InfoBytes Blog

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).

Agency Rule-Making & Guidance Federal Issues CFPB Consumer Finance Credit Cards Fees TILA Regulation Z CARD Act

District Court denies certification and defendants’ motion for summary judgment in FDCPA class action

On January 26, the U.S. District Court for the Western District of Washington denied a plaintiff’s motion for class certification and denied motions for summary judgment from defendants in an FDCPA case stemming from a consent order between one of the defendants and the CFPB. As previously covered by InfoBytes, in September 2017, the CFPB announced it had filed a complaint in the U.S. District Court for the District of Delaware against a collection of 15 Delaware statutory trusts and their debt collector for, among other things, allegedly filing lawsuits against consumers for private student loan debt that they could not prove was owed or that was outside the applicable statute of limitations. According to the consent judgment, the trusts were required to pay at least $3.5 million in restitution to more than 2,000 consumers who made payments resulting from the improper collection suits, to pay $7.8 million in disgorgement to the Treasury Department, and to pay an additional $7.8 million civil money penalty to the CFPB. In addition, the trusts were required to: (i) hire an independent auditor, subject to the Bureau’s approval, to audit all 800,000 student loans in the portfolio to determine if collection efforts must be stopped on additional accounts; (ii) cease collection attempts on loans that lack proper documentation or that are time-barred; and (iii) ensure false or misleading documents are not filed and that documents requiring notarization are handled properly. A separate consent order issued against the debt collector orders the company to pay a $2.5 million civil money penalty to the CFPB.

According to the district court’s order, the plaintiffs, who were sued by the defendants for failing to pay their student loans, alleged that the defendants filed fraudulent, deceptive, and misleading affidavits in order to obtain default judgments. The plaintiffs sought to include a class of those residing in Washington for which the defendants sought to collect a debt allegedly owned by one of the trusts. The district court, however, was “unconvinced” that any of the questions would generate common answers on a class-wide basis. For example, the question of whether the defendants’ employees filed false or misleading affidavits “cannot be resolved in one stroke,” the district court said, because the plaintiffs “cannot show by a preponderance of the evidence that the documents Defendants used in every debt collection action suffered from the same alleged deficiencies.” With respect to the defendants’ summary judgment motion, the district court determined there were genuine issues of material fact regarding the alleged violations of the FDCPA and state law in Washington. The district court denied the defendants’ motion for summary judgment, noting noted that “[a]ttempts to collect debts with false affidavits and without the necessary documentation to prove the claims is unfair or unconscionable and involves false, deceptive, and/or misleading representations in violation of the FDCPA.”

Courts Class Action FDCPA CFPB CFPA

CFPB releases data on pandemic credit scores

On January 25, the CFPB released a blog post on credit score transitions during the Covid-19 pandemic. Using data available to the Bureau, the agency examined the transitions of consumers across credit score tiers using a commercially available credit score. According to the Bureau, the data used quarterly snapshots from June 2010 through June 2022 of the Consumer Credit Panel (CCP), which is a 1-in-48 deidentified longitudinal sample of credit records from one of the nationwide consumer reporting agencies. The Bureau assigned consumers to five credit score bins : deep subprime (300-579); subprime (580-619); near-prime (620-659); prime (660-719); and superprime (720-850). For each quarter of the CCP through June 2021, the Bureau assigned consumers a credit score bin reflecting their credit score, and a score bin reflecting their credit score 12 months in the future. The Bureau reported that transitions out of the subprime credit score tier was more common during the pandemic. Before the pandemic, 37 percent of consumers with subprime credit scores remained in the subprime tier after one year, and 26 percent dropped to the deep subprime tier. The Bureau also found that of consumers with near-prime credit scores, 24 percent transitioned to a lower tier before the pandemic, compared to 21 percent after the pandemic. Because prime credit scores are important to access lower-cost credit, the increasing number of transitions out of subprime credit scores is one factor that led to increased access to credit during the pandemic. Nevertheless, the Bureau warned that a higher credit score may not be enough to offset rising costs for goods purchased on credit.

