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CFPB: TILA does not preempt state laws on commercial financial disclosure
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.”
2nd Circuit: CFPB funding is constitutional
On March 23, the U.S. Court of Appeals for the Second Circuit held that the CFPB’s funding structure is constitutional—splitting from the U.S. Court of Appeals for the Fifth Circuit’s decision in Community Financial Services Association of America v. Consumer Financial Protection Bureau, which concluded that Congress violated the Constitution’s Appropriations Clause when it created what that Court described as a “perpetual self-directed, double-insulated funding structure.” The U.S. Supreme Court is scheduled to review the 5th Circuit’s decision next term (covered by InfoBytes here).
Meanwhile, the 2nd Circuit concluded that it “cannot find any support” for the 5th Circuit’s determination in Supreme Court precedent, the text of the Constitution text, or in the history of the Appropriations Clause. “Because the CFPB’s funding structure was authorized by Congress and bound by specific statutory provisions, we find that the CFPB’s funding structure does not offend the Appropriations Clause,” the 2nd Circuit wrote. As such, the appellate court affirmed a 2020 district court order requiring the defendant debt collection law office to comply with a civil investigative demand issued by the Bureau in June 2017. As previously covered by InfoBytes, the CID requested information from the defendant as part of a Bureau investigation into whether debt collectors, furnishers, or other persons associated with the collection of debt and furnishing of information have engaged or are engaging in unfair, deceptive, or abusive acts or practices in violation of the CFPA, FDCPA, and FCRA. The defendant objected on several grounds, including that the CID was void ab initio under Seila Law LLC v. CFPB (the defendant contended that “the CFPB Director was shielded from presidential oversight by an unconstitutional removal provision at the time the CID was issued”), and that the Bureau is unconstitutionally funded. As noted in the opinion, the Bureau ratified the CID and the enforcement action against the defendant following the Supreme Court’s decision in Seila Law, and the district court ultimately granted the Bureau’s petition to enforce the CID.
On review, the 2nd Circuit affirmed the district court’s order, concluding that the CID was not void ab initio because “there is no dispute that the CFPB Director who issued the CID was properly appointed.” The appellate court pointed to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here), which held that “‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The panel further noted that “[s]ince the CID was issued, there have been three different CFPB Directors appointed by two different presidents, each of whom has been subject to at-will removal at some point in their tenure. There is nothing to suggest that the Director’s removal protection affected the issuance of the CID or the investigation into [the defendant].” The 2nd Circuit further concluded that “the CFPB’s funding structure is not constitutionally infirm under either the Appropriations Clause or the nondelegation doctrine, and that the CID served on [the defendant] is not an unduly burdensome administrative subpoena.”
CFPB updates agency contact information
On March 20, the CFPB published a final rule in the Federal Register to make non-substantive technical corrections and updates to Bureau and other federal agency contact information found within Regulations B, E, F, J, V, X, Z and DD, including federal agency contact information that is required to be provided with ECOA adverse action notices and the FCRA Summary of Consumer Rights (available here). Additionally, the final rule “revises the chapter heading, makes various non-substantive changes to Regulations B and V, and provides a Bureau website address where the public may access certain APR tables referenced in Regulation Z.” The final rule is effective April 19, although the Bureau noted that the mandatory compliance date for the amendments to appendix A to Regulation B, appendix A to Regulation J, and appendix K to Regulation V is March 20, 2024.
FFIEC releases 2022 HMDA data
On March 20, the CFPB announced the release of the 2022 HMDA modified loan application register (LAR) data. The LAR data, available on the Federal Financial Institutions Examination Council’s HMDA platform, contains modified loan-level information on approximately 4,394 HMDA filers. The Bureau also announced plans to produce the 2022 HMDA data “in other forms to provide users insights into the data,” including through a nationwide loan-level dataset, which will provide all publicly available data from all HMDA reporters, as well as aggregate and disclosure reports with summary information by geography and lender, to allow users the ability to create custom datasets and reports. The Bureau also said it plans to publish a Data Point article highlighting key trends in the annual HMDA data.
