Posts tagged ‘CFPB’

Just When Does The Equal Credit Opportunity Act Apply?

The CFPB waded even further into a legal dispute which has direct implications for your day-to-day compliance obligations, by issuing an advisory opinion concluding that the Equal Credit Opportunity Act and its implementing Regulation B applies even after an applicant has been granted credit.  If the CFPB is right, you are all going to be sending out more notices. 

As I know most readers of this blog know, taken as a whole, the ECOA and Regulation B prohibit lending policies and practices which have the purpose or effect of discriminating against individuals on the basis of race, sex and other characteristics.  This is why an individual denied credit is entitled to a written explanation of the reasons for the denial.  Everything I just said is settled law.  In recent years, however, there has been an increase in litigation across the country seeking to sue lenders for actions taken after a loan has been approved. 

For example, in Tewinkle v. Capital One, N.A., 2019 WL 8918731 (W.D.N.Y., 2019), a Western New York resident, sued Capital One after it discontinued his line of credit.  Although he received notice of the closure as specified in his account agreement, he did not receive an explanation as to why the line was shut down.  Many financial institutions have taken similar steps in recent years, particularly following the Great Recession and Mortgage Meltdown.  The district court sided with the bank.  Similar cases are now being appealed.

Enter the CFPB.  In its advisory opinion, the Bureau stated the Tewinkle court as well as others that have reached similar conclusions have got it all wrong.  The Bureau argues as a matter of statutory history and (implicitly) the deference due to regulators interpreting ambiguous statutes that consumers like Mr. Tewinkle should receive full disclosures under Regulation B.  To be fair, other courts have agreed with the Bureau’s analysis, which means this is going to be a hotly debated issue in the federal courts, that could ultimately be decided by the Supremes.

This is an area where it is extremely important that people understand precisely what is being debated.  With or without the ECOA, lenders cannot discriminate against individuals at any point in the lending process.  For example, if a lending institution reduced credit just to African-American consumers, this would be a blatant violation of both state and federal law. 

In addition, as pointed out in Tewinkle the ECOA would have applied in this case had our disgruntled homeowner Tewinkle sought reconsideration or applied for renewal of the line of credit.  At this point, he would have been seeking new credit and been entitled to an explanation if he did not receive it;  but that is not what happened in this case. Capital One followed the terms of its account agreement in closing down a line of credit, something it and other lenders should be allowed to do in a fair, efficient manner. 

Stay tuned. This is a debate which is far from over. By the way, I hope to see some of you at tonight’s Southern Tier Chapter event at McGirk’s Irish Pub in Binghamton.

May 11, 2022 at 9:45 am Leave a comment

Required Reading for the Compliance Geek

Yours truly is always a little ambivalent when someone gives me a reading suggestion; on the one hand, I love a good recommendation, on the other, there’s an implicit pressure that comes with the suggestion lest you have to sheepishly explain why you haven’t gotten to the book the next time you run into the recommender.  
So, with apologies to those of you who already have a list of compliance material piling up in your virtual in-box, there are two recent publications that all good compliance people should take the time to peruse. 

Most importantly, the CFPB released its Quarterly Compendium Of Supervisory Highlights which it uses to put financial institutions on notice as to its areas of regulatory emphasis in the coming months.  The Spring issue includes many topics with which I have seen credit unions grapple in the past, including mandatory re-evaluation of increased credit card interest rates under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) and continued concerns about the reporting practices of financial institutions under the Fair Credit Reporting Act.  But the issue that the CFPB decided to highlight that I think credit unions would be well advised to look at most closely has to do with GAP car insurance and the refund of excess payments.  This has already been the subject of lawsuits and if the issue is highlighted by the CFPB you can bet it’s one that class action lawyers will continue to scrutinize.   

A second document you should review is one of my personal favorites.  A new Consumer Compliance Outlook report has been issued by the Philadelphia Federal Reserve.  This issue provides you with a comprehensive overview of CDFIs and how to become one.  I know this is an area that many a credit union has been examining and, as usual, the report is concise and useful. 

On that surprisingly upbeat note, enjoy your day.  For the five of you who care about hockey out there in the blogosphere, I am predicting a Tampa Bay-Calgary Stanley Cup but was unfortunately not able to get this certified as acceptable collateral, as my hockey predictions are even worse than those for other sports. 

May 3, 2022 at 9:02 am Leave a comment

Why Overdraft Fees Are An Endangered Species

Good morning boys and girls, I want you all to grab a cup of coffee and gather around the virtual rug while I tell you a fascinating story about the history of overdraft protection programs and why a recent decision by the Court of Appeals for the Tenth Circuit is instructive for your credit union.

