The CFPB is proposing revisions to its 2016 no-action letter (“NAL”) policy and is planning to establish “BCFP Product Sandbox,” a regulatory sandbox that would encourage financial institutions to explore innovative products. The revamped policy would address the shortcomings in the 2016 version and streamline the application submission and review process, thus providing banks with increased incentives to seek NALs. Specifically, the revised policy proposes the following key changes:

  • Including language in NALs that the CFPB would not make supervisory findings or bring a supervisory or enforcement action under its UDAAP authority or other authority within its jurisdiction, so long as the NAL recipient acts in good faith and substantially complies with the conditions of the letter;
  • Decreasing the number of required items of information from 15 to seven;
  • Inviting applications from trade associations, service providers, and other third-parties;
  • Including language on coordination between the CFPB and other regulators to provide alternate means of obtaining a NAL;
  • Removing any temporal limitations on NALs;
  • Removing the requirement to share data with the CFPB; and
  • Broadening the categories of information to be considered in reviewing NALs.

The “sandbox” concept would presumably allow an innovator to market a new product in a limited way without fear of penalization. To that end, “sandbox” would offer relief similar to a NAL. Additionally, participants would receive “approval relief” that protects actions or omissions made in conformity with approvals pursuant to TILA, ECOA, and EFTA, or “exemptive relief” that creates an exemption from statutory or regulatory provisions such as ECOA, HOEPA, and FDIA. The CFPB expects that relief pursuant to the sandbox concept will be limited in time—in most cases, to two years. The sandbox proposal differs from the new NAL policy in the following important ways: (1) sandbox applicants would describe the data regarding the impact of the proposed product or service and share that data with CFPB if the application is granted; (2) participants would share information about how their product or service would affect complaint patterns and default rates; (3) participants would commit to compensate consumers for material economic harm caused by the product or service; and (4) the CFPB would publish information about application denials on its website.

Comments on the proposal are due 60 days after it is published in the Federal Register.

We expect the U.S. Senate to confirm, as soon as this afternoon, President Trump’s nominee to lead the CFPB as its Director, Kathy Kraninger. A positive, though razor-thin and highly contested, outcome for Kraninger appears inevitable based on the Senate’s vote just a few days ago, strictly along party lines, to invoke “cloture” on the nomination by a margin of 50-49 (with one Republican absent), thereby prohibiting a Democratic filibuster on the confirmation. If Kraninger is not confirmed today to be the next CFPB Director, we expect confirmation to occur at least by December 21, when the current Senate session will end.

Kraninger has served in the Trump administration at the Office of Management and Budget under Mick Mulvaney, who of course has also occupied the position of Acting Director at the CFPB for the past year. She has been promoted by supporters as a highly competent government manager, but has had very little experience in consumer financial services. The extent to which she will deviate from how Mulvaney has directed the Bureau is yet to be determined but will be closely watched.

Once confirmed by the Senate, Kraninger’s term as Director would be for 5 years if she serves out the full term. This could create conflict down the line, in the event that President Trump is not re-elected. In that case, unless Kraninger resigns voluntarily (as presidential appointees at some other independent agencies have done on occasion when a new President is elected), the new President would only be able to remove her “for cause.”

While numerous litigants have challenged the constitutionality of this “for cause” limitation on the President’s authority to remove the Director, no final appellate decision has endorsed that view to date. (See our prior post, here.) However, briefing recently closed on the issue in a case now before the U.S. Court of Appeals for the Fifth Circuit, so a new decision may be near.

A recent FDIC request for information (RFI) suggests the FDIC is interested in enabling banks to offer small, short-term loans to consumers. Over the coming weeks the FDIC will be taking comments on the matter. After analyzing the comments received, the FDIC may issue guidance or regulations encouraging banks to offer these products.

FDIC data suggests that 13% of U.S. households have unmet demand for small loans from banks, representing 14.8 million potential financial consumers. This correlates with a 2017 Fed survey showing that 40% of U.S. adults would not be able to pay a $400 bill without borrowing, selling, or going broke. The FDIC wants this demand met by insured, stable, and well-regulated banks.

