April 2022 in Brief: Business Regulation & Regulated Industries

Banking Law

Computer-Security Incident Notification Requirements for Banks Become Effective

By Rachael L. Aspery, McGlinchey Stafford, PLLC

On November 23, 2021, the Board of Governors of the Federal Reserve System (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”), jointly issued a final rule with respect to establishing notification requirements for computer-security incidents for banking organizations and bank service providers in order to promote early awareness of emerging threats and enable the agencies to react to the threats before the threats become systemic (“Final Rule”). The Final Rule went into effect on April 1, 2022, with a compliance date of May 1, 2022. The Final Rule is applicable to all banking organizations that are supervised by the Federal Reserve, OCC, and FDIC, but does not apply to designated financial market utilities under 12 U.S.C. § 5462(4).

The Final Rule defines a “notification incident,” which includes a significant computer-security incident that disrupts or degrades, or is reasonably likely to disrupt or degrade, the viability of the bank’s operations; results in customers being unable to access their deposit and other accounts; or impacts the stability of the financial sector. The types of incidents can include major computer-system failure or a cyber-related interruption such as a ransomware attack. The Final Rule also defines a “computer-security incident” as “an occurrence that results in actual harm to the confidentiality, integrity, or availability of an information system or the information that the system processes, stores, or transmits.”

A banking organization is required to notify the Board within thirty-six hours after the bank determines the notification incident occurred. If a bank is unsure whether a notification incident occurred, it is encouraged to still contact the Board. A bank service provider is required to notify each affected bank customer’s point of contact as soon as possible once it determines that it has experienced a computer-security incident. If the bank has not appointed a point of contact, the bank service provider must notify the Chief Executive Officer and Chief Information Officer of the banking organization customer, or two individuals with comparable responsibilities, through any reasonable means. If a bank service provider has any doubt as to whether there is a material disruption or degradation in services that were provided to its banking organization customer for four or more hours that would cause a material adverse impact on the bank, the Board encourages the bank service provider to contact its banking organization customer or its own legal adviser.

17 State Attorneys General Express Concerns with the CFPB’s “Junk Fees” RFI

By Jaline Fenwick, McGlinchey Stafford, PLLC

On January 26, 2022, the Consumer Financial Protection Bureau (CFPB) issued a Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services (“RFI”). The CFPB indicated its desire to mitigate charges like credit card late fees and overdraft and non-sufficient funds fees, which it said accounted for billions of dollars in 2019. The CFPB stated that its goal is to “strengthen competition in consumer finance by using its authorities to reduce these kinds of junk fees.”

On April 11, 2022, seventeen state attorneys general submitted a comment for the RFI. Initiated by Texas and Utah, the states’ comment expressed concern that the RFI was sufficiently broad to potentially encompass a number of fees, including fees specifically authorized or regulated by state law. In their reply, the states noted that they “have carefully weighed consumer protection interests and the open and transparent operation of markets in a manner intended to deliver the maximum benefit to the interests of their states” and “are much better positioned to understand and assess the diverse interests of their states.” Additionally, the states believe that the CFPB authority is limited with respect to regulating fees and pointed out these limitations. The states also expressed their view that more federal oversight would be redundant because states already regulate many fees for consumer financial products and services. The comment goes on to explain that the states are willing to work with the CFPB to promote its statutory purpose of “ensuring that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” However, the states argued consumers and consumer financial services markets are better served when federal and state entities collaborate. Therefore, the CFPB’s view that its authority may be superior to that of the states with respect to these fees is a cause for concern. The states explained that the CFPB’s “approach is especially troubling in the context of this RFI, which pointedly fails to acknowledge the significant role state law plays in many aspects of the fees implicated by the RFI. Unfortunately, the only role the CFPB contemplates for states is to provide comments to the RFI, along with consumers, consumer advocates, and industry.”

In sum, the states ask the CFPB to “abandon its apparent determination to adopt an uncooperative posture” and work with them with respect to existing state laws on fees.

Consumer Finance

CFPB Issues Report on Characteristics of Homeowners Who Remain in Forbearance as Pandemic Protections Expire

By Christopher Greenidge & Sanford Shatz, McGlinchey Stafford, PLLC

Almost eight million borrowers entered forbearance plans during the pandemic, including those plans available under the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Many borrowers have exited their forbearance plans. As a follow-up to its May 2021 report, the Consumer Financial Protection Bureau (CFPB) recently published an updated report on the characteristics of mortgage borrowers who remained under the protection of a forbearance plan as of January 2022 to help understand their demographics and financial capacity.

