Future of Minority Depository Institutions
By Tiyanna D. Lords and Lynette I. Hotchkiss, McGlinchey Stafford, PLLC
On July 26, 2022, the Office of the Comptroller of the Currency (OCC) issued an update to its 2013 policy statement on minority depository institutions (MDIs). Acting Comptroller Michael J. Hsu noted as follows concerning the reason for updating the policy: “MDIs are on the frontlines serving low-income, minority, rural and other underserved communities. They are a critical source of credit to support the financial needs and economic vitality of their communities. The OCC has a long history of recognizing the value of these institutions, and we will continue our efforts to ensure they remain a bedrock of financial access and inclusion.”
Changes to the policy statement include (i) clarifying the definition of an MDI, (ii) describing how an MDI may be formed de novo or by designating an existing bank as an MDI, and (iii) providing examples of support to MDIs. The updated policy statement streamlines descriptions of the OCC’s policies, procedures, and programs relative to MDIs.
FRB Proposes LIBOR Regulation
On July 28, 2022, the Board of Governors of the Federal Reserve System (the “FRB”) published a proposed regulation to implement the Adjustable Interest Rate (LIBOR) Act (“Act”). Due to problems with London Interbank Offer Rate (LIBOR) no longer being representative of the underlying borrowing costs of banks that LIBOR was intended to reflect, LIBOR is scheduled to be discontinued on June 30, 2023. While the federal banking regulators previously required that lenders stop writing new contracts using LIBOR as of December 31, 2021, there are a significant number of existing contracts that reference USD LIBOR that will not mature by June 30, 2023, and cannot be easily amended. Of particular concern are so-called “tough legacy contracts.” Tough legacy contracts not only reference LIBOR and will not mature by June 30, 2023, but also lack adequate fallback provisions providing for a clearly defined or practicable replacement benchmark following the cessation of LIBOR.
To provide a uniform solution to this problem, on March 15, 2022, Congress enacted the Act as part of the Consolidated Appropriations Act of 2022. Among other things, the Act lays out a set of default rules that apply to tough legacy contracts subject to U.S. law.
The Act authorizes the FRB to promulgate regulations to facilitate the implementation of the Act. While the recently proposed Regulation ZZ closely follows the text of the Act, it also provides additional guidance and clarification of some technical issues. Additionally, in the Section-by-Section Analysis in the proposed rule, the FRB noted that the Act may potentially not apply to a subset of tough legacy contracts, specifically those that contain fallback provisions that either identify a clear and practicable benchmark replacement or authorize a determining person to select a benchmark replacement, but that are triggered only when LIBOR is unavailable. The FRB is concerned that the fallback provisions in these contracts are not triggered when LIBOR is available but non-representative. The FRB has asked for public comment on whether its approach in the proposed regulation to provide a solution to those contracts is workable under the Act. The underlying concern of the FRB is the possibility that a “synthetic LIBOR” may be published after June 30, 2023, which could give lenders the impression that “LIBOR” is still available for use as the index for those contracts. It is likely that this issue will be resolved in the final rule.
Comments on proposed Regulation ZZ were due by August 29, 2022, and the Act requires the FRB to publish its final rule by September 11, 2022, so answers to the remaining questions around LIBOR phaseout will be available soon.
Third Circuit Adopts “Reasonable Reader” Standard for Credit Report Accuracy
The Fair Credit Reporting Act (FCRA) 15 USC 1681 et. seq. requires furnishers of information to report the information accurately. Recently, several payment rating/account status cases have been filed and litigated where the Plaintiff’s bar contends the industry’s reporting of account information is misleading and violates the FCRA. However, on August 8, 2022, the U.S. Court of Appeals for the Third Circuit outlined how district courts within the Circuit must analyze credit reports when determining whether an individual tradeline is inaccurate or misleading under the FCRA. This analysis may prove to be the first nail in the coffin of the so-called “payment rating” cases which began in 2015.
In Bibbs v. Trans Union LLC, the Court of Appeals consolidated three cases and affirmed the district court’s orders granting judgment on the pleadings in favor of Trans Union. Each Plaintiff defaulted on student loans by failing to make monthly payments. Each student loan servicer transferred the borrowers’ accounts and, after the accounts were transferred, reported the accounts to the credit reporting agencies with a zero balance, noting that the payment obligations were transferred. They also indicated that the “Pay Status” field showed “120 Days Past Due” but also noted a $0 balance. It was undisputed that each borrower failed to make timely payments and that the accounts were correctly reported as delinquent until they were closed and transferred. It was also undisputed that none of the borrowers owed any balance to the transferring creditor after the transfer occurred, and at the time the transfers occurred, each account was past due. Each borrower argued that reporting a “Pay Status” of “120 Days Past Due” and a balance due of $0 was inaccurate and could mislead prospective creditors into incorrectly assuming each borrower was currently more than 120 days late on loans that have been closed.