The FDIC’s RFI follows efforts by the Office of the Comptroller of the Currency to similarly encourage small-dollar lending by banks. The Comptroller believes that banks’ increased small-lending supply will decrease consumers’ costs and promote their long-term financial goals. The FDIC likely believes the same.

Specific comment areas the FDIC is concerned with include:

  • The small-dollar products currently offered and how much demand is unmet?
  • The potential for banks to work with third-parties
  • Risk factors
  • Regulatory or other legal factors discouraging these loans
  • Using technology to improve services

Interested parties may submit comments until January 22, 2019.

Movements by the FDIC and other federal regulators suggest that the Trump administration is pushing heavily towards making widespread small-dollar lending at banks commonplace. While the increased competition will hurt payday lenders, it should benefit consumers. Importantly, due to the complex nature of the industry, FDIC-insured lenders should consult counsel concerning any new regulations.

This Post is a “Part II” to our recent blog post describing the CFPB’s current plans to consider new rules that may narrow lenders’ exposure to “disparate-impact” liability under the Equal Credit Opportunity Act (“ECOA”), as well as other federal developments along the same lines, particularly with respect to auto lending. Today, we report on important countervailing developments at the state level, which indicate a more aggressive fair lending enforcement posture. Particularly because state laws can impose disparate-impact liability without regard to how the CFPB or the U.S. Supreme Court may interpret federal law, vigilance as to these developments is warranted.

Any review of state-level developments must account for important changes from the elections results this month at the state level. Democrats, who historically have taken a more activist position on fair lending, flipped the attorney general’s office from Republicans in four states (Colorado, Michigan, Nevada and Wisconsin), which will mean that for the first time in the recent past a Democrat will be the top prosecutor in a majority of U.S. states. Given how often state AG enforcement matters require coalitions of cooperating AGs to pool resources, these developments can make state enforcement actions more likely.

Many of these “blue state” AGs had already expressed their “grave concerns” about indications that the CFPB may be retreating from prior positions on disparate-impact liability, particularly in the auto lending space. In a letter to Acting CFPB Director Mulvaney, those AGs also stated their intent to fill any gap created by changes at the Bureau, so as to “ensure nondiscriminatory lending to the residents of our states,” including by enforcing their own states’ prohibitions on disparate-impact discrimination. Just before sending that letter, the AGs made those same points in a letter to the U.S. Department of Housing and Urban Development (HUD) urging that HUD not tinker with its disparate-impact rule under the Fair Housing Act. Both letters emphasize that regardless of disparate-impact developments at the federal level, states still have their own disparate-impact liability laws under which they can bring, and have brought, enforcement actions.

The states also have taken more concrete steps in response to federal developments. For example, the New York State Department of Financial Services recently issued new guidance on New York’s Fair Lending Law, with a press release that explicitly linked it to statements by the CFPB. The agency reiterated that under New York law, lenders still face liability on a disparate-impact basis, including specifically “for any discrimination that may result from markup and compensation policies with third parties such as car dealers.”

Importantly, however, when it comes to imposing data collection requirements to facilitate fair lending enforcement, state power is not unlimited. In particular, there are now serious concerns that a recent change to Connecticut law on that subject is preempted by ECOA. The amendment purports to require auto lenders, in all instances, to collect information on loan applicants’ race, gender and ethnicity. Under prior law, lenders had only been required to record that information “if known.” The change appears generally inconsistent with, and in this case would therefore be preempted by, ECOA’s implementing Regulation, Regulation B. Regulation B, subject to various narrow exceptions, generally prohibits lenders from asking an applicant to identify his or her race, sex, and ethnicity (as well as certain other protected characteristics, like religion). 12 C.F.R. § 1002.5(b). Because of the preemption concerns, the Connecticut Banking Department recently published a memorandum stating that it would be taking a “no-action” position, and therefore not enforcing, the new law until further notice. The agency also indicated that it has submitted a formal request to the CFPB for an Official Interpretation as to whether the new law is preempted by Regulation B.

