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3rd Circuit adopts new “reasonable reader” standard for evaluating accuracy of credit reports
On August 8, the U.S. Court of Appeals for the Third Circuit issued an opinion in a matter consolidated on appeal concerning claims of alleged violations of the FCRA brought by several student loan borrowers. According to the opinion, each of the three borrowers defaulted on their student loan payments. The original lenders closed the accounts and transferred the loans to other lenders after the borrowers were more than 120 days late in their payments. The borrowers claimed that a “pay status” notation included in each of their credit reports, which read “Account 120 Days Past Due Date,” was inaccurate and could create the misleading impression that the borrowers were currently four months behind on payments when they did not owe a balance to the previous creditors. The consumer reporting agency (CRA) responsible for the credit reports at issue countered that the notations accurately reflected the historical status of the closed accounts. The borrowers appealed, arguing that the district court misapplied the “reasonable creditor” standard and that the credit reports did not meet the FCRA’s “maximum possible accuracy” requirement.
On appeal, the 3rd Circuit agreed with the CRA’s interpretation, holding that the credit reports “contain multiple conspicuous statements reflecting that the accounts are closed and Appellants have no financial obligations to their previous creditors.” As such, “[t]hese statements are not in conflict with the Pay Status notations, because a reasonable interpretation of the reports in their entirety is that the pay status of a closed account is historical information,” the appellate court wrote. However, while the 3rd Circuit affirmed previous rulings dismissing the cases issued by the U.S. District Court for the Eastern District of Pennsylvania, it concluded that the “reasonable creditor” standard that the district court applied did not accurately reflect how the FCRA contemplates a range of permissible users, such as employers, investors, and insurers, and not just creditors. To account for this, the 3rd Circuit adopted a new standard for evaluating whether credit reports are inaccurate or misleading when read in their entirety by a “reasonable reader,” and applied that test in its precedential opinion. “A court applying the reasonable reader standard to determine the accuracy of an entry in a report must make such a determination by reading the entry not in isolation, but rather by reading the report in its entirety,” the appellate court said.
DOJ resolves SCRA violations with landlords
On August 8, the DOJ announced a settlement with two landlords resolving allegations that they violated the Servicemembers Civil Relief Act (SCRA) by obtaining unlawful court judgments against military tenants. The DOJ explained that, under the SCRA, if a landlord files a civil lawsuit against a tenant and the tenant does not appear in court, the landlord must file an affidavit with the court stating whether the tenant is in the military before seeking a judgment. The DOJ further noted that if the affidavit states that the tenant is in military service, the court cannot enter judgment until an attorney is appointed to represent the servicemember. The court must also postpone the case for at least 90 days. According to the DOJ’s complaint, which was filed in the U.S. District Court for the Eastern District of Virginia, the property owners allegedly filed false affidavits stating that the servicemembers were “not in military service” and failed to file affidavits of military service, as required by the SCRA, prior to obtaining default judgments against numerous servicemembers. The DOJ further alleged that the property owners had information in their files that would have allowed them to easily verify their tenants’ military status.
The consent decree requires the property owners to pay $162,971 to affected servicemembers and a $62,029 civil penalty to the U.S. The order also requires the property owners to, among other things, vacate the eviction judgments, repair the servicemembers’ credit, and provide SCRA training to their employees. The property owners must also reimburse affected servicemembers for any amounts collected pursuant to an unlawful judgment.
Fannie releases selling guide
On August 3, Fannie Mae issued its Selling Guide for Single Families. According to the guide, Fannie Mae will begin to buy mortgage loans with lender-funded grants, including down payment assistance, closing costs, or financial reserves. Specifically, the guidance noted that: (i) the loan must be a HomeReady loan used for a purchase transaction; (ii) “[t]he borrower(s) must make a 3% contribution from their own funds, other eligible sources of funds as described in Chapter B3-4, Asset Assessment, or through a Community Seconds loan”; and (iii) “[t]he lender must have a documented program that provides grants for low- to moderate-income borrowers, community development, equitable housing initiatives, or similar initiatives.”
CFPB announces meetings for small business lending data reporting
On August 8, the CFPB announced that it is hosting two events to discuss the technical implementation required to prepare for the Bureau’s Small Business Lending Data Collection Rulemaking, which is a requirement under Section 1071 of the Dodd-Frank Act. According to the Bureau, the meetings will be geared toward in-house bank technologists or providers that provide compliance software to banks. Among other things, the meetings will: (i) share how the Bureau builds regulatory compliance technology systems; (ii) discuss possible approaches to authentication and application programming interfaces; and (iii) review technical data submission standards, edits and validations. The Bureau stated that the meetings “will not discuss or seek input on the merits or potential outcome of any ongoing rulemakings or take questions pertaining to the substance of such rulemakings.” According to the CFPB’s spring rulemaking agenda that was released earlier this summer, a final rule is expected in March 2023 (covered by InfoBytes here).