A long, long time ago, in an age before the internet and computers, banks and credit unions would decide on a case-by case basis whether to honor a member’s checks.  Let’s say Mrs. Jones didn’t have quite enough money to pay for the new vacuum she wrote out a check for. If they knew she was a good consistent member who deposited her paycheck every Friday, chances are they would cover the check. Everyone was happy, including the store owner who was dependent on checks to grow his business. 

Times changed.  Technology allowed financial institutions to automate overdraft decisions and financial institutions started charging fees for providing overdraft protection.  Financial institutions began to incorporate this practice into their account agreements and market them to their members. 

But marketing what used to be an ad-hock process into a financial product raised legal and regulatory concerns when that bank or credit union paid a check. For example, when that bank or credit union paid a check for Mrs. Jones’ granddaughter on the assumption that it would get the money back at a later date, wasn’t it extending credit, and if so, why wasn’t it providing more disclosures?   Never mind that some members absolutely loved this service.  For instance, Mrs. Jones’ granddaughter hardly knows what a checkbook is and couldn’t balance her account if her life depended on it.  After all, there are apps for this type of thing.

Responding to these concerns, in 2005, NCUA joined with bank regulators in issuing this guidance explaining the conditions under which financial institutions could provide overdraft protection services to their members and customers without running afoul of state usury laws or federal consumer protection laws, such as the Truth In Lending Act (TILA). The guidance established a common sense framework under which both federal and state credit unions were allowed to charge overdraft fees. The guidance also explained the conditions under which credit unions could offer overdraft lines of credit, but crucially, it explained that lines of credit triggered disclosure requirements under TILA. The OCC also authored an influential opinion letter for banks in 2007 in which it further explained that overdraft fees were part of a bank’s account maintenance activities for which fees could be charged, as opposed to debt collection activity subject to additional state and federal laws. 

Although overdraft fees remain controversial on a policy level, the fundamental premise of the above guidance remains good law.  Overdraft fees are not interest, so long as they are properly disclosed. In addition, members must affirmatively agree to overdraft protections when it comes to their debit cards. 

But just the other day, the Court of Appeals for the Tenth Circuit decided a case which took direct aim at this regulatory framework.  In Walker v. BOKF, National Association, 2022 WL 1052068 (C.A.10 (N.M.), 2022) involves an overdraft product under which the bank’s customers are charged an initial overdraft fee and an additional Extended Overdraft Fee of $6.50 per business day if the account remains overdrawn after five days.

The plaintiff in this case does not challenge the bank’s right to charge the original overdraft fee. He instead argues that the reoccurring charges for nonpayment amounts to interest. Interest which far exceeds the state interest rate cap of 8%. 

Stop yawning kids.  This argument takes direct aim at the core legal premise which allows financial institutions to charge overdraft fees. Remember how the bank used to honor Mrs. Jones’s checks even though there wasn’t enough money in her account? If the bank’s actions where actually classified as a loan, then virtually any fee would exceed NCUA’s interest rate cap not to mention state usury laws. The case in question was not challenging overdraft fees, but if the plaintiff in this case was successful, the next round of litigation would challenge the premise that overdraft protections are fees and not loans. The case is also crucial because it invites the courts to rule that bank regulators misinterpreted the law in 2005 and 2007 when they decided that overdraft fees should not be considered interest. Fortunately for us, the argument was rejected.

So what is the moral of the story? First, if you offer any products which charge both a fee and then recurring charges if the account remains overdrawn for a period of time, prepare yourself for a potential legal challenge.  Litigation like this does not happen in a vacuum. 

But here is an even scarier thought.  Right now the CFPB is considering taking action against so-called Junk Fees.  The distinction between interest rates and fees is a regulatory distinction developed long before the CFPB was conceived by an obscure Harvard law professor by the name of Elizabeth Warren. If the CFPB decides to aggressively challenge the existing regulatory framework, it most likely has the legal authority to do so. What one regulator can give, another can simply take away. Congress may have to be the ultimate arbiter of the overdraft debate.

On that happy note, yours truly is heading south in search of warm weather.  I will return a week from Monday.

April 14, 2022 at 9:32 am Leave a comment

Human Trafficking and the FCRA

Last week the CFPB proposed regulations implementing a federal law which amends the Fair Credit Reporting Act (FCRA) to help victims of human trafficking recover from their abuse by helping them gain access to credit.  As currently proposed, the regulation does not impose any new obligations on credit unions but I would certainly make sure that anyone in your credit union who accesses credit reports, or furnishes information to Credit Reporting Agencies (CRAs) is aware of these pending changes.

