On October 17, 2017, in response to an investigation concluding that title insurance companies and agents were spending millions of dollars a year in “marketing costs” provided to attorneys, real estate professionals, and mortgage lenders in the form of meals, gifts, entertainment, free classes, and vacations that ultimately were passed on to consumers through heightened title insurance rates, the New York Department of Financial Services (“DFS”) issued Insurance Regulation 208, in which it identified a non-exhaustive list of prohibited inducements and permissible marketing expenses. The new rule went into effect on February 1 of 2018. Five months later, on July 5th, 2018, the New York State Supreme Court (the state’s trial-level court) annulled the part of the DFS regulation addressing marketing practices, holding that any such rule must be issued by the state legislature, not a regulating agency. Continue Reading New York Court Annuls DFS Effort to Curb Unscrupulous Title Practices
On June 20, the U.S. Department of Housing and Urban Development (“HUD”) published an advance notice of proposed rulemaking (“ANPR”) that seeks public comment on whether and how to amend its 2013 rule under the Fair Housing Act (“FHA”). The ANPR follows HUD’s May 10 announcement of its intention to formally seek public comment on the rule in light of the Supreme Court’s 2015 decision in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc., in which the Court recognized disparate impact as a cognizable theory under the FHA, but imposed meaningful limitations on the application of the theory.
The ANPR, together with the statement of Bureau of Consumer Financial Protection Acting Director Mick Mulvaney this spring that the Bureau would be “reexamining the requirements of ECOA” in light of “a recent Supreme Court decision” (i.e., Inclusive Communities), signals that the Trump administration is likely seeking to retreat from the Obama administration’s enthusiastic use of disparate impact liability in lending discrimination cases.
The Disparate Impact Rule and Inclusive Communities
HUD finalized its disparate impact rule in February 2013. The rule codified HUD’s Obama-era view that disparate impact is cognizable under the FHA. In contrast to disparate treatment claims, in which a plaintiff must establish a discriminatory motive, a disparate impact claim challenges practices that have a disproportionately adverse effect on a protected class that is not justified by a legitimate business rationale. The rule states that a practice has a “discriminatory effect” where “it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin.” HUD explained that it had “consistently concluded” that facially neutral policies that resulted in a discriminatory effect on the basis of a protected characteristic violated the FHA, and that the rule merely “formalize[d] its longstanding view.” The rule also formalized a three-part burden-shifting test for determining whether a practice had an unjustified discriminatory effect.
At the time HUD issued the rule, the nonprofit Inclusive Communities Project, Inc. was embroiled in a lawsuit against the Texas Department of Housing and Community Affairs, in which it brought a disparate impact claim under the FHA. After HUD issued the disparate impact rule, the Texas Department filed a petition for a writ of certiorari to the Supreme Court on whether the FHA recognized disparate impact claims. In its 2015 decision, the Supreme Court held that disparate impact claims are cognizable under the FHA, but the Court articulated a rigorous standard for a successful claim. The Court did not explicitly address the merits of HUD’s rule, nor did the rule form the basis of its holding. Continue Reading HUD Seeks Public Comment on Disparate Impact Rule
In a June 21, 2018 opinion, Judge Loretta Preska of the U.S. District Court for the Southern District of New York held that the structure of the Bureau of Consumer Financial Protection (“BCFP” or the “Bureau”) is unconstitutional. This ruling is inconsistent with the D.C. Circuit’s en banc decision in PHH Corp. v. CFPB (“PHH”).
The case, CFPB v. RD Legal Funding, LLC, involves joint claims brought by the Bureau and the New York State Office of the Attorney General. RD Legal offers cash advances to consumers waiting on payouts from settlement agreements or judgments entered in their favor. The claims allege that the company defrauded 9/11 first responders and NFL retirees by misleading them regarding cash advances that were represented as valid sales but instead were loans made in violation of state usury law.
