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CFPB levies $1.5M civil money penalty against a credit union
On October 31, the CFPB issued a consent order and stipulation against a federal credit union for allegedly engaging in unfair practices related to its online and mobile banking services, which violated the CFPA. The Bureau found that the credit union’s premature launch of a new banking platform led to service disruptions and harm to consumers. In May 2022, the credit union introduced a new banking platform, but the platform crashed upon launch and was subsequently taken offline. The Bureau alleged these disruptions caused significant harm to the credit union’s members, such as its failure to assess consumer fees properly for timely payments, and restricted access to consumer funds. The order mandated the credit union to comply with the law, refund fees to affected consumers, and pay a $1.5 million civil money penalty.
The CFPB stated the credit union’s actions resulted in substantial injury to consumers, including fees and costs due to missed payments and restricted access to funds. The credit union allegedly failed to establish adequate management and governance processes, ignored red flags, and rushed the project timeline. The order required the credit union to make a contingency plan, conduct a refund audit, and reimburse all affected consumers for previously uncompensated fees and costs.
Despite consenting to the issuance of the order, the credit union neither admitted nor denied any wrongdoing. The CFPB emphasized that the credit union’s failure to provide a stable banking platform constituted an unfair practice under the CFPA. The order included provisions for compliance monitoring and reporting to ensure the credit union adheres to the corrective actions mandated by the Bureau.
DOJ settles with credit union in redlining action
On October 10, the DOJ announced its first redlining settlement against a credit union. The credit union agreed to pay over $6.5 million to resolve allegations of lending discrimination by redlining predominantly Black and Hispanic neighborhoods in and around Philadelphia.
According to the complaint, from at least 2017 through 2021, the credit union allegedly failed to provide mortgage lending services to majority-Black and Hispanic neighborhoods and discouraged residents from obtaining home loans. The credit union’s mortgage lending was allegedly disproportionately focused on white areas, with peer lenders generating mortgage applications and originating loans in Black and Hispanic neighborhoods at significantly higher rates. The complaint also notes that the credit union’s branches are almost exclusively located in majority-White neighborhoods, with none in Philadelphia, which contains a significant portion of the majority-Black and Hispanic neighborhoods in the market area.
Under the proposed consent order, the credit union will invest $6.52 million to increase credit opportunities for communities of color in and around Philadelphia — $6 million in a loan subsidy fund, $250,000 on community partnerships for financial education and foreclosure prevention, $270,000 for advertising and outreach, and the opening of three new branches in predominantly Black and Hispanic neighborhoods. Additionally, the credit union will hire a community lending officer and retain independent consultants to enhance its fair lending program. Finally, the DOJ noted that the credit union, which has assets of approximately $6 billion and operates 24 branches in Greater Philadelphia, cooperated with the investigation.
California bans state banks and credit unions from charging NSF fees
On September 24, the Governor of California signed AB 2017 (the “Act”) into law, prohibiting state-chartered banks and credit unions from charging NSF fees when consumers initiate transactions that are instantaneously or near instantaneously declined because of insufficient funds. The Act aims to protect consumers from abusive financial practices, adding Chapter 5.5 to Division 1 of the Financial Code, specifically Section 530. The law should go into effect on January 1, 2025.
The Act’s analysis highlighted that the Act attracted support in both the Senate and the Assembly. The Act, modeled after the CFPB’s proposed overdraft fee rule (covered by InfoBytes here) eliminates NSF fees charged by banks without labeling them as “abusive.” The analysis emphasized that the Act aims to protect financially vulnerable consumers from being charged fees for transactions that are declined almost instantly, as these fees are considered disproportionate to the actual costs incurred by financial institutions.
NCUA releases Q2 2024 State-Level Credit Union Data Report
On September 16, the NCUA released its Q2 2024 State-Level Credit Union Data Report, which covered the performance of federally insured credit unions over the year. According to the NCUA, the latest Quarterly U.S. Map Review revealed that median total assets, shares and deposits, and membership at these credit unions declined while loans outstanding increased.
The NCUA’s Map Review provided performance indicators for federally insured credit unions across all 50 states and the District of Columbia and included data on two state-level economic indicators: the unemployment rate and home prices.
Court approves final settlement in class action against credit union alleging discriminatory loan denial based on DACA status
On August 15, the U.S. District Court for the Northern District of California, issued a final order approving settlement of a loan discrimination class action against a credit union, entering final judgment and ordering dismissal pursuant to the settlement. In this case, the plaintiff claimed that she and other class members experienced discrimination on the basis of immigration status after attempting to finance the purchase of her vehicle with the defendant credit union. According to the complaint, the plaintiff’s auto loan application was denied after disclosing her status as a DACA recipient to a representative of the defendant. The plaintiff alleged that the representative communicated that the defendant does “not lend on DACA status.” In a previous motion to dismiss, the credit union had argued the ECOA and Regulation B allow creditors to consider immigration and residency status in creditworthiness and repayment analyses. The District Court, however, disagreed with the defendant, denying the motion to dismiss, and holding that “Regulation B does not allow a creditor to decline credit solely on the basis of residency or immigration status.”
