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CFPB’s payday lender rule to begin in March 2025
On June 14, the CFPB published a press release announcing that its payday lender rule from 2017, titled “Payday, Vehicle Title and Certain High-Cost Installment Loans,” will take effect on or around March 30, 2025. The rule will target unfair and abusive practices in short-term lending and will aim to curb lenders’ repeated attempts to withdraw payments from consumers’ accounts even after knowing the accounts may have nonsufficient funds. The CFPB found that such practices resulted in accumulated fees for consumers such as nonsufficient fund fees and overdraft fees. The Bureau also maintained that repeated attempts to withdraw payment from a consumer’s account rarely benefitted lenders because once a withdrawal fails, consecutive attempts are unlikely to succeed.
As previously covered by InfoBytes, the Bureau’s payday lender rule included a “two-strikes-and-you’re-out” rule, which would prohibit lenders from attempting further withdrawals after two failed attempts without the borrower’s explicit authorization. The rule was supposed to take effect in 2019 – however, the rule’s implementation was delayed due to a challenge by an industry trade group. A court order pausing the rule will expire 286 days after the Supreme Court issued a decision in CFPB v. CFSA, which it did so on June 17. In CFPB v. CFSA, the Supreme Court held that the CFPB’s funding structure was constitutional (covered by InfoBytes here).
Senator Warren urges Fed vote on Basel III requirements
On June 17, in a letter to Fed Chair, Jerome Powell, Senator Elizabeth Warren (D-MA) requested information regarding discussions of potentially cutting the Basel III capital requirements in half.
Warren highlighted reports that Powell was considering reducing Basel III capital requirements and was allegedly influenced by lobbying efforts. Warren also referenced Powell's public comments suggesting significant changes or elimination of these requirements. She cited a news article detailing the Fed's alleged plan to lessen the mandated capital increase for major U.S. banks and reports of lobbying efforts, bypassing the Fed's Vice Chair for Banking Supervision, Michael Barr.
Warren expressed concern that such a move could compromise the financial stability and security of middle-class and working families, while benefiting wealthy investors and CEOs. She argued that this contradicted the purpose of the Basel III rules, which were designed to prevent financial crises.
Warren also discussed ongoing risks in the banking and financial sector, including reports of potential regional bank failures due to troubled commercial real estate loans. She challenged the arguments made by large banks against increasing capital reserves and accused Powell of taking lucrative deals following bank failures, suggesting that Powell's actions undermined the role of the Vice Chair for Banking Supervision.
President Biden taps Goldsmith Romero to become next FDIC Chair
On June 13, President Biden announced Christy Goldsmith Romero as his nominee for FDIC Chair. Goldsmith Romero most recently served as a Commissioner at the CFTC since 2022, where she sponsored the CFTC’s Technology Advisory Committee examining cybersecurity, artificial intelligence, digital assets, and blockchain technologies. Goldsmith Romero spent 12 years at the Treasury where she served as the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), as well as on a Council of Inspectors General overseeing the FSOC. Her oversight of SIGTARP resulted in the recovery of more than $11 billion in civil charges against large financial institutions and criminal charges against hundreds of individuals. Goldsmith Romero has also held positions at the SEC as well as in academia as a law professor.
Chopra testifies at House, Senate committee hearings
On June 12, the Senate Committee on Banking, Housing, and Urban Affairs held a hearing to address the CFPB’s Semi-Annual Report to Congress. The CFPB Director, Rohit Chopra, in his opening statement addressed the Committee to report on the agency's recent activities and initiatives including its efforts in financial data privacy, open banking rules, and the protection of financial data from surveillance and misuse. Additionally, Chopra highlighted the CFPB’s work in the credit card market, having issued rules seeking to reduce certain credit card fees, foster competition, and protect consumers’ points and rewards. Chopra expressed a willingness to collaborate with the Committee to further address the country’s financial challenges.
