Introduction to the 2023 Annual Survey of Consumer Financial Services Law

This year’s Annual Survey begins with two surveys of developments in arbitration. The U.S. Supreme Court issued five opinions that dealt with arbitration issues during the past year. It found that the Federal Arbitration Act (“FAA”) partially preempts the California Private Attorneys General Act to the extent that it would, under California case law, prevent individual employee claims from being arbitrated. The Court also ruled that one need not show prejudice to a non-movant party in order to support denial of a late motion to arbitrate on the ground that the movant waived the right to arbitrate the matter. The Court resolved a circuit split by concluding, as a matter of statutory construction, that courts may not employ the “look-through” approach in actions to confirm or vacate arbitration awards under sections 9 and 10 of the FAA in order to determine whether federal jurisdiction exists, unlike what is done under section 4 of the act with motions to compel arbitration, because the sections were drafted differently. The Court also expanded the categories of workers whose claims are exempt from arbitration under section 1 of the act and, resolving another circuit split, held that a private foreign arbitration does not qualify as a “foreign or international tribunal” for which U.S. federal courts can compel discovery. Additionally, Congress amended the FAA to allow sexual assault or harassment claims to be brought in court despite the existence of a predispute arbitration agreement that would include such claims.

Supreme Court decisions that have favored the enforcement of predispute arbitration agreements with consumers and the class action waiver provisions that typically accompany the agreements have led to a countervailing development, the rise of mass arbitrations. This year’s Annual Survey discusses cases that have dealt with that phenomenon, in which a law firm may bring hundreds or thousands of arbitration demands on behalf of individual claimants against the same respondent, subjecting it to having to front costs in the form of filing, administration, and arbitrators’ fees that may run into millions of dollars. One such case involved declining to grant injunctive relief to a respondent that faced 31,000 claims with projected up-front costs of over $90 million. In another case in which counsel for nearly 1,000 claimants in a class action sought to cut its own costs by objecting to the need to secure written opt-out forms from each claimant in order to pursue a mass arbitration, the court overruled the objection and forestalled the arbitration. Another court dealt with assertions that a company’s “bellwether” provision for arbitrating test claims before other claims could be arbitrated, which could delay many claims from being arbitrated for years, was unconscionable, contravened public policy, and lacked mutuality.

Federal Rule of Civil Procedure 23(e) was amended in 2018 in an attempt to standardize the factors that federal courts must consider when reviewing proposed class settlements for fairness, reasonableness, and adequacy. Subsequently, the courts have used both the standardized factors and additional ones that were employed in different circuits before the amendment to scrutinize settlement proposals. Heightened scrutiny in one case led the court to reject a proposed settlement four times for failure to provide adequate class relief, taking inadequate discovery, seeking an unfair amount of attorney’s fees, and other shortcomings. In two of the first appellate decisions under the amended rule, the Eleventh Circuit took issue with the size of the incentive awards proposed for the named class representatives.

As the COVID-19 pandemic continues, relief programs for mortgage borrowers were initiated or extended by the Consumer Financial Protection Bureau (“CFPB”) and other federal regulators. Among other actions, the CFPB issued a final rule to liberalize loan modification procedures for affected borrowers and the Federal Housing Finance Agency encouraged mortgage forbearances. Biased appraisals of home values also became an issue of concern as a multi-agency task force was formed to perform research and make policy recommendations to improve equity and fairness and a rulemaking process was begun by the CFPB to regulate automated valuation models used by the mortgage lending industry.

Rulemaking, guidance, and enforcement actions under the Fair Credit Reporting Act (“FCRA”) came from both the CFPB and the Federal Trade Commission (“FTC”) during the past year. The CFPB issued a human trafficking rule that prohibits consumer reporting agencies (“CRA”) from furnishing adverse information about victims who suffered financial abuse by traffickers. It also issued an opinion advising CRAs that the FCRA prohibits matching information to consumers solely on the basis of the matching of names, and an interpretative rule that stresses that states have the flexibility to enact laws that are more stringent than the FCRA. In an enforcement action, the CFPB obtained $20 million in penalties and consumer redress against an auto finance company for furnishing inaccurate information to CRAs in violation of the FCRA. The FTC filed an FCRA enforcement action against a seller of home security systems for misusing credit reports of other people to falsify the records of its credit applicants. The U.S. Supreme Court ruled that when a CRA reports incorrect information in a consumer report, there is no Article III standing unless that consumer report is shared with someone else.

