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Court orders Department of Education to cease collection efforts on student loans used for defunct for-profit school
On May 25, the U.S. District Court for the Northern District of California granted in part a preliminary injunction barring the U.S. Department of Education (Department) from continuing collection efforts on student loans used for programs at a now defunct for-profit college. The for-profit school closed in 2015 after a federal fraud investigation by the Department. The decision results from a December 2017 putative class action filed by former students of the school against the Department. The complaint alleged the Department violated the Administrative Procedures Act (APA) and the Privacy Act of 1974 by its December 2017 announcement that it would use an “average earnings” metric to determine what to charge students for the value of the education they received at the college. According to the former students, the previous policy—which measured the job placement rate of graduates—would have provided full loan forgiveness for the federal student loans used for the defunct school. In response to the students’ motion for a preliminary injunction, the court granted the students’ request to prevent the Department from using the “average earnings” metric, but denied the motion to require the Department to use the previous job placement metric. Additionally, among other things, the judge denied the students’ request to order the Department to remove all negative credit reporting but did order the Department to cease collection efforts on the loans.
Department of Education plans to use servicers, not private debt collectors, to assist delinquent borrowers
On May 23, the Department of Education (Department) affirmed plans to begin using “‘enhanced servicers’ to assist delinquent borrowers prior to default” instead of private debt collection agencies. The affirmation was made in a reply brief supporting the Department’s motion to dismiss an action filed by collection agencies in the U.S. Court of Federal Claims that challenged the Department’s decision to award contracts to two private debt collectors. The Department argues in the reply brief that the challenge is moot because the Department cancelled the solicitation under which the contracts were awarded to pursue a new collection plan using “enhanced servicers.” According to the brief, the new collection approach will “place a greater emphasis on customer service and early outreach to address delinquencies with a full range of early options for borrowers.”
OCC encourages banks to offer short-term, small-dollar installment lending
On May 23, the OCC released Bulletin 2018-14, which encourages banks to meet the credit needs of consumers by offering short-term, small-dollar installment loans subject to the OCC’s core lending principles. The Bulletin acknowledges the CFPB’s final rule on Payday, Vehicle Title, and Certain High-cost Installment Loans (Payday Rule) – which generally covers loans with maturities shorter than 45 days or longer-term loans with balloon payments – and states the OCC intends on working with the Bureau to ensure banks can “can responsibly engage in consumer lending, including lending products covered by the Payday Rule.”
Specifically, the Bulletin encourages banks to offer loans without balloon payments and with maturities greater than 45 days subject to three core lending principles: (i) the product should be consistent with safe and sound banking, treat customers fairly, and comply with all applicable laws and regulations; (ii) banks should effectively manage risks associated with the product; and (iii) the product should be underwritten based on reasonable policies and practices, such as amount and repayment terms aligning with eligibility, use internal and external data sources to assess a consumer’s creditworthiness, and loan servicing processes that assist distressed borrowers. Additionally, with regard to pricing, the Bulletin stated that the “OCC views unfavorably an entity that partners with a bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing state(s).”
Immediately after the OCC’s release, the CFPB issued a statement applauding the Bulletin because “[m]illions of Americans desperately need access to short-term, small-dollar credit.” In January, the CFPB stated it plans to reconsider the Payday Rule and the Spring 2018 rulemaking agenda indicates the Bureau expects a notice of proposed rulemaking to be issued by February 2019 (previously covered by InfoBytes here and here).
Trump signs legislation enacting bipartisan regulatory relief bill
On May 24, President Trump signed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155) (the bill) — which modifies provisions of the Dodd-Frank Act and eases certain regulations on certain smaller banks and credit unions. Upon signing, the White House released a statement quoting the president, “[c]ommunity banks are the backbone of small business in America. We are going to preserve our community banks.”
The House, on May 22, passed the bipartisan regulatory reform bill by a vote of 258-159. The bill was crafted by Senate Banking, Housing, and Urban Affairs Committee Chairman Mike Crapo, R-Idaho and passed by the Senate in March. The House passed the bill without any changes to the Senate version, even though House Financial Services Chairman, Jeb Hensarling, originally pushed for additional reform provisions to be included. Specifically, the bill does not include certain provisions that were part of Hensarling’s Financial CHOICE Act, such as (i) a complete repeal of the Volker Rule; (ii) subjecting the CFPB to the Congressional appropriations process and restructure the agency with a bipartisan commission; and (iii) reducing the Financial Stability Oversight Council’s (FSOC) authority to designate nonbank financial institutions as Systemically Important Financial Institutions (SIFIs).
