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Financial Services Law Insights and Observations

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  • District court advances CFPB action against bank for alleged TILA, CFPA violations

    Courts

    On December 1, the U.S. District Court for the District of Rhode Island denied a national bank’s motion to dismiss a CFPB lawsuit alleging violations of the Consumer Financial Protection Act (CFPA) and TILA, rejecting the bank’s arguments that, among other things, the CFPB’s claims were time-barred and that the case cannot proceed because the CFPB’s structure violates constitutional separation-of-powers identified in Seila Law LLC v. CFPB. As previously covered by InfoBytes, the CFPB filed suit in January against the bank alleging, among other things, that when servicing credit card accounts, the bank failed to properly (i) manage consumer billing disputes for unauthorized card use and billing errors; (ii) credit refunds to consumer accounts resulting from such disputes; or (iii) provide credit counseling disclosures to consumers. According to the CFPB, the alleged conduct “began in 2010 or earlier and ended, depending on the violation, sometime in 2015 or 2016.” The CFPB also noted that the parties signed agreements tolling all relevant statutes of limitations from February 23, 2017, until January 31, 2020. The bank argued that the CFPB’s claims are governed by section 1640 of TILA with its one-year statute of limitations, but the CFPB countered that its claims were brought pursuant to section 1607 of TILA, which provides a “three-year discovery period.”

    In denying the bank’s motion to dismiss, the court concluded that the tolling agreements were valid and that the three-year limit under section 1607 applied because “plain language indicates that § 1640 only governs cases brought by individuals or state attorneys general,” whereas § 1607 “provides the cause of action for federal enforcement agencies such as the CFPB.” Furthermore, the court determined that because § 1607 “does not contain a statute of limitations,” and “instead stat[es] that cases brought by the CFPB ‘shall be enforced under. . . subtitle E of the [CFPA],’ the action is governed by subtitle E’s requirement that cases be brought within three years of discovery by the CFPB.” The court also dismissed the bank’s constitutional claims, ruling, among other things, that the argument is moot following the U.S. Supreme Court’s decision in Seila, which held that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB (covered by a Buckley Special Alert).

    Courts CFPB CFPA TILA Seila Law Statute of Limitations Enforcement

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  • Agencies finalize certain 2021 thresholds

    Agency Rule-Making & Guidance

    On November 18, the CFPB, OCC, and the Federal Reserve Board announced a final rule, which increases the TILA smaller loan exemption threshold for the special appraisal requirements for higher-priced mortgage loans (HPMLs). TILA requires creditors to obtain a written appraisal before making a HPML unless the loan amount is at or below the threshold exemption. Each year the threshold must be readjusted based on the annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The exemption threshold for 2021 is $27,200, which remains at the same level it was in 2020.

    Additionally, the CFPB and the Federal Reserve Board finalized the annual dollar threshold adjustments that govern the application of TILA (Regulation Z) and Consumer Leasing Act (Regulation M) (available here and here), as required by the Dodd-Frank Act. The exemption threshold for 2021, based on the annual percentage increase in the CPI-W, remains unchanged at $58,300 or less, except for private education loans and loans secured by real or personal property used or expected to be used as the principal dwelling of a consumer, which are subject to TILA regardless of the amount.

    The final rules take effect on January 1, 2021.

    Agency Rule-Making & Guidance CFPB OCC Federal Reserve Regulation Z Regulation M TILA Consumer Leasing Act Mortgages

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  • CFPB releases TRID five-year lookback assessment

    Federal Issues

    On October 1, the CFPB released the assessment report required by Section 1022(d) of the Dodd-Frank Act for the TILA-RESPA Integrated Disclosure Rule (TRID), concluding that the TRID Rule “made progress towards several of its goals.” The assessment report was conducted using the Bureau’s own research and external sources. In opening remarks, Director Kraninger noted that the Bureau was “unable to obtain or generate the data necessary” to include a cost-benefit analysis, but documented the benefits and costs when possible. In addition to studying the effectiveness of the TRID Rule, the report also summarized the public comments the Bureau received from its November 2019 request for information (covered by InfoBytes here).

