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CFPB says TILA does not preempt NY law on commercial disclosures
On December 7, the CFPB issued a preliminary determination that New York’s commercial financing disclosure law is not preempted by TILA because the state’s statute regulates commercial financing transactions and not consumer-purpose transactions. The CFPB issued a Notice of Intent to Make Preemption Determination under the Truth in Lending Act seeking comments pursuant to Appendix A of Regulation Z on whether it should finalize its preliminary determination that New York’s law, as well as potentially similar laws in California, Utah, and Virginia, are not preempted by TILA. Comments are due January 20, 2023. Once the comment period closes, the Bureau will publish a notice of final determination in the Federal Register.
Explaining that recently a number of states have enacted laws to require improved disclosures of information contained in commercial financing transactions, including loans to small businesses, in order to mitigate predatory small business lending and improve transparency, the Bureau said it received a written request to make a preemption determination involving certain disclosure provisions in TILA. While Congress expressly granted the Bureau authority to evaluate whether any inconsistencies exist between certain TILA provisions and state laws and to make a preemption determination, the statute’s implementing regulations require the agency to request public comments before making a final determination.
While New York’s Commercial Financing Law “requires financial disclosures before consummation of covered transactions,” the Bureau pointed out that this applies to “commercial financing” rather than consumer credit. The request contended that TILA preempts New York’s law in relation to its use of the terms “finance charge” and “annual percentage rate”—“notwithstanding that the statutes govern different categories of transactions.” The request outlined material differences in how the two statutes use these terms and asserted “that these differences make the New York law inconsistent with Federal law for purposes of preemption.” As an example, the request noted that the state’s definition of “finance charge” is broader than the federal definition, and that the “estimated APR” disclosure required under state law “for certain transactions is less precise than the APR calculation under TILA and Regulation Z.” Moreover, “New York law requires certain assumptions about payment amounts and payment frequencies in order to calculate APR and estimated APR, whereas TILA does not require similar assumptions,” the request asserted, adding that inconsistencies between the two laws could lead to borrower confusion or misunderstanding.
In making its preliminary determination, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes based on the request’s assertions. The Bureau explained that the statutes govern different transactions and disagreed with the argument that New York’s law impedes the operation of TILA or interferes with its primary purpose. Specifically, the Bureau stated that the “differences between the New York and Federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit.”
CFPB issues fall supervisory highlights
On November 15, the CFPB released its fall 2022 Supervisory Highlights, which summarizes its supervisory and enforcement actions between January and June 2022 in the areas of auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, mortgage servicing, and payday lending. Highlights of the findings include:
- Auto Servicing. Bureau examiners identified instances of servicers engaging in unfair, deceptive, or abusive acts or practices connected to add-on product charges, loan modifications, double billing, use of devices that interfered with driving, collection tactics, and payment allocation. For instance, examiners identified occurrences where consumers paid off their loans early, but servicers failed to ensure consumers received refunds for unearned fees related to add-on products.
- Consumer Reporting. The Bureau found deficiencies in credit reporting companies’ (CRCs) compliance with FCRA dispute investigation requirements and furnishers’ compliance with FCRA and Regulation V accuracy and dispute investigation requirements. Examples include: (i) NCRCs that failed to report the outcome of complaint reviews to the Bureau; (ii) furnishers that failed to send updated information to CRCs following a determination that the information reported was not complete or accurate; and (iii) furnishers’ policies and procedures that contained deficiencies related to the accuracy and integrity of furnished information.
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) conduct reasonable investigations into billing error notices due to human errors and system weaknesses; and (iii) provide explanations to consumers after determining that no billing error occurred or that a different billing error occurred from that asserted. Examiners also identified Regulation Z violations where credit card issuers improperly mixed original factors and acquisition factors when reevaluating accounts subject to a rate increase, and identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA violations where debt collectors engaged in conduct that harassed, oppressed, or abused the person with whom they were communicating. The report findings also discussed instances where debt collectors communicated with a person other than the consumer about the consumer’s debt when the person had a name similar or identical to the consumer, in violation of the FDCPA.
- Deposits. The Bureau discussed how it conducted prioritized assessments to evaluate how financial institutions handled pandemic relief benefits deposited into consumer accounts. Examiners identified unfairness risks at multiple institutions due to policies and procedures that may have resulted in, among other things, (i) garnishing protected economic impact payments funds in violation of the Consolidated Appropriations Act of 2021; or (ii) failing to apply the appropriate state exemptions to certain consumers’ deposit accounts after receiving garnishment notice.