In response to the bill’s passage, the OCC’s Comptroller of Currency, Joseph Otting, issued a statement supporting the regulatory changes and congratulating the House, “[t]his bill restores an important balance to the business of banking by providing meaningful reductions of regulatory burden for community and regional institutions while safeguarding the financial system and protecting consumers.” Additionally, acting Director of the CFPB, Mick Mulvaney, applauded Congress, noting that the reforms to mortgage lending were “long overdue” and called the bill “the most significant financial reform legislation in recent history.”
As previously covered by InfoBytes, the highlights of the bill include:
- Improving consumer access to mortgage credit. The bill’s provisions state, among other things, that: (i) banks with less than $10 billion in assets are exempt from ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) appraisals will not be required for certain transactions valued at less than $400,000 in rural areas; (iii) banks and credit unions that originate fewer than 500 open-end and 500 closed-end mortgages are exempt from HMDA’s expanded data disclosures (the provision would not apply to nonbanks and would not exempt institutions from HMDA reporting altogether); (iv) amendments to the S.A.F.E. Mortgage Licensing Act will provide registered mortgage loan originators in good standing with 120 days of transitional authority to originate loans when moving from a federal depository institution to a non-depository institution or across state lines; and (v) the CFPB must clarify how TRID applies to mortgage assumption transactions and construction-to-permanent home loans, as well as outline certain liabilities related to model disclosure use.
- Regulatory relief for certain institutions. Among other things, the bill simplifies capital calculations and exempts community banks from Section 13 of the Bank Holding Company Act if they have less than $10 billion in total consolidated assets. The bill also states that banks with less than $10 billion in assets, and total trading assets and liabilities not exceeding more than five percent of their total assets, are exempt from Volcker Rule restrictions on trading with their own capital.
- Protections for consumers. Included in the bill are protections for veterans and active-duty military personnel such as: (i) permanently extending from nine months to one year the protection that shields military personnel from foreclosure proceedings after they leave active military service; and (ii) adding a requirement that credit reporting agencies provide free credit monitoring services and credit freezes to active-duty military personnel. The bill also addresses the creation of an identity theft protection database. Additionally, the bill instructs the CFPB to draft federal rules for the underwriting of Property Assessed Clean Energy loans (PACE loans), which would be subject to the TILA ability-to-repay requirement.
- Changes for bank holding companies. Among other things, the bill raises the threshold for automatic designation as a SIFI from $50 billion in assets to $250 billion. The bill also subjects banks with $100 billion to $250 billion in total consolidated assets to periodic stress tests and exempts from stress test requirements entirely banks with under $100 billion in assets. Additionally, certain banks would be allowed to exclude assets they hold in custody for others—provided the assets are held at a central bank—when computing the amount such banks must hold in reserves.
- Protections for student borrowers. The bill’s provisions include measures to prevent creditors from declaring an automatic default or accelerating the debt against a borrower on the sole basis of bankruptcy or cosigner death, and would require the removal of private student loans on credit reports after a default if the borrower completes a loan rehabilitation program and brings payments current.
Each provision of the bill will take effect at various intervals from the date of enactment up to 18 months after.
Court enters default judgment in favor of CFPB against debt relief companies
On May 22, the U.S. District Court for the District of Maryland entered a default judgment, in favor of the CFPB, against two debt relief companies, their service provider, and their owners (defendants) for allegedly misleading consumers about their debt validation program. As previously covered by InfoBytes, the CFPB filed a complaint in October 2017 against the defendants for allegedly violating the Telemarketing Sales Rule and the Consumer Financial Protection Act by, among other things, purportedly claiming to be affiliated with the federal government and misrepresenting the abilities of their services. In granting the CFPB’s request for default judgment, the court held that the defendants failed to defend the action and ordered they pay almost $5 million in restitution, as well as $16 million in civil money penalties. In addition to the fines, the defendants are prohibited from engaging in telemarketing, debt relief and credit repair activities in the future.
Maryland governor signs provisions amending Maryland Consumer Loan Law’s small lending requirements
On May 15, the Maryland governor signed legislation to establish requirements for lenders making covered loans in the state. Among other things, HB1297 increases the threshold for which a loan is subject to small lending requirements within the Maryland Consumer Loan Law (MCLL) from $6,000 to $25,000. The law also prohibits (i) lenders who are not licensed in the state from making loans of $25,000 or less, unless the person is exempt from requirements under MCLL; (ii) a person contracting “for a covered loan that has a rate of interest, charge, discount, or other consideration greater than the amount authorized under state law”; and (iii) covered loans that would be a violation of the Military Lending Act. Loans that violate these provisions are deemed void and unenforceable except in limited circumstances. The law takes effect January 1, 2019.