On November 13, 2018, the Supreme Court agreed to review the Fourth Circuit’s decision in Carlton & Harris Chiropractic, Inc. v. PDR Network, LLC, 883 F.3d 459, 462 (4th Cir. 2018), addressing whether the Hobbs Act requires district courts to accept the Federal Communication Commission’s interpretation of the Telephone Consumer Protection Act. The case could affect the judiciary’s power to interpret agency rules.

A split Fourth Circuit panel held that the Hobbs Act, 28 U.S.C. § 2341 et seq. – also known as the Administrative Orders Review Act – requires district courts to defer to FCC rules interpreting the TCPA. District courts lack authority, the majority held, to apply Chevron’s two-step analysis in deciding whether to adopt such rules.

Carlton & Harris, a West Virginia chiropractic office, filed a class action against PDR Network, the publisher of a physician’s reference book. Carlton & Harris alleged that PDR violated the TCPA by sending a fax inviting it to reserve a free e-book on PDR’s website. PDR moved to dismiss the complaint on the grounds that offering a free e-book was not an “unsolicited advertisement” under the TCPA, 47 U.S.C. § 227(b)(1)(C), because the book was not for sale. Carlton & Harris responded that a 2006 FCC Rule interpreted the term “unsolicited advertisement” broadly enough to include promoting goods at no cost.

The district court sided with PDR, holding that the TCPA’s definition of the term was unambiguous under Chevron’s step one and did not include free promotions. It declined to follow the FCC’s rule.

A divided Fourth Circuit panel reversed, holding that the Hobbs Act, which gives federal appellate courts exclusive jurisdiction “to determine the validity of” FCC rules interpreting the TCPA, precluded the district court from reaching Chevron’s step one. The Hobbs Act bound the district court to apply the FCC’s rule without ever comparing it to the statute. The dissent countered that the Hobbs Act did not strip the district court of its judicial review power because it never held the rule invalid. The district court, in the dissent’s view, simply gave no deference to the rule because the statute’s plain language controlled the outcome of the case. The dissent warned against equating a decision that a statute is unambiguous with a decision that an agency’s rule is invalid.

PDR argued in its certiorari petition that the federal circuits are split on whether a district court must automatically defer to the FCC’s interpretation of the TCPA. PDR took the position that the Hobbs Act bars only facial challenges to an agency’s orders before a district court, not challenges to how an order applies to a particular set of facts.

In light of Veterans Day, there are some recent notable developments regarding the Military Lending Act (MLA) worth discussing. Enacted in 2006, the MLA caps the annual interest rate for an extension of consumer credit to a servicemember and/or their dependents at thirty six percent, among other protections. The MLA initially applied to a narrow range of payday, auto title, and tax refund anticipation loans, but was expanded in 2015 to include credit cards, installment loans and overdraft lines of credit.

The Consumer Financial Protection Bureau (CFPB) recently announced it plans to end supervisory examinations for alleged violations of the MLA. Supervisory examinations are one of the agency’s key tools to ensure that supervised entities comply with federal consumer financial laws and allow the agency to proactively uncover abuses and patterns of illegal practices by companies suspected of wrongdoing.

According to the CFPB’s Acting Director Mick Mulvaney, neither the Dodd-Frank Act nor the MLA contain explicit provisions for it to conduct supervisory examinations related to alleged violations of the MLA. Under the Obama Administration, the agency conducted dozens of investigations into payday and other lenders pursuant to the MLA without any significant legal opposition or challenges.

According to Mulvaney, the CFPB plans to ask Congress to provide it with express authorization to conduct active monitoring of lenders’ MLA compliance. With the Democrats achieving a majority in the House, Congress may very well introduce legislative changes in January 2019.   However, until these changes are enacted, the CFPB plans to halt its use of supervisory examinations to investigate alleged MLA violations.

In response to this announcement, a coalition of thirty-three, bi-partisan state attorneys general sent a letter the CFPB, asking it to reverse course. The coalition argued that MLA permits the CFPB to conduct supervisory examinations and implored the agency to continue strong enforcement of the MLA. Consumer groups and groups representing servicemembers and their families also strongly oppose the CFPB’s change in position.

