JULY 11 – Read the newsletter below for the latest Mortgage Banking and Consumer Finance industry news, written by Ballard Spahr attorneys. In this issue, we discuss the Supreme Court’s overruling of Chevron, Colorado opt-out law, the CFPB’s summer supervisory highlights, and much more.
- Podcast Episode: Consumer Financial Protection Bureau Wins in the U.S. Supreme Court but Can the Fed Continue to Fund the CFPB Without Earnings?
- Podcast Episode: California Consumer Finance Law – Hot Topics and Recent Developments
- The U.S. Supreme Court’s Overruling of Chevron is a Sea Change
- Federal Agencies Issue Final Automated Valuation Model Quality Control Rule
- CFPB Releases Interim Final Rule Extending 1071 Rule Compliance Dates
- CFPB Releases Summer 2024 Supervisory Highlights
- By Passing Buck to Second Circuit, U.S. Supreme Court Leaves National Bank Preemption in Limbo
- Colorado UCCC Administrator Issues Interpretive Opinion Letter Regarding Colorado Opt-Out Law
- Plaintiffs File Amended Complaint in Colorado Opt-Out Litigation
- Looking Ahead
Special guest Alex J. Pollock, Senior Fellow with the Mises Institute and former Principal Deputy Director of the Office of Financial Research in the U.S. Treasury Department, joins us to discuss his recent blog post published on The Federalist Society website in which he urges Congress to look into the question of whether the Federal Reserve can lawfully continue to fund the CFPB if (as now) the Fed has no earnings. We begin with a review of the Supreme Court’s recent decision in CFSA v. CFPB which held that the CFPB’s funding mechanism does not violate the Appropriations Clause of the U.S. Constitution. Alex follows with an explanation of the CFPB’s statutory funding mechanism as established by the Dodd-Frank Act, which provides that the CFPB is to be funded from the Federal Reserve System’s earnings. Then Alex discusses the Fed’s recent financial statements and their use of non-standard accounting, the source of the Fed’s losses, whether Congress when writing Dodd-Frank considered the impact of Fed losses on the CFPB’s funding, and how the Fed can return to profitability. We conclude the episode by responding to arguments made by observers as to why the Fed’s current losses do not prevent its continued funding of the CFPB, potential remedies if the CFPB has been unlawfully funded by the Fed, and the bill introduced in Congress to clarify the statutory language regarding the CFPB’s funding.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, hosts the conversation.
To listen to the episode, click here.
Alex’s blog post, “The Fed Has No Earnings to Send to the CFPB,” can be found here. To listen to our recent podcast episode about this topic with special guest Professor Hal Scott of Harvard Law School, “Did the Supreme Court hand the CFPB a pyrrhic victory?” click here.
Podcast Episode: California Consumer Finance Law – Hot Topics and Recent Developments
California frequently is in the vanguard of consumer financial issues and legislation, foreshadowing trends that may spread to other states. Today’s episode, during which we explore important hot topics and recent developments in California consumer finance law, is hosted by Ballard Spahr Partner Melanie Vartabedian, and features Partners Michael Guerrero and Joel Tasca, and Of Counsel John Kimble.
We first discuss what the future likely holds for proposed rules issued under the California Consumer Financial Protection Law (CCFPL) by the California Department of Financial Protection and Innovation (DFPI). The proposed rules include complex registration and reporting requirements for certain consumer products, and are under revision after rejection by the California Office of Administrative Law for lack of clarity. We then explore the DFPI’s most recent annual report on activity under the CCFPL, which recaps the DFPI’s rulemaking, enforcement efforts, complaints received, and efforts in connection with education outreach and the Office of Financial Innovation. Highlights include a rule that applies consumer-type “unlawful, unfair, deceptive, or abusive acts and practices” (referred to in the report as UUDAAP) prohibitions to financial products and services provided to small businesses; ramped-up enforcement efforts; and high-dollar settlements as well as litigation in progress. Next, we turn to a comparison of California’s Rosenthal Fair Debt Collection Practices with the federal Fair Debt Collection Practices Act, and discuss their similarities, differences, and litigation trends under both laws. We then focus on the California Consumer Credit Reporting Agencies Act, which poses challenges for companies that report consumer data to consumer reporting agencies over and above the requirements of federal law. We conclude with a look at unique issues arising in California with respect to the FTC “holder rule”.
To listen to this episode, click here.
Our blog about the California DFPI’s recent annual report on activity under the CCFPL may be found here.
Michael R. Guerrero, Mindy Harris, John A. Kimble & Joel E. Tasca
The U.S. Supreme Court’s Overruling of Chevron is a Sea Change
On August 6, 2024, we will be holding a 90 minute webinar roundtable featuring 3 administrative law professors who are among the country’s leading experts on the Chevron Deference Doctrine. To register, click here.
We already have published a short blog about the Supreme Court’s opinion issued on Friday, July 28 in Loper Bright Enterprises et al v. Raimondo, Secretary of Commerce, et al, No. 22-451. We have now had an opportunity to more thoroughly read the majority opinion by Chief Justice Roberts, two concurring opinions by Justices Thomas and Gorsuch and the dissenting opinion by Justice Kagan (which Justices Sotomayor and Jackson joined). The purpose of our blog today is primarily to consider the implications and potential impact of the opinion on the consumer financial services industry, the CFPB and other federal agencies that have rulemaking authority over the industry, consumers, the Judiciary and the plaintiffs’ bar.
