September 2022 in Brief: Business Regulation & Regulated Industries

Banking Law

FHFA Announces Comprehensive Review of the Federal Home Loan Bank System

By Taylor Bennington and Lynette I. Hotchkiss, McGlinchey Stafford, PLLC

On August 31, 2022, the Federal Housing Finance Agency (FHFA) announced that the agency will conduct a comprehensive review of the Federal Home Loan Bank (FHLBank) System starting in the fall of 2022. As part of the agency’s review, FHFA is seeking feedback from the public on the efficacy of FHLBanks. In particular, FHFA is seeking feedback from the public in six areas:

• FHLBanks’ general mission and purpose in a changing marketplace;
• FHLBank organization, operational efficiency, and effectiveness;
• the banks’ role in promoting affordable, sustainable, equitable, and resilient housing and community investment;
• the banks’ role in addressing the unique needs of rural and financially vulnerable communities;
• member products, services, and collateral requirements; and
• membership eligibility and requirements.

Those interested in providing feedback can do so by providing written comments through October 21, 2022, via FHFA’s website or mailed to: Federal Housing Finance Agency, 400 7th Street, SW, Washington, DC 20024 or by attending a listening session hosted by the FHFA.

Commercial Finance

New York DFS Releases Proposed Financial Disclosure Regulations

By Kate Fisher, Hudson Cook, LLP

On September 14, 2022, the New York State Department of Financial Services (DFS) released proposed regulations implementing the New York Commercial Finance Disclosure Law (CFDL). The CFDL requires providers of most commercial financing transactions of $2.5 million or less to give detailed cost disclosures to applicants.

The proposed regulations require disclosures when (1) the borrower or merchant receiving the financing is principally directed or managed from New Yok or, in the case of a sole proprietor, is a legal resident of New York; (2) the provider of the commercial financing is principally directed or managed from New York; or (3) the provider of the commercial financing “negotiated the commercial financing from a location in New York.” Under the CFDL, the term “provider” includes a person who solicits and presents specific offers of commercial financing on behalf of a third party. Accordingly, the proposed regulations appear to require New York–specific disclosures whenever a broker who “negotiated” the transaction is located in New York, even if the transaction has no other connection to New York. The only exception is when the recipient’s state also requires standardized disclosures for the commercial financing (which as of now is limited to California, Utah, and for sales-based financing transactions, Virginia).

While the disclosure of broker fees is not expressly required, the proposed regulations require a disclosure indicating whether the broker was compensated and the nature of the compensation. In addition, the proposed regulations include a disclosure of “double-dipping” (when a portion of renewal financing is used to pay unpaid finance charges or fees).

The DFS proposed a compliance date for the disclosure requirements of six months after the publication of the Notice of Adoption of the final regulations in the New York State Register. Accordingly, requirements could go into effect as early as May 2023. The proposed regulations are open to public comment until October 31, 2022.

Consumer Finance

CFPB Publishes Annual Report on Mortgage Market Activity

By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP

On September 19, 2022, the Consumer Financial Protection Bureau (CFPB) released its annual report on residential mortgage lending activity for 2021, a report that reflects data submitted by tens of thousands of mortgage lenders across the country as required by the Home Mortgage Disclosure Act (“HMDA”). The following trends were among the report’s findings:

• Mortgage originations increased by 2.4% over 2020 levels, and the increase resulted from a rise in the level of home purchase loans, as refinance loans fell. The report indicates that the so-called “refinance boom” peaked in March 2021 and that refinance levels decreased “precipitously” thereafter.
• The top twenty-five closed-end mortgage lenders held a combined market share of 43.9%, a figure that has risen consistently since 2018.
• Asian, Black, and Hispanic White mortgage borrowers’ share of home purchase loans increased, while non-Hispanic White borrowers’ share decreased. This is a trend that has continued since 2020.

The report reflects the fourth year of data provided pursuant to the implementation of the 2015 HMDA rule.

