February 2023 in Brief: Business Regulation & Regulated Industries

Banking Law

FDIC Issues Another Round of Cease and Desist Letters Focused on Deposit Insurance Claims

By Susan Seaman & Daniel Wilkinson, Husch Blackwell LLP

On February 15, 2023, the Federal Deposit Insurance Corporation (“FDIC”) issued cease and desist letters demanding that a cryptocurrency exchange, crypto review websites, and a fintech offering high-yield deposit accounts stop making false and misleading statements regarding deposit insurance coverage.

In its letter to the cryptocurrency exchange, the FDIC highlighted the following problematic statement on the exchange’s website: “U.S. dollars held in your [exchange] fiat currency wallet are FDIC-insured up to $250,000 per account.” According to the FDIC, this statement is false or misleading in violation of the Federal Deposit Insurance Act (“FDI Act”) because cryptocurrency exchanges are not insured by the FDIC. The two crypto review websites received cease and desist letters for repeating substantially the same deposit insurance claim in articles reviewing the exchange.

The fintech received a cease and desist letter for problematic statements on its website that indicated or implied that the fintech is FDIC-insured, that funds deposited with the fintech will be insured by the FDIC with no maximum limit, and that FDIC insurance will provide protection in the event of the fintech’s failure.

In addition to making false or misleading statements, the FDIC claimed that the cryptocurrency exchange and fintech failed to identify the insured depository institution(s), into which customers’ funds may be deposited, when they made deposit insurance claims. This omission violated the FDIC’s new False Advertising, Misrepresentations of Insured Status, and Misuse of the FDIC’s Name or Logo rule.

The FDIC sent cease and desist letters in August 2022 to five crypto-related companies. The latest round of cease and desist letters could signal that the FDIC’s scrutiny of deposit insurance claims is expanding beyond crypto-related companies to nonbank fintechs and product review websites.

Consumer Finance Law

CFPB Releases Letter on Suppression of Actual Payment Data by Credit Card Companies

By Eric Mogilnicki & Rye Salerno, Covington & Burling LLP

On February 16, 2023, the Consumer Financial Protection Bureau (CFPB) published a letter summarizing the Bureau’s findings from a May 25, 2022 inquiry to six major credit companies. That inquiry requested information on credit card companies’ practice of not reporting to credit reporting agencies the actual amounts paid on credit cards. The Bureau noted in the inquiry that credit card companies often report only information on minimum payments and balances, and omit the actual payment amounts. The Bureau hypothesized that, by reducing the amount of information available about consumers, this practice could hinder the ability of other lenders to offer competitively priced credit, and therefore harm consumers. The May 2022 inquiry asked the credit card companies if they were reporting actual payment data, and (if not) why not, and if they had any plans to change that practice.

The Bureau’s letter indicates that the practice of not reporting actual payment information spread across the credit card industry between late 2013 and 2015. During that time period actual payment furnishing coverage fell from eighty-eight to forty percent. According to the Bureau, the responses “suggested companies withheld information in an attempt to make it harder for competitors to offer their more profitable and less risky customers better rates, products, or services.” In addition, the Bureau noted that none of the six credit card companies surveyed had any plans to resume reporting actual payment information. The CFPB has not indicated whether it has any plans to seek to alter this practice, but noted in the letter that “[c]onsumers reasonably expect to receive credit based on their ability to manage and repay their credit obligations. . . . Actual payment suppression is also out of step with market and regulatory trends that promote competition, like open banking, including the CFPB’s rulemaking on personal financial data rights.”

CFPB Releases Report Examining Trends in Credit Reporting of Debt in Collections

By Eric Mogilnicki & Rye Salerno, Covington & Burling LLP

On February 14, 2023, the CFPB released a “Market Snapshot” report on third-party debt collections reporting. As explained by the Bureau, debts in collection, or “collection tradelines,” are typically reported to credit reporting agencies by third-party debt collectors, and are almost universally negative for consumers’ credit reports.

In the press release accompanying the report, the Bureau took a dim view of collections reporting, and called out the pernicious effect of false reporting. The Bureau noted that “[g]iven the potential damaging impacts of collections tradelines, reporting of inaccurate data is especially harmful.” In particular, Bureau Director Rohit Chopra stated that “false and inaccurate medical debt on credit reports continues to be a drag on household financial health.”

