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CFPB Requests Information on Fair Lending Practices

August 7, 2020

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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.        

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New York, California and Illinois Sue OCC to Block “Valid When Made” Rule

August 3, 2020

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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. 

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OCC Proposes True Lender Rule

July 24, 2020

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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. 

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CFPB Issues Final Rule on Small-Dollar Lending

July 17, 2020

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On Tuesday, July 7, 2020, the Consumer Financial Protection Bureau (“CFPB”) formally rescinded rules implemented under former CFPB Director Richard Cordray aimed at determining a consumer’s ability to repay small-dollar loans.  In 2017, then Director Cordray instituted mandatory underwriting provisions that would have required payday lenders to assess, as part of the underwriting process, whether borrowers could afford to repay their loans without reborrowing.  Upon review of these mandatory provisions, the CFPB did not find the requisite legal and statutory guidance to further enforce these underwriting standards. 

While small-dollar loans provide for increased consumer access to capital, especially during the COVID-19 pandemic, this renewed focus on small-dollar lending is a noticeable directional turn from the consumer lending advice of prior administrations.  Under the previous presidential administration, regulators were more cautious of banks’ lending in this space and worried about risks, such as high interest rates and perceived repayment risks, associated with lending small-dollar loans to consumers.[1]  In 2013, prudential regulators, including the OCC and the FDIC, went as far to release guidance that essentially discouraged banks from engaging in small-dollar lending activity altogether.[2]   

Regulators under the current administration have signaled that they are more open to reengaging banks in the practice of small-dollar lending, so as to meet the unmet short-term credit needs of the American consumer.[3]  In its press release concerning the repeal of these provisions, the Bureau stated that “rescinding the mandatory underwriting provisions of the 2017 rule ensures that consumers have access to credit and competition in states that have decided to allow their residents to use these small-dollar loan products, subject to state law limitations,” and noted that a subset of consumers might have a particular need for products such as payday loans as a result of the economic downturn brought about by the COVID-19 pandemic.

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SCOTUS Upholds CFPB but not its Singular Director Structure

July 1, 2020

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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 analysisCourt strikes down restrictions on removal of CFPB direction buy leaves bureau in place, SCOTUSblog (Jun. 29, 2020).

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CFPB Rolls Out Pilot Program Offering Advisory Opinions

June 24, 2020

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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.
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CFPB Proposes Rule to Ease Transition to LIBOR for Creditors

June 24, 2020

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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.         
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OCC Releases Final Rule on Permissible Interest Rates, Addressing Madden Debate

June 4, 2020

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On June 1, 2020, the Office of the Comptroller of the Currency (“OCC”) released a final rule on permissible interest on loans that are sold, assigned, or transferred, and effectively reversed the Second Circuit’s 2015 decision in Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015).[1]  In our post on the OCC’s advanced notice of proposed rulemaking (“ANPR”) from November 2019, we discussed how this holding contradicted the “valid when made” doctrine, whereby an obligation is considered valid under the law that applied at the time of origination.  Effectively, a loan’s interest rate was no longer valid when resold to an entity in a state with a lower interest rate cap than where the loan was originally issued.  This week’s final published rule is the first step in addressing the tension between the Second Circuit and the federal powers granted to national banks and federal thrifts.      

An example of the Madden glitch...
An example of a Madden glitch, and visual representation as to why a fix was needed.

Adopted in the form in which it was initially proposed, the OCC’s final rule provides that “[i]nterest on a loan that is permissible under sections 85 and 1463(g)(1), [national banks and federal thrifts] respectively, shall not be affected by the sale, assignment, or other transfer of the loan.”  Published in yesterday’s Federal Register and effective sixty days from now, the final rule reverses the Madden rule and reaffirms the “valid when made” doctrine.  Whereas the Madden decision held that subjecting credit assignees to state usury laws did not significantly interfere with the execution of a national bank’s powers, the OCC disagreed and viewed the decision as an affront to the inherent powers afforded to national banks.[2]  Credit lenders and others in the industry view the OCC final rule as an important and welcomed step in easing the uncertainty created by the Madden rule, citing the rule’s limiting of access to credit markets and propensity for instigating litigation. 

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CFPB Issues Final Remittance Rule

May 13, 2020

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On May 11, 2020, the Consumer Financial Protection Bureau (“CFPB”) announced that it will impose stricter reporting requirements on entities that process international money and remittance transfers for consumers. This final rule will take effect on July 21, 2020, replacing a temporary rule that has been in place since 2013. The new rule requires that international money transfer and remittance providers disclose the following information to consumers: exact exchange rates; the total value of transaction fees; and the amount of money expected to be received by the transfer or remittance recipient. For banks and credit unions that process large numbers of transfers, compliance costs and associated oversight policies will remain burdensome.

