CFPB Highlights Spanish-Language Financial Disclosures
By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP
On May 11, 2022, the Bureau published an unsigned blog post emphasizing the importance of providing clear and accurate customer-facing materials in languages other than English. Among other things, the blog post cited to the Bureau’s January 2021 statement providing key considerations and guidance for serving consumers with limited English proficiency, and included links to Spanish translations of various disclosures available on the Bureau’s website.
CFPB Report Flags Auto Servicing, Credit Reporting, Private Loan Servicing Issues
By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP
On May 2, 2022, the Bureau released a Supervisory Highlights Report, in which it identified legal violations uncovered during the Bureau’s supervisory examinations in the second half of 2021. The Report highlighted Bureau examinations findings that:
- auto servicers engaged in unfair acts or practices by repossessing vehicles, and misled consumers about the amount of their final loan payments;
- credit reporting companies failed to conduct reasonable investigations, as required by the Fair Credit Reporting Act, by not reviewing disputed debts in a timely manner or by failing to review and consider all relevant evidence submitted by consumers; and
- private student loan servicers failed to comply with the terms of their own loans or loan modifications, including with respect to incentive payments and COVID-19 payment relief.
In remarks accompanying the Report’s release, CFPB Director Rohit Chopra noted that “While most entities act in good faith to follow the law, CFPB examiners are identifying law violations that lead to real harm.”
5th Circ. Addresses CFPB’s Constitutionality
By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP
On May 2, 2022, the en banc Fifth Circuit held, in a per curiam decision, that the Bureau may continue an enforcement action against a payday loan company (All American Check Cashing) that had challenged the Bureau’s constitutionality. All American had argued that the single director structure of the CFPB was unconstitutional. The Fifth Circuit, relying upon the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, rejected that constitutional claim.
In a lengthy concurring opinion, however, five circuit judges, led by Judge Edith Jones, suggested that the Fifth Circuit should have also considered—and resolved against the CFPB—the constitutional claim that the Bureau maintains an unconstitutional funding structure. The concurrence noted that Seila Law had not addressed this argument, and it concluded that the CFPB Director’s ability to requisition funds from the Federal Reserve violates separation of powers principles. Such a violation would mean that the CFPB lacked the authority to use funds to bring an enforcement action against All American.
The en banc Fifth Circuit was not willing to rule beyond the question certified for interlocutory review, and so remanded the case to the district court. However, the per curiam decision explicitly left the door open to “any other constitutional challenges.”
CFPB Releases 2021 Fair Lending Annual Report to Congress
By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP
On May 6, 2022, the Bureau released its 2021 Fair Lending Annual Reportto Congress. Among other things, the Bureau:
- emphasized its skepticism of the use of machine learning and predictive analytics in lending practices;
- promised to sharpen its focus on redlining and other discriminatory practices; and
- pledged to continue its cooperation with other regulators and law enforcement agencies to ensure fair lending and equal opportunity, including through the federal banking regulators’ recent proposed updates for assessing regulated banks’ compliance with the Community Reinvestment Act.
CFPB Update on the Amicus Program and Other Litigation
By Gregg Stevens and Joseph Ronderos, McGlinchey Stafford, PLLC
The CFPB issued a Fair Lending Report in May of 2022 (“Report”), in which it provided updates on its involvement with ongoing litigation, including its amicus program. The CFPB emphasized that its amicus program provides courts with its views and helps “ensure that consumer financial protection statutes are correctly and consistently interpreted.”
The CFPB highlighted a 2021 amicus brief that it jointly filed with the Department of Justice, Federal Reserve Board, and Federal Trade Commission in the case of Fralish v. Bank of America, where a consumer sued his bank for closing his credit card account without an explanation required by the Equal Credit Opportunity Act (“ECOA”). The amicus brief rebutted Bank of America’s argument that the ECOA only applies when consumers apply for credit. The brief contends that the ECOA’s protections against credit discrimination extend to all aspects of a credit arrangement. In other words, the ECOA’s protections apply regardless of whether the consumer is a current borrower or seeking credit. When providing examples of these protections, the CFPB noted that consumers have the right to an explanation when their credit application is denied, when an existing account is terminated, or when the account’s terms are unfavorably changed. The CFPB contends that “adverse action notices” discourage discrimination and help educate consumers about the reasons for a creditor’s decision. Although seeing the CFPB’s position was interesting, the case was dismissed by stipulation on January 28, 2022.
