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District court: Maryland’s interest on escrow law not preempted by National Bank Act
On February 24, the U.S. District Court for the District of Maryland denied a national bank’s motion to dismiss a putative class action alleging the bank violated Maryland law by not paying interest on escrow sums for residential mortgages. After the bank allegedly failed to pay the mortgage escrow interest, the consumer filed a lawsuit asserting various claims including for violation of Section 12-109 of the Maryland Consumer Protection Act (MCPA), which “requires lenders to pay interest on funds maintained in escrow on behalf of borrowers.” In response, the bank filed a motion to dismiss on the basis that the state law is preempted by the National Bank Act (NBA) and by 2004 OCC preemption regulations.
The court disagreed, determining that under the Dodd-Frank Act, national banks are required to pay interest on escrow accounts when mandated by applicable state or federal law. Citing previous decisions in similar escrow interest cases brought against the same bank in other states (covered by InfoBytes here and here), the court stated that Section 12-109 “does not prevent or significantly interfere with [the bank’s] exercise of its federal banking authority, because [Section] 12-109’s ‘interference’ is minimal, when compared with statutes that the Supreme Court has previously found were preempted.” The court noted that state law—which “still allows [the bank] to require escrow accounts for its borrowers”—provides that the bank must pay a small amount of interest to borrowers if it chooses to maintain escrow accounts. Moreover, the court concluded that the bank’s “suggestions about interference are belied by the fact that its direct competitors dutifully comply with [Section] 12-109.” As for the OCC’s 2004 preemption regulation, Section 34.4, the court determined that the regulation is entitled to minimal deference, and noted that it is not clear that the OCC, in promulgating the regulations, “ever considered whether the NBA preempts state laws that mandate payment of interest for escrow accounts.” According to the court, the regulations do not mention state escrow interest laws at all. As such, the court stated that it “will not defer to the OCC’s regulation, or to the agency’s current position that [Section] 12-109 is preempted.”
CFPB holds symposium on consumer access to financial records
On February 26, the CFPB held a symposium covering consumer access to financial records and Section 1033 of the Dodd-Frank Act, which deals with consumers’ rights to access information about their financial accounts. In her opening remarks, Director Kathy Kraninger pointed out three major changes in data aggregation since the OCC first warned banks about aggregating consumer data in 2001: (i) “the range of actors involved has expanded greatly”; (ii) “the extent to which they are using aggregated data to provide new products and services to millions of American consumers has grown in scope and scale”; and (iii) “technologies that enable safer and more efficient consumer authorized data sharing continue to evolve and proliferate.” According to the CFPB’s press release, the purpose of this symposium was “to elicit a variety of perspectives on the current and future state of the market for services based on consumer-authorized use of financial data.” The symposium consisted of three panels: (i) the current landscape and benefits and risks of consumer-authorized data access; (ii) market developments; and (iii) considerations for policymakers. Panel highlights include:
- Panel #1. The panelists considered potential benefits and risks for consumers around data access as well as the current landscape and benefits and risks of consumer-authorized data access. Panelists agreed that consumers should be given control over their data and also mentioned the need to educate consumers on data security. One panelist suggested that consumers need to understand not only the breadth of data that is accessible, but also what sensitive consumer data is being accessed, stored, and shared. She stressed that entities storing/accessing the data should be subject to the same supervision for cyber security standards as banks.
- Panel #2. The panel, which was comprised of experts in market developments and trends, including in the areas of cash flow underwriting and the business of securing consumer permission to access checking account data, discussed market developments in consumer-authorized data access. One panelist suggested that the U.S. is behind countries like Australia and Canada (where government intervention in the market clarified consumers’ legal right to access their financial data) because of a lack of connectivity and of data field availability in the U.S. Others discussed alternatives to the current screen scraping model—which does not advance transparency or traceability for consumers—such as a model based on an application program interface (API) (APIs can be used to combine data from various sources into one application). The panelists also discussed tokenized authentication as a possible middle phase when going from screen scraping to APIs. Panelists suggested that the market is making significant technological improvements, but lacks guidance from policymakers.