DOJ, CFPB: Lenders that rely on discriminatory appraisals violate the FHA and ECOA
On March 13, the DOJ and CFPB filed a statement of interest saying that a “lender violates both the [Fair Housing Act (FHA)] and ECOA if it relies on an appraisal that it knows or should know to be discriminatory.” (See also CFPB blog post here.) Pointing out that the case raises important legal questions regarding the issue of appraisal bias, the agencies explained that the DOJ has enforcement authority under both the FHA and ECOA, and the Bureau has authority to interpret and issue rules under ECOA and enforce the statute’s requirements.
The case, which is currently pending in the U.S. District Court for the District of Maryland, concerns whether an appraiser, a real estate appraisal company, and an online mortgage lender (collectively, “defendants”) violated federal and state law by undervaluing plaintiffs’ home on the basis of race and denying a mortgage refinancing application based on the appraisal. Plaintiffs, who are Black, claimed their home was appraised for a lower amount on the basis of race, and maintained that the lender denied their loan even after being told the appraisal was discriminatory. Additionally, plaintiffs claimed that after they replaced family photos with pictures of white people and had a white colleague meet a new appraiser, that appraiser appraised the house for $750,000—a nearly 60 percent increase despite there not being any significant improvements made to the house or meaningful appreciation in the value of comparable homes in the market.
The defendant appraiser filed a counterclaim against the plaintiffs providing technical arguments for why he valued the home at $472,000, including that the property next door was listed for $500,000, but was later reduced to $475,000, only 10 days after he completed the appraisal. He further claimed that the second appraisal failed to include that property as a comparison and relied on home sales that had not happened as of the time of the first appraisal. The lender argued that it should not be held liable because it was relying on a third-party appraiser and that “it can be liable only if it took discriminatory actions that were entirely separate from [the appraiser’s].”
While the statement does not address the issue of vicarious liability, the DOJ and CFPB asserted that lenders can be held liable under the FHA and ECOA for relying on discriminatory appraisals. They explained that it is “well-established that a lender is liable if it relies on an appraisal that it knows or should know to be discriminatory.” The statement also provided that for disparate treatment claims under the FHA and ECOA, “plaintiffs need only plead facts that plausibly allege discriminatory intent.” The agencies also argued that a violation of Section 3617 of the FHA (which includes “a prohibition against retaliating in response to the exercise of fair housing rights”) “does not require a ‘predicate violation’ of the FHA.
CFPB scrutinizes discharged private student loan billing and collection practices
On March 16, the CFPB released a compliance bulletin discussing student loan servicers’ practice of collecting on private student loans discharged in bankruptcy. The bulletin also notified regulated entities on how the Bureau intends to exercise its enforcement and supervisory authorities on this issue. Bulletin 2023-01: Unfair Billing and Collection Practices After Bankruptcy Discharges of Certain Student Loan Debts addressed the treatment of certain private student loans following bankruptcy discharge. The Bureau explained that in order to secure a discharge of a qualified education loan in bankruptcy, a borrower must demonstrate that the loan would impose an undue hardship if not discharged. Loans that do not meet this qualification (“non-qualified student loans”) can be discharged under standard bankruptcy discharge orders, the Bureau said.
Bureau examiners found, however, that several servicers failed to determine whether a borrower’s loan was qualified or non-qualified. As a result, non-qualified student loans were returned to repayment after a bankruptcy concluded, wherein servicers continued to bill and collect payments on the loans even through the borrower was released from this debt through the bankruptcy discharge. According to the Bureau, many borrowers, when faced with collection activities in violation of a bankruptcy court order, continued to make payments on debts they no longer owed.
The Bureau explained that servicers who collected on student loans that were discharged by a bankruptcy court violate the prohibition on unfair, deceptive, or abusive acts or practices under the Consumer Financial Protection Act. The bulletin described unfair practices observed by examiners, such as servicers relying entirely on loan holders to distinguish among the loans and not ensuring that such holders had in fact done so. The bulletin also provided examples of student loans that are eligible for standard bankruptcy discharge, including loans made to students attending schools that are ineligible for federal student aid and loans made to students attending school less than half time. Bureau examiners instructed servicers to immediately stop collecting on discharged loans and take remedial action, including conducting a multi-year lookback and issuing refunds to affected borrowers.
