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Agencies release statement on LIBOR sunset; CFPB amends Reg Z to reflect transition
On April 26, the CFPB joined the Federal Reserve Board, FDIC, NCUA, and OCC in issuing a joint statement on the completion of the LIBOR transition. (See also FDIC FIL-20-2023 and OCC Bulletin 2023-13.) According to the statement, the use of USD LIBOR panels will end on June 30. The agencies reiterated their expectations that financial institutions with USD LIBOR exposure must “complete their transition of remaining LIBOR contracts as soon as practicable.” Failure to adequately prepare for LIBOR’s discontinuance may undermine financial stability and institutions’ safety and soundness and could create litigation, operational, and consumer protection risks, the agencies stressed, emphasizing that institutions are expected to take all necessary steps to ensure an orderly transition. Examiners will monitor banks’ efforts throughout 2023 to ensure contracts have been transitioned away from LIBOR in a manner that complies with applicable legal requirements. The agencies also reminded institutions that safe-and-sound practices include conducting appropriate due diligence to ensure that replacement alternative rate selections are appropriate for an institution’s products, risk profile, risk management capabilities, customer and funding needs, and operational capabilities. Institutions should also “understand how their chosen reference rate is constructed and be aware of any fragilities associated with that rate and the markets that underlie it,” the agencies advised. Both banks and nonbanks should continue efforts to adequately prepare for LIBOR’s sunset, the Bureau said in its announcement, noting that the agency will continue to help institutions transition affected consumers in an orderly manner.
The Bureau also issued an interim final rule on April 28 amending Regulation Z, which implements TILA, to update various provisions related to the LIBOR transition. The interim final rule updates the Bureau’s 2021 LIBOR Transition Rule (covered by InfoBytes here) to reflect the enactment of the Adjustable Interest Rate Act of 2021 and its implementing regulation promulgated by the Federal Reserve Board (covered by InfoBytes here). Among other things, the interim final rule further addresses LIBOR’s sunset on June 30, by incorporating references to the SOFR-based replacement—the Fed-selected benchmark replacement for the 12-month LIBOR index—into Regulation Z. The interim final rule also (i) makes conforming changes to terminology used to identify LIBOR replacement indices; and (ii) provides an example of a 12-month LIBOR tenor replacement index that meets certain standards within Regulation Z. The Bureau also released a Fast Facts summary of the interim final rule and updated the LIBOR Transition FAQs.
The interim final rule is effective May 15. Comments are due 30 days after publication in the Federal Register.
3rd Circuit: Card renewal notices not subject to TILA itemization requirements
On April 11, the U.S. Court of Appeals for the Third Circuit upheld the dismissal of a putative class action suit claiming a national bank’s failure to itemize fees in its credit card renewal notices violated TILA and Regulation Z. Plaintiff alleged that his 2019 card renewal notice listed the annual membership fee as $525, but did not separate the fee into itemized amounts: $450 for the primary cardholder and $75 for an additional authorized user. Stating that the annual membership fee later appeared in his 2020 renewal notice as two separate fees, he claimed that he would have only paid the $450 fee for his own card if he had known it was an option in 2019. Plaintiff sued claiming the 2019 renewal notice violated TILA and Regulation Z, which require creditors to make disclosures before and during a creditor-borrower relationship, including the existence of any annual and periodic fees. The district court rejected the bank’s argument that the plaintiff lacked standing after finding that he suffered an economic injury by paying the full $525. However, the court granted the bank’s motion to dismiss after determining that the plaintiff failed to allege a TILA violation because neither the statute nor its implementing regulation expressly require banks to itemize fees in a renewal notice.
On appeal, the 3rd Circuit issued a precedential opinion finding that while the plaintiff had standing, he failed to plead an actual TILA violation. “While there is an itemization requirement in the statutes and regulations governing periodic disclosures,” the court clarified that “the same requirement is not included in the statutes and regulations applicable to renewal notices.” The 3rd Circuit stated that “[r]enewal notices are not subject to the same disclosure requirements as solicitations and applications, which are provided to consumers before the parties have any relationship,” explaining that because “the creditor does not yet know whether the consumer will add an authorized user to the account” during the solicitation or application period, it “must disclose ‘optional’ additional card fees.” However, during the account renewal stage, TILA and Regulation Z only require creditors to “disclose terms ‘that would apply if the account were renewed.’”
