On November 7, 2023, the Federal Housing Finance Agency proposed a series of significant regulatory and legislative reforms for the Federal Home Loan Bank System in a much-anticipated report, “FHLBank System at 100: Focusing on the Future”, containing the results of a year-long comprehensive review of the FLHB System. This Legal Update provides an overview of the report and its most noteworthy legislative and regulatory recommendations.
Mayer Brown is pleased to provide the latest edition of its UDAAP Round-Up. This newsletter is designed to provide readers with a periodic resource to stay abreast of federal activities regarding the prohibition on unfair, deceptive, or abusive acts or practices in the consumer financial services space. In this edition, we cover notable policy, enforcement, and supervisory developments from April 2023 through September 2023.
Mere days before Halloween, California enacted California Senate Bill 666, imposing a set of restrictions on the fees that commercial financers may charge their small business customers. Signed by the governor on October 13, the legislation marks an escalation of the state’s regulation of commercial financing. What began as a disclosure-based regime with California’s broad 2018 commercial finance disclosure law (the “CFDL”) has developed into the direct regulation of commercial financing business practices with the affirmative prohibition of charging certain fees to “small businesses.” SB 666 closely follows an August 2023 rulemaking by the California Department of Financial Protection and Innovation (“DFPI”) targeting unfair, deceptive, or abusive acts or practices (“UDAAPs”) in commercial financing and requiring commercial financers to submit annual reports of their activities to the state.
Read more in this Mayer Brown Legal Update.
The CFPB’s 1071 Rule is on hold. On October 26, 2023, the United States District Court for the Southern District of Texas issued a nationwide injunction that enjoins the Consumer Financial Protection Bureau (“CFPB”) from implementing and enforcing its small business lending data collection rule (the “1071 Rule”). The injunction stems from a lawsuit filed by a group of lenders and trade associations seeking to set aside the 1071 Rule on the grounds that the rule was issued using funds that were unconstitutionally appropriated to the CFPB, pursuant to the United States Court of Appeals for the Fifth Circuit’s ruling in Community Financial Services Ass’n v. CFPB, which held that the CFPB’s funding mechanism violates the US Constitution’s Appropriations Clause and separation of powers. We previously reported on the 1071 Rule litigation on our recent podcast, available here. With the court’s ruling, the CFPB is now enjoined on a nationwide basis from enforcing and implementing the 1071 Rule against any “covered financial institution,” subject to the Supreme Court’s ruling in Community Financial Services Ass’n, which is expected in 2024.
The CFPB’s 1071 Rule (which we have addressed in detail in previous Legal Updates) requires certain “covered financial institutions” that receive applications for financing from small businesses to collect and report data about their small business lending activities, with the purpose of facilitating enforcement of fair lending laws with respect to women-owned, minority-owned, and small businesses. After a lengthy rulemaking process, the CFPB issued its final 1071 Rule on March 30, 2023, with a tiered effective date between October 24, 2024 and January 1, 2026, depending on a lender’s volume of small business financing activity.
The path to the court’s ruling began shortly after the final 1071 Rule was issued, when Rio Bank, the American Bankers Association, and the Texas Bankers Association filed a lawsuit in the United States District Court for the Southern District of Texas alleging the rule was invalid because it was issued using funds that were unconstitutionally appropriated to the CFPB. In its motion in opposition to the plaintiffs’ motion for a preliminary injunction in that case, the CFPB argued that even if an injunction were to be granted, any injunction should be narrowly tailored and applied only to the plaintiffs before the court. While the court granted injunctive relief to Rio Bank and banks that are members of the American Bankers Association or Texas Bankers Association on July 31, 2023, the court declined to issue a broader nationwide injunction at that time.
