Legal Alert

Mortgage Banking Update - January 4, 2024

January 4, 2024

January 4, 2024 – Read the below newsletter for the latest Mortgage Banking and Consumer Finance industry news written by Ballard Spahr attorneys. In this issue we discuss the forecasted impact the Supreme Court will have on the consumer financial services industry in 2024.

In This Issue:

SCOTUS Slated to Make Lasting Impact on Consumer Financial Services Industry in 2024
New FCC Rule on TCPA Consent for Advertising and Telemarketing Calls and Texts Will Significantly Impact Callers Who Obtain Consent From Lead Generators
Bills to Curtail Trigger Leads Introduced in Congress
FinCEN Issues Final CTA BOI Access Rules, Heralded by YouTube Video
December 14 Podcast Episode: The Biden Administration’s “Junk Fees” Initiative Continues: What the Latest Actions Mean for The Consumer Financial Services and Rental Housing Industries, Part II
FTC Extends Comment Deadline for “Junk Fees” Proposal
December 28 Podcast Episode: Community Reinvestment Act Reform: A Close Look at the Final Rule
December 21 Podcast Episode: What Recent Developments in Federal Preemption for National and State Banks Mean for Bank and Nonbank Consumer Financial Services Providers
Oral Arguments Held in CFPB v. Townstone Financial Case
President Biden Vetoes Congressional Override of CFPB Section 1071 Small Business Lending Rule
California Federal District Court Grants Summary Judgment for DFPI in Lawsuit Challenging State’s Regulations Requiring Consumer-Like Disclosures for Commercial Transactions
OCC Risk Perspective Report Focuses on Third-Party Relationships With Fintechs
CFPB Adjusts HMDA and HPML Asset Exemption Thresholds
CFPB Releases Study of Refinance Mortgage Loans Between 2013 and 2023
CFPB and DOJ File Lawsuit Against Land Developer Alleging Predatory Lending
Financial Services Trade Associations Raise Concerns With CFPB’s Advisory Opinion on Information Requests
Justice Department Departs From OCC View of Preemption in Amicus Brief Filed With SCOTUS; Democratic Senators Criticize OCC Approach to Preemption

SCOTUS Slated to Make Lasting Impact on Consumer Financial Services Industry in 2024

This New Year is setting up to be a momentous one for the consumer financial services industry in the United States Supreme Court. In 2024, the Supreme Court is expected to decide four impactful cases that may hold that the CFPB’s funding is unconstitutional, eliminate giving deference to CFPB, FTC and federal banking agency regulations, severely narrow National Bank Act (NBA) preemption of state laws, and limit the time during which a plaintiff may sue an agency to facially challenge an agency rule. We cannot recall a prior year in which the Supreme Court considered so many cases which impacted the consumer financial services industry.

Constitutionality of CFPB Funding: There is hardly a soul who isn’t aware of CFSA v. CFPB, the existential challenge to the CFPB arising from the manner in which the CFPB is funded exclusively by the Federal Reserve System and not through Congressional appropriations. The case has been fully briefed and argued and a decision will be forthcoming between now and the end of June. See some of our prior blog posts here and here.

Our Consumer Finance Monitor Podcast has devoted three episodes to this case. In May 2023, we released a podcast episode, “CFSA v. CFPB moves to U.S. Supreme Court: a closer look at the constitutional challenge to the Consumer Financial Protection Bureau’s funding,” in which our special guest was GianCarlo Canaparo, Senior Legal Fellow in the Heritage Foundation’s Edwin Meese III Center for Legal and Judicial Studies. In January 2023, we released a two-part episode, “How the U.S. Supreme Court will decide the threat to the CFPB’s funding and structure,” in which our special guest was Adam J. White, a renowned expert on separation of powers and the Appropriations Clause. To listen to the episode, click here for Part I and click here for Part II. After the oral argument, we also presented a webinar roundtable in which we featured six lawyers who filed amicus briefs supporting a variety of positions. To listen to the podcast episode (which was repurposed from the webinar): “The U.S. Supreme Court’s Decision in Community Financial Services Association of America Ltd. v. Consumer Financial Protection Bureau: Who Will Win and What Does It Mean?,” click here for Part I and click here for Part II.

Chevron Judicial Deference: The next two cases (Loper Bright Enterprises, et al. v. Raimondo and Relentless, Inc. v U.S. Department of Commerce) will likely determine whether the Supreme Court will overturn its 1984 opinion in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., which created a framework for courts to use when deciding whether to uphold the validity of federal agency regulations (Chevron Deference). Under Chevron Deference, a court will typically use a two-step analysis to determine if the court must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute is silent or ambiguous, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, the court must defer to the agency’s interpretation. If Chevron Deference is rejected by the Supreme Court, regulated entities may no longer be able to rely on regulations to ensure compliance with federal law. Even worse, regulated entities may no longer be able to rely on regulations that have been previously validated by courts exclusively based on Chevron Deference. Will the Supreme Court 1996 opinion in Smiley v. Citibank, N.A. still be binding precedent? In that opinion, the Supreme Court relied exclusively on an OCC regulation defining “interest” under Section 85 of the NBA to include late fees on credit cards. That decision held that a national bank could charge late fees allowed by the bank’s home state to cardholders throughout the country and ignore limitations on late fees in the laws of the states where the cardholders reside. These two Chevron Deference cases will be argued on January 17, 2023. As we previously stated, we expect the Supreme Court to overrule the Chevron decision.

National Bank Act Preemption: The next extremely important case is one which will determine whether the OCC’s regulations promulgated in 2011 after the enactment of Dodd-Frank too broadly purport to preempt state consumer protection laws. In Cantero v Bank of America, the Supreme Court will decide whether the NBA preempts New York state law requiring the payment of interest on mortgage escrow accounts. The Department of Justice just filed an amicus brief arguing that the OCC’s 2011 regulations contradict the amendments to the NBA made by Dodd-Frank. If the Supreme Court agrees with DOJ’s opinion, many national banks, particularly those engaged in interstate lending or deposit-taking, will need to take a fresh look at whether they need to comply with a whole array of state consumer protection laws. In December, we released a podcast episode, “What recent developments in federal preemption for national and state banks mean for bank and nonbank consumer financial services providers,” discussing the implications of the Supreme Court’s review of NBA preemption (other than Section 85 of the NBA which deals with interest which national banks may charge). The case is in the process of being briefed.

Timing for Facial Challenge to Regulations: Lastly, in Corner Post, Inc. v Board of Governors of the Federal Reserve System, the Supreme Court agreed to decide when a right of action first accrues for an Administrative Procedure Act (APA) Section 702 challenge to a final rule issued by a federal agency—when the final rule is issued or when the rule first causes injury. This case involves a merchant who sued the Federal Reserve Board seeking to invalidate its Regulation II dealing with capping debit card interchange fees. The district court and Eighth Circuit ruled that the six-year statute of limitations for bringing facial APA claims (28 U.S.C. § 2401(a)) begins to run when a final rule is issued, which meant that the limitations period had run before the merchant had opened his doors for business. In its brief, the Petitioner argues that if the statute of limitations for bringing a facial challenge under the APA can expire before a plaintiff is injured by final agency action, a plaintiff seeking to challenge a regulation beyond the six-year period would be forced to intentionally violate a regulation to induce an enforcement proceeding to manufacture an “as applied” challenge. The Federal Reserve argues in its brief that the tolling provision in 28 U.S.C. § 2401(a) would be unnecessary if the statute of limitations did not begin to run until a final rule first caused injury. Twelve amicus briefs have been filed in the case, including a brief supporting the Petitioner filed by the West Virginia Attorney General and 17 other states. Oral argument has not yet been scheduled.

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In this New Year, our blog, Consumer Finance Monitor Blog, and weekly episodes of our Consumer Finance Monitor Podcast will continue to be your best sources for following these cases and analyzing the Supreme Court opinions which will be issued before July 1, 2024.

Alan S. Kaplinsky & Kristen E. Larson

New FCC Rule on TCPA Consent for Advertising and Telemarketing Calls and Texts Will Significantly Impact Callers Who Obtain Consent From Lead Generators

Yesterday, by a vote of 4-1, the Federal Communication Commission (FCC) adopted a new rule amending its regulations implementing the Telephone Consumer Protection Act (TCPA) to close what it refers to as the “lead generator loophole.” The new rule represents a major change for the online lead generation industry, including comparison shopping websites, by requiring lead generators to obtain consumer consent to receive robocalls and robotexts from one seller at a time, rather than having a single consent apply to multiple sellers at once. The FCC also approved a new rule requiring mobile wireless providers to block certain text messages and is encouraging providers to require consumer opt-in for texts originating from email addresses. Stay tuned for information about a webinar that we will be holding on the new FCC rules.

