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SEC ordered to pay $1.8 mil. to defendants for misrepresentations
On May 28, the U.S. District Court for the District of Utah ordered the SEC to cover all attorney fees and related costs as part of sanctions imposed following the court’s earlier emergency ex parte relief it entered into “improvidently.” The SEC originally filed a complaint against the defendants for allegedly violating federal securities law. Concurrently, the SEC sought a temporary restraining order (TRO), a freeze on assets, and appointed a receiver, all of which were granted by the court.
However, in September 2023, the defendants filed a motion to dissolve the TRO and argued the SEC made misrepresentations to the court. The following month, the court agreed with the defendants, dissolving the TRO and receivership. The SEC moved to dismiss the case without prejudice in January. In March, the court imposed sanctions against the SEC for “bad faith conduct” regarding the TRO. Additionally, in a separate dismissal order, the court issued an order to dismiss the case without prejudice.
Siding with the defendants, the court determined the proper method for calculating costs was straight fee recovery, allowing the defendants to submit their specific legal fees rather than using a lodestar method. The court granted most defendants’ fee petitions and the receiver’s application for fees and costs, ordering the SEC to pay over $1.8 million.
OCC releases May CRA evaluations for 19 institutions
On June 3, the OCC released its Community Reinvestment Act (CRA) performance evaluations for May. The OCC evaluated 19 entities including national banks, federal savings associations, and insured federal branches of foreign banks. The assessment framework incorporated four possible ratings: Outstanding, Satisfactory, Needs to Improve, and Substantial Noncompliance. Of the 19 evaluations reported by the OCC, eleven entities were rated “Satisfactory,” and eight entities were rated “Outstanding.” There were no institutions that received a rating of “Needs to Improve.” A full list of the bank evaluations is available here. In the FAQ section regarding the implementation of the CRA, the OCC detailed how it evaluated and rated financial institutions both on an institutional level and a community level. This explanation included an examination of institutional factors such as capacity, constraints, business strategies, competitors, and peers, as well as an analysis of the characteristics of the communities served by these institutions, which covered demographic particulars, economic data, and the availability of lending, investment, and service opportunities.
Ginnie Mae updates its guide to streamline processes for eMortgages
On May 31, Ginnie Mae published its APM 24-09: Updates To Digital Collateral Program Guide to clarify, update, remove and expand policies on digital products, such as notes, closing systems, vaults, applicants and registries. The program may help streamline processes for digital mortgages known as “eMortgages.”
The guide clarified eligibility requirements for issuers and custodians, aligning technology standards with industry best practices, and expanding the types of mortgage pools that can include digital loans. Additionally, Ginnie Mae clarified various requirements related to eMortgages, such as handling defects, transfers, and assumptions. This followed other efforts to promote eMortgages, including Ginnie’s efforts to securitize digital collateral in the same pools as traditional paper collateral (as covered by InfoBytes here). The Digital Collateral Program Guide can be found here, and the changes will go into effect on June 1.
CFPB proposes final rule for registering nonbanks for supervision
On June 3, the CFPB issued a final rule to require the registration and reporting of nonbank financial institutions that have been subject to public orders resulting from regulatory actions. The Bureau’s stated goal in establishing the registry was to assist the public and enforcement agencies in identifying repeat offenders. The registry will compile and maintain all public orders issued by an agency or court, involving certain nonbank entities that were issued at least in part by an action or proceeding by any federal, state or local agency. The final rule mandated those nonbank covered entities—excluding depository institutions and credit unions—must register with the Bureau when they are subject to a public order. Under the CFPA, Section 1022(b)(1) authorized the Bureau to create rules “as may be necessary or appropriate to enable the Bureau to… carry out the purposes and objectives of the Federal consumer financial laws.” Section 1024(b) authorized the Bureau to exercise supervisory authority over certain nonbank entities. The final rule will also require nonbank entities to submit an annual written statement confirming compliance with each public order.
This rule will apply to all covered entities, specifically nonbanks, which have entered into an order with an effective date on or later than January 1, 2017, and which remain in effect following the effective date of the final rule. Every nonbank that was named in an order and was covered under the rule must register, submitting all information required including the executed order. However, nonbanks that were subject to an order published on the NMLS’s Consumer Access website (other than an order in which the CFPB was involved) can elect for a simplified option.