The patchwork nature of the injunction caught the eye of some industry groups. In August 2023, a consortium of trade associations sent a letter to CFPB Director Rohit Chopra requesting that the CFPB ensure “parity and consistency” across financial institutions subject to the 1071 Rule. Noting that the 1071 Rule was stayed for some financial institutions who were parties to litigation where an injunction had been issued, but not other financial institutions, the trade associations requested that the CFPB pause the 1071 Rule’s effective date and compliance dates until the Community Financial Services Ass’n case is resolved by the Supreme Court. The trades’ position was strengthened when a federal court in Kentucky granted similar injunctive relief in a lawsuit brought by the Kentucky Bankers Association and a group of Kentucky banks on September 14, 2023.
After the Southern District of Texas issued its order granting a preliminary injunction in Rio Bank’s lawsuit, a consortium of depository institutions, credit unions, and commercial finance trade associations moved to intervene in the litigation and, eventually, moved for their own preliminary injunction. The intervenor plaintiffs requested that the court issue a nationwide injunction covering all “covered financial institutions” subject to the 1071 Rule, arguing that the prospect of a limited injunction and changed circumstances since the original preliminary injunction ruling risks causing smaller financial institutions with less ability to challenge the 1071 Rule to incur costs implementing compliance controls and processes “that prove unnecessary and unrecoverable.” The court sided with the intervenor plaintiffs on the remainder of the arguments, and granted the intervenor plaintiffs’ motion for a preliminary injunction.
The court then proceeded to the question of whether a nationwide injunction was merited. Finding that “[t]o limit the injunction would undermine the goals of preventing inequality in lending and harm to the constitutional structure pending U.S. Supreme Court review of the question at issue,” the court extended the preliminary injunction to all financial institutions subject to the 1071 Rule, on a nationwide basis. The court clarified that its injunction requires the CFPB to cease implementation and enforcement of the 1071 Rule against all covered financial institutions, but it does not prevent the CFPB from answering inquiries or publishing guidance materials, since these actions do not qualify as “conduct taken against any financial institution[.]”
Industry groups will likely be watching closely for the CFPB’s next move on the 1071 Rule, including whether the CFPB will extend the 1071 Rule’s effective dates to account for the period that implementation of the rule is stayed pending the Supreme Court’s resolution of the Community Financial Services Ass’n case.
On September 25, 2023, the Consumer Financial Protection Bureau began its most substantial Fair Credit Reporting Act rulemaking yet with an outline of proposed changes to Regulation V, which implements FCRA, ahead of the Bureau’s Small Business Advisory Review Panel. The proposals under consideration could have a substantial impact on the data brokerage industry, if implemented. In this Legal Update, we look at the key components of the CFPB’s initial proposals for revising Regulation V.
In a joint statement released October 12, the US Department of Justice (DOJ) and Consumer Financial Protection Bureau (CFPB) cautioned lenders about considering immigration status in credit decisions. Although the CFPB’s Regulation B (which implements the Equal Credit Opportunity Act—or ECOA) expressly permits creditors to consider immigration status in certain circumstances, the joint statement advises lenders that, “Regulation B does not, however, provide a safe harbor for all consideration of immigration status.”
Immigration status is not a prohibited basis under ECOA or Regulation B. In fact, Regulation B explicitly states that a creditor may consider a credit applicant’s immigration status or status as a permanent resident and “any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment.” However, immigration status may broadly overlap with or, in certain circumstances, be viewed as a proxy for a prohibited basis (e.g., national origin, race). In the joint statement, the agencies contend that if a creditor’s consideration of immigration status is not necessary to ascertain the creditor’s rights and remedies regarding repayment and results in discrimination on a prohibited basis, it may violate ECOA and Regulation B. The joint statement advises creditors to evaluate whether their reliance on immigration status and citizenship status is necessary or unnecessary to ascertain their rights or remedies for repayment. According to the joint statement, “To the extent that a creditor is relying on immigration status for a reason other than determining its rights or remedies for repayment, and the creditor cannot show that such reliance is necessary to meet other binding legal obligations . . . the creditor may risk engaging in unlawful discrimination, including on the basis of race or national origin, in violation of ECOA and Regulation B.”
