August 29 – Read the newsletter below for the latest Mortgage Banking and Consumer Finance industry news, written by Ballard Spahr attorneys. In this issue, we discuss we discuss why so many fintechs want to become banks, a new regulatory focus on solar energy lending, a closer look at a controversial recent Ninth Circuit ruling, and much more.
- This Week’s Podcast: Why Do Fintechs Want to Become Banks?
- Texas Federal Judge Strikes Down FTC Noncompete Ban
- CFPB Issues Initial Filing Instructions Guide for Nonbank Enforcement Order Registry
- CFPB Appeals District Court’s Decision to Vacate Changes to UDAAP Exam Manual
- Ninth Circuit Ignores Supreme Court Directive in Cantero v. Bank of America Opinion on NBA Preemption
- Plaintiffs Oppose Colorado’s Motion for a Stay of the Preliminary Injunction in the Colorado Opt-Out Litigation
- CFPB to Issue Proposal to Make It Easier for Consumers to Reach ‘Real Person’ When Seeking Assistance
- V.A. Announces Secondary Borrowing Requirements for Loan Assumptions
- CFPB Releases Updated 1071 Filing Instructions Guide
- Regulators Focus on Solar Lending Industry
- Unlawful Funding Argument Raised in Challenge to Final CFPB Rule
- NLRB Rolling Back More Rules From the Trump Administration
- NLRB to End Practice of Consent Orders, Overruling UPMC
- Looking Ahead
This Week’s Podcast: Why Do Fintechs Want to Become Banks?
A great number of fintechs are contemplating owning a bank or obtaining a banking charter—either a national bank charter, a state bank charter or a special purpose charter. In this episode, we are joined by our special guest Michele Alt, co-founder and partner of Klaros Group, an investment and advisory firm, and Scott Coleman, a partner in our Consumer Financial Services Group who leads our banking practice. Both Michele and Scott help banks and fintechs navigate the complicated regulatory issues that are critical to their growth and sustainability.
We discuss the reasons why fintechs might want to become banks, and why regulators are reluctant to grant them charters. Alt says that a bank charter provides a fintech with low-cost funding in the form of FDIC-insured deposits and it eliminates the applicability of myriad state licensing requirements. On the other hand, she says, there are onerous capital requirements and regulators often are reluctant to embrace innovation. We discuss how some regulators fear that fintechs are fueled by growth over profits and how it could lead to lax management practices. Regulators have reason to be concerned about those risks, and if you charter a bank, you are responsible for it.
Alan Kaplinsky, Senior Counsel in Ballard Spahr’s Consumer Financial Services Group, leads the conversation.
To listen to this episode click here.
Texas Federal Judge Strikes Down FTC Noncompete Ban
On August 20, 2024, Judge Ada Brown of the U.S. District Court for the Northern District of Texas vacated the Federal Trade Commission’s (FTC) final Rule that the FTC enacted to ban noncompete agreements. Judge Brown held that the FTC exceeded its statutory authority and invalidated the Rule on a nationwide basis. The Rule had been scheduled to take effect on September 4, 2024, but is now blocked, pending a potential appeal by the FTC to the Fifth Circuit Court of Appeals.
The Opinion
Judge Brown’s entry of a permanent injunction was consistent with her July 3 decision granting the preliminary injunction blocking the Rule. The Court stated that the FTC did not have “authority to promulgate substantive rules regarding unfair methods of competition.”
The Court also concluded that the Rule was arbitrary and capricious because it is “unreasonably overbroad without a reasonable explanation.” The Court stated that the FTC’s evidence, which consisted of certain studies that examined the economic effects of various state policies towards noncompetes, and compared different states’ approaches to enforcing noncompetes based on specific factual situations, did not support the FTC enacting a sweeping prohibition against all noncompetes. The Court also rebuked the FTC for failing to consider less disruptive alternatives, finding that the Rule was unreasonable.
Impact of the Court’s Ruling and Next Steps for Employers
With Judge Brown’s decision that the Rule is unlawful, employers may continue to have employees sign noncompetes and enforce those agreements. Businesses are also relieved from the Rule’s provision which required employers to send notices voiding the noncompetes that current and former employees had previously signed.
However, businesses still must navigate state laws and other court decisions that seek to limit noncompete agreements. The FTC may appeal Judge Brown’s decision; and as we last reported, other federal courts could reach different decisions on the FTC noncompete ban litigation. Last week, a federal judge in Florida ruled that the ban was likely invalid and blocked it from being applied to a real estate developer. However, last month, a federal judge in the Eastern District of Pennsylvania reached the opposite conclusion, holding that the FTC has clear legal authority to issue procedural and substantive rules as is necessary to prevent unfair methods of competition. If these cases are appealed and the Courts of Appeals are divided, Supreme Court review would be possible.
For now, businesses in Texas and other states that have not banned or restricted noncompetes may continue to enforce those agreements. Notably, several states, including California, Colorado, Illinois, North Dakota, Oklahoma, Massachusetts, Washington DC, Oregon, Minnesota, and Washington, ban or substantially restrict noncompete agreements. Companies should continue to analyze their use of noncompete and other restrictive covenants and confidentiality agreements to adhere to the state laws and ensure that when such agreements are permitted, that they are reasonable as to time, scope and geography. Ballard Spahr’s Labor and Employment team routinely advises on drafting and enforcing noncompetes and other restrictive covenants.
CFPB Issues Initial Filing Instructions Guide for Nonbank Enforcement Order Registry
As previously reported, in June 2024, the CFPB issued a final rule creating a Nonbank Enforcement Order Registry. The rule is effective on September 16, 2024, with registrations available beginning on October 16, 2024, pursuant to a tiered implementation approach.
