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OCC reports on mortgage performance
On September 15, the OCC released a report on the performance of first-lien mortgages in the federal banking system during the second quarter of 2022, providing information on mortgage performance through June 30. According to the OCC, 97 percent of mortgages were current and performing at the end of the quarter, compared to 95 percent a year earlier. The percentage of seriously delinquent mortgages was 1.5 percent in the second quarter of 2022, compared to 1.8 percent in the prior quarter and 3.8 percent a year ago. The report also found that servicers completed 28,109 modifications in the second quarter of 2022—a decrease of 33.7 percent from the previous quarter. Additionally, of the 28,109 mortgage modifications, 78.2 percent reduced borrowers’ monthly payments and 95.6 percent were “combination modifications,” which are modifications that include multiple actions affecting the affordability and sustainability of the loan, such as an interest rate reduction and a term extension.
FTC, CFPB say furnishers must investigate indirect disputes
On September 13, the FTC and CFPB (agencies) filed a joint amicus brief with the U.S. Court of Appeals for the Third Circuit, seeking the reversal of a district court decision that held furnishers of credit information are only obligated to investigate “bona fide” indirect disputes and may choose to decline to investigate other indirect disputes raised by consumers that are deemed frivolous. The agencies argued that this “atextual, judge-made exception” could undermine a key FCRA protection that allows consumers to dispute and correct inaccurate information in their credit reports, leading to a likely increase in consumer complaints related to credit reporting inaccuracies. Under the FCRA, consumers may file a direct dispute with a furnisher or file an indirect dispute with a consumer reporting agency (CRA), which may refer the dispute to the furnisher.
The case involves a direct dispute submitted by a plaintiff to a cable company, requesting an investigation into an allegedly fraudulent delinquent account listed on his credit report. The plaintiff informed the cable company that he was a victim of identity theft and that the account was opened in his name without his authorization. The cable company eventually referred the account to a debt collector (defendant) for collection after the plaintiff failed to provide requested information showing his account was opened due to fraud. An indirect dispute was later filed by the plaintiff with the CRA, which in turn sent the dispute to the defendant as the furnisher of the allegedly inaccurate information. After a second indirect dispute was filed noting the allegedly fraudulent account was the subject of litigation, the defendant removed the account from the plaintiff’s credit report and ceased collections. The plaintiff sued, asserting claims under the FCRA, FDCPA, and Pennsylvania law. The district court granted summary judgment in favor of the defendant, ruling that the plaintiff failed to provide evidence substantiating the basis of his dispute, and that “a furnisher is obligated to investigate only ‘bona fide’ indirect disputes and may therefore decline to investigate any indirect dispute it deems frivolous.”
In urging the appellate court to overturn the decision, the agencies countered in their amicus brief that the text of the FCRA is unambiguous—“furnishers must investigate all indirect disputes.” Nothing in the text suggests that a furnisher can choose not to investigate an indirect dispute if it determines it to be frivolous, the agencies stressed, further noting that if Congress intended to “create an exception for frivolous disputes, it knew how to do so,” and that in other parts of the statute Congress expressly provided that certain frivolous disputes do not need to be investigated.
The amicus brief also pointed out that under the FCRA, consumers are entitled to be notified about the outcome of their disputes, as well as given an opportunity to cure any deficiencies. The district court holding, the agencies said, would circumvent these requirements, thereby undercutting a central remedy under the FCRA that ensures consumers are able to dispute and correct inaccurate information in their credit reports. If furnishers were able to ignore disputes referred to them by CRAs, it could open an unintended loophole that would allow disputes to disappear “into a proverbial black hole,” the agencies asserted, emphasizing that if the district court’s interpretation is affirmed, consumers who submit an indirect dispute that is deemed frivolous by a furnisher may never receive any notice of that determination, and therefore, may never be able to cure any deficiencies or correct erroneous information in their credit reports.
The agencies also challenged whether the exception created by the district court’s ruling is necessary, as the FCRA already provides protections to furnishers from investigating frivolous disputes. Specifically, the statute allows CRAs to determine if a dispute a frivolous before forwarding a dispute to the furnisher. Moreover, furnishers “are not required to conduct an unreasonably onerous investigation into a conclusory or unsubstantiated dispute,” the agencies explained, stating that whether a furnisher has satisfied its obligation to conduct a reasonable investigation is normally a fact-intensive question for trial.
The Bureau noted in an accompanying blog post that it has also filed several other amicus briefs in other pending FCRA cases (previously covered by InfoBytes here) related to consumer reporting obligations.