RD Legal argued that the BCFP’s structure as an independent bureau within the Federal Reserve System violates Article II of the United States Constitution, as the Bureau’s Director can be removed only “for inefficiency, neglect of duty, or malfeasance in office.” In reviewing that claim, Judge Preska sided with one of the dissenting opinions in PHH. Specifically, she noted that she “disagrees with the holding of the en banc court and instead adopts Sections I-IV of Judge Brett Kavanaugh’s dissent…, where, based on considerations of history, liberty, and presidential authority, Judge Kavanaugh concluded that the CFPB ‘is unconstitutionally structured because it is an independent agency that exercises substantial executive power and is headed by a single director.’” Continue Reading SDNY Finds BCFP Structure Unconstitutional, Breaking With DC Circuit
Nearly seven months into Mick Mulvaney’s tenure as Acting Director of the Bureau of Consumer Financial Protection (Bureau), the agency issued just its second enforcement action under his leadership on June 13, 2018. You may have missed it, as the press release was not pushed out through the Bureau’s email notifications and the cursory press release may have flown under your radar. The settlement is with a parent company and its subsidiaries that originated, provided, purchased, serviced, and collected on high-cost, short-term secured and unsecured consumer loans. The consent order contains allegations of violations of the prohibition on unfair practices under the Consumer Financial Protection Act and of the Fair Credit Reporting Act, and requires the respondents to pay a $5 million civil money penalty. Notably, the consent order does not require any consumer redress, despite Mr. Mulvaney’s stated intent to only pursue cases with “quantifiable and unavoidable” harm to consumers.
Debt Collection Practices
The Bureau alleges that respondents engaged in unfair in-person debt collection practices, including discussing debts in public, leaving the respondents’ “field cards” (presumably identifying the respondents) with third parties (including the consumers’ children and neighbors), and visiting consumers’ places of employment. The Bureau alleges that these practices were unfair because they caused substantial injury such as humiliation, inconvenience, and reputational damage; consumers could not reasonably avoid the harm because consumers were not informed of whether and when such visits would occur and could not stop respondents from engaging in the visits; and any potential benefit in the form of recoveries were outweighed by the substantial injury to consumers. The consent order notes that respondent attempted 12 million in-person visits to more than 1.3 million consumers over a five-year period, and requires respondents to cease in-person collection visits at consumers’ homes, places of employment, and public places.
The Bureau also alleges that the respondents made collection calls to consumers at their places of employment even after being told that the consumers could not receive calls at work, and called third parties in a manner that risked disclosing the debts. The Bureau further alleges that respondents did not heed cease-contact requests with respect to these parties. The Bureau alleges that such practices were unfair for the same reasons as the in-person collection practices described above.
Despite Mr. Mulvaney’s emphatic rejection of regulation by enforcement, the debt collection allegations in this consent order center around practices that lack any formal rulemaking. First, it appears that the Bureau is applying the guidance issued in its December 2015 bulletin, regarding unfair, deceptive and abusive acts and practices (UDAAP), which notes that in-person debt collection practices at consumers’ homes or places of employment can result in violations of the prohibition on UDAAP and the FDCPA due to the risk of disclosure of debts to third parties and the risk that such communications are at a time or place known to be inconvenient to the consumer. Second, the Bureau appears to be applying its July 2013 bulletin, which notes that prohibited practices under the FDCPA can be considered UDAAPs when employed by first-party debt collectors. Finally, the allegations suggest that the Bureau believes that debt collectors should inform consumers of their policies or practices regarding in-person collection visits despite no regulatory requirement to do so.
Credit Furnishing Practices
The Bureau alleges that respondents did not have in place any written policies and procedures regarding credit furnishing. The Bureau further alleges that the respondents furnished inaccurate information to credit reporting agencies, were slow to correct errors, overwrote corrected errors, and failed to furnish the date of first delinquency on certain accounts to credit reporting agencies. The consent order requires the respondents to consult an independent consultant to implement and maintain reasonable credit furnishing policies and procedures and to review all information furnished to a credit reporting agency since July 21, 2011.
