InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Fannie, Freddie announce LIBOR transition plans
On December 22, GSEs Fannie Mae and Freddie Mac announced replacement indices based on the Secured Overnight Financing Rate (SOFR) for their legacy LIBOR indexed loans and securities (see here and here). The announcement follows the Federal Reserve Board’s final rule setting forth recommended replacement rates for financial contracts based on LIBOR (covered by InfoBytes here). For single-family mortgage loans and related mortgage-backed securities, the GSEs selected the relevant tenor of CME Term SOFR plus the applicable tenor spread adjustment, as published and provided by Refinitiv Limited (also known as “USD IBOR Cash Fallbacks” for “Consumer” products). The transition to the replacement indices will occur the day after June 30, 2023, which is the last date on which the Intercontinental Exchange, Inc. Benchmark Administration Limited will publish a representative rate for all remaining tenors of U.S. dollar LIBOR. The GSEs also published replacement indices for multifamily mortgage loans and related mortgage-backed securities, single family and multifamily collateralized mortgage obligations and credit risk transfer securities, and derivatives.
Washington issues work from home regulations
Recently, the Washington Department of Financial Institutions adopted regulations implementing amendments to the Consumer Loan Act and the Mortgage Broker Practices Act. The amendments, among other things, allow licensed companies, subject to enumerated conditions, to permit licensed mortgage loan originators to work from their residence without licensing the residence as a branch. The amended regulations also clarify that a licensed loan originator may originate loans from any licensed location or their residence, whether located in Washington or not, so long as the mortgage loan originator’s sponsoring company is licensed to do business in Washington. The amendments are effective January 1, 2023.
CFPB, FTC say furnishers’ investigative duties extend to legal disputes
On December 16, the CFPB and FTC filed an amicus brief in a case on appeal to the U.S. Court of Appeals for the Eleventh Circuit concerning two related FCRA cases in support of plaintiffs-appellants and reversal of their suits involving a defendant hotel chain’s summary judgments. Both cases involve the same defendant company. In one case, the plaintiff entered into a timeshare agreement with the defendant for a property and made monthly payments for approximately three years. When the plaintiff stopped making payments, the plaintiff mailed the defendant letters that disputed the validity of, and purported to rescind, the agreement, while permitting the defendant to retain all prior payments as liquidated damages. The plaintiff obtained a copy of his credit report from a credit reporting agency (CRA), which stated that he had an open account with the defendant with a past-due balance. In three letters to the CRA, the plaintiff disputed the credit reporting. The letters stated that the plaintiff had terminated his agreement with the defendant and that he did not owe a balance. After the CRA communicated each dispute to the defendant, the defendant certified that the information for the defendant’s account was accurate. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of his credit report without conducting reasonable investigations following receipt of his indirect disputes. The defendant moved for summary judgment, alleging, among other things, that the plaintiff’s claim that he was not contractually obligated to make the payments to the defendant that are reported on his credit report as being due “is inherently a legal dispute and is not actionable under the FCRA.” The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
In the other case, the plaintiff entered into a timeshare agreement with the defendant. She made a down payment and the first three installment payments, but did not make any additional payments. The plaintiff sent letters to the defendant disputing the validity of, and attempted to cancel, the agreement. The defendant reported the plaintiff’s delinquency to the CRA. In three letters to the CRA, the plaintiff disputed the credit reporting. After the CRA communicated the disputes to the defendant, the defendant determined there was no inaccuracy in the reporting. The plaintiff sued alleging the defendant violated the FCRA when it verified the accuracy of her credit report without conducting reasonable investigations following receipt of her indirect disputes about credit reporting inaccuracies. The district court granted the defendant’s motion for summary judgment, which the plaintiff appealed.
The CFPB and FTC argued in favor of the plaintiffs-appellants. According to the agencies, furnishers’ duty under the FCRA to reasonably investigate applies not only to factual disputes, but also to disputes that can be labeled as legal in nature. The agencies made three arguments to support their contention. First, a reasonable investigation is required under the FCRA to comport with its goal to “protect consumers from the transmission of inaccurate information about them.” The agencies argued that reasonableness is case specific, but it can “be evaluated by how thoroughly the furnisher investigated the dispute (e.g., how well its conclusion is supported by the information it considered or reasonably could have considered).”
Second, the agencies argued that Congress did not intend to exclude disputes that involve legal questions. The FCRA describes the types of indirect disputes that furnishers need to investigate, which are “those that dispute ‘the completeness or accuracy of any item of information contained in a consumer’s file.’” The agencies said nothing suggests that Congress intended to exclude information that is inaccurate on account of legal issues. Furthermore, the agencies noted that a lot of “inaccuracies in consumer reports could be characterized as legal, which would create an exception that would swallow the rule.” Consumer reports generally include information regarding an individual’s debt obligations, which are generally creatures of contract. Therefore, “many inaccurate representations pertaining to an individual’s debt obligations arguably could be characterized as legal inaccuracies, given that determining the truth or falsity of the representation could require the reading of a contract.”