2nd Circuit requires second look at “design and content” of online user agreement
On September 14, the U.S. Court of Appeals for the Second Circuit reversed a district court’s order denying a credit union’s motion to compel arbitration in a case involving the “unique question” of “whether and how to address incorporation by reference in web-based contracts under New York law.” The plaintiff claimed that the credit union wrongfully assessed and collected overdraft and insufficient funds fees on checking accounts that were not actually overdrawn. After the credit union moved to compel arbitration pursuant to a mandatory arbitration clause and class action waiver provision contained in the account agreement, the plaintiff argued that she was not bound by these provisions because they were not included in the original agreement and the credit union did not notify her when it added them to the agreement. According to the credit union, the plaintiff was on inquiry notice of the modified agreement because she separately agreed to an internet banking agreement that incorporated the modified account agreement by reference, and because the modified account agreement was published on the credit union’s website, which the plaintiff used for online banking. The district court disagreed, finding, among other things, that the hyperlink and language related to the account agreement appeared to be “buried” in the internet banking agreement.
On appeal, the 2nd Circuit held that the district court “erred in engaging in the inquiry notice analysis, which requires an examination of the ‘design and content’ of the webpage, without reviewing the actual screenshots of the web-based contract.” Recognizing that the internet banking agreement was a “clickwrap” or a “scrollwrap” agreement, the appellate court explained that it has “consistently upheld such agreements because the user has affirmatively assented to the terms of the agreement by clicking ‘I agree’ or similar language.” While the plaintiff did not dispute that she signed up for internet banking, this did not end the court’s analysis; according to the 2nd Circuit, when addressing questions concerning digital contract formation, “courts also evaluate visual evidence that demonstrates ‘whether a website user has actual or constructive notice of the conditions.’” The credit union did not provide evidence showing how the internet banking agreement was presented to users—thereby preventing the district court from assessing whether the relevant language and hyperlink were clear and conspicuous. The 2nd Circuit, therefore, instructed the district court to consider on remand the design and content of the internet banking agreement “as it was presented to users” to determine whether the plaintiff agreed to its terms, and to assess whether the account agreements are “clearly identified and available to the users” based on applicable precedents regarding inquiry notice of terms in web-based contracts.
CFPB studying BNPL growth
On September 15, the CFPB announced plans to consider issuing interpretive guidance or regulations to ensure that buy now, pay later (BNPL) lenders follow many of the same consumer protection measures that exist for credit cards. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in the announcement. The Bureau described BNPL products as a form of interest-free credit that “serves as a close substitute for credit cards” and allows consumers to split a retail transaction into smaller, interest-free installments that are repaid over time.
Recognizing that BNPL products are a rapidly growing alternative form of credit for online retail purchases, the Bureau published a report providing key insights into the industry. According to the report, the number of BNPL loans originated from 2019 to 2021 in the US grew 970 percent, from 16.8 million to 180 million. The total dollar volume of these loans grew by 1,092 percent in that period, from $2 billion in 2019 to $24.2 billion in 2021, the report said, noting that 73 percent of applicants were approved for credit in 2021, up from 69 percent in 2020. Additionally, the report found that 89 percent of consumers using BNPL loans linked their accounts to their debit cards, and that late fee policies vary by issuer.
The Bureau raised several concerns with BNPL products in the report, including (i) inconsistent standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and occurrences where consumers are assessed multiple late fees on the same missed payment; (ii) risks related to data harvesting and monetization, as many BNPL lenders shift business models toward proprietary app usage, allowing lenders “to build a valuable digital profile of each user’s shopping preferences and behavior”; and (iii) concerns over consumers taking out several loans during a short period of time at multiple lenders. According to the Bureau, because most BNPL lenders currently do not furnish data to the major credit reporting companies, many lenders are unaware of a consumer’s current liabilities when deciding whether to originate new loans.
The Bureau noted in its announcement that while BNPL lenders are currently subject to some federal and state oversight, compliance and licensing requirements vary. In addition to exploring potential new regulatory guidance, the Bureau said it plans to identify surveillance practices that BNPL lenders should seek to avoid, and it will continue to address the development of appropriate and accurate credit reporting practices for the industry. Chopra further announced that the Bureau is inviting BNPL lenders to self-identify if they wish to be examined for any potentially problematic business practices. The Bureau is also reviewing its authorities to conduct examinations on a compulsory basis and will work with state regulators that license nonbank finance companies on examinations of BNPL firms.