The CFPB also provided updates on two ongoing lawsuits against it. Specifically, in August of 2020, the National Community Reinvestment Coalition, among others, sued the CFPB in the U.S. District Court for the District of Columbia over its final rule amending Regulation C, which raised the loan-volume coverage thresholds for financial institutions reporting data under the Home Mortgage Disclosure Act (“HMDA”) (the “2020 HMDA rule”). Plaintiffs argue that the 2020 HMDA rule violates the Administrative Procedure Act. Also, in 2019, the California Reinvestment Coalition, among others, sued the CFPB in the U.S. District Court for the Northern District of California regarding the CFPB’s obligation to issue rules implementing section 1071 of the Dodd-Frank Act. In February 2020, the court approved a stipulated settlement agreement, which established a process for setting appropriate deadlines for a proposed and final rule implementing section 1071.
CFPB Launches New Office to Facilitate Competition and Innovation
By Aaron P. Kouhoupt and Rachael Aspery, McGlinchey Stafford, PLLC
On May 24, 2022, the Consumer Financial Protection Bureau (CFPB) announced that it is replacing the Office of Innovation with the newly established Office of Competition and Innovation. The CFPB intends to “help spur innovation in financial services by promoting competition and identifying stumbling blocks for new market entrants.”
The new office replaces the Office of Innovation, whose primary focus was to process applications for No Action Letters and Sandboxes that applied to an individual company’s specific product offering. The CFPB found these initiatives were “ineffective.” Further, the CFPB said that participating companies made public statements that were not always consistent with the program’s benefits.
The new Office of Competition and Innovation is tasked with increasing competition to benefit consumers. It will explore ways to reduce barriers to switching accounts and providers; research structural problems blocking innovation; and identify ways to address obstacles facing innovators, including through rulemaking that will give consumers—and the innovators—access to their own data “stored by the big banks.” Furthermore, they will host events to explore barriers to entry and other obstacles that innovators may encounter.
Although the CFPB did not explicitly state that No Action Letters will no longer be issued, taken as a whole, we question whether that may be the result based on the CFPB’s focus shifting away from individual entity requests. Instead, the CFPB “encourag[es] companies, start-ups, as well as members of the public to file rulemaking petitions to ask for greater clarity on particular rules” to help “level the playing field and foster competition.”
Maryland Commissioner of Financial Regulation Warns Lenders and Servicers About Convenience Fees
By Wingrove Lynton, Hudson Cook, LLP
On May 12, 2022, the Maryland Office of the Commissioner of Financial Regulation (“OCFR”) issued an industry advisory to put lenders and servicers on notice of the January 19, 2022, decision by the U.S. Court of Appeals for the Fourth Circuit in Alexander v. Carrington. The Commissioner explained that the Court in Carrington ruled that collecting fees for any form of loan payment violates the Maryland Consumer Debt Collection Act (“MCDCA”) if the fees are not set forth in the loan documents.
The Commissioner warned that:
[A]ny fee charged, whether for convenience or to recoup actual costs incurred by lenders and servicers for loan payments made through credit cards, debit cards, the automated clearing house (ACH), etc., must be specifically authorized by the applicable loan documents. If such a fee is not provided for in the applicable loan documents, it would be deemed illegal. Further, attempts to circumvent this fee restriction by directing consumers to a payment platform associated with the lender or servicer that collects a loan payment fee or requiring consumers to amend their loan documents for the purposes of inserting such fees could also violate Maryland law.
The MCDCA prohibits a lender or servicer from engaging in any conduct that violates §§ 804 through 812 of the federal Fair Debt Collection Practices Act when collecting or attempting to collect an alleged debt arising out of a consumer transaction. The Commissioner explained “[t]his holds true regardless of whether the lender or servicer is subject to the FDCPA under federal law.” The Commissioner recognized the far-reaching implications of the Carrington decision by acknowledging “the conclusions reached in the Carrington decision extend to all lenders and servicers, as well as any other person seeking to collect a consumer debt.”
Not only must lenders and servicers discontinue collecting improper loan payment fees, but they must also engage in remediation. The Commissioner instructed lenders and servicers to “commence a review of their records to determine whether any improper fees have previously been assessed and undertake appropriate reimbursements to affected borrowers.” The Commissioner cautioned lenders and servicers that the OCFR intends to remain focused on this issue in the coming months.
Massachusetts Revises Mortgage Lender and Broker Regulation
By Thomas P. Quinn, Jr., Hudson Cook, LLP
Massachusetts has amended its Licensing of Mortgage Lenders and Mortgage Brokers regulation, found at 209 C.M.R. Part 42. The revisions become effective on May 27, 2022. They will result in three substantive changes to the regulation.
First, the revisions amend the definition of “mortgage broker” to clarify that certain types of lead generation activities require licensure. Specifically, a party must be licensed as a mortgage broker if it collects and transmits information about a prospective borrower to a third party and does one or more of the following: (1) collects the Social Security number of a prospective borrower; (2) views a prospective borrower’s credit report; (3) obtains the prospective borrower’s authorization to access or view his/her credit report or credit score; (4) accepts an “application” (as defined in CFPB Reg. Z); and/or (5) issues a prequalification letter.
Second, Section 42.02A was added to the regulation to list the parties exempt from the mortgage lender and/or mortgage broker licensing requirement. This list exempts from licensing a person whose activities are limited to collecting and transmitting to a third party certain basic information about a prospective borrower (e.g., contact information, estimated credit score, foreclosure and bankruptcy history, veteran or military status, etc.) and a potential transaction (e.g., the address, type, and use of the property; existing home value; mortgage payoff amount; etc.). However, the revised regulation also notes that licensure as a mortgage broker is required if a person collects and transmits any information about a prospective borrower to a third party and receives (or expects to receive) compensation that is contingent on the prospective borrower actually receiving a loan from the third party or subsequent transferee of the information.
Finally, the revised regulation includes two definitions—one for bona fide nonprofit affordable homeownership organizations and one for instrumentalities created by the United States or any state government—that were added to the mortgage lender and broker licensing statute (Chapter 255E) in August 2018.
Georgia Installment Loan Act to Require Licensing of Servicers
By Dailey Wilson, Hudson Cook, LLP
On May 2, 2022, Georgia Governor Brian Kemp signed House Bill 891 into law, expanding the licensing requirement under the Georgia Installment Loan Act (“GILA”) to include servicers.
Previously, the GILA required only those making any installment loan of $3,000 or less, regardless of interest rate, to obtain a license and comply with the Act’s substantive requirements. The amendment now requires those who engage in the business of “acting as an installment lender” to obtain a license. “Installment lender” is defined as “any person that advertises, solicits, offers, or makes installment loans or services installment loans made by others, excluding loans made by affiliated entities” (emphasis added). Accordingly, based on the plain language of the amendment, any person that services installment loans made by anyone other than an affiliated entity (including exempt entities such as banks and credit unions) must obtain an installment lender license. Though the statute also refers to a license being required for any person who advertises, solicits, or offers installment loans, it is not yet clear whether the Georgia Department of Banking and Finance intends to require a license to act as a broker.
House Bill 891 will be effective July 1, 2022.
Vermont Temporarily Suspends High-Rate Mortgage Loan Disclosure
By Wingrove Lynton, Hudson Cook, LLP
Vermont requires all mortgage lenders to provide a disclosure to prospective borrowers on every loan secured by a first lien on residential real estate for which the borrower is expected to be charged more than four points on the loan or interest of three percent over the rate established by the Vermont Commissioner of Taxes (the “Declared Rate”). The 2022 Declared Rate is 3.25%. The disclosure advises prospective borrowers that they may be eligible for a loan with either a lower interest rate, fewer points, or both from another lender. Therefore, the disclosure requirements for high-rate mortgage loans are triggered by any first lien mortgage loan offered in 2022 with an interest rate of more than 6.25% (the “2022 Disclosure Threshold”).
Because of recent increases in mortgage rates, the Commissioner of Financial Regulation determined that it was likely that the interest rate on competitively priced, market rate, first lien mortgage loans may exceed the 2022 Disclosure Threshold. The Commissioner concluded that it could confuse and mislead consumers if they are given a disclosure that advises them that they may be eligible for a loan with a lower interest rate from another lender. Consequently, effective May 5, 2022, the Commissioner temporarily suspended the high-rate mortgage loan disclosure until January 1, 2023. The disclosure requirement for first mortgage loans where the lender is expected to charge the borrower more than four points remains in effect.
MBA Report Reveals Drop in Residential Mortgage Loan Delinquency Rate
By Christopher Greenidge and Sanford Shatz, McGlinchey Stafford, PLLC
The Mortgage Bankers Association’s (“MBA”) First Quarter 2022 National Delinquency Survey revealed that the delinquency rate for mortgage loans on 1–4-unit residential properties decreased to 4.11% of all loans outstanding at the close of the first quarter of 2022. This rate, according to the MBA, represents a decrease of 54 basis points from the fourth quarter of 2021 and 227 basis points from one year ago. Further, MBA Vice President of Industry Analysis Marina Walsh notes that the delinquency rate dropped for the seventh consecutive quarter, reaching its lowest level since the fourth quarter of 2019. Walsh credits the improvement in loan performance to the movement of loans that were ninety days or more delinquent, with most of these delinquencies either being cured or entering post-forbearance loan workouts.
