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CFPB appeals decision on Prepaid Accounts Rule
On August 16, the CFPB filed its opening brief in the agency’s appeal of a district court’s December 2020 decision, which granted a payment company’s motion for summary judgment and vacated two provisions of the Bureau’s Prepaid Account 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 Bureau claimed that it had authority to enforce the mandates under federal regulations, including the EFTA, TILA, and Dodd-Frank, but the district court disagreed, concluding, among other things, that the Bureau acted outside of its statutory authority with respect to the mandatory disclosure clauses of the short-form requirement in 12 CFR section 1005.18(b) by presuming that “Congress delegated power to the Bureau to issue mandatory disclosure clauses just because Congress did not specifically prohibit them from doing so.” In striking the mandatory 30-day credit linking restriction under 12 CFR section 1026.61(c)(1)(iii), the district court determined that “the Bureau once again reads too much into its general rulemaking authority,” and that neither TILA nor Dodd-Frank vest the Bureau with the authority to promulgate substantive regulations on when consumers can access and use credit linked to prepaid accounts. Moreover, the court deemed the regulatory provision to be a “substantive regulation banning a consumer’s access to and use of credit” under the disguise of a disclosure, and thus invalid.
In its appeal, the Bureau urged the U.S. Court of Appeals for the D.C. Circuit to overturn the district court’s ruling, arguing that both the EFTA and Dodd-Frank authorize the Bureau to promulgate rules governing disclosures for prepaid accounts. “The model-clause provision simply ensures that institutions will always have a surefire way of complying with the statute, even when the Bureau’s regulations do not specify how information should be disclosed,” the CFPB said, stressing that “[n]either that provision nor anything else forecloses—let alone unambiguously forecloses—rules requiring disclosures to present specified content in a specified format so that consumers are better able to find, understand, and compare products’ terms.” The decision to adopt such rules, the Bureau added, is entitled to deference. According to the Bureau, the Prepaid Account Rule “does not make any specific disclosure clauses mandatory,” and companies are permitted to use the provided sample disclosure wording or use their own “substantially similar” wording. Additionally, the Bureau argued, among other things, that “[b]y mandating optional model clauses while remaining silent about content and formatting requirements, Congress did not ‘circumscribe[] the [agency’s] discretion’ to adopt such requirements.” Instead, the Bureau contended, “whether to adopt content and formatting requirements is left ‘to agency discretion.’” Moreover, the disputed requirements “fit comfortably” within its power to regulate disclosure standards under EFTA and Dodd-Frank, the Bureau argued, adding that the law “authorizes the Bureau to ‘prescribe rules to ensure that the features of any consumer financial product or service … are fully, accurately, and effectively disclosed to consumers.’”
Payday lender must comply with $50 million CFPB order
On July 30, the U.S. District Court for the District of Kansas granted a petition filed by the CFPB to enforce an administrative order that assessed more than $50 million in restitution and fines against a Delaware-based online payday lender and its CEO (collectively, “respondents”) while the parties await a decision from the U.S. Court of Appeals for the Tenth Circuit. As previously covered by InfoBytes, the CFPB filed an action in 2015 against the respondents for allegedly violating TILA and EFTA and for engaging in unfair or deceptive acts or practices concerning the terms of the loans they originated. The respondents also allegedly (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked their 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 January 2021, former Director Kathy Kraninger adopted an administrative law judge’s findings and conclusions, affirming the respondents violated TILA, EFTA, and the CFPA and concluding the respondents should be held jointly and severally liable for restitution amounting to more than $38.4 million. Kraninger further held the lender liable for a $7.5 million civil penalty and the CEO liable for a civil penalty of $5 million. In March, acting Director Dave Uejio issued an order denying the respondents’ motion to stay Kraninger’s final decision pending appellate review, but granted their request for a 30-day stay to allow them the opportunity to seek a stay from the 10th Circuit. In opposition to the Bureau’s petition to enforce the final order, the CEO argued, among other things, that the final order is not valid and enforceable. The court noted, however, that it is not permitted to stay enforcement of or suspend the final order. The power to suspend the final order or stay its enforcement belongs to the 10th Circuit—a request, the court noted, that the respondents did not seek when they filed their appeal. The CEO “has not cited any authority indicating that this Court may or should refuse to grant a petition for enforcement under this statute,” the court wrote. “Accordingly, the Court grants the petition for enforcement of the Final Order, and respondents are hereby ordered to comply with the Final Order by paying the restitution and civil penalties imposed and by cooperating as directed.”
