InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB warns against collecting on overdraft services without explicit consumer consent
On September 17, the CFPB published a circular clarifying that banks and credit unions can violate the EFTA and Regulation E if they cannot prove that consumers agreed to be enrolled in overdraft services before being charged fees for ATM and other transactions. As described by the CFPB, Regulation E mandates an opt-in regime, meaning consumers are not enrolled in covered overdraft services until they explicitly agree to enroll, and financial institutions are prohibited from charging fees without this consent.
The circular emphasized that the “form of records” demonstrating consumer consent may vary based on the channel the consumer uses, such as signed forms for in-person or mail opt-ins, recorded calls for phone opt-ins, and secured electronic signatures for online or mobile app opt-ins. The CFPB says it has observed instances where institutions failed to provide evidence of consumer consent and highlighted the importance of maintaining accurate records and adhering to Regulation E’s requirements to avoid deceptive and abusive practices.
CFPB to ban servicer from federal student loan servicing and pay $120M
On November 12, the CFPB filed a proposed stipulated final judgment and order against a student loan servicer (the defendant) for alleged violations of the CFPA, the FCRA and the FDCPA. As previously covered by InfoBytes, the CFPB filed a complaint against the defendant in 2017 alleging that it “systematically and illegally” created “obstacles to repayment” and “cheated” many borrowers out of their rights to lower repayments, which the Bureau alleged had borrowers paying significantly more for their student loans.
According to the proposed stipulated final judgment and order, the defendants would be required to pay $100 million in consumer redress and a $20 million civil money penalty. If entered by the court, the proposed order would also permanently ban the defendants from servicing federal Direct Loans, with limited exceptions, and would restrain the company permanently from directly or indirectly servicing most loans under the Federal Family Education Loan Program. The stipulated order also set forth extensive and detailed requirements for servicing the existing book of all federal and private student loans, including, among other things, payment allocation and payment crediting procedures, acceptance of borrower instructions for crediting and processing payments, prohibition of certain fees (such as fees for forbearance or to process payments), required information on billing statements, required written and oral communications, and mandatory training of “repayment specialists” for borrowers.
CFPB publishes BNPL FAQs
On September 18, the CFPB issued Frequently Asked Questions (FAQ) guidance on Buy Now, Pay Later (BNPL) products. The FAQs are organized into three sections: (i) a general description of BNPL products and “Pay-in-Four” BNPL loans; (ii) scope and coverage of Pay-in-Four BNPL loans; and (iii) requirements for periodic statements for Pay-in-Four BNPL loans. In particular, the FAQs offer direction on how to apply Regulation Z to BNPL products, including the application of credit card periodic statement requirements to Pay-in-Four BNPL products accessed through digital user accounts. As previously covered by InfoBytes, the CFPB issued an interpretive rule in May, stating its position that certain consumer protection provisions of Regulation Z applied to BNPL accounts.
CFPB Director speaks on refinancing as interest rate decline expected
On September 13, CFPB Director Rohit Chopra addressed the Congressional Black Caucus Foundation, underscoring the pivotal role of housing in wealth accumulation and the imperative to address racial disparities. Chopra highlighted the CFPB’s efforts to combat redlining, including actions against mortgage lenders and the responsibility of lenders for AI-driven decisions. Chopra also discussed the importance of fair home appraisals, highlighting the CFPB’s efforts to ensure algorithmic appraisals are free from bias.
Additionally, the CFPB is preparing to help homeowners benefit from the Fed’s interest rate reductions by streamlining the refinancing process. Chopra asserted that previous refinancing cycles often exclude Black homeowners unfairly, but the Bureau aims to address this issue by reducing closing costs and junk fees. Finally, the CFPB is collaborating with other agencies to reform the tenant screening industry, addressing issues such as “shoddy practices” and false criminal records that may impede access to housing.