CFPB updates TRID Small Entity Compliance Guide and Guide to Forms
On May 15, the CFPB released the 2018 updated versions of the “Know Before You Owe” mortgage disclosure rule Small Entity Compliance Guide (versions 4.1 and 5.2) and Guide to Forms (versions 1.5 and 2.1). Because the optional compliance period with the 2017 TILA-RESPA Integrated Disclosure Rule (TRID) extends through October 1, the CFPB updated both versions of each guide. Additionally, all four versions are updated with the 2018 TRID changes (covered by InfoBytes here), which will become effective prior to the end of the 2017 optional compliance period.
DOJ, CFPB agree to early termination of consent order with indirect auto lender
On May 15, the auto lending branch of an international automobile company (indirect auto lender) reported in an 8-K filing that the DOJ and CFPB had reached an agreement that the indirect auto lender has met the requirements for early termination of a consent order entered into in 2016 over allegations of unfair lending practices. As previously covered in InfoBytes, a joint agency investigation under ECOA found that the indirect auto lender’s policies allowed for dealers to mark up a consumer’s interest rate on the retail installment contract above the established risk-based buy rate. The parties currently await final court approval of a joint stipulation and proposed order for early termination of the consent order from three years to two years in the U.S. District Court for the Central District of California.
3rd Circuit reverses district court’s decision, rules TILA provisions misapplied to unauthorized-charge suit
On May 16, the U.S. Court of Appeals for the 3rd Circuit reversed a district court’s decision, holding that the lower court, among other things, misapplied a TILA provision under Regulation Z that requires cardholders to dispute charges within 60 days of the “first periodic statement that reflects the alleged billing error.” According to the opinion, the plaintiff-appellant filed a suit against the bank after he was allegedly rebilled for a $657 fraudulent money transfer charge that originally appeared on his statement in July 2015. The charge was originally removed from his account but reappeared in mid-September of that year after the bank claimed the charge was valid after verifying transaction details. The plaintiff-appellant challenged the decision in writing, and later filed a complaint against the bank, alleging he had “timely submitted a written notice of billing error,” and that the bank “had neither credited the charge nor conducted a reasonable investigation” and imposed liability of more than $50. The district court dismissed the complaint with prejudice for failure to state a claim, which the plaintiff appealed.
At issue, the three-judge panel determined, were two provisions under TILA: (i) the “Fair Credit Billing Act” (FCBA), which stipulates that creditors must “comply with particular obligations when a consumer has asserted that his billing statement contains an error,” and (ii) the “unauthorized-use provision,” which requires certain conditions to be met before a credit card issuer can hold the cardholder liable, up to a limit of $50, for any unauthorized use. The panel first addressed the district court’s finding that the bank’s obligations under FCBA were “never triggered” because his written notice came 63 days after the July statement first included the charge. The panel held that, because the plaintiff-appellant’s August billing statement showed a credit to his account for the charge and that “there was no longer anything to dispute” and no reason to believe his statement contained a billing error, the 60-day time limit should have started when the bank rebilled him in September. In addressing the second issue, the district court held that plaintiff-appellant was not entitled to “reimbursement” under the unauthorized-use claim. However, the panel opined that he was not seeking reimbursement but rather “actual damages,” for which the statute does provide relief. “We conclude that a cardholder incurs ‘liability’ for an allegedly unauthorized charge when the issuer, having reason to know the charge may be unauthorized, bills or rebills the cardholder for that charge,” the panel wrote.
FCC seeks comments on interpretation of autodialer under TCPA
On May 14, the FCC’s Consumer and Governmental Affairs Bureau released a notice seeking comment on the interpretation of the Telephone Consumer Protection Act (TCPA) in light of the recent D.C. Circuit decision in ACA International v. FCC. (Covered by a Buckley Sandler Special Alert.) The notice requests, among other things, comment on what constitutes an “automatic telephone dialing system” (autodialer) due to the court setting aside the FCC’s 2015 interpretation of an autodialer as “unreasonably expansive.” Specifically, the FCC requests comment on how to interpret the term “capacity” under the TCPA’s definition of an autodialer (“equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers”) and requests comment on the functions a device must be able to perform to qualify as an autodialer, including how “automatic” the dialing mechanism must be. Additionally, the notice seeks comment on (i) how to treat reassigned wireless numbers under the TCPA; (ii) how a party may revoke prior express consent to receive robocalls; and (iii) three pending petitions for reconsideration, including the 2016 Broadnet Declaratory Ruling and the 2016 Federal Debt Collection Rules. Comments are due by June 13 and reply comments are due by June 28.
On May 3, the U.S. Chamber of Commerce, the American Bankers Association, and over a dozen more trade associations petitioned the FCC seeking a declaratory ruling on the definition of an autodialer under the TCPA, previously covered by InfoBytes here.