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  • CFPB orders companies to submit BNPL information

    Federal Issues

    On December 16, the CFPB issued a series of orders to five companies seeking information regarding the risks and benefits of the “buy now, pay later” (BNPL) credit model. BNPL is a “fast-growing” form of deferred payment that permits a consumer to divide a purchase into smaller installment payments, which are usually four or less and are often with a down payment of 25 percent due at the time of checkout. The Bureau issued the orders under Section 1022(c)(4) of the Consumer Financial Protection Act (12 U.S.C. § 5512(c)(4)), which, as part of the agency’s rulemaking authority, authorizes it to “monitor consumer financial markets and enables the agency to require market players to submit information to inform this monitoring.” The Bureau stated that it is “concerned about accumulating debt, regulatory arbitrage, and data harvesting in a consumer credit market already quickly changing with technology.” The Bureau expects to “publish aggregated findings on insights learned from this inquiry” and intends for the orders “to illuminate the range of these consumer credit products and their underlying business practices.”

    The Bureau made available an example order that contains 20 requests seeking various information and data on several topics, including: (i) “Business Model/Metrics”; (ii) “Loan Performance Metrics”; (iii) “Consumer Protections”; (iv) “User Contacts and Demographics”; and (v) “Data Harvesting.” With respect to data harvesting, the CFPB noted that “[a]s competitive forces pressure the merchant discount, lenders will need to find other sources of revenue to maintain growth and profitability,” and the Bureau “would like to better understand practices around data collection, behavioral targeting, data monetization and the risks they may create for consumers.” The Bureau also noted that as part of the inquiry, it is collaborating with Australia, Sweden, Germany, and the UK (specifically, the Financial Conduct Authority), and will additionally be coordinating with the rest of the Federal Reserve System, and its state partners.

    The same day, the Bureau issued a blog post for consumers on common risks to be aware of before using a BNPL loan. The blog noted, among other cautions, that: (i) “BNPL products often carry fees”; (ii) “[y]our loan repayment agreement is with the BNPL lender rather than the retailer”; (ii) “BNPL loans have fewer protections than credit cards”; and (iii) “[m]ost BNPL lenders don’t report payments to the major credit reporting companies,” nor “generally perform hard credit inquiries when deciding whether or not to give you the loan.” 

    Federal Issues CFPB Agency Rule-Making & Guidance Consumer Finance Buy Now Pay Later Of Interest to Non-US Persons CFPA

  • CFPB asks tech workers to report AI lending discrimination

    Federal Issues

    On December 15, the CFPB released a blog post calling on technology workers to report potential violations of federal consumer financial laws, including related to artificial intelligence (AI), as part of the Bureau’s efforts to adapt to the evolving financial landscape. According to the Bureau, AI has become a part of nearly every consumer financial market, creating the potential for intentional and unintentional discrimination within the decision-making process. As an example, while algorithmic mortgage underwriting has the potential to reduce discrimination, the Bureau warned that “researchers found discriminatory effects of these new technologies, as Black and Hispanic families have been more likely to be denied a mortgage compared to similarly situated white families.” The Bureau asked tech workers, including engineers, data scientists, and others with detailed knowledge of these algorithms and technologies, to report potential discrimination or other misconduct to the Bureau to help ensure these technologies are not being misused or abused. “Tech workers may have entered the field to change the world for the better, but then discover their work being misused or abused for unlawful ends,” CFPB Chief Technologist Erie Meyer stated. The Bureau updated its whistleblower webpage to provide additional information on the whistleblower submission process, and noted that fair lending experts and technologists will review submitted whistleblower tips. The webpage also describes the type of information the Bureau is seeking, and outlines whistleblower protections.