The Majority Opinion
By a 6-3 majority, the Chevron Doctrine (named after the 1984 opinion of the Supreme Court in Chevron U.S.A. Inc. v. National Resources Defense Council, Inc., 467 U.S. 837) has been overturned. Under the Chevron Doctrine courts had to apply a two part test in assessing the actions of federal agencies. If the statute adopted by Congress was clear on the issue before the court, the court had to follow congressional intent. However, if the statute was ambiguous on, or simply did not address, the issue before the court, the court had to defer to the agency’s interpretation as long as it was reasonable, even though the court would have reached a different interpretation. With the overruling of the Chevron Doctrine, going forward, generally courts should no longer give mandatory deference to a regulation (either an existing regulation or one promulgated in the future) by a federal agency empowered by Congress to issue regulations under a federal statute.
The opinion is based entirely on Section 7 of the Administrative Procedure Act (the APA). Section 7 specifies that courts, not agencies, will decide “all relevant questions of law” arising on review of an agency regulation. Justice Thomas elaborated as follows:
“..Section 706 directs that ‘[t]o the extent necessary to decision and when presented, the reviewing court shall decide all relevant questions of law, interpret constitutional and statutory provisions, and determine the meaning or applicability of the terms of an agency action.’ 5 U.S.C. Section 706. It further requires courts to hold ‘unlawful and set aside agency action, findings, and conclusions found to be …not in accordance with law.’ Section 706(2(A).
“The APA thus codifies for agency cases the unremarkable, yet elemental proposition, dating back to Marbury: that courts, not agencies, will decide ‘all relevant questions of law” arising on review of agency action…even those involving ambiguous laws — and set aside any such action inconsistent with the law as they interpret it. And it prescribes no deferential standard for courts to employ in answering those legal questions. That omission is telling, because section 706 does mandate that judicial review of agency policymaking and fact finding be deferential. See Section 706(2)(A) (agency action to be set aside if “arbitrary, capricious, [or] an abuse of discretion); Section 706(2)(E) (agency fact finding in formal proceedings to be set aside if ‘unsupported by substantial evidence’).”
Does that mean that courts should give no deference to a regulation issued by a federal agency?
No. In addition to the conditional deference to be accorded to agency policymaking and fact finding referenced above, Justice Roberts confirmed the continued viability of the Supreme Court opinion in Skidmore v. Swift & Co., 323 U.S. 134 (1944). Justice Roberts explained:
“The APA, in short, incorporates, the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions. In exercising judgment, though, courts may — as they have from the start— seek aid from the interpretations of those responsible for implementing particular statutes. Such interpretations ‘Constitute a body of experience and informed judgment to which courts and litigators may properly resort for guidance’ consistent with the APA. Skidmore, 323 U.S., at 140. And interpretations issued contemporaneously with the statute at issue, and which have remained consistent over time, may be especially useful in determining the statute’s meaning. See ibid, American Trucking Assns., 320 U.S., at 549”
Under Skidmore, the deference an agency receives depends on how persuasive its interpretation is. In making that assessment, a court looks at the thoroughness of the agency’s investigation of the issues, the validity of its reasoning, the consistency of its interpretation over time, and “other persuasive powers” of the agency.
The initial step in assessing whether to give Skidmore deference to a federal agency is to ascertain whether Congress intended to provide the agency with the authority to promulgate the regulation that it promulgated. Justice Roberts explained how a court should make that assessment:
“In a case involving an agency, of course, the statute’s meaning may well be that the agency is authorized to exercise a degree of discretion. Congress has often enacted such statutes. For example, some statutes expressly delegate to an agency the authority to give meaning to a particular term. Others empower an agency to prescribe rules to ‘fill up the details’ of a statutory scheme, or to regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility, such as ‘appropriate’ or ‘reasonable.’ When the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, ‘fix[ing] the boundaries of delegated authority,’ H. Monaghan, Marbury and the Administrative State, 83 Colum. L. Rev. 1, 27 (1983), and ensuring the agency has engaged in ‘reasoned decisionmaking’ within those boundaries. By doing so, a court upholds the traditional conception of the judicial function that the APA adopts.”
Some pundits are already arguing that, while the Chevron Doctrine has been overruled, the Court has substituted a new doctrine which will result in it giving deference to agency regulations issued pursuant to a statute that cabins the type of regulation it can issue and uses words like “appropriate” and “reasonable.” See A. Vermeule, Chevron by Any Other Name, The New Digest (June 28, 2024) (available online):
The majority in Loper Bright argued, on the one hand, that ‘Chevron cannot be reconciled with the APA by presuming that statutory ambiguities are implicit delegations to agencies.’ But with its other hand, the majority almost immediately took that all back. The Loper Bright opinion contains an enormous … loophole through which most if not all of the Chevron regime can easily fit. Here is the critical passage, reproduced without internal citations — except for one especially significant citation to a law review article:
‘In a case involving an agency, of course, the statute’s meaning may well be that the agency is authorized to exercise a degree of discretion. Congress has often enacted such statutes. For example, some statutes expressly delegate to an agency the authority to give meaning to a particular term. Others empower an agency to prescribe rules to ‘fill up the details’ of a statutory scheme, or to regulate subject to the limits imposed by a term or phrase that leaves agencies with flexibility, such as ‘appropriate’ or ‘reasonable.’ When the best reading of a statute is that it delegates discretionary authority to an agency, the role of the reviewing court under the APA is, as always, to independently interpret the statute and effectuate the will of Congress subject to constitutional limits. The court fulfills that role by recognizing constitutional delegations, ‘fix[ing] the boundaries of [the] delegated authority,’ H. Monaghan, Marbury and the Administrative State, 83 Colum. L. Rev. 1, 27 (1983), and ensuring the agency has engaged in ‘reasoned decisionmaking’ within those boundaries. By doing so, a court upholds the traditional conception of the judicial function that the APA adopts.”
What this means is that many, most or even all of the cases that were previously called “Chevron deference” cases can now be relabeled as “Loper Bright delegation” cases. A concrete example may be useful. In her characteristically clear-minded dissent, Justice Kagan listed a series of statutory problems, drawn from real statutory schemes that courts confront. To shoplift one of her examples:
“Congress directed the Department of the Interior and the Federal Aviation Administration to reduce noise from aircraft flying over Grand Canyon National Park—specifically, to ‘provide for substantial restoration of the natural quiet.’ How much noise is consistent with ‘the natural quiet’? And how much of the park, for how many hours a day, must be that quiet for the ‘substantial restoration’ requirement to be met?”
It should be obvious that a Chevron approach to this statutory problem can proceed almost exactly as before, just with different labeling. Interpreting the statute independently, the judges will now say that the best reading itself is that Congress has (in the majority’s terms) “authorized the agency to exercise a degree of discretion” in giving necessary specification and concretization to “substantial restoration,” and so forth.
Put differently, in the terms familiar under the pre-existing and now defunct Chevron regime, all Chevron step two cases could always have been re-labeled as Chevron step one cases – er, I mean, Loper Bright delegation cases. That is, cases that used to be labeled as “deference to reasonable agency interpretations of ambiguous statutes” will now be called “independent judicial interpretation that identifies a single best answer, an answer that consists of a delegation of discretionary authority to agencies within a given range.” But that relabeling changes rather little. It’s as though Chevron really only ever had one step, so that everything that was done under Chevron can also be done under the rubric of independent judicial interpretation.
To be sure, one might say (as I said in the indulgent self-quotation above) that the resulting regime represents a retail rather than wholesale version of Chevron. Whereas Chevron was said to rest on a general presumption that gaps and ambiguities represented a delegation to agencies, judges will now have to decide, statute by statute and problem by problem, whether a Loper Bright delegation is the best reading of the statute. But it is also true that Chevron was always already a retail regime, in the sense that judges always had to decide, statute by statute and problem by problem, what decision Congress had made about the issue at hand. At most, the Loper Bright majority and dissent disagree over whether agency authorization to fill in gaps and ambiguities should be understood as a general guiding presumption, or instead as a case-by-case conclusion. But as general presumptions have always had to be applied at retail in cases, it’s hard to see that the wholesale-to-retail transition will make any major difference, legally or substantively. Even if Loper Bright delegation is best understood as a retail version of Chevron, a relabeled version of Chevron it remains.”
Professor Jeff Sovern has explained how this new framework might be applied with respect to the CFPB’s rulemaking authority. Does Loper-Bright Limit the CFPB’s Power, Consumer Law & Policy Blog (June 30, 2024).
We strongly disagree with Professors Vermeule and Sovern. While courts should always examine the statutory authority for agency rulemaking and compare that to the agency rule itself in deciding whether to give Skidmore deference to the rule, the court is not required to defer to it and, as emphasized throughout Justice Roberts’s opinion (including the language that Professor Vermeule claims is a loophole), the Court must make an independent judgment about the validity of the regulation. In other words, unlike Chevron, deference is not mandatory and the Court is free to ignore it if it reads the statute differently. The Court might, for example, apply the “major questions doctrine” in deciding that the agency’s regulation is not appropriate and/or not reasonable. The major questions doctrine is a principle of statutory interpretation applied in United States administrative law cases which states that courts will presume that Congress does not delegate to executive agencies issues of major political or economic significance. See FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000). This doctrine was used again in the 2022 decision in West Virginia v. EPA to strike down an EPA rule limiting carbon dioxide emissions from certain power plants in the absence of clear Congressional authorization for it to take such action. In addition to no longer being entitled to deference, federal agencies also will need to point to clear Congressional authorization for significant actions taken.
What impact will the opinion have on the CFPB, the FTC, and the federal prudential banking agencies?
Clearly, the opinion will jeopardize the ability of agencies to promulgate regulations that will likely be upheld by the courts. It is more likely that, going forward, regulations will be challenged either directly in an action against the agency under the APA or collaterally in a private lawsuit against a defendant whose defense is that it relied on and complied with an agency regulation. The opinion will apply to all non-final cases in which the legality of agency regulations are being challenged and to all lawsuits initiated in the future against any regulations whose legality is in question.
Congress is not always clear in the statutes that it adopts, and also cannot predict every issue that may arise. As a result, a statute is often ambiguous or silent. In the past, that would have triggered Chevron and a court would have to defer to a reasonable agency interpretation. Because of the Chevron Doctrine, in many cases when an agency action was challenged, the playing field was not level. The agency had a distinct advantage in having its interpretation upheld. A 2017 study found that agencies won 77.4% under Chevron, 66.4% when no regime was selected, 56% under Skidmore, and 38.5% under de novo review. Barnett and Walker, Chevron in the Circuit Courts, 116 Mich. L. Rev. 1, 30 (fig. 1) (2017).
While the demise of Chevron is important for all federal agency actions, the CFPB may face more consequences than many other agencies, given its aggressiveness in interpreting federal statutes and pushing the envelope with respect to its own authority. The CFPB v. Townstone case may be telling in this area. The lower court did not go past step one of Chevron, finding that ECOA clearly applied only to applicants and not to prospective applicants. In its appeal to the Seventh Circuit, the CFPB argued that under the Chevron Doctrine, the court should defer to its interpretation (as set forth in Regulation B) that ECOA applies to prospective applicants as well as applicants. We are still waiting for a decision, and potentially the Seventh Circuit has been waiting for the Supreme Court to decide the fate of Chevron before rendering its decision. Clearly, the CFPB’s argument for the court under Chevron to defer to its interpretation of ECOA (as reflected in Regulation B) that ECOA applies to prospective applicants is no longer a sustainable argument.