- Mortgage Origination. Bureau examiners identified Regulation Z violations and deceptive acts or practices prohibited by the CFPA. An example of this is when the settlement service had been performed and the loan originator knew the actual costs of those service, but entered a cost that was completely unrelated to the actual charges that the loan originator knew had been incurred, resulting in information being entered that was not consistent with the best information reasonably available. The Bureau also found that the waiver language in some loan security agreements was misleading, and that a reasonable consumer could understand the provision to waive their right to bring a class action on any claim in federal court.
- Mortgage Servicing. Bureau examiners identified instances where servicers engaged in abusive acts or practices by charging sizable fees for phone payments when consumers were unaware of those fees. Examiners also identified unfair acts or practices and Regulation X policy and procedure violations regarding failure to provide consumers with CARES Act forbearances.
- Payday Lending. Examiners found lenders failed to maintain records of call recordings necessary to demonstrate full compliance with conduct provisions in consent orders generally prohibiting certain misrepresentations.
Agencies finalize TILA, CLA 2023 thresholds
On October 13, the CFPB and Federal Reserve Board finalized the annual dollar threshold adjustments that govern the application of TILA (Regulation Z) and the Consumer Leasing Act (Regulation M) (available here and here), as required by the Dodd-Frank Act. The exemption threshold for 2023, based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers, will increase from $61,000 to $66,400, except for private education loans and loans secured by real or personal property used or expected to be used as the principal dwelling of a consumer, which are subject to TILA regardless of the amount. The final rules take effect January 1, 2023.
CFPB updates education loan servicing examination procedures
On September 28, the CFPB updated the education loan examination procedures in its Supervision and Examination Manual. According to the Bureau, the update to the education loan servicing examination procedures clarifies that when determining its authority to supervise a private student lender, the Bureau “look[s] only to the definition of private education loan in the Truth in Lending Act and not also to Regulation Z.” The Bureau noted that depending on the scope of an examination, “and in conjunction with the compliance management system and consumer complaint response review procedures,” an examination will cover at least one of the following modules: (i) advertising, marketing, and lead generation; (ii) customer application, qualification, loan origination, and disbursement; (iii) student loan servicing; (vi) borrower inquiries and complaints; (v) collections, accounts in default, and credit reporting; (vi) information sharing and privacy; and (vii) examination conclusion and wrap-up.
CFPB ends EWA sandbox
On June 30, the CFPB issued an order terminating a financial services company’s sandbox approval order related to its earned wage access (EWA) lending model. As previously covered by InfoBytes, the Bureau issued a two-year approval order to the company in December 2020, which provided the company safe harbor from liability under TILA and Regulation Z (to the fullest extent permitted by section 130(f) as to any act done in good faith compliance with the order). The company’s product allowed employees access to their earned but unpaid wages prior to payday and granted employees of a participating employer the ability to download the company’s app and agree to the company’s terms prior to engaging in an EWA program. The Bureau said in its announcement that it had informed the company earlier in June “that it was considering terminating the approval order in light of certain public statements the company made wrongly suggesting a CFPB endorsement of its products.” According to the Bureau, the company then requested termination of the order in order, citing the need to make changes to its fee model that would have required modifying the existing approval order. The Bureau noted that the company “requested termination of the order so it could make fee model changes quickly and flexibly.” The Bureau’s announcement indicated that it plans to issue guidance “soon” regarding earned wage access products and the definition of “credit” under TILA and Regulation Z.
CFPB to look at late fees on cards
On June 22, the CFPB issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses. Under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) rules inherited by the CFPB from the Federal Reserve, credit card late fees must be “reasonable and proportional” to the costs incurred by the issuer as a result of a late payment. However, the rules provide for a safe harbor limit that allows banks to charge certain fees, adjusted for inflation, regardless of the costs incurred. Calling the current credit card late fees “excessive,” the Bureau stated it intends to review the “immunity provision” to understand how banks that rely on this safe harbor set their fees and to examine whether banks are escaping enforcement scrutiny “if they set fees at a particular level, even if the fees were not necessary to deter a late payment and generated excess profits.”
