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CFPB will propose changes to ability-to-repay provisions in Payday Rule in January 2019
On October 26, the CFPB announced it expects to publish proposed rules reconsidering the ability-to-repay provisions of the rule covering Payday, Vehicle Title, and Certain High-Cost Installment Loans (the Rule) in January 2019. The Bureau does not intend to reconsider the payment provisions of the Rule, noting that the ability-to-repay provisions “have much greater consequences for both consumers and industry than the payment provisions.” Under the current Rule, it is an unfair and abusive practice for a lender to make a covered short-term loan or a covered longer-term balloon payment loan without reasonably determining that the consumer has the ability to repay the loan (see the Buckley Sandler Special Alert for more detailed coverage on the Rule). The Bureau also intends to address the compliance date for the Rule, which is currently set at August 19, 2019.
OCC announces enforcement action against bank for previously identified BSA/AML compliance deficiencies
On October 23, the OCC issued a consent order assessing a civil money penalty (CMP) against a national bank for deficiencies in the bank’s Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. The deficiencies allegedly resulted in violations of the BSA compliance program and suspicious activity reporting (SAR) rules that led to the issuance of a 2015 consent order, violations of the 2015 order, and additional violations of the SAR rule and wire transfer “travel rule.” According to the 2018 order, the bank allegedly, among other things, (i) failed to “timely achieve compliance” with the 2015 order; (ii) failed to file the required additional SARs; and (iii) initiated wire transfer transactions containing inadequate or incomplete information.
Under the terms of the 2018 order, the bank agreed to pay a $100 million CMP. The order notes that the bank has undertaken corrective actions to remedy the identified BSA/AML-related deficiencies and enhance its BSA/AML compliance program.
CFPB releases 50-state complaint snapshot
On October 23, the CFPB released its Complaint snapshot: 50 state report, which covers complaints received by the Bureau from January 2015 through June 2018. According to the report, the Bureau has received more complaints from consumers in California than any other state, followed by Florida and Texas. Other highlights of the report include: (i) issues related to credit reporting received the most complaints in 2017, comprising 31 percent of all submitted complaints; (ii) the Bureau averaged over 27,000 complaints per month from January 2017 through June 2018; and (iii) complaints about prepaid cards trended upward the beginning half of 2018, while student loan, payday loan, credit repair, and money transfer complaints all trended lower.
7th Circuit: Courts, not arbiters, decide class arbitration questions
On October 22, the U.S. Court of Appeals for the 7th Circuit held that the availability of class or collective arbitration within an employment agreement is a threshold “question of arbitrability” that must be decided by a court. According to the opinion, an employee filed class and collection action claims against her employer for wage and hour violations. The district court compelled arbitration pursuant to an agreement between the employee and her employer but struck as unlawful a waiver clause that forbid class or collective arbitration of any claim. The case proceeded to arbitration and the arbitrator issued an award of over $10 million in damages to the employee and the other 174 claimants who had opted-in to the arbitration proceeding. The employer appealed the award, arguing that the waiver of collective arbitration provision was valid, rendering the collective arbitration in violation of the employment agreement.
On appeal, the 7th Circuit reversed and remanded the case to the district court, pointing to the Supreme Court’s recent decision in Epic Systems Corp. v. Lewis, which upheld the validity of similar provisions. (Epic held that “an arbitration agreement does not violate the National Labor Relations Act when it requires plaintiffs to pursue employment-related claims in single claimant arbitrations.”). The plaintiff also argued, however, that despite the presence of the waiver, the arbitration agreement still permitted collective arbitration. This left open the question of who interprets the agreement to determine whether collection arbitration applies—the arbitrator or the court. The 7th Circuit found for the latter, concluding that the availability of class or collective arbitration is a threshold question of arbitrability and therefore a district court, and not the arbitrator should decide its permissibility.
FATF updates standards to prevent misuse of virtual assets; reviews progress on jurisdictions with AML/CFT deficiencies
On October 19, the Financial Action Task Force (FATF) issued a statement urging all countries to take measures to prevent virtual assets and cryptocurrencies from being used to finance crime and terrorism. FATF updated The FATF Recommendations to add new definitions for “virtual assets” and “virtual asset service providers” and to clarify how the recommendations apply to financial activities involving virtual assets and cryptocurrencies. FATF also stated that virtual asset service providers are subject to Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations, which require conducting customer due diligence, such as ongoing monitoring, record-keeping, and suspicious transaction reporting, and commented that virtual asset service providers should be licensed or registered and will be subject to compliance monitoring. However, FATF noted that its recommendations “require monitoring or supervision only for purposes of AML/CFT, and do not imply that virtual asset service providers are (or should be) subject to stability or consumer/investor protection safeguards.”
The same day, FATF announced that several countries made “high-level political commitment[s]” to address AML/CFT strategic deficiencies through action plans developed to strengthen compliance with FATF standards. These jurisdictions are the Bahamas, Botswana, Ethiopia, Ghana, Pakistan, Serbia, Sri Lanka, Syria, Trinidad and Tobago, Tunisia, and Yemen. FATF also issued a public statement calling for continued counter-measures against the Democratic People's Republic of Korea due to significant AML/CFT deficiencies and the threats posed to the integrity of the international financial system, and enhanced due diligence measures with respect to Iran. However, FATF will continue its suspension of counter-measures due to Iran’s political commitment to address its strategic AML/CFT deficiencies.
