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CFPB proposes rule making certain NSF fees “abusive”
On January 24, the CFPB released a proposed rule that would identify the charging of non-sufficient funds (NSF) fees on transactions that financial institutions decline instantaneously or near-instantaneously as an “abusive” act or practice. The rule would prohibit financial institutions from charging such fees. The proposed rule defines a “covered transaction” as a consumer’s attempt to withdraw, debit, pay, or transfer funds from their account that is declined instantaneously or near-instantaneously by a “covered financial institution” due to insufficient funds. Further, instantaneously, or near-instantaneously-declined transactions are characterized as transactions that are processed in real-time with “no significant perceptible delay to the consumer when attempting the transaction.” One-time debit card transactions that are not preauthorized, ATM transactions, and certain person-to-person transactions would be covered by the proposed rule. The proposed rule would not cover (i) transactions declined or rejected due to insufficient funds hours or days after a consumer’s attempt; (ii) checks and ACH transactions (given that they are not able to be instantaneously declined); (iii) transactions authorized at first, even if they are later rejected or fail to settle due to insufficient funds. The proposed rule defines “covered financial institution” in line with Regulation E’s definition of “financial institution.”
Although the CFPB noted that currently financial institutions do not typically charge NSF fees on the proposed covered transactions and acknowledged that it was proposing the “rule primarily as a preventive measure,” it expressed concern that financial institutions who do not currently charge NSF fees for “covered transactions” may have an incentive to do so as other regulatory interventions reduce other sources of fee income. Further, the CFPB considered whether its concerns could be addressed through certain disclosures, but declined to pursue that course of action, citing challenges in implementation across diverse payment channels and interfaces. Even if feasible, the CFPB added, such disclosures might be costly and may not fully prevent abusive practices.
Moreover, the proposed rule clarifies the CFPB’s current interpretation of the prohibition on abusive acts or practices and distinguish prior views set forth in the preamble of a separate rule—the CFPB’s 2020 rule rescinding certain provisions of the 2017 Rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans’ (2020 Rescission Rule). Abusive practices are defined to include, among other things, acts or practices that take “unreasonable advantage” of a consumer’s “lack of understanding . . . of the material risks, costs, or conditions” of a consumer product or service. The CFPB proposes to “clarify” its prior interpretation of this prohibition, by articulating its view that a “lack of understanding” need not be “reasonable” to form the predicate of an abusive act or practice. In the CFPB’s view, this distinguishes the abusiveness prohibition from the longstanding prohibition on “unfair” practices, which requires showing that consumers could not “reasonably avoid” consumer injury by, for example, reading disclosures or understanding that a particular transaction would overdraw the balance in their account and result in fees. The Bureau’s current view is that the 2020 Rescission Rule conflated “reasonable avoidability” and “lack of understanding,” contrary to the text and purpose of the abusive conduct prohibition. In addition, the CFPB proposes clarifying that, notwithstanding the 2020 Rescission Rule’s emphasis on the “magnitude” and “likelihood” of harm, the “materiality” requirement pertains to understanding “risks,” not necessarily “costs” or “conditions.” The CFPB explained that a consumer’s lack of understanding of costs does not always align with the analysis of harm likelihood and magnitude, for example, it suffices to demonstrate that a company exploits consumer ignorance about a fee (“cost”) in a specific situation, even if consumers generally understand the “risk” of fees. The CFPB has preliminarily determined that consumers charged NSF fees on covered transactions would “lack understanding of the material risks, costs, or conditions of their account at the time they are initiating covered transactions.”
In the CFPB’s view, financial institutions are taking “unreasonable advantage” of consumers when they impose NSF fees on covered transactions because the financial institution: (i) profits from a transaction but provides no service in return; (ii) chooses to impose NSF fees when instantaneously declining a transaction at no cost or negligible cost is an option; (iii) benefits from negative consumer outcomes caused by their lack of understanding; and (iv) profits from economically “vulnerable” consumers’ lack of understanding or hardship, instead of providing services to alleviate it.
Among other things, the CFPB seeks comments on the proposed parameters of covered transactions, whether the practices identified in the proposed rule are broad enough to address the “potential consumer harms,” and submission of data on covered financial institutions’ cost to decline covered transactions. Comments must be received by March 25. Finally, the CFPB is proposing an effective date of 30 days after publication of the final rule in the Federal Register.
Ginnie Mae to explore a new reverse MBS
On January 16, Ginnie Mae announced its plans to consider the development of a new securitization product in connection with broader efforts to expand its existing Home Equity Conversion Mortgage (HECM) mortgage-backed securities program. Specifically, Ginnie Mae is considering the viability of a securitization product that would accept HECM loans with balances above 98% of the FHA’s Maximum Claim Amount. Ginnie Mae stated that the proposed product reflects efforts to address liquidity issues affecting the stability of secondary mortgage markets, which are crucial for older Americans who may need to rely on home equity for financial support.