The approved settlement established an $86,750 settlement fund to be distributed to the 95 members of two settlement classes (a California class and a national class). The settlement provided that each California class member will receive $2,500 from the settlement fund, while other national class members will receive $250 each. The approved settlement will also require the credit union to implement corrective action to ensure that it does not deny consumer credit applications based solely on immigration status.
6th Circuit upholds dismissal of credit union’s indemnification suit
Recently, the U.S. Court of Appeals for the Sixth Circuit entered an opinion affirming a district court’s dismissal of a credit union’s lawsuit against a cellphone carrier. In this case, the plaintiff’s customers who were subject to a cellphone scam faced unauthorized electronic fund transfers, which the plaintiff reimbursed as required by the EFTA. The plaintiff claimed the defendant inadequately safeguarded its customers and was therefore liable to the plaintiff for indemnification and contribution. The district court dismissed the plaintiff’s complaint, finding it failed to state a claim for indemnification or contribution under the EFTA or state law.
On appeal, the plaintiff presented three arguments for its indemnification and contribution claims: (i) the EFTA implicitly provided these rights; (ii) the Michigan Electronic Funds Transfer Act (MEFTA) supported these claims because it was not preempted by the EFTA; and (iii) the EFTA did not preempt state common-law indemnification claims.
The 6th Circuit held that Congress enacted the EFTA to benefit consumers, not financial institutions, and did not mention a right to indemnification or contribution for financial institutions. Furthermore, the court stated, “the EFTA creates a cause of action for consumers, not financial institutions,” and sometimes allows consumers to seek treble damages. The court, quoting the U.S. Supreme Court, wrote that “[t]he very idea of treble damages reveals an intent to punish past, and to deter future, unlawful conduct, not to ameliorate the liability of wrongdoers.” The court also stated that the plaintiff selectively cited portions of the EFTA to suggest that Congress intended to establish a right for financial institutions to seek indemnification or contribution but failed to identify any specific provisions, structural elements, or legislative history of the EFTA that demonstrated Congress’s intent to do so.
Finally, the 6th Circuit held that the CFPB determined that the EFTA preempted the relevant portions of the MEFTA, which made customers liable for unauthorized transactions due to their negligence. Because the plaintiff was not liable under MEFTA, the court found that it had no claim for state law indemnification or contribution.
Fed Chair Powell discusses monetary policy
On July 9 and 10, Fed Chair Jerome Powell testified at the respective financial committees under the U.S. Senate and U.S. House of Representatives. Lawmakers asked questions on various Fed initiatives, such as the long-term debt proposal, debit interchange fee cap proposal, reforms to the discount window, potential changes to liquidity requirements, and the incentive-based compensation arrangements proposal.
On long-term debt proposal, Powell stated that he was unsure if it would be “inappropriate” to move forward with finalizing a long-term debt proposal rule before finalizing Basel III. The Fed is currently considering comments on the proposal to correct the issues experienced by banks in Spring 2023. On the debit interchange fee cap proposal, Rep. Ann Wagner (R-MO) pointed out how the Fed seemed to propose a rule, Regulation II, despite the Fed releasing research that found negative consequences of the debit interchange fee cap. Chair Powell stated he would have to review the research. On liquidity requirements and Basel III, Chair Powell alluded that the Fed was “pretty close” to releasing that proposal publicly, noting that the Fed’s liquidity proposals may be released “sometime later this year.”
On the incentive-based compensation arrangements proposal, Sen. Elizabeth Warren (D-MA) questioned Powell on how none of the ten largest banks put in policies to delay annual bonuses to those who engaged in risky behaviors. Warren alleged that the Fed did not join the other financial regulators in implementing Section 956 of Dodd-Frank. Thus, there are “no rules” to stop banks from rewarding executives’ risky behaviors, despite Warren quoting Powell that the Fed would be proposing such a rule. Additionally, the testimonies also included discussions about high housing prices, the Fed’s balance sheet, U.S. fiscal policy, stablecoins, digital assets, and synthetic risk transfers.
North Carolina Supreme Court upholds credit union’s right to enforce unilaterally inserted arbitration clause
On May 23, the North Carolina Supreme Court ruled that a defendant credit union can enforce an arbitration clause added to a customer’s contract years after its inception. The case centered on a “Notice of Amendments” provision in the contract, which customers agreed to when opening accounts, allowing the credit union to unilaterally change contract terms with proper notice to the consumer.