Federal Issues CFPB Consumer Finance Credit Scores Covid-19

Biden administration releases Renters Bill of Rights

On January 25, the Biden administration announced new actions for enhancing tenant protections and furthering fair housing principles, which align with the administration’s Blueprint for a Renters Bill of Rights that was released the same day. The Blueprint and fact sheet lay out several new actions that federal agencies and state and local partners will take to protect tenants and increase housing affordability and access.

• The FTC and CFPB will collect information to identify practices that unfairly prevent applicants and tenants from accessing or staying in housing, “including the creation and use of tenant background checks, the use of algorithms in tenant screenings, the provision of adverse action notices by landlords and property management companies, and how an applicant’s source of income factors into housing decisions.” According to the White House, this marks the first time the FTC has issued a request for information that explores unfair practices in the rental market. The data will inform enforcement and policy actions under each agency’s jurisdiction.
• The CFPB will issue guidance and coordinate enforcement actions with the FTC to ensure information in the credit reporting system is accurate and to hold background check companies accountable for having unreasonable procedures.
• The FHFA will launch a transparent public process for examining “proposed actions promoting renter protections and limits on egregious rent increases for future investments.” Periodic updates, including one within the next six months will be provided to interested stakeholders. FHFA Director Sandra L. Thompson commented that the agency “will conduct a public stakeholder engagement process to identify tangible solutions for addressing the affordability challenges renters are facing nationwide, particularly among underserved communities. The proposals discussed during this process will focus on properties financed by [Fannie Mae and Freddie Mac].” She noted that FHFA will continue to evaluate Fannie and Freddie’s role in providing tenant protections and advancing affordable housing opportunities.
• The DOJ intends to hold a workshop to inform potential guidance updates centered on anti-competitive information sharing, including within the rental market space.
• HUD will publish a notice of proposed rulemaking to require public housing authorities and owners of project-based rental assistance properties to provide tenants at least 30 days’ advanced notice before terminating a lease due to nonpayment.
• The Biden administration will also hold quarterly meetings with a diverse group of tenants and tenant advocates to share ideas on ways to strengthen tenant protections.

According to the announcement, the agencies’ actions exemplify the principles laid out in the Blueprint, which underscores key tenant protections, including: (i) renters should be able to access safe, quality, accessible, and affordable housing; (ii) renters should be provided clear and fair leases with defined rental terms, rights, and responsibilities; (iii) federal, state, and local governments should ensure renters are aware of their rights and are protected from unlawful discrimination and exclusion; (iv) renters should be given the freedom to organize without obstruction or harassment from housing providers or property managers; and (v) renters should be able to access resources to prevent evictions, ensure eviction proceedings are fair, and avoid future housing instability.

The administration also announced it is launching a related “Resident-Centered Housing Challenge”—a call to action for housing providers and other stakeholders to strengthen their practices and make independent commitments that will improve the quality of life for renters. The Challenge will launch this spring and encourages states, local, tribal, and territorial governments to improve existing fair housing policies and develop new ones.

Federal Issues Biden Tenant Rights Consumer Finance FHFA CFPB FTC Fair Housing DOJ HUD Fannie Mae Freddie Mac

CFPB seeks feedback on credit cards

On January 24, the CFPB issued a notice and request for information (RFI) seeking public feedback on several aspects of the consumer credit card market in accordance with Section 502(b) of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). The CARD Act was enacted by Congress to establish fair and transparent practices related to the extension of credit within the credit card market, and requires the Bureau to undertake a biennial review of the industry to determine whether regulatory adjustments are needed. The Bureau said it plans to publish its report to Congress later in 2023.

The RFI covers several broad topics ranging from lending practices to the effectiveness of rate and fee disclosures, and seeks comments on the experiences of consumers and credit card issuers in the credit card market, as well as on the overall health of the credit card market. Specifically, the RFI requests feedback on issues related to:

• Credit card agreement terms and credit card issuer practices;
• The effectiveness of issuers’ disclosure of terms, fees, and other expenses of credit card plans;
• The adequacy of protections against unfair or deceptive acts or practices relating to credit card plans;
• The cost and availability of consumer credit cards;
• The safety and soundness of credit card issuers;
• The use of risk-based pricing for consumer credit cards; and
• Consumer credit card product innovation and competition

Comments on the RFI are due April 24. The Bureau noted in its announcement that it also issued market-monitoring orders to several major and specialized credit card issuers seeking information on various topics, including major credit card issuers’ practices related to, among other things, applications and approvals, debt collection, and digital account servicing.

