OCC: Fintechs May Now Apply for Bank Charters

OCC: Fintechs May Now Apply for Bank ChartersThe Office of the Comptroller of the Currency announced, in a highly anticipated decision, that it would begin to consider special-purpose charter applications from fintech entities. This move, which has been the subject of months of industry speculation, came mere hours after the Department of the Treasury endorsed a national charter for fintech companies. This development will allow fintech firms to opt in to a national regulatory scheme rather than the current state law regulation in this market sector.

The OCC’s decision was the subject of a great deal of resistance from state regulators while it was under consideration, and the decision was criticized heavily by state regulators immediately following Tuesday’s announcement. Regulators from New York and California, in particular, described the move as a “regulatory train wreck in the making” and “not authorized under the National Bank Act.”

The OCC’s decision, however, appears focused upon increasing marketplace innovation and inclusivity. Commissioner Joseph Otting released a statement applauding the potential for increased consumer choice, adding that “Providing a path for Fintech companies to become national banks can make the federal banking system stronger by promoting economic growth and opportunity, modernization and innovation and competition.” The Bureau of Consumer Financial Protection’s (BCFP) acting director Mick Mulvaney also issued unprecedented comments on the decision. Mulvaney stated “We welcome the important steps taken by our fellow agencies to promote innovation. Success will be determined by how well U.S. regulators coordinate their efforts. We look forward to working with our State and Federal partners to ensure American global leadership in the Fintech space for years to come.”

Observers believe that chartering qualified fintech companies as national banks will also have significant public policy benefits. The national bank charter provides a framework of uniform standards and supervision; applying this framework to qualified fintech companies may level the playing field with regulated institutions. In addition, applying the OCC’s uniform supervision over national banks, including fintech companies, will assist in promoting consistency in the application of laws and regulations across the country and in promoting the fair treatment of consumers.

While this is a significant development, it will require fintech companies to carefully consider whether they can meet the application requirements, as well as consider what institutional changes they may need to accomplish to comply with OCC supervision. Under the strict parameters set forth by the OCC, fintech companies have significant decisions ahead regarding whether to seek this special-purpose charter. As government at all levels becomes more active in the fintech space, fintech companies need to consider how and when they engage with all levels of government to ensure that their business is understood and their interests protected.

Administration Seeks to Up the Bar for Student Loan Forgiveness Based on Fraud

Administration Seeks to Up the Bar for Student Loan Forgiveness Based on FraudThe Trump administration is looking to stiffen the criteria for borrowers to obtain forgiveness of their student loans based on fraud. If enacted, this higher criteria would mark a significant shift for students who seek forgiveness under the established borrower defense claim.

According to Secretary of Education Betsy DeVos, the Department of Education’s “commitment and our focus has been and remains on protecting students from fraud. The regulations proposed today accomplish that by laying out clear rules of the road for higher education institutions to follow and holding institutions, rather than hardworking taxpayers, accountable for making whole those students who were harmed by an institution’s deceptive practices.”

The proposed Institutional Accountability regulations would, among other things:

  • Require students to be in default before they could apply for the loan forgiveness
  • Require students to show that the school had an “intent to deceive” or exhibited reckless disregard for the truth.
  • Replace a state standard for adjudicating claims with a federal standard to expedite review of student claims
  • Facilitate collection of evidence to decide claims and ensure the Secretary of Education can recoup losses from the institutions where there are successful borrower defense claims.
  • Reduce the time to file a borrower defense application from six years to three years.
  • Would allow schools to use arbitration agreements during enrollment, which previously resulted in the loss of federal funding.
  • Encourage students to seek remedies directly from the schools that committed the misrepresentation

The Obama administration established the “borrower defense” to allow student loan forgiveness if a school misled students or engaged in other misconduct, but the borrower was only required to show that the school had engaged in false advertising. The proposed requirements, however, would establish a higher test to show that the misrepresentation was done intentionally or with “reckless disregard of the truth.” Additionally, the Obama-era rule allowed for forgiveness of a group all at once if the school was shown to be clearly fraudulent, but the new rule would consider each application on a case-by-case basis.