Minnesota fines debt collector for violating earlier consent order
Recently, the Minnesota Department of Commerce issued a consent order assessing $20,000 in fines to a debt collector accused of violating a 2020 consent order. The state previously entered into a consent order with the debt collector, in which it agreed to cease and desist from violating the FDCPA and state law after it was found to have, among other things, commingled funds and allowed agents to work from unlicensed branch locations. The state later found that the debt collector allegedly continued to violate state and federal law by collecting on payday loans from unlicensed lenders and failing to provide meaningful disclosures on telephone calls or register several of its agents as debt collectors in the state. As a result, the state ordered the debt collector to pay the stayed portion of the 2020 fine ($19,000), as well as a $25,000 civil penalty of which $24,000 is stayed. If the stay has not been lifted by December 31, 2025, the remaining portion of the civil penalty will be vacated provided the debt collector does not commit any further violations.
District Court grants final approval to forgive $6 billion in student loans
On November 15, the U.S. District Court for the Northern District of California granted final approval to a class action settlement to forgive certain federal student loan borrower debt. According to the motion for preliminary approval, the plaintiffs are federal student loan borrowers who filed borrower defense (BD) applications with the Department of Education, requesting that the Department discharge their federal student loans because of misconduct committed by their schools. They brought the case to challenge the Department’s delay in making decisions on BD applications. The motion noted that the plaintiffs alleged, “the Department’s inaction was due to a deliberate and uniform policy abandoning BD decision making, a choice that caused a mounting backlog.” In a supplemental complaint filed after discovery, plaintiffs further alleged that the Department “adopted an unlawful policy that presumptively denied BD applications regardless of their merit, and then, pursuant to this policy, sent tens of thousands of legally insufficient denial notices (the ‘Form Denial Notices’) to borrowers, including some of the Named Plaintiffs.” The class consists of approximately 264,000 people who have a BD application pending as of June 22, 2022. The “automatic relief group” consists of applicants who attended one of more than 150 colleges for which the Department found common evidence of institutional misconduct. The motion also noted “it has determined that every class member whose relevant loan debt is associated with those schools should be provided presumptive relief under the settlement due to strong indicia regarding substantial misconduct by the listed schools, whether credibly alleged or in some instances proven, and the high rate of class members with applications related to the listed schools.” Under the terms of the settlement, $6 billion in loans will be canceled for the borrowers.
Fed announces individual capital requirements for all large banks
On August 4, the Federal Reserve Board announced the individual capital requirements for all large banks, which are in part determined by the Board’s stress test results that provide a risk-sensitive and forward-looking assessment of capital needs. According to the Fed, the total common equity tier 1 (CETI) capital requirement for each bank is made up of several components, including a minimum CET1 capital requirement for all banks of 4.5 percent; a stress capital buffer that is determined from the supervisory stress test results and is at least 2.5 percent; and, if applicable, a capital surcharge for global systemically important banks (G-SIB) of at least 1 percent. The requirements are effective October 1.
Agencies seek comment on renewing FFIEC’s cybersecurity assessment tool
On August 8, the OCC, the Federal Reserve Board, the FDIC, and the NCUA (collectively, “Agencies”) issued a notice in the Federal Register soliciting comments on the renewal of the Federal Financial Institutions Examination Council’s cybersecurity assessment tool. According to the notice, the Agencies are seeking comment on, among other things: (i) “[w]hether the collection of information is necessary for the proper performance of the functions of the agencies, including whether the information has practical utility”; (ii) “[t]he accuracy of the Agencies’ estimates of the burden of the collection of information; (iii) how to “enhance the quality, utility, and clarity of the information to be collected”; and (vi) “minimize[ing] the burden of the collection on respondents.” Comments are due 30 days after publication in the Federal Register.
Biden signs bills providing 10-year SOL on PPP and EIDL fraud
On August 5, President Biden signed the Paycheck Protection Program and Bank Fraud Enforcement Harmonization Act (see H.R. 7352) and the COVID-19 Economic Injury Disaster Loan Fraud Statute of Limitations Act (see H.R. 7334). H.R. 7352 provides a 10-year statute of limitations for fraud by borrowers under the SBA’s Paycheck Protection Program, while H.R. 7334 establishes a 10-year statute of limitations for fraud by borrowers under the SBA’s Covid-19 Economic Injury Disaster Loan programs.
CFPB receives rulemaking petition seeking validation of credit score models for credit unions
Recently, the CFPB received a rulemaking petition seeking validation of credit score models for credit unions. The petition, which seeks “a rule governing the requirement to periodically validate credit scores for all lending or financing entities,” argues that validation is necessary to measure the effectiveness of credit scores being used to measure credit risk. Claiming that general letters of compliance from credit reporting agencies are inadequate, the petitioner explains that these letters do not “address the misapplication of credit scores by banks, credit card issuers, auto financing groups or individual credit unions that are the primary cause of errors and financial exclusion.” According to the petitioner, “[o]nly a statistically valid empirically derived study based on funded and declined loans will resolve many of the issues in consumer lending today.” The petitioner points out that validation reports “provide the information necessary to measure the efficiency of the credit score being used to measure credit risk,” and that “[d]emographic comparisons of funded and declined applicants can also be used to identify if the underwriting guidelines used in the application of credit scores result in acceptable percentages of financial inclusion for minorities or protected consumer groups.”