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DOJ: Property owner’s LEP policies violate FHA
On April 1, the DOJ filed a statement of interest in a 2021 lawsuit alleging defendants violated the Fair Housing Act (FHA) by refusing to rent to applicants with limited English proficiency (LEP) unless someone who speaks and reads English resides in the apartment unit. The complaint, filed in the U.S. District Court for the Northern District of New York, also alleged that the defendants refused offers made by the applicants to bring their own interpreters to translate lease documents and assist with communications.
According to the plaintiff fair housing organization, “the defendants’ LEP exclusion policy imposes an unjustified disparate impact on the basis of national origin and race,” with the defendants’ restrictive language policy acting as “a pretext to discriminate against applicants based on” these protected classes. The defendants moved to dismiss the case, “arguing that their LEP exclusion policy cannot, as a matter of law, violate the FHA” and that HUD’s 2016 HUD Office of General Counsel Guidance on Fair Housing Act Protections for Persons with Limited English Proficiency (2016 HUD LEP Guidance), which explains how restrictive language policies may violate the FHA, is wrong and does not deserve deference by the court.
In its statement of interest, the DOJ agreed with the plaintiff that dismissal of the complaint would be inappropriate. In explaining how policies that screen on the basis of an applicant’s language ability may violate the FHA, the DOJ pointed out that some courts have held that language policies can have an unjustified disparate impact on the basis of national origin or race, while others “have recognized that language polices can serve as proxies or pretexts for intentional discrimination based on national origin or race.” As such the DOJ contended that the defendants’ claim that LEP status is not a protected class under the FHA “misses the point.” The DOJ also defended the 2016 HUD LEP Guidance as a reasonable interpretation of the FHA.
OCC’s Hsu discusses managing tail risks
On March 31, acting Comptroller of the Currency Michael J. Hsu spoke before the American Bankers Association Risk 2022 Conference to discuss managing low probability, high impact risk events, or tail risks. In particular, Hsu highlighted the connection between Russia’s invasion of Ukraine and heightened tail risks associated with geopolitical risk, cyber risk, and inflation risk. Hsu warned that multiple possible events stemming from the conflict, including cyber-attacks from Russia, broader conflict in Europe, and increased inflation could materialize simultaneously increasing the chances that tail risks materialize that could trigger a recession. Hsu noted that the increase of sanctions to oil and gas would put upward pressure on fuel prices, and “Ukraine’s role as a producer of wheat, neon, platinum, and palladium is also beginning to affect global prices in certain markets.” Despite the elevated risks, Hsu noted that enhanced stress testing has positioned large banks to absorb a range of shocks, but warned that “nonetheless, greater caution and risk management vigilance is warranted today, perhaps more than any time in recent memory.” Hsu also singled out risks associated with crypto assets and said that the OCC is collaborating with other agencies on “how to maintain a consistent, careful and cautious” approach to bank involvement in cryptocurrency. Hsu cautioned that in light of “limited or unreliable price histories” of crypto-assets, financial institutions should “carefully consider” the tail risks associated with factoring cryptocurrency positions into the overall risk management process. Hsu discussed his worry regarding the potential for crypto derivatives to create “wrong-way risk” in which a leveraged party use trades to “double-down” at the same time it is experiencing financial stress. Hsu stated that the OCC has engaged with government agencies in the U.K. and U.S. on “how to maintain a consistent, careful, and cautious approach to bank involvement in crypto.”
OFAC reaches $78,750 settlement with financial analytics company
On April 1, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced a roughly $78,750 settlement with a financial analytics company for allegedly processing transactions in violation of Ukraine-Related Sanctions Regulations. According to OFAC’s web notice, in August 2016, the company (which had been recently acquired) reissued and re-dated an August 2015 invoice with a new date that was 374 days after the invoice for the debt was originally issued. After a partial payment, the company reissued the original August 2015 invoice creating two “new” invoices each reflecting half of the remaining balance and dated November 2016, both with payment due upon receipt. After another partial payment, the company reissued a fourth invoice with the remaining debt in September 2017, again altering the date. OFAC concluded that the company violated the Ukraine-Related Sanctions Regulations “by dealing in new debt of longer than 90 days maturity when [it] extended the payment date of its invoices.”