CFPB proposes new rule on overdraft lending, opens comment period
On January 17, the CFPB issued a proposed new rule to restrict overdraft fees charged by financial institutions. Historically, the Federal Reserve Board exempted banks from credit disclosure requirements when an overdraft was needed to honor checks (for a fee). The proposed rule would recharacterize overdrafts as extensions of credit, which would extend the consumer credit protections in TILA that apply to other forms of credit to overdraft credit.
According to the related Fact Sheet, the proposed rule would only apply to financial institutions with assets of $10 billion or more. The CFPB offered financial institutions two options on deciding how much to charge customers. First, a financial institution may adopt a “breakeven standard,” charging a fee needed to offset losses for written off overdrawn account balances and direct costs traceable to the provision of courtesy overdrafts. Second, a financial institution may employ a “benchmark fee,” of either $3, $6, $7, or $14, derived by the CFPB from analyzing charge-off losses and cost data. Comments to the rule must be received on or before April 1, 2024. In addition, the proposal would prohibit requiring the customer to use preauthorized electronic fund transfers for repayment of covered overdraft fees by these institutions. The final overdraft rule is expected to go into effect on October 1, 2025.
SDNY pilots new whistleblower program to protect individuals
On January 12, the SDNY launched its Whistleblower Pilot Program to protect individuals who report company wrongdoing from any future prosecution by the DOJ. The SDNY issued this program to encourage the “voluntary self-disclosure of criminal conduct” within white-collar practice areas undertaken in companies, exchanges, and financial institutions, among others. The program aims to reduce fraud or corporate failures affecting market integrity. Specifically, future whistleblowers who approach SDNY with a claim will enter into a non-prosecution agreement (NPA) only if the following conditions are met: the misconduct is not public and is not already known to the SDNY; the whistleblower discloses the information voluntarily, and is not in response to an inquiry or obligation; the whistleblower must assist in the investigation; the information is truthful; the whistleblower is not a government-elected or an appointed official, among others; and the whistleblower has not engaged in any criminal conduct. The policy also provides prosecutors and supervisors with factors to consider when deciding whether to enter into a NPA with a whistleblower.
HUD Secretary Fudge confirms interest in eliminating Mortgage Interest Premiums
On January 11, the Secretary for Housing and Urban Development, Marcia Fudge, testified at the House Financial Services Committee hearing on the Oversight of HUD and the FHA. Topics included qualification for housing programs by veterans, HUD efforts to support more affordable housing, and oversight of public housing authorities, among other things.
Secretary Fudge addressed the possibility of eliminating the Mortgage Insurance Premiums (MIP) from Federal Housing Administration (FHA) mortgages. Specifically, Rep. Brad Sherman (D-CA) asked Secretary Fudge whether she would be willing to eliminate MIPs, to which Secretary Fudge replied “Yes, I’m willing to look at it.” Rep. Gregory Meeks (D-NY) asked whether FHA insurance could follow the same model as private mortgage insurance, where the product is terminated after a certain amount of payment on the principal of the loan. In response, the Secretary replied positively with “I would love to see it happen.”
Fed’s OIG report on CFPB says training improvements needed to meet enforcement goals
Recently, the Office of Inspector General of the Federal Reserve Board released a report assessing the CFPB’s process for conducting enforcement investigations. The report makes two key recommendations. First, noting that the CFPB has not met its stated goal to file or settle 65 percent of its enforcement actions within two years, the OIG recommended that the CFPB Office of Enforcement incorporates the timing expectations for key steps in the enforcement process into the tracking and monitoring of matters. In addition, the Office of the Inspector General also recommended improvements to enforcement staff training on document maintenance and retention requirements for the CFPB’s matter management system. The report states that the recommendations were accepted by the CFPB, with a follow-up to ensure full implementation.
FTC bans data aggregator company from selling consumer data
On January 18, the FTC issued a complaint against a digital platform and data aggregator (the company) and ordered the company to no longer sell or license precise location data, among other requirements. As previously covered by InfoBytes, the FTC’s order followed a recent FTC decision against a data broker in which the FTC alleged the data broker’s contracts were “insufficient to protect consumers from the substantial injury” caused by location data collection as consumers visited sensitive locations, such as churches, healthcare facilities, and schools.
In this case, the company obtained large amounts of personal data on consumers’ demographic data, movements, and purchasing history and retained that information for five years. The company had applications and third-party apps that have been downloaded over 390 million times, leading to about 100 million unique devices sending location data each year to the company. Like the previous FTC order, this FTC order alleged the company collected sensitive information on where consumers live, work, and worship; where their children went to school; where they received medical treatment; and if they attended rallies or demonstrations. The FTC alleged that the company cross-references consumers’ data location histories with points of interest to advertisers, including offering a push notification about a product when a consumer is located near a store that sells that product.