Lastly, the agencies argued that an “atextual exception for legal inaccuracies would create a loophole that could swallow the reasonable investigation rule.” The agencies urged that “[g]iven the difficulty in distinguishing ‘legal’ from ‘factual’ disputes,” the court “should hold that there is no exemption in the FCRA’s reasonable investigation requirement for legal questions” because it would “curtail the reach of the FCRA’s investigation requirement in a way that runs counter to the purpose of the provision to require meaningful investigation to ensure accuracy on credit reports.”
Bank to pay $2 million in collection call suit
On December 14, a Superior Court of California granted a stipulated final judgment resolving claims that a national bank (defendant) violated the Rosenthal Fair Debt Collection Practices Act (RDCPA) and the FDCPA by making “harassing and annoying” debt collection calls to its customers. According to the stipulated final judgment, since at least March 2015, the defendant allegedly violated California and federal law by making phone calls with “unreasonably excessive frequency,” while also persisting in calling wrong numbers in attempts to collect on unpaid debts. The defendant, which did not admit any liability or wrongdoing, agreed to, among other things: (i) adopt or maintain policies and procedures to avoid such harassing calls; (ii) limit the number of calls it will make as part of its future debt collection efforts; and (iii) cease calling those who ask orally or in writing that they not be contacted. Under the terms of the stipulated final judgment, the defendant must pay $1.45 million in civil penalties, $300,000 in investigative costs, and $250,000 in restitution.
District Court vacates DOE order on student loan servicer’s $22 million repayment
On December 16, the U.S. District Court for Eastern District of Virginia vacated and remanded the Department of Education’s (DOE) decision that a student loan servicer (plaintiff) had improperly collected $22 million in student loan-related subsidies from 2002 to 2005. According to the opinion, the plaintiff alleged that the DOE acted arbitrarily and capriciously in violation of the Administrative Procedure Act when it determined that the plaintiff erroneously claimed over $22 million in student loan-related subsidies. The plaintiff contended that in claiming those subsidies, it reasonably relied on two 1993 “Dear Colleague Letters” (DCL) from the DOE authorizing it to collect subsidies for student loans funded in whole or in part by tax-exempt obligations. According to the plaintiff, the DOE issued a new DCL in 2007 which disavowed the guidance in the DOE’s two 1993 DCLs, but nonetheless stated that the DOE would not collect past erroneous subsidies if the plaintiff prospectively followed the DOE’s revised interpretation set forth in the 2007 DCL. Nevertheless, the DOE initiated administrative proceedings seeking over $22 million in past subsidies collected by the plaintiff pursuant to the 1993 DCLs. The DOE’s acting secretary ruled in January 2021 that the plaintiff erred when it claimed those subsidies and must pay it back.
The plaintiff appealed, arguing that the DOE’s decision in 2021 failed to consider its reliance on the previous policy statements in the 1993 and 2007 letters. However, the DOE argued it was “unreasonable” for the plaintiff to rely on the DCLs, saying that the loan company should have known that the 1993 letters contradicted the Higher Education Act. Siding with the plaintiff, the court relied on the U.S. Supreme Court’s decision in Department of Homeland Security v. Regents of the University of California, which found that when an agency alters existing policy, it must assess “whether there were reliance interests, determine whether they were significant, and weigh any such interests against competing policy concerns.” The court further held that it is DOE's job to “weigh the strength of those reliance interests,” and it failed to do so.
NCUA proposal looks to promote CU-fintech partnerships
On December 15, the NCUA issued a proposed rule seeking input on amendments to the agency’s regulations on the purchase of loan participations and the purchase, sale, and pledge of eligible obligations and other loans, including notes of liquidating credit unions. Among other things, the proposed rule would remove certain prescriptive limitations and other qualifying requirements to provide federal credit unions with additional flexibility to purchase eligible obligations of their members and engage with advanced technologies and other opportunities presented by fintechs. Improved flexibility and individual autonomy will allow federal credit unions “to establish their own risk tolerance limits and governance policies for these activities, while codifying due diligence, risk assessment, compliance and other management processes that are consistent with the Board’s long-standing expectations for safe, sound, fair and affordable lending practices,” the NCUA said. Comments on the proposed rule are due 60 days after publication in the Federal Register.
“As I have emphasized before, credit unions should recognize and harness the potential opportunities fintechs may offer them,” NCUA Chairman Todd Harper said. “However, we must also acknowledge the potential risks they pose to credit unions, their members, and the system and develop appropriate guardrails. This proposed rule strikes that balance. It provides flexibility, safety, and tailored relief to credit unions while fostering greater innovation.”