CFPB issues 2023 HMDA institutional and transactional coverage charts
On March 15, the CFPB released the 2023 HMDA institutional and transactional coverage charts. The charts update the reporting thresholds for transactions that involve a closed-end mortgage loan, pursuant to an order issued last September by the U.S. District Court for the District of Columbia in National Community Reinvestment Coalition v. CFPB. (Covered by InfoBytes here.) As previously covered by InfoBytes, in 2020 the CFPB issued a final rule, which amended Regulation C and permanently increased the reporting threshold from the origination of at least 25 closed-end mortgage loans in each of the two preceding calendar years to 100, and permanently increased the threshold for collecting and reporting data about open-end lines of credit from the origination of 100 lines of credit in each of the two preceding calendar years to 200.
The 2023 HMDA Institutional Coverage Chart outlines criteria for determining whether an institution is covered by Regulation C. Additionally, the 2023 HMDA Transactional Coverage Chart explains that under HMDA/Regulation C, a transaction is reportable only if it is an application for, an origination of, or a purchase of a covered loan. The chart explains how to determine whether a transaction involves a covered loan and whether it meets the applicable loan-volume thresholds.
CFPB seeks input on data broker businesses
On March 15, the CFPB issued a Request for Information (RFI) seeking public input on data broker business practices in order to inform planned rulemaking under the FCRA and help the agency understand the current state of the industry. “Modern data surveillance practices have allowed companies to hover over our digital lives and monetize our most sensitive data,” CFPB Director Rohit Chopra said in the announcement. He added, “[o]ur inquiry will inform whether rules under the [FCRA] reflect these market realities.” The Bureau explained that the FCRA—which covers data brokers such as credit reporting companies and background screening firms, as well as parties who report information to these firms—provides several protections, including accuracy standards, dispute rights, and restrictions on how data can be used. The RFI seeks feedback on business models and practices used by the data broker market, including information about the types of data being collected and sold and the sources data brokers rely upon. In particular, the Bureau seeks information on consumer harm and market abuses, and wants to understand “whether companies using these new business models are covered by the FCRA, given the FCRA’s broad definitions of ‘consumer report’ and ‘consumer reporting agency.’” The Bureau stated it is also interested in learning about consumers’ direct experiences with data brokers, including when consumers try to remove, correct, or regain control of their data. Comments on the RFI are due by June 13.
CFPB receives FCRA rulemaking petition on debt collection
On March 3, the CFPB received a rulemaking petition from the National Consumer Law Center (NCLC) in response to forthcoming FCRA rulemaking announced in the Bureau’s Fall 2022 regulatory agenda. As previously covered by InfoBytes, the Bureau announced it is considering pre-rulemaking activity in November to amend Regulation V, which implements the FCRA. In January, the Bureau issued its annual report covering information gathered by the Bureau regarding certain consumer complaints on the three largest nationwide consumer reporting agencies (CRAs). At the time, CFPB Director Rohit Chopra said that the Bureau “will be exploring new rules to ensure that [the CRAs] are following the law, rather than cutting corners to fuel their profit model.” (Covered by InfoBytes here.)
The NCLC presented several issues for consideration in the FCRA rulemaking process, including that the Bureau should (i) “establish strict requirements to regulate the furnishing of information regarding a debt in collections by third-party debt collectors and debt buyers”; (ii) “require translation of consumer reports by the [CRAs] into the eight languages most frequently used by limited English proficient consumers”; and (iii) “establish an Office of Ombudsperson to assist consumers who have been unable to fix errors in their consumer reports from the nationwide CRAs and other CRAs within the CFPB’s supervisory authority.”