Agency Rule-Making & Guidance Federal Issues CFPB Consumer Finance Credit Cards CARD Act UDAAP

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.”

State Issues Agency Rule-Making & Guidance Federal Issues State Attorney General California CFPB Small Business Lending Disclosures Commercial Finance CFDL TILA Regulation Z

CFPB says servicers should suggest sales over foreclosures for some borrowers

On January 20, the CFPB encouraged mortgage servicers to advise homeowners struggling to pay their mortgages that a traditional sale may be better than foreclosure. The Bureau reported that due to the Covid-19 pandemic many homeowners are facing foreclosure, especially consumers who were delinquent when the pandemic began. The Bureau pointed out that while foreclosure rates are relatively low compared to pre-pandemic levels, mortgage data from November 2022 shows an increase of 23,400 foreclosure starts. “Often, the mortgage servicer’s phone representatives are the first line of communication with homeowners,” the Bureau said, reminding servicers to provide training to their representatives so they are prepared to provide information to equity-positive homeowners about selling their home as a potential option. “Of course, conversations about selling the home cannot substitute for the Regulation X requirement that mortgage servicers present all available loss mitigation alternatives to borrowers,” the Bureau stated, explaining that Appendix MS-4(B) to Regulation X contains sample language that can be used to inform homeowners of the option to sell their home. Additionally, the Bureau advised servicers to refer homeowners to HUD-approved housing counseling agencies to discuss their options.

Federal Issues CFPB Consumer Finance Mortgages Servicing Mortgages Foreclosure Covid-19 Regulation X

Respondents urge Supreme Court to wait on CFPB funding review

On January 13, respondents filed a brief in opposition to a petition for a writ of certiorari filed by the CFPB last November, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution (covered by InfoBytes here). The Bureau also asked the Supreme Court to consider the 5th Circuit’s decision to vacate the agency’s 2017 final rule covering “Payday, Vehicle Title, and Certain High-Cost Installment Loans” (Payday Lending Rule or Rule) on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. The Bureau requested that the Supreme Court review the case during its current term, which would ensure resolution of the issue by the summer of 2023. Last December, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the Bureau’s petition for a writ of certiorari, while 16 states filed an amicus brief opposing the petition (covered by InfoBytes here).

In their opposition brief, the respondents urged the Supreme Court to deny the Bureau’s petition on the premise that the 5th Circuit’s decision does not warrant review—“let alone in the expedited and limited manner that the Bureau proposes”—because the appellate court correctly vacated the Payday Lending Rule, which, according to the respondents, has “multiple legal defects, including but not limited to the Appropriations Clause issue.” Among other things, the respondents argued that the Bureau erroneously contended that the Appropriations Clause does not limit the manner in which Congress may exercise its authority, claiming that: (i) the Appropriations Clause ensures Congressional oversight of the federal fiscal and executive power; (ii) the Bureau’s funding statute nullifies Congress’s appropriations power in an unprecedented manner; (iii) the Bureau’s merit defenses, including claims that text, history, and precedent support its funding scheme, all fail; and (iv) the Bureau’s remedial defenses of the Payday Lending Rule also fail.

The respondents also maintained that the case “is neither cleanly presented . . . nor ripe for definitive resolution at this time,” and argued that the Supreme Court could address the validity of the Payday Lending Rule without addressing the Bureau’s funding issue. Explaining that the 5th Circuit’s decision “simply vacated a single regulation that has never been in effect,” the respondents claimed that the appellate court should have addressed questions about the Rule’s validity before deciding on the Appropriations Clause question. The respondents claimed that the appellate court incorrectly rejected two antecedent grounds for vacating the Payday Lending Rule: (i) the Rule’s “promulgation was tainted by the removal restriction later held invalid in Seila Law” (covered by a Buckley Special Alert); and (ii) the Rule exceeds the Bureau’s authority “because the prohibited conduct falls outside the statutory definition of unfair or abusive conduct.” “Given the significant prospect that this Court will be unable to resolve the constitutional question in this case, it should await a better vehicle,” the respondents wrote, adding that “[i]f and when some judgment in some future case has ‘major practical effects,’ [] the Bureau should seek this Court’s review then—which may well present a better vehicle.”

