Consumer Finance Roundup for March 2023 | Practical Law

Consumer Finance Roundup for March 2023 | Practical Law

A roundup of recent developments in consumer finance.

Consumer Finance Roundup for March 2023

Practical Law Legal Update w-038-6145 (Approx. 12 pages)

Consumer Finance Roundup for March 2023

by Practical Law Finance
Published on 29 Mar 2023USA (National/Federal)
A roundup of recent developments in consumer finance.
The following is a roundup of recent developments in consumer finance.

Second Circuit Finds the CFPB's Funding Structure Constitutional

On March 23, 2023, the US Court of Appeals for the Second Circuit held that the Consumer Financial Protection Bureau's (CFPB) funding structure is constitutional and does not violate either:

No Violation of Appropriations Clause

The Second Circuit ruled that the Appropriations Clause:
  • Only requires that an act of the US Congress must approve the payment of any money out of the US Treasury.
  • Does not require that the CFPB's funding have an annual or other time limited appropriation or that its appropriations be drawn from a particular source.
The Second Circuit also indicated that the Appropriations Clause's history requires that the US Congress specify an appropriation's purpose, limit, and fund, which the US Congress did when it established the CFPB's funding structure in the Consumer Financial Protection Act (CFPA) by:
  • Setting out the CFPB's five objectives.
  • Limiting the amount the CFPB can draw to 12% of the Federal Reserve System's operating expenses.
  • Specifying the Federal Reserve's combined earnings as the source of the CFPB's funding.

No Violation of Nondelegation Doctrine

In finding the CFPB's funding structure proper under the nondelegation doctrine, the Second Circuit ruled that this doctrine is lenient and that the US Congress provided the requisite intelligible principle by stating five objectives and six primary functions for the CFPB in the CFPA. The US Congress satisfied the requirements of the nondelegation doctrine by clearly stating the general policy, applicable public agency, and boundaries of its delegated authority.

Practical Implications

The Second Circuit decision creates a circuit split on the constitutionality of the CFPB's funding structure. Resolution of the split depends on the US Supreme Court's decision on the CFPB's appeal of the Fifth Circuit decision, which it will hear in its next term.

New York District Court Rules Cryptocurrencies Constitute Funds Under EFTA

On February 22, 2023, the US District Court for the Southern District of New York held that cryptocurrencies constitute funds under the Electronic Fund Transfer Act (EFTA) (15 U.S.C. §§ 1693 to 1693r) (Rider v. Uphold HQ Inc., (S.D.N.Y. Feb. 22, 2023)).
The district court first determined that the defendant, a cryptocurrency exchange on whose platform users can transfer, purchase, trade, hold, and sell cryptocurrencies:
The key question for the district court was whether cryptocurrencies are funds under the EFTA. The district court looked at the definitions of "funds" and "cryptocurrencies" in Black's Law Dictionary and determined cryptocurrency to be "a digital form of liquid, monetary assets that constitute 'funds' under the EFTA." Based on this determination, the district court dismissed the defendant's motion to dismiss the plaintiff's EFTA claim. The district court rejected the defendant's reliance on a CFPB 2016 final rule, Prepaid Accounts Under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z) (81 Fed. Reg. 83934, 83978-83979 (Nov. 22, 2016)), because in that final rule the CFPB specifically took no position on the EFTA's application to virtual currencies and services.

CFPB Protects Military Families

The CFPB entered into consent orders with an auto title lender and a mortgage lender, each a repeat offender, to resolve alleged violations of the financial rights of military servicemembers and their families (MLA covered consumers) and other consumers.