Although consumer advocates have sharply criticized the proposal as making it more difficult for victims of fraud, the department responded that it is only proposing stronger requirements to document the fraud and that “if a student has actually been defrauded, it is not harder at all to receive loan relief,” according to Department of Education Deputy Press Secretary Sara Broadwater. The department reiterated that it seeks to protect both the borrowers as victims of fraud as well as taxpayers who pay for fraudulent loan forgiveness claims.

According to one source, about 140,000 student loan borrowers have applied for forgiveness under the borrower defense rule in the past three years. Most fraud claims to the Deptarment of Education relate to for-profit schools, which receive approximately 15 percent of the government’s financial aid.

The proposed regulations are open for public comment over the next 30 days to allow the Education Department to finalize the rule by November 1. The new rules would go into effect in July 2019. Stay tuned in the coming months as both industry and consumer advocates provide reaction to the proposals.

BCFP Enters Consent Order with Small Dollar Lender

BCFP Enters Consent Order with Small Dollar LenderTriton Management Group, Inc. (Triton) and several related companies entered into a consent order with the Bureau of Consumer Financial Protection (Bureau) in which Triton agreed to a $1 civil money penalty, $500,000 in consumer redress, and injunctive relief. Triton is a financial services company that originates, purchases, services, and collects on short-term secured and unsecured loans. Triton operates over 100 locations in Alabama, Mississippi, and South Carolina.

The Highlights

The Bureau alleged that Triton engaged in deceptive conduct under the Consumer Financial Protection Act (CFPA) by providing misleading disclosures regarding the finance charge paid on auto title loans originated at one of six Mississippi locations. Mississippi law requires auto title loans to have a term of not more than 30 days, but allows for repeated extensions of the repayment period every 30 days provided certain conditions are met. Triton, in its loan documents, provided the finance charge and total cost of the loan associated with a one-month period, but provided a 10-month payment schedule. The Bureau contended that this 10-month payment schedule was the presumptive payment schedule and that Triton failed to disclose the actual finance charge associated with the 10-month payment schedule.

The Bureau further alleged that the failure to provide the finance charge associated with the 10-month payment schedule violated the Truth in Lending Act (TILA) because it did not clearly reflect the terms of the legal obligations between the parties.

The Bureau also indicated that Triton violated TILA’s advertising restrictions by posting three in-store advertisements that included the payment amount for certain loans without disclosing the annual percentage rate. TILA requires advertisements with certain trigger terms, including the payment amount, to include other mandatory information such as the annual percentage rate.

The Bureau identified $1,522,298 in interest payments made directly or indirectly by consumers that exceeded the amount of the finance charges stated in the disclosures. However, it agreed to reduce the amount of consumer redress to $500,000 based on Triton’s financial condition. The company’s financial condition is also the likely reason that the Bureau only assessed a $1 penalty.

Impacted Industries

The Triton consent order has implications for virtually all financial services companies. While the loans at issue were short-term auto loans, the CFPA and the cited provisions of TILA apply to virtually all financial services companies.

What It Means

First, financial services companies should take note of the interplay between federal and state legal requirements. While it is impossible to be certain, it appears Triton’s efforts to comply with state law contributed to the inaccurate finance charge disclosures. While the tangled relationship between state and federal law can create compliance challenges, attempts to comply with state law do not excuse violations of federal law.

Second, financial services companies should pay close attention to their disclosures, especially disclosures regarding the amount of money paid by consumers. The post-Cordray Bureau may be less inclined to push the envelope, but this consent order indicates that the Bureau will require companies to refund payments of amounts that are not clearly disclosed. For Triton, the consumer loans made at just six of its more than 100 locations led to a potential exposure of over $1.5 million in consumer repayments—which could have been substantially higher had the Bureau imposed more than a nominal monetary penalty.

Third, financial services companies must closely monitor their advertising materials. The Bureau may have foregone an enforcement action if the three in-store advertisements were the only allegation at issue. That said, the Bureau clearly decided that the presence of only three in-store advertisements warranted mention in this consent order.

