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CFPB releases spring 2022 semi-annual report
On December 6, the CFPB issued its semi-annual report to Congress covering the Bureau’s work for the period beginning October 1, 2021 and ending March 31, 2022. The report, which is required by Dodd-Frank, addresses several issues, including complaints received from consumers about consumer financial products or services throughout the reporting period. The report highlighted that the Bureau, among other things, has: (i) conducted an assessment of significant actions taken by state attorneys general and state regulators related to federal consumer financial law; (ii) initiated 21 fair lending supervisory activities to determine compliance with federal laws, including ECOA, HMDA, and UDAAP prohibitions, and engaged in interagency fair lending coordination with other federal agencies and states; (iii) “encouraged lenders to enhance oversight and identification of fair lending risk and to implement policies, procedures, and controls designed to effectively manage HMDA activities, including regarding integrity of data collection”; and (iv) launched a new Diversity, Equity, Inclusion, and Accessibility Strategic Plan to increase workforce and contracting diversity.
In regard to supervision and enforcement, the report highlighted the Bureau’s public supervisory and enforcement actions and other significant initiatives during the reporting period. Additionally, the report noted rule-related work, including advisory opinions, advance notice of proposed rulemakings, requests for information, and proposed and final rules. These include rules and orders related to the LIBOR transition, fair credit reporting, Covid-19 mortgage and debt collection protections for consumers, small business lending data collection, and automated valuation model rulemaking.
CFPB concerned National Guard and reservists pay extra interest on loans
On December 7, the CFPB released a report examining the use of the Servicemembers Civil Relief Act's (SCRA) interest rate reduction benefit. Among other things, the CFPB raised concerns that servicemembers pay extra interest each year as a result of not taking advantage of interest rate reductions to which they are entitled under the SCRA. The SCRA provides certain legal and financial protections to active duty servicemembers, such as the ability to reduce the interest rate on certain pre-service obligations or liabilities to a maximum of 6 percent. According to the Bureau, members of the National Guard and Reserves are likely to have financial obligations that predate a subsequent period of service. As a result, the interest rate reduction benefit could provide considerable financial value. However, the Bureau found that only a small fraction of activated Guard and Reserve servicemembers receive interest rate reductions. Specifically, the Bureau noted that: (i) between 2007 and 2018, less than 10 percent of eligible auto loans and six percent of personal loans received a reduced interest rate; (ii) in addition to the $100 million of foregone benefits on auto and personal loans, members of the reserve component infrequently benefit from interest rate reductions for credit cards and mortgage loans; and (iii) for longer periods of activation, the utilization rate is low. The Bureau recommended that creditors apply SCRA interest rate reductions for all accounts held at an institution if a servicemember invokes their rights for a single account, and stressed that creditors should automatically apply SCRA rights. The Bureau also noted that more frequent information on SCRA rate reduction utilization would help inform and evaluate future efforts to expand servicemembers’ financial rights and protections.
CFPB will not initiate HMDA enforcement actions for certain reporting failures
On December 6, the CFPB issued a blog post emphasizing that financial institutions may need time to implement or adjust policies, procedures, systems and operations to come into compliance with the new HMDA volume reporting threshold and that the agency does not view action regarding institutions’ HMDA data as a current priority. As previously covered by InfoBytes, in September, the U.S. District Court for the District of Columbia granted partial summary judgment to a group of consumer fair housing associations that challenged changes made in 2020 that permanently raised coverage thresholds for collecting and reporting data about closed-end mortgage loans and open-end lines of credit under HMDA. The 2020 Rule, which amended Regulation C, permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200 (covered by InfoBytes here). The plaintiffs sued the CFPB in 2020, arguing, among other things, that the final rule “exempts about 40 percent of depository institutions that were previously required to report” and undermines HMDA’s purpose by allowing potential violations of fair lending laws to go undetected. (Covered by InfoBytes here.)