Panel #3. The third panel, focused on “where we are going and how we get there” or the “future of the market” and “considerations for policymakers on how to” ensure consumer data is safeguarded “while ensuring that consumers have continual access to their data.” Among other things, the panel discussed that regulatory intervention in this space has not been common. Many panelists also mentioned areas of uncertainty, including whether banks or consumers should decide the limitations of rights to consumer data. Regarding Section 1033, one panelist suggested that the bank view is that the CFPB does not need to regulate here and should not provide consumers and their agents with access to their information, however, any entities that have access to the data should be regulated. Others believed that banks and other financial institutions do not view Section 1033 correctly. Another area of uncertainty discussed was whether the consumer data right is an ownership right, and whether a bank can decide to whom it will or will not provide consumer data.
CFPB denies debt collection law firm’s request to set aside CID
On February 10, the CFPB denied a debt collection law firm’s request to modify or set aside a third-party Civil Investigative Demand (CID) issued to the firm by the Bureau while investigating possible violations of the FDCPA, CFPA, and the FCRA. As previously covered by InfoBytes, the Bureau also denied a request by a debt collection company to modify or set aside a CID, which sought information about the company’s business practices and its relationship with the firm in the same investigation. The firm’s petition asserted arguments largely based on the theory that the CFPB’s structure is unconstitutional, and that the Dodd-Frank Act provides the Bureau’s director with “overly broad executive authority.” Alternatively, the firm argued that if the CID is not set aside, it should be modified, stating, among other things, that the CID’s scope exceeds applicable statutes of limitation.
As it did in the debt collection company’s request to set aside or modify the CID, the Bureau rejected the firm’s constitutionality argument, stating that “[t]he administrative process for petitioning to modify or set aside CIDs is not the proper forum for raising and adjudicating challenges to the constitutionality of provisions of the Bureau’s statute.” Additionally, the Bureau’s Decision and Order discounts the firm’s statute of limitations argument, contending that “the Bureau is not limited to gathering information only from the time period in which conduct may be actionable. Instead, what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.” The Bureau also directed the firm to comply with the CID within ten days of the Order.
FHFA, CFPB release new dataset from National Survey of Mortgage Originations
On February 20, the FHFA and the CFPB announced the release of a new loan-level dataset collected through the National Survey of Mortgage Originations (NSMO). Since 2014, every quarter the FHFA and the CFPB send the NSMO survey to borrowers who recently obtained a mortgage to gather feedback on their experiences, perceptions, and future expectations of the mortgage market. This is the second public use file release of the compiled NSMO data and includes an additional year of mortgage data (2017) as well as information through the third quarter of 2019. The NSMO is a component of the National Mortgage Database, which the FHFA and the CFPB launched in 2012 to help regulators better understand mortgage market trends. The NSMO supports policymaking and research efforts and fulfills the mortgage survey and mortgage market monitoring requirements of the Housing and Economic Recovery Act and the Dodd-Frank Act.
Special Alert: Trailer bill would enact California Consumer Financial Protection Law
A trailer bill accompanying the governor’s proposed 2020-2021 state budget would expand the Department of Business Oversight’s (DBO) authority and enact the California Consumer Financial Protection Law (Law).
Specifically, the provisions outlined in the proposed Law would revamp and rename the state’s DBO, expand its authority to protect consumers from predatory practices, and foster the responsible development of new financial products. Under California’s Constitution, a trailer bill — which provides for an appropriation related to the budget bill — takes effect immediately after a simple majority vote and the governor’s signature.* * *
Click here to read the full special alert.