In 2010, the Federal Reserve Board approved implementing regulations for the CARD Act that allowed credit card issuers to charge a maximum late fee, plus an additional fee for each late payment within the next six billing cycles (subject to an annual inflation adjustment). As the CFPB reported, the safe harbor limits are currently set at $30 and $41 respectively. The CFPB pointed out that in 2020, credit card companies charged $12 billion in late fee penalties. “Credit card late fees are big revenue generators for card issuers. We want to know how the card issuers determine these fees and whether existing rules are undermining the reforms enacted by Congress over a decade ago,” CFPB Director Rohit Chopra said. Chopra issued a separate statement on the same day discussing the current credit card market, questioning whether it is appropriate for card issuers to receive enforcement immunity if they hike the cost of credit card late fees each year by the rate of inflation. “Do the costs to process late payments really increase with inflation? Or is it more reasonable to expect that costs are going down with further advancements in technology every year?” he asked.
Among other things, the ANPRM requests information relevant to certain CARD Act and Regulation Z provisions related to credit card late fees to “determine whether adjustments are needed.” The CFPB’s areas of inquiry include: (i) factors used by card issuers to determine late fee amounts and how the fee relates to the statement balance; (ii) whether revenue goals play a role in card issuers’ determination of late fees; (iii) what the costs and losses associated with late payments are for card issuers; (iv) the deterrent effects of late fees and whether other consequences are imposed when payments are late; (v) methods used by card issuers to facilitate or encourage timely payments such as autopay and notifications; (vi) how late are most cardholders’ late payments; and (vii) card issuers’ annual revenue and expenses related to their domestic consumer credit card operations. The Bureau stated that public input will inform revisions to Regulation Z, which implements the CARD Act and TILA. Comments on the ANPRM are due July 22.
The ANPRM follows a June 17 Bureau blog post announcing the agency’s intention to review a “host of rules” inherited from other agencies such as the FTC and the Federal Reserve, including the CARD Act. (Covered by InfoBytes here.)
CFPB issues spring supervisory highlights
On May 2, the CFPB released its spring 2022 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of auto servicing, consumer reporting, credit card account management, debt collection, deposits, mortgage origination, prepaid accounts, remittances, and student loan servicing. The report’s findings cover examinations completed between July and December 2021. Highlights of the examination findings include:
- Auto Servicing. Bureau examiners identified instances of servicers engaging in unfair, deceptive, or abusive acts or practices connected to wrongful repossessions, misleading final loan payment amounts, and overcharges for add-on products.
- Consumer Reporting. The Bureau found deficiencies in credit reporting companies’ (CRCs) compliance with FCRA dispute investigation requirements and furnishers’ compliance with FCRA and Regulation V accuracy and dispute investigation requirements. Examples include (i) both CRCs and furnishers failed to provide written notice to consumers providing the results of reinvestigations and direct dispute investigations; (ii) furnishers failed to send updated information to CRCs following a determination that the information reported was not complete or accurate; and (iii) furnishers’ policies and procedures contained deficiencies related to the accuracy and integrity of furnished information.
- Credit Card Account Management. Bureau examiners identified violations of Regulation Z related to billing error resolution, including instances where creditors failed to (i) resolve disputes within two complete billing cycles after receiving a billing error notice; (ii) reimburse consumers after determining a billing error had occurred; (iii) conduct reasonable investigations into billing error notices due to human errors and system weaknesses; and (iv) provide consumers with the evidence relied upon to determine a billing error had not occurred. Examiners also identified Regulation Z violations connected to creditors’ acquisitions of pre-existing credit card accounts from other creditors, and identified deceptive acts or practices related to credit card issuers’ advertising practices.
- Debt Collection. The Bureau found instances of FDCPA and CFPA violations where debt collectors used false or misleading representations in connection with identity theft debt collection. Report findings also discussed instances where debt collectors engaged in unfair practices by failing to timely refund overpayments or credit balances.
- Deposits. The Bureau discussed violations related to Regulation E, which implements the EFTA, including occurrences where institutions (i) placed duplicate holds on certain mobile check deposits that were deemed suspicious instead of a single hold as intended; (ii) failed to honor a timely stop payment request; (iii) failed to complete error investigations following a consumer’s notice of error because the consumer did not submit an affidavit; and (iv) failed to provide consumers with notices of revocation of provisional credit connected with error investigations regarding check deposits at ATMs.
- Mortgage Origination. Bureau examiners identified Regulation Z violations concerning occurrences where loan originators were compensated differently based on the terms of the transaction. Under the Bureau’s 2013 Loan Originator Final Rule, “it is not permissible to differentiate compensation based on credit product type, since products are simply a bundle of particular terms.” Examiners also found that certain lenders failed to retain sufficient documentation to establish the validity for revisions made to credit terms.
