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On July 7, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from October 1, 2019, through March 31, 2020. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger discusses the Bureau’s response to the Covid-19 pandemic, stating that the Bureau has participated in “countless joint statements, virtual co-appearances, and shared broadcasts to stakeholders with [their] prudential partners” and has “directly engage[d] consumers with the right information, at the right time.”
Among other things, the report highlights first time homebuyers and credit scores as areas in which consumers face significant problems, citing to the Bureau’s Market Snapshot on First-time Homebuyers and the quarterly consumer credit trends report on public records. In addition to highlighting the Bureau’s previous efforts during the reporting period, the report notes upcoming initiatives and plans, including (i) the Taskforce on Federal Consumer Financial Law’s public listening sessions in the fall; (ii) the cost-benefit analysis symposium in July; and (iii) further work on their Covid-19 pandemic responses.
On April 30, the CFPB issued its annual fair lending report to Congress, which outlines the Bureau’s efforts in 2019 to fulfill its fair lending mandate. According to the report, in 2019 the Bureau continued to focus on promoting fair, equitable, and nondiscriminatory access to credit, highlighting several fair lending priorities that continued from years past such as mortgage lending, student loans, and small business lending. The Bureau also highlighted three policies released over the last year to promote innovation and to facilitate compliance: the No-Action Letter Policy, the Trial Disclosure Program Policy, and the Compliance Assistance Sandbox Policy (covered by InfoBytes here). Additionally, the report discussed the Bureau’s efforts in encouraging consumer-friendly innovation to expand access to unbanked and underbanked consumers and communities. These include: (i) using alternative data in credit underwriting to expand credit access responsibly; (ii) issuing a request for information on the use of “Tech Sprints” (covered by InfoBytes here) to encourage regulatory innovation and stakeholder collaboration; (iii) continuing to enforce fair lending laws such as ECOA and HMDA, including reaching a settlement with one of the largest HDMA reporters nationwide to resolve HMDA reporting allegations; and (iv) engaging with stakeholders to discuss fair lending compliance, issues related to credit access, and policy decisions. The report also provides information related to supervision, enforcement, rulemaking, and education efforts.
On May 1, Chairwoman of the House Financial Services Committee, Maxine Waters (D-CA), sent a letter to the Department of Treasury (Treasury) and the Small Business Administration (SBA) urging them to prohibit payday and car-title lenders from receiving Paycheck Protection Program (PPP) loans, citing harm these types of lenders have caused to consumers. The Congresswoman stressed that “there is no reason why Congress, SBA, or Treasury should bail out these predatory lenders” and encouraged them to instead focus on “providing PPP loans to the millions of responsible small businesses who are pillars in communities across the country and warrant immediate support.”
On April 24, the Federal Reserve filed a report with Congress regarding various new credit facilities developed to combat liquidity issues caused by the Covid-19 pandemic. The report provides the initial update to Congress regarding the Primary Dealer Credit Facility, Commercial Paper Funding Facility, and Money Market Mutual Fund Liquidity Facility pursuant to Section 13(3) of the Federal Reserve Act as of April 14, 2020.
On April 23, Senator Elizabeth Warren (D-MA) and Congresswoman Nydia Velazquez sent letters to the Inspectors General (IG) of the Department of Treasury and the Small Business Administration (SBA). On the same day, Senators Schumer (D-NY), Brown (D-OH), and Cardin (D-MD) also sent a letter to the SBA IG. The letters requested that the IGs investigate the administration of loan applications for the SBA Paycheck Protection Program (PPP) in order to detect any preferential treatment provided by lenders to certain applicants. The letter from Warren and Velazquez cited numbers released by the SBA, which they suggested indicated that smaller businesses have been receiving proportionally less of the PPP funds than much larger businesses. Schumer, Brown and Cardin requested that the SBA IG reply to the letter by May 8 with a recommendation on the SBA rules, regulations, and policies and procedures “to ensure small businesses get the money they need and are being treated fairly” by PPP lenders. Their letter expressed concerns that underserved, rural, minority-owned, and women-owned businesses need financial assistance immediately, and the lack of a previously-existing banking relationship should not place them lower in the lender’s queue preventing them from receiving PPP loans.
Treasury and Small Business Administrator urge Congress to appropriate funds for Paycheck Protection Program
On April 15, the U.S. Treasury secretary and Small Business Administration administrator issued a statement urging Congress to appropriate additional funds for the Paycheck Protection Program to meet the high demand from small businesses for relief in response to Covid-19. The statement notes that “SBA will not be able to issue new loan approvals once the programs experiences a lapse in appropriations.”
On March 25, the Federal Reserve Board filed three reports to Congress pursuant to Section 13(3) of the Federal Reserve Act on the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, and the Money Market Mutual Fund Liquidity Facility. Each report provides Congress with details on the facilities, including the structure and basic terms of the facilities. The announcement of the lending facilities was previously covered here.
On February 3, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1, 2019, through September 30, 2019. The report, which is required by the Dodd-Frank Act, addresses, among other things, problems faced by consumers with regard to consumer financial products or services; significant rules and orders adopted by the Bureau; and various supervisory and enforcement actions taken by the Bureau. In her opening letter, Director Kathy Kraninger reported that she has focused, “whenever appropriate and possible” on two areas: (i) encouraging saving, by establishing a program called “Start Small, Save Up”; and (ii) unleashing innovation by reducing regulatory constraints and revising innovation policies and promoting cooperation between state and federal regulators, as demonstrated with the launch of the American Consumer Financial Innovation Network last year.
