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District Court stays CFPB payday action following 5th Circuit decision
On October 31, the U.S. District Court for the Northern District of Texas stayed an enforcement action filed by the CFPB against a defendant Texas-based payday lender until after the U.S. Court of Appeals for the Fifth Circuit issues its mandate in CFSA v. CFPB. As previously covered by a Buckley Special Alert, a three-judge panel unanimously held in CFSA that the CFPB’s funding structure created by Congress violated the Appropriations Clause of the Constitution. The parties filed a joint motion saying there was “good cause” to pause further proceedings in the litigation, explaining that the “agreed stay pending issuance of the mandate in CFSA will promote efficient resolution of the case, as the final decision in CFSA will control the resolution of key issues presented in [defendant’s] pending motion to dismiss.” One of the arguments raised in the defendant’s motion to dismiss centers around the assertion that the Bureau’s complaint should be dismissed because the agency’s funding structure violates the Constitution’s separation of powers.
In July, the Bureau sued the defendant for allegedly engaging in illegal debt-collection practices and allegedly generating $240 million in reborrowing fees from borrowers who were eligible for free repayment plans, in violation of the CFPA (covered by InfoBytes here). According to the Bureau, the defendant allegedly “engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers who indicated that they could not repay their short term, high-cost loans originated by the defendant.” The defendant also allegedly attempted to collect payments by unfairly making unauthorized electronic withdrawals from over 3,000 consumers’ bank accounts.
7th Circuit affirms dismissal of NSF fees action
On October 25, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s ruling dismissing a putative class action alleging an internet credit union improperly charged account holders non-sufficient funds (NSF) fees. Plaintiff claimed she signed an account agreement with the credit union, which required the use of a ledger-balance method when assessing NSF fees, and that only one NSF fee is permitted per transaction. According to the plaintiff, the credit union breached its contract by charging her a $25 NSF fee when she attempted to pay a $6,000 bill, even though her account’s ledger balance was $6,670.94 at the time. She further claimed the credit union charged multiple NSF fees for the same item. The credit union maintained, however, that the contract allowed it to use the “available-balance method” to assess such fees instead. The opinion explained that the ledger-balance method calculates a balance based on posted debits and deposits (and does not incorporate transactions until they are settled), whereas the available-balance method considers holds on deposits and transactions that have been authorized but not yet settled when calculating a customer’s balance. The district court granted the credit union’s motion to dismiss, rejecting the plaintiff's account balance theory by “explaining that ‘the plain, unambiguous language states that a member needs sufficient available funds’ and reasoning that [plaintiff’s] proposed reading would render [the contract’s] use of the word ‘available’ meaningless.” The district court also maintained that the plural use of the word “fees” permitted the credit union to charge multiple fees when a merchant presented the same transaction more than once.
On appeal, the 7th Circuit agreed with the district court that the agreement did not prohibit the credit union from “charging multiple NSF fees for a transaction that is presented and rejected several times.” While recognizing that the credit union “could have drafted the [a]greement more clearly than it did,” the appellate court determined that the credit union never promised “not to use the available-balance method to assess NSF fees or not to charge multiple fees when a transaction is presented to it multiple times,” and upheld the dismissal of plaintiff’s breach-of-contract claim.
FDIC releases September enforcement actions
On October 28, the FDIC released a list of administrative enforcement actions taken against banks and individuals in September. During the month, the FDIC made public 12 orders consisting of “two consent orders, five orders of prohibition, two orders to pay a civil money penalty, two orders of termination of insurance, and one section 19 order.” The FDIC also publicly released an order to pay a civil money penalty taken against an Illinois-based bank related to alleged violations of the Flood Disaster Protection Act and the National Flood Insurance Act for failure to follow lender placement flood insurance procedures in 13 instances. The order requires the payment of an $11,625 civil money penalty.
FFIEC updates 2018 Cybersecurity Resource Guide for Financial Institutions
On October 27, the FDIC issued FIL-50-2022 related to recent updates made to the Federal Financial Institutions Examination Council’s (FFIEC) 2018 Cybersecurity Resource Guide for Financial Institutions. The FFIEC guide is designed to assist financial institutions in meeting their security control objectives and preparing to respond to cyber incidents. The FFIEC guide includes updates to certain references as well as new ransomware-specific resources to address the ongoing threat of ransomware incidents.