This action will be the latest step in the Bureau’s efforts to expand its nonbank supervision program. As previously covered by InfoBytes, the CFPB released a supervisory designation over a nonbank company in March since that company’s conduct posed an alleged risk to consumers (here), and in April the Bureau released its procedural rule to change how it will supervise nonbanks (here). In a prepared statement, the Director of the CFPB, Rohit Chopra, expressed that the final rule was designed to aid the CFPB and other law enforcement agencies to “monitor and track repeat offenders in order to better hold them accountable” regardless of companies reoffending. The director emphasized that court or enforcement orders are not a “tipsheet or set of suggestions.” This rule will go into effect on September 16.
CFPB finalizes standards setting body component of open banking rule
On June 5, the CFPB announced it finalized in part its proposed Personal Financial Data Rights rule, thus establishing the minimum qualifications necessary for the Bureau to become a recognized industry standard setting body when the full rule becomes final. Last October, the CFPB proposed the Personal Financial Data Rights rule to implement Section 1033 of the CFPA (covered by InfoBytes here) which was intended to offer consumers more control over their financial data and more consumer protections for misused data.
After considering relevant public comments, the CFPB made several changes to the sections concerning standard setters and the standards they issue. Commenters asked for clarity regarding changes in standards, such as when a consensus standard ceases to have consensus status, and how it could potentially cause market uncertainty. In response, the Bureau replaced the term “qualified industry standard” with “consensus standard” and added a newly defined “recognized standard setter” term. The final rule defined “consensus standard” to clarify when a given standard will be a consensus standard, and also added that a “consensus standard” must be one that will be adopted and maintained by a recognized standard setter. In response to concerns about market uncertainty, the CFPB responded that they expect revocation of recognition for a standard setter to be a rare occurrence.
Regarding periodic review, the final rule extended the maximum duration of the CFPB’s recognition of a standard-setting body from the proposed duration of three years to five years. The Bureau expects this change will incentivize standard-setting bodies to obtain recognition. The final rule included “data recipients” as an interested party in response to commenter concern that certain fintech sectors may be excluded. Additionally, meeting the criteria in the final rule is just the starting point for approval, as the CFPB may also assess whether the standard-setting body will be committed to developing and upholding open banking standards.
The final rule also included a guide that detailed how standard setters can apply for CFPB recognition, how the Bureau will evaluate applications, and what standard setters can expect once recognized. The final rule will go into effect 30 days after publication in the Federal Register.
CFPB releases semi-annual report on mid-year 2023
On June 4, the CFPB released its semi-annual report to Congress, for the period beginning April 1, 2023, and ending September 30, 2023. The report highlighted rules and orders, complaints, supervisory and enforcement actions, and fair lending initiatives from the Bureau. The Bureau provided an overview of three final rules: a final rule on its authority over nonbanks in determining their risk, a final rule on small business lending under the ECOA, and an interim final rule in helping transition the LIBOR changes to reflect the LIBOR Act. Additionally, the report included a compilation of reports, guidance and spotlights on different consumer finance issues. Looking ahead, the Bureau noted its upcoming rules following September 2023 with four proposed rules. One on personal financial data rights, another on defining the participants for digital consumer payment applications, another on overdraft lending, one on fees for instantaneously declined transactions, and a final rule on credit card penalty fees.
During the period from October 2022 to September 2023, the Bureau received 1.55 million consumer complaints. Of these, around 1.2 million complaints were sent to the relevant companies for review. When broken out by category, 79 percent of all consumer complaints were related to credit or other consumer reporting, with 7 percent on debt collection, 4 percent on credit cards, 4 percent on checking or savings, and 2 percent on mortgages; the remaining 4 percent was spread among a variety of consumer finance products.
During the semi-annual reporting period, the CFPB executed a total of 55 public supervisory and enforcement actions. On state consumer financial law, the Bureau noted its ongoing complaint against an education firm accused of engaging in deceptive marketing and unfair debt collection practices with ten state attorneys general (as covered by InfoBytes here). Additionally, there were three lawsuits submitted along with the New York State Attorney General. Finally, for fair lending, the Bureau discussed its enforcement and rulemaking, with the issuance of a proposed rule on quality for Automated Valuation Models for real estate collateral securing mortgage loans.