According to the blog post, the Bureau “does not intend to initiate enforcement actions or cite HMDA violations for failures to report closed-end mortgage loan data collected in 2022, 2021 or 2020 for institutions subject to the CFPB’s enforcement or supervisory jurisdiction that meet Regulation C’s other coverage requirements and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years but fewer than 100 closed-end mortgage loans in either or both of the two preceding calendar years.”
DOE releases post-moratorium collection guidance for guaranty agencies
On December 2, the Department of Education’s Office of Federal Student Aid published guidance informing guaranty agencies (GAs) of their obligations related to Federal Family Education Loan (FFEL) Program loans that are in default. In August, the DOE implemented its Fresh Start initiative, which establishes guarantor obligations for a one-year period following the pandemic payment pause. As previously covered by InfoBytes, the current pause on student loan repayments, interest, and collection was extended last month as the U.S. Supreme Court reviews the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.
According to the guidance, GAs are required to suspend collection efforts (including involuntary collections) against borrowers who are eligible for the Fresh Start initiative for one year after the pandemic moratorium ends. During this period, GAs may counsel borrowers about the processing of voluntary payments as well as their loan terms and what repayment plans may be available should their loan be removed from default. Loan rehabilitations occurring during the moratorium will not count toward a borrower’s single opportunity to rehabilitate a loan, the guidance explained, adding that beginning February 1, 2023, “GAs will report all defaulted borrowers as current unless their first date of delinquency (FDD) – which is not the same as their default date – is more than seven years ago. If the FDD is more than seven years ago, GAs must delete the borrower’s tradeline.” However, GAs will not be expected to perform retroactive tradeline updates. Following the end of the moratorium, GAs may resume interest rate accruals for all loans provided it is done in accordance with the law and the borrower’s promissory note, in addition to any loan modifications agreed upon by the GA. GAs must also obtain consent under the TCPA when communicating with borrowers, and gather information related to borrowers’ income-driven repayment plans and bankruptcy account details, if applicable.
OCC discusses credit risk management, diversity and inclusion
On December 5, acting Comptroller of the Currency Michael J. Hsu delivered remarks at the RMA Risk Management and Internal Audit Virtual Conference, where he spoke about the current expected credit losses standard (CECL) and the importance of workforce diversity and inclusion. Hsu started by discussing CECL and mentioning that though loan portfolios have generally remained resilient and widespread, “deterioration isn’t currently evident in credit quality metrics, the effects of high inflation, rising interest rates, lagging wage growth, supply chain disruptions, and stress from geopolitical events threaten the unexpectedly strong credit performance observed over the past few years.” He further pointed out that the longer-term effects of the Covid-19 pandemic, such as the shift in preferences toward online shopping and remote work, and other circumstances, can erode business profit margins, debt service capacity, and collateral valuations, in addition to adversely affecting credit risk levels at financial institutions. When speaking about sound practice, Hsu stated that maintaining safe and sound credit risk management practices through this period of economic uncertainty is critical. He also noted that “timely risk identification and ratings, increased focus on concentrated portfolios and vulnerable borrowers, and stress testing and sensitivity analysis are particularly critical risk management activities at this time.” He further warned that the “flexibility” provided by CECL must ensure safety and soundness, arguing that there needs to be “appropriate support and documentation of management’s judgments,” as well as management’s assumptions, decisions, expectations, and qualitative adjustments. He emphasized that the first step to improving diversity, equity, and inclusion requires more transparency from the financial services industry regarding the diversity of their boards and executive leadership, and organizations need to develop diversity plans and monitor outcomes. He also emphasized that financial institutions should actively “foster a true sense of belonging for everyone.” In closing, Hsu stated that “improving diversity and inclusion is a ‘need to have’ for [the OCC] to achieve our mission of assuring safety and soundness, fair access to financial services, and fair treatment of customers.”