The agencies provide the following illustrative example:
For example, if a creditor has a blanket policy of refusing to consider applications from certain groups of noncitizens regardless of the credit qualifications of individual borrowers within that group, that policy may risk violating ECOA and Regulation B. This risk could arise because some individuals within those groups may have sufficient credit scores or other individual circumstances that may resolve concerns about the creditor’s rights and remedies regarding repayment.
The joint statement also warns lenders about the use of “overbroad” policies related to the consideration of certain criteria that also may correlate with immigration status—such as how long a consumer has had a Social Security Number—and indicates any claims that policies are necessary to preserve the creditor’s rights and remedies regarding repayment or to meet other binding legal obligations should be supported by evidence and should not be a pretext for discrimination.
Although the joint statement is for informational purposes only, does not impose any legal requirements and it is not enforceable, it reflects the agencies’ views on this issue. In addition to raising ECOA concerns, the joint statement indicates that creditors’ consideration of immigration status may also raise concerns under 42 U.S.C. § 1981. (Although not referenced by the joint statement, certain state laws, such as California’s Unruh Act, include immigration status as a prohibited basis under the law.)
The DOJ and CFPB’s position articulated in the joint statement arguably is a narrower interpretation of creditors’ ability to consider immigration status than is expressed in the CFPB’s other interpretive guidance on this issue. Notably, the joint statement does not reference other relevant provisions of the CFPB’s Official Interpretation to Regulation B that describe creditors’ permissible consideration of immigration status in making credit decisions. For example, the CFPB’s Official Commentary to Regulation B explicitly states that, “A denial of credit on the ground that an applicant is not a United States citizen is not per se discrimination based on national origin.” The Commentary also explains that an applicant’s immigration status and ties to the community (such as employment and continued residence in the area) could have a bearing on a creditor’s ability to obtain repayment. Accordingly, the Commentary provides that a creditor “may consider immigration status and differentiate, for example, between a noncitizen who is a long-time resident with permanent resident status and a noncitizen who is temporarily in this country on a student visa.”
Because many creditors currently ask about and consider applicants’ immigration status as part of the credit application process, the joint statement is likely to create some controversy in the industry. Also, the CFPB likely will be reviewing how supervised institutions use immigration status in credit decisioning during examinations.
Cyber threats to the financial services industry continue to increase. At the same time, regulatory requirements, litigation risk, contractual requirements and regulator expectations continue to grow. Please join us for a half-day Cybersecurity Awareness Month program that will highlight key recent cyber legal developments and tools that financial services companies can use to mitigate associated legal risks.
This program—led by Adam Hickey, former Deputy Assistant Attorney General, who supervised high-profile cyber investigations for more than a decade, and Justin Herring, former Executive Deputy Superintendent of New York’s Department of Financial Services (NYDFS), who supervised the development of its cyber regulation—will feature current and former law enforcement and regulators.
Mayer Brown has published a new edition of Licensing Link, a periodic publication that will keep you informed on hot topics and new developments in state licensing laws, and provide practice tips and primers on important issues related to state licensing across the spectrum of asset classes and financial services activities.
In this issue, we discuss the application of state licensing laws and recent licensing developments related to other innovative non-recourse financial products: income share agreements (“ISAs”) and home equity option agreements, and provide an update on work-from-home regulations issued by the Oregon Department of Financial Regulation. Check it out and subscribe to receive future issues directly.