The report also found that the number of collection tradelines declined by a third between 2018 and 2022, and that the share of consumers with a collection tradeline on their credit report decreased by 20%. The report explains that this could simply reflect “choice by debt collectors and others to report fewer collections tradelines,” but Director Chopra characterized the data as “yet another indicator that, due to a strong labor market and emergency programs during the pandemic, household financial distress reduced over the last two years.”

CFPB Signs Joint Letter on Discrimination in Appraisal Standards

By Eric Mogilnicki & Rye Salerno, Covington & Burling LLP

On February 14, 2023, eight federal agencies that enforce the nondiscrimination standards of the Fair Housing Act and the Equal Credit Opportunity Act, including the CFPB, submitted a letter to the Appraisal Standards Board. In the letter, the agencies advocated including a discussion of federal prohibitions on discrimination in the 2023 Edition of the Uniform Standards of Professional Appraisal Practice. The agencies noted their concern that an appraiser may otherwise misunderstand the limits of their ability to rely on conclusions based on race or other protected characteristics. In particular, the agencies expressed concern with language in the draft standards stating that appraisers must avoid “unethical discrimination.” In the view of the agencies, this wording introduces an unnecessary and confusing distinction between unethical and unlawful discrimination, and also wrongly implies that there could in some cases be ethical discrimination. 

Bureau Advisory Opinion Prohibits Unlawful Steering in Online Mortgage Comparison Shopping

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On February 7, 2023, the CFPB issued an advisory opinion dealing with the application of the Real Estate Settlement Procedures Act (“RESPA”) to digital mortgage comparison shopping platforms. Section 8 of RESPA prohibits kickbacks and other unearned fees in relation to transactions involving federally related mortgage loans. 12 U.S.C. § 2607(a). In its advisory opinion, the Bureau stated that an operator of a digital mortgage comparison shopping platform would violate section 8 of RESPA if it:

1. non-neutrally uses or presents information about one or more settlement providers participating on the platform;
2. that non-neutral use or presentation has the effect of steering the consumer to use, or otherwise affirmatively influences the selection of, those settlement service providers, thus constituting referral activity; and
3. the Operator receives a payment or other thing of value that is, at least in part, for that referral activity.

The advisory opinion further states that an operator’s receipt of “a higher fee for including one settlement service provider compared to what it receives for including other settlement service providers participating on the same platform” may serve as indicia of an illegal referral fee arrangement, “absent other facts indicating that the payment is not for enhanced placement or other form of steering.”

In a statement announcing the advisory opinion, CFPB Director Rohit Chopra cited rising interest rates as “adding to the stress of homebuying” and making it “more important than ever for Americans to shop and compare products.” He praised the Bureau’s advisory opinion, describing it as helping “to ensure the mortgage market remains resilient and competitive, particularly in the current rate environment.”

Consumer Groups Call on CFPB to Issue Advisory Opinion on FCRA Credit Header Data

By Eric Mogilnicki & Graves Lee, Covington & Burling LLP

On February 8, 2023, a coalition of consumer groups, including the National Consumer Law Center, submitted a letter to CFPB Director Rohit Chopra calling for the Bureau to “rein in widespread harmful behavior by the data broker industry.” In the letter, the consumer groups criticize the “staggering reach” of data brokers, and particularly those dealing in credit header data (i.e., an individual’s name, date of birth, Social Security number, address, and phone number). While existing FTC guidance (see page 21) from 2011 can be read as exempting credit header information from the Fair Credit Report Act (“FCRA”) definition of a “consumer report,” the consumer groups take the position that “[t]his interpretation of the FTC report is erroneous—on the contrary, when such credit header data is derived from the files of a [consumer reporting agency] and is otherwise used in consumer reports, it is a consumer report within the meaning of the FCRA.” The consumer groups “urge the CFPB to swiftly issue an Advisory Opinion . . . clarifying that ‘credit header’ data is not exempt from regulations promulgated under the Fair Credit Reporting Act.” 

CFPB Proposes Rule to Limit Credit Card Late Fees

By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP

On February 1, 2023, the CFPB issued a proposed rule that could transform the fees that credit card issuers charge for late payments. If adopted, the rule would amend Regulation Z’s safe harbor for late fees, which currently provides that a card issuer may charge $30 for a first-time late payment and $41 for each subsequent late payment without running afoul of the Truth in Lending Act’s requirement that late fees be “reasonable and proportional” to the costs the issuer incurs as a result of the late payment. The proposed rule would reduce the safe harbor fee amount to $8 and do away with Reg. Z’s automatic annual adjustment for inflation. It would also prohibit card issuers from charging a late fee greater than 25% of the cardholder’s required minimum payment.