The CFPB’s findings include, among others:

• “The share of mortgages in forbearance fell significantly for minority and non-minority borrowers between March 2021 and January 2022. Decreases in the rate of forbearance were relatively larger for non-white than for white borrowers with the largest decreases occurring among Hispanic and other race borrowers.”
• “Black and Hispanic borrowers were overrepresented among those in forbearance. Black and Hispanic borrowers accounted for a combined 31.2 percent of forbearances, while only accounting for 18.2 percent of the overall sample of borrowers. Furthermore, Black borrowers were 2.8 times more likely and Hispanic borrowers were 1.6 times more likely to be in forbearance compared to white borrowers.”
• “Borrowers in forbearance as of January 2022 appear to have less financial capacity, on average, than borrowers in forbearance as of March 2021. Among mortgage borrowers who were pre-COVID delinquent, the rate of forbearance fell 46 percent between March 2021 and January 2022, whereas the rate of forbearance fell 74 percent over the same period for borrowers who were pre-COVID current.”
• “Mortgage borrowers with current (or mark-to-market) loan-to-value (LTV) ratios over 95 percent had significantly higher rates of forbearance compared to loans with lower LTV ratios in January 2022. However, this population of borrowers accounted for a small share of forbearances (1.0 percent).”

The borrowers identified in this report who still remain in forbearance should be monitored. Additionally, financial institutions should reach out to these persons through the end of forbearance to help them transition to performing loans.

CFPB Publishes Bulletin on Medical Billing and Collection Complaints

By Eric Mogilnicki & Ben Seymour, Covington & Burling LLP

In an April 20, 2022, bulletin, the Consumer Financial Protection Bureau analyzed consumer complaints related to medical debt that the CFPB received in 2021. The Bureau argued that consumers’ complaints demonstrate that medical debt “poses special risks to individuals and families” given the often unexpected nature of medical costs and the complexity of health insurance programs. The bulletin observed that consumers frequently submitted complaints regarding erroneous or already-paid medical debts, particularly when those debts appeared on consumers’ credit reports. Although the Bureau recognized that the three nationwide credit reporting agencies recently committed to removing most paid medical debt tradelines from consumers’ credit reports, the bulletin claimed that the volume of complaints in 2021 “raises questions . . . as to legal compliance of market participants” identified in consumers’ submissions to the Bureau. In a statement on the bulletin, Bureau Director Rohit Chopra added, “The credit reporting system should not be used as a weapon to coerce patients into paying medical bills they do not owe.”

CFPB Blog Post Criticizes Transcript Withholding

By Eric Mogilnicki & Ben Seymour, Covington & Burling LLP

In an April 18, 2022, CFPB blog post, Scott Filter, a Senior Advisor in the Office of Students and Young Consumers, and Emma Oppenheim, a Senior Fellow in the Office of the Director, expressed support for Education Secretary Miguel Cardona’s call to end the practice of universities withholding transcripts to collect education-related debts. Filter and Oppenheim wrote that, by this practice, “institutions are keeping their students from the very academic and labor market opportunities promised by higher education.” The blog post described this practice as “perplexing,” because it hinders students’ attempts to secure the employment necessary to repay education-related debts. Filter and Oppenheim warned that future CFPB exams will scrutinize transcript withholding and other “unique debt collection actions that only schools can take against their students.”

CFPB Publishes Annual Debt Collection Report

By Eric Mogilnicki & Neal Modi, Covington & Burling LLP

On April 15, 2022, the CFPB published its annual report to Congress on its enforcement of the Fair Debt Collection Practices Act. The Report provides an overview of consumer debt and debt collection practices, including the Bureau’s supervisory, enforcement, and education initiatives relating to debt collection.

In a blog post issued the same day, CFPB Director Rohit Chopra noted the predominance of medical debts in collections and encouraged Congress to consider “whether there should be additional debt collections rights and protections for small businesses and entrepreneurs to protect them.”

CFPB Notes the Elimination of NSF and Overdraft Fees

By Eric Mogilnicki & Neal Modi, Covington & Burling LLP

On April 13, 2022, the CFPB published a blog post noting the “positive development” that a “number of large banks have announced that they are eliminating non-sufficient fund (NSF) fees” on their checking accounts and estimating that the elimination of these fees has saved consumers $1 billion. The blog post also states that the CFPB is “closely scrutinizing whether and when charging these [NSF] fees may be unlawful.” The blog post is signed by Rebecca Borné, a Senior Engagement and Policy Fellow, and Ashwin Vasan, a Senior Advisor to the Director.