CFPB: TILA does not preempt state commercial financial disclosures
On March 28, the CFPB issued a determination that state disclosure laws covering lending to businesses in California, New York, Utah, and Virginia are not preempted by TILA. The preemption determination confirms a preliminary determination issued by the Bureau in December, in which the agency concluded that the states’ statutes regulate commercial financing transactions and not consumer-purpose transactions (covered by InfoBytes here). The Bureau explained that a number of states have recently enacted laws requiring improved disclosure of information contained in commercial financing transactions, including loans to small businesses. A written request was sent to the Bureau requesting a preemption determination involving certain disclosure provisions in TILA. While Congress expressly granted the Bureau authority to evaluate whether any inconsistencies exist between certain TILA provisions and state laws and to make a preemption determination, the statute’s implementing regulations require the agency to request public comments before making a final determination. In making its preliminary determination last December, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, and that “differences between the New York and Federal disclosure requirements do not frustrate these purposes because lenders are not required to provide the New York disclosures to consumers seeking consumer credit.”
After considering public comments following the preliminary determination, the Bureau again concluded that “[s]tates have broad authority to establish their own protections for their residents, both within and outside the scope of [TILA].” In affirming that the states’ commercial financing disclosure laws do not conflict with TILA, the Bureau emphasized that “commercial financing transactions to businesses—and any disclosures associated with such transactions—are beyond the scope of TILA’s statutory purposes, which concern consumer credit.”
House Republicans question CFPB’s card late-fee proposal
On March 1, several Republican House Financial Services Committee members sent a letter to CFPB Director Rohit Chopra expressing concerns over the Bureau’s credit card late fee proposal. Among other things, the lawmakers claimed that last year the Bureau broke precedent by failing to address, for the first time, credit card late fees when the agency issued the annual fee adjustments as required under Regulation Z, which implements TILA (covered by InfoBytes here). “In prior years when the CFPB did not make inflation adjustments, because inflation was low, it explained the statistical basis for not indexing the fee,” the letter said. “However, the CFPB has yet to explain or justify why there was not an increase in the most recent annual adjustment announcement—a striking lack of transparency and accountability, and especially so in an era of outsized inflation.” The lawmakers also addressed the Bureau’s February notice of proposed rulemaking (NPRM) to amend Regulation Z and its commentary. As previously covered by InfoBytes, the Bureau said the NPRM would lower the safe harbor dollar amount for first-time and subsequent-violation credit card late fees to $8, eliminate the automatic annual inflation adjustment, and cap late fees at 25 percent of the consumer’s required minimum payment. According to the lawmakers, the changes would disincentivize consumers to make timely payments and impact consumer behavior by shifting “delinquent payment costs to other, innocent, consumers who absorb the associated costs through higher rates or inability to further access unsecured credit that they may need to smooth their consumption.”
The lawmakers posed several questions to the Bureau, including asking why the agency failed to convene a panel as mandated by the Small Business Regulatory Enforcement Fairness Act of 1996 to advise on the rulemaking “[g]iven the broad applicability of this rule making to small institutions.” The Bureau was also asked to provide the data used to determine the dollar limits, as well as any communications the agency had with the Biden administration in the development of the NPRM.
Online lender asks Supreme Court to review ALJ ruling
A Delaware-based online payday lender and its founder and CEO (collectively, “petitioners”) recently submitted a petition for a writ of certiorari challenging the U.S. Court of Appeals for the Tenth Circuit’s affirmation of a CFPB administrative ruling related to alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. The petitioners asked the Court to first review whether the high court’s ruling in Lucia v. SEC, which “instructed that an agency must hold a ‘new hearing’ before a new and properly appointed official in order to cure an Appointments Clause violation” (covered by InfoBytes here), meant that a CFPB administrative law judge (ALJ) could “conduct a cold review of the paper record of the first, tainted hearing, without any additional discovery or new testimony.” Or, the petitioners asked, did the Court intend for the agency to actually conduct a new hearing. The petitioners also asked the Court to consider whether an agency funding structure that circumvents the Constitution’s Appropriations Clause violates the separation of powers so as to invalidate prior agency actions promulgated at a time when the Bureau was receiving such funding.
The case involves a challenge to a 2015 administrative action that alleged the petitioners engaged in unfair or deceptive acts or practices when making short-term loans (covered by InfoBytes here). The Bureau’s order required the petitioners to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO. As previously covered by InfoBytes, between 2018 and 2021, the Court issued four decisions, including Lucia, which “bore on the Bureau’s enforcement activity in this case” by “deciding fundamental issues related to the Bureau’s constitutional authority to act” and appoint ALJs. During this time, two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution. A district court issued a final order upholding the award, which the petitioners appealed, arguing, among other things, that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case.