FTC obtains $450,000 settlement with auto dealer over fraudulent consumer financial documents
On July 29, the FTC announced a proposed settlement with the owner and manager of a group of auto dealers with locations in Arizona and New Mexico near the Navajo Nation’s border, resolving allegations that the individual defendant advertised misleading discounts and incentives and falsely inflated consumers’ income and down payment information on certain financing applications. As previously covered by InfoBytes, in 2018, the FTC filed an action against the defendants alleging violations of the FTC Act, TILA, and the Consumer Leasing Act (CLA) 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.” A settlement was reached with the auto dealer defendants last September (covered by InfoBytes here), which required, among other things, that the auto dealer defendants cease all business operations and pay a monetary judgment of over $7 million.
If approved by the court, the proposed order would result in a $450,000 payment to the FTC, and would prohibit the individual defendant, who neither admits nor denies the allegations, from (i) misrepresenting information in any documents associated with a consumer’s purchase, financing, or leasing of a motor vehicle; (ii) misrepresenting the costs or any other material facts related to vehicle financing; or (iii) falsifying loan information. The individual defendant would also be required to provide consumers a reasonable opportunity and sufficient time to review documents associated with the vehicle financing, and is prohibited from violating the TILA and CLA.
District Court approves final settlement in tribal lending class action
On July 9, the U.S. District Court for the Eastern District of Virginia granted final approval of a revised class action settlement, certifying the settlement class, approving the settlement terms, and entering final judgment regarding allegations that an operation used tribal sovereign immunity to evade state usury laws when charging unlawful interest on loans. As previously covered by InfoBytes, in March, the plaintiffs filed a class action complaint against the operation alleging, among other things, violations of the Racketeer Influenced and Corrupt Organizations Act, EFTA, and TILA. The settlement cancels roughly 71,000 loans, requires the operation to pay $86 million in damages, and caps fees at $15 million. According to the final approval, the court finds the revised settlement to be “fair, reasonable, and adequate.”
Juneteenth creates compliance challenges for mortgage industry
On June 17, President Biden signed S. 475 establishing June 19, Juneteenth, as a federal holiday. The “Juneteenth National Independence Day Act” amends 5 U.S.C. § 6103(a) which codifies the legal public holidays. Because June 19 falls on a Saturday this year, the holiday will be observed on Friday, June 18.
The establishment of a new federal holiday mere hours before the first observance of that holiday poses novel compliance challenges for the mortgage industry. Notably, both TRID and TILA rescission requirements have important timing standards that reference federal holidays.
TRID
Under TRID, the Loan Estimate must be provided to the consumer at least seven business days prior to consummation, and the Closing Disclosure must be provided to the consumer at least three business days prior to consummation. For purposes of these requirements, “business day” is defined as “all calendar days except Sundays and legal public holidays” as specified in 5 U.S.C. § 6103(a). As the holiday occurs on a Saturday this year, Saturday, June 19 is not a “business day” for purposes of calculating either the 7-business day waiting period after delivery of the Loan Estimate or the 3-business-day waiting period after delivery of the Closing Disclosure. Commentary to Regulation Z also states that, for purposes of rescission and the provision of mortgage disclosures, when a federal holiday falls on a Saturday but is observed on the preceding Friday, the observed holiday is a business day.
Accordingly, for purposes of providing the Loan Estimate at least seven business days prior to closing and the Closing Disclosure at least three business days prior to closing, lenders may not count Saturday, June 19, as a business day, but must count Friday, June 18, as a business day. Absent clarification from the CFPB, lenders are advised to push closings back one day where they were previously counting Saturday (June 19) as a business day. For example, if a Closing Disclosure was received by the consumer on Thursday, June 17, closing may not occur until Tuesday, June 22.
Rescission
A rescission period expires on midnight on the third business day after closing and uses the same definition of business days, which is “all calendar days except Sundays and legal public holidays.” As such, Saturday, June 19 this year is not a “business day” for purposes of the 3-business day rescission period and lenders should ensure that consumers are provided an extra day where the rescission period encompasses June 19, and are made aware of that extension. This raises unique funding and Notice of Right to Cancel disclosure related questions, the answers to which may depend on individual facts and circumstances. Absent further guidance from the CFPB, creditors may wish to delay closing by one day for those transactions where the three-day Closing Disclosure period is relevant, as well as consider providing updated Notices of Right to Cancel with a new rescission period taking into account both the new public holiday and when such new notice is sent.
