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 pending legislation in California that would impose new licensing and fiduciary duty obligations on commercial loan brokers, the New York governor’s push for a new licensing and regulatory regime governing Buy Now, Pay Later financing, and the continued trend of state legislatures introducing “true lender” laws. Check it out and subscribe to receive future issues directly.

The New York Department of Financial Services finalized guidance on how banks and mortgage institutions should manage climate-related financial and operational risks. The agency’s guidance creates extensive obligations for New York institutions, particularly mortgage lenders and servicers for which those risk management expectations may be new. Also, the NYDFS emphasizes that those institutions must still recognize the interplay between safe-and-sound climate risk policies and the goal of providing access to affordable credit to all communities and customers. NYDFS will begin requesting information from institutions on their climate risk progress and plans during 2024.

Read about the NYDFS final Climate Risk Management Guidance in Mayer Brown’s Legal Update.

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.

Follow this link for more information and to register.

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.