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On March 31, the U.S. District Court for the District of Columbia mostly denied motions to dismiss filed by a mortgage lender and four executives (collectively, “defendants”) sued by the CFPB for allegedly engaging in unlawful mortgage lending practices. As previously covered by InfoBytes, the Bureau filed a complaint last year against the defendants alleging violations of several federal laws, including TILA and the CFPA. According to the Bureau, (i) unlicensed employees allegedly offered and negotiated mortgage terms; (ii) company policy regularly required consumers to submit documents for verification before receiving a loan estimate; (iii) employees denied consumers credit without issuing an adverse action notice; and (iv) defendants regularly made misrepresentations about, among other things, the availability and cost savings of FHA streamlined refinance loans.
The mortgage lender had argued in its motion to dismiss that neither TILA nor the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) required the lender to ensure that its individual employees were licensed under state law. In denying the motions to dismiss, the court disagreed with the lender’s position stating that in order for a mortgage originator to comply with TILA, it must also comply with Bureau requirements set out in Regulation Z, including a requirement that “obligates loan originator organizations to ensure that individual loan originators working for them are licensed or registered as required by state and federal laws.”
The court also concluded that the individual defendants must face claims for allegedly engaging in unfair or deceptive practices. The Bureau contended that the company’s chief compliance officer had warned the individual defendants that certain unlicensed employees were engaging in activities requiring licensure, and that the company’s owners approved the business model that permitted the underlying practices. According to the court, an individual “engages” in a UDAAP violation if the individual “participated directly in the practices or acts or had authority to control them” and “‘had or should have had knowledge or awareness’ of the misconduct.” The court rejected defendants’ arguments that it was improper to adopt this standard, and stated that “the fact that a separate theory of liability exists for substantially assisting a corporate defendant’s UDAAP violations has no bearing on how courts evaluate whether an individual defendant himself engaged in a UDAAP violation.”
While the court allowed the count to continue to the extent that it was based on allegations of unlicensed employees performing duties that would require licensure, it found that the complaint did not support an inference that the individual defendants knew that the employees were engaging in activities to make it appear that they were licensed. The court provided the Bureau an opportunity to replead the count to provide a stronger basis for such an inference.
On March 15, the U.S. District Court for the Southern District of Ohio granted a defendant mortgage loan servicer’s motion for summary judgment in an action claiming violations of federal law based on alleged defects in the servicing of the plaintiff’s loan. According to the court, after settling similar claims against his two prior loan servicers, the plaintiff sued the companies that own and service his mortgage loan (collectively, defendants) disputing the precise amount of his delinquency and claiming the defendants failed to properly apply his mortgage payments or to respond to his notice of error (NOE). The plaintiff contended, among other things, that the defendants’ response to the NOE, misapplication of payments, and inaccurate periodic mortgage statements breached the terms of the mortgage agreement and violated RESPA, FDCPA, and TILA. In granting summary judgment, the court agreed with the defendants, finding that plaintiff’s breach of contract claim was foreclosed by a prior settlement agreement with his former servicer. The court also found that the servicer’s response to plaintiff’s NOE did not violate RESPA because it “fully addressed both ‘errors’ that the plaintiff presented,” and the perceived errors “amounted to confusion about basic arithmetic.” The court emphasized that “[n]othing in RESPA or Regulation X gives borrowers authority to dictate the parameters of a lender’s investigation,” and concluded that the servicer’s investigation and response was sufficient since the servicer provided the documents used to conclude that there was no misapplication of funds and “[e]ven a cursory investigation would have revealed that the specific errors alleged in the NOE did not occur.”
In granting the defendants’ request for summary judgment regarding claims that the plaintiff received five inaccurate mortgage statements in violation of the FDCPA and TILA, the court concluded that the periodic statements contained all the fields required under Regulation Z, and explained that allegations contesting the accuracy of the information contained in the statements did not violate TILA because “12 C.F.R. § 1026.42(d) does nothing to regulate the accuracy of information presented in a periodic statement.” As to the plaintiff’s FDCPA claim, which was premised on allegations that plaintiff’s prior servicer misapplied funds which caused defendants to collect amount that plaintiff did not owe, the court found that that the disputed periodic statement was truthful and accurate and that the plaintiff released the defendants of any liability under the FDCPA in his settlement agreement with the prior servicer.
On March 31, the FDIC released the spring 2022 edition of the Consumer Compliance Supervisory Highlights to provide information and observations related to the FDIC’s consumer compliance supervision of state non-member banks and thrifts in 2021. Topics include:
- A summary of the FDIC’s supervisory approach in response to the Covid-19 pandemic, including efforts made by banks to meet the needs of consumers and communities.
- An overview of the most frequently cited violations (approximately 78 percent of total violations involved TILA, the Flood Disaster Protection Act (FDPA), EFTA, Truth in Savings Act, and RESPA). During 2021, the FDIC initiated 20 formal enforcement actions and 24 informal enforcement actions addressing consumer compliance examination observations, and issued civil money penalties totaling $2.7 million against institutions to address violations of the FDPA and Section 5 of the FTC Act.
