point between Plaintiff filing a dispute through the CFPB portal and the Complaint being filed, that Plaintiff failed to plausibly allege a violation of the FDCPA.

This case shows how swift action by a collection agency can lead to reduced liability under the FDCPA. While the Court left open Plaintiff’s FCRA claims due to needing additional information concerning the CFPB portal, this case is a positive decision for the collection industry as to the FDCPA claims. Prompt action by debt collectors in response to consumer disputes can make the difference between a lawsuit getting dismissed and extended litigation costs.

Last week, the Consumer Financial Protection Bureau issued a Policy Statement announcing a new designation for CFPB guidance, which will be known as “Compliance Aids.” In its announcement, the CFPB explained the legal status and effect of this designation. The full Policy Statement can be located here and became effective on February 1.

The Policy Statement explains that one of the CFPB’s most important roles is to provide clear and useful guidance to regulated entities. While the CFPB always has provided compliance resources, this new category of Compliance Aids “will provide the public with greater clarity regarding the legal status and role of these materials.” The announcement does not change the status of existing compliance resources that already are in effect, such as instructional guides, factsheets, compliance checklists, and compliance bulletins, but some materials may be re-issued as Compliance Aids if doing so is in the public interest and as resources permit.

In its announcement, the CFPB clarified that Compliance Aids will not be used to make decisions that bind regulated entities, given that they are not “rules” under the Administrative Procedure Act. Instead, Compliance Aids will present the requirements of existing rules and statutes in a manner that is useful for compliance professionals, such as including practical suggestions for how regulated entities may choose to comply, and accurately summarizing and illustrating the underlying rules and statutes.

The CFPB stressed that regulated entities are not required to follow the Compliance Aids and, instead, only are required to comply with the underlying rules and statutes. However, the CFPB noted that, when exercising its enforcement and supervisory discretion, it does not intend to sanction entities that reasonably rely on the Compliance Aids.

On January 24, the Consumer Financial Protection Bureau issued a policy statement that limits the “abusive acts and practices” standard created by the 2010 Dodd-Frank Act. While the policy statement does not define what constitutes an “abusive” act or practice, and in fact leaves many important questions unanswered, it plainly limits the scope of the abusiveness standard, which is welcome news to companies within the scope of the CFPB’s authority.

With the 2010 Dodd-Frank Act, Congress gave the CFPB broad authority to prohibit “unfair, deceptive, or abusive acts or practices.” The unfairness and deception standards were largely carried over from the Federal Trade Commission Act, which prohibits “unfair or deceptive acts or practices.” But the abusiveness standard was something of an innovation, and in fact, the Dodd-Frank Act was the first federal law to prohibit “abusive” acts or practices with respect to all consumer financial products and services.

But the Dodd-Frank Act did not clearly define the abusiveness standard, and the CFPB’s enforcement and supervisory efforts to date have not created a clear standard. That has frustrated many companies subject to the CFPB’s broad enforcement and supervisory authority, who argue that the uncertainty created by the abusiveness standard chills innovation and creates unnecessary compliance burdens.

Responding to those concerns, the CFPB’s policy statement identifies three principles that will now govern the abusiveness standard.

  • Focus on Consumer Harm. The CFPB will focus on consumer harm, challenging conduct as abusive only if the harms caused by the conduct outweigh its benefits. This limitation mirrors a limitation Congress imposed on the unfairness standard. And it suggests that the CFPB will not challenge conduct that harms a vulnerable subset of consumers if the conduct provides substantial benefits to consumers generally.
  • Avoid Duplicative Claims. The CFPB will avoid duplicative pleading, challenging conduct as abusive only when the conduct does not fall with the broad scope of its authority to prohibit unfair or deceptive conduct. This limitation is intended to bring “more certainty” to the abusiveness standard over time by forcing both the CFPB and the courts to distinguish conduct that falls within the scope of the abusiveness standard from conduct that falls within the scope of the unfairness or deception standards.
  • Seek Monetary Relief Only from Bad Actors. The CFPB will not seek monetary remedies in actions alleging standalone abusiveness claims if the target of the action “made a good faith effort to comply with the law based on a reasonable – albeit mistaken – interpretation of the abusiveness standard.” This limitation recognizes that, despite the CFPB’s policy statement, the abusiveness standard is still not clearly defined, such that companies subject to the CFPB’s authority “must make decisions about whether to engage in conduct notwithstanding uncertainty.”

In announcing the policy statement, CFPB Director Kathleen Kraninger encouraged companies subject to the CFPB’s authority to focus on compliance. “I am committed to ensuring we have clear rules of the road and fostering a culture of compliance – a key element in preventing consumer harm,” she said. “We’ve developed a policy that provides a solid framework to prevent consumer harm while promoting the clarity needed to foster consumer beneficial products as well as compliance in the marketplace, now and in the future.” Kraninger’s comments echo statements made in the CFPB’s 2013 Responsible Business Conduct Bulletin, which noted that the CFPB would “consider awarding affirmative credit” in the context of enforcement actions if companies had engaged in “responsible conduct” via compliance programs that included “self-policing, self-reporting, remediation, and cooperation.”

Troutman Sanders regularly defends companies before the CFPB and also regularly assists clients in building out and maintaining their compliance programs.