CFPB Director Kathy Kraninger has filed her first contested lawsuit as CFPB Director.  Somewhat surprisingly, the lawsuit seeks to enforce a Civil Investigative Demand (CID) issued by the CFPB in June 2017—under former Director Richard Cordray—to a debt collection law firm.  The petition to enforce the CID makes clear that the respondent law firm made a “final, partial, redacted production” in response to the CID in September 2017.  Clearly, therefore, this matter was pending at the CFPB throughout the year-long tenure of Mick Mulvaney, during which the agency took no action to enforce the CID. It is dangerous to read too much into this action, but it does suggest that Kraninger may take a more aggressive enforcement posture than Mulvaney, who was criticized for the sharp drop in the number of enforcement actions under his watch.

The CID at issue is a typically broad CFPB CID from that era. It contains 21 interrogatories with dozens of sub-parts, seven requests for written reports, 15 requests for documents, and, unusually, four request for “tangible things,” in this case phone recordings and associated metadata. Read as a whole, the CID seeks information regarding virtually every aspect of the respondent’s debt collection business over a period of three-and-a-half years. The CID’s Notification of Purpose is equally broad and limitless, Continue Reading Kraninger’s First Lawsuit

While most of the federal government remained shuttered in mid-January, the Consumer Financial Protection Bureau (CFPB or the Bureau) was on the job, thinking about the Military Lending Act (MLA or the Act). On January 17, 2019, the Bureau’s Director, Kathleen Kraninger, issued a statement asking Congress to “explicitly grant the Bureau authority to conduct examinations specifically intended to review compliance with the MLA.” Director Kraninger’s predecessor, Mick Mulvaney, reportedly halted MLA-related examinations last year, citing the lack of statutory authority . It appears from the Director’s request that the CFPB may not conduct MLA compliance examinations without new legislation.

The MLA—enacted in 2006 and implemented by the Department of Defense—provides enhanced protection to active duty service members, their spouses, and their dependents when they obtain certain types of loan products. One of the main protections prevents creditors from imposing more than a 36% Military Annual Percentage Rate (an annualized rate including interest and other fees) on a covered individual for certain products. The Act also prohibits certain loan terms, such as mandatory arbitration clauses or prepayment penalties.

Congress granted the Bureau enforcement authority for the MLA’s requirements in 2013. At the time, the Bureau interpreted the scope of that new authority to include supervision—the authority to proactively examine covered institutions for violations of the Act. In its Supervisory Highlights for Winter 2013, the Bureau stated that it would ensure adherence to the MLA through both enforcement and supervision activity, and noted that it had updated its short-term, small-dollar loan examination procedures with guidance on how to identify MLA violations. The Bureau then issued a set of standalone examination procedures for MLA compliance in 2016. The Bureau has taken one enforcement action based on MLA violations—a consent order issued in 2013.

The Bureau has not issued any formal guidance regarding MLA-related supervisory activity since 2016. However, in August 2018, it was widely reported that then-Acting Director Mulvaney planned to suspend MLA-related examinations. The basis for the suspension was reportedly that, although the MLA legislation granted the Bureau enforcement authority, the Act did not grant supervisory authority. In other words, the Bureau planned to continue to exercise its enforcement authority as violations of the MLA came to its attention, but CFPB examiners would not proactively monitor covered institutions for violations.

Subsequent to those reports, Democratic members of the House Committee on Financial Services (HCFS)—including current HCFS Chair Maxine Waters—sent a letter to Director Kraninger requesting that she commit to resuming MLA-related supervisory activity. The Director responded by issuing the above-mentioned request for legislation explicitly granting the Bureau supervisory authority over the MLA. Based on the wording of Director Kraninger’s request, it appears that the Bureau may not conduct “examinations specifically intended to review compliance with the MLA” until it receives explicit legislative authority from Congress.

In conjunction with her request, Director Kraninger submitted to lawmakers proposed legislation that would grant the Bureau supervisory authority for the MLA’s requirements. A week prior to the Director’s request, Representative Andy Barr introduced House Resolution 442, which would also grant the requested authority. The prospects for either proposal are unclear in a divided Congress.

Possibly hinting toward a revival of fair lending enforcement following a recent lull, the OCC’s Ombudsman recently declined a bank’s appeal of the OCC’s decision to refer the bank to both DOJ and HUD for potential Fair Housing Act violations.

The OCC’s Ombudsman oversees an infrequently used program for banks that desire to appeal agency decisions and actions.  In 2018, a bank appealed the determination of the OCC’s supervisory office that the bank may have engaged in a pattern or practice of discrimination on the basis of race, national origin, or sex in violation of the Fair Housing Act.

The Ombudsman reviewed the bank’s appeal under Section 2-204 of Executive Order 12892 and DOJ guidance from 1996 describing the circumstances that qualify as a “pattern or practice” meriting a referral.  Under Executive Order 12892, when the OCC receives “information from a consumer compliance examination…suggesting a violation of the Fair Housing Act,” it must forward that information to HUD. If the information indicates a possible pattern or practice of discrimination in violation of the Act, the OCC must also forward it to DOJ. After examining the information, HUD may choose to pursue an administrative enforcement action and DOJ may choose to pursue legal action.