    Federal Issues CFPB Artificial Intelligence Fintech Whistleblower Fair Lending Consumer Finance

  • CFPB’s debt-collection suit can proceed

    Courts

    On December 13, the U.S. District Court for the District of Delaware ruled that the CFPB can proceed with its 2017 enforcement action against a collection of Delaware statutory trusts and their debt collector for, among other things, allegedly filing lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations. (Covered by InfoBytes here.) According to the court’s opinion, the U.S. Supreme Court’s decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert) upended its previous dismissal of the case, which had held that the Bureau lacked enforcement authority to bring the action when its structure was unconstitutional. The court also previously ruled that the Bureau’s claims were barred by the statute of limitations and that former Director Kathy Kraninger’s subsequent ratification of the action came after the limitations period had expired. (Covered by InfoBytes here.) 

    In now finding that the CFPB can proceed with the 2017 enforcement action, the court rejected the statute of limitations argument because, under the Supreme Court’s ruling that unconstitutional removal protections do not automatically void agency actions, the Bureau’s action in 2017 was valid and it stopped the three-year clock when it sued. While the court recognized the defendants’ argument that the Bureau first discovered the alleged violations on September 4, 2014, when it issued a civil investigative demand and then sued on September 18, 2017 (allegedly exceeding the three-year limit by two weeks), the court noted that at this stage it could not find a time bar because nothing on the “face of the complaint” supports the defendants’ argument that the allegations are untimely.

    The court also held that the Bureau did not need to ratify the suit. Pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here), the court stated that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the agency’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The court wrote: “This suit would have been filed even if the director had been under presidential control. It has been litigated by five directors of the CFPB, four of whom were removable at-will by the President. . . . And the CFPB did not change its litigation strategy once the removal protection was eliminated. This is strong evidence that this suit would have been brought regardless.”

    The court also disagreed with the defendants’ argument that, as trusts, they are not “covered persons” under the Consumer Financial Protection Act (CFPA). While the defendants argued that they used subservicers to collect debt and therefore did not “engage in” providing services listed in the CFPA, the court stated that the trusts were still “engaged” in their business and the alleged misconduct even though they contracted it out. “[I]f Congress wanted to allow enforcement against only those who directly engage in offering or providing consumer financial services, it could have said so,” the court said.

    Courts CFPB Enforcement Consumer Finance Seila Law Student Lending U.S. Supreme Court CFPA UDAAP

  • New York AG warns mortgage servicers of obligation to help homeowners affected by Covid-19

    State Issues

    On December 13, New York Attorney General Letitia James sent a letter warning mortgage servicers operating in the state of their obligation to help homeowners impacted by the Covid-19 pandemic. The letter, which was also sent to mortgage industry trade associations, reiterated that mortgage servicers are expected to comply with New York law and federal regulations and guidelines when providing long-term relief to affected homeowners. James also announced “that the Office of the Attorney General’s (OAG) Mortgage Enforcement Unit (MEU) will be helping to oversee the distribution of New York state’s Homeowner Assistance Fund (HAF) announced last week by New York Governor Kathy Hochul.” According to the letter, HAF funds “may be used to pay off arrears or reduce mortgage principal so that homeowners can qualify for an affordable loan modification.” However, James stressed that these funds “must supplement rather than replace the mortgage industry’s own efforts,” adding that mortgage servicers must “play their part by offering homeowners all available loss mitigation options before that homeowner seeks an outside HAF grant, in order to help the program save as many homes as possible.” MEU will contact the mortgage industry, including New York legal services and housing counseling agencies, to provide additional information on the HAF application process. MEU will also be responsible for reviewing HAF applications to determine whether homeowners have been presented all available and affordable loan modification options.

    James’ announcement stated that mortgages servicers are also expected to comply with streamlined modification programs offered by various federal agencies, Fannie Mae, and Freddie Mac, and must also “provide comparable relief (pursuant to New York state Banking Law § 9-x and New York’s mortgage servicing regulations) to homeowners whose mortgages are owned by private investors through private label securities or by banks in their own portfolios.” Mortgage servicers should also prepare for surges in requests for assistance, and will be held responsible for staffing shortages and poor customer communications, James warned. She noted in her letter that the OAG is “currently investigating whether certain servicers of privately-owned mortgages have failed to offer homeowners the forbearance relief and post-forbearance modifications required by New York Banking Law § 9-x,” and emphasized that the OAG “will continue to monitor compliance and initiate enforcement actions against individual mortgage servicers as needed to protect New York homeowners.”

