On November 30, 2020, the Consumer Financial Protection Bureau (“CFPB”) set forth procedures for the issuance of advisory opinions provided as interpretive rules to resolve regulatory uncertainty, effective immediately. Under this new advisory opinion schema, the CFPB concurrently released two advisory opinions: one on earned wage access products and one on private education loans.

Advisory Opinions

A request for an advisory opinion must include:

• Identity of the person or entity seeking the opinion, or the person or entity submitted a request on behalf of a third part (e.g., outside counsel, in which case clients need not be identified);
• Statement about the absence of investigation or litigation;
• All material facts about an actual fact or course of action that is (a) within the CFPB’s purview and (b) that the person or entity is engaged in or is planning to engage in;
• A description of the uncertainty or ambiguity, including (a) identification of the regulatory or statutory provision at issue; (c) a proposed interpretation of the law or regulation; and (d) an explanation of why that proposed interpretation is an appropriate resolution of the uncertainty or ambiguity;
• Identification of information that should be treated as confidential.

Each advisory opinion will be specific to the facts provided, which the CFPB will not generally investigate independently, making it important that the request include a clear description of any material facts. Where the advisory opinion permits for a safe harbor, as provided for in the Truth in Lending Act (“TILA”), Equal Credit Opportunity Act, Electronic Fund Transfer Act, Real Estate Settlement Procedures Act, and Fair Debt Collection Practices Act, that fact will be explained in the advisory opinion. The scope and terms of an advisory opinion will be set out in the advisory opinion itself.

The CFPB will weigh multiple factors in determining whether to issue an advisory opinion on a specific topic, including issues that it has previously noted that are of significant importance or where clarification would provide significant benefit, and where the CFPB has not previously addressed a highlighted ambiguity. Conversely, the CFPB may decide an advisory opinion is not the appropriate tool for responding to an inquiry. In particular, issues where the CFPB is actively investigating or enforcing a related matter or a rulemaking is proposed or being planned.

On July 28, 2020, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a request for information (“RFI”) seeking public and industry input related to the Equal Credit Opportunity Act (“ECOA”) and Regulation B.  The CFPB submitted this RFI in an effort to create a regulatory regime that expands consumer access to credit while ensuring that consumers remain protected from credit transaction discrimination.  The RFI signals a renewed regulatory focus on fair lending in the wake of the broader societal focus on racial equality in the U.S. 

The Bureau presented 10 questions in its RFI related to: disparate impact; Limited English Proficiency products, special purpose credit programs; affirmative advertising to disadvantaged groups; small business lending; sexual orientation and gender identity discrimination; scope of federal preemption of state law; public assistance income; the use of artificial intelligence and machine learning; and ECOA adverse action notices.  We have chosen to highlight a select few below. 

The CFPB’s first question asked whether the Bureau should “provide any additional clarity regarding its approach to disparate impact analysis under ECOA and Regulation B.”  The Supreme Court’s decision in Texas Dept. of Housing and Comm. Affairs v. Inclusive Comm. Project, Inc., 135 S. Ct. 2507 (2015), in which the Court affirmed the cognizability of disparate impact theory under the Fair Housing Act (“FHA”), did not address ECOA.  Likewise, the contours of the Court’s limits on the disparate impact claims left open questions for industry and regulators alike.  Guidance on whether disparate impact theory is cognizable under ECOA and if so what limits might apply would have significant impacts on creditors’ fair lending obligations going forward.        

Just two months ago, the Office of Comptroller of the Currency (“OCC”) addressed the “valid when made” doctrine and held that interest rates established on bank-originated loans remain valid even after the loan is transferred to a non-bank partner.  On July 29, the attorneys general of New York, California, and Illinois sued the OCC alleging federal overreach that undermines state-preemption regarding usury rate caps.  Specifically, the AGs allege the OCC’s rule is “arbitrary and capricious” in violation of the Administrative Procedures Act.  In the complaint, the AGs allege “[t]he rule is beyond the OCC’s power to issue, is contrary to statute and would facilitate predatory lending through sham ‘rent-a-bank’ partnerships designed to evade state law.”