Nevada Courts Provide Additional Guidance on HOA Super Priority Lien Law for Lenders

Nevada Supreme CourtAs we’ve discussed on this blog before, Nevada’s courts remain a battleground for lenders seeking to establish that their security interests were not eliminated by homeowners’ association foreclosure sales under NRS 116. In recent weeks, the Ninth Circuit and Supreme Court of Nevada have issued new opinions providing more guidance to ultimately resolve those issues. Lenders now have more support for two of their strongest arguments. First, for loans owned by Fannie Mae and Freddie Mac, the Nevada Supreme Court held that the security interests could not have been extinguished by a homeowners’ association’s foreclosure sale due to the preemptive effect of the Housing and Economic Recovery Act (HERA), even if the loan had been placed into a securitized trust. Second, the court reaffirmed its recognition of the doctrine of tender, holding that under longstanding blackletter law, a lender’s unconditional offer to pay the full superpriority amount of the association’s lien caused that lien to be discharged, and protected the lender’s security interest in the ensuing association foreclosure sale. On the other hand, the Nevada Supreme Court also issued a decision in favor of association-sale purchasers, holding that an association’s sale of the right to receive payment from a delinquent homeowner’s account to a third party did not deprive the association of standing to foreclose upon its lien.

First, HERA seems to be the lenders’ strongest arguments, and both the Ninth Circuit and the Nevada Supreme Court have consistently ruled in favor of lenders on that point. In 2017, the Ninth Circuit endorsed the argument in Berezovsky v. Moniz, holding that HERA’s so-called “Federal Foreclosure Bar” barred NRS 116 sales from extinguishing deeds of trust securing loans owned by Fannie Mae and Freddie Mac. In March 2018, the Supreme Court of Nevada reached the same conclusion in Saticoy Bay LLC Series 9641 Christine View v. Fannie Mae.

On June 25, 2018, the Ninth Circuit issued its second major opinion on HERA in FHMLC v. SFR Investments Pool 1, rejecting an argument made by SFR (the purchaser at the association’s sale and a frequent player in the litigation) that the Federal Foreclosure Bar did not apply to loans that had been securitized. The court held that the securitization of a loan did not prevent the Federal Housing Finance Agency (FHFA) from succeeding to ownership of that loan when it became conservator of Fannie Mae and Freddie Mac. To the contrary, the court wrote that HERA “confers additional protections upon [Fannie and Freddie’s] securitized mortgage loans” (emphasis original). The court also rejected SFR’s argument that FHFA deprived it of a property right without due process. The court wrote that NRS 116 “does not mandate … vestment of rights in purchasers at HOA foreclosures sales” and so held that purchasers “lac[k] a legitimate claim of entitlement.”

Purchasers will probably continue to seek to challenge the application of HERA, even after the FHLMC decision, possibly by challenging specific evidence offered in support of the lender’s position that Fannie Mae or Freddie Mac owned the loan at the time of the association’s foreclosure sale. But both the Ninth Circuit and the Nevada Supreme Court have consistently rejected every argument the purchasers have raised to date; after FHMLC, it looks like that streak will continue.

Second, the Nevada Supreme Court recently addressed another one of the lenders’ strongest arguments: that a lender or servicer’s pre-foreclosure offer to pay the association’s superpriority lien extinguished that lien, and thereby protected the lender’s security interest in the association’s foreclosure sale. On April 27, the Nevada Supreme Court issued its opinion in Bank of America, N.A. v. Ferrell Street Trust, which reaffirmed the underlying validity of the lenders’ tender arguments, even if it did not address every issue. In Ferrell Street Trust, the court made several pro-lender statements about the law of tender: (1) Tender is sufficient to discharge the lien and preserve the lender’s interest; (2) an unjustified rejection of valid tender does not prevent the lien from being discharged; (3) the tendering party does not have to deposit a rejected payment into escrow to “keep the tender good;” and (4) an “unconditional offer to pay” is valid tender. The court reversed the district court’s grant of summary judgment for the purchaser and remanded the case for further development with proper application of the tender doctrine.

Ferrell Street Trust was an unpublished, non-binding decision and did not purport to resolve every issue concerning the application of the tender doctrine in HOA sale cases. While it is helpful in noting that the underlying premise of the tender argument appears to be valid and well-grounded in the law, we will have to wait for a more comprehensive published decision (which could come at any time) for the final word on tender.