Change to TCPA consent requirement. The TCPA and the FCC’s implementing rules require callers to obtain consumer consent for certain calls and texts sent using an automatic telephone dialing system or made using a prerecorded or artificial voice. If a robocall or robotext includes or introduces an advertisement or constitutes telemarketing, the prior express consent must be writing. The new rule is intended to close the “lead generator loophole” that has resulted in consumers receiving calls and texts from multiple businesses based on a single grant of consent. The new rule amends the definition of “prior express consent” in the TCPA rules (47 C.F.R. Sec. 64.1200(f)) to provide:

The term prior express written consent means an agreement, in writing, that bears the signature of the person called that clearly and conspicuously authorizes no more than one identified seller to deliver or cause to be delivered the person called advertisements or telemarketing messages using an automatic telephone dialing system or made using an artificial or prerecorded voice. Calls must be logically and topically associated with the interaction that prompted the consent and the agreement must identify the telephone number to which the signatory authorizes such advertisements or telemarking messages to be delivered. (New language highlighted.)

In addition to the requirement for one-to-one consent, the new rule requires the consent to come after a clear and conspicuous disclosure to the consumer that he or she will receive robotexts and/or robocalls from the seller. It also requires robotexts and robocalls that result from consumer consent obtained on comparison shopping websites to be logically and topically related to that website. In its Report and Order, the FCC states, by way of example, that “a consumer giving consent on a car loan comparison shopping website does not consent to get robotexts or robocalls about loan consolidation.”

Do-Not-Call. The new rule also amends the National Do-Not-Call Registry regulations (47 C.F.R. Sec. 64.1200(e )) to explicitly state that DNC protections apply to text messaging, such that marketing text messages cannot be sent to numbers on the registry.

Call Blocking. The new rule also amends the FCC common carrier regulations (47 C.F.R. Sec. 64.1200(s)) to require terminating mobile wireless providers to block all texts from a particular number or numbers when notified by the FCC’s Enforcement Bureau of suspected illegal texts from that nobler or numbers, unless a provider’s investigation shows the identified texts are legal.

In the Report and Order, the FCC also:

Encourages providers to make email to text an opt-in service. The FCC has also issued a proposal to require providers to obtain consumer opt-ins for texts originating from email addresses.
Clarifies that the texter or caller has the burden to prove they have consent that satisfies the TCPA and FCC rules.
Clarifies that consumer consent to a seller is not transferrable or subject to sale to another seller.

The amendments to the TCPA consent requirement will not be effective until six months after the FCC’s Report and Order is published in the Federal Register. The Report and Order is otherwise effective 30 days after its publication in the Federal Register.

Daniel JT McKenna, Jenny N. Perkins, Matthew A. Morr & Michael R. Guerrero

Bills to Curtail Trigger Leads Introduced in Congress

Bills have been introduced in the U.S. House of Representatives (H.R. 4198) and the U.S. Senate (S. 3502) to amend the Fair Credit Reporting Act (FCRA) to curtail the practice of trigger leads with mortgage loans.

The practice is controversial for both consumers and mortgage industry participants. When a mortgage lender orders a credit report on a consumer, the credit bureau providing the report may then alert various other mortgage lenders who have subscribed to a service of that fact, which is a good indication that the consumer is seeking a mortgage loan. The consumer then will receive unsolicited offers from other mortgage lenders, often prompting the consumer to complain to the mortgage lender they are working with. Of course, that mortgage lender typically advises the consumer that the last thing they would do is let their competitors know that the consumer was seeking a mortgage loan.

The House bill would amend FCRA section 604(c), which governs prescreened credit offers, to add the following:

(4) TREATMENT OF PRE-SCREENING REPORT REQUESTS.—If a person requests a report from a consumer reporting agency in connection with a credit transaction involving an extension of credit secured by real estate, such agency may not, solely on the basis of such request, furnish a report to a third party unless such third party has submitted documentation to such agency certifying that such third party has the consumer’s consent or has a current relationship, relating to credit, servicing or other financial services, with such consumer.

The Senate bill would amend the same FCRA section to add certain definitions and the following limitation:

(B) LIMITATION.—If a person requests a consumer report from a consumer reporting agency in connection with a credit transaction involving a residential mortgage loan, that agency may not, solely on the basis of that request, furnish that consumer report to another person unless that other person—

(i) has submitted documentation to that agency certifying that such other person has, pursuant to paragraph (1), the authorization of the consumer to whom the consumer report relates; or

(ii) (I) has originated the current residential mortgage loan of the consumer;

(II) is the servicer of the current residential mortgage loan of the consumer; or

(III)(aa) is an insured depository institution or insured credit union; and

(bb) holds a current account for the consumer to whom the consumer report relates.

Although the House and Senate bills are not identical, the effort to curtail trigger leads has support from both industry participants and consumer groups, including the Mortgage Bankers Association, the National Consumer Law Center, the National Association of Mortgage Brokers, the Community Home Lenders of America, U.S. PIRG, the Association of Independent Mortgage Experts, the Broker Action Coalition, the American Bankers Association, and the Independent Community Bankers of America.

Mortgage Bankers Association President and CEO Bob Broeksmit released the following statement:

MBA and its members have led the industry in advocating for legislative reforms to stop the unwanted harassment of consumers resulting from trigger lead abuses. We commend Senators Jack Reed and Bill Hagerty for introducing the Homebuyers Privacy Protection Act to protect consumers while preserving the legitimate use of trigger leads in appropriately narrow circumstances during a real estate transaction.

We will advocate for this important bipartisan Senate bill, along with the Protecting Consumers from Abusive Mortgage Leads Act (H.R. 4198) introduced earlier this year and led in the House by Reps. John Rose (R-TN) and Ritchie Torres (D-NY), to be passed into law as soon as possible.

Richard J. Andreano, Jr.

FinCEN Issues Final CTA BOI Access Rules, Heralded by YouTube Video

This morning, the Financial Crimes Enforcement Network (FinCEN) issued the much-anticipated final rule (Final Rule) under the Corporate Transparency Act (CTA) regarding access to beneficial ownership information (BOI) reported to FinCEN. These regulations could hardly have arrived any later than they did – the CTA becomes effective on January 1, 2024, although FinCEN recently extended the reporting deadline for companies created in 2024 to a period of 90 days from the date of creation.

The access regulations initially proposed in December 2022 (see our blog post here) were complex; the Final Rule is as well, or more so. Indeed, it is over 247 pages long, prior to its final publication version in the Federal Register. Given the Final Rule’s length, we will analyze it in more detail in a future blog post.

Today, we will describe the YouTube video contemporaneously released by FinCEN, which describes the Final Rule at a high level, and notes certain differences between it and the initially proposed regulations. The headline here is that FinCEN has attempted to address certain criticisms raised by financial institutions regarding the initially proposed regulations and their access to BOI. In the video, FinCEN Director Andrea Gacki observed that FinCEN still needs to propose regulations aligning the CTA with the existing Customer Due Diligence (CDD) Rule for banks and other financial institutions (FIs), which requires covered FIs to obtain BOI from designated entity customers.

This blog post is high-level and focuses only on the statements made during the video. The details of the Final Rule still need to be parsed. Also, FinCEN continued the information onslaught today by issuing an accompanying news release, fact sheet, statement for banks, and statement for non-bank financial institutions.

The YouTube Video: Changes to Proposed BOI Access Rule

U.S. Treasury Office of Terrorism and Financial Intelligence Under Secretary Brian Nelson made introductory remarks and introduced Director Gacki. Among other general prefatory comments, Under Secretary Nelson stressed the importance of BOI obtained through the CTA to law enforcement, intelligence gathering, and national security. Interestingly, the use of BOI during tax investigations received particular mention.

Director Gacki explained that the FinCEN issued the Final Rule after receiving over 80 public comments from a variety of stakeholders, including financial institutions, trade associations, businesses, CTA advocacy groups, law enforcement, legal industry groups, and Congress. In response to these comments, the Final Rule includes some key changes from the proposed rule.

