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The Business Lawyer

Spring 2024 | Volume 79, Issue 2

Introduction to the 2024 Annual Survey of Consumer Financial Services Law

John L Ropiequet, Eric J Mogilnicki, and Christopher Keith Odinet

Introduction to the 2024 Annual Survey of Consumer Financial Services Law Caner Arican

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The introduction to the consumer financial services survey provides a preview of the topics that will be included in the survey.

These include: arbitration, CFPB, mortgage regulation, FCRA, state privacy law, FinTech, small dollar lending, auto finance, fair lending, real-time payments, and fraudulent funds transfers.

This year’s Annual Survey again begins with two surveys of developments in arbitration. The Supreme Court issued a decision that resolved a split among nine circuits on the question of whether the denial of a motion to compel arbitration under the Federal Arbitration Act (“FAA”) requires a stay pending appeal or, instead, allows the lower courts discretion. The Court ruled that section 16(a) of the FAA requires an automatic stay so that the right of appeal would not be nullified. Other courts dealt with the issues of what is sufficient to form a binding agreement to arbitrate in an online contract; whether the arbitrator or the court decides if class action claims are subject to arbitration; under what circumstances a court can vacate an arbitration award; and whether a claim that arbitration was waived requires a showing of prejudice.

A countervailing development to the advent of predispute arbitration and class action waiver provisions in consumer contracts has been a turning of the table on companies that have such provisions in their contracts by filing individual arbitration demands on behalf of thousands of consumers. Such mass arbitrations threaten to inflict the cost of massive filing fees on a targeted company regardless of the ultimate outcome. One company has attempted to thwart this tactic by simply refusing to pay the filing fees, with the ultimate consequences of its refusal still undecided. Some companies have attempted to temper the phenomenon of mass arbitrations by including a bellwether clause in their contracts that requires a test case or group of cases to be arbitrated before others can be dealt with, in order to promote settlement. Some courts have found this provision to be unconscionable because of the decision-making power that the defendant retains, which can delay the resolution of consumers’ claims indefinitely.

After the Supreme Court ruled that the structure of the Consumer Financial Protection Bureau (“CFPB”) was unconstitutional because the provision that its director could only be removed for cause violated the separation of powers in the Constitution, which the Court resolved by making the director removable at will by the President, the CFPB’s structure was challenged on another ground. In a case that sought to hold that a CFPB final rule was invalid, it was argued that the CFPB’s funding structure violated the Appropriations Clause of the Constitution because its funding did not come through the congressional appropriations process. The Fifth Circuit agreed, finding that the double insulation that the CFPB enjoyed from the appropriation and congressional budgetary oversight process violated the requirements of the Appropriations Clause. The Second Circuit, however, reached the opposite conclusion, finding that the CFPB’s funding mechanism was not constitutionally infirm. The Supreme Court heard arguments on a petition for certiorari from the Fifth Circuit’s decision in October 2023 (before a petition for certiorari from the Second Circuit’s decision was ruled on).

Federal agencies dealt with a variety of issues involving mortgage lending during the past year. An interagency Task Force on Property Appraisal and Valuation Equity issued a report and action plan to address unlawful discrimination in residential valuation, enhance fair housing and fair lending enforcement, improve the appraisal workforce, empower consumers to take action, and obtain better data to monitor appraisal bias. Concrete actions to implement the goals of the plan were taken by the U.S. Department of Housing and Urban Development (“HUD”), the Federal Housing Finance Agency, and the U.S. Department of Veterans Affairs. The use of automated valuation systems for assessing property values was the subject of proposed rulemaking by six federal agencies. The CFPB and other federal agencies focused on artificial intelligence and digital marketing by bringing digital marketers under regulation as service providers in certain circumstances, by making referral fees received by digital marketing companies subject to scrutiny for potential violations of the Real Estate Settlement Practices Act, and by noting how the use of automated valuation systems can lead to violations of anti-discrimination laws. The CFPB also proposed rulemaking for Property Assessed Clean Energy Transactions.

This year’s update on Fair Credit Reporting Act (“FCRA”) developments discusses efforts by the CFPB and the Federal Trade Commission to study problems in the tenant screening industry stemming from a White House initiative. The CFPB also advised credit reporting agencies to take steps to identify and remove “junk data” from credit reports. It also entered into a consent order with a medical debt collector that allegedly failed to handle credit data accurately. FCRA litigation dealt with whether the act requires investigation of disputes that raise legal rather than factual questions, what the standard is for determining whether credit information in a report creates a misleading impression, the impact of the Communications Decency Act on FCRA liability, and whether a credit reporting agency can be held liable for discrimination in rental decisions.

The trend of states enacting comprehensive consumer privacy laws continued during the past year. New laws were passed in Iowa, Indiana, Tennessee, Montana, Texas, and Oregon that largely adopted the approach previously taken in five other states to regulate controllers and processors of consumers’ personal data when the amount of data involved reaches certain thresholds. The new statutes also establish a set of affirmative and enforceable consumer rights that are similar to those created by the earlier statutes.

Several developments affected non-depository financial technology (“FinTech”) companies during the past year. Colorado opted out of a federal law that grants state banks the ability to export their home states’ interest rate restrictions, which may limit the operations of FinTech-bank partnerships. Two states enacted amendments to their consumer credit laws to add so-called “true lender” provisions that may also affect the operations of such partnerships. Three federal agencies issued a joint guidance that emphasized the need for depository institutions to assess the risks in third-party relationships, including FinTech-bank partnerships. The Federal Deposit Insurance Corporation entered into a consent decree with a bank to regulate the products that it offers through such partnerships. Ongoing litigation in California continues to deal with the state regulator’s enforcement action against a FinTech company that operates a loan business with a bank partner.

Litigation that challenged the CFPB’s Payday Loan Rule regulating small dollar loans on a nationwide basis failed to invalidate the rule on its merits, but succeeded on other grounds when the Fifth Circuit ruled that the CFPB’s funding mechanism was unconstitutional, as discussed elsewhere in this Annual Survey, and it accordingly vacated the rule. The CFPB actively prosecuted enforcement actions against small dollar lenders for unfair and deceptive acts and practices and for violation of the Military Lending Act, although other actions were stayed in the wake of the Fifth Circuit’s ruling on constitutionality. Consumer litigation against small dollar lenders was also active and many states enacted laws and promulgated regulations that affect such lending.

Developments in auto finance during the past year focused on discrimination and the regulation of ancillary products. The Federal Trade Commission brought an enforcement action against another dealership group for racial discrimination and other wrongdoing. The Massachusetts attorney general brought similar enforcement actions against dealerships. The New York Department of Financial Services also obtained a consent order based on alleged racial discrimination by a state-chartered bank that provided auto financing. The Colorado attorney general obtained settlements with two credit unions for their improper handling of refunds for cancelled ancillary products. Several states also dealt with the regulation of the sale of ancillary products by statute.

The U.S. Department of Justice entered into several settlements with financial institutions as it redoubled its efforts to combat racially discriminatory redlining, including its largest settlement to date for $31 million with a Los Angeles mortgage lender. Substantial settlements were also reached with lenders in Philadelphia, Columbus, Ohio, and Newark, New Jersey. Other fair lending enforcement actions were filed for allegedly discriminatory loan modifications and mortgage loan pricing practices. HUD reinstated its 2013 Discriminatory Effects Rule as a new rule in 2023 to provide standards for bringing discriminatory effects claims under the Fair Housing Act (“FHA”). The CFPB promulgated a Small Business Lending Rule as required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, but it was stayed pending the resolution of the constitutionality of the CFPB’s funding mechanism, as discussed elsewhere in this Annual Survey.

Decisions in the Seventh Circuit and a district court applied the Supreme Court’s strict evidentiary standards for proving violations of the FHA to cases brought by a local government against mortgage lenders to end the cases on summary judgment, although a similar case elsewhere survived motions to dismiss. The provision of Regulation B that extended liability under the Equal Credit Opportunity Act to prospective applicants for credit as well as those who actually file applications was found to be invalid because it was not supported by the language of the statute. In contrast to the local government cases, a case filed by a coalition of fair housing advocacy organizations that alleged that a bank and its servicer handled foreclosed houses in a racially discriminatory manner in thirty-seven cities across the country survived summary judgment.

The subject of real-time payment systems, in which clearance and settlement of funds is almost instantaneous rather than occurring over a period of days, is new to the Annual Survey. Two competing real-time payment rail systems have debuted in the United States, the RTP network launched by the The Clearing House, and, more recently, the FedNow® Service launched by the Federal Reserve. The history and features of the two systems are discussed and compared in depth, as well as their potential impact on the payments industry and potential issues with fraudulent use.

The problem of how to recover for funds that have been misdirected electronically by cybercriminals has loomed large in recent years. Also new to the Annual Survey is the issue of whether the bank that transferred the funds to an account controlled by a cybercriminal can be held liable to a defrauded person, or instead, whether a safe harbor provision in Article 4A of the Uniform Commercial Code will block such a recovery.