Bipartisan state Attorneys General coalition urge CFPB to examine for MLA compliance
On October 23, a bipartisan coalition of 33 state Attorneys General sent a letter to acting Director of the CFPB, Mick Mulvaney, expressing concern over reports that the Bureau is no longer supervising financial institutions for compliance with the Military Lending Act (MLA). The Attorneys General wrote that the Bureau would be “failing to abide by its statutorily mandated duty to enforce the MLA” by interpreting its authority to preclude the examination of lenders for compliance with the act. Specifically, the Attorneys General point to recent amendments to the MLA providing that the statute “shall be enforced” by the Bureau (among other agencies) “under any . . . applicable authorities available to the [Bureau].” This includes the authority to examine lenders “to ‘detect[] and assess[] risks to consumers.” According to the Attorneys General, the origination of non-MLA compliant loans to servicemembers constitutes such a risk.
District Court denies arbitration bid, rules clauses signed by borrowers are invalid
On October 18, the U.S. District Court for the Western District of Washington denied a motion to compel arbitration, holding that an arbitration clause was invalid under the “effective vindication” exception to the Federal Arbitration Act (FAA). According to the opinion, borrowers received several loans from an online payday lender, incorporated under tribal law, which charged usurious, triple-digit interest rates on the loans. Per the terms of the loan agreements, the borrowers consented to binding arbitration for any disputes and agreed per the choice-of-law provision that tribal law applied, effectively waiving any protections they might have enjoyed under federal and state law. The lender moved to arbitrate, which the borrowers opposed, arguing that the arbitration agreement was unenforceable under the “effective vindication” exception to arbitration because it implicitly waives a consumer’s state and federal statutory rights. The district court agreed, finding that the arbitration clause operated as a prospective waiver of most federal statutory remedies. The court found that while the FAA gives parties the freedom to structure arbitration agreements as they choose, that freedom does not extend to a substantive waiver of federally protected statutory rights. The lender also argued that the arbitrator, rather than the court, should decide if the agreement’s choice-of-law provision was invalid. The court disagreed, ruling that questions of arbitrability are for the courts to decide, not the arbitrators. Finally, the lender asked to sever the choice-of-law provision of the arbitration agreement. The court rejected such an approach, holding that when the “offending provisions” of an arbitration agreement “go to the essence of the contract,” they cannot be severed.
Freddie Mac guide features new chapter on disaster relief
On October 17, Freddie Mac released Guide Bulletin 2018-18, which announces selling updates, including a new chapter on properties affected by disasters. Effective November 19, the Freddie Mac Selling Guide will now include Chapter 4407, Properties Affected by Disasters, which outlines requirements and provides certain flexibilities for the origination of mortgages secured by properties impacted by disasters. The chapter also introduces a “major disaster plan,” which, if implemented by Freddie Mac, would allow for flexibilities in both documentation requirements and in value estimates for Freddie Mac Relief Refinance Mortgages.
The Bulletin also covers, among other things, (i) updates to the Loan Collateral Adviser for mortgages secured by condominium units; and (ii) updates to the requirements for Condominium Projects.
Fannie Mae issues mortgage industry alert to Southern California lenders
On October 16, Fannie Mae’s Mortgage Fraud Program issued an industry alert to mortgage companies operating in California identifying new, potentially false, employment information used by mortgage loan applicants in Southern California, Los Angeles County. As previously covered by InfoBytes, Fannie Mae issued industry alerts earlier this year covering “fictitious” employers whose existence could not be verified. This new alert provides common “red flags” to help lenders and originators identify potential mortgage fraud when reviewing employment information.
District Court rejects request for attorneys’ fees in dismissed CFPB debt collection suit
On October 19, the U.S. District Court for the Northern District of Ohio entered an order rejecting a request that the CFPB pay $1.2 million in attorney’s fees after the Bureau lost its debt collection lawsuit, finding no evidence of bad faith. As previously covered by InfoBytes, the court entered judgment against the Bureau on all counts after ruling that the agency failed to meet its burden to show that the debt collectors mislead consumers when it sent demand letters on law firm letterhead even though the attorneys at the firm were not meaningfully involved in preparing those letters.
According to the opinion, the law firm argued that it was entitled to attorneys’ fees under the Equal Access to Justice Act because, among other things, it suffered reputation harm and expended significant resources in its defense. Furthermore, the law firm claimed that the Bureau knew or should have known its claims were meritless. But the court decided otherwise, pointing to the advisory jury’s findings that the law firm’s debt collection letters to some consumers were “false, deceptive, or misleading” and acknowledging the Bureau’s reliance on expert testimony and its survival of summary judgment and judgment on the pleadings. The court found that even if the litigation was “an overreach based on facts, or that the Bureau was attempting to expand consumer protection laws past their useful purpose,” there is no evidence to suggest the suit was targeted or in bad faith.