First, the scope of BOI access for FIs has broadened, and is no longer limited to the sole purpose of complying with the CDD Rule. Instead, FIs subject to the CDD Rule also may access BOI for the purposes of maintaining their Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) compliance program; compliance with sanctions screening; potential filing of Suspicious Activity Reports (SARs); and conducting enhanced due diligence (EDD). This change attempts to address criticisms from FIs and other groups that broader access to BOI was necessary to both effectuate the goals of the CTA and for FIs to comply more effectively with the BSA, and that attempting to circumscribe access BOI to “pure” CDD compliance questions created an artificial and unwieldy distinction given the holistic nature of BSA compliance.

Second, the Final Rule removes a requirement that BOI access by FIs is limited to personnel within the U.S. This was a sticking point for FIs, who frequently maintain offshore compliance staff. However, FIs must notify FinCEN within three days of receiving a request from a foreign government, law enforcement entity or party for access to BOI held by the FI.

Third, access to the BOI database has been streamlined. Federal law enforcement may access and query the BOI database directly. State authorities may obtain BOI if they certify that they have received “court authorization,” rather than the more narrow “court order,” and they do not have to provide supporting documentation or wait for FinCEN’s authorization to search. FIs also will have direct access to BOI, but in a more limited fashion that the federal government. Like all parties with access to BOI, FIs are subject to the CTA’s security and confidentiality rules; FIs generally may satisfy these requirements by complying with the Gramm-Leach-Bliley Act and other obligations, including certifying that the reporting company has consented to access. The streamlining of access attempts to address criticisms that a stilted system of one-at-a-time requests for BOI access would be administratively difficult and undermine the CTA’s goals.

Director Gacki stressed that the Final Rule does not impact the CDD Rule, and that regulations regarding the alignment of the CTA with the CDD Rule are forthcoming. According to the high-level interagency statement released today by FinCEN and federal and state banking regulators, FinCEN will revise the current CDD Rule, as required by the CTA, to account for FIs’ access to BOI so that FIs may confirm BOI provided directly to them by customers for the purposes of facilitating their compliance with AML, countering the financing of terrorism, and CDD requirements. The forthcoming rule also will, hopefully, seek to reduce burdens on FIs and legal entity customers that are unnecessary or duplicative in light of the CTA.

Director Gacki also stated that the BOI database would begin functioning as scheduled on January 1, 2024. However, access to BOI will be rolled out in phases, beginning with a pilot program which will first grant access to key federal agencies. Access then will be granted in stages, in this general order: U.S. Treasury personnel and certain federal agencies engaged in law enforcement and national security activities that have memorandums of understanding for access to BSA information in place; additional federal agencies, national security and intelligence agencies, and state, local, and tribal law enforcement authorities; intermediary agencies in connection with foreign government requests; and then FIs and their regulators.

Finally, Director Gacki noted that FinCEN still needs to publish in the Federal Register the forms that parties will need to submit to obtain BOI access, and that FinCEN will continue to distribute information and engage with CTA stakeholders.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Peter D. Hardy & Kaley Schafer

December 14 Podcast Episode: The Biden Administration’s “Junk Fees” Initiative Continues: What the Latest Actions Mean for The Consumer Financial Services and Rental Housing Industries, Part II

This two-part podcast repurposes our most recent webinar on the latest salvo of actions in the Biden Administration’s initiative directed at combatting so-called “junk fees.” Launched in January 2022, the initiative shows no signs of abating.

In Part II, we first look at the Consumer Financial Protection Bureau’s advisory opinion on fees charged by large banks and credit unions to respond to information requests, including the Bureau’s discussion of non-fee obstacles such as chatbots that could unlawfully impede consumers’ ability to make an information request. We then discuss the CFPB’s second edition of Supervisory Highlights focused on “junk fees,” taking a close look at the CFPB’s findings regarding deposit account fees, auto servicing fees, and remittance transfer fees and its discussion of the CFPB’s circular on reopening closed deposit accounts, a remedial action against an auto servicer, and risks in connection with payment processing platforms for student meal accounts. We also discuss CFPB “junk fees” enforcement actions involving NSF fees, fees for add-on products charged by an installment loan lender, and refinancing costs imposed by a high-cost installment lender, as well as state law activity in California and elsewhere related to “junk fees.” We conclude with a discussion of potential future CFPB rulemaking and other actions involving “junk fees,” steps providers should consider to reduce “junk fees” compliance risk, and the preemptive effect on state law of an FTC “junk fees” rule.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, moderates the discussion, joined by John Culhane and Reid Herlihy, Partners in the Group, Michael Gordon and Kristen Larson, Of Counsel in the Group, and Roger Winston, a Partner in the firm and Leader of its Mixed-Use, Condominium, and Multifamily Development Team.

To listen to Part II, click here. To listen to Part I, click here.

The webinar repurposed in this podcast episode is a follow up to our well-attended May 2023 webinar on “junk fees.” To listen to our two-part podcast episode which repurposes the May 2023 webinar, click here and here.

FTC Extends Comment Deadline for “Junk Fees” Proposal

The FTC has extended by 30 days the deadline for submitting comments on its proposed “Rule on Unfair or Deceptive Fees” targeting what the FTC refers to as “junk fees.” The new comment deadline is February 7, 2024.

In October 2023, we released an episode of our Consumer Finance Monitor Podcast about the FTC’s proposal for which our special guest was Stacy Cammarano, Staff Attorney in the FTC’s Bureau of Consumer Protection, Division of Advertising Practices, and a lead attorney on the proposal. To listen to the episode, click here.

We have also released two, two-part podcast episodes on the Biden Administration’s “junk fees” initiative that repurposed webinars we previously held on the initiative. To listen to our first two-part episode, “What the Biden Administration’s “Junk Fees” Initiative Means for the Consumer Financial Services Industry: A Look at the Fees Under Attack,” click here and here. To listen to our second two-part episode, “The Biden Administration’s “Junk Fees” Initiative Continues: What the Latest Actions Mean for the Consumer Financial Services and Rental Housing Industries,” click here and here.

John L. Culhane, Jr.

December 28 Podcast Episode: Community Reinvestment Act Reform: A Close Look at the Final Rule

On October 24, 2023, the OCC, FDIC and Board of Governors of the Federal Reserve System jointly adopted final amendments to their regulations implementing the Community Reinvestment Act of 1977 (CRA). In this episode, which repurposes a webinar, we are joined by guest speaker Kenneth H. Thomas, Ph.D., Founder/CEO of Community Development Fund Advisors. After reviewing the background of the adoption of the CRA and implementing rules of the banking agencies, we discuss the key elements of the final rule. We look at the requirement for banks to delineate assessment areas in which their CRA performance will be evaluated, the tests under which banks’ CRA performance will be evaluated, the strategic plan option, and data collection and reporting requirements. In discussing the final rule’s requirements, we also consider how they apply to banks of different sizes. Throughout our discussion, Dr. Thomas provides his commentary on the final rule’s impact on the goals of CRA and CRA evaluations.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion, joined by Scott Coleman, a partner in the Group, and Sarah Dannecker, an associate in the Group.

To listen to the episode, click here.

Dr. Thomas was also our special guest for a previous podcast episode, “A look at the joint Community Reinvestment Act proposal issued by the OCC, FDIC, and Federal Reserve Board.” Click here to listen to the episode.

December 21 Podcast Episode: What Recent Developments in Federal Preemption for National and State Banks Mean for Bank and Nonbank Consumer Financial Services Providers

Providers of consumer financial services that rely on federal preemption to charge customers uniform interest rates and fees on a nationwide basis are currently facing a series of legislative and litigation challenges. In this episode, which repurposes a recent webinar, we first discuss the U.S. Supreme Court’s grant of certiorari in Cantero v. Bank of America on the question whether the National Bank Act preempts state laws requiring the payment of interest on mortgage escrow accounts and look at the competing arguments and preemption standards under consideration. We then look at the Dodd-Frank Act’s provisions on federal preemption for national banks and federal savings associations, OCC regulations addressing the scope of federal preemption, and federal statutes providing interest rate exportation authority for national and state-chartered banks and other institutions. We then turn to current legal challenges to rate exportation authority, focusing on state laws opting out of federal law allowing interest rate exportation by state banks, state laws defining “true lender” to target nonbank/bank partnerships seeking to take advantage of federal interest rate exportation authority, and the California trial court’s recent ruling in a very important “true lender” lawsuit. We conclude with a discussion of the potential implications of a U.S. Supreme Court override of the Chevron deference framework for OCC and FDIC regulations interpreting federal statutes on interest rate authority of national and state banks.

Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the discussion, joined by John Culhane, Reid Herlihy, and Ronald Vaske, partners in the Group, and Mindy Harris, Of Counsel in the Group.