Further, the respondents stated that if the Supreme Court grants review of the case, it “should proceed in a more deliberative fashion than the Bureau has urged.” The respondents asked the Supreme Court to expressly include the antecedent questions by either granting the respondents’ cross-petition or adding them to the Board’s petition in order to provide clarity about whether the Supreme Court intends to consider the alternative grounds. They further urged the Supreme Court to wait until next term to review the case, writing that the Bureau “cannot justify its demand for a case of this complexity and importance to be briefed, argued, and decided in a few months at the end of a busy Term.”

Courts Appellate Fifth Circuit U.S. Supreme Court CFPB Constitution Payday Lending Payday Rule Enforcement Funding Structure

CFPB updates Mortgage Servicing Examination Procedures

On January 18, the CFPB released an updated version of its Mortgage Servicing Examination Procedures, detailing the types of information examiners should gather when assessing whether servicers are complying with applicable laws and identifying consumer risks. The examination procedures, which were last updated in June 2016, cover forbearances and other tools, including streamlined loss mitigation options that mortgage servicers have used for consumers impacted by the Covid-19 pandemic. The Bureau noted in its announcement that “as long as these streamlined loss mitigation options are made available to borrowers experiencing hardship due to the COVID-19 national emergency, those same streamlined options can also be made available under the temporary flexibilities in the [agency’s pandemic-related mortgage servicing rules] to borrowers not experiencing COVID-19-related hardships.” Servicers are expected to continue to use all the tools at their disposal, including, when available, streamlined deferrals and modifications that meet the conditions of these pandemic-related mortgage servicing rules as they attempt to keep consumers in their homes. The Bureau said the updated examination procedures also incorporate focus areas from the agency’s Supervisory Highlights findings related to, among other things, (i) fees such as phone pay fees that servicers charge borrowers; and (ii) servicer misrepresentations concerning foreclosure options. Also included in the updated examination procedures are a list of bulletins, guidance, and temporary regulatory changes for examiners to consult as they assess servicers’ compliance with federal consumer financial laws. Examiners are also advised to request information on how servicers are communicating with borrowers about homeowner assistance programs, which can help consumers avoid foreclosure, provided mortgage servicers collaborate with state housing finance agencies and HUD-approved housing counselors to aid borrowers during the HAF application process.

Agency Rule-Making & Guidance CFPB Federal Issues Supervision Examination Mortgages Mortgage Servicing Covid-19 Consumer Finance

CFPB: Negative option marketing practices could violate the CFPA

On January 19, the CFPB released Circular 2023-01 to reiterate that companies offering “negative option” subscription services are required to comply with federal consumer financial protection laws. According to the Circular, “‘negative option’ [marketing] refers to a term or condition under which a seller may interpret a consumer’s silence, failure to take an affirmative action to reject a product or service, or failure to cancel an agreement as acceptance or continued acceptance of the offer.” The Bureau clarified that negative option marketing practices could violate the CFPA where a seller: (i) misrepresents or fails to clearly and conspicuously disclose the material terms of a negative option program; (ii) fails to obtain consumers’ informed consent; or (iii) misleads consumers who want to cancel, erects unreasonable barriers to cancellation, or fails to honor cancellation requests that comply with its promised cancellation procedures.

The Bureau described receiving consumer complaints from older consumers about being repeatedly charged for services they did not intend to buy or no longer wanted to continue purchasing. Other consumers reported being enrolled in subscriptions without knowledge of the program or the costs. Consumers also submitted complaints regarding the difficulty of cancelling subscription-based services and about charges on their credit card or bank account after they requested cancellation.

The Bureau also warned that negative option programs can be particularly harmful when paired with dark patterns. The Circular noted that the Bureau and the FTC have taken action to combat the rise of digital dark patterns, which can be used to deceive, steer, or manipulate users into behavior that is profitable for a company, but often harmful to users or contrary to their intent. The Bureau noted that consumers could be misled into purchasing subscriptions and other services with recurring charges and be unable to cancel the unwanted products and services or avoid their charges.

Federal Issues CFPB Consumer Finance Dark Patterns Negative Option