Significantly, in ruling on the bank’s appeal, the Ombudsman determined that the OCC is only required to have information suggesting a possible pattern or practice of Act violations in order to forward that information to HUD  or DOJ pursuant to Executive Order 12892.  In other words, the OCC is not required to meet evidentiary standards that would otherwise be applicable in court. According to the Ombudsman’s decision, DOJ conducts its own investigation of information forwarded by the OCC and directs bank regulatory agencies that they need not have “overwhelming proof” of an “extensive pattern or practice of discrimination” before making a referral.

Appeals to the Ombudsman rarely involve fair lending matters. The last bank appeal involving fair lending occurred in 2011, and involved a community bank that the OCC believed had engaged in racial redlining. The Ombudsman agreed with the supervisory office’s referral in that case as well. More recently, banks have used the Ombudsman’s office to challenge various matters requiring attention in examination reports, with many focusing on ratings assigned during Shared National Credit examinations.

It’s difficult to predict whether this recent Ombudsman ruling is  a harbinger of more vigorous fair lending supervision.  Banks should take note, however, that the OCC is conducting Fair Housing Act examinations and willing to refer matters to HUD and DOJ based solely on information “suggesting a possible pattern or practice” of violations.

 

Oversight of the Consumer Financial Protection Bureau (Bureau) by the U.S. House of Representatives is expected to become more aggressive when the 116th Congress convenes in January 2019. On December 11, 2018, members of the new Democratic House majority nominated Representative Maxine Waters to chair the House Financial Services Committee, which oversees the Bureau. During Rep. Waters’ time as ranking member on the Committee, she heavily criticized many of the changes Acting Director Mick Mulvaney made at the Bureau. Mayer Brown summarized those changes in a recent Legal Update.

As chair, Rep. Waters will set the Committee agenda, enabling her to turn her criticism into more direct pressure on the Bureau and its new Director Kathleen Kraninger. Proposed legislation sponsored by the incoming chair may hold some clues to the actions the Committee may take.

In September 2018, Rep. Waters introduced the Consumers First Act. The bill is largely designed to restore the Bureau to how it looked and functioned before Acting Director Mulvaney’s tenure. Some of its major topics include the following: Continue Reading House Oversight of CFPB Expected to Become More Aggressive Under Chair Waters

The Consumer Financial Protection Bureau recently proposed amendments to its earlier policy for issuing no-action letters, and proposed a process for participating in a so-called regulatory “sandbox,” which would provide certainty in or exemptions from complying with certain federal consumer protection laws. Comments on the proposals are due by February 19, 2019.

Read more in Mayer Brown’s Legal Update.

As the Mortgage Bankers Association gathers for its Regulatory Compliance conference next week in Washington, DC, Mayer Brown’s Consumer Financial Services group will be addressing all the hot topics.

Melanie Brody will be talking about the Equal Credit Opportunity Act (ECOA) on a panel called “Fair Lending and Equal Opportunity Laws” on Sunday, September 16.

On Monday, September 17th, Phillip Schulman will discuss trends in RESPA Section 8 compliance. He will also join in the round-table discussion of RESPA later that afternoon.

Ori Lev will speak on panel entitled “UDAAP Compliance.”

Krista Cooley will be discussing the latest developments in FHA servicing compliance. She will also field questions on the topic during the afternoon servicing round-table.

On Tuesday, September 18th, Keisha Whitehall Wolfe will discuss state compliance issues.

Also in attendance from Mayer Brown will be new partner Michael McElroy, partner David Tallman, and associates Christa Bieker, Joy Tsai, and James Williams.

We look forward to seeing you there!

 

The ABA Business Law Section is holding its 2018 Annual Meeting in Austin, Texas on September 13-15, 2018. The Meeting will offer over 80 CLE programs and many more committee meetings and events, and will feature several Mayer Brown panelists.

Financial Services Regulatory & Enforcement (FSRE) partner Laurence Platt will participate in a panel discussion on the future of housing finance.

FSRE partner Marc Cohen will participate in a panel discussion on what the Anti-Terrorism Act and Alien Tort Statute mean for banks.

FSRE associate Eric Mitzenmacher will participate in a panel on current developments in consumer financial services.

Stuart Litwin, co-head of Structured Finance and Capital Markets, will moderate a panel on the transition away from LIBOR and similar rates.

FSRE partner David Beam will moderate a panel on the differences between P2P and interbank payment systems.

FSRE associate Matthew Bisanz will moderate a panel discussion on current trends in banking enforcement actions against individuals.

The Bureau of Consumer Financial Protection (the “Bureau”) has struck out again in trying to enforce a Civil Investigative Demand (“CID”) that contains broad and generic language about the nature of the agency’s investigation. For the second time, a US Court of Appeals has ruled that a CID issued by the Bureau was invalid because the agency failed to meet the statutory requirement that the CID identify the conduct constituting the alleged violation under investigation and the provision of law applicable to such violation, as required by 12 U.S.C. § 5562(c)(2). As we previously discussed, last year the DC Circuit ruled that a CID that the Bureau issued to a college accrediting agency failed to meet the statutory threshold when it merely identified “unlawful acts and practices in connection with accrediting for profit colleges” as the conduct under investigation. CFPB v. ACICS, 854 F.3d 683 (D.C. Cir. 2017).

Now, a unanimous panel of the Fifth Circuit has followed suit and held that a CID issued to the Source for Public Data, “a company that provides public records to the public through an Internet-based search engine,” is invalid because it uses similarly broad language that does not comply with the statute. Continue Reading Another One Bites the Dust: BCFP Loses CID Appeal

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. Continue Reading Mulvaney’s Bureau Issues Second Enforcement Action: Debt Collectors Beware?