Additionally, the MBA found that the expiration of pandemic-related foreclosure moratoriums resulted in a modest increase in foreclosure starts from the record lows that persisted over the past two years. The MBA expects foreclosure starts to remain low due to the limited housing inventory, rising prices, and variety of available home retention and foreclosure alternatives.
Other notable findings of the 2022 survey include:
- Compared to last quarter, the seasonally adjusted mortgage delinquency rate decreased for all loans. By stage, the thirty-day delinquency rate decreased 6 basis points to 1.59%, the sixty-day delinquency rate remained unchanged at 0.56%, and the ninety-day delinquency bucket decreased 48 basis points to 1.96%.
- By loan type, the total delinquency rate for conventional loans, those that are up to ninety days past due, decreased 55 basis points to 3.03% over the previous quarter, the lowest level since the fourth quarter of 2019. The FHA delinquency rate decreased 118 basis points to 9.58%, the lowest level since fourth quarter of 2019. The VA delinquency rate decreased 38 basis points to 4.86%, the lowest level since first quarter of 2020. The rate for seriously delinquent loans, those that are ninety days or more past due or in foreclosure, declined to 2.39%—44 basis points lower than last quarter and 231 basis points lower than last year, its lowest point since the pandemic began.
- The percentage of loans in foreclosure at the end of the first quarter was 0.53%, up 11 basis points from the fourth quarter of 2021 and down 1 basis point from one year ago. The percentage of loans on which foreclosure actions were started in the first quarter rose by 15 basis points to 0.19%. The foreclosure starts rate remains below the quarterly average of 0.41% dating back to 1979.
- The five states with the largest quarterly decreases in their overall delinquency rate were: Louisiana (168 basis points), New Jersey (109 basis points), Indiana (105 basis points), Mississippi (97 basis points), and Maryland (97 basis points).
‘Record’ Energy Prices Lead to U.S. ‘Price Gouging’ Legislation, U.K. ‘Windfall’ Profit Tax
By Lev Breydo
Russia’s “brutal assault” on Ukraine has caused “severe economic dislocation” across global markets, with a particularly acute impact on the global energy value chain. Crude oil is at a decade-high of well over $100 a barrel, U.S. gasoline prices have hit a “record,” and European gas is six times dearer than just last year.
This rapid shift is, in turn, fueling inflation—both directly through “pain at the pump” and indirectly through producers’ passing higher energy costs on to consumers with steady price increases.
Legislators on both sides of the Atlantic have passed recent measures to address the impacts of rising energy prices on their constituencies.
In the U.S., the House of Representatives recently approved the “Consumer Fuel Price Gouging Prevention Act,” aimed at combating alleged unfair price increases for retail gasoline. According to The Hill, “[t]he legislation is unlikely to gain traction in the Senate,” however, given that it was passed largely on partisan lines, with support from zero Republicans in the House. The legislation would need ten Republican votes to move forward in the Senate. The heart of the debate stems from whether price increases are the result of market forces, as some—including Democrats—have argued, or oil and gas companies “raking in record profits,” as alleged by the bill’s sponsors.
Meanwhile, the U.K. has taken a somewhat more direct approach. On May 26, 2022, the British government announced that it was levying a 25% “windfall tax” on energy groups’ profits. The measure is estimated to raise about $6.3 billion, earmarked to one-off grants of about £650 for eight million of the U.K.’s poorest households. U.K. Chancellor of the Exchequer Rishi Sunak had previously rejected the proposed levy as “superficially appealing,” but changed course, observing “extraordinary” energy sector profits from “surging global commodity prices driven in part by Russia’s war.”
Texas Legislation Bars Muni Deals with Firms that ‘Boycott’ Energy Sector
By Lev Breydo
Illustrating the partisan dynamics arguably innate to aspects of ESG and sustainability-oriented investment, Texan officials have indicated that banks deemed to “boycott” the energy sector need not apply for the state’s municipal bond underwriting business. Texas is one of largest municipal bond issuers, typically behind only California and New York in annual deal volume.
In late 2021, Texas passed legislation restricting contracting with companies that “boycott energy companies.” That measure followed similar legislation prohibiting “discriminati[on]” against the firearms industry.