The CFPB has now released the initial version of a Filing Instructions Guide (FIG) that provides details on how to submit information to the Nonbank Registry Portal (Portal). The CFPB noted that the Portal is not yet deployed and it plans to have the Portal go live for applicable companies to start the registration process for covered orders on October 16, 2024. The CFPB Nonbank Registry webpage includes links to the FIG, as well as links to an executive summary of the rule (previously issued), a company registration sample form, and instructions for viewing state regulatory actions in the Nationwide Multistate Licensing System & Registry (NMLS). The CFPB advises on the webpage that forthcoming guidance materials include quick reference user guidance and additional sample forms.
The FIG addresses how company personnel may register to use the Portal and assign levels of authority to other personnel. Additionally, the FIG addresses how companies may submit various items of required information to the Portal, including:
- Administrative information regarding the company.
- Information on a covered order, including the law(s) involved and the issuing court or issuing agency/agencies. Companies will be able to add information on covered orders to the Portal in draft form, and make edits, before actually submitting the order to the CFPB through the Portal.
- Whether the company is registering the order under the standard requirements, or under the alternative one-time registration available for covered orders published on the NMLS in which the CFPB was not involved. The FIG contains an advisory notice that questions about the alternative filing option for applicable orders published on the NMLS, including eligibility and how to provide the required information to the Portal, should be submitted to the CFPB’s Nonbank Registry by either submitting a support ticket in the Portal or through a specified email address, and that questions about the option should not be submitted to the NMLS Call Center.
- An optional Notice of Good-Faith Non-Registration, by which a company may notify the CFPB that it is not registering based on a good faith belief that it is not subject to the registration requirements. The FIG provides that a company may opt to submit one of the following Good-Faith Notices to the Nonbank Registry: (1) it is not a covered nonbank, (2) it is not a CFPB-Supervised Covered Nonbank, and therefore, is not required to comply with the written statement requirements (including designating an attesting executive), and/or (3) the order(s) that it is subject to is not a covered order under the CFPB rule.
- For companies subject to the annual statement filing and attestation requirements, how such statements and attestations may be submitted. With regard to the required written statement that must be submitted by an attesting executive, the FIG has an advisory that once documents are submitted to the Portal they may not be deleted.
- The submission of a final statement regarding a registered order once the order is terminated, abrogated, or ceases to be a covered order.
The Consumer Financial Services Group held a webinar on July 23, 2024 addressing the Registry, and will publish a podcast regarding the Registry on September 5. We will continue to monitor developments regarding the implementation of the Registry.
CFPB Appeals District Court’s Decision to Vacate Changes to UDAAP Exam Manual
On August 8, 2024, the CFPB filed its Appellant Brief with the Fifth Circuit, appealing the September 2023 decision by the Federal District Court for the Eastern District of Texas that vacated the March 2022 changes to the CFPB’s unfair, deceptive or abusive acts or practices (UDAAP) Exam Manual. In the 2022 amendments to the Exam Manual, the CFPB purported to use the unfair prong of UDAAP under the Consumer Financial Protection Act (CFPA) to prohibit discriminatory conduct, whether or not it is covered by fair lending laws. For more details about the initial suit, read our blog.
In vacating the changes, the district court concluded that the changes were invalid because (1) the CFPB’s funding is unconstitutional, and (2) the changes exceeded the CFPB’s UDAAP authority. Shortly after the order, the CFPB repealed the amendments to the Exam Manual. In November 2023, the CFPB filed a notice with the Texas federal district court that it was appealing to the Fifth Circuit the district court’s order granting summary judgment. With the Supreme Court ruling that the CFPB’s funding structure complies with the Appropriations Clause of the Constitution, the constitutional challenge is now resolved. Therefore, the Fifth Circuit will need to first consider the procedural issues raised by the CFPB, and if the case remains in the Fifth Circuit, it will need to address the substantive arguments in the case.
In its appeal, in addition to raising standing and other procedural issues, the CFPB argued that the district court’s decision should be reversed because “the only natural reading of [United States Code section] 5531[which sets forth the CFPB’s UDAAP authority] is that unfairness can encompass discriminatory acts” and treating discriminatory conduct as unfair “would not necessarily raise a major question [which is a principle of statutory interpretation applied in cases which states that courts will presume that Congress does not delegate to federal agencies issues of major political or economic significance].” The CFPB also argues that Congress has provided “clear congressional authorization to regulate in that manner.” We disagree with both positions of the CFPB, and believe the court will, like the district court, find that discrimination and unfairness are distinct concepts. In its brief, the CFPB made many of the substantive arguments it made when opposing the district court’s injunction, and we believe the Fifth Circuit is likely to agree with the district court.
The Chamber of Commerce’s response is due September 6, 2024. We will continue to follow this and other litigation affecting rules and guidance issued by the CFPB.
Loran Kilson, Richard J. Andreano, Jr. & Alan S. Kaplinsky
In a surprising quick turn of events, on remand from SCOTUS, the Ninth Circuit, on August 23, 2024, issued its unanimous unpublished panel opinion in Kivett v. Flagstar Bank, FSB (Kivett II) in which it essentially reaffirmed its earlier panel opinion holding that there is no preemption of a California state law which requires the payment of 2% interest on residential mortgage escrow accounts. Regardless of whether you think the new opinion is right (and we do not), we think that all parties are perplexed as to why the panel (which was the same panel that heard the earlier case (Kivett I)) did not invite briefing from the parties as to what the panel should do in reaction to the Supreme Court opinion in Cantero.
In order to better understand and evaluate the new panel opinion in Kivett II, it is appropriate to review the history of the Kivett case, another pre-Kivett Ninth Circuit opinion in Lusnak v. Bank of America, N.A., the SCOTUS opinion in Cantero and the just-issued Kivett II opinion. (Unlike the Ninth Circuit in Kivett II, the Second Circuit in Cantero ordered new briefing from the parties.)