The FTC alleged the company failed to notify users that consumers’ location data is used for targeted advertising. Additionally, the FTC alleged the company retains consumer data “longer than reasonably necessary” which the FTC argues could lead to future consumer injury. According to the FTC, these allegations constitute deceptive or unfair practices as prohibited by Section 5(a) of the FTC Act. Under the order, the company must not materially misrepresent how the company collects or uses consumers’ location data, the company must not sell or license location data, and the company must implement a sensitive location data program as proscribed by the order. The company must also delete all historical location data for all consumers which does not affirmatively consent to the continued retention of such data. The company neither admits nor denies any of these allegations.
CFPB, seven State AGs file suit against debt-relief company
On January 19, the CFPB and seven state attorneys general (Colorado, Delaware, Illinois, Minnesota, New York, North Carolina, and Wisconsin) announced a lawsuit against a debt-relief company, its subsidiaries, and its two individual owners (defendants) for allegedly facilitating an unlawful debt relief service. According to the complaint, the company used third parties to solicit consumers with large debts and direct them to contact defendants. The company then, allegedly, advised consumers to enroll in their debt-relief service that will negotiate reduced payoff amounts with consumers’ creditors and represent consumers. Additionally, individual defendants implicated in the action created law firms paired with one of the company’s subsidiaries, which performed little to no work on behalf of consumers, while non-attorney negotiators from the company were tasked with renegotiating a consumer’s debt. The CFPB and the AGs alleged that the company charges fees ($84 million since 2016) before and during the service, that left consumers with additional debt, lower credit scores, lawsuits with creditors, and had none of their original debts settled or reduced.
Among other things, the CFPB claimed the company violated the Telemarketing Sales Rule (TSR) by (i) charging advance fees before a consumer has made at least one payment under a debt settlement plan; (ii) collecting fees after settling some of a consumer’s debts when the fees are not proportional to the amount of debt defendant successfully settled or based on a fixed percentage of the amount saved; and, (iii) supporting its subsidiary law firms that the company knew or knowingly avoided knowing engaged in abusive acts or practices. The complaint sought permanent and preliminary injunctive relief, redress for consumers, and a civil money penalty. On January 11, the court granted the Bureau’s request for a temporary restraining order.
Washington Appeals Court disagrees with appellant in a class action data breach; affirms lower court’s decision
On January 8, the Washington State Court of Appeals affirmed superior court rulings granting final approval to a class action settlement, denying a motion to consolidate six class action lawsuits, and approving a class notice plan. According to the opinion, in 2021, the U.S. Department of Health and Human Services notified the respondent company, a nonprofit organization serving low-income individuals, of a data breach that exposed the social security numbers of 163,499 individuals. In 2022, appellant filed a class action lawsuit against the respondent company, one of six such separate class action lawsuits. The appellant filed a motion to consolidate the six pending class action lawsuits, which was denied. Subsequently, plaintiffs in one of the class action lawsuits signed a settlement agreement and release that would release, discharge, and bar all claims asserted in the other class action lawsuits and provide compensation anywhere from $100 to $25,000 to impacted individuals. The appellant plaintiff then filed the instant appeal alleging that the lower court abused its discretion by denying her motion to consolidate the six actions, that the class action plan failed to provide reasonable notice, and that the settlement was not fair, reasonable, or adequate because “the settlement is the product of collusion between the settling parties.” The appellate court disagreed and ultimately upheld the lower court’s rulings.
Student loan servicer fined $1.8 million by Massachusetts Attorney General
On January 11, the Massachusetts Attorney General (AG) announced a $1.8 million settlement with a student loan servicer, to resolve allegations that the company did not properly communicate Income-Driven Repayment (IDR) plan renewals to borrowers. According to the settlement, IDR plans are a “helpful tool for managing unaffordable federal student loan debt and avoiding the consequences of default… [and respondent] is required to follow specific procedures intended to ensure that borrowers are able to successfully navigate the enrollment and annual recertification processes required for IDR.” The AG alleged that the respondent violated state law by sending written notices that did not meet regulatory requirements and failed to send required notices.
Under the terms of the settlement, respondent will (i) pay $1.8 million; (ii) include certain disclosures in renewal notice correspondence to borrowers; (iii) comply with requirements for FFELP loans owned by the DOE and enrolled in certain repayment plans; (iv) clearly disclosure to certain borrowers that failure to timely provide certain information about income or family size will result in increased monthly payments; and (v) retain copies of each written communication that it sends to borrowers regarding their IDR plans. The student loan servicer enters into this agreement for settlement purposes only (without admission).