“Given the level of errors, problems, and abuses by debt collectors in furnishing and resolving disputes, requiring an original creditor tradeline is a reasonable quality control mechanism,” the NCLC said. “Alternatively, if the CFPB continues to permit the furnishing of debt collection information without a pre-existing tradeline by the original creditor, the Bureau should require that the furnisher of debt collection activity (whether a debt collector, debt buyer, servicer or other) provide a complete account history in the tradeline, including positive payments,” the petition added, stressing that “such reporting must require adequate substantiation[.]”
House subcommittee discusses CFPB reform proposals
On March 9, the House Financial Services Committee’s Subcommittee on Financial Institutions and Monetary Policy held a hearing to discuss proposals that would alter the structure and authority of the CFPB. The subcommittee heard from several witnesses, including the CEO of the American Financial Services Association (AFSA), the Bureau’s former deputy director, and the Minnesota attorney general.
During the hearing, members discussed legislation that would reform the Bureau, including: (i) the Consumer Financial Protection Commission Act, which would make the Bureau an independent commission; (ii) the Transparency in CFPB Cost-Benefit Analysis Act, which would require the Bureau to include a statement justifying any proposed rulemaking (including “why the private market, State, local, or tribal authorities cannot adequately address the problem”), as well as provide qualitative and quantitative cost assessments and data or studies used in preparing a proposal; (iii) the CFPB-IG Reform Act, which would create a separate inspector general for the Bureau; and (iv) the Taking Account of Bureaucrats’ Spending (TABS) Act, which would make the Bureau an independent agency from the Federal Reserve System called the “Consumer Financial Empowerment Agency” that would be funded through congressional appropriations rather than the Fed.
In his prepared testimony, the AFSA CEO alleged several examples of regulatory overreach taken by the Bureau, including: (i) imposing limits on arbitration, despite the Bureau’s own finding that arbitration benefits consumers; (ii) releasing guidance, instead of legislative rulemaking, which creates ambiguity for companies and consumers; (iii) using “regulation by enforcement” to change TILA and creating an ability to repay standard that does not exist in any consumer financial law or regulation; (iv) issuing press releases that serve as regulations and provide recommendations inconsistent with the plain language of laws such as the SCRA; and (v) creating potential harm to servicemembers through misinterpretations of the Military Lending Act. He further explained that a press release issued by the Bureau last year on junk fees (covered by InfoBytes here) “goes beyond its authority” and creates confusion for both depository institutions and finance companies who are unsure what the rules are. He emphasized that “the best way to protect consumer is to protect access to credit,” and the best method for achieving this “is to have clearly defined terms and conditions that both industry and the regulatory community can understand and follow.”
The former CFPB deputy director also asserted in his prepared testimony that the agency is prone to exceeding statutory limits or requirements. He commented that “[w]hile one or two of these actions could perhaps be dismissed as over-exuberance, the frequency with which these issues arise suggests that the agency lacks adequate internal or external controls to ensure it operates within the law,” and that in “the absence of these controls . . . [it] compels the conclusion that the CFPB is ripe for reform.” He also maintained that having the Bureau go through the annual appropriations process would help the agency “focus its priorities” and “improve its effectiveness and efficiency.” He further noted that expanding the Bureau’s UDAAP authority to cover conduct it observes in the marketplace (such as applying UDAAP credit discrimination laws to any decision making by a financial institution) is “a decision fundamentally for Congress.”
The Minnesota attorney general, however, highlighted joint enforcement actions taken with the Bureau in his prepared testimony, stating that by serving “as a critical enforcement partner,” the agency is operating as Congress intended when it created the Bureau in response to the 2008 financial crisis. “The CFPB’s destruction would topple the whole system like dominos,” he stressed, adding that the funding arguments fall short as several federal agencies are not funded by Congress.
Senators Sherrod Brown (D-OH), Chair of the Senate Banking Committee, and Representative Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee, issued a statement strongly disagreeing with the introduced legislation. “We will continue to work with our colleagues to stop any anti-consumer bill and protect the CFPB so that consumers can continue to have an agency solely dedicated to protecting their hard-earned money,” the lawmakers said.
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit