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District Court: "Least sophisticated consumer" would not be misled by collection letter disclosures
On August 23, a magistrate judge of the U.S. District Court for the District of Colorado granted a defendant’s motion for summary judgment, ruling pursuant to the “least sophisticated consumer standard” that the debt collection letter accurately conveyed the subject FDCPA rights. The plaintiff alleged the defendant debt collector’s letter violated several sections of the FDCPA by, among other things, making false and misleading representations in violation of Section 1682e by informing the plaintiff that “calling for further information or making a payment is not a substitute for disputing the debt” because it implied that disputing the debt was mandatory instead of optional. Additionally, the plaintiff contended that this language overshadowed and contradicted the required disclosure on the second page of the letter by “suggest[ing] that disputing the debt was mutually exclusive to making a payment”—an alleged violation of Section 1692g. The defendant moved for summary judgment, arguing that the plaintiff lacked standing to sue, or in the alternative, that he lacked sufficient evidence to prove his FDCPA claims.
The court disagreed, ruling that the plaintiff’s alleged injuries (that the FDCPA violation caused him to not pay his debt and that he lost out on the ability to make payments or to, among other things, negotiate a separate payment plan) did not rise to the level of tangible harm necessary to satisfy Article III standing. The court then reviewed the letter’s disclosures under the least sophisticated consumer standard and determined that “it is one thing to say that making a payment and disputing a debt are different, and another entirely to suggest that they are mutually exclusive. The phrase, ‘IS NOT A SUBSTITUTE FOR,’ does not carry any reasonable implication of exclusivity, and in fact demonstrates, when read in full context, that Defendant is informing Plaintiff that making a payment does not take the place of disputing the debt. In other words, both can be pursued without exclusivity.” Moreover, because the language is not misleading or contradictory, the court ruled that it did not overshadow the second-page disclosure, which informed him of his right (but not obligation) to dispute the debt.
DFPI again modifies draft regulations for commercial financing disclosures
On August 9, the California Department of Financial Protection and Innovation (DFPI) issued a second draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, and last September, California initiated the formal rulemaking process with the Office of Administrative Law (covered by InfoBytes here and here). The second modifications to the proposed regulations follow a consideration of public comments received on the initial proposed text, as well as additional comments received on modifications made to the proposed text in April. Among other things, the proposed modifications (i) amend several terms including “approved advance limit,” “approved credit limit,” and “amount financed”; (ii) clarify the definition of “at the time of extending a specific commercial financing offer”; (iii) replace the London Interbank Offered Rate (LIBOR) with the Secured Overnight Financing Rate as one of the benchmark rate options; (iv) add several terms including “broker,” “recipient funds,” “average monthly cost,” “estimated monthly cost,” and “prepaid finance charge”; (v) provide that for disclosure purposes, “a provider shall assume that there are 30 days in every month and 360 days in a year” and specify that the annual percentage rate must be expressed to the nearest ten basis points; (vi) amend certain disclosure requirements and thresholds; (vii) clarify methods for estimating monthly sales, income, or receipt projections for sales-based financing; (viii) amend duties and requirements for financers and brokers; and (ix) clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of funding a recipient will receive.
Comments on the second modifications must be received by August 24.
CFPB appeals decision on Prepaid Accounts Rule
On August 16, the CFPB filed its opening brief in the agency’s appeal of a district court’s December 2020 decision, which granted a payment company’s motion for summary judgment and vacated two provisions of the Bureau’s Prepaid Account Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the Bureau claimed that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, but the district court disagreed, concluding, among other things, that the Bureau acted outside of its statutory authority with respect to the mandatory disclosure clauses of the short-form requirement in 12 CFR section 1005.18(b) by presuming that “Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.” In striking the mandatory 30-day credit linking restriction under 12 CFR section 1026.61(c)(1)(iii), the district court determined that “the Bureau once again reads too much into its general rulemaking authority,” and that neither TILA nor Dodd-Frank vest the Bureau with the authority to promulgate substantive regulations on when consumers can access and use credit linked to prepaid accounts. Moreover, the court deemed the regulatory provision to be a “substantive regulation banning a consumer’s access to and use of credit” under the disguise of a disclosure, and thus invalid.
In its appeal, the Bureau urged the U.S. Court of Appeals for the D.C. Circuit to overturn the district court’s ruling, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts. “The model-clause provision simply ensures that institutions will always have a surefire way of complying with the statute, even when the Bureau’s regulations do not specify how information should be disclosed,” the CFPB said, stressing that “[n]either that provision nor anything else forecloses—let alone unambiguously forecloses—rules requiring disclosures to present specified content in a specified format so that consumers are better able to find, understand, and compare products’ terms.” The decision to adopt such rules, the Bureau added, is entitled to deference. According to the Bureau, the Prepaid Account Rule “does not make any specific disclosure clauses mandatory,” and companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording. Additionally, the Bureau argued, among other things, that “[b]y mandating optional model clauses while remaining silent about content and formatting requirements, Congress did not ‘circumscribe[] the [agency’s] discretion’ to adopt such requirements.” Instead, the Bureau contended, “whether to adopt content and formatting requirements is left ‘to agency discretion.’” Moreover, the disputed requirements “fit comfortably” within its power to regulate disclosure standards under EFTA and Dodd-Frank, the Bureau argued, adding that the law “authorizes the Bureau to ‘prescribe rules to ensure that the features of any consumer financial product or service … are fully, accurately, and effectively disclosed to consumers.’”
CFPB seeks comment on mobile-device disclosures
On August 11, the CFPB issued a notice and request in the Federal Register for comments on a Generic Information Collection titled, “Electronic Disclosure on Mobile Devices.” According to the notice, the CFPB is planning “to conduct several studies using methodologies rooted in psychology and behavioral economics to understand electronic disclosure on mobile devices.” Through these studies, the CFPB intends to collect information about demographics, reading electronic disclosures, and how consumers engage with their finances on different devices. Comments are due by September 10.
SEC: Offshore issuers must disclose relationships to China-based operating companies
On July 30, SEC Chair Gary Gensler issued a statement instructing staff to seek certain disclosures from China-based operating companies and offshore issuers associated with such companies before their registration statements can be declared effective. Gensler explained that the Chinese government recently provided “new guidance to and placed restrictions on China-based companies raising capital offshore, including through associated offshore shell companies.” This is relevant to U.S. investors, Gensler stated, because a number of Chinese sectors restrict companies from having foreign ownership and prohibit them from listing on exchanges outside of China.
In order to bypass these restrictions, many China-based operating companies are structured as Variable Interest Entities (VIEs), where they establish an offshore shell company in another jurisdiction, such as the Cayman Islands, to issue stock to public shareholders, Gensler said. He expressed concerns that the average U.S. investor “may not realize that they hold stock in a shell company rather than a China-based operating company,” where the investors’ “exposure” to the Chinese company is derived only through a series of contracts between the shell and the operating company, with neither the investor nor the shell company holding any equity in the Chinese company itself.
In light of the overall risks associated with the China-based VIE structure, Gensler asked staff to ensure that offshore issuers associated with China-based operating companies prominently and clearly disclose (i) that investors are buying shares of a shell company issuer; (ii) that “investors face uncertainty about future actions by the government of China that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements”; and (iii) the financial relationship between the VIE and the issuer. In addition, for all China-based operating companies seeking to register securities with the SEC (either directly or through a shell company), Gensler asked staff to ensure these companies disclose, among other things, whether the company and the issuer received permission from Chinese authorities to be listed on U.S. exchanges, as well as the risk that an approval could be denied or rescinded. Gensler further noted that China-based operating companies may be delisted in the future if the Public Company Accounting Oversight Board is unable to inspect an issuer’s public accounting firm within three years, as required by the Holding Foreign Companies Accountable Act.
FSB addresses climate-related financial risks
On July 7, the Financial Stability Board (FSB) released several reports addressing climate-related financial risks. The FSB Roadmap for Addressing Climate-Related Financial Risks noted that a growing number of international initiatives are underway that address financial risks resulting from climate change. “Effective risk management at the level of individual companies and financial market participants is a precondition for a resilient financial system,” the report stated, adding that the “interconnections between climate-related financial risks faced by different participants in the financial system reinforce the case for coordinated action.” Among other things, the FSB set out a roadmap that focuses on four interrelated areas: (i) firm-level disclosures that should be used as the basis for pricing and managing climate-related financial risks at the level of individual entities and market participants; (ii) consistent metrics and disclosure data that can “provide the raw material for the diagnosis of climate-related vulnerabilities”; (iii) an analysis of vulnerabilities to provide the groundwork for designing and applying regulatory and supervisory framework and tools; and (iv) the establishment of regulatory and supervisory practices and tools to allow authorities to effectively identify climate-related risks to financial stability. FSB also released the Report on Promoting Climate-Related Disclosures, following a survey of members which explored national and regional current or planned climate-related disclosures. FSB presented several high-level recommendations, including, among other things, that financial authorities use a framework based on recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD) across both non-financial corporates and financial institutions to propose a more consistent global approach. FSB issued another report entitled, The Availability of Data with Which to Monitor and Assess Climate-Related Risks to Financial Stability, that suggested various priorities to address climate-related data gaps “to improve the monitoring and assessment of climate-related risks to financial stability.”
Additionally, Federal Reserve Board Vice Chair for Supervision, Randal K. Quarles, spoke before the Venice International Conference on Climate Change on July 11, in which he discussed the work of the TCFD and stressed the importance of improving data quality and addressing data gaps, as well as ultimately establishing "a basis of comprehensive, consistent, and comparable data for global monitoring and assessing climate-related financial risks."
Juneteenth creates compliance challenges for mortgage industry
On June 17, President Biden signed S. 475 establishing June 19, Juneteenth, as a federal holiday. The “Juneteenth National Independence Day Act” amends 5 U.S.C. § 6103(a) which codifies the legal public holidays. Because June 19 falls on a Saturday this year, the holiday will be observed on Friday, June 18.
The establishment of a new federal holiday mere hours before the first observance of that holiday poses novel compliance challenges for the mortgage industry. Notably, both TRID and TILA rescission requirements have important timing standards that reference federal holidays.
TRID
Under TRID, the Loan Estimate must be provided to the consumer at least seven business days prior to consummation, and the Closing Disclosure must be provided to the consumer at least three business days prior to consummation. For purposes of these requirements, “business day” is defined as “all calendar days except Sundays and legal public holidays” as specified in 5 U.S.C. § 6103(a). As the holiday occurs on a Saturday this year, Saturday, June 19 is not a “business day” for purposes of calculating either the 7-business day waiting period after delivery of the Loan Estimate or the 3-business-day waiting period after delivery of the Closing Disclosure. Commentary to Regulation Z also states that, for purposes of rescission and the provision of mortgage disclosures, when a federal holiday falls on a Saturday but is observed on the preceding Friday, the observed holiday is a business day.
Accordingly, for purposes of providing the Loan Estimate at least seven business days prior to closing and the Closing Disclosure at least three business days prior to closing, lenders may not count Saturday, June 19, as a business day, but must count Friday, June 18, as a business day. Absent clarification from the CFPB, lenders are advised to push closings back one day where they were previously counting Saturday (June 19) as a business day. For example, if a Closing Disclosure was received by the consumer on Thursday, June 17, closing may not occur until Tuesday, June 22.
Rescission
A rescission period expires on midnight on the third business day after closing and uses the same definition of business days, which is “all calendar days except Sundays and legal public holidays.” As such, Saturday, June 19 this year is not a “business day” for purposes of the 3-business day rescission period and lenders should ensure that consumers are provided an extra day where the rescission period encompasses June 19, and are made aware of that extension. This raises unique funding and Notice of Right to Cancel disclosure related questions, the answers to which may depend on individual facts and circumstances. Absent further guidance from the CFPB, creditors may wish to delay closing by one day for those transactions where the three-day Closing Disclosure period is relevant, as well as consider providing updated Notices of Right to Cancel with a new rescission period taking into account both the new public holiday and when such new notice is sent.
On June 18, CFPB acting Director Dave Uejio issued a statement recognizing that "some lenders did not have sufficient time after the Federal holiday declaration to consider whether and how to adjust closing timelines" and that "some lenders may delay closings to accommodate the reissuance of disclosures adjusted for the new Federal holiday." Uejio further noted that "TILA and TRID requirements generally protect creditors from liability for bona fide errors and permit redisclosure after closing to correct errors." He added that any guidance ultimately issued by the Bureau "would take into account the limited implementation period before the holiday and would be issued after consultation with the other FIRREA regulators and the Conference of State Bank Supervisors to ensure consistency of interpretation for all regulated entities."
9th Circuit reverses $1.3 billion judgment following Supreme Court’s decision
On June 8, the U.S. Court of Appeals for the Ninth Circuit issued an order vacating its December 2018 judgment, reversing a district court’s award of equitable monetary relief following the U.S. Supreme Court’s recent decision in FTC v. AMG Capital Management, and remanding the case to the district court for further proceedings consistent with the Supreme Court’s opinion. The decision impacts defendants—a Kansas-based operation and its owner—who were ordered in 2016 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and violating Section 5(a) of the FTC Act by making false and misleading representations about loan costs and payments (covered by InfoBytes here). The 9th Circuit previously upheld the judgment (covered by InfoBytes here) by, among other things, rejecting the defendant owner’s challenge, which was based on an argument that the district court overestimated his “wrongful gain” and that the FTC Act only allows the court to issue injunctions. At the time, the 9th Circuit concluded that the defendant owner failed to provide evidence contradicting the wrongful gain calculation and that a district court may grant any ancillary relief under the FTC Act, including restitution. However, as previously covered by InfoBytes, the Supreme Court reversed the 9th Circuit and held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.”
CFPB releases TRID FAQs
On May 14, the CFPB released five new FAQs regarding housing assistance loans to assist with TILA-RESPA Integrated Disclosure Rule (TRID Rule) compliance. Highlights from the FAQs are listed below:
- The TRID Rule covers a loan if it: “[i] is made by a creditor as defined in § 1026.2(a)(17); [ii] is secured in full or in part by real property or a cooperative unit; [iii] is a closed-end, consumer credit (as defined in § 1026.2(a)(12)) transaction; [iv] is not exempt for any reason listed in § 1026.3; and [v] is not a reverse mortgage subject to § 1026.33.”
- Regulation Z exempts certain mortgage loans from the TRID disclosure requirements (i.e., providing the LE and CD) (the “Partial Exemption”). This exemption covers certain subordinate housing assistance loans. To qualify, “a transaction must meet all of the following criteria: [i] the transaction is secured by a subordinate-lien; [ii] the transaction is for the purpose of a down payment, closing costs, or other similar home buyer assistance, such as principal or interest subsidies; property rehabilitation assistance; energy efficiency assistance; or foreclosure avoidance or prevention; [iii] the credit contract provides that it does not require the payment of interest; [iv] the credit contract provides that repayment of the amount of credit extended is: forgiven either incrementally or in whole, deferred for at least 20 years after the transaction, or until the sale of the property, or until the property securing the transaction is no longer the consumer’s principal dwelling; [v] the total of costs payable by the consumer in connection with the transaction only include recording fees, transfer taxes, a bona fide and reasonable application fee, and a bona fide and reasonable fee for housing counseling services[;] the application fee and housing counseling services fee must be less than one percent of the loan amount; [and] [iv] the creditor provides either the Truth-in-Lending (TIL) disclosures or the Loan Estimate and Closing Disclosure[.] Regardless of which disclosures the creditor chooses to provide, the creditor must comply with all Regulation Z requirements pertaining to those disclosures.”
- The BUILD Act includes a partial statutory exemption from the TRID disclosure requirements for similar transactions. To qualify for the Partial Exemption from the TRID disclosure requirements under the BUILD Act, the loan must be a residential mortgage loan, offered at a 0 percent interest rate, have only bona fide and reasonable fees, and be primarily for charitable purposes and be made by an organization described in Internal Revenue Code section 501(c)(3) and exempt from taxation under section 501(a) of that Code.
- If a housing assistance loan creditor opts for one of the partial exemptions under either the Regulation Z Partial Exemption or under the BUILD Act, they are excused from the requirement to provide the Loan Estimate and Closing Disclosure for that transaction. The Partial Exemption under Regulation Z does not excuse the creditor from providing certain other disclosures required by Regulation Z. If the creditor qualifies for the exemption under the BUILD Act, they have the option to provide the GFE, HUD-1 and Truth In Lending disclosures in lieu of the LE and CD at the creditor’s discretion.
CFPB releases tech sprints presentations
On April 26, the CFPB announced presentations from the Bureau’s first two tech sprints—forums that gather “regulators, technologists, financial institutions, and subject matter experts from key stakeholders for several days to work together to develop innovative solutions to clearly-identified challenges”—as a means to encourage regulatory innovation and collaborate with stakeholders on solutions to regulatory compliance challenges. The first tech sprint, covering Adverse Action Notices, took place in October 2020, and focused on improving electronic distribution of these disclosures to assist consumers in making more informed financial choices. Participants were able to contribute in “developing innovations in the way lenders notify consumers of adverse credit actions.” The second tech sprint, covering the submission and publication of Home Mortgage Disclosure Act (HMDA) data, took place in March 2021 and challenged participants to work with the Bureau on ways to innovate on how the Bureau receives and processes HMDA data. The second forum also focused on how to improve accessibility to the data to increase market transparency and drive better decision making, especially around issues of equity and inclusion.