First Kivett Opinion in Ninth Circuit
On May 17, 2022, the Ninth Circuit in Kivett I affirmed the opinion of the U.S. District Court for the Northern District of California holding that there was no preemption of the California statute which requires mortgagees to pay 2% interest on residential mortgage escrow accounts. The District Court based its decision on the earlier Ninth Circuit opinion in Lusnak mentioned above. In Lusnak, as discussed below, a Ninth Circuit panel held that there was no preemption based on an amendment to the Truth-in-Lending Act (TILA) which requires the payment of interest on mortgage escrow accounts for certain high-priced mortgages. The District Court concluded at that time that the Lusnak opinion was binding precedent. (This conclusion, of course, was reached well before the recent SCOTUS opinion in Cantero). The Ninth Circuit in Kivett I affirmed the District Court on the same basis as the District Court — namely, that the Ninth Circuit opinion in Lusnak was binding precedent. The Bank filed a petition for a writ of certiorari to the Supreme Court in Kivett I.
On June 10, 2024, shortly after the Supreme Court’s issuance of its opinion in Cantero, the Supreme Court granted the petition for a writ of certiorari and issued a summary disposition in Kivett I. The Supreme Court vacated the judgment of the Ninth Circuit in Kivett I and remanded the case to the Ninth Circuit for further consideration in light of the Supreme Court’s decision in Cantero.
Cantero v. Bank of America, N.A.
On May 30, 2024, in a unanimous decision, the Supreme Court reversed the Second Circuit’s decision in Cantero, and remanded the case back to the Second Circuit and instructed the Circuit Court to analyze whether New York’s law requiring lenders to pay interest on mortgage escrow accounts is preempted under the Dodd-Frank Act by applying the Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996) standard. No bright line test for preemption was articulated by the Court; instead, the Court relied on Barnett Bank and its earlier precedents dealing with National Bank Act (NBA) preemption. On remand, the Second Circuit was instructed by SCOTUS to conduct a “nuanced comparative analysis” under Barnett Bank and its earlier precedents dealing with NBA preemption and “[i]f the state law prevents or significantly interferes with the national bank’s exercise of its powers, the law is preempted.”
As stated above, in remanding the Kivett case to the Ninth Circuit, SCOTUS vacated Kivett I and, in doing so, implicitly concluded the Ninth Circuit opinion in Lusnak was at best not binding precedent in the Ninth Circuit and, at worst, wrongly decided. The Supreme Court further instructed the Ninth Circuit to further consider Kivett II in light of Cantero. In remanding the case to the Second Circuit, the Supreme Court in Cantero instructed the Second Circuit to conduct a “nuanced comparative analysis” under Barnett Bank and earlier Supreme Court precedents dealing with National Bank Act preemption.” The Ninth Circuit in Kivett II completely failed to conduct the “nuanced comparative analysis” and instead affirmed Kivett I based entirely on its conclusion in Kivett II that the Lusnak opinion was and still is correctly decided even though the Lusnak opinion did not contain a “nuanced comparative analysis”. Let’s now take a close look at the reasoning employed by the Ninth Circuit in Lusnak.
Lusnak v. Bank of America, N. A.
The issue before the Ninth Circuit in Lusnak was identical to the issue before the Ninth Circuit in Kivett II — namely, whether the NBA preempts the California statute which requires the payment of interest on mortgage escrow accounts.
In finding no preemption, the Ninth Circuit reasoned (with excerpts directly quoted from the opinion) as follows:
- “[B]ecause this case involves state regulation of consumer credit, Bank of America must affirmatively demonstrate that Congress intended to preclude states from enforcing their escrow interest laws.”
- The Dodd-Frank Act did not change the standards to be applied to claims of NBA preemption. “Dodd-Frank addressed the preemptive effect of the NBA in several ways. First, it emphasized that the legal standard for preemption set forth in Barnett Bank, applies to questions of whether state consumer financial laws are preempted by the NBA. 12 U.S.C. § 25b(b)(1)(B). Second, it required the OCC to follow specific procedures in making any preemption determination. See id. §§ 25b(b)(1)(B) (requiring the OCC to make any preemption determination on a “case-by-case basis”); 25b(b)(3)(B) (requiring the OCC to consult the Bureau of Consumer Financial Protection when making a preemption determination). And third, it clarified that the OCC’s preemption determinations are entitled only to Skidmore deference. 12 U.S.C. § 25b(b)(5)(A); see Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944) (explaining that an agency’s views are ‘entitled to respect’ only to the extent that they have the ‘power to persuade’). Of these, only the second amendment was an actual change in the law. The first and third amendments merely codified existing law as set forth by the Supreme Court.”
- “Before Dodd-Frank, the Supreme Court held in Barnett Bank that states are not ‘deprive[d] . . . of the power to regulate national banks, where doing so does not prevent. or significantly interfere with the national bank’s exercise of its powers.’ 517 U.S. at 33. This is because ‘normally Congress would not want States to forbid, or to impair significantly, the exercise of a power that Congress explicitly granted.’ Id.”
- “Barnett Bank continues to provide the preemption standard; that is, state consumer financial law is preempted only if it ‘prevents or significantly interferes with the exercise by the national bank of its powers,’ 12 U.S.C. § 25b(b)(1)(B). Congress also made clear that only Skidmore deference applies to preemption determinations made by the OCC. See id. § 25b(b)(5)(A). The OCC has recognized as much. See, e.g., 76 Fed. Reg. at 43557 (conceding that section 25b(b)(1)(B) ‘may have been intended to change the OCC’s approach by shifting the basis of preemption back to the [Barnett Bank] decision itself’). Therefore, to the extent that the OCC has largely reaffirmed its previous preemption conclusions without further analysis under the Barnett Bank standard, see 76 Fed. Reg. at 43556, we give it no greater deference than before Dodd-Frank’s enactment, as the standard applied at that time did not conform to Barnett Bank. That is, the OCC’s conclusions are entitled to little, if any, deference.”