However, the 10th Circuit affirmed the district court’s $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order. The 10th Circuit determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing,” nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote.
The petitioners maintained that “[d]espite the Court’s clear instruction to hold a ‘new hearing,’ ALJs and courts have reached divergent conclusions as to what Lucia requires, expressing confusion and frustration regarding the lack of guidance.” What it means to hold a “new hearing” runs “the gamut,” the petitioners wrote, pointing out that while some ALJs perform a full redo of the proceedings, others merely accept a prior decision based on a cold review of the paper record. The petitioners argued that they should have been provided a true de novo hearing with an opportunity for new testimony, evidence, discovery, and legal arguments. The rehearing from the new ALJ was little more than a perfunctory “paper review,” the petitioners wrote.
Petitioners asked the Court to grant the petition for three reasons: (i) “the scope of Lucia’s ‘new hearing’ remedy is an important and apparently unsettled question of federal law”; (ii) “the notion Lucia does not require a genuinely ‘new’ de novo proceeding is necessarily wrong because a sham ‘remedy’ provides parties no incentive to litigate Appointments Clause challenges”; and (iii) the case “is an ideal vehicle to provide guidance on Lucia’s ‘new hearing’ remedy.” The petitioners further argued that “Lucia’s remedy should provide parties an incentive to raise separation of powers arguments by providing them actual and meaningful relief.”
The petitioners’ second question involves whether Appropriations Clause violations that render an agency’s funding structure unconstitutional, if upheld, invalidate agency actions taken under such a structure. The petitioners called this “an important, unsettled question of federal law meriting the Court’s review,” citing splits between the Circuits over the constitutionality of the Bureau’s funding structure which has resulted in uncertainty for both regulators and regulated parties. Recently, the Court granted the Bureau’s request to review the 5th Circuit’s decision in CFSAA v. CFPB, which held that Congress violated the Appropriations Clause when it created what the 5th Circuit described as a “perpetual self-directed, double-insulated funding structure” for the agency (covered by InfoBytes here).
CFPB shutters mortgage lender, alleging deceptive advertising
On February 27, the CFPB entered a consent order against a California-based mortgage lender (respondent) for alleged repeat violations of the Consumer Financial Protection Act, TILA (Regulation Z), and the Mortgage Acts and Practices Advertising Rule (Regulation N), in relation to a 2015 consent order. As previously covered by InfoBytes, in 2015, the Bureau claimed the respondent (which is licensed in at least 30 states and Puerto Rico and originates consumer mortgages guaranteed by the Department of Veterans Affairs and mortgages insured by the FHA) allegedly led consumers to believe it was affiliated with the U.S. government. Specifically, respondent allegedly used the names and logos of the VA and FHA in its advertisements, described loan products as part of a “distinctive program offered by the U.S. government,” and instructed consumers to call the “VA Interest Rate Reduction Department” at a phone number belonging to the mortgage lender, thus implying that the mailings were sent by government agencies. The 2015 consent order required the respondent to abide by several prohibitions and imposed a $250,000 civil money penalty.
The Bureau contends, however, that after the 2015 consent order went into effect, the respondent continued to send millions of mortgage advertisements that allegedly made deceptive representations or contained inadequate or impermissible disclosures, including that the respondent was affiliated with the VA or the FHA. Additionally, the Bureau alleges that the respondent misrepresented interest rates, key terms, and the amount of monthly payments, and falsely represented that benefits available to qualifying borrowers were time limited. Many of these alleged misrepresentations, the Bureau claims, were expressly prohibited by the 2015 consent order.
The 2023 consent order permanently bans the respondent from engaging in any mortgage lending activities, or from “otherwise participating in or receiving remuneration from mortgage lending, or assisting others in doing so.” The respondent, which neither admits nor denies the allegations, is also required pay a $1 million civil money penalty.
11th Circuit advances TILA suit weighing agency theory of liability
On February 6, the U.S. Court of Appeals for the Eleventh Circuit reversed a district court’s finding of summary judgment in favor of a financing company concerning alleged violations of TILA. The plaintiff agreed to purchase air conditioning repairs by taking out a loan with a company that finances home-improvement loans for heating and air conditioning products. According to the plaintiff, the repair company lied about the price of the loan and prevented him from viewing the loan paperwork. The plaintiff sued the defendants for violations of TILA and various state consumer protection laws, claiming he was not provided certain required disclosures and maintaining that had he received the disclosures he would not have accepted the loan. The plaintiff eventually decided to cancel the order before the work was commenced and was told he would have to contact the financing company to cancel the loan. The plaintiff was not released from the unpaid loan for work that never happened, and the negative payment history was reported to the credit bureaus.