For financial institutions, the CFPB’s change in supervisory policy will mean reduced oversight through routine supervisory examinations based solely on the MLA. While the CFPB will continue to pursue cases against creditors for violations of the thirty-six percent interest rate cap and other MLA prohibitions, it will rely solely on complaints from servicemembers, rather than its own examinations to uncover violations.

A year ago, the CFPB reported that it had handled over 91,000 complaints from servicemembers, veterans, and their families since 2011. Its 50-state snapshot showed servicemembers are less likely to submit complaints than non-servicemembers about mortgages and credit reporting.

 

In its recently published Fall 2018 Rulemaking Agenda, the Bureau of Consumer Financial Protection announced that it is considering future rulemaking activity regarding the requirements of the Equal Credit Opportunity Act (“ECOA”) – specifically, “concerning the disparate impact doctrine in light of recent Supreme Court case law and the Congressional disapproval of a prior Bureau bulletin concerning indirect auto lender compliance with ECOA and its implementing regulations.”

In May, President Trump signed a joint resolution passed by Congress disapproving the Bureau’s March 21, 2013 Bulletin titled “Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act.” The Bulletin’s purpose was to “provide[] guidance for indirect auto lenders within the Bureau’s jurisdiction on ways to limit fair lending risk under the ECOA.” The Bulletin had been controversial from the start, suggesting that indirect auto lenders — who purchase and service loans made by auto dealers that fit criteria agreed to between the dealer and lender — consider imposing controls on dealer markup and eliminate the dealer’s discretion to markup buy rates.

Acting Bureau Director Mick Mulvaney praised the congressional resolution, continuing the Bureau’s move away from the fair lending enforcement priorities of the Bureau’s first Director, Richard Cordray (who, as an aside, was just defeated this past Election Day as the Democratic nominee for Governor of Ohio). Mulvaney thanked President Trump and Congress “for reaffirming that the Bureau lacks the power to act outside of federal statutes.” Mulvaney also referred to the Bulletin as an “instance of Bureau overreach,” and asserted that the initiative “seemed like a solution in search of a problem.” He indicated then that Bureau rulemaking on disparate impact would reflect another theme of his approach: a move toward formal rulemaking in lieu of bulletin issuance or “regulation by enforcement.”

Although the Bureau’s Rulemaking Agenda does not address the details of the contemplated rulemaking activity around ECOA, the Agenda’s reference to “recent Supreme Court case law” suggests that any rulemaking may be designed to address unanswered questions following the Supreme Court’s 2015 decision in Tex. Dep’t of Housing & Community Aff. v. Inclusive Communities Project, Inc., 135 S. Ct. 2507 (2015), in which the Court upheld the concept of disparate impact liability under the other principal federal lending discrimination law, the Fair Housing Act, but also emphasized that disparate impact litigants must prove causation – in other words, proof of a statistical disparity among racial groups alone is not sufficient. Inclusive Communities also imposed other restrictions on disparate impact liability.

Potential Bureau rulemaking might focus on application of the Court’s holdings to ECOA. Such a rule would be more durable than the Bureau’s earlier fair lending bulletin, remaining in effect unless altered by later rulemaking (and thus surviving any future leadership change at the Bureau). A rule would also be binding on other federal agencies and the courts, and thus could provide much-desired clarity for lenders.

On October 25, 2018, the Conference of State Bank Supervisors (CSBS) renewed its lawsuit against the Office of the Comptroller of the Currency (OCC) seeking to prevent the OCC from issuing its long awaited special-purpose bank charters to fintech companies. The OCC recently announced that it would begin accepting applications for the special-purpose charter, a move that would allow the OCC to regulate fintech companies similar to their supervision of national banks.