- Prepaid Accounts. The Bureau found violations of Regulation E and EFTA related to institutions’ failure to submit prepaid account agreements to the Bureau within the required time frame. Examiners also identified instances where institutions failed to honor oral stop payment requests related to payments originating through certain bill pay systems. The report cited additional findings where institutions failed to properly conduct error investigations.
- Remittances. Bureau examiners identified violations of the EFTA, Regulation E, and deceptive acts and practices. Remittance transfer providers allegedly made false and misleading representations concerning the speed of transfers, and in multiple instances, entered into service agreements with consumers that violated the “prohibition on waivers of rights conferred or causes of action created by EFTA.” Examiners also identified several issues related to the Remittance Rule’s disclosure, timing, and recordkeeping requirements.
- Student Loan Servicing. Bureau examiners identified several unfair acts or practices connected to private student loan servicing, including that servicers failed to make advertised incentive payments (which caused consumers to not receive payments to which they were entitled), and failed to issue timely refund payments in accordance with loan modification payment schedules.
The report also highlights recent supervisory program developments and enforcement actions, including the Bureau’s recent decision to invoke a dormant authority to examine nonbanks (covered by InfoBytes here).
CFPB’s UDAAP claims to proceed against mortgage lender
On March 31, the U.S. District Court for the District of Columbia mostly denied motions to dismiss filed by a mortgage lender and four executives (collectively, “defendants”) sued by the CFPB for allegedly engaging in unlawful mortgage lending practices. As previously covered by InfoBytes, the Bureau filed a complaint last year against the defendants alleging violations of several federal laws, including TILA and the CFPA. According to the Bureau, (i) unlicensed employees allegedly offered and negotiated mortgage terms; (ii) company policy regularly required consumers to submit documents for verification before receiving a loan estimate; (iii) employees denied consumers credit without issuing an adverse action notice; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of FHA streamlined refinance loans.
The mortgage lender had argued in its motion to dismiss that neither TILA nor the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) required the lender to ensure that its individual employees were licensed under state law. In denying the motions to dismiss, the court disagreed with the lender’s position stating that in order for a mortgage originator to comply with TILA, it must also comply with Bureau requirements set out in Regulation Z, including a requirement that “obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws.”
The court also concluded that the individual defendants must face claims for allegedly engaging in unfair or deceptive practices. The Bureau contended that the company’s chief compliance officer had warned the individual defendants that certain unlicensed employees were engaging in activities requiring licensure, and that the company’s owners approved the business model that permitted the underlying practices. According to the court, an individual “engages” in a UDAAP violation if the individual “participated directly in the practices or acts or had authority to control them” and “‘had or should have had knowledge or awareness’ of the misconduct.” The court rejected defendants’ arguments that it was improper to adopt this standard, and stated that “the fact that a separate theory of liability exists for substantially assisting a corporate defendant’s UDAAP violations has no bearing on how courts evaluate whether an individual defendant himself engaged in a UDAAP violation.”
While the court allowed the count to continue to the extent that it was based on allegations of unlicensed employees performing duties that would require licensure, it found that the complaint did not support an inference that the individual defendants knew that the employees were engaging in activities to make it appear that they were licensed. The court provided the Bureau an opportunity to replead the count to provide a stronger basis for such an inference.
New Mexico caps interest rates on small-dollar loans at 36%
On March 1, the New Mexico governor signed HB 132, which amends certain provisions related to the state’s small dollar lending requirements. Among other things, the bill makes several amendments to the New Mexico Bank Installment Loan Act of 1959 (BILA) and the New Mexico Small Loan Act of 1955 (SLA) by raising the maximum installment loan amount to $10,000 and providing the following: (i) “no lender shall make a loan pursuant to the [BILA] to a borrower who is also indebted to that lender pursuant to the [SLA] unless the loan made pursuant to the [SLA] is paid and released at the time the loan is made”; (ii) only federally insured depository institutions may make a loan under the BILA with an initial stated maturity of less than one hundred twenty days; (iii) a lender that is not a federally insured depository institution may not make a loan under the BILA “unless the loan is repayable in a minimum of four substantially equal installment payments of principal and interest”; and (iv) lenders, aside from federally insured depository institutions, may not make a loan with an annual percentage rate (APR) greater than 36 percent (a specified APR increase is permitted if the prime rate of interest exceeds 10 percent for three consecutive months). When calculating the APR, a lender must include finance charges as defined in Regulation Z “for any ancillary product or service sold or any fee charged in connection or concurrent with the extension of credit, any credit insurance premium or fee and any charge for single premium credit insurance or any fee related to insurance.” Excluded from the calculation are fees paid to public officials in connection with the extension of credit, including fees to record liens, and fees on a loan of $500 or less, provided the fee does not exceed five percent of the loan’s total principal and is not imposed on a borrower more than once in a twelve-month period.