Finally, in West Sunset 2050 Trust v. Nationstar Mortgage, LLC, the Nevada Supreme Court ruled against lenders’ interest in a case that involved an unusual, though not unique, fact pattern. In West Sunset, a third party had entered into a factoring agreement with the homeowners’ association, under which the third party received the right to any recovery by the association against a homeowner’s delinquent account. After the association foreclosed, the servicer challenged the validity of the foreclosure sale, arguing that the factoring agreement had severed the lien from the underlying debt and thereby made the lien unenforceable. The Nevada Supreme Court rejected this argument, holding that the agreement did not affect the relationship between the association and the homeowner—and thus, by extension—could not be challenged by the party with a security interest on the homeowner’s property. The court concluded with a note that it is “disinclined to so interfere with HOA’s financing practices” absent a policy rationale.

The latest trio of decisions provides some more clarity to the Nevada landscape, although—as we’ve reported for years now—there are still issues to be decided. The application of HERA seems nearly unassailable at this point, however, representing a significant victory for lenders’ interests. We will continue to monitor the courts in hopes of a similar comprehensive victory on the tender issue.

Borrower Can’t Blindly Rely on Lender’s Appraisal, Court Rules

Borrower Can’t Blindly Rely on Lender’s Appraisal, Court RulesA June 19, 2018, decision by the North Carolina Court of Appeals will likely make it more difficult for borrowers in the Tar Heel State to sue on the claim that their mortgage originator misled them as to their home’s value. In Cordaro v. Harrington Bank, FSB, the Court of Appeals underscored the need for borrowers to show they reasonably relied on the lender’s appraisal as a predicate for claims based on an allegedly inflated valuation. To demonstrate such reliance, the court held, the borrower must either show that he made an independent inquiry as to the value of the home or that he was prevented from doing so.

The plaintiff in Cordaro alleged various tort and contract claims against the lender based on a 2012 appraisal that substantially overvalued the plaintiff’s property: the appraiser selected by the lender valued the home at $1.15 million, but a valuation four years later found the home’s value was only $765,000. The court found that each of the borrower’s tort claims required evidence of the plaintiff’s justifiable reliance on the appraisal.  Although past decisions by the Court of Appeals and North Carolina Supreme Court rejected suits with insufficientallegations of reliance on an inflated appraisal, the Cordaro court acknowledged that the plaintiff’s suit was factually distinguishable. Here, the plaintiff alleged he had a verbal agreement with his builder to cancel a contract to build the home if it did not appraise for the value of the lot plus the cost of construction, and the plaintiff told the bank’s loan officer that he would not go forward with the loan if the house did not appraise for a sufficient value. Nevertheless, the court affirmed the trial court’s dismissal of the plaintiff’s complaint, holding that such reliance could not be justifiable unless the plaintiff were to allege “either that he undertook his own independent inquiry regarding the validity of the Construction Appraisal or that he was somehow prevented from doing so.” The plaintiff could not blindly rely on an appraisal conducted by the bank for its own underwriting purposes.

Cordaro suggests that the circumstances in which a lender can be sued for an allegedly faulty appraisal are quite narrow. The decision would bar virtually all claims for borrowers who do not obtain an independent appraisal of their property. At the same time, it is unlikely that a borrower who obtains her own independent valuation would thereafter rely on the lender’s appraisal. Assuming the decision withstands any further challenge, it should provide an effective argument for lenders seeking dismissal of similar suits at the pleading stage.

California Sets the Bar for Privacy with the Passage of The California Consumer Privacy Act of 2018 – Part I

California Sets the Bar for Privacy with the Passage of The California Consumer Privacy Act of 2018 - Part IAs most people started to wind down for the July 4th holiday week, California was just ramping up its “as California goes” focus on data privacy. On June 28, 2018, California passed a comprehensive data privacy bill that has been touted as the strictest in the nation.

The good news first—businesses have until January 1, 2020, to revamp privacy compliance programs, update policies, procedures and processes, and operationalize the sweeping new changes passed by the California legislature. The not-so-good news for businesses, however, is that this new law proposes a significant number of restrictions to the way businesses collect, use, store, and share personal data. In addition, consumers now have a private right of action for certain disclosures or loss of personal data. While the new California Consumer Privacy Act of 2018  amends Sections 1798.100 through 1798.198 of the California Civil Code, there is still a lot of uncertainty as to what specific requirements may be revised in the next 18 months.

This initial overview provides a few high-level practical questions to help your company get a head start on determining how best to implement this new legislation. Bradley will continue its review and coverage of this law in an ongoing series devoted to state privacy law updates, so please check back here for more information.