CFPB publishes data spotlight on mortgage costs and interest rates
On September 17, the CFPB published a data spotlight examining the impact of mortgage interest rates on housing affordability. Mortgage rates significantly rose from 2.65 percent in January 2021 to a high of 7.79 percent in October 2023. They have since declined to around 6.2 percent in September 2024. This escalation in interest rates has substantially increased mortgage payments, with the periodic payment on a $400,000 loan rising by over $1,200 per month. Rising home prices have compounded affordability challenges, leading the typical household to allocate about 36 percent of their monthly income to mortgage payments for a median-priced home.
The surge in interest rates was largely attributed to policy responses to post-pandemic inflation and the Fed’s retreat from purchasing mortgage-backed securities. Despite a slight decline in interest rates, housing affordability remains a challenge. For instance, the principal and interest payment for a median-priced home jumped 78 percent to $2,891 in October 2023 as compared to January 2021.
Currently, around 60 percent of all mortgages have interest rates below 4 percent. As interest rates fall, millions of borrowers could refinance more affordable payments. For example, the CFPB noted how a reduction from 7.25 percent to 6.5 percent could save a mortgage-payer $200 monthly on a $400,000 loan. The CFPB expressed its intention to continue monitoring refinancing activity and industry practices, with a purported focus on streamlining the process and minimizing closing costs to enhance consumer benefits.
Senate Banking Committee pens support on CFPB’s proposed BNPL supervision
On September 10, Senators Jack Reed (D-RI), Sherrod Brown (D-OH) and Tammy Duckworth (D-IL) penned a letter expressing their support for a new interpretive rule by the CFPB classifying “Buy Now, Pay Later” (BNPL) providers as credit card issuers. As previously covered by InfoBytes, on May 22, the CFPB issued an interpretive rule stating that certain consumer protection provisions of Regulation Z apply to BNPL accounts, asserting that “digital user accounts” used to access BNPL credit are considered “credit cards” under Regulation Z. In their letter, the senators characterized the rule as an “important step toward clarifying the regulatory status of BNPL loans.”
In the letter, the senators reported 43 percent of BNPL users were behind on payments and 28 percent delinquent on other debts, which they concluded shows that BNPL users are at greater risk of financial distress compared to credit card holders. They argued that the new rule would help protect consumers by requiring BNPL providers establish uniform methods for calculating the cost of credit, provide meaningful disclosure of those costs to consumers, provide standardized mechanisms for resolving credit billing disputes, and provide periodic statements. The senators also called for the CFPB to initiate separate rulemaking to bring the largest BNPL providers under federal supervision. Finally, to better assess whether BNPL users face elevated levels of defaults or delinquencies, the letter urged the CFPB to publish current data on the state of the BNPL market and to update this information annually.
CFPB says 2024 federal student loan interest rates will cost borrowers
On September 13, the CFPB published a blog post stating that higher student loan interest rates could cost students over $3 billion in the aggregate in additional interest for loans taken out in 2024. The Bureau reported that on July 1, interest rates for new federal student loans rose to the highest level since 2006, with undergraduate loan rates increasing to 6.53 percent — almost a 19 percent increase compared to last year. and a 44 percent increase from five years ago. The CFPB emphasized that, given the current interest rate environment, borrowers are often forced to choose between a private loan with lower rates that do not provide the important protections that come with federal student loans, or federal student loans with higher rates. The CFPB highlighted it has observed instances in which private student loan servicers denied benefits improperly, failed to honor protections afforded to borrowers by law, and referenced borrower complaints that private student lenders acted improperly. The Bureau warned it will continue to “ensure that student loan companies comply with federal consumer protection laws.”
CFPB’s Frotman speaks on helping vulnerable populations
On September 13, the CFPB General Counsel, Seth Frotman, released prepared remarks on the Bureau’s impact on the lives of financially vulnerable individuals. The speech emphasized how consumer financial laws protect those struggling with basic needs, like food and housing, and how federal laws can prevent companies from taking advantage of vulnerable consumers. Frotman noted the CFPB’s recent focus on combating “junk fees,” which he argued affect low-income individuals disproportionately because “companies often structure their complex, back-end pricing — including fees — in a way that specifically takes advantage of people when they are vulnerable.” Frotman highlighted that these fees, which can include credit card late fees, overdraft fees and “research” or “statement” fees extract billions of dollars from consumers, particularly those with limited resources.