In remarks on the proposal, CFPB Director Rohit Chopra noted that fees issuers charge for late payments are disproportionate to the costs they incur as a result of those late payments, and that as much as “75 percent of late fees—$9 billion [annually]—have no purpose beyond padding the credit card companies’ profits.” The Bureau predicts that the rule would reduce late fees by up to $9 billion per year. The Chairman of the House Financial Services Committee, Patrick McHenry, sharply criticized the proposal, suggesting that it would “raise costs for all credit card issuers.”

CFPB Announces Consent Order with Auto Title Lender Over Alleged Violations of the Military Lending Act, Truth in Lending Act, and Consumer Financial Protection Act

By Lucy E. Morris & Michael Essiaw, Hudson Cook, LLP

On February 23, 2023, the CFPB announced that it had issued a consent order against a title lending company headquartered in Savannah, Georgia. The consent order alleged that the company violated the Military Lending Act (MLA) by making at least 2,670 prohibited auto title loans to covered borrowers. The CFPB alleged that these loans exceeded the 36% MLA rate cap to active duty servicemembers or their dependents. The Bureau also alleged that the loans included mandatory arbitration clauses and notice provisions prohibited by the MLA. According to the CFPB, the lender withheld information about the military families’ rights under the MLA and doctored personally identifiable information so borrowers would not be identified as servicemembers or their dependents.

In addition, the CFPB stated that the lender violated the Consumer Financial Protection Act (CFPA) by unfairly charging borrowers non-file insurance fees when the product provided no coverage. Finally, the Bureau alleged that the lender violated TILA and CFPA by failing to properly disclose non-file insurance fees as part of the finance charge and APR on certain loans.

The company did not admit to or deny these allegations, but agreed to the entry of a five-year consent decree that includes a $10 million penalty, a $5.05 million redress plan, and requirements to implement and maintain robust controls to ensure future compliance.

Taking the Case: SCOTUS to Decide Constitutionality of CFPB

By James W. Sandy, McGlinchey Stafford, PLLC

On February 27, 2023, the Supreme Court of the United States granted the petitions for writs of certiorari filed in CFPB et. al. v. Com. Fin. Services Ass’n., where a panel of the United States Court of Appeals for the Fifth Circuit ruled that the funding mechanism of the Consumer Financial Protection Bureau (CFPB) is unconstitutional, and ultimately invalidated the payday lending rule at issue in that case. The Community Financial Services case is the latest in a long line of challenges to the Bureau itself that could have a wide-ranging impact on businesses and entities subject to the CFPB’s authority.

Indeed, while the Fifth Circuit only invalidated the payday lending law at issue in that case, the reality is that the underlying rationale would support similar challenges to various rules promulgated or amended by the CFPB, including but not limited to: the Fair Debt Collection Practices Act and Regulation F, the Fair Credit Reporting Act and Regulation V, the Truth in Lending Act and Regulation Z, the Real Estate Settlement Procedures Act and Regulation X, and a new set of rules governing prepaid accounts in Regulation E under the Electronic Funds Transfer Act.

In its petition, the CFPB argued that the Fifth Circuit clearly got it wrong and conflicts with the United States Court of Appeals for the District of Columbia Circuit’s decision in the 2017 PHH Corporation v. Consumer Financial Protection Bureau ruling, which found the funding mechanism constitutional. Most district courts that have considered the issue have likewise come to the conclusion that the CFPB’s funding mechanism passes constitutional muster. The CFPB’s petition also focused on the proverbial “parade of horribles,” noting that the Fifth Circuit’s ruling potentially undermines any and all rules amended or promulgated by the CFPB, calls into question any enforcement actions it has undertaken, and throws the economy into uncertainty and instability. As evidenced by the CFPB’s request that the Supreme Court hear the case this very term, the CFPB clearly views Community Financial Services as an existential threat to its very existence.