Those tuned into the debate surrounding the “valid when made” rule saw this court battle coming.  The OCC has recently worked to clarify disputed rules regarding privileges afforded to banks under the National Bank Act.  Under the National Bank Act, national banks that are under the supervision of the OCC are permitted to charge interest on loans at the maximum rate permitted by their home state—even in instances where that interest rate would violate state usury laws.  While federal law carves out this exception for federally regulated banks, it does not extend the same exemption to non-banks.  Accordingly, the attorneys general have asked the Northern District of California to declare the rule invalid and hold that the OCC exceeded the authority granted to it by the National Bank Act and the Dodd-Frank Act. 

On Wednesday, July 22, 2020, Acting Comptroller of the Currency Brian Brooks reaffirmed his interest in being seen as an agent of modernization in a letter clarifying the authority of national banks and federal savings associations to provide cryptocurrency services for customers.

The letter from the Office of the Comptroller of the Currency (“OCC”) discusses the increasing acceptance of cryptocurrency, and especially Bitcoin, as a method of payment and form of investment. It acknowledges a correlating growing demand for “safe places, such as banks, to hold unique cryptographic keys associated with cryptocurrencies on behalf of customers and to provide related custody services.” Three reasons – a safe way to hold cryptocurrency keys; a secure storage service; and custodian services for assets managed by investment advisors – are cited in the letter as driving the demand for cryptocurrency custody services.

The safekeeping services are described as a modernization of special deposit and safe deposit boxes, falling within “longstanding authorities to engage in safekeeping and custody activities.” Thus, “the authority to provide safekeeping services extends to digital activities and, specifically, that national banks may escrow encryption keys used in connection with digital certificates because a key escrow service is a functional equivalent to physical safekeeping.”

COVID-19 has laid bare the need to have good technological solutions for the systems and services upon which we rely. In the financial sector, perhaps more than many others, the pace of innovation is beholden to regulatory parameters, but there is some optimism that Fintechs can help fill the gap in traditional financial products, especially in emerging markets. As in our in recent post about digital banking modernization by the OCC, regulators are feeling out the interest in certain programs. On Monday, July 20, 2020, the FDIC announced a request for public input on a certification program to “promote the efficient and effective adoption of innovative technologies at FDIC-supervised financial institutions.”

More specifically, the FDIC is seeking input regarding whether the development of relevant standards in connection with a voluntary certification process could be applied to third-party models and whether such standards would allow more financial institutions, particularly community banks, to engage with third parties that provide these models, including Fintechs. Such a voluntary certification program could, in theory, reduce costs of doing business for both the financial institutions and providers of models and permit FDIC supervision resources to be used more efficiently and effectively.

On July 20, 2020, the Office of the Comptroller of the Currency (“OCC”) issued a notice of proposed rulemaking that would determine the “true lender” of a national bank or federal savings association loan in the context of a partnership between a bank and a third party.  The proposed rule states that a bank is a true lender of a loan “if, as of the date of origination, it is named as the lender in the loan agreement or funds the loan” and would apply to all national banks and federal savings associations.  Most recently, the OCC addressed the related “valid when made” doctrine and held that interest rates established on bank-originated loans remain valid even after the loan is transferred to a non-bank partner.  This final rule, however, did not address the true lender question, and this week’s proposed rule does just that.     

The OCC proposed this rule in response to the “increasing uncertainty” surrounding the legal principles that apply to the loans made in the course of bank and third party relationships.  Courts are not unified in their analysis and have looked to both “the form of the transaction” and a battery of fact-intensive tests to determine the true lender of a loan.  While federal rulemaking addresses many relationships between banks and third parties such as making payments and taking deposits, there is not much guidance on these relationships as it relates to lending.  See e.g., 12 CFR 5.20(e).  Per the OCC’s proposed rule, this uncertainty “may discourage banks and third parties from entering into relationships, limit competition, and chill the innovation that results from these partnerships.”  Taken together, these unintended consequences would restrict consumer access to affordable and available credit. 