In most pertinent part, the energy-specific statute provides that “a governmental entity may not enter into a contract with a company for goods or services unless the contract contains a written verification from the company that it: (1) does not boycott energy companies; and (2) will not boycott energy companies during the term of the contract.”
Section 809.001 of the statute defines “boycott energy company” as follows: “without an ordinary business purpose, refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company because the company:
(A) engages in the exploration, production utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law; or
(B) does business with a company described by Paragraph (A).”
Earlier this year, the state requested information from nineteen financial services companies “seeking clarification of their fossil-fuel investment policies and procedures.” That correspondence indicated that any firm that failed to respond within sixty days “will be presumed to be boycotting energy companies.” Subsequently, in April 2022, the Lone Star state’s Comptroller, Glenn Hegar, demanded disclosure regarding climate policies from a broader universe of more than 140 firms.
An April 27, 2022, letter clarified that the state “require[s] standing letters to evidence compliance” with the energy and firearm industry-specific measures.
As a result of the measures, large investment banks are finding themselves shut out of the Texas municipal underwriting business. The effect may be broader, as other states including Louisiana, West Virginia, Oklahoma, Kansas, and South Carolina are reported to mull similar actions.
The Texas measure also represents something of a contrast to the disposition of the Securities and Exchange Commission, which has recently proposed significantly expanding climate-related disclosures.
‘Sobering’ NERC Assessment Warns of Summer Power Outages, DoE Releases ‘Next Generation’ GridTech Report
By Lev Breydo
The U.S. Department of Energy describes the electric power system in the United States as “massive, complex, and rapidly transforming.” In recent years, that system has grown “increasingly unreliable” with oftentimes tragic failings, including deadly California wildfires and unprecedented 2021 power outages in Texas.
In its May 2022 “Summer Reliability Assessment,” the North American Electric Reliability Corp. (NERC), the U.S. grid monitor, warned that much of the nation—including the central and upper Midwest, Texas, and Southern California—face an increased risk of power outages this summer.
“It’s a very sobering report. It’s clear the risks are spreading,” noted an NERC official in a press briefing following the report.
The underlying drivers are complex and myriad, but in simplest terms, reflect critical mismatches between supply and demand for electricity. The electric grid, in many ways, reflects “a balancing act”: the system’s needs and resources have to match.
Due to increased electrification and climate-driven usage shifts, demand is broadly growing. While often blamed on the intermittency of renewable resources, supply side pressure can, perhaps more aptly, be attributed to the highly localized nature of energy consumption; sufficient resources in the wrong place or at the wrong time do not do much good for grid balancing.
The Department of Energy’s Next Generation Grid Technologies report provides some points for optimism. The research emphasizes “three transformative paradigms,” including “the shift from static line ratings to dynamic line ratings, from static networks to dynamic topology optimization, and from passive equipment to advanced power electronics.”
Ninth Circuit Reverses Tax Court on When Partnership Return Is Deemed Filed
By Timothy M. Todd, Liberty University School of Law
In this case, the 9th Circuit reversed the Tax Court and held that a partnership had effectively filed a delinquent partnership tax return when it provided it directly to an IRS official at his or her instruction.
Although the taxpayer claimed it timely mailed the partnership return to the proper IRS service center, the IRS had no record of receiving the filing. In response to various IRS requests, the majority partner or his representative provided copies of the partnership return to IRS employees (by fax and by mail). Several years later, however, the IRS issued the partnership a Final Partnership Administrative Adjustment (FPAA), noting that no return had been filed and disallowing items of income, loss, and expenses on the “unfiled tax return” provided by the partnership.
The partnership challenged the FPAA in the Tax Court, arguing that the statute of limitations barred the assessment. The Tax Court, however, held that neither faxing a copy of the partnership return to a revenue agent nor mailing a copy to IRS counsel constituted filing a tax return.
Reversing the Tax Court, the Ninth Circuit held that, “when (1) an IRS official authorized to obtain and receive delinquent returns informs a partnership that a tax return is missing and requests that tax return, (2) the partnership responds by giving the IRS official the tax return in the manner requested, and (3) the IRS official receives the tax return, the partnership has ‘filed’ a tax return for § 6229(a) purposes.”
The case is Seaview Trading, LLC v. Comm’r, No. 20-72416 (9th Cir. May 11, 2022), which you can read here: https://cdn.ca9.uscourts.gov/datastore/opinions/2022/05/11/20-72416.pdf.