- “Applying that standard here, we hold that California Civil Code § 2954.8(a) is not preempted because it does not prevent or significantly interfere with Bank of America’s exercise of its powers. Again, section 1639d(g)(3) of Dodd-Frank states, ‘If prescribed by applicable State or Federal law, each creditor shall pay interest to the consumer on the amount held in any . . . escrow account that is subject to this section in the manner as prescribed by that applicable State or Federal law.’ 15 U.S.C. § 1639d(g)(3). This language requiring banks to pay interest on escrow account balances ‘[i]f prescribed by applicable State [] law’ expresses Congress’s view that such laws would not necessarily prevent or significantly interfere with a national bank’s operations.” Section 1639(d) of the Dodd-Frank sets forth when a creditor must establish an escrow account in connection with first lien residential mortgage loans, including when required by federal or state law and, subject to exceptions, when the loan is a higher-priced mortgage loan governed by Regulation Z section 1026.35.
- “Although we need not resort to legislative history, we note that it, too, confirms our interpretation of section 1639d(g)(3). A House Report discusses how mortgage servicing, and specifically escrow accounts, contributed to the subprime mortgage crisis. H.R. Rep. No. 111-94, at 53–56. The Report notes that mortgage servicers are typically ‘large corporations’ who ‘may . . . earn income from the float from escrow accounts they maintain for borrowers to cover the required payments for property insurance on the loan.’ Id. at 55. The Report’s section-by-section analysis of Dodd-Frank then explains Congress’s purpose behind section 1639d(g)(3), stating: Servicers must administer such accounts in accordance with the Real Estate Settlement Procedures Act (RESPA), [Flood Disaster Protection Act], and, if applicable, the law of the State where the real property securing the transaction is located, including making interest payments on the escrow account if required under such laws. Id. at 91. This passage shows Congress’s view that creditors, including large corporate banks like Bank of America, can comply with state escrow interest laws without any significant interference with their banking powers.’
Did Ninth Circuit Adhere to Instructions of the Supreme Court in Cantero?
Clearly, Kivett II did not comply with the Supreme Court instructions to conduct a “nuanced analysis” of Barnett Bank and other earlier precedents dealing with NBA preemption. As stated above, Kivett II, in finding no preemption, relied entirely on Lusnak which in turn relied almost entirely on the provision added to TILA by Dodd-Frank which requires the payment of interest on certain mortgage escrow accounts to the extent required by applicable federal or state law even though the TILA provision did not apply to the mortgages in Kivett and Lusnak. In the Cantero opinion, the Supreme Court noted that all parties had acknowledged that the TILA provision was inapplicable. As a result, the Second Circuit is unlikely to give any weight to the Kivett II opinion as the Court decides how to apply the Supreme Court’s opinion in Cantero. The Second Circuit has ordered fresh briefing by the parties
We would be remiss if we did not explain why the reasoning in Lusnak is wrong. We don’t think the TILA provision should be a factor in connection with the interest-on-escrow issue. The Dodd-Frank act was the result of a mortgage industry meltdown. One key factor was that various lenders did not take into account consumer obligations to pay taxes and insurance, which was particularly an issue with subprime loans. So Dodd-Frank in various ways sought to rectify that situation. The provision referencing when an escrow account is required by federal or state law, actually provides that such an account may not be established except in certain cases, including when required by federal or state law. We do not read that provision as subjecting all mortgage lenders to all state law escrow requirements. We read it as Congress allowing the creation of escrow accounts in certain cases, including when required by federal or state law, to address what had been a poor practice in the mortgage industry. That is far from a blanket federal authorization of all state law mortgage escrow account requirements.
We would expect Flagstar to file a petition for rehearing en banc in the Ninth Circuit or a petition for a writ of certiorari in the U.S. Supreme Court.
Hopefully, the Second Circuit in Cantero and the First Circuit in the Citizens Bank case will adhere more faithfully to the directive of the Supreme Court in Cantero.
We are hoping that the Acting Comptroller of the Currency will soon fulfill his promise to review the OCC’s preemption determinations and, specifically, the issue before the three Circuit Courts.
For more information about the Cantero Case, you may want to listen to our podcast in which we featured four outside guests who filed amicus briefs in Cantero in the Supreme Court.
We have been counseling several national banks with respect to their determinations of what state laws they should comply with in the aftermath of the Supreme Court Cantero Opinion.
Alan S. Kaplinsky, Richard J. Andreano, Jr. & John L. Culhane, Jr.
Very soon, briefing by the parties in the 10th Circuit will commence with respect to Colorado’s appeal of a preliminary injunction entered by the Federal District Court for the District of Colorado. The District Court enjoined the Colorado Attorney General and UCCC Administrator from applying to out-of-state, state banks making loans to Colorado residents its (1) recently enacted statute opting out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act of 1980 (the DIDMCA) (conferring on state-chartered, FDIC-insured banks the same right to export interest rates as Section 85 of the National Bank Act) pursuant to Section 525 of the DIDMCA and (2) Colorado’s usury laws. Section 525 of the DIDMCA confers on states the right to opt out of Section 521 of the DIDMCA only for “loans made” in the state that has opted out, and the District Court ruled that a loan is “made in” the bank’s state, not the borrower’s state.