- Information on the charging of multiple non-sufficient funds fees (NSF) for re-presented items, and risk-mitigating activities taken by banks to avoid potential violations. According to the FDIC, “failure to disclose material information to customers about re-presentment practices and fees” may be deceptive. The failure to disclose material information to customers “may also be unfair if there is the likelihood of substantial injury for customers, if the injury is not reasonably avoidable, and if there is no countervailing benefit to customers or competition. For example, there is risk of unfairness if multiple fees are assessed for the same transaction in a short period of time without sufficient notice or opportunity for consumers to bring their account to a positive balance.” Recommendations on addressing overdraft issues are discussed in the report.
- An overview of fair lending concerns highlighting ways to mitigate risk, including “[m]aintaining written policies and procedures that include information for lending staff to reference when applying credit decision criteria and determining whether borrowers are creditworthy” and reviewing requirements used to screen potential applicants to make sure there is no “discriminatory impact.”
- Information on regulatory developments, such as (i) rulemaking related to the Community Reinvestment Act, flood insurance, false advertising/misuse of the FDIC’s name or logo rulemaking, deposit insurance, and LIBOR; and (ii) guidance on fintech due diligence, artificial intelligence/machine learning, and third-party risk management.
- A summary of consumer compliance resources available to financial institutions.
- An overview of consumer complaint trends.
On April 1, the FTC and the Illinois Attorney General announced a proposed settlement with an Illinois-based multistate auto dealer group for allegedly adding junk fees for unwanted “add-on” products to consumers’ bills and discriminating against Black consumers. Under the terms of the proposed settlement, the defendants are ordered to pay a $10 million penalty, of which $9.95 million will be used to provide monetary relief to consumers. According to the FTC, this is the highest penalty ever obtained against an auto dealer. The remaining balance of the penalty will be paid to the Illinois Attorney General Court Ordered and Voluntary Compliance Payment Projects Fund.
According to the complaint, which brings claims under the FTC Act, TILA, ECOA, and comparable Illinois laws, eight of the defendant’s dealerships, along with the general manager of two of the Illinois dealerships, allegedly tacked on junk fees for unwanted “add-on” products such as service contracts, GAP insurance, and paint protection to consumers’ purchase contracts at the end of the negotiation process, often without consumers’ consent. In other instances, consumers were told that the add-ons were free or were required to purchase or finance their vehicle. The complaint further alleges that defendants discriminated against Black consumers by charging them higher interest rates or more for add-on products than similarly situated non-Latino white consumers. As result, Black consumers allegedly paid, on average, $190 more in interest and $99 more for add-on products.
FTC Chair Lina M. Khan and Commissioner Rebecca Kelly Slaughter issued a joint statement noting that they “would have also supported a count alleging a violation of the FTC Act’s prohibition on unfair acts or practices.” Khan and Slaughter elaborated on reasons why the FTC “should evaluate under its unfairness authority any discrimination that is found to be based on disparate treatment or have a disparate impact,” pointing out that (i) discrimination based on protected status can cause substantial injury to consumers; (ii) “injuries stemming from disparate treatment or impact are unavoidable because affected consumers cannot change their status or otherwise influence the unfair practices”; and (iii) “injuries stemming from disparate treatment or impact are not outweighed by countervailing benefits to consumers or competition.”
On January 18, acting CFPB General Counsel Seth Frotman sent a letter to consumer advocates responding to their concerns that the Bureau’s November 2020 advisory opinion on earned wage access (EWA) products was being misused as justification for passage by proponents of a pending New Jersey bill that would permit third-party earned wage access companies to charge fees or permit “tips” for their products without having to abide by the state’s 30 percent usury cap. As previously covered by InfoBytes, the Bureau issued an advisory opinion on EWA products to address the uncertainty as to whether EWA providers that meet short-term liquidity needs that arise between paychecks “are offering or extending ‘credit’” under Regulation Z, which implements TILA. The advisory opinion stated that “‘a Covered EWA Program does not involve the offering or extension of ‘credit,’” and noted that the “totality of circumstances of a Covered EWA Program supports that these programs differ in kind from products the Bureau would generally consider to be credit.” In December 2020, the Bureau approved a compliance assistance sandbox application, which confirmed that a financial services company’s EWA program did not involve the offering or extension of “credit” as defined by section 1026.2(a)(14) of Regulation Z. The Bureau noted that various features often found in credit transactions were absent from the company’s program, and issued a two-year approval order, which provides the company a safe harbor from liability under TILA and Regulation Z, to the fullest extent permitted by section 130(f) as to any act done in good faith compliance with the order (covered by InfoBytes here).