Consent Order with Auto Title Lender

On February 23, 2023, the CFPB issued a press release announcing a consent order with TMX Finance LLC (TitleMax) (TitleMax consent order) to resolve allegations that TitleMax violated:
  • The Military Lending Act (MLA) (10 U.S.C. § 987) and its implementing regulations (32 C.F.R. §§ 232.1 to 232.13) by extending and servicing auto title loans (military auto title loans) to MLA covered consumers, a violation of 32 C.F.R. §232.8(f). The TitleMax consent order also alleged MLA violations in connection with military auto title loans by:
    TitleMax failed to comply with its own policies prohibiting military auto title loans by:
    • ignoring responses from a database that a consumer was an MLA covered consumer;
    • changing a consumer's personally identifiable information so that the consumer would not be an MLA covered consumer; or
    • failing to take any steps to confirm if a consumer was an MLA covered consumer.
  • Section 1036(a)(1)(B) of the CFPA (12 U.S.C. § 5536(a)(1)(B)) because it engaged in unfair, deceptive, or abusive acts or practices (UDAAP), as defined in Section 1031 of the CFPA (12 U.S.C. § 5531), by extending other auto title loans for which it charged a fee for insurance for not recording its lien on a vehicle's title (non-file insurance fee) on a loan:
    • for which it had previously recorded its lien;
    • that was unsecured; or
    • for which it did not obtain the insurance coverage.
The Truth in Lending Act (TILA) (15 U.S.C. §§ 1601 to 1667f) and TILA's implementing Regulation Z (12 C.F.R. §§ 1026.1 to 1026.61) by not including the non-file insurance fee in its computation of the finance charge or annual percentage rate (APR) (12 C.F.R. §§ 1026.4(a), 1026.17, 1026.18(d), and 1026.18(e)). Among other things, the TitleMax consent order requires TitleMax to:
  • Pay a $10 million civil penalty.
  • Reserve $5.05 million, and create a plan, to provide redress to:
    • impacted MLA covered consumers by paying them all the payments they made on military auto title loans, transportation costs for the loss of each vehicle securing a military auto title loan that was repossessed (at the rate of $75 for each day from repossession to return or sale of the vehicle), and the replacement cost of any repossessed vehicle sold or not returned by the consent order's effective date; and
    • consumers impacted by TitleMax's CFPA, TILA, and Regulation Z violations by paying them all non-file insurance fees, all interest accrued on any financing of the non-file insurance fees, and the loss of use of the amount of the non-file insurance fees and interest.
  • Satisfy various other compliance and reporting requirements.

Consent Order with Mortgage Lender

On February 27, 2023, the CFPB issued a press release announcing a consent order with RMK Financial Corporation (RMK) (RMK consent order) to resolve allegations that RMK violated an April 19, 2015 Consent Order with the CFPB, including by:
  • Continuing to engage in practices prohibited by the 2015 Consent Order, including:
    • disseminating advertisements for mortgages that used the names, logos, and seals of the US Department of Veterans Affairs (VA) or the Federal Housing Administration (FHA) and other design elements that "falsely implied that [RMK] was, or was affiliated with, the VA or FHA" or that the VA or FHA sent the advertisements or was the loan provider;
    • marketing variable rate mortgages through mailers that disclosed only the initial annual interest rate and did not disclose, or only disclosed in small print, either the other annual interest rates that would apply during the loan term or the period when each interest rate would apply; and
    • not disclosing, when it advertised a monthly payment, that the payment amount did not include taxes and insurance premiums that would increase the actual payment amount over the advertised payment amount.
  • Violating Sections 1031 and 1036 of the CFPA (12 U.S.C. §§ 5531 and 5536), the Mortgage Acts and Practices – Advertising Rule (Regulation N) (12 C.F.R. §§ 1014.1 to 1014.7), or Regulation Z by:
    • misrepresenting its affiliation with a government agency or the government agency's involvement with its mortgage products (12 C.F.R. § 1014.3(n));
    • misrepresenting the existence of time limits on VA and FHA benefits;
    • misrepresenting an advertised loan's fees and costs (12 C.F.R. § 1014.3(c));
    • misrepresenting a consumer's cost savings compared to the consumer's existing loan;
    • misrepresenting how much a consumer would receive from a mortgage credit product (12 C.F.R. § 1014.3(j));
    • misrepresenting a consumer's ability or likelihood of obtaining an advertised mortgage, credit terms, or refinancing (12 C.F.R. §§ 1014.3(q) and 1014.3(r));
    • advertising unavailable credit terms (12 C.F.R. § 1026.24(a));
    • disclosing a loan's simple interest rate more conspicuously than its APR (12 C.F.R. § 1026.24(c));
    • disclosing only the initial annual interest rate on a loan or the initial monthly payment without disclosing, or clearly and conspicuously disclosing, the other annual interest rates that would apply during the loan term, the period each interest rate would apply, or other payments that would apply during the loan term (12 C.F.R. §§ 1026.24(f)(2)(i) and 1026.24(f)(3)(i)); and
    • sending advertisements that disclosed the name of a consumer's current lender more prominently that RMK's name and not clearly and conspicuously stating that RMK was not affiliated with or acting on behalf of the consumer's current lender (12 C.F.R. § 1026.24(i)(4)).
Among other things, the RMK consent order:
  • Permanently bans RMK from mortgage lending activities or assisting others in, participating in, receiving compensation from, mortgage lending activities.
  • Requires RMK to pay a $1 million civil money penalty, sell its mortgage loans, and not misrepresent any government affiliation or existence of a government benefit or any facts material to consumers.