CFPB Releases Report on Payday Borrower Fees and Extended Payment Plans

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On April 6, 2022, the CFPB released a report finding that payday loan borrowers are not taking advantage of “no-cost extended payment plans,” which allow borrowers to repay the principal and fees already incurred over several months. Rather, the report found that payday borrowers continue to roll over their loans and incur additional fees. While sixteen states require payday lenders to offer no-cost extended payment plans, the report found that these states varied widely in their disclosure, fee, and timing requirements.

In the press release accompanying the report, Director Rohit Chopra states, “Our research suggests that state laws that require payday lenders to offer no-cost extended repayment plans are not working as intended,” and that “[p]ayday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing.” The press release also indicates that “[t]he CFPB will continue to monitor the payday loan industry, and it will use its enforcement and supervisory authorities where it sees abuses and violations.”

Eleventh Circuit Remands CFPB’s Ocwen Lawsuit for Further Analysis

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On April 6, 2022, the Eleventh Circuit remanded the Bureau’s mortgage servicing enforcement action against Ocwen Financial Corp. (“Ocwen”) to the district court for further analysis of the overlap between the CFPB’s 2017 enforcement action and a prior 2014 settlement. Last year, the district court held that a 2014 national settlement between the CFPB, state authorities, and Ocwen barred the CFPB’s more recent enforcement action. The CFPB appealed, and the Eleventh Circuit remanded the case for further analysis with the guidance that: “the CFPB may . . . sue Ocwen for alleged violations that occurred between January 2014 and February 26, 2017, only if they aren’t covered by the consent judgment’s servicing-standard, monitoring and enforcement regime.” The Eleventh Circuit expressed skepticism regarding the CFPB’s position, indicating, “If the CFPB could freely elect when to proceed through the strictures of the settlement agreement and when to go straight to court, Ocwen surely wouldn’t have agreed to the [costly] three-year compliance-and-enforcement regime.”

CFPB Files Amicus Brief in Ninth Circuit Mortgage Servicing Case

By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP

On April 4, 2022, the CFPB filed an amicus brief in McCoy v. Wells Fargo Bank, N.A., a consumer class action pending appeal in the Ninth Circuit. The proposed class action was filed in 2020 in Oregon district court, and it alleges violations of the Real Estate Settlement Procedures Act (“RESPA”) and Regulation X related to alleged failures to respond to consumers’ inquiries about mortgage loans subject to foreclosure. The district court held that RESPA did not impose a legal obligation to respond to the borrowers’ non-servicing related requests and dismissed the lawsuit. The borrowers appealed, and the CFPB amicus brief supporting the appeal argues that 2013 amendments to the RESPA rules “broadened” mortgage servicers’ obligations to respond to any written request for information. In a blog post discussing the amicus brief, CFPB General Counsel Seth Frotman stated, “It’s only fair that the same entity that takes the homeowner’s payments, usually the only entity in this complex web for whom the homeowner has any contact information, should also answer questions the homeowner has about their loan.”

Credit Unions Challenge New York Interest Rate Law

By Eric Mogilnicki & Neal Modi, Covington & Burling LLP

On April 4, 2022, three credit unions filed a federal class action lawsuit in the Southern District of New York seeking to challenge and halt New York’s implementation of a recently-enacted law that would reduce—both retroactively and prospectively—the annual interest rate on unpaid judgments arising out of a consumer debt from 9% to 2%.

The lawsuit claims that the retroactive application of the law, which would require consumer judgment holders to file amended executions of judgment showing the recalculated interest rate, would improperly deprive these credit unions of their property and effectively cancel millions of dollars currently owed. The lawsuit also highlights the significant compliance uncertainty given the statute’s silence on how to recalculate consumer judgments retroactively.

Alongside the complaint, the credit unions also filed a motion for a preliminary injunction to prevent the law from taking effect on April 30, 2022, as scheduled. The presiding court is scheduled to hear the motion on April 20, with a decision expected to follow shortly thereafter.