In arriving at the settlement amount, OFAC considered various aggravating factors, including, among other things, that (i) the company “failed to exercise a minimal degree of caution or care when it reissued and re-dated four invoices to extend the payment date of invoices far beyond the authorized debt tenor, knowing or having reason to know such conduct would violate U.S. sanctions regulations”; (ii) the company’s staff “were aware of and involved in the conduct giving rise to the Apparent Violations”; and (iii) the company “was a commercially sophisticated entity and considered a leader in global energy market analysis, with over 500 customers in 60 countries.” OFAC also considered various mitigating factors, including, among other things, that the company (i) has not received a penalty notice from OFAC in the preceding five years; (ii) “took remedial measures by enhancing their compliance program to better ensure compliance with OFAC sanctions, creating more robust training, adding periodic testing to invoices involving SSI List entities, and adding additional staff to manage sanctions issues”; and (iii) cooperated during the investigation.
Providing context for the settlement, OFAC stated that this “case underscores the importance of careful adherence to OFAC regulations, including in cases where counterparties may make compliance challenging.”
9th Circuit upholds dismissal of wrongful garnishment claims
On March 30, the U.S. Court of Appeals for the Ninth Circuit affirmed a lower court’s dismissal of claims based on the FDCPA and the Washington Consumer Protection Act (WCPA). According to the memorandum, the complaint alleged that the defendants violated the FDCPA and WCPA when they sought to garnish plaintiff’s wages based a state court judgment that was not yet final. The district court dismissed the FDCPA claim, holding that “at worst, Defendants violated a state court procedural rule—not substantive law—when they applied for the writ of garnishment based on the valid, albeit, not final judgment.” In affirming that dismissal, however, the appellate court noted that “[t]he issue is not whether [the defendant] and [the defendant’s attorney] violated state law but whether they violated the FDCPA.” The 9th Circuit clarified that “[t]he [plaintiff] might have argued that [the defendant] and [the defendant’s attorney] falsely represented the legal status of their debt by implicitly claiming in the garnishment application that the debt was subject to a final judgment. But they [did] not make this argument, so it is waived.” With respect to the WCPA claim, while the district court’s dismissal was based on a determination that the garnishment did not “occur[] in trade or commerce” as required under that statute, the 9th Circuit pointed out that if the garnishment was “a violation of the Washington Collection Agency Act (WCAA), [it] would have established an unfair or deceptive act in trade or commerce for purposes of the WCPA,” but upheld dismissal because the plaintiff had waived that argument as well.
FDIC highlights NSF/overdraft fees, fair lending in 2022 Consumer Compliance Supervisory Highlights
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
HUD proposes 40-year term for loan modifications
On April 1, HUD published a proposed rule in the Federal Register to increase the maximum term limit allowable on loan modifications for FHA-insured mortgages from 360 to 480 months. According to the proposed rule, the update would allow mortgagees to provide a 40-year loan modification option to borrowers who may not qualify for loss mitigation options and is intended to help borrowers experiencing a financial hardship, including those impacted by the Covid-19 pandemic, obtain affordable monthly payments. The proposed rule noted that “[i]ncreasing the maximum term limit to 480 months would allow mortgagees to further reduce the borrower’s monthly payment as the outstanding balance would be spread over a longer time frame, providing more borrowers with FHA-insured mortgages the ability to retain their homes after default.” Additionally, the proposal would align FHA with Fannie Mae and Freddie Mac, “which both currently provide a 40-year loan modification option.” Comments are due by May 31.
FTC imposes “record-setting” fine on auto dealer alleging discriminatory junk fees
On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.
