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  • Arguments Heard in English Litigation; CFPB Announces Relaxed Compliance Requirements for HMDA; Other Proposed Rulemakings

    Federal Issues

    On December 22, Judge Timothy Kelley heard arguments from both parties related to Leandra English’s litigation against President Trump and Mick Mulvaney. Judge Kelley did not rule on the matter at the close of the hearing. As previously covered by InfoBytes, English filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction on December 6.

    In response to English’s new arguments, the defendants filed an opposition motion on December 18.  Among other things, the response counters an argument—raised by English for the first time in her amended complaint—that the Federal Vacancies Reform Act (FVRA) cannot be used to appoint an acting CFPB Director because the Director is also a member of the FDIC. Defendants responded that the FVRA provision excluding appointments to independent multi-member boards or commissions only applies to direct appointments and not to positions that serve as “ex officio” members, as the CFPB Director does on the FDIC. The defendants go on to explain that English’s interpretation would prevent the use of FVRA to fill multiple Cabinet and other high-ranking Executive Branch positions that serve as ex officio members of independent agencies. The defendants also alleged that English failed to satisfy the requirements of the federal quo warranto statute – the exclusive means, according to the defendants, for directly challenging Mulvaney’s authority to perform as Acting Director of the CFPB. English replied to the defendant’s opposition motion on December 21.   

    Throughout the week, the CFPB took action regarding current and future rulemakings:

    HMDA. On December 21, the CFPB issued a statement regarding compliance with the Home Mortgage Disclosure Act (HMDA) final rule and amendments to the HMDA final rule. Although the Bureau did not delay the January 1, 2018 effective date as some had hoped, it acknowledged the difficulties of coming into compliance with the new requirements, stating that the Bureau “does not intend to require data resubmission unless data errors are material or assess penalties with respect to errors for data collected in 2018 and reported in 2019.” According to the CFPB, compliance with the HMDA requirements pose “significant system and operational challenges” and therefore, institutions should focus the 2018 data collection on identifying areas for improvement in their HMDA compliance management systems for future years. The Bureau further advised that it expects that supervisory examinations of 2018 HMDA data will be “diagnostic” to help “identify compliance weaknesses, and will credit good-faith compliance efforts.” However, institutions will still use the CFPB’s new HMDA Platform for data collected in 2017.  The FDIC and the OCC issued similar announcements, Financial Institution Letter FIL-63-2017 and OCC Bulletin 2017-62 respectively, and other regulators are expected to do the same. 

    The Bureau’s stated intent to focus on “good-faith compliance efforts” and “material” errors in the early days of the new HMDA requirements is similar to the approach taken for implementation of the Ability-to-Repay/Qualified Mortgage Rule and the TILA-RESPA Integrated Disclosure Rule.  While this flexible approach is generally beneficial for lenders and consumers, it does produce some uncertainty over what will be considered “good faith” or “material.”

    The Bureau also announced its intent to engage in additional HMDA rulemaking that may (i) re-examine the criteria determining whether institutions are required to report data; (ii) adjust the requirements related to reporting certain types of transactions; and (iii) re-evaluate the required reporting of additional information beyond the data points required in HMDA, as amended by the Dodd-Frank Act.

    Prepaid Accounts. On December 21, the CFPB also issued a statement on the final rule covering prepaid accounts and the proposed amendments to that rule. In the statement, the CFPB announced that it intends to adopt final amendments “soon after the new year” and that it expects to further extend the April 1, 2018 effective date to allow more time for implementation. The Bureau did not give details on the nature of the amendments or the length of the expected extension.

    Debt Collection. On December 14, OMB released a Notice of Action, which reflected that the CFPB withdrew its plan to conduct a survey related to debt collection disclosures of 8,000 individuals. According to OMB’s notice, the CFPB withdrew the plan because “Bureau leadership would like to reconsider the information collection in connection with its review of the ongoing related rulemaking.”

    Federal Issues CFPB Succession Courts CFPB Debt Collection Prepaid Rule HMDA English v. Trump

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  • Fifth Circuit Claims Loan Modification Communications Are Not Debt Collection Activities Under TDCA

    Courts

    On December 11, the U.S. Court of Appeals for the Fifth Circuit ruled that a mortgage servicer’s communications about a potential loan modification do not constitute “debt collection activity” under the Texas Debt Collection Act (TDCA). The servicer had initially told borrowers that they could apply for a loan modification but later informed them that they were not eligible. The borrowers unsuccessfully appealed the determination with the servicer, yet prior to a final determination on the appeal, the servicer sent a statement reflecting a new monthly payment in the amount that the borrowers had been requesting. The borrowers made one payment in that amount, which the servicer accepted, but weeks later the servicer sent a letter stating that the mortgage was still in default. In affirming the district court’s judgment in favor of the mortgage servicer, the three-judge panel determined that while “modification discussions may constitute debt collection activities under the TDCA when those discussions are used as a ruse to collect debt,” the borrowers failed to make such a showing, and instead the servicer’s misrepresentations were “merely poor customer service.”