Credit Reporting Agency Sued for FCRA Violation Based on Alleged Inaccurate Reporting of Mortgage Delinquency During COVID-19 Forbearance

By Alyssa Weiss, McGlinchey Stafford, PLLC

On March 24, 2022, a complaint was filed against Equifax Information Services, LLC based on its alleged inaccurate reporting of a mortgage loan delinquency. The borrowers filed the two-count complaint in the U.S. District Court for the Southern District of California, alleging Equifax violated the Fair Credit Reporting Act (FCRA) and the California Consumer Credit Reporting Agencies Act (CCRAA). The borrowers contend Equifax failed to follow reasonable procedures to establish maximum possible accuracy in the preparation of the borrowers’ credit reports. As a result, they seek actual, statutory, and punitive damages, attorney fees and costs, and other relief.

In support of their claims, the borrowers state they obtained a mortgage loan on their primary residence and timely made the necessary payments each month, up until their loan went into forbearance due to the COVID-19 pandemic. The borrowers contend that during this forbearance period, Equifax prepared a credit report that “wrongfully indicated [the borrowers] were delinquent.” Following the completion of the forbearance, the borrowers sold their home, and the loan was paid in full. They maintain their mortgage servicer sent an Automated Universal Data form (AUD) to Equifax requesting the date of default and delinquency reporting be removed. However, the borrowers claim that in applying for another mortgage loan, they discovered that Equifax continued to report their account as delinquent during the forbearance period. As a result of the alleged inaccurate reporting, the borrowers contend their credit scores decreased significantly. They suffered emotional distress. They could not obtain financing and lost the opportunity to purchase a new house that now has considerably appreciated in value.

As forbearance periods mandated by the Cares Act conclude, there is an increased amount of litigation resulting from alleged inaccurate credit reporting. Although this matter is in its infancy, the issues surrounding alleged incorrect credit reporting will be worth watching over several months as case law begins to develop.

Virginia Enacts Sales-Based Financing Registration and Disclosure Law

By Katherine C. Fisher, Hudson Cook, LLP

On April 11, 2022, Virginia Governor Glenn Youngkin signed H.B. 1027, which creates the Sales-Based Financing Providers Chapter of the Financial Institutions and Services Title (the “SBFP Chapter”). The SBFP Chapter requires sales-based financing providers and brokers to register with the State Corporation Commission (the “Commission”). It also requires sales-based financing providers to make certain disclosures to the recipients of sales-based financing and imposes other substantive limitations on sales-based financing contracts.

Every sales-based financing provider and sales-based financing broker must register with the Commission in accordance with procedures established by the Commission. Further, unless such provider or broker is organized under the laws of Virginia or otherwise is not required to obtain authority to transact business in Virginia as a foreign entity, the provider or broker must obtain authority to transact business in Virginia. The registration must be renewed annually.

Each provider must provide a number of specific disclosures to a recipient at the time of extending a specific offer of sales-based financing, according to formatting prescribed by the Commission. The provider must obtain the recipient’s signature, which may be fulfilled by an electronic signature, on all disclosures required to be presented to the recipient at the time the recipient accepts the specific sales-based financing offer.

The SBFP Chapter also includes restrictions on venue and arbitration proceedings that impact sales-based financing contracts.

The SBFP Chapter does not apply to:

• a financial institution;
• any person, provider, or broker that enters into no more than five sales-based financing transactions with a recipient in a twelve-month period; or
• a single sales-based financing transaction in an amount over $500,000.

The Commission is required to adopt regulations as it deems appropriate to effect the purposes of the law, including the formatting for the required disclosures. However, the effective date of the SBFP Chapter is not contingent upon the adoption of these regulations. The SBFP Chapter applies to contracts or agreements for sales-based financing entered into on or after July 1, 2022. Notwithstanding this effective date, sales-based financing providers and brokers have until November 1, 2022, to register with the Commission.

Landlord/Tenant Law

California Extends Renter Protections During the Pandemic

By Sanford Shatz, McGlinchey Stafford, PLLC

On March 31, 2022, California Governor Gavin Newsom approved Assembly Bill 2179, which extends existing protections for California renters.

The Bill amends the COVID-19 Tenant Relief Act to require that notices that demand payment of rent must now inform tenants that they have certain rights if they pay at least 25 percent of their rent and apply for government rental assistance for the amounts owing to the landlord. It also extends the time to August 1, 2022, that local jurisdictions can begin to require tenants to repay past-due rent.

The Bill amends the COVID-19 Rental Housing Recovery Act to extend the restriction on unlawful detainer (evictions) actions based in whole or in part of nonpayment of rental debt due to COVID-19 hardship through July 1, 2022. If in response to a demand for a payment of rent the tenant submits a declaration to the landlord stating that the tenant has applied for government rental assistance to cover the rental debt demanded, the landlord may not file an eviction action before July 1, 2022.