The overruling of Chevron also will affect how the Fifth Circuit assesses the pending challenge to the CFPB’s interpretation that its UDAAP authority encompasses discrimination beyond any specific anti-discrimination laws, and also challenges to the CFPB’s small business lending data collection and reporting rule, credit card late fee rule and the payday lending rule. The latter rule, among other things, requires written contemporaneous consent in order for a lender to initiate additional payment transfers from a consumer’s account after a lender has twice unsuccessfully presented the borrower’s check or other device for payment (colloquially referred to as the “2-strike” rule). The odds have now increased that these CFPB regulations (which were already in great jeopardy of being invalidated) will be invalidated or modified by the courts. Other rules that have been finalized are likely to suffer the same fate. Those include the Buy-Now, Pay-Later interpretive regulation and the regulation establishing a non-bank registry of judgments and consent orders. The same can be said for proposed regulations (overdraft fees, NSF fees, open banking, larger participant rule for payment providers, and the FCRA amendment dealing with the reporting of medical debt).
This opinion also jeopardizes the likelihood of regulations of other agencies being upheld by the courts. Cases in point would be the new regulations issued by the federal prudential banking agencies (The Federal Reserve Board, OCC, and FDIC) under the Community Reinvestment Act, being challenged in federal district court in Texas, as well as the FTC regulations pertaining to car dealer practices, being challenged in the DC Circuit Court of Appeals. In March, the federal district court in Texas issued a preliminary injunction against the agencies to prohibit them from enforcing the new CRA rules while that litigation is pending. The FTC case in the DC Circuit has been fully briefed and is awaiting oral argument.
We would be remiss if we did not comment on what this means for the Cantero v. Bank of America case. In that case, the Supreme Court reversed the Second Circuit and remanded the case so that the Second Circuit could apply the National Bank Act preemption provision in Dodd-Frank, which requires that the court apply the holding in the Barnett Bank case (state law is preempted only if it prevents or significantly interferes with the exercise of a national bank power). Dodd Frank also expressly states that no Chevron deference can be given to the Comptroller of the Currency with respect to regulations it promulgated pertaining to preemption of state laws. The Loper opinion basically says that no Chevron deference can be given to any regulations issued by any agency. Thus, we do not think that the Loper opinion adds anything more to the inquiry that the Supreme Court in Cantero requested the Second Circuit to make regarding deference. It seems to us that the Second Circuit can only give Skidmore deference to the OCC regulations, and that will probably not carry the day.
What about final judgments of the Supreme Court and other lower courts validating regulations based exclusively on the Chevron Doctrine?
Fortunately, Justice Roberts addressed this issue head-on even though it was not germane to the Loper case itself.
“.. [W]e do not call into question prior cases that relied on the Chevron framework. The holdings of those cases that specific agency actions are lawful. .. are still subject to stare decisis despite our change in interpretive methodology. C. CBOCS West, Inc v. Humphries, 553 U.S. 442, 5457 (2008). Mere reliance on Chevron cannot constitute a ‘special justification’ for overruling such a holding, because to say a precedent relied on Chevron is, best, “just an argument that the precedent was wrongly decided. That is not enough to justify overruling a statutory precedent.”
Thus, there should not be any concern about the continued viability of the Supreme Court opinion in Smiley v Citibank where the court held that a credit card late fee constitutes “interest” within the meaning of section 85 of the National Bank Act, even though the opinion relied exclusively on the Chevron Doctrine because of a regulation promulgated by the Comptroller of the Currency defining “interest “to include late fees. Stare decisis will apply.
But, what about opinions of lower courts that validated regulations based exclusively on Chevron? Such cases include district court summary judgments in favor of the OCC and FDIC with respect to their “valid when made” regulations which were intended to override the Second Circuit opinion in Madden v. Midland Funding. In that case, the court held that the transfer of credit card receivables by Chase to a debt buyer did not carry with it the favorable interest rate permitted to be charged by a national bank in Delaware. Those lower court opinions will also continue to be binding precedent.
Is this a good result for industry and consumers?
While the conventional wisdom may be that the industry likes the idea of Chevron being discarded, we believe the overturning of Chevron presents concerns for the industry. It is true that industry is more likely to oppose regulations issued during a Democratic administration, and like regulations issued during a Republican administration. But the industry needs certainty in conducting business. Even if a company disagrees with a particular regulation, there is comfort in knowing that the likelihood of the regulation being validated was fairly high under the Chevron Doctrine. As a result, a company would have confidence that it could move forward to implement the regulation, and it would know that its competitors would also have to comply with the same regulation. Now, however, there will be much greater uncertainty about what a court will do. That makes it much harder to conduct business.
One final point that needs to be made. There is no question that overriding Chevron, combined with the opinion in the Corner Post case handed down yesterday by the Supreme Court (holding that the six-year statute of limitations under the Administrative Procedure Act runs from when the plaintiff is injured by the regulation and not from when the regulation became final) will lead to an avalanche of lawsuits, challenging agency regulations directly or indirectly through private lawsuits. Unfortunately that means that regulations that do not go as far as consumer advocates would like, or that are at all favorable to the industry, will be the subject of litigation by plaintiffs’ lawyers.
Alan S. Kaplinsky, Richard J. Andreano, Jr. & John L. Culhane, Jr.
Federal Agencies Issue Final Automated Valuation Model Quality Control Rule
Federal banking regulators recently began adopting a final rule that requires, among other things, supervised mortgage originators and secondary market issuers to ensure that automated valuation models they use follow quality control standards, including a requirement that they comply with nondiscrimination laws. The final rule will be effective on the first day of the calendar quarter following the 12 months after publication in the Federal Register.
The Dodd-Frank Act requires the agencies, including the CFPB, the OCC, the FDIC, the FHFA, the NCUA and the Federal Reserve Board, to issue quality control standards for automated valuation models (AVMs). The final rule applies to the use of AVMs by mortgage originators or secondary market issuers in determining the value of collateral for a loan to be secured by the consumer’s principal dwelling in connection with making a credit decision or covered securitization determination regarding a mortgage or mortgage-backed security. The rule applies regardless of whether the loan is primarily for consumer purposes or business purposes, and whether the credit is closed-end or open-end.
For purposes of the final rule:
- The definition of “mortgage originator” is based on the definition set forth in section 103 of the Truth in Lending Act (TILA), with modifications. (The agencies originally proposed to simply incorporate the TILA definition by reference.) The initial part of the definition provides that a “mortgage originator” is any person who, for direct or indirect compensation or gain, or in the expectation of direct or indirect compensation or gain (i) takes a mortgage application, (ii) assists a consumer in obtaining or applying to obtain a mortgage, or (iii) offers or negotiates terms of a mortgage.
- A “secondary market issuer” means any party that creates, structures, or organizes a mortgage-backed securities transaction.
- A “covered securitization determination” means a determination regarding:
- Whether to waive an appraisal requirement for a mortgage origination in connection with its potential sale or transfer to a secondary market issuer; or
- Structuring, preparing disclosures for, or marketing initial offerings of mortgage-backed securitizations.
- “Credit decision” means a decision regarding whether and under what terms to originate, modify, terminate, or make other changes to a mortgage, including a decision whether to extend new or additional credit or change the credit limit on a line of credit.
Significantly, and consistent with the proposed rule, under the final rule when a secondary market issuer, such as Fannie Mae or Freddie Mac, uses an AVM to offer an appraisal waiver, the secondary market issuer must comply with the final rule, and not the mortgage originator.
With regard to the use of third-party AVMs by lenders, the agencies noted that “A banking organization’s use of third parties does not diminish its responsibility to meet these requirements to the same extent as if its activities were performed by the banking organization in-house.”
In addition to discrimination, the quality standards also address several other issues.
“The final rule requires supervised mortgage originators and secondary market issuers that engage in credit decisions or covered securitization determinations themselves, or through or in cooperation with a third-party or affiliate, to adopt and maintain policies, practices, procedures, and control systems to ensure that AVMs used in these transactions adhere to quality control standards,” the agencies said.
Those standards must:
- Ensure a high level of confidence in the estimates produced;
- Protect against the manipulation of data;
- Seek to avoid conflicts of interest;
- Require random sample testing and reviews; and
- Comply with applicable nondiscrimination laws.
For purposes of the final rule, “control systems” is defined as “the functions (such as internal and external audits, risk review, quality control, and quality assurance) and information systems that are used to measure performance, make decisions about risk, and assess the effectiveness of processes and personnel, including with respect to compliance with statutes and regulations.”
The first four factors are set forth in Dodd-Frank, and the agencies added the fifth factor based on authority in Dodd-Frank to “account for any other such factor that the agencies . . . determine to be appropriate.” The inclusion of the fifth factor in the proposed rule drew numerous comments, both supporting and raising concerns about the inclusion of the factor.
The agencies set forth their reasons for including the fifth factor in the preamble to final rule, and make the following statement:
“As with models more generally, there are increasing concerns about the potential for AVMs to produce property estimates that reflect discriminatory bias, such as by replicating systemic inaccuracies and historical patterns of discrimination. Models could discriminate because of the data used or other aspects of a model’s development, design, implementation, or use. Attention to data is particularly important to ensure that AVMs do not rely on data that incorporate potential bias and create discrimination risks. Because AVMs arguably involve less human discretion than appraisals, AVMs have the potential to reduce human biases. Yet without adequate attention to ensuring compliance with Federal nondiscrimination laws, AVMs also have the potential to introduce discrimination risks. Moreover, if models such as AVMs are biased, the resulting harm could be widespread because of the high volume of valuations that even a single AVM can process. These concerns have led to an increased focus by the public and the agencies on the connection between nondiscrimination laws and AVMs.”
In explaining the need for the rule, the agencies said that while computer models can provide critical information for sellers, buyers and lenders, they cannot be inaccurate or discriminatory.
“It can be tempting to think that computer models can take bias out of the equation, but they can’t,” they said.
The Biden Administration has highlighted allegations of appraisal bias as a major issue that must be addressed. The administration formed an Interagency Task Force on Property Appraisal and Value Equity, known as the PAVE Task Force to focus on the problem.
As was the case with the proposed rule, with regard to the final rule the agencies addressed not adopting a more prescriptive set of standards. The agencies advised that “[d]ifferent policies, practices, procedures, and control systems may be appropriate for institutions of different sizes with different business models and risk profiles, and a more prescriptive rule could unduly restrict institutions’ efforts to set their risk management practices accordingly.”
In continuing its criticism of artificial intelligence, the CFPB in announcing the rule stated:
“The new rule approved today is also another example of the CFPB’s work to use existing laws on the books to police potential pitfalls when it comes to artificial intelligence. We’ve terminated the program that handed out special legal immunities and favors to individual AI companies that they could exploit to gain an unfair advantage. We’ve issued guidance and reports to make clear that there is no “fancy technology” exemption in our nation’s consumer financial protection and fair lending laws. We’re also building more capacity at the CFPB to address new and emerging technologies.”