    The Bureau issued the TRID Rule in November 2013, and the Rule took effect on October 3, 2015. Among other things, the TRID Rule integrated TILA’s Good Faith Estimate (GFE) and RESPA’s settlement statement (HUD-1), as well as other Dodd-Frank required disclosures, into the “Loan Estimate” and “Closing Disclosure” forms. Key findings of the assessment include:

    • The TRID disclosure forms improved borrower abilities to locate key mortgage information, and compare costs and features of different mortgage offers;
    • Evidence was mixed as to whether the TRID disclosure forms improved borrower abilities to understand loan estimates and transactions, and the TRID Rule increased consumer shopping for mortgages;
    • The median response for one-time costs for lenders of implementing the rule was roughly $146 per mortgage originated in 2015;
    • Evidence was unclear regarding ongoing costs for lenders, noting that over the last decade, lenders’ costs have increased steadily, but the data does not show a clear increase from the time the TRID Rule took effect; and
    • Purchases and refinances dropped notably (around 14 percent and eight percent, respectively) in the first two months after the effective date, and purchase closing times lengthened by about 13 percent. However, both changes returned to pre-TRID Rule amounts and durations. 

    Additionally, the Bureau released a Data Point report titled, “How mortgages change before origination,” which details how the terms and costs of a mortgage loan may change during the origination process. The Bureau examined about 50,000 mortgages originated between March 2016 and November 2017, and found, among other things, that (i) APR changes occurred in more than 40 percent of mortgages; (ii) loan amount and the loan to value ratio changed for nearly 25 percent of mortgages; and (iii) interest rate changed for eight percent of mortgages.

    Federal Issues TRID TILA RESPA Disclosures Mortgages Dodd-Frank CFPB

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  • FFIEC adopts revised interagency examination procedures for TILA

    Agency Rule-Making & Guidance

    On September 30, On September 30, the OCC issued Bulletin 2020-84 announcing the Task Force on Consumer Compliance of the Federal Financial Institutions Examination Council’s adoption of revised interagency examination procedures for TILA, as implemented by Regulation Z. The updated interagency procedures reflect changes made to Regulation Z that relate to the TILA-RESPA Integrated Mortgage Disclosure Rule. Updates also reflect amendments to TILA that relate to the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), such as (i) special provisions relating to high-cost loans, appraisals, and student lending; (ii) “an additional type of qualified mortgage for insured depository institutions with less than $10 billion in assets”; and (iii) “an additional type of escrow exemption for insured depository institutions with less than $10 billion in assets.” The bulletin rescinds the “Truth in Lending Act” booklet of the Comptroller’s Handbook, as well as OCC Bulletin 2018-31, “Truth in Lending Act: Revised Comptroller's Handbook Booklet and Rescissions.” Going forward, examiners should only rely on the revised interagency examination procedures.

    The CFPB also updated its TILA examination procedures to reflect 2017 and 2018 amendments to Regulation Z and EGRRCPA on September 29.

    Agency Rule-Making & Guidance TILA CFPB OCC FFIEC Mortgages Disclosures

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  • CFPB denies petition to set aside CID; cites authority to seek “reasonably relevant” information

    Federal Issues

    On August 27, the CFPB denied a petition by an auto financing company to set aside a civil investigative demand (CID) issued by the Bureau in June. The CID requested information from the company to determine, among other things, “whether auto lenders or associated persons, in connection with originating auto loans (including marketing and selling products ancillary to such loans), servicing loans, collecting debts (including through repossessing vehicles), or consumer reporting” may have violated the Consumer Financial Protection Act’s UDAAP provisions, as well as the FCRA and TILA. The company petitioned the Bureau to set aside the CID. Among other things, the company argued that because certain aspects of the CID do not fall within a “reasonable construction of the CID’s notification of purpose,” and thus failed to provide fair notice as to what the Bureau is investigating, the CID should be “modified to strike each of these requests or clearly confine them to the enumerated topics.”

    The Bureau rejected the company’s request to set aside or modify the CID, countering that (i) the particular requests that the company objects to are “all reasonably relevant to the Bureau’s inquiry as described in the notification of purpose,” and that the company cannot rewrite the CID’s notification of purpose to describe only four specific topics and then argue that the Bureau is asking for irrelevant information; and (ii) the Bureau has broad authority to seek information that may be “reasonably relevant” to an investigation, and that the Bureau’s “own appraisal of relevancy must be accepted so long as it is not obviously wrong.” According to the Bureau, the company failed to overcome this “high hurdle established in the judicial precedent.” However, the Bureau granted the company’s request for confidential treatment of its petition and attached exhibits by agreeing to redact certain proprietary business information and confidential supervisory information.

