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On March 10, Senate Banking Committee Ranking Member Sherrod Brown (D-Ohio) released a minority staff report titled “Consumers Under Attack: The Consumer Financial Protection Bureau under Director Kraninger.” Specifically, the report faulted the Bureau for, among other allegations, purportedly protecting payday lenders, failing to properly scrutinize student loan servicers, and failing to enforce civil rights protections. The report was released the same day Kraninger testified before the Senate Banking Committee (covered by InfoBytes here). Among other things, the report argues that the CFPB’s proposed debt collection rule and supplemental notice of proposed rulemaking (covered by InfoBytes here and a Buckley Special Alert) “does more to provide safe harbors for debt collectors than protect consumers” by not banning the collection of time-barred debt. The report also reiterates concerns over Kraninger’s decision to no longer defend the CFPB’s constitutionality (covered by InfoBytes here), as well as her decision last year to delay certain ability-to-repay provisions of the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (covered by InfoBytes here), which has led to stays of enforcement actions.
On February 28, the Department of Defense (DoD) published an amendment to its December 2017 interpretive rule (2017 Rule) for the Military Lending Act (MLA) to withdraw a provision concerning the exemption of credit secured by a motor vehicle or personal property. As previously covered by InfoBytes, the 2017 Rule stated that additional costs may be added to an extension of credit so long as these costs relate to the object securing the credit, and not the extension of credit itself. In particular, the 2017 Rule stated that if credit is extended to cover “Guaranteed Auto Protection insurance or a credit insurance premium” the loan is covered by the MLA.
Following the publication of the 2017 Rule, the DoD received several requests to withdraw this Rule. The requests raised concerns that creditors “would be unable to technically comply with the MLA . . . because 232.8(f) of the [MLA] regulation would prohibit creditors from taking a security interest in the vehicle in those circumstances and creditors may not extend credit if they could not take a security interest in the vehicle being purchased.” The DoD stated that it found merit in these concerns and agreed that additional analysis is warranted. As a result, the DoD has withdrawn amended Q&A #2 from the 2017 Rule, and reinstated the 2016 Rule, which states that loans secured by “personal property” do not fall within the exception to “consumer credit” if the creditor “simultaneously extends credit in an amount greater than the purchase price.”
The amended interpretive rule is effective immediately.
On February 6, SEC Commissioner Hester M. Pierce announced her proposal for a three-year safe harbor rule applicable to companies developing digital assets and networks. Pierce suggested that not only would the rule provide regulatory flexibility “that allows innovation to flourish,” but it would also protect investors by “requiring disclosures tailored to their needs” while still maintaining anti-fraud safeguards, allowing investors to participate in token networks of their choice. Proposed Securities Act Rule 195 would allow companies to sell or offer tokens without being subject to the Securities Act of 1933, and without the tokens being subject to the registration requirements of the Securities Act of 1934. In order to qualify for these exemptions, the proposed rule requires that a company developing a network must, among other things, (i) “intend for the network on which the token functions to reach network maturity…within three years of the date of the first token sale”; (ii) disclose key information on a freely accessible public website,” including applicable source code and descriptions of how to search and verify transactions on the network; (iii) offer and sell its tokens in order to allow access to or development of its network; (iv) make “good faith and reasonable efforts to create liquidity for users”; and (v) “file a notice of reliance” with the SEC’s EDGAR system within 15 days of the company’s first token sale made in reliance on the safe harbor. Pierce suggested that the three-year grace period for qualifying companies would allow time for the development of decentralized or functional networks, and, at the end of the three years, a successful network’s tokens would not be regulated as securities.