OCC to establish Office of Financial Technology
On October 27, the OCC announced it intends to establish an Office of Financial Technology early next year that will build on and incorporate the agency’s Office of Innovation (established in 2016 and covered by InfoBytes here). Intended to strengthen the OCC’s expertise and ability to adapt to a rapidly evolving banking landscape, the Office of Financial Technology will provide strategic leadership, vision, and perspective for the agency’s financial technology activities and related supervision. The new office will be led by a chief financial technology officer who will be a deputy comptroller reporting to the senior deputy comptroller for bank supervision policy. “Financial technology is changing rapidly and bank-fintech partnerships are likely to continue growing in number and complexity. To ensure that the federal banking system is safe, sound, and fair today and well into the future, we need to have a deep understanding of financial technology and the financial technology landscape,” acting Comptroller of the Currency Michael J. Hsu said. “The establishment of this office will enable us to be more agile and to promote responsible innovation, consistent with our mission.”
CFPB seeks additional public input on big tech payment platforms
On October 31, the CFPB announced it will reopen the public comment period for 30 days on a 2021 notice and request for comment related to the Bureau’s inquiry into big tech payment platforms. In October 2021, the Bureau issued orders to six large U.S. technology companies seeking information and data on their payment system business practices to inform the agency as to how these companies use personal payments data and manage data access to users (covered by InfoBytes here). The Bureau is inviting additional comments to broaden its understanding of the risks consumers face and potential policy solutions on topics related to, among other things, “companies’ acceptable use policies and their use of fines, liquidated damages provisions, and other penalties.” A notice will be published in the Federal Register with additional details on the public comment period in the coming days.
DOE announces final rules for targeted debt relief programs
On October 31, the Department of Education (DOE) announced final rules to streamline and improve targeted debt relief programs. (See DOE fact sheet here.) The final rules implement several changes to protect student borrowers, including:
- Borrower defense to repayment and arbitration. The final rules establish a strong framework for borrowers to raise a defense to repayment if their post-secondary institution misleads or manipulates them. Claims pending on or received on or after July 1, 2023, can be decided individually or as a group, and may be based on one of the following categories of actionable circumstances: substantial misrepresentation, substantial omission of fact, breach of contract, aggressive and deceptive recruitment, or judgments or final secretarial actions. The final rules will only provide full relief (partial discharges will not be considered), with approved claims requiring “that the institution committed an act or omission which caused the borrower detriment of such a nature and degree that warrant full relief” based upon a preponderance of the evidence. Additionally, the final rules establish certain recoupment processes for DOE to pursue institutions for the cost of approved claims, and will allow borrowers to litigate their case “by preventing institutions that participate in the Direct Loan program from requiring borrowers to engage in pre-dispute arbitration or sign class action waivers.”
- Closed school discharges. The final rules provide an automatic discharge of a borrower’s loan “one year after a college’s closure date for borrowers who were enrolled at the time of closure or left 180 days before closure and who do not accept an approved teach-out agreement or a continuation of the program at another location of the school.” Borrowers who accept but do not complete a teach-out agreement or program continuation will receive a discharge one year after the last date of attendance.
- Total and permanent disability discharge. The final rules include new options for borrowers who have had a total and permanent disability to receive a discharge, including borrowers (i) who receive additional types of disability review codes from the Social Security Administration (SSA); (ii) who later aged into retirement benefits and are no longer classified by one of SSA’s codes; (iii) who have an established disability onset date determined by SSA to be at least 5 years in the past; and (iv) whose first continuing disability review is scheduled at three years. The final rules also eliminate a three-year income monitoring requirement.
- Interest capitalization. Under the final rules, “interest will no longer be added to a borrower’s principal balance the first time a borrower enters repayment, upon exiting a forbearance, and leaving any income-driven repayment plan besides Income-Based Repayment.” Specifically, the final rules eliminate all instances where interest capitalization—which occurs when a borrower has outstanding unpaid interest added to the principal balance—is not required by law.