According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.
FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”
CFPB handled nearly 1 million consumer complaints in 2021
On March 31, the CFPB published its Consumer Response Annual Report for 2021, providing an overview of consumer complaints received by the agency between January 1 and December 31, 2021. According to the report, the Bureau handled approximately 994,000 consumer complaints last year. Among other trends, the agency found that complaints about credit or consumer reporting continue to increase, accounting for more than 70 percent of all complaints received last year. Debt collection complaints are also increasing, accounting for more than 10 percent of all complaints. Consumers also reported difficulties with financial institutions failing to adequately address consumer complaints, giving consumers the runaround, and described issues with reaching companies to raise concerns about digital assets, mobile wallets, and buy-now-pay-later credit. The Bureau noted that during the second year of the Covid-19 pandemic, complaint data showed that the volume of complaints from consumers struggling to pay their mortgages is increasing as borrower protections have expired. While complaints related to vehicle loans have also increased, the Bureau reported that student loan complaints remain lower than pre-Covid levels due to the implementation of temporary relief programs. The top products and services—representing approximately 94 percent of all complaints—were credit or consumer reporting, debt collection, credit cards, checking or savings accounts, and mortgages. The Bureau also received complaints related to money transfers and virtual currency; vehicle finance; prepaid cards; student, personal, and payday loans; credit repair; and title loans.
House subcommittee discusses eliminating overdraft fees
On March 31, the House Financial Services Committee’s Subcommittee on Consumer Protection and Financial Institutions held a hearing titled, The End of Overdraft Fees? Examining the Movement to Eliminate the Fees Costing Consumers Billions, to discuss efforts to reduce or eliminate overdraft fees. Subcommittee Chair Ed Perlmutter (D-CO) opened the hearing by noting that “consumers in the United States pay around $10 to $12 billion in overdraft fees and nonsufficient fund fees,” with just 9 percent of consumers representing up to 80 percent of these fees. He also noted that these “types of fees impact people of color at a disproportionate rate,” and that “[s]tudies have found banks with branches in predominantly black neighborhoods charge more for overdraft on average, and black customers are overrepresented in those who report paying more than $100 in fees in the past year.” Some subcommittee Democrats appeared supportive of measures to address the alleged growing reliance by banks and credit unions on revenues from overdraft fees to make up for interest lost in the current low-rate environment. In contrast, certain subcommittee Republicans appeared skeptical of government efforts to limit financial institutions’ ability to provide overdraft services, questioning the impact such efforts would have on smaller financial institutions like community banks and credit unions. The committee memorandum and hearing focused on the evolving trends related to overdraft programs and fees and their impact on consumers, including the following:
- Overdraft and Non-Sufficient Funds (NSF) Fee Data and Trends. The subcommittee quoted a study that found that “federal regulators have required banks and credit unions with more than $1 billion in assets to report revenue collected specifically from overdraft and NSF fees, totaling between $11 billion and $12 billion annually,” since 2015. According to the subcommittee, “the true fee total is likely higher since smaller depository institutions are exempt from the reporting requirement.”
- Impact on Consumers. The subcommittee quoted a report that said “consumers face challenges with unclear or confusing overdraft policies or are charged fees simply because of a delay in when their paycheck deposits are made available or when other transactions are settled in their account.” According to the report, consumers “incur overdraft fees despite carefully attempting to avoid them and often believing they have. One practice, in particular, has garnered increased attention recently: charging overdraft fees on debit card transactions that were authorized when the consumer had sufficient funds in the account but then settled, often a few days later, when the account no longer had sufficient funds.”