    Federal Issues CFPB CIDs Auto Finance CFPA TILA FCRA

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  • FTC settles with auto dealers for falsifying consumer financial documents

    Federal Issues

    On September 4, the FTC announced a settlement with group of auto dealers (defendants) with locations in Arizona and New Mexico near the Navajo Nation’s border, resolving allegations that the defendants advertised misleading discounts and incentives and falsely inflated consumers’ income and down payment information on certain financing applications. As previously covered by InfoBytes in August 2018, the FTC filed an action against the defendants alleging violations of the FTC Act, TILA, and the Consumer Leasing Act for submitting falsified consumer financing applications to make consumers appear more creditworthy, resulting in consumers—many of whom are members of the Navajo Nation—defaulting “at a higher rate than properly qualified buyers.”

    The court-approved settlement requires the defendants to cease all business operations and includes a monetary judgment of over $7 million. Because the defendants are currently in Chapter 7 bankruptcy proceedings, the settlement will make the FTC an unsecured claimant in the bankruptcy proceedings. The settlement also prohibits the bankruptcy trustee from using or selling the consumer information obtained from the defendants’ business activities as part of the bankruptcy liquidation.

    Federal Issues Consumer Finance FTC Auto Finance FTC Act TILA Consumer Leasing Act Bankruptcy

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  • Lender and owner to pay $12.5 million in civil money penalties in CFPB administrative action

    Courts

    On August 4, an Administrative Law Judge (ALJ) recommended that a Delaware-based online payday lender and its CEO be held liable for violations of TILA, CFPA, and the EFTA and pay restitution of $38 million and $12.5 million in civil penalties in a CFPB administrative action. As previously covered by InfoBytes, in November 2015, the Bureau filed an administrative suit against the lender and its CEO alleging violations of TILA and the EFTA, and for engaging in unfair or deceptive acts or practices. Specifically, the CFPB argued that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. In 2016, an ALJ agreed with the Bureau’s contentions, and the defendants appealed the decision. In May 2019, CFPB Director Kraninger remanded the case to a new ALJ.

    After a new hearing, the ALJ concluded that the lender violated (i) TILA (and the CFPA by virtue of its TILA violation) by failing to clearly and conspicuously disclose consumers’ legal obligations; and (ii) the EFTA (and the CFPA by virtue of its EFTA violation) by “conditioning extensions of credit on repayment by preauthorized electronic fund transfers.” Moreover, the ALJ concluded that the lender and the lender’s owner engaged in deceptive acts or practices by misleading consumers into “believing that their APR, Finance Charges, and Total of Payments were much lower than they actually were.” Lastly, the ALJ concluded the lender and its owner engaged in unfair acts or practices by (i) failing to clearly disclose automatic rollover costs; (ii) misleading consumers about their repayment obligations; and (iii) obtaining authorization for remote checks in a “confusing manner” and using the remote checks to “withdraw money from consumers’ bank accounts after consumers attempted to block electronic access to their bank accounts.” The ALJ recommends that both the lender and its owner pay over $38 million in restitution, and orders the lender to pay $7.5 million in civil money penalties and the owner to pay $5 million in civil money penalties.

     

    Courts ALJ Civil Money Penalties Payday Lending EFTA CFPB TILA UDAAP

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  • Pennsylvania settles with third-party financing company, resulting in $200k in debt cancellation

    State Issues

    On August 4, the Pennsylvania attorney general announced it had entered into an Assurance of Voluntary Compliance with a third-party financing company, which permanently shuts down the company’s operations in the state and requires the company to cancel nearly $200,000 in debt for its former customers. According to the AG, the company entered into agreements with various debt relief companies to provide third-party financing to student loan borrowers so they could be enrolled in certain federal student loan repayment programs offered by the Department of Education. However, the company allegedly violated provisions of the Pennsylvania Consumer Protection Law and TILA related to closed end credit transaction by, among other things, (i) misrepresenting that the finance plan was a revolving credit plan, when it was actually a closed end transaction; (ii) misrepresenting that it retained a security interest as a result of its financing agreements when in in fact it did not; (iii) financing consumers’ student loan debt relief services when it knew, or should have known, that consumers were not receiving the services as advertised; and (iv) failing to provide Regulation Z-required disclosures for closed end credit transactions, including the amount financed, finance charges, total of payments, and the number and amount of payments necessary to repay the total payments. In addition, the AG claimed that the company charged consumers unacceptably high interest rates. Under the terms of the settlement, the company is banned from financing or assisting others in financing student loan debt relief services and from collecting debt from Pennsylvania borrowers. The company must also request that credit reporting agencies delete the reported debts from consumers’ credit reporting files. Monetary relief in the amount of $930,000 is suspended unless a court determines the company has violated the terms of the settlement.