Who Is Affected?

According to some accounts, the act will apply to more than 500,000 U.S. companies and has the potential to affect hundreds of thousands more companies worldwide. Additionally, even though the law does not apply to information already regulated under various federal laws, it does apply to entities traditionally covered by regulations such as the Gramm-Leach Bliley Act, the Fair Credit Reporting Act, and the Health Insurance Portability and Accountability Act.

Any company that meets certain criteria and receives personal data from California residents must comply with the new statute. Note that although the act is touted as a “consumer privacy” law, California has broadly defined consumer to include “any natural person who is a California resident.”

Under the act, any company that (1) has an annual gross revenue of $25 million, (2) obtains personal information of 50,000 or more California residents, households or devices annually, or (3) derives 50 percent or more annual revenue from selling California residents’ personal information would be a covered entity under the statute. Note that parent companies and subsidiaries using the same branding are covered, even if those companies and subsidiaries do not exceed the applicable thresholds.

Why Is This Different?

In passing the act, legislators declared that it was their intent to provide Californians with specific rights to privacy, including: (1) the right to know what personal information is being collected about them; (2) the right to know whether their personal information is being sold or disclosed and to whom; (3) the right to say no to the sale of personal information; and (4) the right to access and delete their personal information.

Additionally, as currently drafted, “personal information” is defined as “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be linked, directly or indirectly, with a particular consumer or household.” The broad nature of this definition encompasses data that relates not just to a single individual, but an entire household—effectively encompassing information regarding web browsing histories, IP addresses, energy consumption, or other general information—even if no individual name is associated with it.

What Can I Do Now?

First and foremost, understand what data you collect. The concept of data mapping has been recommended by privacy professionals for some time, however, this new act makes it even more pertinent that companies map and inventory data. What information does your company collect on California residents? What are those sources of data? Is the information shared with third parties and in what context? These and many other questions will need to be answered before an entity can evaluate whether the new act will apply and in what ways the company may need to alter its practices or update its policies and procedures.

In addition, companies should start to consider whether or not current systems and processes will allow compliance with the new rights afforded to consumers, such as the ability to verify the identity of persons who make requests for data deletion, access or transfer. Also, how will companies store and maintain records on consumers who have opted out of data sharing or made a request for information?

Although the implementation of the new act is still another 18 months away, companies should begin the process of assessing the act’s impact on business processes, operations and data handling practices. Additionally, anyone affected by the act should pay close attention to potential revisions and changes to the law as we move toward January 1, 2020.

Bureau of Consumer Financial Protection Once Again Deemed Unconstitutional

Bureau of Consumer Financial Protection Once Again Deemed UnconstitutionalThe Bureau of Consumer Financial Protection has once again been deemed unconstitutional, this time in an opinion issued on June 21, 2018, by Loretta A. Preska, Senior U.S. District Judge for the Southern District of New York, in Consumer Financial Protection Bureau et al. v. RD Legal Funding LLC et al. Although there are a number of interesting components to this case, the aspect of the decision that is most likely to garner headlines is the constitutionality holding. Specifically, Judge Preska determined that the Bureau’s structure as set forth in Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act violates the Constitution’s separation of powers because it attempts to create “an independent agency that exercises substantial executive power and is headed by a single Director.”

Judge Preska notes at the outset of the constitutionality discussion that, while she certainly is aware of the contrary holding from the Court of Appeals for the D.C. Circuit on January 31, 2018, in PHH v. CFPB, the Southern District of New York is not bound by decisions of the D.C. Circuit Court of Appeals. Instead of adopting the majority’s decision from the PHH case, Judge Preska instead chose to adopt Sections I-IV of the dissent that was written by Judge Brett Kavanaugh and Section II of the dissent written by Judge Karen LeCraft Henderson.

Collectively, this means that Judge Preska held that, “based on considerations of history, liberty, and presidential authority,” the Bureau’s single director structure, whereby the director can only be removed by the president for cause, is unconstitutional. According to Judge Preska, rather than simply strike the for-cause removal provision from Title X of Dodd-Frank, the appropriate remedy for this situation is to strike the entirety of Title X.