CFPB says remittance provider violated EFTA
On December 22, the CFPB announced a consent order against an international remittance company for multiple alleged violations of the requirements governing electronic money transfers. According to the Bureau, the company allegedly failed to comply with many requirements of the Electronic Fund Transfer Act, including failing to provide refunds to customers after the company made money transfer errors. The Bureau also alleged that the company violated the Remittance Rule by failing to develop and maintain required written policies and procedures for error resolution, and claimed the company violated Regulation E by failing to retain evidence demonstrating compliance with the Remittance Rule’s error-resolution requirements. Under the terms of the consent order, the company is required to provide consumer redress of approximately $30,000 to harmed customers and pay a $700,000 civil money penalty to the Bureau. The company is also required to update disclosure and key transfer information that is provided to customers, as well as its error-resolution policies and procedures.
FHA extends some pandemic-related waivers
On December 20, FHA published FHA INFO 2022-107, which extends temporary regulatory and Single Family Housing Policy Handbook 4000.1 waivers, and permits mortgagees to use alternative methods for conducting face-to-face interviews with borrowers in accordance with FHA’s early default intervention requirements. FHA initially published temporary partial waivers of these requirements on March 13, 2020, and previously extended them through December 31, 2022, in response to the Covid-19 pandemic. FHA is further extending the waivers due to the Covid-19 pandemic, the spread of the Respiratory Syncytial Virus and seasonal flu, and current staffing and resource constraints affecting mortgage servicers. The waivers are now effective through December 31, 2023.
CFPB fines bank over auto loan, mortgage, and deposit account allegations
On December 20, the CFPB announced a consent order against a national bank for allegedly mismanaging auto loans, mortgages, and deposit accounts. According to the Bureau, the bank allegedly engaged in deceptive or unfair acts or practices in violation of the CFPA by, among other things: (i) incorrectly processing auto-loan payments; (ii) assessing borrowers erroneous fees and interest due to technology, audit, and compliance failures; (iii) incorrectly denying mortgage loan modification applications; (iv) failing to ensure that unearned Guaranteed Asset Protection fees were refunded to borrowers who paid off their loans; (v) incorrectly denying mortgage loan modification applications and miscalculated fees; and (vi) charging “surprise” overdraft fees on debit card transactions and ATM withdrawals because, according to the Bureau, consumers “believed that if they had enough money to cover the relevant transaction when it was authorized they would not incur an [o]verdraft fee.”
Under the terms of the consent order, the bank is required to pay redress totaling more than $2 billion to allegedly harmed customers. Specifically, the bank is ordered to pay approximately: (i) $1.3 billion in consumer redress for affected auto lending accounts; (ii) $500 million in consumer redress for affected deposit accounts, including $205 million for illegal surprise overdraft fees; and (iii) nearly $200 million in consumer redress for affected mortgage servicing accounts. Among other things, the bank is prohibited from charging overdraft fees for deposit accounts when the consumer had available funds at the time of a purchase or other debit transaction, but then subsequently had a negative balance once the transaction settled. The bank is also ordered to pay a $1.7 billion civil penalty to the Bureau. CFPB Director Rohit Chopra released a statement following the announcement saying the order does not provide immunity for any individuals nor does it release claims for any ongoing illegal acts or practices.
The bank issued a press release stating that “[c]urrent leadership has made significant progress to transform the bank,” and noting that “the CFPB recognized that since 2020, the company has accelerated corrective actions and remediation, including to address the matters covered by today’s settlement.”
District Court preliminarily approves lending discrimination settlement
On December 15, the U.S. District Court for the Northern District of California preliminarily approved a $480,000 class action settlement concerning whether an online lender allegedly denied consumers’ applications based on their immigration status. Plaintiffs filed a putative class action against the defendants, alleging the lender denied their loan applications based on one of the plaintiff’s Deferred Action for Childhood Arrivals (DACA) status and the other plaintiff’s status as a conditional permanent resident (CPR). Plaintiffs claimed that these practices constituted unlawful discrimination and “alienage discrimination” in violation of federal law and California state law. Plaintiffs also alleged that the defendants violated the FCRA by accessing their credit reports without a permissible purpose. (Covered by InfoBytes here.) Under the terms of the preliminarily approved settlement, the defendants would be required to pay $155,000 into a settlement fund, as well as up to $300,000 in attorneys’ fees and $25,000 in administrative costs. The defendants have also agreed to change their lending policies to ensure DACA and CPR applicants are evaluated for loan eligibility based on the same terms as U.S. citizens.
The district court noted, however, that the proposed settlement includes a “clear sailing arrangement,” which provides that the defendants will not oppose plaintiffs’ motion for attorneys’ fees and costs provided the requested amount does not exceed $300,000. Referring to an opinion issued by the U.S. Court of Appeals for the Ninth Circuit in which the appellate court warned that clear sailing arrangements are “important warning signs of collusion” because they show an increased “likelihood that class counsel will have bargained away something of value to the class,” the district court explained that it intends to “carefully scrutinize the circumstances and determine what attorneys’ fee awards is appropriate in this case.”