In his letter, Frotman stated that “[i]t appears from your recounting of the legislative history that the advisory opinion has created confusion, as proponents of the bill seem to have misunderstood the scope of the opinion. The CFPB’s advisory opinion, by its terms, is limited to a narrow set of facts—as relevant here, earned wage products where no fee, voluntary or otherwise, is charged or collected.” Frotman acknowledged that the Bureau’s advisory opinion has also received pushback from consumer groups who sent a letter last year urging the Bureau to rescind the advisory opinion and sandbox approval and regulate fee-based EWA products as credit subject to TILA (covered by InfoBytes here). “Given these repeated reports of confusion caused by the advisory opinion due to its focus on a limited set of facts, I plan to recommend to the Director that the CFPB consider how to provide greater clarity on these types of issues,” Frotman wrote. He further stated that the advisory opinion did not purport to interpret whether the covered EWA products would be “credit” under other statutes other than TILA, including the CFPA or ECOA, or whether they would be considered credit under state law.
On January 12, the U.S. Court of Appeals for the Third Circuit vacated an order granting summary judgment in favor of a mortgage lender (defendant) for alleged violations of TILA and RESPA, among other claims. The plaintiff, a retired disabled military veteran, contracted with a home builder to purchase a home and used the defendant to obtain mortgage financing, which was later transferred to a servicing company. The plaintiff contended that the defendant allegedly (i) provided outdated TILA and RESPA disclosures; (ii) misrepresented that the plaintiff would not have to pay property taxes; (iii) failed to make a reasonable and good faith determination of the plaintiff’s ability to pay; and (iv) failed to provide notice of the transfer of servicing rights. On appeal, the 3rd Circuit determined that the defendant did not meet the initial burden to show no genuine dispute as to any material fact related to the plaintiff’s claims, and remanded the action. Without assessing the evidentiary value of the testimonies and materials submitted by each party in support of their own version of events, the appellate court reasoned that “these materials do not foreclose a reasonable jury from crediting [the plaintiff’s] testimony over [the defendant’s] account and finding [the defendant] liable.”
Recently, the CFPB released its annual lists of rural counties and rural or underserved counties for lenders to use when determining qualified exemptions to certain TILA regulatory requirements. In connection with these releases, the Bureau also directed lenders to use its web-based Rural or Underserved Areas Tool to assess whether a rural or underserved area qualifies for a safe harbor under Regulation Z.
On December 23, the CFPB announced final rules adjusting the asset-size thresholds under HMDA (Regulation C) and TILA (Regulation Z). Both rules took effect January 1, 2022. Under HMDA, institutions with assets below certain dollar thresholds are exempt from the collection and reporting requirements. The final rule increases the asset-size exemption threshold for banks, savings associations, and credit unions from $48 million to $50 million, thereby exempting institutions with assets of $50 million or less as of December 31, 2021, from collecting and reporting HMDA data in 2022. TILA, likewise, exempts certain entities from the requirement to establish escrow accounts when originating higher-priced mortgage loans (HPMLs), including entities with assets below the asset-size threshold established by the CFPB. The final rule increases this asset-size exemption threshold from $2.230 billion to $2.336 billion, thereby exempting creditors with assets of $2.336 billion or less as of December 31, 2021, from the requirement to establish escrow accounts for HPMLs in 2022.
On December 30, the U.S. District Court for the Northern District of California approved the stipulated final judgment and order against a California-based online lender (defendant) for alleged violations of fair lending regulations and a 2016 consent order. As previously covered by InfoBytes, the CFPB filed a complaint against the defendant (the third action taken against the defendant by the CFPB) for allegedly violating the terms of a 2016 consent order related to false claims about its lending program. The 2016 consent order alleged that the defendant engaged in deceptive practices by misrepresenting, among other things, the fees it charged, the loan products that were available to consumers, and whether the loans would be reported to credit reporting companies, in violation of the CFPA, TILA, and Regulation Z (covered by InfoBytes here). According to the September 8 complaint, the defendants continued with much of the same illegal and deceptive marketing that was prohibited by the 2016 consent order. Among other things, the complaint alleged that the defendants violated the terms of the 2016 consent order and various laws by: (i) deceiving consumers about the benefits of repeat borrowing; and (ii) failing to provide timely and accurate adverse-action notices, which is in violation of ECOA and Regulation B.
The settlement prohibits the defendant from: (i) making new loans; (ii) collecting on outstanding loans to harmed consumers; (iii) selling consumer information; and (iv) making misrepresentations when providing loans or collecting debt or helping others that are doing so. The order also imposes a $100,000 civil money penalty based on the defendant’s inability to pay.
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.
- Buckley Webcast: Fifth Circuit muddles CFPB’s plans to use in-house judges in enforcement proceedings
- Steven vonBerg to discuss “Regulatory plenary” at the Information Management Network’s Non-QM Forum
- Jeffrey P. Naimon to discuss “Understanding the ESG impact on compliance” at the ABA’s Regulatory Compliance Conference