On June 18, CFPB acting Director Dave Uejio issued a statement recognizing that "some lenders did not have sufficient time after the Federal holiday declaration to consider whether and how to adjust closing timelines" and that "some lenders may delay closings to accommodate the reissuance of disclosures adjusted for the new Federal holiday." Uejio further noted that "TILA and TRID requirements generally protect creditors from liability for bona fide errors and permit redisclosure after closing to correct errors." He added that any guidance ultimately issued by the Bureau "would take into account the limited implementation period before the holiday and would be issued after consultation with the other FIRREA regulators and the Conference of State Bank Supervisors to ensure consistency of interpretation for all regulated entities."
CFPB publishes rulemaking agenda
On June 11, the Office of Information and Regulatory Affairs released the CFPB’s spring 2021 rulemaking agenda. According to a Bureau announcement, the information released represents regulatory matters the Bureau is “currently pursuing under interim leadership pending the appointment and confirmation of a permanent Director.” Any changes made by the new permanent director will be reflected in the fall 2021 rulemaking agenda. Additionally, the Bureau indicates that it plans to continue to focus resources on actions addressing the adverse impacts to consumers due to the ongoing Covid-19 pandemic, and highlighted an interim final rule issued in April that addresses certain debt collector conduct associated with the CDC’s temporary eviction moratorium order (covered by InfoBytes here). The Bureau will also continue to take concrete steps toward furthering the agency’s “commitment to promoting racial and economic equity.”
Key rulemaking initiatives include:
- Small Business Rulemaking. Last September, the Bureau released a Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA) outline of proposals under consideration, convened an SBREFA panel last October, and released the panel’s final report last December (covered by InfoBytes here and here). The Bureau reports that it anticipates releasing a notice of proposed rulemaking (NPRM) for the Section 1071 regulations this September to “facilitate enforcement of fair lending laws as well as enable communities, governmental entities, and creditors to identify business and community development needs and opportunities of women-owned, minority-owned, and small businesses.”
- Consumer Access to Financial Records. The Bureau notes that it is considering 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 last fall regarding consumer data access (covered by InfoBytes here).
- 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. The Bureau notes 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, [ ] avoid conflicts of interest, require random sample testing and reviews,” and account for any other appropriate factors. An NPRM is anticipated for December.
- Amendments to Regulation Z to Facilitate LIBOR Transition. As previously covered by InfoBytes, the Bureau issued an NPRM in June 2020 to amend Regulation Z to address the sunset of LIBOR, and to facilitate creditors’ transition away from using LIBOR as an index for variable-rate consumer products. A final rule is expected in January 2022.
- Reviewing Existing Regulations. The Bureau notes in its announcement that while it will conduct an assessment of a rule implementing HMDA (most of which took effect January 2018), it will no longer pursue two HMDA proposed rulemakings previously listed in earlier agendas related to the reporting of HMDA data points and public disclosure of HMDA data. Additionally, the Bureau states that it finished a review of Regulation Z rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 and plans to publish any resulting changes in the fall 2021 agenda.
The Bureau’s announcement also highlights several completed rulemaking items, including (i) a final rule that formally extended the mandatory compliance date of the General Qualified Mortgage final rule to October 1, 2022 (covered by InfoBytes here); (ii) proposed amendments to the mortgage servicing early intervention and loss mitigation-related provisions under RESPA/Regulation X (covered by a Buckley Special Alert) (the Bureau anticipates issuing a final rule before June 30, when the federal foreclosure moratoria are set to expire); and (iii) a proposed rule (covered by InfoBytes here), which would extend the effective date of two final debt collection rules to allow affected parties additional time to comply due to the ongoing Covid-19 pandemic (the Bureau plans to issue a final rule in June on whether, and for how long, it will extend the effective date once it reviews comments).
9th Circuit reverses $1.3 billion judgment following Supreme Court’s decision
On June 8, the U.S. Court of Appeals for the Ninth Circuit issued an order vacating its December 2018 judgment, reversing a district court’s award of equitable monetary relief following the U.S. Supreme Court’s recent decision in FTC v. AMG Capital Management, and remanding the case to the district court for further proceedings consistent with the Supreme Court’s opinion. The decision impacts defendants—a Kansas-based operation and its owner—who were ordered in 2016 to pay an approximately $1.3 billion judgment for allegedly operating a deceptive payday lending scheme and violating Section 5(a) of the FTC Act by making false and misleading representations about loan costs and payments (covered by InfoBytes here). The 9th Circuit previously upheld the judgment (covered by InfoBytes here) by, among other things, rejecting the defendant owner’s challenge, which was based on an argument that the district court overestimated his “wrongful gain” and that the FTC Act only allows the court to issue injunctions. At the time, the 9th Circuit concluded that the defendant owner failed to provide evidence contradicting the wrongful gain calculation and that a district court may grant any ancillary relief under the FTC Act, including restitution. However, as previously covered by InfoBytes, the Supreme Court reversed the 9th Circuit and held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement.”