     

    State Issues State Attorney General Department of Education Courts Student Lending TILA

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  • Federal legislation would apply TILA to small business financing

    Federal Issues

    On July 30, Congresswoman Nydia Velázquez (D-NY), the Chairwoman of the House Small Business Committee, announced new legislation titled, “Small Business Lending Disclosure and Broker Regulation Act,” which would amend TILA and subject small business financing transactions to APR disclosures. The federal legislation would track similar state legislation enacted in California and currently pending the governor’s signature in New York, covered by InfoBytes here and here. However, unlike both California and New York, the federal legislation does not exempt depository institutions from coverage. Highlights of the TILA amendments include:

    • CFPB Oversight. The legislation provides the CFPB with the same authority with respect to small business financing as the Bureau has with respect to consumer financial products and services.
    • Coverage. The legislation defines small business financing as, “[a]ny line of credit, closed-end commercial credit, sales-based financing, or other non-equity obligation or alleged obligation of a partnership, corporation, cooperative, association, or other entity that is [$2.5 million] or less,” that is not intended for personal, family, or household purposes.
    • Disclosure. The legislation would require disclosure of the following information at the time an offer of credit is made: (i) financing amount; (ii) annual percentage rate (APR); (iii) payment amount; (iv) term; (v) financing charge; (vi) prepayment cost or savings; and (vii) collateral requirements.
    • Fee Restriction. The legislation prohibits charging a fee on the outstanding principal balance when refinancing or modifying an existing loan, unless there is a tangible benefit to the small business.

    Additionally, the legislation would amend the Consumer Financial Protection Act to create the Office of Broker Registration, which would be responsible for oversight of brokers who “solicit[] and present[] offers of commercial financing on behalf of a third party.” The legislation would, among other things: (i) require commercial brokers to register with the CFPB; (ii) require commercial brokers to provide certain disclosures to small business borrowers; (iii) prohibit the charging of fees if financing is not available or not accepted; and (iv) require the CFPB to collect and publicly publish broker complaints from small businesses. Lastly, the legislation would require each state to establish a small business broker licensing law that includes examinations and enforcement mechanisms.

    Relatedly, the FTC recently took action against New York-based merchant cash advance providers and two company executives for allegedly engaging in deceptive practices by misrepresenting the terms of their merchant cash advances (MCAs), using unfair collection practices, making unauthorized withdrawals from consumers’ accounts, and misrepresenting collateral and personal guarantee requirements. See detailed InfoBytes coverage on the complaint here.

    Federal Issues TILA Small Business Financing Broker CFPB Disclosures State Issues Licensing Federal Legislation FTC Merchant Cash Advance

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  • CFPB adjusts annual dollar amount thresholds under TILA regulations

    Agency Rule-Making & Guidance

    On July 17, the CFPB released the final rule revising the dollar amounts for provisions implementing the Truth in Lending Act (TILA) and amendments to TILA, including the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s ability-to-repay and qualified mortgage (ATR/QM) provisions. The CFPB is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2020. The following thresholds will be effective on January 1, 2021:

    • For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
    • For open-end consumer credit plans under the CARD Act, the adjusted dollar amount for the safe harbor for a first violation penalty fee will remain unchanged at $29, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will also remain unchanged at $40;
    • For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $22,052, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,103; and
    • The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) three percent of the total loan amount for loans greater than or equal to $110,260; (ii) $3,308 for loan amounts greater than or equal to $66,156 but less than $110,260; (iii) five percent of the total loan amount for loans greater than or equal to $22,052 but less than $66,156; (iv) $1,103 for loan amounts greater than or equal to $13,783 but less than $22,052; and (v) eight percent of the total loan amount for loan amounts less than $13,783.

    Agency Rule-Making & Guidance CFPB TILA Regulation Z CARD Act Credit Cards HOEPA Qualified Mortgage Dodd-Frank

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