More of the Same?
The settlement has many of the familiar trappings of the old Bureau in terms of the kind of conduct at issue and the corrective action required of the respondents (a Compliance Plan, etc.). But the consent order also reflects what appear to be new approaches to some issues. The consent order’s description of how the respondents’ actions were unfair, for example, is more fulsome than prior consent orders, including an acknowledgement that the collection tactics at issue may have a “marginal benefit in the form of more recoveries.” While this suggests that Mr. Mulvaney’s Bureau may be more thoroughly considering the third prong of unfairness (which requires a balancing of likely consumer injury with advantages to consumers or competition) than the previous leadership, the consent order still summarily concludes that the “marginal benefit” does not outweigh likely consumer injury. This conclusion is not supported by any empirical findings, notwithstanding Mr. Mulvaney’s assertion that the Bureau will engage in more quantitative analysis and his establishment of an Office of Cost Benefit Analysis. Time will tell whether the move to empirical analysis will be limited to rulemaking or will make its way to the enforcement realm as well.
Additionally, despite the allegations of substantial injury from the debt collection conduct at issue, the consent order does not require any financial consumer redress or cancellation of debts for impacted consumers. While the Bureau has been inconsistent in this regard in its past debt collection actions, it has typically required such consumer redress. For example, in a prior action involving in-person debt collection, the Bureau required that consumers be refunded any payments made within 90 days of an in-person collection visit.
It is dangerous to read too much into any one enforcement action, but what does appear clear is that the Bureau’s enforcement machinery is slowly creaking back to life after a near-freeze at the beginning of Mr. Mulvaney’s tenure. Future actions will reveal whether he was serious about there being “more math” (i.e., quantitative analysis) in the Bureau’s future and whether this action reflects a new approach to consumer redress.
Mayer Brown partner Jon Jaffe will present at an American Bankers Association webinar on June 13, entitled “How Can Your Bank Compete in the Age of the Digital Mortgage? Industry Experts Explain.” The webinar for ABA members is the first in a series intended to explore innovative mortgage business strategies in the age of “fintech.” This session will provide an overview of the evolving digital loan process, from customer acquisition to electronic closing and beyond. Jon will address legal and regulatory issues arising in connection with eMortgages and eClosings.
Last week, we wrote about how the Bureau of Consumer Financial Protection (“Bureau”) under Acting Director Mick Mulvaney had surprisingly doubled down on claims of unfair, deceptive and abusive practices (“UDAAP”) brought under former Director Richard Cordray in a case against a lead aggregator (back when the Bureau referred to itself as the Consumer Financial Protection Bureau). As if to prove the point that the Bureau is not backing off aggressive UDAAP claims, the very next day the Bureau filed a brief in another case similarly supporting novel UDAAP claims brought under Cordray. The Bureau’s brief was filed in opposition to a motion to dismiss by defendants Think Finance, LLC and related entities. The case involves Bureau claims that Think Finance engaged in unfair, deceptive and abusive conduct when it attempted to collect on loans that were, according to the Bureau, void under state law. Continue Reading UDAAP Strikes Again: The New BCFP Seems a Lot Like the Old CFPB
The Office of Students and Young Consumers (Office of Students) has been an important component of the Consumer Financial Protection Bureau (CFPB or the Bureau) since its creation in 2011. On May 9, 2018, the CFPB’s Acting Director announced plans to fold the Office of Students into the Office of Financial Education. The Student Loan Ombudsman, a position the Dodd-Frank Act created, will also reportedly be part of the Office of Financial Education. This move could signal a major shift in the CFPB’s approach to the student loan market.