Ranking Member Tim Scott (R-SC) warned that the Supreme Court’s recent ruling on the constitutionality of the CFPB’s funding structure was “not a green light for your progressive wish list.” Ranking Member Scott also questioned the CFPB’s issuance of civil investigative demands (CIDs), providing an example of a lengthy multi-year audit that resulted in no CFPB action. Additionally, Senator Reed (D-RI) raised concerns about the Buy Now, Pay Later (BNPL) market, noting that unlike credit card companies, BNPL firms do not consistently report consumer repayments to credit bureaus. He noted that the situation could lead to issues where consumers do not receive credit score benefits for responsible credit usage and where the industry lacks visibility into a consumer's total debt burden. Director Chopra acknowledged Reed’s concerns, citing that auto and mortgage lenders are worried about the lack of BNPL data in credit reports, which could affect their ability to assess borrowers' creditworthiness. Chopra suggested that while reporting is not currently mandated by federal law, it was an area of concern for the CFPB. Additionally, Senator Lummis (R-WY) highlighted “junk fees” and how the concept is being applied in the mortgage industry. Lummis mentioned a working paper by CFPB staff that credited consumer education provided by banks for a particular finding regarding rural borrowers’ understanding of the mortgage process. She followed by asking Chopra if the Bureau considered consumer education a valuable service provided by community banks because, according to Lummis, the cost to educate consumers was being labeled as a “junk fee” by the administration. Chopra’s response noted that there was no attempt to label all mortgage closing costs as “junk fees.” Senator Kennedy (R-LA) expressed confusion regarding the funding of the CFPB, referencing a distinction between revenue and earnings. He cited the statute that governs the CFPB's funding, which stated the agency received its funds from the combined earnings of the Fed. Kennedy pointed out that since September 2022, the Fed had been losing money and therefore had no earnings to transfer, questioning how the CFPB was entitled to any funds under these circumstances. Director Chopra acknowledged the concern and suggested that it was a theory the CFPB has previously explored.
The following day, the House Financial Services Committee also held a hearing to address the CFPB’s Semi-Annual Report. Representative McHenry (R-NC) reflected on the Supreme Court's decision to uphold the funding structure of the CFPB as established by the Dodd-Frank Act. He interpreted the court's opinion as affirming Congress's authority over funding mechanisms and suggested that Democrats join Republicans in creating legislative plans to make the CFPB more accountable. McHenry criticized Director Chopra's leadership, claiming the CFPB under Chopra had become politicized and was neglecting consumer protection in favor of political objectives. He also accused the CFPB of unfairly characterizing financial institutions and questioned Chopra's involvement in the FDIC's internal issues, referencing a toxic workplace culture and leadership problems. On the other hand, Representative Waters (D-CA) highlighted that the CFPB was “combating excessive and illegal junk fees, fighting against housing discrimination and redlining, and holding mega-banks accountable for breaking the law and harming consumers.”
Addressing the Bureau’s proposed rule under Section 1033 of the Dodd-Frank Act, which governed consumer access to financial records, McHenry expressed concerns that the CFPB's proposed regulations might “entrench” those in the financial industry by valuing their hold on financial data. Director Chopra responded by emphasizing the need to prevent practices like bait-and-switch, where financial products such as auto loans are offered with the ulterior motive of “harvesting” and selling data. When McHenry asked for a timeline, Chopra indicated the aim to finalize the rule by October.
Among questions from other representatives, Representative Wagner (R-MO) questioned Director Chopra about the principles of risk-based pricing in the financial industry. Chopra stated that while it was not mandated, risk-based pricing was commonly used by institutions to appropriately measure risk. Wagner expressed concerns that the CFPB's new rules on credit card late fees and overdrafts could undermine this principle. Chopra disagreed, arguing that the rules would encourage better risk-based pricing, and he did not see a connection between aligning late fees with Congressional guidelines and undermining risk-based pricing. Wagner then suggested the new rules could increase persistent debt among consumers. Throughout the discussion, Chopra insisted that the CFPB's actions were in line with common sense and Congressional prohibitions against unreasonable fees.
