March 02, 2020

MONTH-IN-BRIEF: Business Regulation & Regulated Industries

Lynette Hotchkiss

Consumer Finance

Additional Briefs Filed in Bureau Constitutionality Case

Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On February 14, 2020, both petitioner Seila Law and respondent CFPB (through the Solicitor General’s office) filed reply briefs at the Supreme Court of the United States.  Reflecting the unusual procedural posture of the case, both briefs argued that there is no barrier to the Court reaching the question of the constitutionality of the for-cause removal provision for the Director of the CFPB.  Both briefs also reiterate the view that the for-cause removal provision is unconstitutional.  However, the briefs differ in the remedy sought.  The Solicitor General’s brief argues that the provision should be severed from the broader legislation, leaving the rest of the Bureau’s structure intact.  Seila Law, however, argues that the entirety of Title X of the Dodd-Frank Act, which establishes the CFPB, should be invalidated. 

Because both the Department of Justice and CFPB Director Kathleen L. Kraninger have taken the position that the provision is unconstitutional,  the Supreme Court asked former United States Solicitor General Paul Clement to defend the constitutionality of the provision as an amicus curiae.  The Supreme Court is set to hear oral argument in the case on March 3, 2020.  Time for argument will be divided as follows: 20 minutes for petitioner Seila Law, 20 minutes for the Solicitor General, 20 minutes for the Court-appointed amicus curiae, and 10 minutes for the House of Representatives as amicus curiae arguing for the constitutionality of the provision.

Bureau Issues Supplemental NPRM on Time-Barred Debt Disclosures

Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On February 21, 2020, the CFPB announced that it issued a Supplemental Notice of Proposed Rulemaking (Supplemental NPRM) regarding the collection of time-barred debt.  The CFPB proposes to prohibit collectors from using non-litigation means such as phone calls to collect on time-barred debt unless collectors disclose to consumers during the initial contact and on any required validation notice that the debt is time-barred.  Such disclosures would be required only when the collector knows or should know that the debt is time-barred.

The Supplemental NPRM proposes model language and forms that debt collectors may use to comply with the proposed disclosure requirements.  The CFPB published the model disclosure language after engaging ICF International, Inc. to launch a large-scale online test of several versions of disclosures.  The Bureau has published the results of the survey in a new report.  The public is invited to submit written comments on the proposed rule.

The Supplemental NPRM builds on the May 2019 CFPB proposal (May 2019 NPRM) to implement the Fair Debt Collection Practices Act (FDCPA). The May 2019 NPRM would provide consumers with additional protections and options to address or settle disputes.  It would also set limits on the number of calls debt collectors may place to reach consumers on a weekly basis.  In addition, the May 2019 NPRM would clarify how collectors may communicate with consumers lawfully using newer technology, such as text messaging, that has been developed since the passage of the FDCPA in 1977. 

Bureau Releases Winter 2020 Edition of its Supervisory Highlights

Eric Mogilnicki & Cody Gaffney, Covington & Burling LLP

On February 14, 2020, the Bureau released the Winter 2020 edition of its Supervisory Highlights.  This edition summarizes the Bureau’s findings in the areas of debt collection, mortgage servicing, payday lending, and student loan servicing from examinations between April and August 2019.  The report also describes developments in the CFPB’s supervisory program and public enforcement actions brought by the Bureau since the last report.  A brief summary of the Bureau’s findings from the four focus areas is below:

  • In the area of debt collection, the report describes two violations of the Fair Debt Collection Practices Act: (i) debt collectors that failed to disclose in subsequent communications that the communication is from a debt collector; and (ii) debt collectors that failed to send validation notices following the initial communication with the consumer.  In both cases, the debt collectors revised their policies and procedures, monitoring and/or audit programs, and training.
  • In the area of mortgage servicing, the report describes multiple violations of Regulation X, including mortgage servicers that failed provide required notices in connection with loss mitigation applications.  Because the mortgage servicers were making specific efforts to address escalated borrower needs arising from natural disasters, the CFPB examiners did not issue any Matters Requiring Attention for these violations.
  • In the area of payday lending, the report describes multiple violations of Regulation Z, Regulation B and unfair acts or practices, including: (i) failures to apply borrowers’ payments to their loans; (ii) misstatements of APRs to customers, and; (iii) failures to disclose renewal fees as part of the finance charge in connection with the refinancing of delinquent loans.
  • In the area of student loan servicing, the report describes instances where the stated amounts due in periodic statements that exceeded those authorized by consumers’ loan notes.  These inaccurate monthly payment amounts were caused by data mapping issues in connection with the transfer of private loans between servicing systems.

Bureau Director Kraninger Appears Before House Financial Services Committee

Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On February 6, 2020, CFPB Director Kathleen Kraninger appeared before the House Financial Services Committee at a hearing entitled “Protecting Consumers or Allowing Consumer Abuse?  A Semi-Annual Review of the Consumer Financial Protection Bureau.”  The hearing came just days after Director Kraninger submitted the CFPB’s Semi-Annual Report to Congress.  See below.  The text of Director Kraninger’s opening statement is available here.  Her longer-form written testimony is available here.  Video of the hearing is available here.