To listen to the episode, click here.

Oral Arguments Held in CFPB v. Townstone Financial Case

On December 8, 2023, oral arguments were held before a three judge panel of the U.S. Court of Appeals for the Seventh Circuit in the CFPB v. Townstone Financial case, in which the CFPB alleges that Townstone Financial, a non-bank mortgage company (Townstone), engaged in redlining in the Chicago area in violation of the Equal Credit Opportunity Act (ECOA). The tea leaf reading may now commence.

As previously reported, in February 2023 the U.S. District Court for the Northern District of Illinois granted Townstone’s motion to dismiss the CFPB’s complaint on the grounds that the ECOA applies to applicants and not to prospective applicants. While the ECOA only refers to applicants, Regulation B under the ECOA provides that a “creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” (Emphasis added.) The CFPB argued that the court should follow Regulation B, and should defer to its interpretation of the ECOA reflected therein because the regulation is “reasonably related” to the objectives of the ECOA. The federal district court rejected this argument and concluded that the “plain text of the ECOA . . . clearly and unambiguously prohibits discrimination against applicants, which the ECOA clearly and unambiguously defines as a person who applies to a creditor for credit.” As a result, the court determined that a redlining claim could not be maintained under ECOA.

In April 2023, the CFPB appealed the ruling to the Seventh Circuit. The CFPB and then Townstone filed briefs with the court, as did other parties supporting the CFPB and supporting Townstone.

In its brief, the CFPB argued that the court should follow the “Chevron framework,” which refers to the approach set forth by the U.S. Supreme Court in its 1984 decision in Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc. for how courts should review a federal agency’s interpretation of a statute. Under the Chevron framework, a court will typically use a two-step analysis to determine if it must defer to an agency’s interpretation. In step one, the court looks at whether the statute directly addresses the precise question before the court. If the statute directly addressed the precise question, the court must follow the intent of Congress. If the statute is ambiguous or silent, the court will proceed to step two and determine whether the agency’s interpretation is reasonable. If it determines the interpretation is reasonable, then to follow the Chevron framework the court must defer to the agency’s interpretation.

In asserting that the Seventh Circuit under the Chevron framework should defer to its interpretation in Regulation B that ECOA applies to prospective applicants, the CFPB argued:

Under step one of the Chevron framework, the Seventh Circuit should conclude that Congress has clearly spoken to the precise question at issue in this case–whether, consistent with the ECOA, Regulation B can prohibit discriminatory discouragement. In delegating ECOA rulemaking authority to the Federal Reserve Board, Congress specifically intended the Board (and now the CFPB) to regulate conduct not specifically mentioned in the ECOA if the failure to regulate would frustrate the ECOA’s purpose or permit evasion of the ECOA. Regulation B has expressly protected prospective applicants from discriminatory discouragement since 1975 and Congress has never repudiated this interpretation of the ECOA. Congress evidenced its intent to protect prospective applicants by amending the ECOA in 1991 to add a referral provision that states specified agencies shall “refer [a] matter to the Attorney General whenever the agency has reason to believe that 1 or more creditors has engaged in a pattern or practice of discouraging or denying applications for credit in violation of section 1691(a) of this title.”
Even if the Seventh Circuit concludes that Congress has not specifically addressed the question at issue, Congress has not foreclosed the CFPB’s interpretation of Regulation B. Under the second step of the Chevron framework, the Seventh Circuit should find that Regulation B’s prohibition on the discouragement of prospective applicants is reasonable because it furthers the purpose of the ECOA to prohibit discrimination in credit transactions. “Absent a prohibition on discouragement, a discriminating lender could easily frustrate the intent of Congress by discouraging applications on the basis of race, sex, or any of the other protected categories listed in section 1691(a). Indeed, there may be no more obvious way to frustrate the central purpose of ECOA than by discouraging prospective applicants.”

That the CFPB focused on the Chevron framework is interesting, because on January 17, 2024, the U.S. Supreme Court will hear oral arguments in two cases in which the plaintiffs are asking the Court to overrule, or at least clarify, the Chevron framework. During the oral arguments in Townstone, Chief Judge Sykes noted that the Chevron framework may not be with us for long, but did not indicate that the Seventh Circuit might defer its decision pending the Supreme Court’s ruling on the Chevron framework.

Townstone in its brief countered that the interpretation in Regulation B that ECOA applies to prospective applicants does not survive an analysis under the Chevron framework. In particular, Townstone argued that:

Under step one of the Chevron framework, the ECOA unambiguously bars discrimination only against “applicants” with respect to any aspect of a “credit transaction.” The ECOA definition of “applicant” is limited to an identifiable person who requests credit from a creditor. Adding “prospective” to “applicant,” as the CFPB does in its anti-discouragement rule, obliterates this limitation. Also, the anti-discouragement rule cannot be reconciled with the unambiguous meaning of “discrimination” and “credit transaction” in the ECOA. Section 1691(a) prohibits discrimination “with respect to any aspect of a credit transaction.” As defined by Regulation B, a “credit transaction” includes “every aspect of an applicant’s dealings with a creditor regarding an application for credit or an existing extension of credit.” Thus, a “credit transaction” requires two or more identifiable individuals acting in concert with the goal of obtaining credit from the other. While the ECOA does not define “discrimination,” Regulation B defines “discriminate against an applicant” as “treat[ing] an applicant less favorably than other applicants.” Thus, to discriminate on a prohibited basis, a creditor must treat an applicant differently than other applicants because of the applicant’s race or other protected characteristics. “Discourage” is a far broader term that is much less susceptible to an objective definition than “discrimination.” Discrimination under section 1691(a) turns on the actions of the creditor and is fact-based and objective. Discouragement, under the rule, turns entirely on the listener’s subjective reaction.
To be entitled to reach step two of the Chevron framework, an agency must show either ambiguity in the statute or an explicit gap that Congress left for the agency to fill. The ECOA provision that directs the CFPB to enact regulations that “are necessary or proper to effectuate the purposes of [the ECOA] [and] prevent circumvention or evasion thereof” is a general rulemaking provision and not a gap-filling provision because it did not direct the CFPB to elaborate on a particular statutory term or provision. If a statement that an agency can issue rules to prevent “evasion or circumvention” can justify the anti-discouragement rule, it could be used to justify virtually any change to the ECOA.

In addition to challenging the anti-discouragement rule in Regulation B under the Chevron framework, Townstone argued that if the rule is determined to be valid under that framework, the Court should hold that the rule is unconstitutional because it violates the First and Fifth Amendments. Townstone asserted that the rule violates the First Amendment for reasons that include (1) it gives the CFPB unbridled discretion to decide who may speak and what they may say because violations of the anti-discouragement rule turn entirely on the subjective views of the listener, which is no standard at all, and (2) the CFPB is enforcing the anti-discouragement rule against Townstone because of its views. Townstone also argued that the rule is unconstitutionally vague and overboard in violation of the First and Fifth Amendments because a person of ordinary intelligence cannot know, in advance, what it prohibits.

During the oral argument, the CFPB attorney focused on the ECOA delegation of authority provision, which provides:

“The Bureau shall prescribe regulations to carry out the purposes of this subchapter. These regulations may contain but are not limited to such classifications, differentiation, or other provision, and may provide for such adjustments and exceptions for any class of transactions, as in the judgment of the Bureau are necessary or proper to effectuate the purposes of this subchapter, to prevent circumvention or evasion thereof, or to facilitate or substantiate compliance therewith.”

The attorney argued that through this provision Congress empowered the CFPB to address any loophole in the ECOA. Chief Judge Sykes disagreed that the provision conveyed broad authority on the CFPB regarding the scope of ECOA, noting that the prevention of circumvention or evasion language is tethered to language that precedes it. Chief Judge Sykes believed the provision gave the CFPB the power to make adjustments and exceptions to a class of transactions to prevent the circumvention or evasion of the statutory non-discrimination provision, but did not give the CFPB the power to expand the statutory non-discrimination provision. The ECOA provision that prohibits discrimination provides:

“It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction-

on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract);
because all or part of the applicant’s income derives from any public assistance program; or
because the applicant has in good faith exercised any right under [the Consumer Credit Protection Act].”

The section clearly refers to discrimination against an applicant, but not a prospective applicant, whatever that is. Chief Judge Sykes also noted that with regard to civil liability, the ECOA limits liability of a creditor to an “aggrieved applicant,” and asked doesn’t the Court need to focus on that in interpreting the scope of the ECOA non-discrimination provision.