CFPB Seeks Public Input on Ways to Spur Competition in the Mortgage Refinance Market

By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP

On September 22, 2022, the CFPB issued a Request for Information soliciting input from the public on ways to help spur competition and make products more consumer-friendly in markets for mortgage refinance products. The Request seeks comments on two broad topics: (1) ways to facilitate mortgage refinancing for consumers who would benefit from refinancing, including consumers with small loan balances; and (2) ways to reduce risk for consumers who experience economic hardship or instability that makes it difficult to remain current on their mortgage loans. The Request then specifically invites comments about what the agency can do to promote the availability of beneficial refinance products, including targeted and streamlined refinancing, automatic refinancing, and automatic forbearance and long-term loss mitigation assistance.

In a speech delivered at the Exchequer Club announcing the Request, CFPB Director Rohit Chopra highlighted the Bureau’s efforts to enhance competition generally, among other topics. The press release accompanying the Request for Information says that the Request is part of a “broader effort” at the agency to “promote competition and innovation in consumer finance markets.”

CFPB Releases Report on Buy Now, Pay Later (“BNPL”) Services

By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP

On September 15, 2022, the Bureau published a report titled “Buy Now, Pay Later: Market trends and consumer impacts.” The report finds that BNPL loans offer several advantages over traditional credit products, such as reduced interest rates and fees, ease of access, and simpler repayment terms. The report cautions, however, that BNPL loans may pose risks to consumers, such as account overdrafts related to automatic payments, data harvesting by large tech companies, and the potential for excessive debt.

In prepared remarks, CFPB Director Chopra identified several areas of regulatory concern related to BNPL loans, such as a purported lack of clear dispute resolution mechanisms and credit reporting practices. Director Chopra also stated that he had asked Bureau staff to take various actions related to BNPL loans, such as considering whether additional rulemaking is needed, and ensuring that BNPL “companies are subjected to appropriate supervisory examinations.”

10th Circuit Court of Appeals Upholds CFPB Enforcement Order

By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP

On September 15, 2022, the United States Court of Appeals for the Tenth Circuit issued an opinion in Integrity Advance, LLC v. CFPB. The appeal relates to a 2015 enforcement action in which the Bureau alleged that Integrity had violated the Truth in Lending Act, the Consumer Financial Protection Act, and the Electronic Fund Transfer Act. The initial hearing was overseen by an administrative law judge borrowed by the CFPB from the United States Coast Guard. That administrative law judge found for the Bureau on all counts and recommended an order requiring Integrity and its CEO to pay multi-million-dollar fines and restitution.

While the enforcement action was pending, the United States Supreme Court issued several opinions relevant to the Bureau’s enforcement powers, including Lucia v. SEC, which held that administrative law judges must be appointed under the Appointments Clause of the United States Constitution. Following that decision, the CFPB Director remanded the Integrity enforcement action to a properly appointed administrative law judge, who conducted a de novo review of the record and did not allow the parties to present new evidence. The new administrative law judge recommended an order requiring that Integrity and its CEO pay multi-million-dollar fines and restitution.

On appeal, Integrity and its CEO raised several challenges to the order, including that that the second hearing was inadequate because the parties were not allowed to present new evidence, and that the entire enforcement action was invalid because the Bureau was unconstitutionally structured when it launched the enforcement action in 2015. The court rejected both arguments, holding that a de novo review of the record by a properly appointed administrative law judge was sufficient because the parties had a fair opportunity to present evidence during the first hearing. The court also held that the constitutional defect in the Bureau’s structure did not render the enforcement action invalid, explaining that the United States Supreme Court’s opinion in Collins v. Yellen rejected similar arguments regarding the Federal Housing Finance Authority.

CFPB Publishes Blog Post on Furnishers’ Obligation to Investigate Disputes

By Eric Mogilnicki and Blair Hotz, Covington & Burling LLP

On September 14, 2022, the Bureau published a blog post entitled “Furnishers Have an Obligation to Investigate Consumer Disputes.” The blog post asserts that the Fair Credit Reporting Act (“FCRA”) requires furnishers to investigate all indirect disputes forwarded by credit reporting companies, regardless of whether the furnisher determines that the dispute is frivolous, for three reasons:

• the FCRA does not include an express exemption relieving furnishers of their obligation to investigate indirect disputes that are frivolous;
• when furnishers decline to investigate indirect disputes, consumers do not receive sufficient notice of the outcome of their dispute and potential for supplementation; and
• furnishers do not need an independent right to screen indirect disputes because the FCRA already empowers credit reporting companies to consider whether a dispute is frivolous before sending the dispute to furnishers.