If you have any questions regarding the California Consumer Financial Protection Law or other related issues, please visit our Consumer Finance practice page or contact a Buckley attorney with whom you have worked in the past.CFPB symposium on consumer access to financial records set for February 26
On February 20, the CFPB announced that its fourth symposium, regarding Consumer Access to Financial Records and Section 1033 of the Dodd-Frank Act, will be held February 26 at 9:30 am EST. The event will be webcast on the Bureau’s website. According to the Bureau, Section 1033 “addresses consumers’ rights to access information about their financial accounts.” The symposium—featuring remarks from Director Kathy Kraninger and consisting of three panels of experts—will solicit a variety of perspectives on the current and future market for services based on consumer-authorized use of financial data. The first panel, moderated by Paul Watkins, Assistant Director in the Bureau’s Office of Innovation, will discuss the current landscape of holders of consumer data and the benefits and risks of consumer-authorized data access. The second panel will examine market developments in consumer-authorized data access and will be moderated by Will Wade-Gery, Senior Advisor in the Bureau’s Office of Innovation. The third panel will assess the future state of the market, as well as considerations for policymakers on safeguarding consumer data while ensuring consumers have continual access to their data. This panel will be moderated by Thomas Devlin, Managing Counsel in the Bureau’s Research, Markets and Regulation Division.
Find prior InfoBytes symposium coverage here.
CFPB, South Carolina, and Arkansas file charges in pension-advance scheme
On February 20, the CFPB, the South Carolina Department of Consumer Affairs, and the Arkansas attorney general filed a complaint in the U.S. District Court for the District of South Carolina against a South Carolina-based company and two of its managing partners (defendants) for allegedly violating the Consumer Financial Protection Act and the South Carolina Consumer Protection Code by working with a series of broker companies that brokered contracts offering high-interest credit to disabled veterans and other consumers in exchange for the assignment of some of the consumers’ unpaid earnings, monthly pensions, or disability payments. Under federal law, agreements under which a person acquires the right to receive a veteran’s pension or disability payment are void, and South Carolina law—which governs these contracts—“prohibits sales of unpaid earnings and prohibits assignments of pensions as security on payment of a debt.”
The complaint alleges that the defendants substantially assisted broker companies that allegedly engaged in deceptive and unfair acts or practices through the marketing and administration of high-interest credit. (Covered by InfoBytes here.) The defendants’ alleged actions include: (i) “developing a pre-approval or risk-assessment process for the contracts and conducting underwriting”; (ii) “approving or denying consumers’ applications to enter into the transactions”; (iii) “directing and administering the execution of the contracts”; (iv) “serving as the payment processor for the initial lump-sum payment and fees”; and (v) “continuing to serve as the transactions’ payment processor, tracking and controlling the collection and distribution of consumers’ payments on the contracts.” In addition, the Bureau alleges, among other things, that the defendants provided substantial assistance to the broker companies’ deceptive misrepresentations that consumers could be subjected to criminal prosecution if they breached their contracts. In addition, the defendants also allegedly collected on contracts brokered by the broker companies that were void from inception “by initiating ACH debts to take payments from consumers’ bank accounts,” demanding payments through letters and other communications, and filing suit against consumers who failed to make payments.
The complaint seeks injunctive relief, restitution, damages, disgorgement, and civil money penalties.
CFPB updates FCRA exam procedures
On February 11, the CFPB issued updates to its Supervision and Examination Manual to include requirements of the FCRA created by the Economic Growth, Regulatory Relief, and Consumer Protection Act. The updates apply to the examination procedures covering consumer reporting, larger participants, and education loans, and aim to reduce instances of consumer compliance law violations by companies that provide consumer financial products and services. According to the CFPB, the larger participants examination procedures provide guidance to examiners covering a number of areas including, among other things, (i) “accuracy of information and furnisher relations”; (ii) “contents of consumer reports”; (iii) “consumer inquiries, complaints, and disputes and the reinvestigation process”; (vi) “consumer alerts and identity theft provisions”; and (v) “other products and services and risks to consumers.” The Bureau’s guidance to examiners on education loan exam procedures concentrates on servicing and origination. Some of the topics included are: (i) “advertising, marketing, and lead generation”; (ii) “customer application, qualification, loan origination, and disbursement”; (iii) “student loan servicing”; (iv) “borrower inquiries and complaints”; and (v) “information sharing and privacy.”