The CFPB proposed new rules in January addressing outdated regulations that allowed for these supposed “junk fees.” The CFPB estimates the proposed changes will save consumers billions of dollars annually and ease financial burdens on low-income households. Additionally, the CFPB has taken steps to ensure that public benefits are not undermined by financial institutions through high fees or discriminatory practices. The Bureau enforces the EFTA and ECOA to protect consumers receiving government assistance and to prevent lenders from discriminating against borrowers with public assistance income.
CFPB urges District Court to dissolve preliminary injunction and lift stay on late fee rule
On August 22, the CFPB filed a reply brief in support of its motion urging the U.S. District Court for the Northern District of Texas to dissolve the preliminary injunction and lift the stay on the CFPB’s late fee rule. As previously covered by InfoBytes, the District Court granted the plaintiffs’ motion for a preliminary injunction and stayed the CFPB’s final rule in May. The rule, promulgated earlier this year, would lower the safe harbor amount for credit card late fees from $30 (and $41 for a subsequent late fee charged within six billing cycles) to $8. In the recent reply brief, the CFPB argued that the rule was consistent with the CARD Act and TILA and that the plaintiffs, a group of national and local business and bank associations, failed to show how the stay would serve the public interest or why a 90-day compliance period would be appropriate.
The CFPB made several points in its recent 13-page reply brief. First, it argued that the rule is “entirely consistent” with the statute, maintaining that the plaintiffs “overread” the CARD Act as permitting late fees to exceed the costs incurred for a late payment. The CFPB also contended that the plaintiffs were not entitled to a preliminary injunction because of TILA’s effective-date provision, which requires six months of lead time before certain TILA regulations can go into effect. Second, the CFPB urged the court to reconsider its finding that a preliminary injunction would serve the public interest, arguing that maintaining the current injunction would harm consumers. Lastly, the CFPB asserted that the plaintiffs’ arguments to impose a 90-day compliance period in the event the court lifts the stay were unpersuasive.
This case has also been the subject of a venue dispute. The CFPB originally filed a motion to transfer the venue from Texas to the U.S. District Court for the District of Columbia, which was granted, but the U.S. Court of Appeals for the Fifth Circuit intervened (covered by InfoBytes here) and transferred the case back to Texas, where it remains (also covered by InfoBytes here).
CFPB faces new constitutionality challenge under funding mechanism
Recently, a Texas-based payday lender (the defendant) filed a motion to dismiss in the U.S. District Court for the Northern District of Dallas, challenging the legality of the CFPB’s funding structure. As previously covered by InfoBytes, in July 2022, the CFPB filed a complaint against the defendant for allegedly engaging in illegal debt collection practices; the Bureau alleged the respondent generated $240 million in reborrowing fees from borrowers who were eligible for free repayment plans in violation of the CFPA.
While this case was not the first challenge to the CFPB’s funding structure, the defendant’s argument hinges on the U.S. Supreme Court’s recent ruling (covered by InfoBytes here) that the CFPB’s funding structure was deemed constitutional since it came from the surplus funds of the Fed that would otherwise be deposited into the general fund of the Treasury. The motion emphasized that the Fed has been operating at a deficit since 2022, accumulating a deferred asset of $184.4 billion, which the defendant argued this deficit would prevent making any surplus available for the CFPB — yet the CFPB continues to receive hundreds of millions of dollars. Furthermore, the defendant argued the CFPB’s funding from sources other than the Fed’s combined earnings violates both the Dodd-Frank Act and the Appropriations Clause of the U.S. Constitution.
The defendant urged the court to dismiss the action on the basis that the CFPB’s method of funding violates the Appropriations Clause and the statutory limitations set by Congress, rendering the CFPB’s actions, including the prosecution of the current lawsuit, invalid.