CFPB Releases Interim Final Rule Extending 1071 Rule Compliance Dates
On June 25th, the CFPB issued an interim final rule with a request for public comment extending the compliance dates for the Small Business Lending Rule in light of the Supreme Court’s decision finding the funding structure of the CFPB to be constitutional in CFPB v. Community Financial Services Association of America (CFSA). The CFPB previously issued informal guidance indicating that an interim final rule was forthcoming. Consistent with the order of the Texas federal district court in a case challenging the rule, the CFPB extended the compliance dates by 290 days (the amount of time the rule was stayed by the lower court pending the Supreme Court’s decision).
The extended compliance dates are effective 30 days after publication of the interim final rule in the Federal Register. As of the date of this blog post, the interim final rule has not yet published in the Federal Register.
The extended compliance dates are set forth below:
|
Compliance tier |
Original compliance date |
New compliance date |
First filing deadline |
|
Tier 1 (originating at least 2,500 covered transactions in each of the preceding two calendar years) |
October 1, 2024 |
July 18, 2025 |
June 1, 2026 |
|
Tier 2 (originating at least 500 covered transactions in each of the preceding two calendar years) |
April 1, 2025 |
January 16, 2026 |
June 1, 2027 |
|
Tier 3 (originating at least 100 covered transactions in each of the preceding two calendar years) |
January 1, 2026 |
October 18, 2026 |
June 1, 2027 |
According to the interim final rule, covered financial institutions may use the volume of small business originations from 2022 and 2023 or 2023 and 2024 to determine the applicable compliance tier. The final rule adds new § 1002.114(c)(3) in connection the alternative period for counting covered originations.
The interim final rule does not make any changes to the submission deadline, which remains June 1 of the following calendar year in which the data is collected. Likewise, the CFPB’s grace period policy remains intact. During the grace period the CFPB does not intend to exercise its supervisory and enforcement discretion or assess any penalties for data reporting errors for the first 12 months after a covered financial institution’s initial compliance date (for those covered financial institutions subject to CFPB supervision and enforcement).
The interim final rule provides the following grace periods:
|
Financial institutions covered by the grace period Dates covered by the grace period |
Dates covered by the grace period |
|
Tier 1 institutions (originating at least 2,500 covered transactions in each of the preceding two calendar years), as well as any financial institutions that make a voluntary submission for the first time for data collected in 2025. |
The data collected in 2025 (from July 18, 2025 through December 31, 2025) as well as a portion of data collected in 2026 (from January 1, 2026 through July 17, 2026). |
|
Tier 2 institutions (originating at least 500 covered transactions in each of the preceding two calendar years), as well as any financial institutions that make a voluntary submission for the first time for data collected in 2026. |
The data collected in 2026 (from January 16, 2026 through December 31, 2026) as well as a portion of data collected in 2027 (from January 1, 2027 through January 15, 2027) |
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Tier 3 institutions (originating at least 100 covered transactions in each of the preceding two calendar years), as well as any financial institutions that make a voluntary submission for the first time for data collected in 2027. |
The data collected in 2026 (from October 18, 2026 through December 31, 2026) as well as a portion of data collected in 2027 (from January 1, 2027 through October 17, 2027). |
Similarly, the interim final rule does not change the ability of covered financial institutions to collect data early. Demographic data may be collected up to one year prior to the compliance date, affording covered financial institutions the opportunity to test their systems and procedures.
In addition, the CFPB’s small business lending data submission platform will be available and open for beta testing beginning this August. The CFPB encourages any entity interested in participating in the beta testing to sign up for updates on the agency’s Small Business Lending Rule webpage. The CFPB is revising the text of the final rule and commentary to account for these extended deadlines.
As a reminder, lawsuits challenging the rule that were filed in Texas, Kentucky and Florida were stayed until the Supreme Court’s decision in CFPB v. CFSA. The plaintiffs will seek leave to amend their filings consistent with the decision in CFPB v. CFSA and these cases will now move forward. We will continue to monitor the status of these cases, which could still have an impact on the compliance dates noted above.
Our CFS attorneys continue to assist financial institutions in preparing for the upcoming compliance dates. We continue to monitor updates to the CFPB’s Small Business Lending Rule.
Kaley N. Shafer, Loran Kilson, Richard J. Andreano, Jr. & John L. Culhane, Jr.
CFPB Releases Summer 2024 Supervisory Highlights
The CFPB has released its Summer 2024 Supervisory Highlights, covering issues ranging from student loan servicing to financial institution supervision of medical providers offering payment products. The report covers the period from April 1, 2023 to December 31, 2023.
Here are key findings from the report:
- CFPB examiners reported finding several instances of unfair, deceptive or abusive practices at companies servicing auto loans. Examiners found that auto loan servicers mishandled consumers’ final loan payments by not informing borrowers that they were required to pay their final payments manually even if they were enrolled in auto pay programs. The servicers then charged borrowers late fees for failing to make their final loan payment on time. In response, servicers said they are revising their procedures to either include the final payment in auto pay or inform borrowers when a payment must be made manually.
- The CFPB reported that certain student loan servicers likewise engaged in practices that the CFPB has previously deemed to be unfair, deceptive or abusive and also identified a violation with respect to the servicing of preauthorized electronic fund transfers. Servicers created “excessive” barriers to assistance, provided inaccurate benefit forms and failed to notify consumers about funds transfers. Examiners reported significant problems with phone hold times, understaffed call centers and problems with interactive voice response systems. Some consumers were unable to gain access to online account management systems. Servicers also provided inaccurate information about the forms borrowers were required to file to qualify for loan programs with certain benefits such as forbearance, according to the bureau. The servicers also failed to follow requirements about notifying borrowers in advance when their preauthorized electronic funds transfers were larger than prior transfers. In response, servicers said they were developing plans to reduce drop rates and hold times.