The Consumer Financial Protection Bureau (“CFPB”) is slightly less than a decade old, created in the wake of the 2008 financial crisis to enforce the nation’s consumer financial protection laws and ensure that consumer debt products are safe and transparent for the consumers who use them.  The Bureau has had only two directors, Richard Cordray and Kathleen Kraninger, with Mick Mulvaney as Acting Director in between.  SCOTUS’s recent ruling will give the president the right to fire the director at will, unless Congress acts to change CFPB to a commission structure (like the FTC).  The ruling is important but leaves a number of unanswered questions likely to spur further litigation and CFPB challenges.

Single Director Provisions and Constitutionality

Unlike many agencies, which are governed by multimember boards and commissions, the CFPB is governed by a single director, who is appointed by the president, confirmed by the Senate for a five-year term, and may only be removed for “inefficiency, neglect of duty, or malfeasance in office.”  See 12 U.S.C. §§ 5491(c)(1),(3). This leadership structure and, by association, the constitutionality of the organization itself, was challenged in Seila Law, LLC v. Consumer Financial Protection Bureau, 591 U.S. ___, (2020) a case on appeal from the Ninth Circuit.  In 2017, the CFPB issued a civil investigative demand (“CID”) to Seia Law LLC, a California law firm specializing in debt-related legal services.  In response to the CID, Seia Law asked the CFPB to set it aside on the grounds that the Bureau’s leadership structure was unconstitutional insofar as its single director structure violated the separations of powers.  The District Court held for the CFPB and the Ninth Circuit affirmed.  See Consumer Financial Protection Bureau v. Seila Law LLC, 923 F.3d 680 (9th Cir. 2019).    

The Roberts Majority Opinion

The Supreme Court of the United States vacated the judgment of the Ninth Circuit and per Chief Justice John Roberts’s majority opinion (joined by Justices Thomas, Alito, Gorsuch, and Kavanaugh), “the CFPB’s leadership by a single individual removable only for inefficiency, neglect, or malfeasance violates the separation of powers.”  See Seila Law, 591 U.S. at 11-30.  Article II provides the president with executive powers that empower him to “take care that the laws be faithfully executed.”  See U.S. Const. art. II.  Time and again, precedent has confirmed that such executive powers permit the president to both appoint and remove executive officials.  In advancing the argument of the Ninth Circuit, Paul Clement, whom the Supreme Court appointed to defend the Ninth Circuit’s ruling, looked to Humphrey’s Executor v. United States, 295 U.S. 602 (1935), where the Supreme Court held that the structure of the Federal Trade Commission (“FTC”) – consisting of five members who could be removed only for cause – did not violate Article II of the Constitution.  Since the 1935 decision in Humphrey’s, the Court has recognized two exceptions to the president’s power to remove those whom he appoints: 

“Congress could create for-cause removal protections for a multimember body of experts, balanced along partisan lines, that performed legislative and judicial functions and was not to exercise any executive power; [and] [sic.] exceptions for inferior officers, who have limited duties and lack policymaking or administrative authority, such as an independent counsel.”  See Amy Howe, Opinion analysis:  Court strikes down restrictions on removal of CFPB direction buy leaves bureau in place, SCOTUSblog (Jun. 29, 2020).

The Office of the Comptroller of the Currency’s (“OCC”) attention to modernizing regulation to better accommodate innovative products and industries is continuing full steam ahead since our recent post about a potential payments charter. In the weeks since we posted that article, Brian Brooks has become the acting Comptroller of the Currency, so it should come as no surprise that his goals are garnering some attention.

On Thursday, June 6, the OCC issued a notice of proposed rulemaking seeking public comment to update its rules for national bank and federal savings association activities and operations and an advance notice of proposed rulemaking seeking comment on rules on national banks’ and federal savings associations’ (banks) digital activities. These releases confirm that the agency is “reviewing its regulations on bank digital activities to ensure that its regulations continue to evolve with developments in the industry.”

As part of a substantial modification of the regulatory system, the OCC seeks comment on additional flexibility for banks with respect to permissible derivatives activities, tax equity finance transactions, corporate governance, anti-takeover provisions, capital stock issuances and repurchases, and participation in financial literacy programs.