The Bureau and the Federal Trade Commission made the same arguments in an amicus brief filed in Ingram v. Waypoint Resource Group, LLC, an appeal pending before the United States Court of Appeals for the Third Circuit.

New York Interest-On-Escrow Law Preempted by National Bank Act

By Christopher Greenidge and Lynette I. Hotchkiss, McGlinchey Stafford, PLLC

On September 15, 2022, the U.S. Court of Appeals for the Second Circuit ruled in Cantero v. Bank of Am. that the National Bank Act (NBA) preempts a New York law requiring mortgage lenders to pay interest on mortgage escrow accounts as it relates to national banks. This ruling creates a circuit split on the issue of NBA preemption of state laws requiring payment of interest-on-escrow accounts.

In Cantero, plaintiffs obtained loans from Bank of America (BOA) to purchase homes in New York. Escrow accounts were established for the loans for the payment of insurance premiums and property taxes. NY Gen. Oblig. Law § 5-601 requires that interest at a rate of not less than 2% per year be paid on sums in an escrow account. BOA, however, did not pay interest on the Plaintiffs’ escrow accounts. Plaintiffs brought suit against BOA for failure to pay such interest, and BOA moved to dismiss on grounds that the New York law was preempted by the NBA. The district court denied BOA’s motion, holding that the New York law was not preempted. BOA appealed.

On appeal, the Second Circuit found that the NBA preempts NY Gen. Oblig. Law § 5-601. The court explained that the key question in determining whether the NBA conflicts with a state law is whether enforcement of the state law would have an impact on a banking power. After noting that the banking power at issue in this case was the ability to create and fund escrow accounts, the court concluded that the New York law was preempted because it “would target, curtail, and hinder a power granted to national banks by the federal government. By requiring a bank to pay its customers in order to exercise a banking power granted by the federal government, the law would exert control over banks’ exercise of that power.” The court also highlighted that its conclusion was consistent with prior statements issued by the New York Department of Financial Services and the Office of the Comptroller of the Currency.

Next, the court examined preemption in light of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), holding that Dodd-Frank’s express reference to the preemption standard used in the Barnett Bank, N.A. v. Nelson case was evidence that Dodd-Frank simply codified the NBA’s preemption standard; it did not change it. The court also examined and rejected the district court’s conclusion that Dodd-Frank’s amendment of the Truth in Lending Act (“TILA”) to require creditors to establish escrow accounts for certain mortgages and, if prescribed by federal or state law, to pay interest on these accounts to consumers, was suggestive of a larger intent to subject all escrow accounts to such laws. In rejecting the district court’s reasoning, the court stated that the plain language of the statute and its legislative history show Congress’s intent to only subject certain escrow accounts to state law rather than all accounts, noting that the enumeration of only some exceptions in a statute typically implies the exclusion of others. Additionally, the court emphasized that plaintiff Cantero’s mortgage predated the TILA amendments and as such, the district court erred by looking to those amendments to determine the correct preemption standard in Cantero’s case.

This ruling creates a circuit split on the issue of NBA preemption of state interest-on-escrow laws; in a similar case involving a California interest-on-escrow law, the Ninth Circuit concluded that California’s law was not preempted. This means the issue could be ripe for review by the Supreme Court in the near future.

Third Circuit Rules the FCRA Waives U.S. Sovereign Immunity

By Gregg Stevens and Alyssa Weiss, McGlinchey Stafford, PLLC

On August 24, 2022, the U.S. Court of Appeals for the Third Circuit held that the plain text of the Fair Credit Reporting Act (FCRA) operates as a waiver of sovereign immunity, widening the circuit split on this issue.