Colorado has pending before the District Court a motion to stay the preliminary injunction order pending the outcome of the appeal. We previously blogged about Colorado’s brief supporting this motion and observed that there is no likelihood of the Court granting this motion and that it was filed as a prerequisite to later filing the same motion in the 10th Circuit. Under 10th Circuit precedent and Rule 8(a)(1) of the Federal Rules of Appellate Procedure, Colorado is entitled to a stay of the preliminary injunction order only if it can demonstrate to the Court (1) its likelihood of success on the merits of the appeal; (2) irreparable injury if the stay were denied; (3) that a stay would not substantially harm other parties to the litigation; and (4) that the public interests favor a stay.
The plaintiff-trade groups last week filed their opposition brief which made the following arguments:
- In response to Colorado’s argument that a loan can’t be “made” without there being a borrower involved as well, the plaintiffs make the point that while that is true, it is beside the point. It is also true that while a borrower can’t receive a loan unless a lender makes a loan, that doesn’t mean that a lender also receives a loan. In response to Colorado’s argument that the injunction undermines the intent of Congress with respect to Section 525 of DIDMCA, the plaintiffs argue that (1) the express language used in the statute (“loans made”) overrides Congressional intent and (2) Congressional intent with respect to Sections 521 and 525 was focused exclusively on loans made to borrowers within the opt-out state.
- Colorado’s argument that the plaintiffs have no legally cognizable cause of action is frivolous. As the District Court recognized, Ex Parte Young, 209 U.S. 123 (1908), allows suits in federal courts for injunctions against officials acting on behalf of states to proceed despite the State’s sovereign immunity when the State acted contrary to any federal law or contrary to the Constitution. Colorado argued that Ex Parte Young does not apply to lawsuits predicated on federal preemption of state laws because of the existence of the FDIC. There is nothing in the Federal Deposit Insurance Act that evinces any intent by Congress to preclude a lawsuit like the one brought here pursuant to Ex Parte Young.
- The Plaintiffs argue:
Colorado mischaracterizes the preliminary injunction as a “disfavored injunction,” and argues that the Court failed to apply the heightened standard required to grant one. Mot. 12-13. Colorado is incorrect on both counts. First, while the Court found it “doubtful” that the injunction sought by plaintiffs was disfavored, it also found that it “need not resolve that question, because … the plaintiffs have made a showing as to their likelihood of success on the merits and threatened irreparable harm sufficient to satisfy even the heightened standard for disfavored injunctions.” Order 6-7. So whatever standard applies, Plaintiffs have met it.
Second, Colorado is in any event incorrect that a heightened standard applies here: The preliminary injunction does not permanently enjoin Colorado’s interest rate caps, and it therefore does not afford Plaintiffs “all the relief that the moving party could expect from a trial win.” Free the Nipple-Fort Collins v. City of Fort Collins, 916 F.3d 792, 797-98 & n.3 (10th Cir. 2019) (stating application of the heightened standard “was likely in error” because “if the plaintiffs lose on the merits after a trial, then [the defendant] may fully enforce its public-nudity ordinance”); see also Order 6 n.2.
- As the District Court has already determined, the failure to enter a preliminary injunction would substantially harm the plaintiffs.
Alan S. Kaplinsky, Burt M. Rublin, Mindy Harris, Joseph J. Schuster & Ronald K. Vaske
Many financial services providers would be required to allow consumers seeking assistance to be connected to a “real person” by clicking on one button, under a new Biden Administration “Time is Money” initiative.
“Companies often deliberately design their business processes to be time-consuming or otherwise burdensome for consumers, in order to deter them from getting a rebate or refund they are due or canceling a subscription or membership they no longer want—all with the goal of maximizing profits,” the administration said in a fact sheet.
“Americans should be able receive customer service on their terms and their own time without significant hassle or hardship,” the administration added.
As part of its plan, the CFPB would issue a proposal to require companies to eliminate “doom loops” during which consumers are required to navigate a maze of menu options and automated recordings before being helped.
As part of the initiative, the FCC also will launch an inquiry whether phone, broadband and cable companies should be subject to similar requirements. And, the departments of Health and Human Services and Labor plan to call on health plan providers to make it easier to talk to a customer service agent.
The CFPB also will issue rules or guidance to crack down on “ineffective and time-wasting chatbots” used by banks and other financial services providers.
“The CFPB will identify when the use of automated chatbots or automated artificial intelligence voice recordings is unlawful, including in situations in which customers believe they are speaking with a human being,” the administration said.
The CFPB issued a report on “Chatbots in Consumer Finance” in June 2023.
The new administration initiative will not help consumers, Neil Bradley, the U.S. Chamber of Commerce’s executive vice president, chief policy officer and head of strategic advocacy said.
“Businesses succeed by being responsive to customers and have a far better track record of customer service, streamlined paperwork, and prompt response times than the federal government,” Bradley said. “Imposing heavy-handed regulations that micromanage business practices and pricing is the wrong approach, inevitably raising costs for consumers.”
John L. Culhane, Jr., Alan S. Kaplinsky & Reid F. Herlihy
V.A. Announces Secondary Borrowing Requirements for Loan Assumptions
In connection with its guaranteed home loan program, the Department of Veterans Affairs (VA) announced in Circular 26-24-17 requirements when a party assuming a VA guaranteed loan in connection with the purchase of a home also obtains a secondary mortgage to help finance the purchase. The VA notes that a VA guaranteed home loan, other than for repairs, alterations, or improvements, must be secured by a first lien and that when a party assuming an existing VA loan also obtains secondary financing, if the secondary loan is not processed correctly it can jeopardize the VA guaranteed home loan’s first lien position.
In the Circular, the VA advises that when processing the assumption of a VA guaranteed loan, loan holders are expected to take the following steps to protect the loan’s priority:
- Any steps necessary to ensure the secondary borrowing is subordinate to the VA guaranteed loan. The steps may, for example, include obtaining a subordination agreement.
