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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

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

 

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.

Despite changes in leadership at numerous federal agencies, Washington D.C. continues to focus on lending to servicemembers. In December, Congress extended the time period for protections against foreclosure under the Servicemembers Civil Relief Act. Otherwise, those protections would have expired at the end of 2017.

In addition, the Department of Defense recently amended its Military Lending Act interpretive rule. Among other topics, the amendments address loans to purchase a motor vehicle or other property, and the extent to which the Act’s requirements exempt loans that finance amounts in addition to the purchase price.

Read more in Mayer Brown’s Legal Update.

On June 22, 2017, the CFPB’s Student Loan Ombudsman put out its annual report on student loans, as required by the Dodd-Frank Act. The report analyzes complaints submitted by consumers about student loan servicers between March 2016 and February 2017. Many of the complaints relate to practices, such as payment processing, customer service and borrower communication, and income-based repayment plan enrollment, that the CFPB has frequently scrutinized in the past through supervision and enforcement activities.

However, the majority of the report focuses on complaints from consumers related to the Public Service Loan Forgiveness (PSLF) program, which allows those who enter careers in public service to have their student loans forgiven after a decade. The CFPB’s report criticizes servicers’ alleged failures to actively advise borrowers on how to qualify for PSLF, track their progress toward PSLF completion, and inform them about the requirements of the PSLF program. In conjunction with the report, the CFPB updated its education loan examination procedures to include additional questions about the PSLF program. Continue Reading CFPB Issues Report on Student Loan Servicing and Updated Examination Procedures