Barr suggests stress test changes may be coming
On December 1, Federal Reserve Board Vice Chair for Supervision Michael S. Barr signaled changes may be coming to the supervisory stress test standards for large banks, as the Fed evaluates whether the test used to set capital requirements reflects an appropriately wide range of risks. Speaking during an American Enterprise Institute event, Barr commented that the Fed is also “considering the potential for stress testing to be a tool to explore different sources of financial stress and uncover channels for contagion that lead to unanticipated consequences.” He added that the use of “multiple scenarios or adapting the stress test in other ways to better account for the high degree of interconnectedness between banks and other financial entities could allow supervisors and banks to identify those conditions and take action to address them.” Financial stability risks posed by the nonbank sector are also a strong concern for regulators, Barr said, commenting that many of these firms are undercapitalized and engage in high-risk activities. He stressed that the migration of activities from banks to nonbanks should be monitored carefully, and cautioned against lowering bank capital requirements “in a race to the bottom,” particularly since nonbank financial market stress is often directly and indirectly transmitted to the banking system. Banks must have sufficient capital to remain resilient to those stresses, Barr said.
California appellate court upholds judgment in RFDCPA suit
On November 23, the California Court of Appeal for the Fourth Appellate District upheld a summary judgment ruling for a creditor over allegations that it violated the Rosenthal Fair Debt Collection Practices Act (RFDCPA). The plaintiff, the widow of a former patient of the defendant doctor, asserted claims against the doctor and his professional corporation (collectively, “defendants”) alleging that they were debt collectors within the meaning of the RFDCPA. The plaintiff alleged that the defendants violated the RFDCPA by sending “multiple bills and making incessant” phone calls seeking payment for services provided to her husband before he died. The plaintiff requested that the defendants stop contacting her and seek payment through insurance and the hospital. The defendants used two different companies for its third-party billing services, and those companies sent invoices to the plaintiff, who responded that payment inquiries for her deceased husband should only be submitted to the insurance company and the medical center. The trial court granted the defendants’ motion for summary judgment, ruling they did not meet the statute’s definition of a debt collector.
The appellate court affirmed, finding that “a medical service provider that exclusively uses an unaffiliated, third-party billing service to collect payment for services rendered to patients” is not a “debt collector” within the meaning of the RFDCPA. The court found that although the RFDCPA “applies to those who collect debts on behalf of themselves,” the law still requires that a defendant “must regularly and in the ordinary course of business ‘engage in’ debt collection” for liability to attach. The appellate court emphasized that it was not holding that “a creditor may never be vicariously liable for the actions of a debt collector on an agency theory.” Instead, the plaintiff carried “the burden to demonstrate a triable issue of material fact on the existence of such an agency relationship, and she failed to do so on this record.”
Supreme Court asked to stay judgment holding that HEROES Act does not authorize the creation of the DOE’s student debt relief plan
Recently, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas in an action related to whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. As previously covered by InfoBytes, the district court held that while the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the district court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness. On December 1, the U.S. Court of Appeals for the Fifth Circuit denied the DOE’s motion for stay pending appeal.
In its application, the DOE argued that the plaintiffs never asserted that the debt relief plan exceeded the education secretary’s statutory authority. Instead, the DOE argued, the plaintiffs alleged only that they were improperly denied the opportunity to comment on the plan, stressing that while the district court recognized that the HEROES Act expressly exempts the APA’s notice-and-comment obligations, it went further by holding that the plan went beyond the secretary’s authority. “The district court profoundly erred by raising and deciding a claim that respondents did not assert and could not have asserted,” the DOE stressed, further adding that the plaintiffs did not claim that providing debt relief to other borrowers would inflict injury on them. Beyond this, the secretary’s plan “falls squarely within the plain text of his statutory authority,” the DOE asserted. The DOE requested that the Supreme Court stay the district court’s judgment, or in the alternative, defer the application pending oral argument and treat it as a petition for certiorari before judgment, grant the petition, and hear the case along with a second separate action, discussed below, involving a challenge to an injunction that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.