President Biden vetoes SEC crypto-asset rule nullification resolution
On May 31, President Biden vetoed H.J.Res. 109 subsequently returning the bill to Congress. This resolution, as previously covered by InfoBytes, was passed by the U.S. House of Representatives on May 8 to nullify an SEC Staff Accounting Bulletin 121 (SAB 121). The guidance, which has been in effect since April 11, 2022, described how the SEC staff expected entities to account for and disclose their custodial obligations to “safeguard crypto-assets held for their platform users.” In his veto message to the House, President Biden stated that the resolution would “inappropriately constrain” the SEC’s ability to “set forth appropriate guardrails and address future issues.” The resolution will now be sent back to the House of Representatives and would require an override vote of two-thirds of the House.
New Jersey proposes disparate impact discrimination rule
On June 3, New Jersey Attorney General, Matthew Platkin, and the state’s Division on Civil Rights announced a proposed rule that described and clarified prohibitions against disparate impact discrimination under the New Jersey Law Against Discrimination (LAD), including employment, housing, places of public accommodation, credit, and contracting. The proposed rule provided examples of policies and practices that may result in a disparate impact on members of a protected class under the LAD.
The proposed rule aimed to clarify that the LAD outlawed practices or policies that have an adverse impact on members of a protected class, regardless of whether there was intent to discriminate. Such practices or policies were only permissible if they were necessary to attain an important and legitimate non-discriminatory goal and there was no alternative method that was less discriminatory and equally effective in achieving that goal. The rule would codify largely the existing legal standard and burdens of proof used in New Jersey and Federal courts when reviewing claims of disparate impact discrimination pursuant to the LAD for determining whether a practice or policy was discriminatory unlawfully, along with the framework used in evaluating claims of disparate impact. Comments on the proposed rule must be received by August 2.
Colorado extends its money transmitter regulations
On June 3, Colorado enacted HB 1328, (the “Act”), which will extend the state’s regulation of money transmitters until September 2030. The law had previously been scheduled to sunset on September 1. The Act will implement the recommendations of the Department of Regulatory Agencies, as specified in the Department's sunset review of the regulation of money transmitters. Specifically, the Act will (i) authorize the State Banking Board to suspend a money transmitter’s license and issue cease and desist orders; (ii) expand the requirement to furnish surety bond coverage to include all money transmission, rather than any exchange; (iii) increase the maximum penalty for failure to allow an examination from $100 to $1,000 per day the refusal continues and for failure to report up to $750 per day; and (iv) expand the licensing exemption to cover out-of-state banks. The Act will go into effect 90 days following the adjournment of the General Assembly, assuming a referendum petition will not be filed.
District Court denies class certification in lending discrimination suit
On May 30, the U.S. District Court for the Eastern District of Virginia entered an opinion denying class certification in a suit accusing a credit union (defendant) of lending discrimination. Each plaintiff applied to defendant for at least one home loan product, including first-lien mortgages, VA-backed loans, and refinancings. Plaintiffs’ complaint alleged that defendant’s mortgage underwriting policies violated the Fair Housing Act (the FHA) and the ECOA because they have had a “disparate impact on minority loan applicants” and defendant’s “refusal to correct those discrepancies constitutes intentional discrimination.” Plaintiffs based their claims on three independent reports analyzing publicly-available HMDA data from 2019-2022.
The court found that plaintiffs failed to establish a disparate treatment claim under the FHA, the ECOA, section 1981, and state law. Among other things, the court found that plaintiffs failed to address defendant’s argument that the data relied on in the reports lacked important metrics relating to credit scores and debt-to-income ratios. The court reasoned that plaintiffs’ sole reliance on reports analyzing defendant’s HMDA data – absent other allegations of evidence of discriminatory intent – did not make out a plausible claim of intentional discrimination. Moreover, the court found defendant’s argument persuasive that some of the plaintiffs attained loans elsewhere at higher interest rates than the loans originally sought from defendant, which suggested that plaintiffs were unqualified for the lower-interest rate loans for which they originally applied.
The court did, however, find that the complaint sufficiently pled a claim for disparate impact under the FHA and the ECOA at the motion to dismiss stage because the statistical analyses cited in the complaint revealed a disparate impact among non-white loan applicants and the underwriting algorithm and process was alleged to have caused the disparity. However, the court cautioned that if plaintiffs later failed to link during discovery the described “secret” underwriting process to the precise disparities and adverse consequences experienced by plaintiffs, the court may revisit whether the claim can survive at summary judgment.
Finally, the court struck the class allegation because the circumstances of plaintiffs’ loan application processes are too varied. Even though the proposed class was denied, plaintiffs may proceed on their FHA and ECOA disparate impact claims.