As its name indicates, the Office of Financial Education focuses on consumer education. Specifically, its stated focus is “strengthen(ing) the delivery of financial education . . . and creat[ing] opportunities for people to obtain the skills to build their financial well being.” Given that mission, some have speculated that the recent movement of the Office of Students within the Bureau’s Office of Financial Education may lead to fewer examinations, investigations, and enforcement actions against participants in the private student loan market. Continue Reading CFPB to Eliminate Student Loan Office
Much has been written about Mick Mulvaney’s statements about how the Consumer Financial Protection Bureau (CFPB) will no longer “push the envelope” when it comes to enforcement and no longer engage in “regulation by enforcement.” But a little-noticed filing by the CFPB in the Ninth Circuit last month suggests that the CFPB is not necessarily scaling back its enforcement efforts with respect to novel claims under its authority to prevent unfair, deceptive, and abusive acts and practices (UDAAP). Continue Reading Meet the New Boss; Same as the Old Boss? The CFPB’s Take on UDAAP Might Surprise You
On May 8, 2018, the United States Department of Justice and KleinBank reached a settlement agreement resolving allegations that the bank engaged in mortgage lending discrimination by failing to adequately serve predominantly minority neighborhoods (so-called “redlining”) in and around the Twin Cities of Minneapolis and St. Paul, Minnesota. The settlement resolves one of the only redlining investigations to ever land in court, and marks the Trump DOJ’s first fair lending settlement.
DOJ filed its complaint against KleinBank on January 13, 2017, one week before the inauguration of President Trump, suggesting that the Obama administration’s DOJ may have been concerned that the Trump administration would be disinclined to pursue fair lending cases aggressively. Given recent activities at the Consumer Financial Protection Bureau, this worry may have been well-founded.
The complaint alleges that, from 2010 until at least 2015, KleinBank intentionally avoided lending to residents of predominantly minority neighborhoods in the Twin Cities area because of the race or national origin of the residents of those neighborhoods. Specifically, the DOJ alleged that KleinBank carved majority-minority census tracts out of its Community Reinvestment Act assessment area, located its branch and mortgage loan officers in majority-white census tracts (and not majority-minority census tracts), and directed marketing and advertising predominantly toward residents in majority-white census tracts. While most targets of redlining claims have sought to settle the allegations in short order, KleinBank took the rare step of fighting the DOJ’s claims in litigation.
Prior to the settlement, on March 30, 2018, the district court handling the case adopted a magistrate’s recommendation that KleinBank’s motion to dismiss be denied. The magistrate’s report and recommendation are under seal, making it impossible to fully analyze the rationale underlying the decision. However, the court noted that contrary to KleinBank’s contention, the government had sufficiently plead the intent element of a disparate treatment claim by, among other things, alleging that the bank intentionally drew its assessment area to avoid minority areas and intentionally avoided marketing to such areas.
Under the settlement agreement, KleinBank is required to open (and operate for at least three years) one new full-service branch office in a majority-minority census tract. Redlining resolutions that require banks to open branch offices are noteworthy considering the rapid increase in online banking activities and the cost associated with opening a full service branch.
The settlement agreement also requires KleinBank to invest $300,000 through a special purpose credit program to increase the amount of credit it extends in minority neighborhoods. Further, the bank must invest another $300,000 in advertising, outreach, financial education, and credit repair in order to “assist in establishing a presence in majority-minority census tracts in Hennepin County.
A few aspects of this agreement stand out. First, the DOJ’s use of a settlement agreement rather than a consent decree is notable. Most DOJ cases are resolved using consent decrees, which are generally easier for the government to enforce. Second, many of the settlement agreement provisions are less onerous than the terms of other recent redlining settlements. For example, the agreement does not subject KleinBank to a civil money penalty, and provides for flexibility on the timing of the bank’s advertising and loan subsidy obligations. This suggests that the Trump DOJ may be taking a more subdued approach to fair lending cases than did its predecessor.
Time will tell if the KleinBank settlement is a red herring or harbinger for more federal fair lending enforcement.
On May 8, 2018, the House of Representatives used the Congressional Review Act (“CRA”) to vote to repeal the Consumer Financial Protection Bureau’s (CFPB’s) March 2013 bulletin addressing indirect auto lending and compliance with the Equal Credit Opportunity Act (“ECOA”). That vote follows the Senate’s April 18 CRA vote to repeal the bulletin. President Trump is expected to sign the joint resolution (S.J. Res. 57) within 10 days.