House task force holds hearing on AI bias
On February 12, the House Financial Services Committee’s Task Force on Artificial Intelligence (AI) held a hearing entitled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.” As previously covered by InfoBytes, the Committee created the task force to determine how to use AI in the financial services industry and examine issues surrounding algorithms, digital identities, and combating fraud. According to the Committee’s memorandum regarding the hearing, AI’s key technology is machine learning (ML)—“a process that may rely on pre-set rules to solve problems (also known as algorithms) without” or with only limited involvement of humans. Witnesses largely from the fields of computer science and AI delved into AI and ML at the hearing, discussing how human biases can be perpetuated in algorithms using historical data as input and how to best ensure fairness and accuracy. It was agreed that fairness has many different definitions that must be considered when creating algorithms. Witnesses provided testimony that when striving for fairness for one protected class, there may necessarily be tradeoffs resulting in less fairness to another protected class. Among other things, committee members questioned whether it is possible to formulate an algorithm that guarantees fairness and were urged not to focus too much on algorithms, but to also consider the data—where it came from, its quality and appropriateness—as potentially flawed data that could likely result in flawed outputs.
CFPB denies debt collector’s request to set aside CID
On February 6, the CFPB released a Decision and Order denying a debt collection company’s (petitioner) request to set aside or modify a third-party Civil Investigative Demand (CID) issued by the Bureau, and directing the petitioner to provide all information required by the CID. The CID in dispute was issued to the petitioner by the CFPB in November and seeks documents and written responses pertaining to the petitioner’s business practices and its relationship with a New York-based debt collection law firm. The CID requests information regarding whether “debt collectors, furnishers, or associated persons” had, among other things, (i) violated the Consumer Financial Protection Act by ignoring warnings regarding debts resulting from identity theft “in a manner that was unfair, deceptive or abusive”; (ii) violated the FDCPA by disregarding cease-and-desist requests or by failing to provide required notices or making false or misleading statements; or (iii) violated the FCRA by “fail[ing] to correct and update furnished information, or fail[ing] to maintain reasonable policies and procedures.”
In its petition to set aside or modify the CID, the petitioner set out four primary arguments: (i) the structure of the CFPB is unconstitutional, and it therefore “lacks authority to proceed with enforcement activity”; (ii) the CID improperly seeks attorney-client privileged information; (iii) the CID is “overly broad,” does not apply to the petitioner, and does not sufficiently provide the “nature of the conduct under investigation and the applicable provisions of law”; and (iv) the CID improperly seeks information beyond the applicable statute of limitations.
The Bureau’s denial of the petitioner’s request addresses each of the petitioner’s arguments. Regarding the constitutionality of the CFPB’s structure, the order asserts that “the administrative process set out in the [B]ureau’s statute and regulations for petitioning to modify or set aside a CID is not the proper forum for raising and adjudicating challenges to the constitutionality of the [B]ureau’s statute.” In response to the petitioner’s attorney-client privilege argument, the order states that the petitioner “does not ask…to modify the CID to avoid seeking privileged information—it only asks that the CID be quashed in its entirety.” The Bureau states that because the petitioner makes a “blanket assertion” of attorney-client privilege rather than providing the required privilege log in order to properly claim privilege over materials requested in the CID before filing its petition, the petitioner’s argument is “procedurally improper” and does not show that the “CID should be set aside on these grounds.” To the petitioner’s lack of specificity argument, the order states that the CID “sets forth in detail both the conduct under investigation and applicable laws,” adding that there is no requirement that the Bureau disclose the targets of its “ongoing and confidential law-enforcement investigations.” The order also rejects the petitioner’s statute of limitations argument, explaining that the Bureau is not limited to the three years preceding the CID, but “instead what matters is whether the information is relevant to conduct for which liability can be lawfully imposed.”