- The secondary borrowing must be documented in the assumption loan file, including the name of the secondary lender, the amount of the secondary borrowing, and the repayment terms of the secondary borrowing agreed to by the assuming party.
- The proceeds of the secondary borrowing may be used to pay for allowable closing costs needed to close the assumption, or for amounts due the seller at closing as part of the assumption transaction.
- The assuming party may not receive cash back from the secondary borrowing.
- The recurring monthly payment for the secondary borrowing must be considered when evaluating the assuming party’s debts on VA Form 266393, Loan Analysis, and in automated underwriting feedback, as applicable.
- The interest rate on the secondary financing may exceed the rate on the VA guaranteed loan and may be negotiated between the assuming party and the lender of the secondary borrowing.
- If the secondary borrowing is not assumable, the holder of the VA guaranteed loan “should counsel” the assuming party that this may restrict their ability to sell the property to another creditworthy assumer through an assumption in the future. In contrast, when a veteran obtains secondary financing in connection with the origination of a first lien VA guaranteed loan, the secondary financing must be assumable by a creditworthy party.
- The secondary financing must include a reasonable grace period before a late charge is assessed and, in the event of default, before the secondary lender may commence foreclosure proceedings. The guidance does not address what is a reasonable grace period. VA regulations permit the imposition of a late fee on a VA guaranteed loan when an installment is paid more than 15 days after the due date.
Except as noted, the requirements are generally consistent with VA requirements when a veteran obtains secondary financing in connection with the origination of a first lien VA guaranteed loan. The guidance does not address the level of diligence that a holder must engage in to obtain information on the secondary financing as necessary to comply with the requirements set forth above.
CFPB Releases Updated 1071 Filing Instructions Guide
On August 16, 2024, the CFPB issued an updated 2025 Small Business Lending Filing Instructions Guide (the “Guide”). The Guide provides updated compliance dates that correspond to the new compliance dates.
As a refresher, the CFPB previously issued an Interim Final Rule 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.
The Guide makes the following minor updates:
- changing references from 2024 to 2025;
- changing the applicable filing period to reflect the updated Tier 1 compliance dates of July 18, 2025 through December 31, 2025;
- changing the examples for the “Action Take Date” and “Application Date” data points to reflect the new compliance dates and the year 2025; and
- changing the validation ID E0321 to reflect the updated filing period based on the new Tier 1 compliance dates.
As another reminder, on August 7, 2024, the U.S. District Court for the Eastern District of Kentucky granted the CFPB’s motion to stay the Small Business Lending Rule litigation before the court until resolution of the case pending in the Southern District of Texas.
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, and related litigation.
Kaley Schafer, Loran Kilson, Richard J. Andreano, Jr. & John L. Culhane, Jr.
Regulators Focus on Solar Lending Industry
On August 7, 2024, the CFPB published an Issue Spotlight on the solar lending industry. In conjunction with the CFPB’s Issue Spotlight, the CFPB, U.S. Department of Treasury, and the Federal Trade Commission also issued a Consumer Advisory in connection with solar energy sales. All of this comes on the heels of states increasing scrutiny of solar sales practices.
CFPB Issues Spotlight on Solar Lending Industry
The CFPB’s Issue Spotlight examines solar loans facilitated by large financial technology companies via a point-of-sale partnership with solar installers. As quoted by an accompanying press release, Director Chopra said “[t]he CFPB is closely scrutinizing solar lenders to make sure that Americans don’t get burned.” The Issue Spotlight highlights the rapid growth of the residential solar energy market. In 2023, 58 percent of consumers financed solar installations.
The CFPB identified four areas of significant consumer risk: (1) hidden markups and fees; (2) misleading claims about what consumers will pay; (3) ballooning monthly payments; and (4) exaggerated savings claims.
Hidden Markups and Fees
The CFPB found that lenders include fees such as “dealer fees,” “platform fees,” “program fees,” “lending fees,” “financing fees,” or “original issue discounts,” in the loan principal but do not indicate that these fees are a markup from the total cash price. Lenders do not typically include the fees in the total cost of credit presented to the consumer and salespeople do not explain the difference between the cash price and the loan principal. The CFPB also found that salespeople do not explain the difference between the cash price and the loan principal.
Misleading Claims
The Issue Spotlight found that sales pitches promote and assume the benefit of a federal tax credit. Marketing materials also assume that the consumer is automatically eligible for the tax credit, deduct the amount from the total loan amount, and present the figure to the consumer as the “net cost” of the solar system. The CFPB indicated that incorporating the federal tax credit into the marketing materials and loan documents gives a misleading impression of the overall price. The CFPB found that lenders present the actual principal amount in small, light-colored font, while presenting the “net system cost” taking into account the federal tax credit in large, bold font. Disclaimers regarding tax credits are often found in the fine print of consumer agreements or footnotes in advertisements. The disclaimers may not be obvious enough for consumers to notice. The CFPB also indicated that promising tax savings is problematic because lenders and installers do not know the consumer’s tax liability; the credit is not issued until the consumer actually files a tax return, and the tax credit may not be fully realized if the consumer owes other tax liabilities.
Misrepresenting Prepayment Amounts
The CFPB found that solar lenders structure loans so that the monthly payments increase unless the borrower prepays a share of the loan principal, typically 30 percent—the presumptive amount of the federal tax credit. The CFPB found that the prepayment requirement was a surprise to many consumers. Consumers that do not receive the federal tax credit or do not have the ability to pay for the prepayment face large increases to monthly payments and are unable to prevent higher payments from re-amortizing. In addition, the CFPB found that the prepayment requirement was not clearly discussed at the time of signing the loan documents, and that the digital nature of the sales process increased the likelihood that salespeople may guide consumers past these sections.