SEC extends deadline for FINRA SLATE rule decision
On June 10, the SEC extended the review period for a proposed rule change by FINRA. The proposed FINRA Rule 6500 Series, concerning the Securities Lending and Transparency Engine (SLATE), would require the reporting of securities loans and provide dissemination of related information for the public. Initially published for public comment on May 7, the rule's decision deadline has now been moved to August 5 to allow the SEC adequate time to consider feedback and deliberate on the rule’s changes.
North Carolina Supreme Court upholds credit union’s right to enforce unilaterally inserted arbitration clause
On May 23, the North Carolina Supreme Court ruled that a defendant credit union can enforce an arbitration clause added to a customer’s contract years after its inception. The case centered on a “Notice of Amendments” provision in the contract, which customers agreed to when opening accounts, allowing the credit union to unilaterally change contract terms with proper notice to the consumer.
In January 2021, the credit union notified the plaintiff that it was updating its membership agreement to include an arbitration requirement for certain disputes and a waiver of class actions. In March 2021, the plaintiff filed a class action lawsuit against the credit union, alleging that it was improperly collecting overdraft fees on accounts that were never overdrawn. The trial court denied the credit union's motion to compel arbitration, but the appeals court reversed that decision and remanded the case with instructions to stay the case pending arbitration, holding that the addition of the arbitration provision was enforceable.
The North Carolina Supreme Court addressed in its opinion whether the inclusion of the arbitration violated the implied covenant of good faith and fair dealing. The Court highlighted the economic necessity for companies to adapt contractual terms efficiently and found that amendments adhering to the original contract's subject matter met the covenant of good faith and fair dealing.
The court then turned to the question of whether the original agreement “reasonably anticipated” the changes and whether the changes reasonably related to “subjects discussed” in the agreement. The court held that the inclusion of an arbitration clause was foreseeable due to the original contract's dispute resolution terms, which stated that the agreement was subject to the laws of North Carolina and set the venue for any dispute. Since the agreement’s changes addressed the forum for disputes, the court deemed this to be within the “same universe of terms.” Moreover, the court determined the contract was not illusory because the language included in the change to the contract limited its scope by stating “[e]xcept as prohibited by applicable law.”
Finally, the court rejected the plaintiff’s argument that she did not accept the offer to arbitrate “through silence,” holding that there was an agreement between the credit union and the plaintiff that the credit union could change the terms upon proper notice, not with consent of the plaintiff.
Connecticut amends its Money Transmission Act
On June 6, Connecticut enacted HB 5211 (the “Act”), amending laws regulating virtual currency and money transmission. The Act updated "permissible investment" to include additional forms of assets and clarified that “cash” will include demand deposits and cash equivalents, such as international wires in transit to the payee, transmission receivables funded by debit cards or credit cards, and AAA-rated mutual funds. The Act also stated that after October 1, 2024, the owning, operating, solicitation, marketing, advertising, or facilitation of virtual currency kiosks will be considered to “money transmission” business and thus will require persons to be state licensed as a money transmitter.
Additionally, the Act will require money transmission licensees to maintain a detailed accounting plan on winding down operations, as well as meet certain conditions to terminate a licensee’s businesses. Furthermore, the Act will require licensees to communicate third party disclosure information to consumers, as well as provide a physical receipt for transactions to senders. The Act also expanded the banking commissioner’s authority to adopt forms and orders governing digital assets to expressly include nonfungible tokens.
Connecticut amends its Money Transmission Act
On June 6, Connecticut enacted HB 5211 (the “Act”), amending laws regulating virtual currency and money transmission. The Act updated "permissible investment" to include additional forms of assets and clarified that “cash” will include demand deposits and cash equivalents, such as international wires in transit to the payee, transmission receivables funded by debit cards or credit cards, and AAA-rated mutual funds. The Act also stated that after October 1, the owning, operating, solicitation, marketing, advertising, or facilitation of virtual currency kiosks will be considered to “money transmission” business and thus will require persons to be state licensed as a money transmitter.