    State Issues State Attorney General Mortgages Mortgage Servicing Covid-19 New York Consumer Finance

  • CFPB publishes fall 2021 rulemaking agenda

    Agency Rule-Making & Guidance

    On December 13, the Office of Information And Regulatory Affairs released the CFPB’s fall 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau plans to pursue during the period from November 2, 2021 to October 31, 2022. Additionally, the Bureau stated that the latest agenda reflects continued rulemakings intended to further its consumer financial protection mission and help advance the country’s economic recovery from the Covid-19 pandemic. Promoting racial and economic equity and supporting underserved and marginalized communities’ access to fair and affordable credit continue to be Bureau priorities.

    Key rulemaking initiatives include:

    • Small Business Rulemaking. This fall, the Bureau issued its long-awaited proposed rule (NPRM) for Section 1071 regulations, which would require a broad swath of lenders to collect data on loans they make to small businesses, including information about the loans themselves, the characteristics of the borrower, and demographic information regarding the borrower’s principal owners. (Covered by a Buckley Special Alert.) The NPRM comment period goes through January 6, 2022, after which point the Bureau will review comments as it moves to develop a final rule. Find continuing Section 1071 coverage here.
    • Consumer Access to Financial Records. The Bureau noted that it is working on rulemaking to implement Section 1033 of Dodd-Frank in order to address the availability of electronic consumer financial account data. The Bureau is currently reviewing comments received in response to an Advance Notice of Proposed Rulemaking (ANPR) issued fall 2020 regarding consumer data access (covered by InfoBytes here). Additionally, the Bureau stated it is monitoring the market to consider potential next steps, “including whether a Small Business Review Panel is required pursuant to the Regulatory Flexibility Act.”
    • Property Assessed Clean Energy (PACE) Financing. As previously covered by InfoBytes, the Bureau published an ANPR in March 2019 seeking feedback on the unique features of PACE financing and the general implications of regulating PACE financing under TILA (as required by Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which amended TILA to mandate that the Bureau issue certain regulations relating to PACE financing). The Bureau noted that it continues “to engage with stakeholders and collect information for the rulemaking, including by pursuing quantitative data on the effect of PACE on consumers’ financial outcomes.”
    • Automated Valuation Models (AVM). Interagency rulemaking is currently being pursued by the Bureau, Federal Reserve Board, OCC, FDIC, NCUA, and FHFA to develop regulations for AVM quality control standards as required by Dodd-Frank amendments to FIRREA. The standards are designed to, among other things, “ensure a high level of confidence in the estimates produced by the valuation models, protect against the manipulation of data, seek to avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for June 2022.
    • Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued a final rule on December 7 to facilitate the transition from LIBOR for consumer financial products, including “adjustable-rate mortgages, credit cards, student loans, reverse mortgages, [and] home equity lines of credit,” among others. The final rule amended Regulation Z, which implements TILA, to generally address LIBOR’s eventual cessation for most U.S. dollar settings in June 2023, and establish requirements for how creditors must select replacement indices for existing LIBOR-linked consumer loans. The final rule generally takes effect April 1, 2022.
    • Reviewing Existing Regulations. The Bureau noted in its announcement that it decided to conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), and referred to a notice and request for comments issued last month (covered by InfoBytes here), which solicited public comments on its plans to assess the effectiveness of the HMDA Rule. Additionally, the Bureau stated that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009, and that “[a]fter considering the statutory review factors and public comments,” it “determined that the CARD Act rules should continue without change.”

    Notably, there are 14 rulemaking activities that are listed as inactive on the fall 2021 agenda, including rulemakings on overdraft services, consumer reporting, student loan servicing, Regulation E modernization, abusive acts and practices, loan originator compensation, and TILA/RESPA mortgage disclosure integration.