Exaggerated Savings Claims
The CFPB found that solar installers misrepresent the future cost of energy and overestimate the amount of electricity that the solar panels will produce. Lastly, the CFPB found misleading statements and marketing materials regarding financial benefits, such as representations that the solar panels will cover the cost of financing and eliminate future energy bills.
Other Population-Specific Risks
The CFPB found that the sales practices impact older adults or those who have limited English proficiency. Some sales pitches target consumers in their preferred language but then provide the solar purchase contract only in English.
Additional Regulatory Agency Focus
The CFPB, U.S. Department of Treasury, and the Federal Trade Commission (the “Agencies”) Consumer Advisory warns consumers to be wary of solar energy sales companies resorting to predatory contracts, including unfair financing, and failing to install or activate residential solar systems as promised.
“Expanded access to affordable, reliable residential solar is crucial for lowering energy costs and providing meaningful benefits for Americans,” the Agencies said. “Residential solar power can save households tens of thousands of dollars in electricity expenses over the life of the solar installation.”
The Agencies added that Americans should be able to benefit from state and federal incentives to gain access to solar power in their homes without fearing unfair or deceptive practices. The Agencies encourage consumers to file complaints with the CFPB, FTC, or state attorney general.
States have increased scrutiny of solar energy financing and sales practices as well. Earlier this year the Minnesota Attorney General sued several solar lenders for violations of the Minnesota Prevention of Consumer Fraud Act and the Uniform Deceptive Trade Practices Act. The Minnesota AG’s complaint parallels many of the risks highlighted in the Issue Spotlight. Specifically, the Minnesota AG alleges that solar lenders were charging hidden dealer/platform fees, which increased the costs to borrowers between 15 – 30 percent. The complaint criticizes these fees not being included in sales proposals or lending disclosures. The complaint alleges consumers were not made aware that they could pay less if they paid in cash or financed through a different lender.
Solar lenders and contractors should take a close look at their consumer agreements, disclosures, and sales practices to ensure compliance with federal and state lending laws.
Kaley Schafer, Michael R. Guerrero & John L. Culhane, Jr.
Unlawful Funding Argument Raised in Challenge to Final CFPB Rule
We have previously blogged about how targets of CFPB enforcement actions have asserted that the actions must be dismissed because the investigations were conducted and the lawsuits were brought and are being prosecuted with funds unlawfully obtained from the Federal Reserve Board at a time when the Federal Reserve System had no combined earnings. The Dodd-Frank Act states and the Supreme Court has confirmed that the CFPB may only be funded by the Federal Reserve Board out of “combined earnings of the Federal Reserve System” or from direct Congressional appropriations. See here, here, here, and here.
Now, for the first time, this unlawful funding argument is being used to attack a final CFPB regulation rather than an enforcement action — namely, in the ongoing litigation brought by several trade associations against the CFPB arguing that the CFPB’s small business loan data collection rule promulgated under Section 1071 of Dodd-Frank is unlawful.
In order to better understand the context in which the unlawful funding argument has been made, it is necessary to review the status of the case. On July 31. 2023, the U.S. District Court for the Southern District of Texas, McAllen Division (Randy Crane) granted a preliminary injunction in favor of the plaintiffs to preclude the CFPB from enforcing the 1071 rule against members of the three trade groups. The injunction was based on the Fifth Circuit opinion in the CFSA v. CFPB case which had held that the CFPB’s funding mechanism was unconstitutional as a violation of the Appropriations Clause. After the Supreme Court granted review of the Fifth Circuit CFSA case, the Federal District Court in the 1071 case stayed further proceedings pending the outcome of the CFSA case in the Supreme Court. After the Supreme Court reversed the CFSA case, the parties in the CFSA case filed cross-motions for summary judgment with respect to the remaining claims in the case, namely, that the CFPB exceeded its authority in adding many data points for collection that were not specified in Section 1071 of Dodd-Frank; the CFPB acted arbitrarily and capriciously: and the costs and benefits analysis was unreasonable.
Subsequent to the District Court granting a preliminary injunction in favor of the original plaintiffs in the case, other intervenor-plaintiffs filed their own motions for preliminary injunction to extend the motion to themselves and their members. Three of the plaintiff-intervenors are: the Farm Credit Council, Texas Farm Credit and Capital Farms Credit (collectively, the Farm Credit Intervenors).
On August 2, 2024, the Farm Credit Intervenors filed a motion to amend their Complaint in Intervention. On that same date, the Farm Credit Intervenors filed a motion for judgment on the pleadings. Both the Amended Complaint and the motion for judgment on the pleadings argue that the 1071 Rule is invalid because the development and promulgation of the Rule was funded from the Federal Reserve Board unlawfully because there was no “combined earnings of the Federal Reserve System “ and the CFPB must be funded out of such “combined earnings.” On August 16, 2024, the CFPB filed in the District Court a motion to extend the deadline for responding to the motion for judgment on the pleadings until after the Court adjudicates the Farm Credit Intervenors pending motion to amend their complaint and the CFPB has answered the docketed amended complaint.
The CFPB argues that a motion for judgment on the pleadings is premature since there is not yet an amended complaint on the docket and the CFPB has not yet responded to the Amended Complaint. While that may be procedurally the right way to go about things, it seems likely that the unlawful funding issue will eventually be ripe for adjudication by the Court.
NLRB Rolling Back More Rules From the Trump Administration
In its continuing repudiation of policies developed under the Trump administration, the National Labor Relations Board (NLRB or Board) has published its Fair Choice-Employee Voice Final Rule.