On August 8, the U.S. District Court for the Eastern District of Kentucky granted a loan applicant’s request for partial summary judgment on allegations that a bank violated ECOA when it failed to timely send an adverse-action notice. The court ruled that the bank failed to establish its inadvertent error defense. The plaintiff’s loan application was submitted on October 30, 2018, and subsequently reviewed and denied on November 5 due to “issues with his credit report that needed to be resolved” in order for his application to be fully considered. The adverse action paperwork was then placed in a courier pouch for delivery to the lending officer responsible for notifying the plaintiff. However, the information failed to make it to the intended officer until after the plaintiff filed the action, upon which, the adverse action letter was generated on December 19. Under ECOA, notification of action must be made within 30 days of receipt.
The bank argued that partial summary judgment was inappropriate because the failure to provide notice within 30 days was an “inadvertent error” under 12 CFR 1002.16, and therefore did not constitute a violation of ECOA. The court stated that, in order to prevail on its argument on the safe-harbor provision for inadvertent errors, the bank, as the nonmoving party, must establish three elements: (i) the error was “mechanical, electronic, or clerical”; (ii) the error was unintentional; and (iii) the error “occurred ‘. . .notwithstanding the maintenance of procedures reasonably adapted to avoid such errors.” However, the bank conceded that it could not explain what caused the courier pouch error, put forth no evidence to show that the effort was clerical in nature, and also acknowledged that it “does not maintain any procedure reasonably adapted to avoid such errors.” As such, the court determined that the bank failed to demonstrate the existence of a genuine issue of any material fact bearing on the elements of the defense, and thus failed to qualify for the safe harbor defense.
On May 8, a bipartisan group of 38 state and territorial Attorneys General wrote to congressional leaders to urge the advancement of legislation that would allow banks to do business with marijuana-related businesses in states and territories that have legalized certain uses of marijuana. Specifically, the letter expresses support for the SAFE Banking Act (HR 1595), which “would provide a safe harbor for depository institutions that provide a financial product or service to a covered business in a state that has implemented laws and regulations that ensure accountability in the marijuana industry.” The letter notes that banks providing services to state-licensed cannabis businesses, or even to their vendors, could find themselves subject to criminal and civil liability under the federal Controlled Substances Act and certain federal banking statutes because the federal government classifies marijuana as an illegal substance. Because the revenues of the legalized marijuana industry are currently handled outside of the banking system, the letter argues that it is difficult to track revenues for taxation and regulatory compliance purposes, and further contributes to potential public safety issues as “cash-intensive businesses are often targets for criminal activity.” Emphasizing that the support of the SAFE Banking Act is not an endorsement for the legalization of marijuana-related transactions, the letter notes that allowing banks the safe harbor provided in the legislation would bring billions of dollars into the banking industry and would render state and federal regulatory bodies more effective in monitoring and taxing marijuana businesses.
On May 1, the U.S. District Court for the Eastern District of New York granted a debt collector’s motion for judgment on the pleadings in a suit concerning alleged FDCPA violations. In 2018, the plaintiff filed a putative class action against the defendant contending the debt collection letter he received omitted debt amount information and failed to provide any information about the accruing interests and charges. In its motion, the defendant argued that the letter did not violate the FDCPA because it provided the minimum amount due, current balance, and safe harbor language approved by the U.S. Court of Appeals for the 2nd Circuit in Avila v. Riexinger & Associates LLC. In that opinion, the 2nd Circuit held that “a debt collector will not be subject to liability under section 1692e for failing to disclose that the consumer’s balance may increase due to interest and fees if the collection notice . . . accurately informs the consumer that the amount of the debt stated in the letter will increase over time.” The district court agreed and ruled that because the defendant’s letter informed plaintiff of “the total, present quantity of money due” as of the date of the letter and contained the safe harbor language, the plaintiff failed to plead that the letter violated the FDCPA.
On February 11, a coalition of 22 Democratic state Attorneys General responded to the CFPB’s proposed policy on No-Action Letters (NAL) and a new federal product sandbox, pushing back on the Bureau’s efforts to provide relief to financial institutions looking to implement new consumer financial products or services. (InfoBytes coverage on the proposal available here.) The Attorneys General argued that the Bureau “has no authority to issue such sweeping immunity absent formal rulemaking” and urged the Bureau to rescind the proposals, which the Bureau had stated were exempt from the notice and comment procedures of the Administrative Procedures Act.