Comprehensive state laws protecting consumer privacy continued to spread across the country during the past year. New laws were enacted in Utah and Connecticut that resemble the laws enacted earlier in California, Virginia, and Colorado. New administrative rules were proposed to implement California’s privacy laws as the Virginia and Colorado laws become effective in 2023. A federal data privacy law has also been introduced in Congress.

Article III standing to sue for claimants who are seeking only statutory damages under federal consumer laws like the Fair Debt Collection Practices Act (“FDCPA”) has become a significant issue following the U.S. Supreme Court’s decisions in Spokeo, Inc. v. Robins in 2016 and TransUnion LLC v. Ramirez in 2021 in which the Court focused on what kind of injury must be established to provide constitutional standing. This year’s Annual Survey includes a circuit-by-circuit recap of how the many circuit and district court decisions that have been handed down following Spokeo and TransUnion have addressed the injury-in-fact requirement in a variety of contexts for FDCPA cases.

The CFPB announced that it would broaden its supervision of non-depositary financial technology (“FinTech”) companies during the past year, focusing on potentially unfair, deceptive, and abusive acts and practices. Two states joined others that have instituted true lender tests that apply interest rate caps to FinTech lenders that partner with depositary institutions. Court challenges by state attorneys general to valid-when-made regulations promulgated by the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation were dismissed without appeal, ending uncertainty over the rules. The CFPB changed course from its previously approving view of loan underwriting based on innovative artificial intelligence and machine learning algorithms.

Both the CFPB and the FTC filed enforcement actions against small-dollar lenders during the past year that targeted alleged unfair and deceptive practices against consumers and servicemembers. State enforcement actions were filed against online and auto title lenders that allegedly violated state usury limits, and similar violations were pursued in consumer litigation. Several states imposed interest rate caps or placed other restrictions on small-dollar lending.

This year’s auto finance survey reports on a $10 million joint FTC and Illinois consent order with a dealership group for alleged unfair and deceptive practices and racial discrimination. The FTC issued an advisory opinion stating that its holder rule, which requires that retail installment contracts contain language that permits consumers to bring actions against subsequent holders of the contract for the original sellers’ acts or omissions, allows consumers to obtain attorneys’ fees and costs if state law permits recovery. The California Supreme Court subsequently applied the advisory opinion to allow such a recovery under California law. The CFPB issued a bulletin warning against several unfair and deceptive practices in automobile repossessions. Two states entered into consent decrees with auto finance companies concerning their practices in handling refunds due to consumers when their guaranteed auto protection plans are terminated. The U.S. Department of Justice (“DOJ”) continued to enforce the protections of the Servicemembers Civil Relief Act against auto finance companies, entering into consent decrees that involved allegedly improper auto lease termination refunds and failing to reduce the interest rates on servicemembers’ retail installment contracts.

Past trends in fair lending continued as cases filed by local governments against mortgage lenders for the effects of alleged racial discrimination ended by stipulated dismissals or by court rulings that the claims failed to meet the causation requirements set by the U.S. Supreme Court. Cases filed by non-governmental organizations fared better as a nationwide real estate broker entered into a settlement that required it to change its procedures to eliminate discrimination and pay $4 million in monetary relief. In an even larger settlement, Fannie Mae agreed to pay $53 million to settle claims of discrimination in maintaining foreclosed properties. One provision of Regulation B that broadened its reach to accountholders as well as applicants for credit was invalidated. The DOJ entered into a settlement with Facebook that required it to stop using a housing advertising tool that had discriminatory effects. The DOJ and the CFPB jointly settled with a mortgage lender to end redlining in the Philadelphia area and to make a $20 million remedial investment, and settled with another lender to end redlining in the Memphis area. Several trade associations challenged the CFPB’s 2022 revisions to its examination manual by filing a suit that claimed that the revisions were beyond its statutory authority and violated the Administrative Procedures Act as rulemaking taken without going through notice and comment.

The topic of medical debt is new to the Annual Survey. Problems arising from both medical debt collection and credit reporting for medical debt have been the subject of congressional action during the past year, legislation in several states, and initiatives by the White House and federal agencies.