Addressing an assertion made by the CFPB in its brief, Judge Rovner asked the attorney for Townstone that if the anti-discouragement provision in Regulation B is held to apply to only applicants, wouldn’t that permit lenders to place “Whites Only” signs at the entrance to their offices. The attorney responded that such conduct would be prohibited by the Fair Housing Act and the Illinois Human Rights Act, and considered the CFPB assertion to be a fanciful hypothetical. Judge Rovner nonetheless raised a concern of the result in a non-mortgage credit situation, in which the Fair Housing Act does not apply. The attorney for Townstone countered that if there is a loophole in the ECOA regarding prospective applicants, then it is for Congress to fix the loophole. Judge Rovner also appeared to be skeptical of Townstone’s First Amendment argument, although Chief Judge Sykes appeared to be more receptive to the argument.

Judge Ripple did not ask any questions during the oral argument. That complicates the assessment of how the Seventh Circuit may rule. In our view, the statement of Chief Judge Sykes that the ECOA’s delegation of authority provision does not give the CFPB the power to expand the ECOA’s non-discrimination provision is spot on. If one or both of the other judges agree with Chief Judge Sykes on this point, that likely will not bode well for the CFPB. In the end, however, it may not matter how the three-judge panel rules. The party that does not receive a favorable opinion may well request a rehearing by the entire Seventh Circuit, or seek review by the Supreme Court. If the case gets to the Supreme Court, the CFPB likely would face strong head winds in arguing that the ECOA applies to prospective applicants.

Richard J. Andreano, Jr.

President Biden Vetoes Congressional Override of CFPB Section 1071 Small Business Lending Rule

As previously reported, the U.S. House of Representatives, by a vote of 221-202, voted under the Congressional Review Act to override the CFPB’s final Section 1071 small business lending rule (1071 Rule), and the U.S. Senate, by a vote of 53-44, voted to do the same. As was expected, on December 19, 2023 President Biden vetoed the legislation.

Based on the margin of each vote, an override of the veto by Congress does not appear likely. As a result, attention will now turn to two lawsuits challenging the rule in federal district courts, one in Kentucky, and one in Texas, and a lawsuit challenging the constitutionality of the CFPB’s funding structure that is now before the Supreme Court. The Kentucky and Texas lawsuits include claims that the 1071 rule is invalid because the CFPB’s funding structure is unconstitutional, based on the ruling of the U.S. Court of Appeals for the Fifth Circuit that held the CFPB’s funding is unconstitutional in Community Financial Services Association of America Ltd. v. CFPB, and because portions of the rule also violate various requirements of the Administrative Procedure Act (APA). The Kentucky lawsuit also includes a claim under the First Amendment. On October 3, 2023, the U.S. Supreme Court heard oral arguments in the CFSA v. CFPB case, and a ruling is not expected until as late as June 2024.

Both the Kentucky and Texas courts issued rulings that preliminarily enjoin the CFPB from implementing and enforcing the 1071 Rule. The preliminary injunction in the Texas case initially was limited to the plaintiffs and their members, while the preliminary injunction in the Kentucky case was not so limited. The preliminary injunction in the Texas case was later extended to apply on a nationwide basis. The court’s order in the Texas case (1) stays all deadlines for compliance with the 1071 Rule for the plaintiffs and their members, parties that intervened in the lawsuit after the initial ruling and their members, and all covered financial institutions until after the Supreme Court’s decision in CFSA v. CFPB, and (2) requires the CFPB, if the Supreme Court rules that its funding is constitutional, to extend the deadlines for compliance with the 1071 Rule to compensate for the period stayed. The court’s order in the Kentucky case does not provide for such an extension of the compliance deadlines.

Richard J. Andreano, Jr.

California Federal District Court Grants Summary Judgment for DFPI in Lawsuit Challenging State’s Regulations Requiring Consumer-Like Disclosures for Commercial Transactions

A California federal district court recently granted the motion for summary judgment filed by the California Department of Financial Protection and Innovation (DFPI) in the lawsuit filed by an advocacy organization seeking to enjoin the DFPI from enforcing its final regulations (Regulations) implementing California’s commercial financing disclosure law. SB 1235, which was signed into law in 2018, requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. The Regulations became effective on December 9, 2022.

The plaintiff, the Small Business Finance Association (SBFA), alleged in its complaint that the Regulations violate the First Amendment rights of its members. More specifically, SBFA alleged that the compelled disclosures do not accurately inform customers about the terms of a provider’s products because the disclosures for sales-based financing (SBF) transactions are “literally false” and the disclosures for both SBF transactions and open-end credit (OEC) are misleading because they are inaccurate. SBFA also alleged that the Regulations are preempted by the Truth in Lending Act (TILA) because they mandate disclosure of the “APR” and “finance charge” but define and calculate those terms differently than TILA.

In rejecting the SBFA’s First Amendment claim, the court applied the First Amendment test for compelled commercial speech established by the U.S. Supreme Court in its 1985 decision in Zauderer v Office of Disciplinary Counsel of Supreme Court of Ohio. According to the district court, to satisfy Zauderer, the DFPI was required to prove that the compelled disclosures are (1) purely factual, (2) noncontroversial, (3) not unduly burdensome, and (4) reasonably related to a substantial governmental interest. With regard to each of these elements, the court reasoned:

For a disclosure to be purely factual, it must be “literally true” and “not misleading.” SBFA alleged the use of the word “fees” in the SBF disclosure that “[t]he cost of this financing is based upon fees charged by the [provider] rather than interest that accrues over time” was false because the cost of an SBF is based on a “discount” and not “fees.” The word “discount” did not make the disclosure false because operationally, “discounts” are similar to “origination fees.” SBFA also alleged the use of the word “payment” in the disclosure “Estimated Total Payment Amount” and the word “owe” in the disclosure “[y]our finance charge will not increase if you take longer to pay off what you owe” falsely connote a loan and should be replaced with “remittance” and “due,” respectively. These are distinctions without a difference. Making a “payment” means the same as making a “remittance” and an amount “owed” is not different than an amount “due.” The SBF disclosures are literally true because terms “payment” and “owe” are truthful descriptors within the SBF disclosures.
The record did not show that the SBF and OEC disclosures mislead recipients into believing that the products are traditional loans. Neither are they misleading because the estimated figures for payment, term, and APR vary significantly from actual results. The disclosures explicitly state that they are based on assumptions, putting any reasonable person on notice that the calculations are based on assumptions and may not perform as estimated.
“Objective controversy” exists where a statement “elevates one side of a legitimately unresolved scientific debate.” SBFA alleged the disclosures are “objectively” controversial because there is a “vigorous debate” in the commercial financing industry whether an “Estimated APR” should be disclosed in connection with an SBF transaction. The existence of some disagreement about the usefulness of an estimated APR did not render the disclosure controversial for First Amendment purposes. There was no evidence that the “Estimated APR” term has been expressly rejected by reputable authorities on the matter. “Subjective controversy” exists where a statement is “fundamentally at odds with [the speaker’s] business.” The “Estimated APR” disclosure is not subjectively controversial because it is simply a mathematical calculation based on the terms of a contract and the assumptions stated. The fact that TILA uses a different methodology for calculating the APR in consumer lines of credit does not make the OEC disclosures subjectively controversial. TILA does not apply to commercial financing and there is no evidence that any authority has rejected the use of the Regulations’ methodology in the commercial financing context.
To be unduly burdensome, a compelled disclosure must be so comprehensive that it drowns out the speaker’s own message. The disclosures required by the Regulations are not unduly burdensome because they do not impede speech and there was no evidence that the costs of compliance would prevent a provider’s commercial speech (i.e. make it uneconomical to offer financing). Also, nothing in the Regulations prevents providers from making any statement outside of the disclosures.
The disclosures are reasonably related to the state’s substantial interest in protecting small businesses from unwittingly entering into unaffordable financing transactions.

In rejecting SBFA’s preemption claim, the court gave a “high level of deference” to the CFPB’s March 2023 determination that TILA does not preempt SB 1235. TILA provides that it does not preempt state laws “relating to the disclosure of information in connection with credit transactions” except to the extent such laws are “inconsistent with the provisions of [TILA], and then only to the extent of the inconsistency.” The court cited the Supreme Court’s 1980 decision in Ford Motor Credit Co v Milhollin. In that case, the Supreme Court deferred to a Federal Reserve Board interpretation of TILA. The question of what is the appropriate level of judicial deference to agency interpretations (and whether the Supreme Court’s 1984 Chevron decision, which created a framework for judicial review of an agency interpretation, should be overruled) is now before the Supreme Court in two cases.