In addition to challenging the Bureau’s authority to establish these policies, the Attorneys General asserted specific concerns with the NAL proposal, including (i) the fact that the proposed NAL policy would make NALs binding on the CFPB indefinitely; (ii) the streamlined application process and 60-day decision window, potentially causing the Bureau to render hasty, uninformed decisions; and (iii) the proposed NAL policy’s purported deviations from the policies of other federal agencies, such as the SEC.
As for the new product sandbox, the Attorneys General viewed the proposed policy as “even more troubling” than the NAL proposal, as it provides immunity from “enforcement actions by any Federal or State authorities, as well as from lawsuits brought by private parties.” The Attorneys General rejected the Bureau’s contention that the statutory safe harbors in TILA, ECOA, and the EFTA grant the authority to provide the broad enforcement relief and accused the Bureau of “abandoning its critical role in monitoring the risk that new and emergency technologies post to consumers in the financial marketplace.”
California Legislature Urges Congress to Request the Department of Defense Alter Criteria for Safe Harbor Provision in the MLA
On September 25, the California Legislature filed a joint resolution that urges Congress to impress upon the Department of Defense the need to realign their criteria requiring a social security number for the safe harbor provision in the Military Lending Act (MLA). The resolution noted that the revised MLA regulations requiring lenders to ask for a social security number, among other information from borrowers, may expose lenders to liability under the California Unruh Civil Rights Act. It further states that this provision of the MLA could unnecessarily burden many segments of California’s immigrant communities.
On July 13, a federal judge in the U.S. District Court for the Western District of Kentucky issued an opinion holding that a safe harbor provision for affiliated business arrangements under Section 8(c)(4) of RESPA protects a Louisville law firm's relationship with a string of now-closed title insurance agencies. (See CFPB v. Borders and Borders, Plc, No. 3:13-cv-01047-CRS-DW (W.D. Ky. July 13, 2017)). In 2013, the CFPB alleged the firm violated RESPA by paying kickbacks for real estate settlement referrals through a network of joint ventures with the principals of nine title insurance companies. (See previous InfoBytes summary here.) The judge granted the firm’s motion for summary judgment on only one safe harbor question, stating that the firm’s agreements with the title insurance agencies qualified as “affiliated business arrangements” because it “disclosed the relationship…, the customers could reject the referral, and the Bureau failed to show that the [title insurance companies] received anything of value beyond their ownership interests.”
The judge rejected the firm's claim that the CFPB cannot seek disgorgement as a remedy and further declined to address the firm’s ultra vires argument that the CFPB is an unconstitutional agency and therefore lacks legal authority to bring suit, stating that the en banc decision in PHH Corp. v. CFPB has not yet been issued.
Notably, however, the judge appeared to suggest that case could be appealed because the firm’s other arguments fail to qualify for RESPA safe harbors under Sections 8(c)(1) and 8(c)(2).
- Jonice Gray Tucker to join CFPB panel at CBA’s Washington Forum
- Jonice Gray Tucker to moderate “Pandemic relief response and lasting impacts on access, credit, banking, and equality” at the American Bar Association Business Law Section Spring Meeting
- Jeffrey P. Naimon to discuss "Post-pandemic CFPB exam preparation" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Making fair lending work for you" at the Mortgage Bankers Association Spring Conference & Expo
- Jonice Gray Tucker to discuss "Reading the tea leaves of President Biden’s initial financial appointees" at LendIt Fintech
- Moorari K. Shah to discuss “CA, NY, federal licensing and disclosure” at the Equipment Leasing & Finance Association Legal Forum
- Jonice Gray Tucker to discuss "Compliance under Biden" at the WSJ Risk & Compliance Forum
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference