Thursday, February 2, 2023

November 2022 OBA Legal Briefs

  • HMDA Changes Un-Changing?
  • Defunding the CFPB
  • New “Junk Fees”

HMDA Changes Un-changing?

By Andy Zavoina

As a part of your Compliance Management Program, you should meet periodically with senior management and/or the board of directors and keep them informed of changes that are or may be coming down at you. This is especially the case as we approach budget talks. You absolutely do not want to submit your compliance budget only to advise senior management a month after it is approved that you already need an increase for 2023 because of a new requirement you had not factored in. And that is just one of the topics you should be briefing them about.

You may be thinking, “Well, Andy, we don’t think the Reg B small business data gathering will be completely in place and certainly not for the whole year, so what “new” requirement are you talking about?” In a nutshell, the Home Mortgage Disclosure Act (HMDA). Many HMDA reporters received benefit of a threshold change for reporting a HMDA Loan Application Register. The floor amount was raised in 2020 and the threshold for reporting was increased from 25 to 100 closed-end loans. More details on that in a minute, but the Consumer Financial Protection Bureau’s (CFPB) methodology for justifying this change was challenged in court and the CFPB “lost” meaning the Court is declaring the change to be invalid. Those banks taking advantage of the increased threshold may find themselves scrambling to complete HMDA LARs again.

Now some details for a better understanding. The case was between the National Community Reinvestment Coalition and the CFPB in the U.S. District Court for the District of Columbia. It was a federal judge who moved to vacate the HMDA changes by the CFPB to lower the reporting requirements by increasing the closed-end loan threshold.

HMDA rules require a lender to review two preceding years of mortgage loan activity to determine if reporting requirements apply. There is one threshold for closed-end loans and another for open-end. In 2015 the closed-end threshold for required reporting was 25 or more and the open-end threshold was 100 or more. Additional qualifications such as asset size and location are not addressed here but would still apply.

In 2020 the CFPB opted to reduce the reporting burden by increasing the threshold of reportable closed-end loans from 25 to 100. In theory this reduces the smaller, low volume reporters and still retained the bulk of the active HMDA reporters. In May 2020, the CFPB estimated there are about 4,860 financial institutions required to report their closed-end mortgage loans and applications under HMDA. These were banks and credit unions and together in 2018 they accounted for 6.3 million closed-end loans. The CFPB further noted that the total number of institutions that were engaged in closed-end mortgage lending in 2018, regardless of whether they met all HMDA reporting criteria, was about 11,600, and the total number of closed-end mortgage originations in 2018 was about 7.2 million. In other words, under the current 25 closed-end loan threshold, about 41.9 percent of all mortgage lenders are required to report HMDA data, and they account for about 87.8 percent of all closed-end mortgage originations in the country. Further, 3,250 of these insured depository institutions and insured credit unions were already partially exempt for closed-end mortgage loans under the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), and thus were not required to report a subset of the data points currently required by Reg C for these transactions. So, the percentage of loans and lenders receiving the benefits of the exemption was small. The CFPB estimated that when the closed-end threshold would increase to 100 under this final rule, the total number of financial institutions required to report closed-end mortgage loans would drop to about 3,160, a decrease of about 1,700 financial institutions.

The plaintiffs were referred to as the National Community Reinvestment Coalition (“NCRC”), but actually also included Montana Fair Housing (“MFH”), Texas Low Income Housing Information Service (“TxLIHIS”), Empire Justice Center (“EJC”), and the Association for Neighborhood & Housing Development (“ANHD”)—and the City of Toledo, Ohio. They said that HMDA data have been invaluable in “uncovering and addressing redlining, fair lending violations, and other inequitable lending practices” over the decades and the CFPB did not dispute that claim. It was noted that open-end loans were reported after a 2015 HMDA change to the rule, but eventually that, “22 percent of depository institutions” that had previously been required to report HMDA data, were exempted and this resulted in a significant loss of data in certain census tracts.

The burden on low volume lenders to file HMDA reports did not justify the costs to complete that task, the CFPB heard and accepted as evidenced by changes in 2020. The CFPB increased the threshold from 25 to 100 closed-end loans in April of that year and it required the collection of HMDA data through June 30, for institutions that would no longer be subject to HMDA requirements for closed-end loans. These institutions no longer had to collect data starting July 1, 2020, and the reporting of any closed-end loan data collected in 2020 was optional for them.

The plaintiffs stated that each of them “use HMDA data in their research, education, and advocacy to promote access to credit, and thus to housing opportunities” in minority and rural communities. Not having the data from these low-volume lenders leaves holes and unanswered questions and could allow these lenders to violate fair lending laws because the controls are no longer in place to police them.”

The District Court ruled in favor of the plaintiffs and  invalidated the closed-end loan exemption expansions but let stand the of 200 open-end lines threshold. Remember reporting of those lines had been optional until these changes began. The court vacated and remanded the closed-end mortgage loan reporting threshold to the CFPB.

Now there are two questions we do not have the answers to, but banks must begin to prepare for in any case. What action will the CFPB take, and when will it take it? The CFPB could take the case to a higher court and seek to justify the changes it made, or it could reverse the closed-end loan reporting threshold back to the 25 closed-end loan limit. It is reasonable to assume that they will let the record stand for 2021 and 2022 and could enforce the new – old – limit effective for 2023. That is to me a logical plan but the CFPB’s intention has not yet been made public as of this writing. If that is the option they will select, those estimated 1,700 banks that fell out of reporting and any others who controlled their application counts with product restrictions need to consider training, systems and controls to get back up to speed with these new – old – rules. If this is less than two months away, HMDA reporters who were exempt deserve time to evaluate and react to their needs. If your bank may fall into this category, you must make some determinations and meet with senior management to advise them of your situation and action plan if one is needed.

Defunding the CFPB

By Andy Zavoina

Another legal case the CFPB is involved in may bring additional changes to the “keeper of the consumer protection regs.” In mid-October 2022, a three-judge panel of the United States Court of Appeals for the Fifth Circuit ruled on a pending case, Community Financial Services of America vs Consumer Financial Protection Bureau.

In this case, Community Financial sued the Bureau in 2018 on behalf of payday lenders and other small lending businesses. They wanted to set aside the 2017 Payday Lending Rule which affected personal loans with short term or balloon-payment structures, typically including payday, vehicle title loans and many high-cost installment credit products.

Community Financial alleged that the CFPB exceeded its statutory authority, and it further attacked the CFPB claiming that the rulemaking authority violated the Constitution’s separation of powers. Remember, the CFPB is set up to request its funding each year from the Federal Reserve. The amount is determined by the CFPB’s Director, and the Federal Reserve must approve the request so long as it does not exceed 12 percent of the Federal Reserve’s total operating expenses. Unlike other federal government agencies, the CFPB determines its own needs, and it automatically gets that funding from the Federal Reserve – bypassing Congressional appropriation steps. This limits Congressional control and makes the agency’s structure unconstitutional in the Court’s view.

This multi-pronged attack was not new. In Seila Law, LLC v. Consumer Financial Protection Bureau, the Supreme Court ruled that the CFPBs  structure of being a single director agency who was only removable by the President “for cause” violated the separation of powers requirements. The Court found that provision to be severable, and simply invalidated the “for cause” requirement in the Dodd-Frank Act meaning the President could replace the CFPB director at will. The Court did not invalidate actions taken by the CFPB. This new case with Community Financial differs in that the Fifth Circuit leaves the funding mechanism and the CFPBs actions connected.

In this case the Court ruled that the CFPB’s funding structure violates the Constitution’s Appropriations Clause and separation of powers. Because the funding used by the CFPB to create the Payday Lending Rule was drawn through the unconstitutional funding structure, the Court ordered the Rule vacated. In this case the Court stated that the “Bureau’s perpetual insulation from Congress’s appropriations power, including the express exemption from congressional review of its funding, renders the Bureau no longer dependent and, as a result, no longer accountable to Congress and, ultimately, to the people.” The three-judge panel noted that this constitutional problem is even more of a problem given the CFPB’s authority. The panel then quoted the Supreme Court in the Seila Law case as the CFPB “acts as a mini legislature, prosecutor, and court, responsible for creating substantive rules for a wide swath of industries, prosecuting violations, and levying knee-buckling penalties against private citizens.”

The debate goes on as to funding because not all agencies are covered by the Congress’s appropriations power. The FDIC as an example assesses fees to stakeholders in the industry. The CFPB does not. It gets funding as noted, from the Federal Reserve from funds that would normally be remitted to the Treasury Department. Treasury is itself appropriated under federal law. So, in a roundabout way the CFPB’s funding comes at the expense of the Treasury Department and therefore Congress is forced to appropriate more to Treasury than it otherwise would.

The Fifth Circuit panel then connected the dots. The Court explained that the remedy is based on “the distinction between the Bureau’s power to take the challenged action and the funding that would enable the exercise of that power.” Because Congress “plainly (and properly)” authorized the CFPB to promulgate the Payday Lending Rule, it is not per se invalid. Instead, Community Financial has to show that the unconstitutional funding provision of the law “inflicted harm.” The Court said that showing that was easy, because the CFPB used the unconstitutional funding to promulgate the Payday Lending Rule. The Court therefore held the Plaintiffs were entitled to “a rewinding of the [the Bureau’s] action.” The Court rendered judgment for Community Financial, vacating the Payday Lending Rule “as the product of the Bureau’s unconstitutional funding scheme.”

So, what does all this mean? As Yogi Berra said, “it’s never over till it’s over.” The CFPB is expected to request an “en banc” hearing where all the judges of the Fifth Circuit Court of Appeals will hear the case instead of the three-judge panel. If that is not successful, it could then go to the Supreme Court.

In this case the Payday Lending Rule was defeated, but remember the court did not say the law itself was not valid, just the way it got there. Still, that opens the door to other challenges. Community Financial’s case, if it becomes final, would only be binding on federal district courts in in Texas, Louisiana, and Mississippi. But the door is open and less than one week after this ruling by the Fifth Circuit we have seen a challenge on an Illinois case, the CFPB v. TransUnion, in which the CFPB alleges that TransUnion violated a prior consent order with the CFPB entered into in 2017, citing the Community Financial case. There is also now a Utah case, CFPB v. Progrexion Marketing, Inc., in which the CFPB alleges that the methods used by the defendants to market credit repair services violated the Telemarketing Sales Rule and the Consumer Financial Protection Act. Again, attributes of the Community Financial case are being used here. And there is a third case in the Ninth Circuit, the CFPB v Nationwide Biweekly Administration again following a similar argument. In this case a California district court imposed a $7.9 million civil penalty against Nationwide for allegedly misleading marketing practices but did not award the nearly $74 million in restitution sought by the CFPB. The CFPB is still pursuing that remedy in the court system.

As to the pending TransUnion case, the CFPB filed an immediate response saying the Fifth Circuit ruling was “neither controlling nor correct” and “mistaken.” The CFPB maintains the court cited no case law holding that Congress violates the appropriations clause or separation of powers when it authorizes spending by statute, that the funding through the Federal Reserve contains checks and balances via audits, reports and appearances it makes to Congress among other arguments.

There is no projecting how long this Community Financial case or those new cases with similar arguments will take to become final. One ruling may quickly resolve all the satellite cases coming from it and it is doubtful that everything the CFPB has done will be invalidated with one decision, but management does need to be apprised of the case and understand this is not a final word and that business cannot revert to a pre-CFPB era based on the Fifth Circuit ruling.

New “Junk Fees”

By Andy Zavoina

I had a frantic message on Slack the morning of October 26, 2022, from one of my bosses. President Biden was on national television talking about banks charging “junk fees” which is a new and derogatory term in many cases for fees consumers agreed to pay, but which are now, to use a phrase, “politically incorrect” to charge. These are unjust or unearned fees which take advantage of a consumer. It makes me wonder sometimes how many fees are justified and really good to a consumer. If a bank charges a fee for paying someone into an overdraft, rather than charging a fee and returning the check to another entity which might then charge a fee for the returned check, add a late fee and then refuse to accept any personal checks from that person again for the next six months, that first bank fee does not sound too bad. But hey, remove all these “junk fees” and the consumer will be happier and at no cost, right? It is like a toll-free telephone line, “don’t cost nobody nothing.” Well, except the bank paying for the toll-free calls that are not free at all.

I do take offense when it is said that if a bank charges “surprise overdraft fees … they may be breaking the law.” Firstly, what law prohibits the imposition of this agreed upon fee? Is it that subjectively someone decided that fee is “unfair” and hey again, “unfair” is in a law so it must be illegal. The Unfair, Deceptive or Abusive Acts or Practices (UDAAP) law is becoming the catch-all law many were afraid it could be. Classifying a fee as unfair just seems politically correct for a number of reasons – mostly because the majority does not like to pay them.

Here is my analogy. A person with tritanomaly has a hard time telling the difference between blue and green, and between yellow and red. Should yellow and red be deemed junk colors? Should yellow cabs be outlawed because they do not appear yellow to everyone? Should the government revise the colors at traffic lights because they can cause confusion to some color-blind people? Well, no. But if there were more people with this color blindness and they had a hard time with the order of stop lights red, yellow, and green vertically, top to bottom, or horizontally, left to right, banning these colors might be “politically correct” and they would be used less when colors matter. There one could cite the Americans with Disabilities Act more than UDAAP, but it is subjective nonetheless.

It is important that many agencies of the U.S. government are headed up by political appointees who are there to serve the president. That is their job, in addition to serving the people of the United States. In this national broadcast President Biden appeared at the White House with CFPB Director Rohit Chopra, the FTC Director and others proclaiming his administration was taking action to eliminate all “junk fees.” These include fees for deposited checks that are returned unpaid, surprise banking overdraft fees, and other non-bank fees like hidden hotel booking fees and termination charges to stop people from changing cable plans. President Biden said that this was about  making fees for depositing a check that bounces and overdraft fees for transactions that are authorized into a positive balance but later settle into a negative balance “illegal” and he wants to save consumers over $1 billion each year. The CFPB is developing rules and guidance that will reduce credit card late fees that cost credit card holders $24 billon each year. And his administration has “encouraged” banks to reduce the fees they charge consumers across-the-board and that the CFPB is developing rules that will require banks to go further in addressing additional types of junk fees.

The CFPB then provided guidance on two new fees often charged by banks that it classifies as “junk fees,” which is certainly a derogatory sounding fee label regardless of the fact that the fees have been around a very long time, and both disclosed to and accepted by consumers. In fact, the consumer opts in. The guidance document is Circular 2022-06, “Unanticipated overdraft fee assessment practices.” The circular even points this out in the Analysis section subtitled, “Violations of the Consumer Financial Protection Act,” as it states, “consumers generally cannot reasonably be expected to understand and thereby conduct their transactions to account for the delay between authorization and settlement—a delay that is generally not of the consumers’ own making but is the product of payment systems. Nor can consumers control the methods by which the financial institution will settle other transactions—both transactions that precede and that follow the current one—in terms of the balance calculation and ordering processes that the financial institution uses, or the methods by which prior deposits will be taken into account for overdraft fee purposes.” This is augmented by footnote 23, which states, “While financial institutions must obtain a consumer’s ‘opt-in’ before the consumer can be charged overdraft fees on one-time debit card and ATM transactions, 12 CFR 1005.17(b), this does not mean that the consumer intended to make use of those services in these transactions where the consumer believed they had sufficient funds to pay for the transaction without overdrawing their account.”

In a nutshell, the justification says a consumer agreed to it, but that was before they knew they would be responsible for their own actions and have to pay for it. I can understand that consumers have a difficult time with payment priority of items. Bankers do as well. When a check is written it is presented through payment channels and it may have had sufficient funds when it was written, but the cash withdrawal at an ATM reduced the balance and now that check will not pay. Disclosures a bank gives would have a hard time making sense of all the different channels that can add and subtract from a consumer’s balance. But at the end of the day, if I rely not on what the computer says I have available but rather on my account register, if I started with $100 and wrote a check for $80, I know I should not take $60 from the ATM regardless of what the computer says I have available.

The Circular does make it clear that UDAAP is the enforcement action of choice. It asks one question: “Can the assessment of overdraft fees constitute an unfair act or practice under the Consumer Financial Protection Act(CFPA), even if the entity complies with the Truth in Lending Act (TILA) and Regulation Z, and the Electronic Fund Transfer Act (EFTA) and Regulation E?” and answers this with 13 pages of explanation.

The short answer is Yes, and that is because it is a UDAAP violation to charge such fees because “overdraft fees assessed by financial institutions on transactions that a consumer would not reasonably anticipate are likely unfair.” At the risk of sounding redundant, would an account register help the consumer understand they can not spend more than has gone into the account? Is relying on what a computer says the balance is what we used to call “playing the float,” and is not writing a check for funds not on deposit still “theft by check”? In my state it is a Class C or Class B Misdemeanor. But nowadays a consumer has more ways to access funds and it is a UDAAP violation of law by a bank.

One key concern in the circular are accounts that “authorize positive, settle negative” (APSN). That is, an unanticipated overdraft is charged because the consumer would not reasonably anticipate a fee because there were sufficient funds when an authorization was made.

The Circular differentiates between an overdraft which is a negative balance created when the bank pays an item for which there was not enough money to pay the item presented, and non-sufficient funds where the bank incurs no credit risk when it returns a transaction unpaid for insufficient funds. The overdraft is a loan which involves credit risk and banks charge fees for paying these items. The fee is typically a flat amount and is not based on the amount of the overdraft.

Two areas of concern are:

A fee banks have not seen targeted by the CFPB before—one imposed on a depositor when a bank charges back a check that has “bounced” (that is, it was returned unpaid) by the paying bank, and

“Surprise” fees, including overdraft fees charged when a consumer had enough money in their account to cover a debit charge at the time the bank authorized it.

In the first case (addressed in Compliance Bulletin 2022-06, issued the same day as Circular 2022-06), when the consumer deposits a check into their account, they assume these are good funds. We would believe this is less of a problem today as more payments are made electronically through Zelle, Venmo and the like. But while checks have declined in volume, they have not been eliminated. People are not accustomed to the potential bouncing and reversal of a check that they deposited whether a Reg CC hold notice was provided or not. These are not typically bad customers unless they played a role in the deception and no matter how meticulous they are at keeping a check register, they truly could not prevent the reversal and declining balance that would result from a deposited item coming back. The bank, however, dedicated staff time, decisioning, and technical resources to this process, so a fee for compensation is both disclosed and charged. Your bank accepted the deposit and never participated in the decision to pay or return the item. That was the paying bank’s decision.

According to the CFPB, while charging these fees across the board potentially violates existing law – UDAAP, banks may opt to have a targeted fee policy that charges depositor fees only in situations where a depositor could have avoided the fee. One such situations is when that depositor repeatedly accepts checks from the same originator who has paid them with checks which have bounced before. It would appear this process, while deserving of a fee, would be even more cumbersome and labor intensive to research and present to a depositor.

The second area of concern (covered in Circular 2022-06) are the surprise overdraft fees. The CFPB believes that these overdraft fees occur when a bank account balance reflects that a customer has sufficient funds to complete a debit card purchase at the time of the transaction, but the consumer is subsequently charged an overdraft fee because additional payments/withdrawals arrived possibly through a variety of channels which cause the balance to now be insufficient to cover that debit card withdrawal. The CFPB’s discussion here references the practice of using APSN (referenced above) to assess overdraft fees.

The CFPB asserts that a recent consent order entered into by the CFPB related to APSN overdrafts is applicable industrywide. It noted actions and discussions on these types of fees going back to 2010 by the CFPB, the Federal Reserve and the FDIC. It notes the FDIC cautioned banks on this in 2010 when it issued its Final Overdraft Payment Supervisory Guidance. In 2015, and the CFPB issued public guidance explaining how banks acted unfairly and deceptively when they charged certain overdraft fees. And in 2016, the Federal Reserve publicly discussed issues with unfair fees related to transactions that authorize positive and settle negative. They mentioned it again in 2018 in an issue of the Consumer Compliance Supervision Bulletin, describing it in terms of UDAP and Section 5 of the FTC Act. Then, in June 2019, the FDIC issued its Consumer Compliance Supervisory Highlights and raised risks regarding certain use of the available balance method. And finally in September 2022, the CFPB found that a financial institution had engaged in unfair and abusive conduct when it charged APSN fees and that is the case which is applicable to the industry. This was, of course, the Bureau’s action against Regions Bank where the bank was ordered to reimburse $141 million to customers, pay a civil money penalty of $50 million, and forgo charging any Authorized-Positive Overdraft Fees going forward.

The CFPB opined that, under the circumstances described, these “unanticipated” overdraft fees likely violate the Consumer Financial Protection Act(UDAAP) as they “are likely to impose substantial injury on consumers that they cannot reasonably avoid and that is not outweighed by countervailing benefits to consumers or competition.”

This is an area Compliance is involved in but needs to work with Operations and management to determine the extent of the circumstances in your bank described here. How often does it happen? What are the fees imposed and paid and the losses incurred? What are the risks of facing a regulatory enforcement action as a result? From there budget considerations can be made after a plan of action has been determined along with a policy change, if necessary.