In response to the CFPB’s petition, Community Financial Services filed a cross-petition asking the court to consider two antecedent questions if it were to accept the CFPB’s petition:

1. Whether the payday lending rule should still be invalidated because it was implemented by a director who, at the time it was enacted, was shielded from removal by the Executive Branch, which the Court subsequently held was unconstitutional; and
2. whether the rule should be invalidated because the prohibited conduct falls outside of the definition of unfair or abusive.

Otherwise, Community Financial Services objected to the Court accepting the case and objected to the expedited review requested by the CFPB.

Ultimately, a decision by the Supreme Court to affirm the Fifth Circuit’s opinion would have significant impact on any business or entity subject to the CFPB’s rulemaking or enforcement authority and could conceivably impact other regulatory agencies’ funding in a similar manner to the CFPB.

CFPB Loses Novel Redlining Case Against Non-Bank Mortgage Lender

By Gregg Stevens & Alyssa Weiss, McGlinchey Stafford PLLC

On February 3, 2023, an Illinois federal judge dismissed with prejudice Bureau of Consumer Financial Protection v. Townstone Financial Inc. et al., the Consumer Financial Protection Bureau’s redlining case against a non-bank mortgage lender.

In Townstone, the CFPB alleged that mortgage lender Townstone Financial Inc. engaged in unlawful discrimination that violated the Equal Credit Opportunity Act (the “ECOA”). The complaint centered on the CFPB’s “redlining” theory, which relies on discouraging prospective applicants through discriminatory exclusionary tactics rather than demonstrating discrimination toward actual applicants. The CFPB alleged that comments made by the hosts on their radio show discouraged a class of applicants from seeking loans in various areas of Chicago.

The judge dismissed the action with prejudice, concluding that the ECOA does not extend to prospective applicants under a plain language reading of the statute and any amendment of the complaint would therefore be futile. The Court reasoned that “because the ECOA clearly and unambiguously defines [an applicant] as a person who applies to a creditor for credit . . . Congress has directly and unambiguously spoken on the issue at hand and only prohibits discrimination against applicants.” Therefore the Court did not need to go further than the face of the statute in conducting its Chevron analysis.

The Townstone case was novel for the CFPB, as it was one of the CFPB’s first fair lending enforcement actions against a lender in the non-bank mortgage sector. The CFPB may appeal the decision to the Seventh Circuit. While the decision has no binding impact on other courts, it may encourage more lenders to litigate rather than settle future redlining actions brought by the CFPB, especially if the issue involves prospective loan applications instead of applicants.

D.C. Federal Circuit Court Upholds CFPB Prepaid Rule

By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP

On February 3, 2023, the Court of Appeals for the District of Columbia Circuit reversed a D.C. District Court judgment and, at least temporarily, upheld the CFPB’s 2016 Prepaid Rule against a challenge from PayPal. The district court had held that the Prepaid Rule violated the Electronic Funds Transfer Act (“EFTA”) because its short-form prepaid account disclosure requirements “effectively creat[e] mandatory disclosure clauses,” whereas EFTA authorizes only “optional” clauses. In reversing, the circuit court held that the Prepaid Rule does not mandate the use of specific language, but gives providers the option between using its model clauses or language that is “substantially similar.” In the absence of mandating specific language, the circuit court determined that the CFPB had not contravened EFTA. The court remanded the decision to allow the district court to address PayPal’s Administrative Procedures Act and constitutional challenges to the Prepaid Rule, which the lower court did not address.

Magistrate Judge Finds Cell Phone Owners Not Covered Under 47 U.S.C. § 227(c)

By Ke Liu (Kevin), Pilgrim Christakis LLP

A North Carolina magistrate judge has recommended dismissal of a putative nationwide Telephone Consumer Protection Act (TCPA) class action brought under 47 U.S.C. § 227(c), holding that this subsection of the TCPA covers only “residential telephone subscribers.” Section 227(c) gives the FCC authority to establish the National Do Not Call (DNC) Registry, and the corresponding regulation, 47 C.F.R. § 64.1200(c), prohibits entities from making telephone solicitations to residential telephone subscribers who have registered their number with the DNC registry. Under Section 227(c)(5), residential telephone subscribers have a private right of action if they registered their number with the DNC registry and receive more than one telephone solicitation from the same entity within a twelve-month period. Unlike Section 227(b), Section 227(c) does not require the use of an automated telephone dialing system or an artificial or prerecorded voice.