Michael R. Guerrero

OCC Risk Perspective Report Focuses on Third-Party Relationships With Fintechs

In its Fall 2023 Semiannual Risk Perspective, published on December 7, the Office of the Comptroller of the Currency (OCC) reported on key issues facing the federal banking system. In evaluating the overall soundness of the federal banking system, the OCC emphasized the need for banks to maintain prudent risk management practices. The key risk themes that the OCC underscored in the report included credit, market, operational, and compliance risks.

Of particular note was the discussion on the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) compliance risks with respect to fintech relationships. We also will discuss briefly certain other compliance and operational risks highlighted by the OCC.

Fintech Partnerships

The OCC cautioned banks that are adopting or considering fintech relationships to scrutinize each third-party relationship. The OCC stressed that banks need to understand the risks associated with each third-party relationship, and enter into effective contracts to address the potential for default and termination. It also emphasized the identification of nested relationships, in which fintech firm may be providing services to other fintech firms without appropriate controls. In such circumstances, banks are considered on the hook for those partners’ practices. Overall, the OCC recognized that the range of payment methods and their accessibility continue to expand and evolve, but cautioned banks to keep pace with the corresponding risks by continuing to evaluate their BSA/AML risks and corresponding controls. In a separate section of its report, the OCC essentially reiterated these BSA/AML compliance risks with third-party arrangements with fintech firms as operational risks as well.

This discussion comes on the heels of recent OCC and FDIC consent orders involving banks concerning their third-party risk management practices. This discussion also tracks concerns noted by the Federal Reserve, FDIC, and OCC in final interagency guidance issued in June 2023 regarding managing risks associated with third-party relationships, including relationships with financial technology-focused entities such as bank/fintech sponsorship arrangements.

The OCC further emphasized the BSA/AML and financial crime risks associated with the expanding use by banks of digital and electronic products and services, as well as with more traditional financial crime risks, such as mail-theft related check fraud, business email compromise schemes, and payroll tax evasion. Overall, Suspicious Activity Report (SAR) filing “data trends reflect significant increases in SAR filings related to fraud.”

Other Compliance and Operational Risks

Another compliance risk highlighted by the OCC is the need to ensure equal access to credit, and the fair and consistent treatment of consumers. “Banks’ compliance risk management frameworks should be commensurate with their existing risk profiles and capable of efficiently and effectively supporting risk profile changes.” These consumer-facing concerns can sometimes be in tension with AML concerns which can lead to banks engaging in de-risking.

Similar to the BSA/AML compliance risks outlined above, the OCC identified the expanding use of new technologies by banks, including the use of faster and real-time payment products, as an operational risk. “Sound risk management practices can help safeguard against fraud, financial crimes, and operational errors[,]” including fraud targeting P2P and related payment platforms. Such products can enhance consumer convenience, but the speed and irreversible nature of these payments also make these products attractive instruments for perpetuating consumer fraud.

Finally, the OCC identified artificial intelligence (AI) as a special topic presenting potential compliance, credit, reputation and operational risks. Although AI presents many opportunities and potential benefits, it also can result in third-party risk, privacy concerns, cybersecurity risks, and potential consumer-facing bias and other consumer protection concerns. The OCC states that it is “technology neutral” and will continue to monitor the use of generative AI.

Although the OCC does not specifically discuss the potential use of AI in regards to BSA/AML compliance, there is increasing discussion of this topic in the industry. However, it is likely more accurate to regard machine learning, which is a subset of all AI, as currently having more direct applicability to BSA/AML compliance, including as to transaction monitoring.

Celia Cohen, Peter D. Hardy & Ronald K. Vaske

CFPB Adjusts HMDA and HPML Asset Exemption Thresholds

The CFPB recently issued a final rule increasing the asset exemption threshold under the Home Mortgage Disclosure Act (HMDA) and a final rule increasing the asset exemption threshold for the Truth in Lending Act (TILA) requirement to maintain an escrow account for a higher-priced mortgage loan (HPML).

Banks, savings associations and credit unions are not subject to HMDA for a calendar year if their assets as of December 31 of the prior calendar year did not exceed an asset threshold. The asset threshold is subject to annual adjustment based on inflation. The asset threshold for calendar year 2023 HMDA data collection and reporting is $54 million. The final rule increases the asset threshold for calendar year 2024 HMDA data collection and reporting to $56 million. As a result, banks, savings associations, and credit unions with assets of $56 million or less as of December 31, 2023, are exempt from collecting and reporting HMDA data for 2024 activity.

Regulation Z, which implements the TILA, generally requires creditors to maintain an escrow account for the payment of taxes and insurance on a first lien HPML. There are two creditor-based exemptions to the escrow account requirement. The original exemption is for creditors with assets below a certain threshold that also meet additional criteria, which include (among other criteria) extending a first lien loan subject to the Regulation Z ability to repay rule (a “covered loan”) in a rural or underserved area and having a covered loan volume, with affiliates, at or below a certain level. The asset threshold is subject to annual adjustment based on inflation. For purposes of the asset threshold, a creditor’s assets include the assets of any affiliate that regularly extends covered loans. The asset threshold for 2023 is $2.537 billion. The final rule increases the asset threshold for 2024 to $2.640 billion. As a result, if a creditor’s assets, together with the assets of its applicable affiliates, are less than $2.640 billion on December 31, 2023, and the creditor satisfies the additional criteria, the creditor will be exempt from the escrow account requirement for HPMLs in 2024. Additionally, based on a grace period in the HPML rule, such a creditor will also be exempt from such requirement for purposes of any loan consummated in 2025 if the application was received before April 1, 2025.

The asset size threshold for purposes of the original exemption from the HPML escrow account requirement also is one of the criteria that determines whether a creditor qualifies under the ability to repay rule to make loans based on the small creditor portfolio, and small creditor balloon payment, qualified mortgage loan provisions. As a result, for 2024 the $2.640 billion threshold will apply for purposes of determining if a creditor is a small creditor under such provisions.

The Economic Growth, Regulatory Relief, and Consumer Protection Act, adopted in 2018, required the CFPB to add an additional exemption from the HPML escrow account requirements for insured depository institutions and insured credit unions. The additional exemption applies to insured depository institutions and insured credit unions with assets at or below a certain threshold that also meet additional criteria, which include (among other criteria) extending a covered loan in a rural or underserved area and having a covered loan volume, with affiliates, at or below a certain level, that is lower than the level under the original exemption. The asset threshold for 2023 is $11.374 billion. The final rule increases the asset threshold for 2024 to $11.835 billion. As a result, if an insured depository institution’s or insured credit union’s assets are $11.835 billion or less on December 31, 2023, and the entity satisfies the additional criteria, the entity will be exempt from the escrow account requirement for HPMLs in 2024. Additionally, based on a grace period in the HPML rule, such an insured depository institution or insured credit union will also be exempt from such requirement for purposes of any loan consummated in 2025 if the application was received before April 1, 2025.

Richard J. Andreano, Jr.

CFPB Releases Study of Refinance Mortgage Loans Between 2013 and 2023

The CFPB recently released results of a study of residential mortgage refinance loans from the first quarter of 2013 to the first quarter of 2023, focusing on differences between cash-out and non-cash-out (or rate and term) refinance loans. The CFPB used data from the National Mortgage Database to conduct the study.

For purposes of the study, the CFPB considered a refinance loan to be a cash-out refinance loan “when the total value of sampled refinance loans and their associated junior liens were more than five percent larger than the total value of the preceding loans and associated junior liens.” This helps to exclude loans in which the consumer financed costs of refinancing into the new loan but did not receive any, or any material, amount of cash.

The CFPB highlights the following findings:

Cash-out refinances were a larger share of all refinances during periods of rising interest rates.
Borrowers of cash-out refinances had lower credit scores, lower incomes, and smaller loan amounts compared to non-cash-out refinance borrowers.
Loan-to-value and debt-to-income ratios were similar for cash-out and non-cash-out refinances.
Cash-out refinances had larger shares of older, female, Black, and Hispanic consumers, compared to non-cash-out refinances.
Serious delinquencies were rare for consumers with higher credit scores, regardless of whether the refinance was cash-out or not.
For consumers with lower credit scores, both cash-out and non-cash-out refinance consumers have similar two-year delinquency rates, except for a relative increase in delinquencies among cash-out refinance consumers in 2017—a year marked by rising interest rates.