The new rule, however, augments the safe harbor protections afforded to certain banks and credit unions when reporting the costs of transfers and remittances to consumers. Under the temporary version of Regulation E, which was adopted in 2013, banks and credit unions that provide fewer than 500 remittances or transfers per year were permitted to estimate the costs of remittance transfers to consumers rather than providing exact transaction fees and exchange rates. Preceding the effective date of the temporary regulation, this safe harbor provision only applied to those banks and credit unions that processed fewer than 100 transfers per year. The final rule increases the transfer threshold to 500 transfers per year, making the temporary exemption permanent. In addition, the Bureau adopted a new, permanent exemption for insured institutions to “estimate the exchange rate for a remittance transfer to a particular country if, among other things, the designated recipient will receive funds in the country’s local currency and the insured institution made 1,000 or fewer remittance transfers in the prior calendar year” and the recipients received funds in the country’s local currency.

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Regulators Propose CRA Overhaul

December 17, 2019

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Regulators Propose CRA Overhaul

December 17, 2019

Authored by: Benjamin Saul and Ross Handler

On Thursday, December 12, 2019, the OCC and the FDIC issued a notice of proposed rulemaking (NPR) in an effort to modernize the regulatory framework behind the Community Reinvestment Act (CRA). Last autumn, renewed deliberations began when the OCC published an advanced notice of proposed rulemaking (ANPR) that solicited answers to 31 questions about the CRA. In response, national and state-chartered banks, trade associations, community advocates, government representatives, and others submitted nearly 1,500 individual comments. Thursday’s NPR is the culmination of the regulators’ review of these comments and proposed recommendations.

The proposed rule has received support from the OCC and the FDIC. However, the Federal Reserve has been unwilling to sign on to draft plan, leading some to speculate about prospective, competing CRA regimes. Disharmony among the regulators as to how they examine institutions under the CRA would be unprecedented, as the three prudential regulators have implemented the CRA and examined financial institutions in substantially similar manners since the law’s promulgation in the 1970s.

The proposed changes in the NPR to the CRA’s regulatory framework are significant. Key components of the revamped CRA and the NPR include:

  • Additional Assessment Areas Based on Deposit Locations: Currently, whether a bank’s activities qualify for consideration under the CRA depends on the characteristics of the activities and where those activities take place. Under the current framework, the CRA requires that banks delineate assessments areas where the bank has its main office, branches, and deposit-taking facilities, in addition to the surrounding areas where the bank originated or purchased a substantial portion of the loans in its portfolio. Under the NPR, the definition of geographic area is expanded to include areas where banks receive five percent or more of their deposits, if the banks themselves source 50 percent or more of their retail domestic deposits from outside their facility-based assessment areas. Further, the NPR permits banks to receive CRA consideration for qualifying activities outside of the assessments areas, including tribal lands and rural areas.
  • Home Mortgage Lending Restrictions: Under the current CRA framework, home mortgage loans made to high- and middle-income individuals living in low-to-moderate income (LMI) areas receive credit under CRA examination. Moving forward, such home mortgage loans would not receive CRA consideration. Mortgage-backed securities, a controversial yet CRA-eligible activity under the current CRA framework, would not receive the same credit under the NPR. Such securities would only be deemed CRA creditworthy if backed by loans to LMI borrowers and businesses.
  • A Non-exhaustive List of CRA Pre-Approved Activities: As it stands, the CRA does not provide much insight as to prequalified CRA-approved activities. The NPR proposes to create more descriptive and expansive criteria for the type of activities that qualify for CRA credit. To this end, the regulators would provide a publicly available, non-exhaustive list of activities that automatically qualify for CRA credit. Further, the NPR provides a process through which interested parties may submit additional items for consideration for inclusion on the list.
  • Increased Minimum for Small Business and Farm Loans: Under the current CRA framework, the threshold for small business loan or farm loan consideration is set at $1 million. The NPR raises the loan size to $2 million.
  • Metric-Based Benchmarks: The CRA regulations provide for different methods to evaluate a bank’s CRA performance, relative to factors such as the bank’s asset size and business strategy. Banks both small and large have commented that these different methods provide for inconsistent examination processes and results, prompting them to request more streamlined examination criteria. The new performance standards under the NPR would assess (1) the distribution and level of qualifying retail loan originations to LMI individuals, businesses, and farms within its assessment area; and (2) the total dollar value of the bank’s CRA-qualifying activities relative to its retail domestic deposits.
  • Preferential Treatment for Small Banks: Small banks, those defined as institutions with $500 million or less in assets, are provided some preferential treatment under the NPR. Small banks would have the option to be examined under the existing CRA regulatory framework or under the revised framework of the NPR.
  • New Reporting Requirements: Currently, the CRA requires banks to collect and report on a variety of data and loans. Small banks, however, are generally exempt from such requirements. Under the NPR, banks evaluated under the small bank performance standards would be required to collect, but not to report, data related to their retail domestic deposits. Additionally, banks evaluated under the NPR standards would be required to collect, maintain, and report certain data related to qualifying activities non-qualifying activities, and retail domestic deposits, and assessments areas. Banks would be required to collect and maintain all necessary data in machine-readable form.
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