The financing company argued that the plaintiff’s injuries are not traceable to the disclosure paperwork because the repair company never showed him the paperwork. The plaintiff countered that the repair company was not independent of the financing company because it was acting as the financing company’s agency. Under the “agency theory of liability,” the plaintiff argued that the financing company is liable under TILA for the repair company’s failure to provide the required disclosures. The district court ruled, however that the plaintiff lacked standing based on the finding that his injuries were not traceable to the financing company’s TILA violation, and that the plaintiff had not alleged that the repair company was acting as the financing company’s agent to provide the required disclosures.
On appeal, the 11th Circuit concluded that the plaintiff had standing to raise his agency-based TILA claim against the financing company. As a threshold matter, the appellate court first recognized that the plaintiff suffered a concrete injury (e.g., time spent disputing his debt; the impact on his credit; money spent sending documents to his attorney; and feelings of anxiousness), noting that injury and traceability were separate analyses. With respect to traceability, the appellate court next reviewed whether there was “a causal connection” between the plaintiff’s injuries and the challenged action of the financing company. The 11th Circuit accepted one theory of traceability—a theory of agency. “TILA liability attaches not only to the provision of incorrect disclosures, but also to the failure to provide any disclosures at all,” the appellate court explained, stating that in this case, the plaintiff argued that the repair company was acting as an agent of the financing company for the purpose of providing the disclosures. While expressing no opinion on the merits of the claim, the 11th Circuit concluded that the plaintiff had adequately pled that the financing company contracted with the repair company “who at all times acted as its agent” and that the financing company “is vicariously liable for the harms and losses” caused by the repair company’s misconduct by virtue of this agency relationship.
D.C. Circuit says CFPB’s Prepaid Rule does not mandate model disclosures for payment companies
On February 3, the U.S. Court of Appeals for the D.C. Circuit reversed a district court’s decision that had previously granted summary judgment in favor of a payment company and had vacated two provisions of the CFPB’s Prepaid Rule: (i) the short-form disclosure requirement “to the extent it provides mandatory disclosure clauses”; and (ii) the 30-day credit linking restriction. As previously covered by InfoBytes, the company sued the Bureau alleging, among other things, that the Bureau’s Prepaid Rule exceeded the agency’s statutory authority “because Congress only authorized the Bureau to adopt model, optional disclosure clauses—not mandatory disclosure clauses like the short-form disclosure requirement.” The Bureau countered that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, and argued that the “EFTA and [Dodd-Frank] authorize the Bureau to issue—or at least do not foreclose it from issuing—rules mandating the form of a disclosure.”
The district court concluded, among other things, that the Bureau acted outside of its statutory authority, and ruled that it could not presume that Congress delegated power to the agency to issue mandatory disclosure clauses just because Congress did not specifically prohibit it from doing so. Instead, the Bureau can only “‘issue model clauses for optional use by financial institutions’” since the EFTA’s plain text does not permit the Bureau to issue mandatory clauses, the district court said. The Bureau appealed, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts, and that the decision to adopt such rules is entitled to deference. (Covered by InfoBytes here.) However, the Bureau maintained that the Prepaid Rule “does not make any specific disclosure clauses mandatory,” and stressed that companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording.
In reversing and remanding the ruling, the appellate court unanimously determined that because the Bureau’s Prepaid Rule does not mandate “specific copiable language,” it is not mandating a “model clause,” which the court assumed for purposes of the opinion that the Bureau was prohibited from doing. While the Prepaid Rule imposes formatting requirements and requires the disclosure of certain enumerated fees, the D.C. Circuit stressed that the Bureau “has not mandated that financial providers use specific, copiable language to describe those fees.” Moreover, formatting is not part of a “model clause,” the appellate court added. And because companies are allowed to provide “substantially similar” disclosures, the appellate court held that the Bureau has not mandated a “model clause” in contravention of the EFTA. The appellate court, however, did not address any of the procedural or constitutional challenges to the Bureau’s short-form disclosures that the district court had not addressed in its opinion, but instead directed the district court to address those questions in the first instance.