In that bulletin, the CFPB (under the leadership of former director Richard Cordray) had stated that some indirect auto lenders may be subject to ECOA and Regulation B, and advised them to “take steps to ensure that they are operating in compliance” with those antidiscrimination principles. Most significantly, the bulletin noted that indirect auto lenders may have direct liability under ECOA for allegedly discriminatory pricing disparities. In an indirect auto lending arrangement, instead of providing financing directly to the consumer, the auto dealer facilitates financing through a third party. The CFPB bulletin stated that some indirect auto lenders have policies that allow dealers to mark up lender-established rates and then compensate dealers for those markups, which may result in pricing disparities on a basis prohibited under ECOA.
As explained in a prior Mayer Brown Legal Update, the CRA allows Congress to pass a resolution of disapproval of an agency rule within 60 legislative session days of the rule’s publication. Such a resolution, if passed by both houses of Congress and signed by the President (or passed by a two-thirds majority in both houses to overcome a presidential veto), invalidates the rule. The CRA allows Congress to use expedited procedures that effectively prohibit filibusters in the Senate.
The 60-day clock for introduction of a disapproval resolution in Congress begins on the “submission or publication” date of the rule, which the CRA defines as the later of the date on which Congress receives the agency’s report related to the rule or the date the rule is published in the Federal Register, if it is published. Although the CFPB issued its indirect auto lending bulletin more than 60 days ago, the CFPB did not submit to Congress a report on the bulletin or publish it in the Federal Register, so arguably the 60-day clock did not begin in 2013.
Upon signing this resolution, President Trump will have used the CRA to invalidate 16 agency rules. Prior to the Trump administration, the CRA had been used only once to invalidate a rule. However, this resolution marks the first time Congress has used the CRA to invalidate agency guidance. Previously, Congress had used the CRA only to repeal rules that the respective agencies viewed as legislative rules or regulations subject to the Administrative Procedure Act’s notice-and-comment requirements. Unlike those legislative rules, the CFPB’s indirect auto lending bulletin is informal guidance that, as the Government Accountability Office (“GAO”) concluded, “offers clarity and guidance on the Bureau’s discretionary enforcement approach.” Nonetheless, the GAO found that the CFPB bulletin qualifies as a “rule” subject to the CRA. The GAO has responded to requests from members of Congress to opine on the status of agency issuances by consistently noting that the scope of the definition of a rule under the CRA is broad. In a 2012 letter, the GAO explained that the “definition of a rule has been said to include ‘nearly every statement an agency may make.’”
If the CRA is available to Congress to invalidate agencies’ non-rule guidance that was not reported to Congress or published in the Federal Register, it is unclear what, if any, timing boundaries apply. This novel approach could implicate a large swath of informal agency guidance issued since the CRA’s passage. Further, a CRA disapproval extends beyond the rule (or non-rule guidance) itself, and prohibits the agency from issuing any rule that is “substantially the same” as the invalidated rule, absent subsequent statutory authorization.
It is unclear, however, what this means in the context of agency guidance. If agency guidance is an interpretation of existing statutes and regulations, and Congress repeals only the guidance/interpretation, but not the existing statutes (or regulations, if applicable), it is possible that an agency could simply attempt to return to its initial stance (for instance, a CFPB director could possibly refocus on indirect auto lenders, using an approach similar to that announced in the CFPB’s 2013 bulletin). Certainly, the actions of Congress under the CRA do not protect entities from scrutiny by the Department of Justice, the Federal Trade Commission, or the states, which also have enforcement authority under ECOA, or from private plaintiffs, who have a cause of action.
In any event, Congress definitely has clarified that it is willing to use the CRA to invalidate both agency regulations and informal guidance, and it remains to be seen which additional Obama-era regulations or guidance documents may be the CRA’s next victim.