Interestingly, the opinion also sheds light on the Bureau’s attempt to rebut the constitutional question. The Bureau filed its action in this case on February 7, 2017, while Richard Cordray was still serving as the director of the Bureau. After Mick Mulvaney was appointed by the president to serve as acting director, the Bureau filed a Notice of Ratification with the court, attempting to ratify its decision to file the enforcement action. The Bureau then apparently argued that, because Acting Director Mulvaney is removable by the president at will, the defendants’ constitutional argument was mute. Judge Preska disagreed with this argument, and noted that “the constitutional issues presented by the structure of the [Bureau] are not cured by the appointment of Mr. Mulvaney. As Defendants point out, the relevant provisions of the Dodd-Frank Act that render the [Bureau’s] structure unconstitutional remain intact.”

As a result of the unconstitutionality holding, Judge Preska dismissed the Bureau’s claims because it “lacks authority to bring [the] enforcement action,” and terminated the Bureau as a party to the action. The attorney general for the state of New York, who joined the Bureau in its suit against RD Legal Funding and the other defendants, can proceed with the case. We will continue to track this case and any other developments that occur.

The Supreme Court Levels the SEC Playing Field

The Supreme Court Levels the SEC Playing FieldIn a highly anticipated decision, the United States Supreme Court ruled the practice employed for years by the Securities and Exchange Commission of choosing administrative law judges to hear SEC enforcement actions, violates the Appointments Clause of the Constitution. The Supreme Court, in Lucia v. Securities and Exchange Commission, held that administrative law judges (ALJs) are “officers of the United States” subject to the Appointments Clause.

The SEC has long been criticized for the process of choosing ALJs to hear enforcement matters. Going forward, ALJs will need to be appointed by the president or the head of the SEC. Holding for the requirement of an appointment, the court did not agree that ALJs are regular federal employees hired through the civil service process.

The case was brought by former investment advisor Raymond J. Lucia who appealed sanctions handed down by an ALJ that included a bar from the industry, as well as a $300,000 fine. Lucia argued that his constitutional rights were violated because the ALJ was not constitutionally authorized to have such broad power. Lucia asserted that ALJs should be subject to the Appointments Clause because they carry out judicial proceedings, including evidentiary rulings and rendering decisions. Lucia (as well as others), noted that the SEC rarely overturns or gives more than a passing review to ALJ decisions.

This decision should help level the playing field, at least within the SEC, for internally handled enforcement matters.

CFPB Issues Second Consent Order under Acting Director Mulvaney

CFPB Issues Second Consent Order under Acting Director MulvaneySecurity Group, Inc. and several of its wholly owned subsidiaries entered into a consent order with the Consumer Financial Protection Bureau (CFPB) in which it agreed to injunctive relief and to pay a $5 million penalty. Security Group is a financial services company that originates, purchases, services, and collects on short-term secured and unsecured loans. Security Group operates approximately 900 locations in 21 states.

The Highlights

The CFPB alleged that Security Group engaged in unfair activity in the following ways:

  1. In-person collection visits that included:Discussing debts with consumers in places where third parties could see or overhear the interaction;
    • Handing field cards to third parties, including family members and neighbors;
    • Identifying themselves as Security Finance when speaking with neighbors;
    • Informing third parties of consumers’ delinquency;
    • Visiting consumers’ places of employment when Security Group knew or had reason to know that consumers were not allowed to have personal visitors there; and
    • Visiting consumers’ homes or places of employment with excessive frequency.
  1. Collection calls to consumers’ places of employment that included:
    • Calling consumers on shared phone lines and disclosing or risking disclosing the existence of consumers’ delinquent debts;
    • Calling consumers after being told that consumers were not allowed to receive calls at work; and
    • Failing to properly track and review cease and desist requests, which resulted in calls to parties who had previously requested that calls cease.
  1. Collection calls to third parties that included:
    • Calling third parties, including credit references, supervisors, landlords, family members, and suspected family members in a manner that disclosed or risked disclosing the existence of a delinquent debt; and
    • Failing to properly track and review cease and desist requests, which resulted in calls to parties who had previously requested that calls cease.

The CFPB also alleged that Security Group violated the Fair Credit Reporting Act by:

    • Failing to maintain written policies and procedures related to credit reporting, including policies and procedures regarding the accuracy and integrity of consumer information;
    • Failing to provide accurate information to credit reporting agencies; and
    • Failing to promptly update reported accounts to reflect account activity such as payments and settlements.