In Heather Gaker v. Q3M Insurance Solutions, the plaintiff alleged that she received six telephone solicitations over three weeks on her cell phone, which she had registered with the DNC registry. The magistrate judge, however, found that the term “residential telephone subscribers” does not extend to owners of cell phones. The court reasoned that Congress intended to treat residential telephones and cellular telephones differently, as Section 227(b) (regulating use of autodialers and prerecorded messages) expressly addresses calls to numbers assigned to “cellular telephone service[s],” yet this term is noticeably absent from Section 227(c). The court further relied on the Eleventh Circuit’s analysis of Congress’s legislative intent, noting that the privacy concerns present for unwanted calls to residential homes were lessened for calls to cell phones: “[T]he findings in the TCPA show a concern for privacy within the sanctity of the home . . . cell phones are often taken outside of the home and often have their ringers silenced, presenting less potential for nuisance and home intrusion.” Salcedo v. Hanna, 936 F.3d 1162 (11th Cir. 2019).

Notably, the magistrate judge expressly declined to follow the FCC’s 2003 interpretation, which permitted “wireless subscribers” to register their numbers with the DNC registry and affords them the presumption to qualify as “residential subscribers.” 18 FCC Rcd. 14014. The court cited Justice Thomas’s concurrence in Perez v. Mortgage Bankers Ass’n, 575 U.S. 92 (2015): “[T]he judicial power, as originally understood, requires a court to exercise its independent judgment in interpreting and expounding upon the laws.” The court’s decision is in line with a series of cases from several years ago. See Cunningham v. Britereal Mgmt., Inc., No. 4:20-cv-144, 2020 WL 7391693 (E.D. Tex. Nov. 20, 2020); Cunningham v. Politi, No. 4:18-cv-362, 2019 WL 2519702 (E.D. Tex. Apr. 26, 2019); Cunningham v. Sunshine Consulting Grp., LLC, No. 3:16-2921, 2018 WL 3496538 (M.D. Tenn. July 20, 2018); Cunningham v. Enagic USA, Inc., No. 3:15-0847, 2017 WL 2719992 (M.D. Tenn. June 23, 2017); Cunningham v. Rapid Response Monitoring Servs., Inc., 251 F. Supp. 3d 1187 (M.D. Tenn. 2017); but see Boger v. Citrix Sys., Inc., No. 8:19-cv-1234, 2020 WL 1033566 (D. Md. Mar. 3, 2020) (declining to dismiss case where plaintiff’s cell phone number could have “functioned as a residential telephone number”).

Labor and Employment Law

FTC Non-Compete Proposed Rule—What Does That Mean for Employee Benefit Plans?

By Susan A. Wetzel

On January 5, 2023, the Federal Trade Commission (FTC) proposed a new rule that, if adopted, would ban non-compete provisions and require recission of existing non-competes. While the rule is not yet effective, employers should inventory their various benefit plans and compensation arrangements to determine where they have restrictive covenants so that they can act quickly in the event the proposed rule is finalized. The impact of this rule on benefit plans and compensation arrangements could be wide-reaching, so employers should not just limit their review to employment agreements. For example, the following provisions in equity and compensation plans could become ineffective if the FTC’s proposed rule becomes final:

• Equity and phantom equity agreements often include restrictive covenants and provide that the awards will be forfeited upon a violation of the restrictive covenants, and any previously vested portion of the award would also be clawed back.
• Code Section 457(f) plans of nonprofits often include restrictive covenants and delay payment (and taxation) until the restrictive covenants lapse.
• Code Section 280G provides that parachute payments do not include payments that are established by clear and convincing evidence to be reasonable compensation for personal services (including payments made for someone to refrain from performing services). However, in order for payments for a non-compete to be so excluded, the non-compete must be enforceable.
• Bonus plans often include restrictive covenants and provide for forfeiture of bonuses (and clawback of prior bonuses) in the event the participant violates the restrictive covenants.
• Nonqualified deferred compensation plans subject to Code Section 409A often include provisions that forfeit any employer contributions in the event the participant violates restrictive covenants in the plan.

While employers do not need to make any changes to their plans now, it is important for employers to identify which plans may include restrictive covenants to know how this proposed rule may impact those plans. Employers should also alert their board of directors of the possible change in enforceability of restrictive covenants when the board is approving any new compensation programs that include restrictive covenants so that the board understands that, should the rule be adopted, the restrictive covenants may no longer apply.