    Courts Debt Collection Appellate Mortgage Servicing Fifth Circuit

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  • District Court Rules CFPB Violates FOIA in Withholding Documents Produced in Response to CID; Upholds Other CFPB Interpretations of FOIA

    Courts

    On December 14, the U.S. District Court for the District of Columbia ruled that any CFPB policy considering information provided to the CFPB in response to CID requests to have been submitted “voluntarily” and therefore exempt from public disclosure violates the Freedom of Information Act (FOIA). In response to a lawsuit filed by a consumer class action law firm, the court reviewed numerous claims related to the CFPB’s use of FOIA Exemptions. As explained in the opinion, the D.C. Circuit views information provided voluntarily to government entities as “more stringently protected” than compulsory submissions in determining whether materials qualify as “confidential” under FOIA Exemption 4. The court, in granting summary judgment, agreed with the plaintiff in holding that the CFPB had “actual legal authority” to issue the CID and obtain the related materials, and therefore the CFPB cannot treat information produced in response as having been disclosed voluntarily. In addressing other claims, however, the court agreed with the CFPB that documents it relied upon to identify wrongful collection lawsuits were exempt from public disclosure under FOIA Exemption 7(E), which protects “records or information compiled for law enforcement purposes,” and that CFPB attorney notes from a settlement conversation were exempt under FOIA Exemption 5, which protects intra-agency memoranda and has been interpreted to protect attorney work product. The court also supported the CFPB’s policy treating debt collectors and debt buyers as financial institutions as consistent with FOIA Exemption 8 related to financial institution information, finding that debt collectors “as a link in the credit-management chain” fit comfortably within the “inherently broad” term financial institutions.

    Courts CFPB FOIA

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  • Judge Dismisses OCC Fintech Charter Challenge

    Fintech

    A U.S. District Court Judge dismissed the New York Department of Financial Services’ (NYDFS) challenge to the OCC’s proposed federal charter for fintech firms.  (See previous InfoBytes coverage here.) In the December 12 order, the judge agreed with the OCC that the court lacked subject matter jurisdiction over NYDFS’ claims because the OCC has yet to finalized its plans to actually issue fintech charters. The case was dismissed without prejudice.

    As previously covered by InfoBytes, the Conference of State Bank Supervisors (CSBS) has also filed a lawsuit, which challenges the same statutory authority allowing the OCC to create charters for fintech companies. The CSBS lawsuit is still active. 

    Fintech Courts OCC NYDFS Litigation Fintech Charter

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  • Supreme Court Rejects Tribal Lenders’ Petition to Avoid CFPB CID

    Courts

    On December 11, the U.S. Supreme Court rejected without comment a petition from online tribal lending entities to appeal a Ninth Circuit Court of Appeals decision that ordered the entities to comply with a CFPB investigation related to small-dollar loan products. As previously covered by InfoBytes, the entities argued that due to tribal sovereignty, the CFPB does not have jurisdiction over the small-dollar lending services. The CFPB urged the Supreme Court to deny the petition, arguing that the Court’s review is unnecessary because “[t]he question at this juncture is solely whether the Bureau may obtain information from petitioners pursuant to a CID,” not “whether petitioners are subject to the Bureau’s regulatory authority.” 

    Courts Consumer Finance CFPB U.S. Supreme Court Payday Lending

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  • DOJ Announces Settlement With Mortgage Lender to Resolve Alleged False Claims Act Violations

    Lending

    The DOJ announced a $11.6 million settlement on December 8 with a Louisiana-based direct endorsement mortgage lender and certain affiliates to resolve allegations that the lender violated the False Claims Act by falsely certifying compliance with federal requirements in order to obtain insurance on mortgage loans from the Federal Housing Administration (FHA). According to the DOJ’s press release, between January 2005 and December 2014, the lender (i) certified loans that failed to meet HUD’s underwriting and origination requirements for FHA insurance; (ii) paid incentives to underwriters in violation of the “underwriter commission prohibition,” and continued to make incentive payments even after HUD notified the lender of commission prohibition noncompliance in 2010; and (iii) failed to, in a timely manner, “self-report material violations of HUD requirements” or perform quality reviews. The settlement also fully resolves a False Claims Act qui tam lawsuit that had been pending in the United States District Court for the Eastern District of Arkansas.