Among other things, the report highlights credit scores, credit reporting, and the consumer credit card market as areas in which consumers face significant problems. The report notes that credit reports and credit scores greatly affect credit available to consumers. With respect to the availability of general purpose credit cards the report cites Bureau findings that in 2018, consumers with high credit scores had an 83 percent approval rate, whereas consumers with subprime credit scores had only a 17 percent approval rate. In addition to these areas of focus, the report notes the issuance of one significant final rule—Payday, Vehicle Title, and Certain High-Cost Installment Loans; Delay of Compliance Date; Correction Amendments—last year. (Covered by InfoBytes here.) Several less significant rules were also finalized, including (i) Technical Specifications for Submissions to the Prepaid Account Agreements Database; (ii) Availability of Funds and Collection of Checks (Regulation CC); and (iii) Home Mortgage Disclosure (Regulation C)–2019 Final Rule.
On January 15, the SEC filed a brief in a pending U.S. Supreme Court action, Liu v. SEC. The question presented to the Court asks whether the SEC, in a civil enforcement action in federal court, is authorized to seek disgorgement of money acquired through fraud. The petitioners were ordered by a California federal court to disgorge the money that they collected from investors for a cancer treatment center that was never built. The SEC charged the petitioners with funneling much of the investor money into their own personal accounts and sending the rest of the funds to marketing companies in China, in violation of the Securities Act’s prohibitions against using omissions or false statements to secure money when selling or offering securities. The district court granted the SEC’s motion for summary judgment, and ordered the petitioners to pay a civil penalty in addition to the $26.7 million the court ordered them to repay to the investors. The petitioners appealed to the Supreme Court and in November, the Court granted certiorari.
The petitioners argued that Congress has never authorized the SEC to seek disgorgement in civil suits for securities fraud. They point to the court’s 2017 decision in Kokesh v. SEC, in which the Court reversed the ruling of the U.S. Court of Appeals for the Tenth Circuit when it unanimously held that disgorgement is a penalty and not an equitable remedy. Under 28 U.S.C. § 2462, this makes disgorgement subject to the same five year statute of limitations as are civil fines, penalties and forfeitures (see previous InfoBytes coverage here). The petitioners also suggested that the SEC has enforcement remedies other than disgorgement, such as injunctive relief and civil money penalties, so loss of disgorgement authority will not hinder the agency’s enforcement efforts.
According to the SEC’s brief, historically, courts have used disgorgement to prevent unjust enrichment as an equitable remedy for depriving a defendant of ill-gotten gains. More recently, five statutes enacted by Congress since 1988 “show that Congress was aware of, relied on, and ratified the preexisting view that disgorgement was a permissible remedy in civil actions brought by the [SEC] to enforce the federal securities laws.” The agency notes that the Court has recognized disgorgement as both an equitable remedy and a penalty, suggesting, however, that “the punitive features of disgorgement do not remove it from the scope of [the Exchange Act’s] Section 21(d)(5).” Regarding the petitioner’s reliance on Kokesh, the brief explains that “the consequence of the Court’s decision was not to preclude or even to place special restrictions on SEC claims for disgorgement, but simply to ensure that such claims—like virtually all claims for retrospective monetary relief—must be brought within a period of time defined by statute.”
In addition to the brief submitted by the SEC, several amicus briefs have been filed in support of the SEC, including a brief from several members of Congress, and a brief from the attorneys general of 23 states and the District of Columbia.
On January 14, a coalition of attorneys general from 19 states and the District of Columbia sent a letter to Congress in support of H.J. Res. 76, which was passed by the House of Representatives on January 16, and provides for congressional disapproval of the Department of Education’s 2019 Borrower Defense Rule (covered by InfoBytes here). The Department’s 2019 Borrower Defense Rule, published last September and set to take effect July 1, revises protections for student borrowers that were significantly misled or defrauded by their higher education institution and establishes standards for loan forgiveness applicable for “adjudicating borrower defenses to repayment claims for Federal student loans first disbursed on or after July 1, 2020.”
The AGs claim, however, that the 2019 Borrower Defense Rule “provides no realistic prospect for borrowers to discharge their loans when they have been defrauded by predatory for-profit schools, and . . . eliminates financial responsibility requirements for those same institutions.” The AGs further argue that the new provisions require “student borrowers to prove intentional or reckless misconduct on the part of their schools,” which they claim is “an extraordinarily demanding standard not consistent with state laws governing liability for unfair and deceptive conduct.” Other standards, such as requiring student borrowers to “prove financial harm beyond the intrinsic harm caused by incurring federal student loan debt as a result of fraud” and establishing a three-year time bar on borrower defense claims, would further reduce protections for student borrowers. Citing to several state enforcement actions taken against for-profit schools for alleged deceptive and unlawful tactics, the AGs stress the need for a “robust and fair borrower defense rule.”
- Jonice Gray Tucker to discuss “How the new administration sets the tone for 2021” at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Sherry-Maria Safchuk to discuss UDAAP in consumer finance at an American Bar Association webinar
- Jeffrey P. Naimon to discuss "What to expect: The new administration and regulatory changes" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Steven R. vonBerg to discuss "LO comp challenges" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss “The False Claims Act today” at the Federal Bar Association Qui Tam Section Roundtable