Additionally, the Act will require money transmission licensees to maintain a detailed accounting plan on winding down operations, as well as meet certain conditions to terminate a licensee’s businesses. Furthermore, the Act will require licensees to communicate third party disclosure information to consumers, as well as provide a physical receipt for transactions to senders. The Act also expanded the banking commissioner’s authority to adopt forms and orders governing digital assets to expressly include nonfungible tokens.
California appellate court upholds ruling on debt collection practices
Recently, the California Court of Appeal for the First Appellate District upheld a ruling against a defendant and its related entities. Plaintiff had filed a class action lawsuit against the defendants, alleging that they had violated the FDCPA and California’s Unfair Competition Law (UCL) in their debt collection practices related to homeowners’ associate (HOA) assessments.
The case was removed from federal to state court after the parties agreed on the move. Plaintiff was permitted to amend her complaint to include allegations against the law firm representing the debt collector and its associates, asserting they were “alter egos” of the debt collector. The state court agreed to bifurcate the claims and first addressed the UCL claim. The court found in favor of plaintiff, ruling that defendant had violated the FDCPA (a prerequisite to finding liability under the UCL) and that the law firm was jointly and severally liable for restitution and attorney fees for class counsel.
On appeal, defendants contended first that the trial court incorrectly upheld the federal court's decision that a waiver of California Civil Code section 5655(a), which required the application of payments be first applied to assessments owed, was invalid. This waiver was included as part of the payment plan that plaintiff agreed to, but the federal court determined it was void as a matter of public policy. Second, the defendants argued that the court was incorrect that defendants breached the FDCPA by issuing pre-lien notices and letters before issuing a notice of default. Finally, the defendants challenged the trial court's decision to approve plaintiff’s request to split the trial and prioritize a non-jury trial on her claim under the UCL.
In denying defendants’ claims, the appellate court agreed that the section 5655(a) waiver was invalid because it contradicted public policy intended to protect homeowners. Additionally, the court doubted whether the collection agency’s pre-lien letter could reasonably be characterized as threatening foreclosure and agreed with the trial court that “the least sophisticated debtor would reasonably understand this language in [defendant’s] pre-[notice of default] letter as threatening foreclosure in violation of section 5720.” Finally, regarding the decision to bifurcate plaintiff’s claims, the court decided that defendant did not sufficiently demonstrate that the trial court had abused its discretion in granting plaintiff’s motion to bifurcate.
District Court highlights the importance of precise dispute letters when challenging debt collection
On June 6, the U.S. District Court for the Northern District of Alabama ruled on dueling motions for summary judgment in a suit against a debt collection agency for alleged violations of the FDCPA. The plaintiff contended the debt collection agency improperly handled the reporting of two accounts to credit reporting agencies, one of which the debt collection agency failed to identify as disputed after receiving a dispute letter from the plaintiff’s counsel, violating both § 1692e and § 1692f of the FDCPA.
First, the court concluded that the plaintiff’s § 1692f claim was defective because it was duplicative of the § 1692e claim. A claim under the 1692f “catch-all” prohibition against unfair and unconscionable conduct must be supported to conduct “beyond that which [s]he asserts violates other provisions of the FDCPA.” Since the plaintiff offered no additional allegations beyond what was claimed to support the 1692e claim, the court granted the debt collection agency summary judgment on the § 1692f claim.
The court found that there was a genuine dispute as to whether the debt collection agency should have known that one of the debts was disputed, and denied summary judgment to both parties. Here, the plaintiff sent a dispute letter notifying the debt collection agency of a dispute “for all debts that [plaintiff] may have,” and then stated that “the above referenced individual(s) disputes the debt which you are attempting to collect.” While the plaintiff alleged that the reference to “all debts” put the debt collection agency on notice of multiple debts being disputed, the debt collection agency halted negative reporting on the first account by matching the plaintiff’s name and social security number, it did not do the same for the second account because no matching information was provided. The court found that the dispute letter was ambiguous, and consequently denied motion for summary judgment for both sides.