- Proposals and Challenges to Improving Consumer Protections when Consumers Overdraft. The subcommittee pointed out that initiatives to improve overdraft fees and NSF fees would “focus on enhancing disclosures and information about overdraft provided to consumers; capping the number of fees a consumer may be charged in a defined period of time; reducing the cost of each fee, or encouraging or incentivizing financial institutions to offer small-dollar loans with streamlined underwriting and affordable interest rates or repayment plans to provide an alternative for consumers who typically rely on overdraft.” The subcommittee also said another possible improvement in the market would result from adopting a faster payments network, such as the FedNow Service. As previously covered by InfoBytes, the Fed announced in August 2020 its intention to implement the FedNow Service—a “round-the-clock real-time payment and settlement service”—through a phased approach with a target launch date sometime in 2023 or 2024.
One witness, a senior policy analyst from a Latino civil rights and advocacy organization, expressed his support for reducing or eliminating overdraft fees, stating that “[o]verdraft fees, by their nature, impact consumers when they can least afford an additional [c]ost.” The witness quoted a study that found “[l]ow- to moderate-income households are nearly twice as likely as higher-income households to overdraw an account.” Calling overdrafts “a penalty for being poor or financially insecure,” another witness, a consumer policy counsel at a civil rights nonprofit, expressed that “overdraft fees are a penalty for being poor or financially insecure.” Quoting a study finding that approximately “80 percent of overdraft fee revenue to banks comes from 9 percent of accounts,” the witness stated that the “median account balance of this group is less than $350.” In contrast, another witness, a law professor at George Mason University, stated in the hearing that “exasperation is not a substitute for sound economic analysis," He stressed that “this is an area in which unintended consequences of bans on overdraft protection, substantive limits, price controls and the like could have some serious unintended consequences.” He further warned of possible negative consequences should policymakers eliminate overdraft programs, cautioning that new restrictions on overdrafts may have many negative implications for consumers, including “higher bank fees, higher minimum monthly deposits . . . and a loss of access to free checking.”
Additionally, some House Republicans were critical of recent efforts taken by the CFPB in this space and the elimination of overdrafts by several banks. During the hearing, Rep. Blaine Luetkemeyer (R-MO) criticized the CFPB’s inquiry into junk fees (covered by InfoBytes here), arguing that, “t[h]ere is no legal authority for the CFPB to define the term ‘junk fee’ . . . and even less authority for the CFPB to act as a price setter in the consumer financial market.” Luetkemeyer added that “the CFPB is manufacturing a crisis about hidden fees for financial products and services when they are the very people that made up the disclosure regime,” and called the effort “another attempt by the CFPB to denigrate legally operating businesses by any means possible.”
FTC sues company over “free” tax filing campaign
On March 29, the FTC issued an administrative complaint against a company that produces tax filing software for allegedly engaging in deceptive business practices when advertising, marketing, distributing, and selling their purportedly “free” tax filing services. The FTC also filed a complaint for a temporary restraining order and an emergency motion for a temporary restraining order (TRO) and preliminary injunction against the company in the U.S. District Court for the Northern District of California, stating that unless the court steps in, the company will “be free to continue disseminating the deceptive claim that consumers can file their taxes for free using [the software] when, in truth, in numerous instances, defendant does not permit consumers to file their taxes for free using [the software].” The FTC stated in its announcement that millions of consumers are unable to take advantage of the tax filing software’s allegedly “free” service (including those who get a 1099 form for work in the gig economy or those who earn farm income), noting that roughly two-thirds of tax filers were unable to file their taxes for free in 2020. According to the complaint, these consumers are often informed they need to upgrade to a paid version to complete and file their taxes. The FTC specifically pointed to the company’s “Absolute Zero” ad campaign, in which the company informed consumers that its “offering was truly free.” The agency said company’s campaign included the words “Free Guaranteed” to “bolster and emphasize the claim that the offer was truly free.” While many of the company’s ads do contain a fine print disclaimer clarifying that the offer is limited to consumers with “simple tax returns,” the FTC said this is inadequate to cure the misrepresentation that consumers can file their taxes for free because the disclaimers are “disproportionately small compared to the prominent text emphasizing that the service is free,” appear for just seconds, and are in writing only and not read by a voiceover.