    Lending DOJ False Claims Act / FIRREA FHA Settlement HUD Courts

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  • Jury Verdict Clears Student Loan Servicer in FCA Suit

    Courts

    On December 5, after a five-day trial, a jury in the U.S. District Court for the Eastern District of Virginia entered a unanimous verdict clearing a Pennsylvania-based student loan servicing agency (defendant) accused of improper billing practices under the False Claims Act (FCA) and bilking the federal government of millions of dollars. The plaintiff—a former Department of Education employee whistleblower—sought treble damages and forfeitures under the FCA. The case stems from a qui tam suit originally filed in 2007, in which the plaintiff alleged that multiple state-run student loan financing agencies overcharged the U.S. government through fraudulent claims to the Federal Family Education Loan Program in order to unlawfully obtain 9.5 percent special allowance interest payments. Although the district court dismissed four of the agencies from the suit in 2009, ruling that they were state agencies and therefore immune from lawsuits brought by a qui tam relator, a Fourth Circuit Panel eventually reversed the ruling with respect to the Pennsylvania-based state agency defendant, holding that the entity “is an independent political subdivision, not an arm of the commonwealth,” and “therefore a 'person' subject to liability under the False Claims Act.” The panel held that the defendant failed to qualify as a state entity because the defendant’s board is responsible for decision-making and its revenue derives from commercial activities, notwithstanding the fact that the defendant is operated by state employees and is required to deposit its funds in the state’s treasury.

    Upon remand, the district court cleared the way for the jury trial by denying the defendant’s motion for judgment on the pleadings, which argued that the plaintiff cannot establish the materiality requirement set under Universal Health Services, Inc. v. U.S. ex rel. Escobar. In a memorandum opinion, the court concluded that the Department of Education continuing to pay claims even after becoming aware of the loan servicer’s billing practices did not, in fact, change the definition of materiality under the FCA, and therefore, did not “merit reconsideration of this court’s ruling that plaintiff stated a plausible claim.”

    The case then went to jury trial in November, leading to the jury’s verdict in favor of the defendant. 

    Courts False Claims Act / FIRREA Student Lending Appellate

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  • English Litigation Continues as Mulvaney Delays CFPB Enforcement Cases and Lawmakers Begin New Payday CRA Action

    Federal Issues

    On December 6, Deputy Director of the CFPB, Leandra English, filed an amended complaint for declaratory and injunctive relief and a motion for preliminary injunction with a supporting memorandum. In her amended complaint, English adds, among other things, a constitutional claim alleging that President Trump’s appointment of Mulvaney violates Article II, section 2 of the U.S. Constitution, which empowers the President to appoint “Officers of the United States,” subject to “the Advice and Consent of the Senate.” According to English, since Mulvaney was appointed without Senate approval and the Federal Vacancies Reform Act (FVRA) allegedly does not provide the President with a separate authority, President Trump does not have the constitutional authority to appoint Mulvaney in the manner he chose.

    The amended complaint also alleges that the appointment of Mulvaney under the FVRA is illegal because that act cannot be used to make an appointment to an “independent multi-member board or commission without Senate approval,” and the CFPB Director is, by law, a member of the FDIC’s board. This argument mirrors the argument made in a new complaint filed on December 5 by a New York-based credit union against President Trump and Acting CFPB Director Mick Mulvaney in the U.S. District Court for the Southern District of New York to contest the legality of Mulvaney’s appointment. The defendants have yet to respond to the credit union’s complaint.

    With respect to English’s litigation, the defendants are set to respond to the motion for preliminary injunction, which builds off the arguments in the amended complaint, by December 18, and a hearing on the motion is set for December 22.

    Mulvaney has continued his work as Acting Director at the CFPB. On December 4, according to sources, he met with reporters to announce his decision to delay at least two active litigation cases as part of his plan to reevaluate the Bureau’s enforcement and litigation practices. The first case concerns a district court dispute between the Bureau and an immigration bond company over whether the CFPB has the authority to enforce a civil investigative demand for personal information about the company’s customers. The second case involves Mulvaney’s decision to withdraw the Bureau’s demand that a mortgage payment company post bond after being ordered to pay a $7.9 million civil money penalty (see previous InfoBytes coverage here). Mulvaney’s December 4 statements also included a freeze on the Bureau’s collection of consumers’ personally identifiable information. These actions follow directions issued by Mulvaney during his first week at the Bureau as previously covered by InfoBytes here.

    Mulvaney has also suggested that he would not seek to repeal the Bureau’s final rule concerning payday loans, vehicle title loans, deposit advance products, and longer-term balloon loans but expressed his support for resolution H.J. Res. 122, which was introduced December 1 by a group of bipartisan lawmakers to override the rule under the Congressional Review Act (CRA).  The final rule is set to take effect January 16, 2018, but compliance is not mandatory until August 19, 2019. A press release issued by the House Financial Services Committee in support of the resolution stated, “small-dollar loans are already regulated by all 50 states, the District of Columbia and Native American tribes. The CFPB’s rule would mark the first time the federal government has gotten involved in the regulation of these loans.”