CFPB Requests Comments in Review of Mortgage Loan Originator Rules

On March 16, 2023, the CFPB published a request for comment in connection with its review of Regulation Z's Mortgage Loan Originator Rules (MLO rules) (12 C.F.R. §§ 1026.25(c)(2), 1026.36(a), 1026.36(b), and 1026.36(d) to 1026.36(j)) under Section 610 of the Regulatory Flexibility Act. The CFPB specifically seeks comment on the economic impact of the MLO rules on small entities.
The MLO rules are designed primarily to protect consumers by reducing incentives for loan originators to steer consumers into loans with particular terms and by ensuring that loan originators are adequately qualified. Among other things, the MLO rules:
  • Prohibit compensating loan originators based on a term (or proxy for a term) of a mortgage transaction.
  • Prohibit a loan originator from receiving compensation from both the creditor and consumer on the same transaction.
  • Prohibit steering practices that do not benefit consumers.
  • Implement licensing and qualification requirements for loan originators.
  • Prescribe rules of recordkeeping and compliance.
The request for comment references previously received input on the MLO rules from industry and other stakeholders, including:
  • Whether to permit different loan originator compensation for originating State housing finance authority loans as compared to other loans.
  • Whether to permit creditors to decrease a loan originator's compensation due to the loan originator's error or to match competition.
  • How the MLO rules apply to loans originated by mortgage brokers and retail loan originators differently.
Comments must be received on or before May 1, 2023.

DOJ and CFPB File Statement of Interest in Appraisal Bias Lawsuit

On March 13, 2023, the US Department of Justice (DOJ) and the CFPB filed a statement of interest in a lawsuit by homeowners against a real estate appraiser, a real estate appraisal company, and a lender alleging violations of, among other things, the Fair Housing Act (FHA) (42 U.S.C. §§ 3601 to 3631) and the Equal Credit Opportunity Act (ECOA) (15 U.S.C. §§ 1691 to 1691f).
The DOJ and CFPB argue that:
  • Since the defendants are seeking dismissal of the complaint, the proceedings are at the pleading stage and the plaintiffs:
    • only need to plead facts plausibly showing the defendants' discriminatory intent in connection with their claim of disparate treatment; and
    • do not need to either offer direct evidence of discriminatory intent or plead a prima facie case that satisfies the burden-shifting requirements of McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973). (Under McDonnell Douglas, a plaintiff must make a prima facie case of disparate treatment to create a presumption of unlawful intent, the defendant must then provide evidence it had a nondiscriminatory reason for its action, and the plaintiff can then show the defendant's justification to have been pretextual.) According to the statement of interest, the McDonnell Douglas framework applies at the summary judgment or trial stage, not at the pleading stage.
  • A lender can be liable under the FHA and ECOA if it "relies on an appraisal that it knows or should have known to be discriminatory." The regulations that implement:
    • the FHA prohibit use of a residential real property appraisal in a financing if the user of the appraisal knows or should know the appraisal takes race into consideration (24 C.F.R. § 100.135(d)(1)); and
    • ECOA prohibit a creditor from using a prohibited basis in evaluating an applicant's creditworthiness (12 C.F.R. § 1002.6(b)(1)) or considering information that discriminates against an applicant on a prohibited basis when evaluating an application (12 C.F.R. § 1002.6(a)).
    In addition, 12 C.F.R. § 128.11(a) prohibits use or reliance on an appraisal that a user knows or should know discriminates under the FHA or ECOA.
    The DOJ and CFPB also challenge the defendant lender's claim that the Mortgage Reform and Anti-Predatory Lending Act (Mortgage Reform Act) prevented it from complying with the FHA and ECOA. Although the Mortgage Reform Act prohibits creditors from causing appraised values to be based on other than an appraiser's independent judgment or influencing or encouraging a certain value to help make or price a transaction (15 U.S.C. §§ 1639e(b)(1) and 1639e(b)(3)):
    • actions to avoid race discrimination comply with the FHA, ECOA, and other anti-discrimination laws and do not cause an appraised value to be based on something other than the appraiser's independent judgment or encourage a specific value;
    • the defendant lender could have taken action in addition to requesting the appraiser to reconsider the appraised value (such as requiring the appraiser to consider comparable properties or correct errors in the appraisal, reporting the appraiser to a licensing authority, and obtaining multiple valuations (15 U.S.C. §§ 1639e(c) and 1639e(e); 12 C.F.R. § 1026.42(c)(3)(iv)); and
    • federal civil rights laws would be rendered ineffectual if a discriminatory appraisal were sacrosanct.
  • For a claim under Section 818 of the FHA (42 U.S.C. § 3617), which prohibits retaliation for exercising fair housing rights (in this case the defendants' refusal to answer or return the plaintiffs' calls after they challenged the appraisal), a plaintiff does not need to allege an underlying violation of the FHA. FHA Section 818 does not reference such a violation, and the implementing regulation for this section specifies actions that violate this section without an underlying FHA violation (24 C.F.R. § 100.400(c)).