In her prepared testimony, Kraninger described the CFPB’s recent Policy Statement on the abusiveness standard, and stressed the importance of transparency in supervision and enforcement activities in order to promote compliance with the law.  She also highlighted strides made by the CFPB’s Office of Minority and Women Inclusion to assess the diversity and inclusion practices of the entities the Bureau regulates.  Committee Chair Maxine Waters criticized Director Kraninger for what the Chair views as the CFPB’s consistently weak stance on enforcement matters.  Ranking Member McHenry thanked Director Kraninger for adopting the position that the for-cause removal provision for the position of CFPB Director is unconstitutional.  Rep. Rashida Tlaib pressed Director Kraninger on the importance of bringing enforcement actions against entities that discriminate against consumers on the basis of race or ethnicity in imposing interest rates. 

Bureau Signs MOU With Department of Education on Student Loans

Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On February 3, 2020, the CFPB announced that it has entered into a Memorandum of Understanding (“MOU”) with the U.S. Department of Education.  Under the MOU, the two agencies will coordinate and share data on complaints by student loan borrowers.  CFPB Director Kathleen Kraninger and Education Secretary Betsy DeVos both released statements indicating that the MOU would facilitate the agencies’ efforts to protect student loan borrowers.

The CFPB has drawn congressional scrutiny for its handling of the Public Service Loan Forgiveness Program.  Director Kraninger indicated in March 2019 that a forthcoming MOU between the two agencies would improve the administration of the program.  A January 30 letter from Senators Sherrod Brown and Robert Menendez to Director Kraninger sharply critiqued the Bureau’s “lack of transparency with Congress” on the loan forgiveness program and demanded information on the Bureau’s progress towards a finalized MOU with the Department of Education.

Steffek v. Client Services, Inc.

Christopher J. Carpuso, Hudson Cook

On January 21, 2020, the U.S. Court of Appeals for the Seventh Circuit held in Steffek v. Client Services, Inc. that a debt collector’s collections letters to consumers did not clearly identify the current creditor as required under the Fair Debt Collection Practices Act, even though the letters included the name of the current creditor. The collection letters listed the name of the current creditor in each letter’s header, as well as the account number associated with the debt. However, the Seventh Circuit stated that the mere presence of the name of the current creditor and the account number for the debt are insufficient under the FDCPA because that information “says nothing about the creditor today.” Further, though the debt collector identified themselves as a debt collector on the letter and argued that such a disclosure would logically make the listed bank the current creditor, the Seventh Circuit found that such an argument is not a logical conclusion but rather that it creates “guesswork” for the consumer to determine the identity of the current creditor.

Gadelhak v. AT&T Services, Inc.

By Marielise Fraioli, Pilgrim Christakis

In Gadelhak v. AT&T Services, Inc., a unanimous Seventh Circuit panel recently held (as the Second and Ninth Circuits have done) that receipt of unwanted text messages can constitute a concrete injury-in-fact for Article III standing purposes. Sure of its jurisdiction, the Seventh Circuit then examined the statutory definition of an automatic telephone dialing system (“ATDS”) under the Telephone Consumer Protection Act.

Joining the Third and Eleventh Circuits, the Seventh Circuit concluded that AT&T’s “Customer Rules Feedback Tool,” which places calls using an existing database of numbers, does not qualify as an ATDS because it “neither stores nor produces numbers using a random or sequential number generator,” but rather “exclusively dials numbers stored in a customer database,” and therefore “is not an ‘automatic telephone dialing system’ as defined by the Act.” In reaching this conclusion, the Seventh Circuit carefully considered various grammatical interpretations of the definition of ATDS, ultimately agreeing with AT&T’s preferred reading and rejecting the Ninth Circuit’s broad interpretation of ATDS urged by the plaintiff. In adopting its narrow interpretation of ATDS, the Seventh Circuit increases the likelihood that the Supreme Court may be called upon to resolve this ever-widening circuit split.

Lynette Hotchkiss

EVP/General Counsel & Corporate Secretary; Rabobank, N.A

Lynette Hotchkiss is EVP/General Counsel & Corporate Secretary for Rabobank, N.A., where she also previously served as Associate General Counsel. Prior to joining Rabobank, Lynette was with OneWest Bank, N.A, where her responsibilities included monitoring and reporting on regulatory developments impacting the bank’s operations and providing legal support for regulatory compliance matters. Before that, Lynette was an attorney in the Financial Practices Division of the Federal Trade Commission, where she focused on mortgage servicing issues. For much of her career, Lynette used her knowledge and experience in consumer finance laws and regulations to build compliance tools to help financial institutions comply with the complex array of federal and state requirements, first acting as the lead compliance attorney at CFI ProServices Inc. (now Finastra) to develop the Laser Pro® loan documentation system and later leading the legal team at Mavent Inc. (now part of Ellie Mae) to develop the Mavent Expert System, an automated compliance system for mortgage origination.