In April of 2020, the Board published a final rule addressing various union representation issues: (1) union elections while unfair labor practice (ULP) charges are pending, (2) voluntary recognition procedures, and (3) Section 9(a) recognition in the construction industry. The Biden administration NLRB issued proposed regulations in November 2022 to reverse that rule, and has now published its own final rule that reestablishes the NLRB’s pre-2020 election representation policies and procedures.
As we previously reported, the Trump-era final rule required the Board’s regional directors to conduct representation elections and promptly count votes, with limited exceptions, even if there were a ULP charge pending. Under the new final rule, the Board returns to its pre-2020 “blocking charge” policy and reestablishes a regional director’s authority and discretion to delay a representation election if an unfair labor practice charge is sufficiently serious to interfere with employee free choice. To help ensure that a charge is “sufficiently serious” (and not simply a frivolous attempt to delay an election), the Board also reinstituted a 2014 amendment to the Board’s election rules requiring that the charging party present a list of witnesses who are able to attest to and testify about the charge.
The 2020 final rule also established new voluntary recognition parameters by requiring a 45-day waiting period following an employer’s voluntary recognition of a union as representing certain of its employees, in order to allow employees an opportunity to challenge recognition. Even if an employer and union entered into a voluntary recognition agreement, employees had a 45-day period in which they could demand a representation election to contest the voluntary recognition. The new final rule removes that waiting period completely and, instead, restores the six-month bar on decertification petitions following voluntary recognition.
Finally, Section 8(f) of the National Labor Relations Act (NLRA) allows employers in the construction industry to recognize a union even without the union demonstrating the support of a majority of employees in the proposed bargaining unit (a ULP outside the industry), commonly known as “pre-hire” recognition. The more common Section 9(a) recognition provisions require a showing of majority status before an employer may lawfully recognize as a representative of its employees. For these reasons, Section 9(a) relationships are afforded more protections than those relationships established under Section 8(f). Under the 2020 Trump-era final rule, in order to convert a Section 8(f) relationship to a Section 9(a) relationship, the union had to provide “positive evidence” of majority status when seeking the conversion. Under the new final rule, the Board returned to its pre-2020 policy, eliminating the need to show “positive evidence” of majority status at the time of the attempted conversion. Such a change will make it easier to convert Section 8(f) relationships to Section 9(a) relationships and give greater protection to many construction industry unions without their having to prove support of a majority of employees.
The Board’s final rule will go into effect September 30, 2024 (60 days after its August 1, 2024 publication). However, it is likely to face legal challenge, particularly given the Supreme Court’s decision to overturn Chevron and give less deference to administrative agency actions. Ballard Spahr’s labor and employment team monitors NLRB developments and advises employers on all aspects of compliance with NLRB procedures.
Justen R. Barbierri & Shannon D. Farmer
NLRB to End Practice of Consent Orders, Overruling UPMC
In a 3-1 decision, the National Labor Relations Board (NLRB or Board) ended the agency’s practice of approving “consent orders,” which permitted an administrative law judge to resolve an unfair labor practice case before adjudication based on terms offered solely by the respondent. The Board’s decision will make it more difficult for employers to settle cases at the NLRB unless they are willing to accept the full remedy sought by the general counsel.
In Metro Health, Inc. d/b/a Hospital Metropolitano Rio Piedras, 373 NLRB No. 89, decided on August 22, 2024, the Board likened the practice of approving consent orders to a unilateral resolution between an administrative law judge and respondent, concluding for the first time in more than fifty years that the Board’s Rules and Regulations do not permit judges to “adjust cases” in this manner. The Board also reasoned that allowing judges to approve consent orders intrudes on the General Counsel’s prosecutorial authority under Section 3(d) of the National Labor Relations Act, and that the practice “poses administrative challenges and inefficiencies” for the Board. Finally, the Board concluded that the policy of the Act does not support approval of consent orders.
Hospital Metropolitano overrules the 2017 decision in UPMC, 365 NLRB 1418 (2017), which expressly approved a judge’s authority to approve a consent order over the objection of the General Counsel and/or charging party if the proposed consent order met the reasonableness standards of Independent Stave Co., 287 NLRB 740 (1987) – a standard also applicable to settlement agreements between parties. The Hospital Metropolitano majority made clear that it would continue to evaluate true settlement agreements – those between a respondent and at least one other party – under the Independent Stave standards, but clarified that consent orders are “not settlement agreements in any sense.”
In Hospital Metropolitano, the union accused the employer of violating the Act by refusing to provide the union with requested information. There, the judge approved a consent order that “wholly comported” with the settlement agreement proposed by the General Counsel except that it contained a non-admission clause and did not include a provision explicitly requiring the respondent to distribute the notice to employees via text message. Despite the consent order’s similarity to the General Counsel’s proposed settlement, the Board rejected the judge’s authority to approve the consent order and ordered the respondent to litigate or settle on terms acceptable to the General Counsel or the charging party.
Calling the majority’s decision “radical,” the dissent accused the ruling of giving the General Counsel “carte blanche” to force cases through litigation to suit her agenda.
The Board’s press release announcing the decision can be found at this link.
Ballard Spahr’s Labor & Employment Group monitors NLRB developments and advises employers on all aspects of compliance with NLRB procedures.
Rebecca A. Leaf & Monica Nugent
MBA Human Resources Symposium 2024
September 18-19, 2024 | MBA Headquarters, Washington, D.C.
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.
MBA Compliance and Risk Management Conference
September 22-24, 2024 | Grand Hyatt, Washington, D.C.
Compliance Conversations Track: RESPA Section 8
September 22, 2024 – 2:15 PM ET
Speaker: Richard J. Andreano, Jr.
Trending Compliance Issues Track: Servicing Compliance Part 1 Loss Mitigation Updates
September 24, 2024 – 9:15 AM ET
Speaker: Reid F. Herlihy
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