CFPB Issues Findings on Buy Now, Pay Later Borrowers

On March 2, 2023, the CFPB issued a press release containing a report on the financial profiles of Buy Now, Pay Later (BNPL) borrowers.
The report defines BNPL as a zero-interest loan for purchases at the point of sale that a consumer must repay in four or fewer installments.
The report's findings include:
  • The types of consumers more likely to use BNPL are:
    • Blacks;
    • Hispanics;
    • females;
    • consumers with household income between $20,001 and $50,000 (with BNPL the least popular with consumers with household income above $200,000);
    • consumers with at least a bachelor's degree; and
    • consumers under 35.
  • BNPL users have:
    • access to traditional credit (such as credit cards, retail cards, personal loans, and student loans) and use it at higher rates than non-BNPL users;
    • lower average credit scores;
    • less non-retirement savings, cash, and credit card liquidity; and
    • higher measures of financial distress. These include higher credit card debt and utilization rates, higher utilization of alternative financial services that charge high interest rates (such as bank account overdrafts and payday loans, pawn loans, and auto title loans), and a higher likelihood of revolving on their credit cards (meaning that they pay less than the full balance) or of being overdrawn or delinquent. However, financial distress markers existed for BNPL users before BNPL usage became widespread in 2019, and the CFPB could not determine whether consumers in distress were more likely to use BNPL or BNPL use causes increased usage of non-BNPL products.
  • Since BNPL providers charge late fees if a consumer does not pay on time, BNPL could be more expensive than a credit card depending on how long the consumer takes to repay.
  • More research is needed to determine if BNPL products improve or exacerbate the financial health of financially distressed consumers.

CFPB Criticizes Credit Card Company Credit Reporting Practices

On February 16, 2023, the CFPB issued a blog post and letter reporting on its findings from responses to its May 25, 2022 letter to the six largest credit card companies that requested information on the companies' practices relating to their furnishing of actual payment information to consumer reporting agencies (CRAs) (that is, "the amount a borrower repays each month in a credit account, as opposed to the minimum payment or full balance").
The findings include that:
  • Although the CFPB did not investigate explicit collusion, after one credit card company started suppressing actual payment information, the others started doing so.
  • No credit card company admitted to currently furnishing actual payment information or indicated whether it would resume doing so (and some credit card companies indicated no intention of doing so).
  • Credit card companies suppress actual payment information to make the offering of better rates, products, and services to less risky customers harder for their competitors and to not be at a competitive disadvantage.
The CFPB notes that it considers the suppression of actual payment information anti-competitive because it:
  • Limits the competitive functioning of the credit market.
  • Removes a valuable tool for lenders and consumers.
  • Impairs consumers' ability to demonstrate creditworthiness and to receive credit based on how they manage and pay their credit obligations.
The CFPB also notes that it will continue to monitor and address credit card company practices that impede effective market competition and brief financial regulators and law enforcement on its findings.

Democratic Senators Urge Federal Banking Regulators to Examine Zelle

In a letter dated March 2, 2023, five Democratic Senators urged the Federal Reserve Board (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC) to take action to protect customers who fall victim to scams and fraud when using the Zelle instant payment app.
The letter explains that "although Zelle is marketed as a convenient and inexpensive way to transfer money within the supervised banking system, its model has opened the door to fraud and scams on a tremendous scale." Currently banks take the position that they are under no obligation under the EFTA to make customers whole "when fraudsters use the network to steal their hard-earned money." The letter notes that this may give rise to, among other things, a loss of customer confidence, safety and soundness risk, as well as a risk of unfair, deceptive, or abusive practices if a bank's communications lead customers to expectations of safety.
The letter urges regulators to:
  • Closely review and examine the customer reimbursement policies and the anti-money laundering practices of all of the banks that participate in the Zelle network.
  • Examine Early Warning Services, the company that operates the Zelle network and is owned by seven of the nation's largest banks, on an ongoing basis to evaluate safety and soundness risks as well as the company’s compliance with consumer protection.
  • Coordinate their supervisory approach with the CFPB.

CFPB Receives FCRA Rulemaking Petition

In connection with anticipated rulemaking under the Fair Credit Reporting Act (FCRA) (15 U.S.C. §§ 1681 to 1681x) announced by the CFPB in its Fall 2022 Regulatory Agenda, the National Consumer Law Center submitted a petition on March 3, 2023 recommending that the rulemaking:
  • Establish strict requirements to regulate the furnishing of information regarding debt in collections by third-party debt collectors and debt buyers.
  • Require translation of consumer reports by the national CRAs into the eight languages most frequently used by limited English proficient consumers.
  • Establish an Office of Ombudsperson to assist consumers who have been unable to fix errors in their consumer reports from the national CRAs and other CRAs within the CFPB's supervisory authority.