CFPB proposal targets late fees on cards
On February 1, the CFPB issued a notice of proposed rulemaking (NPRM) to amend Regulation Z, which implements TILA, and its commentary to better ensure that late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under the statute, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The NPRM would (i) adjust the safe harbor dollar amount for late fees to $8 for any missed payment—issuers are currently able to charge late fees of up to $41—and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type (a company would be able to charge above the immunity provision provided it could prove the higher fee is necessary to cover the incurred collection costs); (ii) eliminate the automatic annual inflation adjustment for the immunity provision amount (the Bureau would instead monitor market conditions and make adjustments as necessary); and (iii) cap late fees at 25 percent of the consumer’s required minimum payment (issuers are currently able to potentially charge a late fee that is 100 percent of the cardholder’s minimum payment owed).
The NPRM also seeks feedback on other possible changes to the CARD Act regulations, including “whether the proposed changes should apply to all credit card penalty fees, whether the immunity provision should be eliminated altogether, whether consumers should be granted a 15-day courtesy period, after the due date, before late fees can be assessed, and whether issuers should be required to offer autopay in order to make use of the immunity provision.” Comments on the NPRM are due by April 3, or 30 days after publication in the Federal Register, whichever is later.
According to the CFPB, the Federal Reserve Board “created the immunity provisions to allow credit card companies to avoid scrutiny of whether their late fees met the reasonable and proportional standard.” As a result, the CFPB stated that immunity provisions have risen (due to inflation) to $30 for an initial late payment and $41 for subsequent late payments, resulting in consumers being charged approximately $12 billion in late fees in 2020. Based on CFPB estimates, the NPRM could reduce late fees by as much as $9 billion per year. CFPB Director Rohit Chopra issued a statement commenting that the current immunity provisions are not what Congress intended when it passed the CARD Act.
The Bureau also released an unofficial, informal redline of the NPRM to help stakeholders review the proposed changes, as well as a report titled Credit Card Late Fees: Revenue and Collection Costs at Large Bank Holding Companies, which documents findings on the relationship between late fee revenue and pre-charge-off collection costs for certain large credit card issuers. According to the report, “revenue from late fees has consistently far exceeded pre-charge-off collection costs over the last several years.”
The NPRM follows several actions initiated by the Bureau last year, including a request for comments on junk fees, a research report analyzing credit card late fees, and an advance notice of proposed rulemaking that solicited information from credit card issuers, consumer groups, and the public regarding credit card late fees and late payments, and card issuers’ revenue and expenses (previously covered by InfoBytes here and here).
California: TILA does not preempt state laws on commercial financial disclosure
On January 20, California Attorney General Rob Bonta sent a comment letter to CFPB Director Rohit Chopra in response to a preliminary determination issued by the Bureau in December, which concluded that commercial financial disclosure laws in four states (New York, California, Utah, and Virginia) are not preempted by TILA. As previously covered by InfoBytes, the Bureau issued a Notice of Intent to Make Preemption Determination under the Truth in Lending Act seeking comments pursuant to Appendix A of Regulation Z on whether it should finalize its preliminary determination. The Bureau noted that a number of states have recently enacted laws requiring improved disclosures of information contained in commercial financing transactions, including loans to small businesses, to mitigate predatory small business lending and improve transparency. In making its preliminary determination, the Bureau concluded that the state and federal laws do not appear “contradictory” for preemption purposes, explaining, among other things, that the statutes govern different transactions (commercial finance rather than consumer credit).
Under the California Commercial Financing Disclosures Law (CFDL), companies are required to disclose various financing terms, including the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.” Bonta explained that the CFDL only applies to commercial financing arrangements (and not to consumer credit transactions) and “was enacted in 2018 to help small businesses navigate a complicated commercial financing market by mandating uniform disclosures of certain credit terms in a manner similar to TILA’s requirements, but for commercial transactions that are unregulated by TILA.” He pointed out that disclosures required under the CFDL do not conflict with those required by TILA, and emphasized that there is no material difference between the disclosures required by the two statutes, even if TILA were to apply to commercial financing. According to Bonta, should TILA preempt the CFDL’s disclosure requirements, there would be no required disclosures at all for commercial credit in the state, which would make it challenging for small businesses to make informed choices about commercial financing arrangements.
While Bonta agreed with the Bureau’s determination that TILA does not preempt the CFDL, he urged the Bureau to “articulate a narrower standard that emphasizes that preemption should be limited to situations where it is impossible to comply with both TILA and the state law or where the state law stands as an obstacle to the full purposes [of] TILA, which is to provide consumers with full and meaningful disclosure of credit terms in consumer credit transactions.” He added that the Bureau “should also reemphasize certain principles from prior [Federal Reserve Board] decisions, including that state laws are preempted only to the extent of actual conflict and that state laws requiring additional disclosures—or disclosures in transactions not addressed by TILA—are not preempted.”