In Kirtz v. Trans Union LLC, the Third Circuit examined whether the FCRA waives sovereign immunity. The plaintiff obtained a student loan and a loan offered by the U. S. Department of Agriculture (USDA). He alleged both loan accounts were closed with a zero balance but were being reported as “120 Days Past Due Date.” He disputed the statements, but, according to the plaintiff, neither agency took action to investigate or correct the disputed information. The plaintiff sued, claiming willful and negligent violations of the FCRA, and the USDA filed a motion to dismiss for lack of subject matter jurisdiction based on sovereign immunity. The district court granted the motion, concluding that applying the FCRA’s literal text would produce implausible results.

The Third Circuit held that implausibility is not ambiguity, and where Congress clearly expressed its intent, courts may neither second-guess its choices nor decline to apply the law as written. Noting that the statute expressly defines “person” to include “any government or governmental subdivision or agency,” the Court concluded that Congress did not intend to exempt the federal government when it enacted the FCRA. The Court reversed and ruled that the FCRA unambiguously authorizes suits for civil damages against the federal government.

Four other circuit courts have also addressed this issue. D.C. and Seventh Circuits previously concluded that the FCRA’s plain text waives the United States’ sovereign immunity. At the same time, the Fourth and Ninth Circuits ruled that the United States is not subject to liability under the FCRA. With this holding, the Third Circuit is now in line with the D.C. and the Seventh Circuit, thus further widening the circuit split.

Georgia Enacts Digital License Plate Regulations, Effective October 1st

By Devin P. Leary-Hanebrink, McGlinchey Stafford, PLLC

Beginning October 1, 2022, in lieu of the traditional metal license plate issued by the Georgia Department of Revenue (“Department”), motor vehicle owners may display a digital license plate provided by a state-approved digital license plate provider. The final rule, effective October 1, 2022, was published in June. Georgia is the fifth state to approve digital license plates, following Arizona, California, Colorado, and Michigan. (Earlier this year, Texas approved such plates for commercial fleets of twenty-five or more vehicles, but it has not yet approved them in non-commercial applications.)

Digital license plates typically include a processing unit, storage media, and wireless connectivity all built into an electronic display—similar to a tablet e-reader and roughly the same size as a traditional license plate. However, while such plates may look like a traditional license plate, the technology makes it easier for vehicle owners to maintain their title, registration, and other vehicle records—essentially eliminating DMV visits altogether. Conversely, the technology also makes it easier for creditors to track and locate vehicles (such as for repossession purposes) and for the state to monitor citizens’ driving habits and general whereabouts—all of which raise legal, privacy, ethical, and safety concerns.

Georgia’s new rules define “digital license plate” as a license plate that receives wireless data communication to display information electronically. Only persons or entities approved by the Department may supply such hardware and services to vehicle owners. Further, each device must be certified by the Georgia State Road and Tollway Authority as complying with state readability standards, among other requirements. (The Department has also published design guidelines.) Of note, the Department will still issue a metal license plate, and vehicle owners must keep the Department-issued metal plate in the vehicle at all times.

Going forward, expect more states to adopt similar laws. Several jurisdictions are already exploring the feasibility and viability of this technology, including Florida, Illinois, and Texas.

Labor and Employment Law

CCPA Employment and B2B Exemptions Set to Expire in January

By Laura Bacon, Hudson Cook, LLP

The California legislature adjourned on August 31, 2022, without extending the two business-friendly exemptions of the California Consumer Privacy Act (CCPA). The two exemptions had limited much of the CCPA from applying to personal information in certain employment and business-to-business contexts. With the expiration of the exemptions, starting January 1, 2023, the CCPA will require businesses to do the following in relation to this employment and business data, among other requirements:

• Provide detailed and prescriptive notices at collection and privacy notices;
• honor consumers’ rights, including the right to know, right to delete, right to correct, right to limit use and disclosure of sensitive personal information, and right to opt out of sale and sharing of personal information for purposes of cross-contextual advertising;
• ensure that service providers that handle personal information adhere to contractual obligations;
• sell personal data under contract;
• pass on deletion requests to third parties to which the business has sold personal information; and
• comply with data security requirements.