    On December 5, the Government Accountability Office (GAO) issued a letter to Senator Pat Toomey (R-Pa.) stating that CFPB Bulletin 2013-02 (Bulletin) on indirect auto lending and compliance with the Equal Credit Opportunity Act (ECOA) is a “general statement of policy and a rule” that is subject to override under the CRA. According to GAO, the CRA’s definition of a “rule” includes both traditional rules, which typically require notice to the public and an opportunity to comment, and general statements of policy, which do not. GAO concluded that the Bulletin meets this definition “since it applies to all indirect auto lenders; it has future effect; and it is designed to prescribe the Bureau’s policy in enforcing fair lending laws.” GAO’s decision may allow Congress to repeal the four year old Bulletin through a House and Senate majority vote under the CRA, followed by the President’s signature. Sen. Toomey issued a statement saying, “I intend to do everything in my power to repeal this ill-conceived rule using the [CRA].”

    Additionally, and as expected, on December 5, former Director Richard Cordray officially announced his candidacy for governor of Ohio.

    Federal Issues CFPB Succession Courts CFPB Auto Finance Fair Lending Payday Lending Congressional Review Act English v. Trump

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  • Mulvaney Completes First Week as Acting Director of CFPB

    Federal Issues

    In his first week at the Bureau, Mulvaney ordered freezes on hiring and any new regulations for 30 days, and also announced a halt to payouts from the enforcement fund. It is also reported that Mulvaney has put new enforcement actions on hold as he reviews on-going matters. Additionally, on December 1, the White House appointed Brian Johnson, an aide to House Financial Services Committee Chairman Jeb Hensarling (R-Texas), to assist Mick Mulvaney in his role as the Acting Director of the CFPB. Johnson was a featured speaker at Buckley Sandler’s CFPB Today conference at the end of October.

    As previously covered by InfoBytes, Judge Timothy Kelly, denied CFPB Deputy Director Leandra English’s  request for a temporary restraining order preventing Mulvaney from acting as the Acting Director. English is expected to continue the litigation; a briefing schedule is due in the case by December 1.

    Federal Issues CFPB Trump Courts CFPB Succession English v. Trump

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  • Ride-Sharing Company Announces Data Breach; State Attorneys General Launch Investigations

    State Issues

    On November 21, a ride-sharing company disclosed via press release a 2016 data breach that exposed the personal data of 57 million riders and drivers. According to the company, an outside forensic investigation revealed that in October 2016 hackers obtained approximately 600,000 driver names and license numbers, along with rider names, email addresses, and mobile phone numbers. The company claimed that hackers did not obtain driver or passenger social security, credit card, bank account, birth date, or trip location information. Though the company stated that it has taken action to address the delay in notifying affected individuals and regulators, lawsuits filed by the State of Washington and the City of Chicago claim that the company capitulated to hackers’ demands and “paid the hackers to delete the consumer data and keep quiet about the breach.”

    According to a letter from the company to the Washington attorney general attached to the state’s complaint, the company “is taking personnel actions with respect to some of those involved in the handling of the incident.” The company further stated that it has “implemented and will implement further technical security measures, including improvements related to both access controls and encryption.”

    According to sources, three separate class action lawsuits have been filed against the company as a result of the 2016 breach (see here, here, and here) and five attorneys general (New York, Illinois, Connecticut, Massachusetts, and Missouri) have launched investigations.

    The 2016 data breach follows a settlement in January of that year with the New York Attorney General related to allegations that the company failed to promptly disclose a 2014 data breach.  The 2014 data breach involved an alleged failure to prevent unauthorized access to the company’s consumer and driver data maintained on a third-party cloud service provider. As previously reported in InfoBytes in August, the company reached a settlement with the FTC related to the 2014 data breach; however, that settlement was entered into before the company disclosed the existence of the 2016 breach.

    In a related development, on November 27, the U.S. District Court for the Northern District of California dismissed without prejudice a putative class action lawsuit against the company related to the 2014 data breach. The court held that the driver’s name, license number, and limited banking information disclosed in the breach was not the type of personally identifiable information that could expose plaintiffs to the risk of identity theft. Accordingly, the court dismissed the case for lack of Article III standing. The court also granted plaintiffs a final opportunity to amend their complaint to address the standing deficiencies.

    State Issues Privacy/Cyber Risk & Data Security Data Breach State Attorney General FTC Class Action Settlement Courts

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