In January 2021, the credit union notified the plaintiff that it was updating its membership agreement to include an arbitration requirement for certain disputes and a waiver of class actions. In March 2021, the plaintiff filed a class action lawsuit against the credit union, alleging that it was improperly collecting overdraft fees on accounts that were never overdrawn. The trial court denied the credit union's motion to compel arbitration, but the appeals court reversed that decision and remanded the case with instructions to stay the case pending arbitration, holding that the addition of the arbitration provision was enforceable.
The North Carolina Supreme Court addressed in its opinion whether the inclusion of the arbitration violated the implied covenant of good faith and fair dealing. The Court highlighted the economic necessity for companies to adapt contractual terms efficiently and found that amendments adhering to the original contract's subject matter met the covenant of good faith and fair dealing.
The court then turned to the question of whether the original agreement “reasonably anticipated” the changes and whether the changes reasonably related to “subjects discussed” in the agreement. The court held that the inclusion of an arbitration clause was foreseeable due to the original contract's dispute resolution terms, which stated that the agreement was subject to the laws of North Carolina and set the venue for any dispute. Since the agreement’s changes addressed the forum for disputes, the court deemed this to be within the “same universe of terms.” Moreover, the court determined the contract was not illusory because the language included in the change to the contract limited its scope by stating “[e]xcept as prohibited by applicable law.”
Finally, the court rejected the plaintiff’s argument that she did not accept the offer to arbitrate “through silence,” holding that there was an agreement between the credit union and the plaintiff that the credit union could change the terms upon proper notice, not with consent of the plaintiff.
District Court denies class certification in lending discrimination suit
On May 30, the U.S. District Court for the Eastern District of Virginia entered an opinion denying class certification in a suit accusing a credit union (defendant) of lending discrimination. Each plaintiff applied to defendant for at least one home loan product, including first-lien mortgages, VA-backed loans, and refinancings. Plaintiffs’ complaint alleged that defendant’s mortgage underwriting policies violated the Fair Housing Act (the FHA) and the ECOA because they have had a “disparate impact on minority loan applicants” and defendant’s “refusal to correct those discrepancies constitutes intentional discrimination.” Plaintiffs based their claims on three independent reports analyzing publicly-available HMDA data from 2019-2022.
The court found that plaintiffs failed to establish a disparate treatment claim under the FHA, the ECOA, section 1981, and state law. Among other things, the court found that plaintiffs failed to address defendant’s argument that the data relied on in the reports lacked important metrics relating to credit scores and debt-to-income ratios. The court reasoned that plaintiffs’ sole reliance on reports analyzing defendant’s HMDA data – absent other allegations of evidence of discriminatory intent – did not make out a plausible claim of intentional discrimination. Moreover, the court found defendant’s argument persuasive that some of the plaintiffs attained loans elsewhere at higher interest rates than the loans originally sought from defendant, which suggested that plaintiffs were unqualified for the lower-interest rate loans for which they originally applied.
The court did, however, find that the complaint sufficiently pled a claim for disparate impact under the FHA and the ECOA at the motion to dismiss stage because the statistical analyses cited in the complaint revealed a disparate impact among non-white loan applicants and the underwriting algorithm and process was alleged to have caused the disparity. However, the court cautioned that if plaintiffs later failed to link during discovery the described “secret” underwriting process to the precise disparities and adverse consequences experienced by plaintiffs, the court may revisit whether the claim can survive at summary judgment.
Finally, the court struck the class allegation because the circumstances of plaintiffs’ loan application processes are too varied. Even though the proposed class was denied, plaintiffs may proceed on their FHA and ECOA disparate impact claims.
CFPB reports larger banks charge higher interest rates on credit cards than smaller banks
On February 16, the CFPB published the results of a report that found, on average, larger banks charged higher credit card interest rates than smaller banks and credit unions. The CFPB’s data suggested larger banks charge interest rates eight to 10 points higher than non-large banks. If a consumer were to pick a large bank credit card over a smaller bank, the consumer would see an estimated difference of “$400 to $500” in additional annual interest.
Other findings from the report suggested that large issuers offered higher rates across credit scores: e.g., the median interest rate for people with scores between 620 and 719 was 28.20 percent for large banks and 18.15 percent for small ones. The CFPB also found that 15 bank-issued credit cards with interest rates above 30 percent: nine of the largest issuers reported at least one product over that rate. Lastly, the report found that large banks were more likely to charge annual fees, with 27 percent of large banks charging an annual fee, compared to 9.5 percent of small banks. The CFPB published a table between large and small banks that showed median purchase APR by credit tier.