On September 8, 2023, a federal court struck down the Consumer Financial Protection Bureau’s (CFPB) attempts to supervise institutions for so-called “unfairness discrimination.” The CFPB had previously announced the view that the statutory prohibition on unfairness encompasses a broad-based prohibition on discrimination in an update to its examination manual in March 2022, eliciting substantial objections and pushback from the financial services industry. Importantly, in addition to declaring the CFPB’s interpretation to be beyond the CFPB’s statutory authority, the court also enjoined the CFPB from “any examination, supervision, or enforcement action … based on the [CFPB’s] interpretation of its UDAAP authority announced in the March 2022 update to its Supervision and Examination Manual” with respect to any member of the plaintiff organizations in the case. If upheld on appeal, the ruling would be a significant blow to the CFPB’s efforts to enforce anti-discrimination principles based on the statutory prohibition on unfairness.
As we have previously discussed, in March 2022, the CFPB updated the UDAAP section of its examination manual to include a review for discriminatory conduct in all aspects of the offering or provision of consumer financial products or services, regardless of whether a company extends any credit or would otherwise be subject to the Equal Credit Opportunity Act (ECOA), including activities such as advertising, pricing, servicing, collections, consumer reporting, payments, remittances, deposits and algorithms. The CFPB’s announcement also suggested that the CFPB may be expecting supervised entities to perform testing to identify and correct unfair discrimination outside of the credit context. Specifically, the CFPB stated that it will “require supervised companies to show their processes for assessing risks and discriminatory outcomes” and that the CFPB will review “how companies test and monitor their decision-making processes for unfair discrimination.”
Several industry trade associations sued the CFPB, alleging, among other things, that the CFPB’s interpretation of “unfairness” to encompass discrimination untethered from any legislatively identified protected classes or activities stretched the notion of unfairness too far. In its ruling, the district court agreed. The court first held that the “major questions” doctrine applies because the question of whether unfairness encompasses discrimination “is a question of major economic and political significance” given the impact it would have on the financial services industry. The court went on: “Given that context, the CFPB faces a high burden in arguing that Congress conferred a sweeping antidiscrimination authority without defining protected classes or defenses, without using the words ‘discrimination’ or ‘disparate impact,’ and while separately giving the agency authority to police ‘discrimination’ only in specific areas.” Although noting that the CFPB’s interpretation “has a certain appeal given the facial breadth of [the statutory] language” defining unfairness, the court ultimately determined that that the “text and structure of the Act … make its definition of ‘unfairness’ at least vague as to the topic of discrimination” and thus “is not the sort of ‘exceedingly clear language’ that the major-questions doctrine demands.” (The court separately ruled against the CFPB based on its funding structure, an issue that the Supreme Court will be ruling upon this term. Unless it is overturned on appeal, the substantive ruling about the CFPB’s statutory authority will survive even if the Supreme Court upholds the CFPB’s structure.)
As a remedy, the court not only vacated the update to the examination manual but went further and enjoined the CFPB from pursuing any examination, supervision or enforcement action against any member of any of the plaintiff organizations. (The plaintiffs in the case are: the U.S. Chamber of Commerce, the Longview Chamber of Commerce, the American Bankers Association, the Consumer Bankers Association, the Independent Bankers Association of Texas, the Texas Association of Business, and the Texas Bankers Association). Any institution that is a member of these organizations need only inform the CFPB of that membership to trigger the protections of the injunction. We expect that additional trade associations may seek to intervene in the case to obtain the benefits of the injunction for their members, which is what has happened in the separate lawsuit challenging the CFPB’s small business data collection rule. Any company that is the subject of a UDAAP examination (or enforcement investigation) in which the CFPB seems to be exploring possible claims of UDAAP discrimination should consider whether it wishes to take steps to avail itself of the protections of the injunction. The CFPB is likely to appeal this decision and we will continue to monitor this case.
Transactions involving the purchase and sale of residential mortgage loans and mortgage servicing rights (“MSRs”) frequently raise the question of whether they require submitting premerger notification filings to the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino (“HSR”) Act. This Legal Update provides an overview of how residential mortgage loans, MSRs and related assets are treated for HSR purposes in the context of asset or servicing platform sales and equity transactions pertaining to entities that hold mortgage loans or MSRs, including residential mortgage servicers.