Each borrower sent a dispute letter to TransUnion, arguing that it is impossible to be late on an account with a $0 balance, and requested that their respective tradelines be corrected or removed. TransUnion timely investigated the accounts and sent each borrower a letter stating each credit report was accurate.
The borrowers argued that the court should adopt a standard instructing District Courts to read “Pay Status” fields independently from the rest of the credit report when assessing the accuracy of the field. The borrowers argued that the standard applied by the District Court (the “reasonable creditor” standard) was not appropriate because unsophisticated employers, landlords, insurers, and other non-creditors may be misled by reports. The Court of Appeals agreed that the “reasonable creditor” standard was inappropriate, but it declined to adopt a standard that would look at credit reporting fields myopically. Instead, to determine whether the tradelines were inaccurate or misleading under the FCRA, the court adopted a “reasonable reader” standard. District Courts are therefore instructed to view a credit report from the perspective of a typical, reasonable reader viewing the tradeline in its entirety, not by reading a portion of the credit report in isolation.
In applying this reasonable reader standard, the court analyzed whether the “Pay Status” field showing “120 Days Past Due” was inaccurate or misleading given the “maximum possible accuracy” standard that the FCRA applies to the credit reporting agencies. The court held that a reasonable reader viewing each borrower’s credit report would see the multiple conspicuous statements noting that the accounts were closed and conclude no amounts were due to the creditors that transferred the accounts. The Court affirmed the judgment on the pleadings and held the credit reports were accurate under 15 U.S.C.S. § 1681e(b).
The court also resolved the two remaining issues in TransUnion’s favor. In assessing the reasonableness of TransUnion’s reinvestigation of the credit report, the court noted that a finding of inaccuracy was a prerequisite to recovery for a claim based on an unreasonable reinvestigation under 15 U.S.C.S. § 1681i(a). Because the court concluded the tradeline was accurate, it again affirmed the judgment entered by the District Court. As to the borrowers’ final claim that discovery was necessary to determine whether creditors would be misled or would make adverse credit decisions based on the reporting, the court held that because the reasonable reader standard is objective, discovery would not be necessary.
This holding should provide guidance to furnishers of credit information regarding how to accurately report closed or transferred accounts, as well as provide a strong defense to claims predicated upon idiosyncratic interpretations of credit reporting.
Director Chopra Compares For-Profit Colleges to Subprime Lenders in Remarks on ITT Tech Loan Cancellation
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On August 16, 2022, Consumer Financial Protection Bureau Director Rohit Chopra made remarks on the Department of Education’s recent move to discharge $3.9 billion in loans borrowers received to attend ITT Technical Institute. Likening for-profit colleges to subprime lenders prior to the 2008 foreclosure crisis, Chopra argued that some schools engaged in “widespread deception,” structured complex loan products that allowed them to “harvest profits even as they set up borrowers to fail,” and targeted veterans and servicemembers. Chopra closed his remarks with a vow to continue working with the Department of Education and other regulators to ensure that in-house institutional lending programs do not “strongarm” their students with illegal practices.
CFPB Issues Circular Indicating That Financial Companies May Violate Consumer Financial Protection Law When They Fail to Safeguard Data
By Eric Mogilnicki and Neal Modi, Covington & Burling LLP
On August 11, 2022, the Bureau released Circular 2022-04. In the Circular, the Bureau concluded that, in addition to other federal laws governing data security, entities can violate the prohibition on unfair acts or practices under the Consumer Financial Protection Act (CFPA) when they have insufficient data protection or information security.
After noting that no one particular security practice is required under the CFPA, the Circular provided examples of widely implemented data security practices which, if not implemented, might increase the risk that an entity’s conduct triggers liability under the CFPA. These practices include: multi-factor authentication, adequate password management, and timely software updates.
The Circular cites heavily to precedent from data security–related cases brought by the Federal Trade Commission (FTC), including the March 2022 enforcement action against the operators of CafePress, an online retailer of customizable T-shirts and other merchandise, as well as a 2019 CFPB settlement with a nationwide consumer reporting agency.
In an accompanying press release, the Bureau noted that it is “increasing its focus on potential misuse and abuse of personal financial data,” with CFPB Director Rohit Chopra also remarking that “[w]hile many nonbank companies and financial technology providers have not been subject to careful oversight over their data security, they risk legal liability when they fail to take commonsense steps to protect personal financial data.”