As previously covered by InfoBytes, on December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit. The 8th Circuit held that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose,” and pointed to the fact that the collection of student loan payments and the accrual of interest have both been suspended. (Covered by InfoBytes here.) The 8th Circuit’s opinion followed a ruling issued by the U.S. District Court for the Eastern District of Missouri, which dismissed an action filed by state attorneys general from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina for lack of Article III standing after concluding that the states—which attempted “to assert a threat of imminent harm in the form of lost tax revenue in the future”— failed to establish imminent and non-speculative harm sufficient to confer standing. In an unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Oral arguments are scheduled for February 28, 2023.
9th Circuit revives data breach class action against French cryptocurrency wallet provider
On December 1, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a district court’s dismissal of a putative class action brought against a French cryptocurrency wallet provider and its e-commerce vendor for lack of personal jurisdiction. As previously covered by InfoBytes, plaintiffs—customers who purchased hardware wallets through the vendor’s platform between July 2017 and June 2020—alleged violations of state-level consumer protection laws after a 2020 data breach exposed the personal contact information of thousands of customers. Plaintiffs contended, among other things, that when the breach was announced in 2020, the wallet provider failed to inform them that their data was involved in the breach, downplayed the seriousness of the attack, and did not disclose that the attack on its website and the vendor’s data theft were connected. The district court held that it did not have jurisdiction over the French wallet provider, and ruled, among other things, that the plaintiffs did not establish that the wallet provider “expressly aimed” its activities towards California in a way that would establish specific jurisdiction, and “did not cause harm in California that it knew was likely to be suffered there.” The district court further held that the fact that the vendor was headquartered in California at the time the breach occurred was not sufficient to establish general jurisdiction because the vendor moved to Canada before the class action was filed. “Courts have uniformly held that general jurisdiction is to be determined no earlier than the time of filing of the complaint,” the district court wrote, dismissing the case with prejudice.
On appeal, the 9th Circuit concluded that dismissal was improper because the French wallet provider’s contracts with California were sufficient to establish jurisdiction under the “purposeful availment” framework. The appellate court explained that because the French wallet provider sold roughly 70,000 wallets in the state, collected California sales tax, and shipped wallets directly to California addresses, the “facts suffice to establish purposeful availment because [the French wallet provider’s] contacts with the forum cannot be characterized as ‘random, isolated, or fortuitous.’” However, the 9th Circuit limited the claims to only those brought by California residents under the state’s consumer protection laws. A forum-selection clause in the French wallet provider’s privacy policy and terms of use documents provided that disputes would be subject to the exclusive jurisdiction of French courts, the appellate court said, which was enforceable except with respect to the class claims of California residents brought under California law “because it violated California public policy against waiver of consumer rights under California’s Consumer Legal Remedies Act.”
The 9th Circuit also determined that the district court abused its discretion in disallowing any jurisdictional discovery concerning the defendant e-commerce vendor. Explaining that the e-commerce vendor employs more than 200 people who work remotely from California, including a data-protection officer (DPO) who may have played a role related to the data breach, the appellate court wrote that “[b]ecause more facts are needed to determine whether those activities support the exercise of jurisdiction, we reverse the district court’s denial of jurisdictional discovery with respect to the DPO’s role and responsibilities and his relationship to [the e-commerce vendor], which processed and stored the data.”
OFAC sanctions Haitian politicians
On December 2, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 14059 against two Haitian politicians for their involvement in activities or transactions that have materially contributed to, or pose a significant risk of materially contributing to, the international proliferation of illicit drugs or their means of production. As a result of the sanctions, all property and interests in property belonging to the sanctioned persons subject to U.S. jurisdiction are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by one or more blocked persons are also blocked.” U.S. persons are also generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons. Persons that engage in certain transactions with the individuals or entities designated today may themselves be exposed to sanctions or subject to enforcement. Additionally, OFAC warned that engaging in certain transactions with the designated individuals could expose entities to sanctions or subject them to an enforcement action.