The lawsuit, filed in the U.S. District Court for the District of Columbia, comes on the heels of a similar suit brought against the OCC in the Southern District of New York by the New York State Department of Financial Services (DFS) Superintendent Maria T. Vullo. Both complaints challenge the OCC’s authority in providing the special-purpose charter under the National Bank Act (NBA) arguing that fintech “nonbanks” do not fall within the “business of banking” or any other authorized special-purpose provision. The lawsuits place a significant emphasis on the role of the state regulator in the U.S. dual-banking system, arguing that states are uniquely qualified to regulate banking practices and enable financial innovation. In addition to lacking statutory authority, the lawsuits argue that the OCC’s actions were arbitrary, unconstitutional, and procedurally defective, as the OCC failed to adhere to notice provisions under the NBA.

Since the OCC’s first public announcement of the charter in 2016, the special-purpose charter has faced criticism from state regulators. Both the CSBS and DFS previously filed complaints questioning the OCC’s statutory authority, but the complaints were dismissed as speculative and unripe for judicial review.

On September 30, 2018, California enacted the nation’s first small business truth-in-lending law when Governor Jerry Brown signed into law SB 1235. The law aims to protect small businesses from predatory lending practices by requiring increased transparency of certain business-purpose loans marketed to small businesses.

SB 1235 draws comparisons to the federal Truth in Lending Act, which imposes disclosure requirements for consumer-purpose, but not business-purpose loans.  SB 1235 covers “commercial financing,” defined to include commercial loans, commercial open-end credit plans, factoring, and merchant cash advances, for transactions less than $500,000.  Of note, SB 1235 applies to nondepository institutions, such as an “online lending platform,” and exempts traditional depository institutions.

Disclosures required by the law include: (i) the total amount of funds provided, (ii) the total dollar cost of the financing, (iii) the term or estimated term, (iv) the method, frequency, and amount of payments, (v) the description of prepayment policies, and (vi) the annualized rate of the total cost of financing. The California Department of Business Oversight (DBO) is tasked with developing regulations to clarify the ambiguous scope of SB 1235.

The law has garnered broad industry support from signatories to the Small Business Borrowers’ Bill of Rights, which encompasses small business lenders, fintech companies, advocacy groups, and community organizations. Some business groups, including the Commercial Finance Association and Electronic Transactions Association, have chosen not to support the bill.

 

 

In the latest sign of regulatory scrutiny of asset-advance companies offering consumers what regulators believe are in fact regulated “credit” under federal law and “loans” under state law, the Bureau of Consumer Financial Protection (BCFP) filed its first new lawsuit under Acting Director Mulvaney last Thursday. The complaint, filed in the Central District of California, alleges that a so-called pension-advance company, Future Income Payments, LLC, its President and affiliates falsely marketed high-interest loans as mere purchases of consumers’ rights to future cash income streams on pensions and other assets.

This action continues the Bureau’s and state regulators’ focus on such asset-advance enterprises: see action against Pension Funding, LLC and others here; action against RD Legal Funding, a litigation settlement advance company, here; and the Bureau’s 2015 “Consumer advisory: 3 pension advance traps to avoid.” In its new complaint, the BCFP complaint alleges that the defendants failed to treat their products as “credit” and “loans,” and alleges violations of the Truth-in-Lending Act and the Consumer Financial Protection Act for (i) failure to follow federal credit disclosure requirements, (ii) engaging in deceptive marketing practices, and (iii) failure to follow various state laws governing “loans.”

In this case, the BCFP specifically alleged that Defendants, based in Irvine, CA, lured senior citizens, disabled veterans, and other vulnerable consumers into borrowing money at deceptively high interest rates. The company allegedly offered consumers lump-sum payments of up to $60,000 in exchange for their assigning to the company a larger amount of their future pension and other income streams. Marketing the product as a “purchase” and not a loan, the company allegedly claimed that the advance was interest-free and a useful way to pay off credit card debt. In fact, the Bureau alleges, the discount applied to consumers’ future income streams was a disguised form of interest, equivalent to rates of up to 183%.

Interestingly, though, the Complaint does not address exactly why the challenged transactions are, in fact, extensions of “credit” under the federal Truth-in-Lending Act’s definition of that term and “loans” under state law. We will continue to track the Bureau’s analysis of those issues, because they are arising repeatedly as Fintech and other new companies develop products that seek, in a wide variety of forms, to offer consumers advances in exchange for future cash streams.