Impacted Industries

The Security Group consent order has implications for any financial services company that (1) furnishes credit reports to the credit reporting agencies or (2) collects delinquent debts from borrowers. Likely the most important aspect of this consent order to financial services companies is the fact that the CFPB used UDAAP rather than the FDCPA to pursue its debt collection claims. So, the CFPB could pursue similar claims against first-party creditors as well as third-party debt collectors.

What It Means

First, the CFPB continues to live up to Acting Director Mulvaney’s promise to narrow its focus. Since Acting Director Mulvaney took over in November of 2017, the CFPB has issued only two consent orders, dismissed two high profile cases, taken steps to delay the effective date of payday lending rules, and generally slowed rulemaking while seeking community input in a series of requests for information. A second consent order, on its own, does not indicate a return to the volume of enforcement actions under former Director Richard Cordray.

Second, the CFPB appears to be focused on the debt collection industry.  Acting Director Mulvaney has, on several occasions, noted the significant number of consumer complaints related to debt collection and the importance of those consumer complaints in shaping the CFPB’s agenda.  While one debt collection consent order certainly does not indicate a trend, the limited evidence suggests the CFPB is paying additional attention to the debt collection industry.

Third, the CFPB’s allegations provide interesting insights into the CFPB’s views on debt collection and credit reporting practices.

  • The CFPB continues to disfavor in-person collection practices, and the Security Group consent order suggests that in-person collection efforts inherently run the risk of unfairly alerting third parties to the existence of a debt.
  • The Security Group consent order seems to suggest that calling a consumer on a shared line at the consumer’s place of employment, regardless of the precautions the debt collector may take to avoid disclosing its identity, may constitute an unfair practice because of the potential that this type of call could alert third parties to the existence of a debt.
  • The CFPB based part of its FCRA claims on a failure to report positive credit activity during a period in which Security Group implemented a credit reporting freeze while it evaluated and updated its credit reporting policies.

A Bid to Delay Implementation of the Payday Rule Ends in a Judicial Cul-de-sac

A Bid to Delay Implementation of the Payday Rule Ends in a Judicial Cul-de-sacLate last month, the CFPB took the extraordinary step of joining two trade groups in requesting a stay of a case challenging the bureau’s final payday/auto title/high-rate installment loan rule (“Payday Rule”) pending the CFPB’s reconsideration of the rule promulgated under the prior administration. Significantly, the joint motion also seeks a stay of the Payday Rule’s compliance date. The CFPB’s decision to join the plaintiff in requesting the stay of the rule is a firm indication of the bureau’s altered priorities under Director Mick Mulvaney. Indeed, the joint motion goes so far as to state that the CFPB’s rulemaking “may result in repeal or revision of the Payday Rule and thereby moot or otherwise resolve this litigation or require amendments to Plaintiffs’ complaint.” On this basis, the CFPB and the trade groups asked the federal court in Texas to stay the compliance date until 445 days from the date of final judgment in the litigation.

In response, several consumer advocacy groups filed amicus memorandum opposing the joint request for a stay. These groups argue that the CFPB’s decision to join the plaintiffs in seeking to stay the case and the Payday Rule compliance date deprive the court of the “benefit of adversarial briefing.” The consumer groups also argue that the CFPB lacks authority under 5 U.S.C. § 705 to delay implementation of the Payday Rule because Section 705 can only “stay agency action for the purpose of maintaining the status quo during judicial review.” The consumer groups argue that the CFPB is not seeking to maintain the status quo to protect against litigation uncertainties but rather to address uncertainties created by its reconsideration of its own rule. The consumer groups argue that, in fact, “the parties are not litigating and have no intention to do so,” and that application of Section 705 is therefore improper. The plaintiffs in the case filed a reply to the oppositions on June 11.

On June 12, 2018, the court entered an order staying the litigation and relieving the CFPB of the obligation to file an answer. Importantly, however, the order denied the request to stay the Payday Rule compliance date. This leaves the industry in essentially the same position that it was before the suit was filed. It is still possible that Director Mulvaney could propose a change to the rule extending the compliance date. Until then, impacted entities must continue to prepare for the August 2019 compliance date.

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