Consumer groups urge Chopra to limit forced arbitration
On September 13, a collation of consumer advocacy groups sent a letter to CFPB Director Rohit Chopra, urging him to limit the use of forced arbitration in consumer contracts in cases where consumers have been “victimized by banking abuses or fraud.” Pursuant to the Dodd-Frank Act, Congress directed the Bureau to study the use of forced arbitration clauses in the consumer finance market and authorized it to write a rule to limit or restrict the practice, which resulted in a 2015 Arbitration Study report (covered by InfoBytes here). The report, according to the letter, “found that tens of millions of consumers were subject to forced arbitration clauses and class action bans in their credit card, deposit account, prepaid account, student loan, payday loan, and wireless carrier contracts,” and, among other things suggested only a small minority of consumers actually filed for forced arbitration. The letter argued that mandatory arbitration clauses in banks’ consumer contracts are “blocking millions of consumers from seeking justice,” and urged the Bureau to use its authority to ensure that “consumers are empowered to act as a group and on their own in the courts.” The letter concluded by urging the Bureau to “rein in forced arbitration in financial services.”
District Court grants final approval in data breach suit
On September 13, the U.S. District Court for the Eastern District of Virginia granted final approval of a class action settlement in a data breach suit. As previously covered by InfoBytes, in July 2019, a national bank (defendant) announced that an unauthorized individual had obtained the personal information of credit card customers and applicants. In May 2020, a magistrate judge ordered the defendant to produce to plaintiffs in litigation a forensic analysis performed by a cybersecurity consulting firm regarding the defendant’s 2019 data breach, concluding the report was not entitled to work product protection. According to the final settlement, members of the settlement class, which includes approximately 98 million U.S. residents whose information was compromised in the breach disclosed in July 2019, will receive cash compensation for out-of-pocket losses traceable to the data breach, cash compensation for time spent addressing with issues related to the breach, and at least three years of identity theft defense and resolution services. Counsel can seek fees and court costs of 35 percent of the settlement fund. Additionally, each of the eight settlement class representatives could receive $5,000 in service awards, and the other plaintiffs who were deposed by the defendant will receive service awards.
District Court orders college operator to comply with CFPB CID
On September 13, the U.S. District Court for the District of Utah ordered the operator of several defunct colleges to cooperate with a CFPB civil investigative demand (CID) for potential violations of the Consumer Financial Protection Act. In 2019, the Bureau issued a CID to the operator seeking information on its private student loan financing program, as well as litigation concerning the loan program dating back to 2012, to aid its investigation into whether the program constituted unfair, deceptive, or abusive acts or practices. The operator argued that the CID was unenforceable for several reasons, including that it was “unreasonably oppressive” and that the legality of its program had already been litigated in state action. The operator also argued that because the Bureau’s leadership structure rendered it unconstitutional, it lacked authority to enforce the CID. A magistrate judge’s recommendation narrowed the scope of the CID, but the operator continued to object, stating that a severe reduction in staff created a loss of “significant institutional knowledge” about the loan program. After the U.S. Supreme Court issued its ruling in Seila Law LLC v. CFPB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert ), the Bureau’s director ratified the CID. The operator then raised new objections claiming the Bureau’s funding structure violates the U.S. Constitution’s separation of powers, and therefore the agency lacks valid authority to enforce the CID.
The court rejected the operator’s argument, writing that dicta in the Supreme Court’s decision in Seila Law “suggests the Bureau’s funding structure is not an unconstitutional delegation of power from Congress to the Executive Branch.” According to the court, while the majority opinion in Seila Law made note of the CFPB’s funding structure, it treated it “merely as an aggravator” of the for-cause removal protection issues and “went as far as saying the Bureau’s constitutional infirmity would ‘disappear’ if ‘the Director were removable at will by the President.’”
With respect to burdensomeness, the court said the operator has failed to show evidence establishing an unreasonable burden in its objections, and that, moreover, it “has had more than three years’ notice to preserve any information it thought may be relevant to the Bureau’s investigation.” The court further stressed that the CID does not become overly burdensome simply because the operator shuttered its campuses thereby allegedly relinquishing “institutional knowledge” concerning its own education loan program prior to complying with the CID. The court granted the operator a 90-day extension to comply with the CID.