CFPB amends Regulation Z HPML escrow exemption commentary
On June 3, the CFPB published correcting amendments to its Official Interpretations to Regulation Z (TILA) that were not part of the final rule published in February, which exempts certain insured depository institutions and credit unions from the requirement to establish escrow accounts for certain higher-priced mortgage loans (HPMLs). As previously covered by InfoBytes, under the final rule, any loan made by an insured depository institution or credit union that is secured by a first lien on the principal dwelling of a consumer would be exempt from Regulation Z’s HPML escrow requirement if (i) the institution has assets of no more than $10 billion; (ii) “the institution and its affiliates originated 1,000 or fewer loans secured by a first lien on a principal dwelling during the preceding calendar year”; and (iii) the institution meets certain existing HPML escrow exemption criteria.
The amendments add one comment to the CFPB’s commentary that was not incorporated into the Code of Federal Regulations “due to an omission in an amendatory instruction,” and revise a second comment that inadvertently did not appear in the final rule. The amendments to the commentary relate to (i) Regulation Z section 1026.35(b)(2)(vi)(B), which covers requirements for escrow exemptions for HPMLs; and (ii) Regulation Z section 1026.43(f)(1)(vi), which addresses the exemption associated with balloon-payment qualified mortgages made by certain creditors under the minimum standards for transactions secured by a dwelling. The corrections took effect June 3.
FTC shares 2020 enforcement report with CFPB
On June 1, the FTC announced that it submitted its 2020 Annual Financial Acts Enforcement Report to the CFPB. The report covers the FTC’s enforcement activities regarding the Truth in Lending Act (TILA), the Consumer Leasing Act (CLA), and the Electronic Fund Transfer Act (EFTA). Highlights of the enforcement matters covered in the report include:
- TILA and CLA. FTC enforcement actions concerning TILA/Regulation Z and CLA/Regulation M include: (i) efforts to combat deceptive automobile dealer practices; (ii) a payday lending action involving deceptive charges and tactics used to overcharge customers on loan repayments; and (iii) credit repair and debt relief schemes, including a student loan debt relief scheme involving illegal fees and false claims loan payments.
- EFTA. The FTC reported eight new or ongoing cases related to EFTA/Regulation E. These include: (i) negative option plans involving, among other things, companies applying recurring charges to consumers’ debit or credit card numbers for goods or services without obtaining proper written authorization; and (ii) use of robocalls for marketing deceptive products.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) collaboration with Department of Defense’s interagency group on preauthorized electronic fund transfer issues; (ii) a small business financing forum that provided “an overview of small business lending and the emergence of new online options available to businesses seeking finance”; and (iii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
FTC settles with remaining operators of student loan debt-relief scam
On May 17, the FTC announced settlements to resolve litigation against the remaining defendants involved in a student loan debt-relief operation charged with allegedly engaging in deceptive and abusive practices by collecting advance fees and making false promises to consumers that they could lower or eliminate loan payments or balances. As previously covered by InfoBytes, the FTC filed complaints against two groups of defendants involved in the debt-relief operation claiming the defendants, among other things, charged consumers advance fees and enrolled consumers in a high-interest financing program without making required disclosures. These actions, the FTC, contended, violated the FTC Act, TILA, and the Telemarketing Sales Rule (TSR), and stipulated orders were entered against several of the defendants in 2019. The terms of the stipulated final orders reached with the remaining defendants (see here and here) prohibit the defendants from (i) engaging in transactions involving secured or unsecured debt relief products and services; (ii) making misrepresentations and unsubstantiated claims regarding any products and services; (iii) violating the TSR; and (iv) collecting any further payments from consumers who purchased debt-relief services prior to the entry of the order. Additionally, certain defendants are required to pay a more than $24.5 million monetary judgment, which will be partially suspended due to inability to pay. One of the defendants is also required to pay $11,500, which will go towards consumer redress.