In addition, the OCC seeks comment on a significant number of banking issues related to digital technology and innovation. The OCC asks whether current legal standards are sufficient flexible, whether they create undue hurdles, and whether there are other areas they should cover. Their requests for comments also touch on current questions, namely whether the pandemic has brought any concerns to light and what issues are unique to smaller institutions – which performed well with the rollout of the SBA’s Paycheck Protection Program, but may encounter hard times to come.

The devil is in the details.  The best intentioned new financial services rules and regulations can present challenges for compliance folks trying to implement the rules into their institutions’ existing systems and practices.  Requirements, which may seem simple in the abstract, sometimes create herculean challenges because of system limitations, programming challenges, or simple ambiguity when loaded into real world operations.  To hopefully overcome these compliance obstacles, on Thursday, June 18, 2020, the Consumer Financial Protection Bureau (“CFPB”) began its trial phase of a pilot program offering advisory opinions aimed at “reduc[ing] ambiguity and increas[ing] regulatory certainty, support[ing] proactive consumer protection, and enhanc[ing] the timeliness of guidance.”  The CFPB first previewed this pilot program in March 2020 so that financial services providers could solicit provisional legal opinions on matters pertaining to the interpretation of the Bureau’s rules and laws.

Joining other agencies, like HUD who have had a no action letter procedure in place for years, the CFPB pilot will focus on four stated priorities:  (1) “Consumers are provided with timely and understandable information to make responsible decisions”; (2) “Identify outdated, unnecessary or unduly burdensome regulations in order to reduce regulatory burdens”; (3) “Consistency in enforcement of Federal consumer financial law in order to promote fair competition”; and (4) “Ensuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”

As the pilot program is new and untested, the CFPB will pick which company questions to answer based on a review of the various petitions, granting priority to those questions that are novel and whose answers might benefit those in the greater consumer financial services community.  The Bureau has said it will consider questions such as those arising during CFPB exams and those that have not otherwise been authoritatively addressed.  In this regard, the CFPB noted the following factors that will drive its prioritization of requests:

• The request’s alignment with the CFPB’s statutory objectives;
• The scope of the impact on consumers if the CFPB is to provide an answer or interpretation;
• In the event where two regulators share concurrent jurisdiction over a specific consumer protection measure, whether the CFPB’s advisory opinion will impact the manner in which the other regulator regulates the same measure; and
• The impact the advisory opinion would have on the CFPB’s existing resources and personnel.

On June 4, 2020, the Consumer Financial Protection Bureau (“CFPB”) issued proposed rules and changes to the Truth in Lending Act (“TILA”) to address the anticipated sunset of the London Interbank Offered Rate (“LIBOR”) at the end of 2021.  Some market lenders currently rely on the LIBOR as an index for calculating rates for open-end and closed-end credit products.  The CFPB’s proposed rules and changes shed some light on what creditors might expect when the LIBOR is discontinued, and also include a compilation of frequently asked questions (“FAQs”) to help prepare creditors for the eventual transition.

In its proposed rule, the CFPB contemplates several amendments to Regulation Z, which implements TILA, for both open-end and closed-end credit products to address the discontinuation of the LIBOR.  Select amendments include:    

• To ensure that credit card issuers and HELOC creditors choose acceptable replacement indices for the LIBOR, the CFPB has proposed a detailed roadmap to outline specifically how these creditors may replace the LIBOR before it becomes unavailable.  Under these guidelines, credit card issuers and HELOC creditors must select a replacement index where the annual percentage rate (“APR”) for the new index is calculated similarly to the LIBOR index.  The CFPB stated that the prime rate published in The Wall Street Journal as well as certain Secured Overnight Financing Rates will be considered suitable replacements as well. 
• Regulation Z requires lenders to disclose certain terms to borrowers of open-end credit products.  Under the proposed rule, Regulation Z would require creditors to provide further disclosures, including change-in-terms notices to inform borrowers as to which new interest rate their credit product will transition.   
• The CFPB also proposes adding an exception from the rate reevaluation provisions applicable to credit card accounts.  Under current regulations, when a card issuer increases a rate on a credit account, the creditor must reevaluate the rate increase every six months until such time the rate is then reduced.  Per the CFPB’s proposal, a credit card issuer would be exempt from these requirements for increases that occur as a result of replacing the LIBOR index.