For the study period, CFPB provides for cash-out and non-cash-out refinances the quarterly volume of loans, the median consumer credit score, the medium combined loan-to-value ratio, various loan and consumer characteristics, and rates of serious delinquencies (60 or more days past due) after two years with credit scores at or below 756 and with credit scores over 756. As noted above, for both types of refinance loans, delinquencies for consumers with the higher credit scores were rare, and for consumers with lower credit scores ranged from 0.7% to 1.0%, although the delinquency rates between cash-out and non-cash-out loans for such consumers were relatively similar.

The CFPB notes as potential concerns with cash-out refinance loans:

The potential systemic risk of equity extraction contributing to a new financial crisis.
Based on data from the JP Morgan Chase Institute, cash-out refinance loans had a longer loan term and larger monthly payment compared to the paid-off mortgage, which suggests that cash-out consumers are more likely to still be paying off their mortgage and less likely to own their home free and clear in retirement, potentially exposing these consumers to more future financial shocks while the mortgage is outstanding.
A cash-out refinance with a higher interest rate than the prior paid-off mortgage could effectively lead to much higher borrowing costs, relative to the original mortgage or to other sources of credit, like home equity loans or home equity lines of credit, that do not raise the interest rate on the existing first-lien loan balance.

Richard J. Andreano, Jr.

CFPB and DOJ File Lawsuit Against Land Developer Alleging Predatory Lending

The CFPB and Justice Department filed a joint complaint last week in a Texas federal district court against Colony Ridge Development, LLC and three related entities (collectively, “Colony Ridge”) in which the agencies allege that Colony Ridge engaged in discriminatory targeting of Hispanic consumers with predatory financing and other unlawful conduct. In remarks given at a press conference about the complaint, Assistant Attorney General Kristen Clarke described the lawsuit as “the first predatory mortgage lending case brought by the Justice Department.”

Assistant Attorney General Clarke also indicated that the lawsuit is a part of the Justice Department’s “Combating Redlining Initiative.” She stated:

[The lawsuit] underscores why equal access to credit on fair terms is so important. Indeed, redlining is one of the major reasons that homeownership scams still have a foothold in our economy today. It leaves vulnerable communities devoid of real credit options, and a perfect target for reverse redlining scams that zero in on these communities with predatory loan products. Through today’s action, the Justice Department is making clear that it is equally determined to stamp out predatory lenders who take advantage of the conditions created by redlining as it is to prevent illegal redlining in the first place.

According to the complaint, Colony Ridge, a Texas-based land developer, has developed more than 40,000 lots spread across six residential subdivisions in Liberty County, Texas. Colony Ridge extends credit to consumers to purchase the lots. The facts alleged in the complaint include the following:

Colony Ridge advertises almost exclusively in Spanish. In its advertising, Colony Ridge features cultural markers associated with Latin America such as national flags of Latin American countries and regional music and promotes the “American Dream of homeownership.”
Colony Ridge falsely represents in advertising that lots were sold with water, sewer, and electrical infrastructure already in place. It only discloses that lots may not have this infrastructure until after applicants have paid a non-refundable deposit and makes that disclosure only in English.
Colony Ridge employees fail to inform buyers of flood risk despite repeated past flooding of lots or falsely tell buyers that the lots have not flooded.
Colony Ridge’s interest rates are significantly higher than prevailing rates. Colony Ridge’s interest rates are not based on an individualized assessment of risk related to a consumer’s actual likelihood of repaying the loan. Colony Ridge does not assess borrowers’ ability to repay before extending credit, requiring only self-reported (but unverified) gross income and a nominal down payment.
From September 2019 through September 2022, Colony Ridge initiated foreclosures on at least 30% of seller-financed lots within just three years of the purchase date, with most credit failures occurring even sooner.
Foreclosure and property deed records indicate that Colony Ridge flipped at least 40% of all the properties it sold between September 2019 and September 2022, selling approximately 8,237 properties twice, 3,267 properties three times, and 2,067 properties four or more times in three years.

The complaint alleges that Colony Ridge:

Engaged in unlawful discrimination against applicants in violation of the Equal Credit Opportunity Act and Regulation B, including by targeting Hispanic applicants on the basis of race or national origin with predatory seller financing.
Engaged in unlawful discrimination against applicants in violation of the Fair Housing Act, including by targeting Hispanic applicants on the basis of race or national origin with predatory seller financing and exploiting applicants’ limited English proficiency.
Engaged in conduct that violated the Interstate Land Sales Full Disclosure Act (ILSA) and Regulations K and J by: selling lots without filing an initial Statement of Record with the CFPB and paying the required fee; failing to provide purchasers with a printed Property Report in advance of signing a contract or agreement; displaying advertising and promotional materials to prospective purchasers that were inconsistent with the information required to be disclosed in the Property Report (i.e., that the lots were subject to periodic flooding); making misrepresentations or omitting material facts about the lots (i.e. representing they were sold with the infrastructure necessary to connect water, sewer, and electrical services pre-installed and omitting estimates of the costs required to connect those services); and failing to file an Annual Report of Activity with the CFPB and paying the required fee.
Engaged in deceptive acts or practices in violation of the Consumer Financial Protection Act by misrepresenting that lots were sold with the infrastructure necessary to connect water, sewer, and electrical services pre-installed and violated the CFPA based on the ECOA and ILSA violations.

The Count of the complaint alleging violations of the ECOA is alleged jointly by the CFPB and Justice Department. The Count alleging violations of the FHA is alleged only by the Justice Department and the Counts alleging violations of the CFPA and ILSA are alleged only by the CFPB.

Director Chopra also appeared with Attorney General Clarke at the press conference about the complaint. According to the complaint, Colony Ridge extensively used social media to promote sales of the lots. In his remarks, Director Chopra stated that the CFPB is “closely watching how fraud is trafficked on large platforms like TikTok, Facebook, and YouTube using behavioral targeting” and that it is “fully prepared to use longstanding laws on the books to crack down on this fraud.” He commented that the lawsuit represented the CFPB’s first federal court action to enforce the ILSA.

John L. Culhane, Jr. & Richard J. Andreano, Jr.

Financial Services Trade Associations Raise Concerns With CFPB’s Advisory Opinion on Information Requests

Several financial services trade associations wrote to CFPB Director Rohit Chopra voicing their concerns with the Advisory Opinion regarding Section 1034(c) of the Consumer Financial Protection Act. The trade associations include the American Financial Services Association, the Bank Policy Institute, the Consumer Bankers Association, and the U.S. Chamber of Commerce.

For background, the CFPB issued an Advisory Opinion titled “Consumer Information Requests to Large Banks and Credit Unions” which requires large banks and credit unions to comply “in a timely manner” with consumer requests concerning their accounts. The Advisory Opinion was the CFPB’s first guidance regarding Section 1034(c).

The Advisory Opinion indicates that large banks and credit unions may not require a consumer to pay a fee to obtain the account information. The CFPB advised that such fees would “likely include charging fees (1) to respond to consumer inquiries regarding their deposit account balances; (2) to respond to consumer inquiries seeking the amount necessary to pay a loan balance; (3) to respond to a request for a specific type of supporting document, such as a check image or an original account agreement; and (4) for time spent on consumer inquiries seeking information and supporting documents regarding an account.”

In their letter to Director Chopra, the trade associations assert that: (1) the Advisory Opinion goes beyond the CFPB’s interpretation or guidance and instead articulates specific, additional requirements that go beyond the scope of the statute; and (2) the CFPB should adhere to the notice and comment requirements of the Administrative Procedures Act. For these reasons, the trade associations request that the CFPB rescind the Advisory Opinion.

More specifically, the trade associations highlight that the Advisory Opinion does not permit “unreasonable impediments to a request for information about a consumer’s account” but the term “unreasonable impediment” is a new legal standard not contemplated by the language of Section 1034(c). Additionally, the trade associations highlight that impeding the ability to charge a fee for a consumer request may be “at odds with banks’ obligations to operate in a safe and sounds manner and does not take into consideration fees banks may have to pay third parties to respond to a consumer’s request[.]” Lastly, the trade associations ask the CFPB to commit to not seeking monetary relief for violations of Section 1034(c), as the CFPB indicated in a footnote in the Advisory Opinion that the agency did not intend to seek monetary relief for violations.