Democrats want PLUS loans in relief plan
On September 12, eight Senate Democrats sent a letter to President Biden, urging him to extend student-loan debt relief to roughly 3.6 million borrowers under the Parent Loan for Undergraduate Student (PLUS) loan program. Biden’s debt relief plan instructed the Department of Education (DOE) to, among other things: (i) provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the DOE; (ii) provide up to $10,000 in debt cancellation to non-Pell Grant recipients for borrowers making less than $125,000 a year or less than $250,000 for married couples; and (iii) propose a new income-driven repayment (IDR) plan and cap monthly payments for undergraduate loans at 5 percent of a borrower’s discretionary income. Additionally, for IDR plans, Biden’s August announcement instructed the DOE to propose a rule to, among other things, reduce the amount that borrowers have to pay each month for undergraduate loans from 10 percent to 5 percent. The Senators expressed their concern that Biden’s recent actions do not appropriately cover Parent PLUS borrowers and urged his administration and the DOE to “to incorporate Parent PLUS borrowers in any administrative improvements to federal student loan programs, including the Public Service Loan Forgiveness and Income-Driven Repayment programs, extensions or creation of waivers, and in the implementation of executive actions to provide student debt relief.”
Republicans take issue with CFPB agenda
On September 12, several Republican senators sent a letter to CFPB Director Rohit Chopra expressing concerns that the Bureau is again pursuing “a radical and highly-politicized agenda unbounded by statutory limits.” In particular, the letter took issue with recent Bureau reports on the use of overdraft fees (covered by InfoBytes here and here), calling the agency’s actions a “relentless smear campaign” against banks. “Charging fees that customers chose to pay should not be disturbing or illegal, and yet, the CFPB appears to have developed a particular disdain for banks charging their customers for services, pejoratively calling overdraft protection ‘junk fees,’” the letter stated. Additionally, the letter claimed that the Bureau is changing its rules in order to publish previously confidential information about financial institutions to make it easier to threaten them with reputational harm (covered by InfoBytes here), without affording the financial institution the similar ability to, for example, disclose the existence of a CFPB examination. Among other things, the new procedural rule establishes a disclosure mechanism intended to increase transparency of the Bureau’s risk-determination process that will exempt final decisions and orders by the CFPB director from being considered confidential supervisory information, allowing the Bureau to publish the decisions on their website. According to the senators, the rule requires nonbanks to keep confidential information relating to a decision issued by the Bureau, including facts that could question the decision or raise procedural concerns. “The one-sided nature of the CFPB’s rule change gives the agency the ability to publicly tarnish an institution’s name without affording the firm the power to defend itself,” the letter said. The letter also decries a recent change to the agency’s rules of adjudication to make it more difficult for companies to defend themselves against novel enforcement theories by bypassing an administrative law judge and permitting the director to rule directly on the validity of the legal basis for the enforcement action.
11th Circuit says wasted time, distress can confer FDCPA standing
On September 7, the U.S. Court of Appeals for the Eleventh Circuit vacated the dismissal of an FDCPA action after determining that wasted time and emotional distress can be sufficiently concrete as to confer Article III standing. After the plaintiff fell behind on his monthly condo association payments, the association referred the matter to a law firm (collectively, “defendants”). The defendant law firm eventually filed a claim of lien against the plaintiff’s condo and threatened foreclosure if the plaintiff did not pay more than $10,000 in past-due fees, interest, late fees, attorney’s fees, and costs. The plaintiff sued for violations of the FDCPA and state law, claiming, among other things, that the debt collection letters and claim of lien overstated the amount due by including interest, late fees, and other charges not permitted under Florida law. He also alleged that the law firm violated the FDCPA by filing the claim of lien in the public record, thereby communicating with a third party about his debt without permission. These actions, the plaintiff contended, caused him emotional distress and cost him time, money, and effort when “trying to ‘determine, verify, and dispute the amounts being sought against him.’” The plaintiff eventually voluntarily dismissed the claims against the association, and the law firm moved to dismiss for lack of jurisdiction. The district court determined that the plaintiff lacked standing because the law firm’s actions did not cause him any concrete injury and dismissed the suit.
On appeal, the 11th Circuit disagreed after finding that the time the plaintiff spent trying to determine the correct amount of debt and the emotion distress he suffered during the process were adequate to satisfy constitutional standing requirements. “[Plaintiff] presented evidence that he suffered injuries—including an inaccurate claim of lien against his property; time spent trying to determine the correct amount of his debt, resolve the lien, and avoid the threatened foreclosure; and emotional distress manifesting in a loss of sleep—which are sufficiently tangible to confer Article III standing,” the appellate court wrote. The 11th Circuit explained that while the time and money spent on the FDCPA lawsuit itself could not give rise to a concrete injury for standing purposes, the time and money spent by the plaintiff defending against a legal action taken by a debt collector was “separable” from the costs of bringing the FDCPA suit. Moreover, the appellate court determined that the defendants refusing to release the lien against the plaintiff’s home unless he paid more than what was actually owed “was a tangible harm sufficient to give [plaintiff] standing for his claims that the defendants’ conduct in filing the lien and threatening to foreclose on it violated the FDCPA.”