The act also expands the SLA’s scope on existing anti-evasion provisions to specify that a person may not make small dollar loans in amounts of $10,000 or less without first having obtained a license from the director. The amendments also expand the scope of the anti-evasion provisions to include (i) the “making, offering, assisting or arranging a debtor to obtain a loan with a greater rate of interest . . . through any method, including mail, telephone, internet or any electronic means, regardless of whether the person has a physical location in the state”; and (ii) “a person purporting to act as an agent, service provider or in another capacity for another entity that is exempt from the [SLA]” provided the person meets certain specified criteria, such as “the person holds, acquires or maintains, directly or indirectly, the predominate economic interest in the loan” or “the totality of the circumstances indicate that the person and the transaction is structured to evade the requirements of the [SLA].” Under the act, a violation of a provision of the SLA that constitutes either an unfair or deceptive trade practice or an unconscionable trade practice is actionable under the Unfair Practices Act.
The act also makes various amendments to a licensees’ books and records requirements to facilitate the examinations and investigations conducted by the Director of the Financial Institutions Division of the Regulation and Licensing Department. Failure to comply may result in the suspension of a license. Additionally, the act provides numerous amended licensing reporting requirements concerning the loan products offered by a licensee, average repayment times, and “the number of borrowers who extended, renewed, refinanced or rolled over their loans prior to or at the same time as paying their loan balance in full, or took out a new loan within thirty days of repaying that loan,” among other things. The act also outlines credit reporting requirements, advertising restrictions, and requirements for the making and paying of small dollar loans, including specific limitations on charges after judgment and interest.
The act takes effect January 1, 2023.
CFPB may revisit EWA guidance
On January 18, acting CFPB General Counsel Seth Frotman sent a letter to consumer advocates responding to their concerns that the Bureau’s November 2020 advisory opinion on earned wage access (EWA) products was being misused as justification for passage by proponents of a pending New Jersey bill that would permit third-party earned wage access companies to charge fees or permit “tips” for their products without having to abide by the state’s 30 percent usury cap. As previously covered by InfoBytes, the Bureau issued an advisory opinion on EWA products to address the uncertainty as to whether EWA providers that meet short-term liquidity needs that arise between paychecks “are offering or extending ‘credit’” under Regulation Z, which implements TILA. The advisory opinion stated that “‘a Covered EWA Program does not involve the offering or extension of ‘credit,’” and noted that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.” In December 2020, the Bureau approved a compliance assistance sandbox application, which confirmed that a financial services company’s EWA program did not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z. The Bureau noted that various features often found in credit transactions were absent from the company’s program, and issued a two-year approval order, which provides the company a safe harbor from liability under TILA and Regulation Z, to the fullest extent permitted by section 130(f) as to any act done in good faith compliance with the order (covered by InfoBytes here).
In his letter, Frotman stated that “[i]t appears from your recounting of the legislative history that the advisory opinion has created confusion, as proponents of the bill seem to have misunderstood the scope of the opinion. The CFPB’s advisory opinion, by its terms, is limited to a narrow set of facts—as relevant here, earned wage products where no fee, voluntary or otherwise, is charged or collected.” Frotman acknowledged that the Bureau’s advisory opinion has also received pushback from consumer groups who sent a letter last year urging the Bureau to rescind the advisory opinion and sandbox approval and regulate fee-based EWA products as credit subject to TILA (covered by InfoBytes here). “Given these repeated reports of confusion caused by the advisory opinion due to its focus on a limited set of facts, I plan to recommend to the Director that the CFPB consider how to provide greater clarity on these types of issues,” Frotman wrote. He further stated that the advisory opinion did not purport to interpret whether the covered EWA products would be “credit” under other statutes other than TILA, including the CFPA or ECOA, or whether they would be considered credit under state law.