- Public Service Loan Forgiveness. As previously covered by InfoBytes, the final rules will provide benefits for borrowers seeking Public Service Loan Forgiveness, including providing credit toward the program for borrowers who have qualifying employment.
- False certification. The final rules will provide borrowers with an easier path to discharge when a college falsely certifies a borrower’s eligibility for a student loan. This includes expanding allowable documentation, clarifying applicable discharge dates, and allowing for the consideration of group discharges.
The final rules are effective July 1, 2023.
Commissioner says CFTC should take a “same risk, same regulatory outcome” approach for addressing crypto risks
On October 26, CFTC Commissioner Christy Goldsmith Romero spoke before the International Swaps and Derivatives Association’s Crypto Forum 2022, where she presented thoughts on the financial stability risks of cryptocurrency assets. Romero cautioned that the “rapidly developing crypto market” is facing similar financial stability risks as the traditional financial system, including parallel themes from the 2008 financial crisis. She highlighted events such as those that happened earlier in the year where an algorithmic stablecoin and related crypto-asset collapsed and triggered a broad sell off of cryptocurrency that spread losses to several institutions who abruptly cut off lending. These vulnerabilities serve as a warning for growing intra-market risks, Romero said, explaining that “[j]ust as regulators could not see the true exposures or risk in 2008 due to unregulated companies and products, [regulators] cannot see that today with unregulated crypto markets.” Moreover, without additional regulatory authority, the CFTC’s ability to monitor these risks is hampered, she said, adding that “[f]inancial stability risk will increase, and could rise to the level of systemic risk if in the future there are greater interconnections between the crypto industry and traditional finance players performing critical market functions.”
Romero recognized that novel technologies bring novel risks, and said that the CFTC should address these risks by using its existing authority to follow a “same risk, same regulatory outcome” approach and establish customer protections and guardrails that investors and customers are familiar with and have come to expect from other regulated financial products and markets. She emphasized that financial institutions interested in entering the digital asset space “should undertake substantial due diligence to determine vulnerabilities” in areas such as cyber theft, money laundering, and sanctions evasion; fraud, scams, and market manipulation; customer asset segregation; and conflicts of interest.
DOE expands support for veterans/servicemembers and incarcerated individuals
On October 27, the Department of Education (DOE) announced final rules cracking down on deceptive practices affecting veterans and servicemembers and expanding college access to incarcerated students. (See DOE fact sheet here.) The final rules, among other things, (i) implement a change to the “90/10 rule” made by the American Rescue Plan in 2021, which closed a loophole in the Higher Education Act that previously incentivized some for-profit colleges to aggressively recruit veterans and servicemembers in order to receive more DOE funding (going forward, these institutions may no longer count money from veteran and service member benefits toward a 10 percent revenue requirement); (ii) expand access to DOE’s Second Chance Pell Experimental Sites Initiative to allow incarcerated individuals in nearly all states to participate; (iii) provide incarcerated individuals with access to the FSA’s Fresh Start initiative, which will help borrowers with defaulted loans access income-driven low monthly payments as well as with access to Pell Grants; and (iv) clarify requirements and processes for post-secondary institutions when changing ownership, which may require institutions to provide additional financial protection or impose other conditions to protect against risks arising from the transaction.
CSBS provides tips on NMLS annual renewal
On October 20, the Conference of State Bank Supervisors (CSBS) announced that individuals and businesses in the mortgage, money transmission, debt collection, and consumer financial services industry are encouraged by state regulators to prepare for November 1, which is the beginning of the Nationwide Multistate Licensing System (NMLS) annual license renewal. The announcement noted the number of individual state licenses eligible for renewal is 13 percent higher than the same time last year, while the number of company licenses eligible for renewal is up 16 percent compared to this time last year. CSBS provided five tips for licensees to prepare for NMLS renewal, which include, among other things, resetting NMLS passwords to conform with new requirements that went into effect this past March and to review state-specific renewal requirements. CSBS also noted that the renewal period in most states runs from November 1 to December 31.