- Examinations of debt collectors revealed violations of the Fair Debt Collection Practices Act and violations of other consumer protection laws, the CFPB said. Examiners found that debt collectors failed to provide validation notices within five days of their initial contact with borrowers. In addition, the CFPB said that some student loan debt collectors concealed their true company names in communications with borrowers. Examiners also reported that debt collectors contacted borrowers at inconvenient or unusual places and at times used aggressive or abusive language. Examiners found that debt collectors communicated or attempted to communicate with consumers through a medium of communication, such as a text message and/or through a specific telephone number that the consumers had requested the debt collectors not use to communicate with the consumers. In the case of credit card collections, examiners found that certain credit card issuers committed unfair acts or practices when, with respect to receivables that were sold to debt collectors, they erroneously determined the applicable statutes of limitations in one particular state to be 10 years rather than 5 years. In response, debt collectors said they will update their call scripts and written communications to provide the disclosures that are required. They also said they have improved training and monitoring and that they are enhancing training to ensure that consumers are not contacted at inconvenient or unusual places and times.
- Examiners identified a significant number of consumer complaints about how healthcare providers promoted and sold medical credit cards to consumers. Patients said they felt misled and pressured to open a credit card account. The CFPB said its examiners will continue to assess financial services company oversight of medical providers and will be reviewing marketing material and incentives offered to enroll patients. “Supervision expects supervised entities to have effective processes for managing the risks of service provider relationships, including relationships with medical providers who directly communicate with consumers about medical payment products,” the CFPB said.
- The CFPB said that in reviewing deposits and prepaid account practices, examiners have focused on practices that prevent consumers from accessing their funds and account information. Agency officials said that some financial institutions failed to inform consumers that their accounts had been frozen because fraud or other suspicious activity was suspected. Responding to the CFPB, financial institutions said they planned to improve their processes to provide consumers with automatic notice of account freezes and ways that consumers can un-freeze their accounts. They also changed their procedures to allow consumers to speak directly with customer service representatives to challenge account freezes.
- CFPB supervisors also examined institutions holding allotment savings accounts for servicemembers and other federal employees. Because military and federal payroll deductions are one way that companies can collect first-in-line payments for expensive items, such as insurance or rent, the CFPB expressed concern that, in some cases, servicemembers and other federal employees may have had accounts opened or kept open without their knowledge, resulting in excess fees or other harm. In that regard, the Bureau said that in recent exam work, agency officials found that institutions did not send periodic statements to consumers with dormant allotment accounts for extended periods of time during which they charged fees on thousands of dormant accounts. In response to examiners’ reports, the institutions corrected system issues and committed to remediating servicemembers and federal employees.
In summing up the report, CFPB Director Rohit Chopra said, “Loan servicers and debt collectors harm borrowers when they fail to provide required information, create barriers to customer assistance, or harass people about their debts. The CFPB is working to ensure servicers, debt collectors, and other financial service providers follow the law to protect consumers.”
Brian Turetsky, Reid F. Herlihy, Ronald K. Vaske & John L. Culhane, Jr.
By Passing Buck to Second Circuit, U.S. Supreme Court Leaves National Bank Preemption in Limbo
On July 11, we hosted a Webinar Roundtable about the Supreme Court’s recent opinion on May 30, in which a unanimous Supreme Court reversed and remanded the Cantero v. Bank of America case to the Second Circuit. This is a case of extraordinary importance to national banks and non-banks that partner with them where the objective, at least in part, is to take advantage of a national bank’s preemption of state law. We had as our guests four lawyers who were our guests on the previous Webinar Roundtable we held shortly after the oral argument in the Cantero case. My colleague, Joseph Schuster and I also partook. The recording of the webinar will be available here in the coming days.
The issue in Cantero is whether a national bank should have complied with a New York State law which requires the payment of 2% interest on residential mortgage escrow accounts. The Second Circuit had found preemption on the basis that the New York law affected the national bank’s power to establish and maintain mortgage escrow accounts. The Supreme Court held that the Second Circuit applied the wrong test for determining preemption and instead should have applied the “prevent or significantly interfere” test established by the Supreme Court and codified by the Dodd-Frank Act and other Supreme Court opinions dealing with preemption of state laws for national banks. This guidance is not very helpful.
We discussed two other similar cases (one involving Flagstar Bank where the Supreme Court granted cert, and reversed and remanded the case to the Ninth Circuit and the other involving Citizens Bank which was stayed pending the decision in Cantero. As a result, there are now three separate Circuits that will be trying to figure out how to apply the Supreme Court’s fuzzy opinion in Cantero to 3 state laws which require the payment of 2% interest on mortgage escrow accounts.
We discussed the viability of the OCC’s regulations in light of Cantero, the language in Dodd-Frank which prohibits the use of the Chevron Deference Doctrine and the Supreme Court’s opinion in Loper Bright Enterprises which overruled the Chevron case.
Finally, we discussed what national banks should be doing in order to evaluate whether they can ignore state laws mandating the payment of interest on residential mortgage escrow accounts and thousands of other state and local laws that by their terms apply to national banks.