The trade associations also ask the CFPB to respond to a series of questions, including:

Although specific examples are given in the Advisory Opinion, what is the standard for determining whether a condition is an “unreasonable impediment”?
Are financial institutions permitted to assess fees for customer information requests through a particular channel when it makes the same information available for free via other and/or easier-to-access channels?
Do institutions have to create specific reports in response to customer inquiries?
What is the standard for determining whether wait times are “excessively long” when a customer is making a request to customer service? Will the CFPB consider the facts and circumstances of the inquiry?
Is a large bank or credit union required to ensure that a customer “received” the account information?

Kaley Schafer

Justice Department Departs From OCC View of Preemption in Amicus Brief Filed With SCOTUS; Democratic Senators Criticize OCC Approach to Preemption

The scope of national bank preemption is currently before the U.S. Supreme Court in Cantero v. Bank of America, N.A. A New York statute requires the payment of interest on mortgage escrow accounts and the question before the Supreme Court is whether the National Bank Act (NBA) preempts application of the New York statute to national banks. Reversing the district court, the Second Circuit ruled that the New York statute is preempted by the NBA.

In its amicus brief filed with the Supreme Court, the Justice Department argues that the Court should vacate the Second Circuit’s judgment and remand the case to allow the Second Circuit to undertake the correct preemption inquiry in the first instance. OCC regulations provide that certain types of state laws are categorically preempted by the NBA, including state laws addressing “[e]scrow accounts, impound accounts, and similar accounts.” In ruling that the New York law is preempted by the NBA, the Second Circuit did not rely on OCC preemption regulations. Instead the Second Circuit concluded that in determining the NBA’s preemptive scope, the relevant “question is not how much a state law impacts a national bank, but rather whether it purport to ‘control’ the exercise of its powers.”

As it did in its amicus brief filed at the invitation of the Supreme Court at the petition stage of Cantero, the Justice Department, in its merits stage amicus brief, takes issue with the OCC’s “different and broader view of NBA preemption.” The Justice Department states that the interpretation of the NBA set forth in its amicus brief “better reflects the text, structure, and history of the statute and this Court’s cases applying the NBA.” In its brief, the Justice Department points to the language in 12 U.S.C. Sec. 25b (Dodd-Frank Section 1044) which provides that a state consumer financial law is preempted if it “prevents or significantly interferes with the exercise by the national bank of its powers.” According to the Justice Department, this language requires a court to make a practical, case-by-case assessment of the degree to which a state law will impede the exercise of those powers. The Second Circuit’s conclusion that a state law is preempted if it attempts to “control” a national bank’s exercise of its powers “runs counter to the ordinary meaning of the term “significantly interferes with”; it is inconsistent with Congress’s evident expectation that preemption determinations will rest on practical degree-of-interference assessments; and it does not account for this Court’s many decisions holding that the NBA did not preempt various state laws regulating national banks’ banking activities.” The Justice Department also argues that the Second Circuit’s analysis was “particularly flawed” because it “logically implies that substantially all ‘State consumer financial laws’ will be preempted in contravention of Section 25b’s text, structure, and history.”

The OCC’s approach to preemption was recently criticized by a group of seven Democratic Senators in a letter sent to Michael Hsu, the Acting Comptroller of the Currency. In the letter, the Senators ask Mr. Hsu “to address [the OCC’s] longstanding expansion of its preemption authority to undermine state consumer protections.” More specifically, the Senators listed the following ways in which the OCC “has not operated consistent with Congress’s carefully calibrated regime in the years since Dodd-Frank”:

The OCC has “improperly sidestepped” Section 1044 of Dodd Frank (12 U.S.C. Sec. 25b) “to justify preempting broad categories of state consumer protection laws.” Section 1044 states that a state consumer protection law is preempted only if one of three conditions is met: (1) application of the state law would have a discriminatory effect on national banks, in comparison with the effect of the law on a bank chartered by that state; (2) in accordance with the legal standard for preemption in Barnett Bank, the state law prevents or significantly interferes with the exercise by the national bank of its powers; or (3) the state law is preempted by a provision of federal law other than Dodd-Frank. In 2020, the OCC issued an interpretive letter in which it asserted that an OCC action with “indirect…effects on a state consumer financial law” is not a preemption determination and therefore not subject to Section 1044. “Indirect” preemption is not one of three conditions in which state consumer protection laws regulating national banks may be preempted.
The OCC’s preemption rules published in 2011 cannot be reconciled with the text and Congressional intent of Section 1044.
The OCC has not reviewed its preemption determinations every five years as required by Dodd-Frank.
The OCC has “unduly interfered” with states’ ability to gather information about credible violations of non-preempted state consumer protection laws. Although states may not exercise visitorial powers over national banks, state attorneys general have “unquestioned” authority to enforce non-preempted state laws under governing Supreme Court precedent which is codified in Section 1047 of Dodd-Frank. (The Senators reference a letter recently sent to CFPB Director Chopra by 21 state attorneys general requesting that the CFPB take appropriate action to make clear to national banks, federal savings associations and other federally-chartered institutions that it creates a material risk that may give rise to unfair or abusive acts or practices for a bank to refuse to cooperate with state AG information requests that see to further enforcement of applicable state laws, including enforcement of generally applicable state consumer laws.)

The Senators urge the OCC to (1) conduct its statutorily mandated review of its preemption determinations, (2) rescind any regulations, orders, interpretive letters, or other guidance that contravene Section 1044, including the OCC’s 2011 preemption regulations and 2020 interpretive letter, (3) issue supervisory guidance directing all national banks to comply with state requests for information regarding credible allegations involving non-preempted state consumer protection laws. (The state attorneys general who sent the letter to Director Chopra referenced above also sent a letter to Acting Comptroller Hsu urging the OCC to issue such supervisory guidance.)

The outcome of Cantero will finally bring to a head an unresolved issue which has been percolating ever since the OCC proposed its preemption regulations in 2011. At that time, as the Justice Department noted in its amicus brief, even the Treasury Department submitted a comment letter to the OCC in which it disagreed with the OCC’s proposed broad preemption approach. Since the OCC finalized its preemption regulations, most national banks have relied on them to not comply with many state consumer protection laws. A ruling by the Supreme Court in Cantero that the NBA does not preempt the New York law will implicitly call into the question the validity of the OCC’s preemption regulations and mean that national banks will have to take a fresh look at whether they must now comply with certain state consumer protection laws and regulations which they have been ignoring–a task that will not be easy and could require each national bank to seek preemption determinations from the OCC with respect to each state law or regulation in question. In connection with that review, a bank may need to look at the costs associated with complying with such state laws and regulations and the impact on the bank’s profitability. Given how costly and time-consuming that process could be, it might be easier for national banks to comply with previously ignored state laws and regulations.

An even more difficult issue is whether an adverse ruling by the Supreme Court in Cantero would apply retroactively to the enactment date of Dodd-Frank, i.e. to July 21, 2010. We would not be surprised to see an adverse ruling in Cantero trigger a new wave of state AG enforcement actions and private litigation against national banks based on violations of state consumer protection laws and regulations. While banks might seek to argue that Cantero does not apply retroactively and that they were entitled to rely on the OCC preemption regulations because, under the Chevron deference framework, they represented a reasonable interpretation of the NBA by the OCC, an adverse ruling in Cantero would call into question the reasonableness of the OCC’s interpretation. In addition, the Supreme Court is scheduled to hear oral argument in two cases on January 17, 2024 in which the question before the Court is whether it should overrule its Chevron decision. If the Court does overrule Chevron, banks might be unable to rely on Chevron to defend the validity of the OCC regulations.

The Justice Department’s amicus brief supporting vacatur of the Second Circuit’s decision is in sharp contrast to the amicus brief filed by the OCC in Cantero when it was before the Second Circuit. In the OCC’s amicus brief filed in the Second Circuit, the OCC argued that the New York law mandating the payment of interest on mortgage escrow accounts is preempted based in large part on the OCC’s preemption regulations which provide that state laws addressing mortgage escrow accounts are categorically preempted. Unfortunately, because the OCC has no independent right to litigate in the Supreme Court, it cannot file its own amicus brief in the Supreme Court as of right. While the OCC might seek permission from the Justice Department to file its own amicus brief in the Supreme Court in support of Bank of America, it seems very unlikely that the Justice Department would grant such permission. As a result, it will be the Justice Department that expresses the views of the United States rather than the agency charged by Congress with the role of interpreting the NBA.

It should be noted that Cantero and the controversy over the scope of NBA preemption of state consumer financial protection laws does not implicate Section 85 of the NBA, which deals with the interest rate authority of national banks.

John L. Culhane, Jr., Ronald K. Vaske, Reid F. Herlihy & Alan S. Kaplinsky

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Mortgage Banking Update - January 4, 2024

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