Federal Court Upholds OCC and FDIC Valid When Made Rules
On February 8, 2022, the United States District Court for the Northern District of California issued two separate orders that upheld the “valid-when-made” rules of the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).
In 2020, the OCC and FDIC issued separate rules addressing, among other things, uncertainty in secondary markets following the decision of Madden v. Midland Funding, LLC, 786 F.3d 246 (2d Cir. 2015), which established that usury claims against non-bank assignees were not preempted by the National Banking Act of 1864 (NBA). The OCC promulgated a rule entitled “Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred.” Additionally, the FDIC promulgated its own “valid when made” rule entitled “Federal Interest Rate Authority.”
As expected, a small number of states mounted a legal challenge related to policy concerns with these rules, which, they argued, may enable “rent-a-charter” schemes that seek to evade state usury limits. In a major victory for the OCC and FDIC, United States District Court Judge Jeffrey S. White issued two separate orders (OCC Order and FDIC Order) that granted summary judgment in favor of the agencies in lawsuits brought by the states.
In both cases, the Plaintiff states alleged that the agencies violated the Administrative Procedures Act when they promulgated their respective rules. In its order granting the FDIC’s cross-motion for summary judgment, the Court found that the FDIC did not exceed its statutory authority when it promulgated its rule. The Court turned to a Chevron analysis and concluded that the FDIC’s rule was not unreasonable or arbitrary and capricious and that the rule was consistent with the principle that “the assignee steps into the shoes of the assignor.”
Likewise, in its order granting the OCC’s cross-motion for summary judgment, while acknowledging the “true lender” rule also promulgated by the OCC in 2020 had been invalidated by Congress pursuant to the Congressional Review Act, the Court did not consider that outcome relevant to the valid-when-made rule. The Court also found that the OCC did not exceed its statutory authority when it promulgated its rule addressing permissible interest on loans that are sold, assigned, or transferred. The Court found that the OCC did not violate procedural statutory requirements set forth in the NBA when promulgating the rule and also found that the rule did not run afoul of the 2nd Circuit’s prior ruling in Madden v. Midland Funding, LLC in 2015, because the procedural claims presented before the Court were separate and distinct from what the 2nd Circuit was presented with in Madden. The Court then turned to a Chevron analysis and concluded the OCC’s rule was not unreasonable or arbitrary and capricious and cited the OCC’s reasoning that the rule was intended to resolve uncertainty following the Madden decision.
CFPB Joins Several Federal Agencies in Encouraging Lenders to Pursue Special Purpose Credit Programs
On February 22, 2022, seven federal agencies including the Consumer Financial Protection Bureau (CFPB) issued an “Interagency Statement on Special Purpose Credit Programs Under the Equal Credit Opportunity Act and Regulation B.” The statement seeks to encourage lenders to offer Special Purpose Credit Programs (“SPCPs”) to better serve historically disadvantaged communities.
In a related blog post, the Bureau pointed lenders to prior CFPB guidance on how they can participate in SPCPs and encouraged lenders to consult with their regulators to seek to resolve any uncertainty relating to the relevant Equal Credit Opportunity Act and Regulation B provisions.
The post also notes that “[r]ecent research has shown that the average white family has eight times more wealth than the average Black family.” Moreover, research indicates Black and Hispanic credit applicants are declined at higher rates and minority small business owners are approved for less financing than their white counterparts. The CFPB and other federal agencies are “committed to exploring incentives that better serve those who have been historically shut out of the mainstream credit markets.”
Bureau to Focus on Lender Practices and Consumer Outcomes for Auto Loans
On February 24, 2022, the CFPB published a blog post describing its concerns and plans regarding auto loan debt. The Bureau notes that, due to rising inflation, “the total amount of debt and the average loan size will continue to increase and that larger car loans will put increased pressure on some consumers’ budgets for much of the next decade.” The Bureau also noted that auto loans are the third largest consumer credit market in the United States at over $1.4 trillion, double its size a decade ago.
The Bureau expresses several concerns related to this growth in auto lending:
- High auto prices, especially for used cars, might create incentives for lenders to repossess cars more quickly, assisted by new technology.