Colorado UCCC Administrator Issues Interpretive Opinion Letter Regarding Colorado Opt-Out Law
On April 22, 2024 (almost 2 months before Judge Daniel Domenico issued a preliminary injunction against the UCCC Administrator and Colorado Attorney General), Administrator Martha Fulford issued an Interpretive Opinion Letter regarding the Colorado opt-out law (to be codified on its effective date of July 1, 2024 as C.R.S. Section 5-13-106) (the Colorado Opt-Out Law).
The Colorado Opt-out Law states, as follows:
In accordance with section 525 of the Federal “Depository Institutions Deregulation and Monetary Control Act of 1980”, Pub. L. 96-221, the General Assembly declares that the State of Colorado does not want the amendments to the “Federal Deposit Insurance Act”, 12 U.S.C. 1811 et seq.; the Federal “National Housing Act”, 12 U.S.C. sec. 1701 et seq.; and the “Federal Credit Union Act”, 12 U.S.C. sec. 1757, made by sections 521 to 523 of the Federal “Depository Institutions Deregulation and Monetary Control Act of 1980”, Pub. L. 96-221, prescribing interest rates and preempting state interest rates to apply to consumer credit transactions in this state. The rates established in articles 1 to 9 of this title 5 control consumer credit transactions in this state. (Emphasis added)
Section 525 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA) states that Sections 521-523 of DIDMCA (which gives state-chartered, FDIC-insured banks, savings and loan associations and credit unions usury parity with national banks) will not apply to any state which after April 1, 1980 enacts a law which states expressly that it does not want Sections 521, 522 and/or 523 of DIDMCA to “apply with respect to loans made in such State.” (Emphasis added)
After reciting the above paragraphs quoting the relevant Colorado and Federal statutes, the Administrator states:
The Administrator interprets § 5-13-106 to apply only to consumer credit transactions “made in” Colorado in accordance with Section 525 of DIDMCA. Section 5-13-106 specifically cites Section 525 and expresses an intent to be “in accordance with” that section. The Administrator understands and interprets § 5-13-106’s language of “in this state” to be wholly congruent and identical with the opt-out authorized by Section 525 for loans “made in” the state.
On page 23 of the opinion granting the preliminary injunction, Judge Domenico held as follows:
“The plain meaning of [Section 525 of DIDMCA] is that what state a loan is “made in” depends on where the bank is located and performs its loan- making functions and does not depend on the location of the borrower. The plaintiffs have therefore made a strong showing that they are substantially likely to succeed on the merits of their claim that Colorado cannot opt out of the federal preemptive interest-rate caps as to loans that plaintiffs’ member banks make outside of Colorado, even if those loans are made to Colorado borrowers.”
The Administrator states that the language “in this state” in the Colorado Opt-out Law must be read to be congruent with the language of Section 525 of DIDMCA “made in such state.” In light of Judge Domenico’s opinion and the Administrator’s acknowledgment that where a loan is “made” for purposes of the Colorado Opt-out Law should be interpreted consistently with where a loan is “made” under Section 525 of DIDMCA, we urge the Administrator to amend the interpretive letter or issue a new interpretive letter saying that unless and until the injunction is dissolved, the Administrator will, from an enforcement standpoint, interpret the scope of the Colorado Opt-out Law to be consistent with Judge Domenico’s opinion.
Alan S. Kaplinsky, Burt M. Rublin, Mindy Harris, Joseph Schuster & Ronald K. Vaske
Plaintiffs File Amended Complaint in Colorado Opt-Out Litigation
Here is an update on the lawsuit filed by three trade associations against the Colorado Attorney General and UCCC Administrator challenging the application of the Colorado opt-out statute to out-of-state, state chartered, FDIC-insured banks.
On June 18, 2024, Judge Domenico from the U.S. District Court for Colorado issued a preliminary injunction enjoining the Colorado Attorney General and UCCC Administrator from enforcing the Colorado statute opting out of Section 521 of DIDMCA against members of the plaintiff trade associations who make loans from outside Colorado to Colorado residents. The defendants have until July 18 to appeal the district court’s order to the 10th Circuit.
In the meantime, on July 2, the plaintiffs filed a first amended complaint against the defendants. The main change from the original complaint is the omission of the Commerce Clause count. Shortly after the filing of the First Amended Complaint, the court dismissed as moot the defendants’ motion to dismiss the original complaint. The defendants have 14 days or until July 16 to file a response to the First Amended Complaint.
The preliminary injunction remains in full force and effect, notwithstanding the filing of the First Amended Complaint.
Alan S. Kaplinsky & Burt M. Rublin
New Tariffs on Chinese Goods: Changes Affecting U.S. Manufacturers
A Ballard Spahr Webinar | July 17, 2024, 2:00 PM – 3:00 PM ET
Speakers: Brendan K. Collins
A Ballard Spahr Webinar | July 23, 2024, 2:00 PM – 3:00 PM ET
Speakers: Alan S. Kaplinsky, Richard J. Andreano, Jr., John L. Culhane, Jr., Reid F. Herlihy, Mike Kilgarriff, Joseph Schuster
A Ballard Spahr Webinar | August 8, 2024, 1:30 PM – 2:45 PM ET
Speakers: Alan S. Kaplinsky, Joseph Schuster, Ronald K. Vaske, Mindy Harris, Kristen Larson, Burt M. Rublin
MBA Human Resources Symposium 2024
September 18-19, 2024 | MBA Headquarters, Washington, D.C.
Agenda
Fair Labor Standards Act and 2024: New Rules, New Headaches
September 18, 2024 – 9:15 AM ET
Speaker: Meredith S. Dante
The Loan Originator Compensation and Other Regulatory and Legal Developments
September 18, 2024 – 1:00 PM ET
Speaker: Richard J. Andreano, Jr.
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