    Agency Rule-Making & Guidance CFPB Covid-19 Small Business Lending Section 1071 Consumer Finance PACE Programs AVMs Dodd-Frank Section 1033 Regulation Z LIBOR HMDA RESPA TILA CARES Act Debt Collection EGRRCPA Federal Reserve OCC FDIC NCUA FHFA Bank Regulatory FIRREA CARD Act

  • FTC settles with debt collectors

    Federal Issues

    On December 13, the FTC announced a settlement with several South Carolina-based debt collection companies and an individual (collectively, "defendants") for allegedly engaging in fraudulent debt collection practices. The FTC filed a complaint against the defendants alleging that they violated the FTC Act and the FDCPA by, among other things: (i) using robocalls to leave deceptive messages; (ii) falsely representing that an individual is an attorney or is in communication with an attorney; (iii) “falsely claiming or implying that nonpayment of a debt will result in the arrest or imprisonment of a person”; (iv) threatening to take unlawful legal action; and (v) making false representations or using deceptive means to collect or attempt to collect a debt. The action was taken as part of the FTC’s “Operation Corrupt Collector”—a nationwide enforcement and outreach effort established by the FTC, CFPB, and more than 50 federal and state law enforcement partners to target illegal debt collection practices (covered by InfoBytes here). The effort previously resulted in settlements with two other debt collectors, which included permanent bars from the industry.

    Under the terms of the settlement, in addition to being permanently banned from participating in debt collection and debt brokering activities, the defendants will also be prohibited from making misrepresentations to consumers, including (i) whether consumers are legally obligated to pay defendants; (ii) whether defendants are attorneys or affiliated with a law firm; (iii) the terms of any refund policy; and (iv) any material facts concerning products or services. The order also requires the defendants to surrender the contents of numerous bank and investment accounts, including property and the value of certain assets. An approximately $12 million monetary judgment will be partially suspended upon completion of asset transfers from all financial institutions holding accounts in the defendants’ names.

    Federal Issues FTC Debt Collection Enforcement FTC Act UDAP FDCPA Courts Consumer Finance

  • OCC launches DC REACh

    Federal Issues

    On December 13, the OCC announced the launch of DC REACh , which expands the OCC’s Project REACh (Roundtable for Economic Access and Change) efforts to Washington, D.C. As previously covered by InfoBytes, in 2020, the OCC launched this initiative to promote greater financial inclusion of underserved populations. According to the OCC, Project REACh brings together leaders from the banking industry, national civil rights organizations, and various businesses and technology organizations who will identify and reduce barriers to accessing capital and credit. The OCC further noted that DC REACh “will organize and initiate formal efforts to promote greater access to affordable homeownership, enhance small business financing, and expand access to credit for economically disadvantaged and underserved communities in Washington, D.C.” According to remarks by acting Comptroller of the Currency Michael J. Hsu at the launch of DC REACh, the OCC “will be working with local community leaders and financial institutions to build paths towards entrepreneurship and affordable homeownership for District residents.”

    Federal Issues OCC Bank Regulatory Consumer Finance Underserved

  • CFPB releases EFTA FAQs

    Federal Issues

    On December 13, the CFPB released updated Electronic Fund Transfers FAQs, which pertain to compliance with the Electronic Fund Transfer Act (EFTA) and Subpart A to Regulation E. The updated topics include transaction coverage, financial institution coverage, error resolution, and unauthorized EFT error resolution. Highlights from the updated FAQs include:

    • Person-to-person (P2P) payments can be unauthorized electronic transfers under Regulation E.
    • “[A] ‘pass-through’ payment transfers funds from the consumer’s account held by an external financial institution to another person’s account held by an external financial institution,” which is “initiated through a financial institution that does not hold a consumer’s account, for example, a non-bank P2P provider.”
    • “Regulation E section 1005.2(i) defines financial institution under EFTA and Regulation E to include banks, savings associations, credit unions, and: any other person that directly or indirectly holds an account belonging to a consumer, or any other person that issues an access device and agrees with a consumer to provide electronic fund transfer (EFT) services.”
    • “Any P2P payment provider that meets the definition of a financial institution, as discussed in Electronic Fund Transfers Coverage: Financial Institutions Question 1, is a financial institution under Regulation E.” Therefore, “if a P2P payment provider directly or indirectly holds an account belonging to a consumer, they are considered a financial institution under Regulation E.”
    • The transfer is considered to be an unauthorized EFT under Regulation E if a consumer’s account is obtained from a third party through fraudulent means (hacking), and a hacker utilizes that information to make an unauthorized electronic transfer from the consumer’s account.
    • “Although private network rules and other commercial agreements may provide for interbank finality and irrevocability, they do not reduce consumer protections against liability for unauthorized EFTs afforded by the Electronic Fund Transfer Act…. Accordingly, any financial institution in this transaction must comply with the error resolution requirements discussed in Electronic Fund Transfers Error Resolution Question 2, as well as the liability protections for unauthorized transfers.”

    Federal Issues CFPB Consumer Finance EFTA Electronic Fund Transfer Regulation E

  • California sentences student loan debt relief scammers

    State Issues

    On December 6, the California attorney general announced the sentencing of four individuals involved in a student loan assistance scam and related computer crimes. According to the AG, the individuals’ now-defunct company presented “itself as a legitimate source of help and feigned association with the U.S. Department of Education (ED) in order to gain the trust of distressed student loan borrowers and access their personal information.” Company employees “were directed to access and disrupt student loan borrower account data, as well as create new student borrower accounts while posing as the borrowers,” which violated the state’s computer crime laws the AG stated. Borrowers were convinced to pay fees of up to $1,300 in monthly payments in order to participate in the company’s loan payment reduction programs, which offered loan deferment and income-driven repayment. However, many of the borrowers were unaware that these payment reduction programs were already offered free of charge by the Department of Education. Moreover, borrowers did not know that their monthly payments were not a subscription service or applied towards their federal student loans, but were rather payments on a high interest loan. The AG contended that borrowers were purportedly required to continue making these payments even if they attempted to cancel the company’s services, and that “to facilitate the scam, the defendants used the Federal Student Aid website to illegally access student borrower records housed in computer systems belonging to ED.” In additional to their sentences of up to 180 days in prison, community service and probation, the individuals were ordered to pay restitution to harmed borrowers.

    State Issues California State Attorney General Enforcement Consumer Finance Debt Relief Student Lending

  • District Court: Debt collectors may rely on information supplied by credit card issuer

    Courts

    On December 2, the U.S. District Court for the District of Oregon granted defendants’ motion for summary judgment in an FDCPA action over an alleged disputed debt, ruling that defendants are allowed to rely on information supplied by a credit card issuer that a “debt owned has been verified and is owed.” The plaintiff opened a credit card in 2015 and stopped making payments on the card in June 2018. After she stopped making payments, the plaintiff sent notices of dispute to the credit card issuer contesting, among other things, whether the issuer owned the account, and received correspondence back from the issuer with information about where disputes about the debt should be directed. The issuer also explained that based on an investigation into her account, the issuer believed the account to be valid. Several months later, the defendants sent a demand letter on behalf of the issuer to the plaintiff using the address associated with the account, and later filed a collection lawsuit in state court seeking judgment to recover the unpaid balance.

    The plaintiff sued, accusing the defendants of violating Sections 1692e(2)(A), 1692e(5), and 1692e(10) of the FDCPA when they initiated the collections action. Among other claims, the plaintiff argued that she never received the demand letter. She also contended that the defendants should have known about the disputes. The court, however, agreed with the magistrate judge’s final orders and judgment, which ruled that it is not a requirement of the FDCPA for the defendants to confirm that a notice was received as a condition of filing the state court action. According to the court, the plaintiff identified no evidence that mail sent to the address used by the defendants was returned as undeliverable. The court also agreed that the plaintiff’s notices of dispute “did not challenge that she opened the account or was responsible for the charges,” and that the defendants submitted bank statements showing that the plaintiff made payments on the account.

    Courts Consumer Finance FDCPA Debt Collection Credit Cards

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