- When auto loans are made at the “edge of (or beyond) a consumer’s ability to repay, any economic disruption in the consumer’s life can result in repossession.”
- Given the “uncertainty around the ongoing economic recovery” and the rising length and amount of loan terms, the Bureau will be “closely monitoring lender practices and consumer outcomes.”
- In particular, the Bureau will evaluate “lending structures where lenders seem to rely on high interest rates and fees to profit even when consumers fail.”
- Consumers with subprime credit scores have less leverage and fewer options because they largely obtain loans indirectly “through a smaller pool of lenders that operate exclusively through dealers or from buy-here-pay-here dealers.”
Bureau Releases Guidance on the Obligations of Student Loan Servicers Regarding the Public Service Loan Forgiveness Program
By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP
On February 18, 2022, the CFPB released guidance summarizing student loan servicers’ legal obligations to communicate with borrowers about their eligibility for the Public Service Loan Forgiveness (“PSLF”) program, including the Biden administration’s temporary expansion of the PSLF program for public service workers. The bulletin states that the CFPB “plans to prioritize student loan servicing oversight work in deploying its enforcement and supervision resources in the coming year with a specific focus on monitoring engagement with borrowers about PSLF and the PSLF Waiver.” In connection with this oversight, the Bureau will pay particular attention to:
- the completeness and accuracy of communications about the PSLF program;
- policies and procedures regarding the PSLF program, including with respect to how the servicer responds to borrowers expressing interest in the program, and whether the servicer is directing borrowers to appropriate resources; and
- steps taken to promote benefits of the PSLF program to borrowers who express interest or whose files otherwise demonstrate eligibility.
In the press release accompanying the guidance, CFPB Director Rohit Chopra stated, “Illegal conduct by a student loan servicer can be ruinous for borrowers who miss out on the opportunity for debt cancelation,” and signaled that the Bureau “will be working closely with the U.S. Department of Education to ensure that loan cancellation promises for public service are honored.”
Bureau Emphasizes Appraisal Discrimination Is Illegal Under Federal Law
On February 4, 2022, the CFPB’s Fair Lending Director, Patrice Alexander Ficklin, joined a wide range of senior government officials in a letter to The Appraisal Foundation (“TAF”) emphasizing federal prohibitions against discrimination under the Fair Housing Act and the Equal Credit Opportunity Act. The letter urges TAF to provide clear guidance on the existing legal standards as they relate to appraisal bias.
In a related blog post, the Bureau noted that “a home’s valuation may be skewed by one’s skin color or the demographics of the surrounding community,” and that such a biased appraisal “can worsen racial inequities and distort the housing market.” The Bureau notes discriminatory statements the Fair Housing Administration recently identified in some home appraisals, and the appraisal disparities for communities of color found in Freddie Mac and Fannie Mae studies. The Bureau intends to “engag[e] with all relevant stakeholders and us[e] all of the CFPB’s tools” to address these issues.
CFPB Releases Report on Criminal Justice Financial Ecosystem
On January 31, 2022, the Bureau issued a press release announcing the publication of its review of the financial issues individuals and families who come in contact with the with the criminal justice system face. The report finds “an ecosystem rife with burdensome fees and lack of choice, and where families are increasingly being forced to shoulder the costs.” Director Chopra said the report “describes how private companies undermine the ability for individuals to successfully transition from incarceration.”
Specifically, the report found:
- Burdensome fees: Many who interact with the criminal justice system encounter fines, fees, and restitution, and may be subject to third-party debt collectors.
- Lack of consumer choice: There is limited choice with respect to such financial services as the transfer of funds into or out of a prison account, and that option may involve high fees or barriers to resolving errors.
- Shifting financial burdens: Governments are increasingly shifting the cost of such services as “court operations, a court-appointed public defender, drug testing, prison library use, and probation supervision” to private companies that set prices that are “wildly inflated over typical market costs.”
In sum, the Bureau found that “the available information raises serious questions about the transparency, fairness, and availability of consumer choice in markets associated with the justice system, as well as demonstrating the pervasive reach of predatory practices targeted at justice-involved individuals.”