Section 6102 of the National Defense Authorization Act amended the FCRA by adding a new section 605C which generally prohibits CRAs from including information in credit reports resulting from “any adverse item of information about a consumer that resulted from a severe form of trafficking in persons or sex trafficking if the consumer has provided trafficking documentation to the consumer reporting agency.” Credit unions are furnishers of information contained in credit reports and users of this information, under the FCRA, but are not credit reporting agencies.

CRAs are going to be responsible for collecting the appropriate documentation and ensuring that they update an individual’s credit report.  The obligations of CRAs will be triggered by the receipt of “…a determination that a consumer is a victim of trafficking made by a Federal, State, or Tribal governmental entity or a court of competent jurisdiction or documents filed in a court of competent jurisdiction indicating that a consumer is a victim of trafficking; and government documentation demonstrating that an individual has been victimized by trafficking.” 

Once an individual’s identity has been established, the CRAs will be responsible for using this, or additional, information provided by the victim to remove adverse information from a credit report.  As currently drafted, precisely how this responsibility is going to be performed should be further clarified, but again, a credit union is not responsible for performing this obligation.

One aspect of the regulation that could involve your credit union, involves the receipt of a notification that a credit report contains information affected by human trafficking.  Specifically, the Bureau is seeking comment on whether a CRA should be required to notify a furnisher about the consumer’s submission to prevent a CRA from furnishing a consumer report containing any adverse item of information about a consumer that resulted from trafficking.

Presumably, this would include a mandate that furnishers update their policies and procedures to ensure that they cease providing the impacted information to the CRAs.  We will have to wait and see what is in the final regulations.

April 12, 2022 at 9:53 am Leave a comment

Is Your Credit Union Responsible For Your Member’s “Unauthorized” Person to Person Transfer?

This is the question the CFPB zeroed in on when it released its Supervisory Highlights in December.  You’re not going to like its answer. 

First, let’s make sure we are using the same terminology.  Digital wallets are all the rage but they have subtle and important differences that your members could not care less about but lawyers and compliance officers are going to be obsessing and litigating over as long as Congress refuses to update the Electronic Fund Transfer Act.  After all, in 1978 an ATM was cutting edge technology.  Now, we walk around with ATMs on our wrists. 

When the CFPB updated Regulation E in 2016, it made an important and reasonable distinction between services such as Apple Pay which simply hold a member’s debit and credit card information and allow a member to effectively activate these cards, and P2P services like Venmo and certain Google products which allow members to use directory information such as an email or phone number to seamlessly transfer money to a person’s account.  Crucially, P2P services such as Venmo allow members to store money outside of their traditional accounts and the CFPB concluded that these accounts made P2P providers subject to Regulation E and its error resolution requirements. 

This distinction seemed clear enough, but in the highlights, the CFPB muddied the waters.  Specifically, it said that when a member claims that a P2P transfer was sent to the wrong party, a bank or credit union must do more than simply confirm that the money was transferred consistent with a member’s instructions.  According to the Bureau,

Examiners found that, in certain cases, due to inaccurate or outdated information in the digital payment network directory, consumers’ electronic fund transfers (EFTs) were misdirected to unintended recipients, even though the consumer provided the correct identifying token information for the recipient, i.e., the recipient’s current and accurate phone number or email address. These misdirected transfers are referred to as “token errors.” Token errors are incorrect EFTs because the funds are not transferred to the correct account. 14 Examiners found that institutions violated Regulation E by failing to determine that token errors constituted “incorrect” EFTs under Regulation E.

In other words, notwithstanding the fact that you did exactly as instructed by a member who willingly provided her account information to a third party, your credit union has obligations under Regulation E including providing provisional credit. Also in December, the CFPB released a series of updated FAQs further clarifying your responsibilities with regard to mobile wallets and EFTs.  Clearly, this is an area where legislators and regulators have to step in.    In a recent letter to the CFPB, NAFCU outlined in detail issues that can and should be addressed.  In my compliance fantasy world, there needs to be mechanisms put in place, similar to the existing check negotiation system, allowing financial institutions to reclaim lost funds from digital wallet providers whose directory information has become a lynch pin of the entire consumer finance ecosystem.

February 17, 2022 at 9:40 am Leave a comment

Appraiser Bias Under The Microscope

The standards used by appraisers to value residential property has come under scrutiny in recent years as critics, including the CFPB, argue that the industry undervalues homes in poor areas, having a disproportionate impact on the ability of minority groups to obtain housing. 

A recent draft proposal by a private organization responsible for establishing ethics standards for appraisers across the country is further fueling this debate. 

The Appraisal Foundation is one of those obscure but powerful organizations tucked away in Washington D.C. that most people don’t know exists and wouldn’t be all that interested in finding out that it does, but for the last 30 years it has been responsible for establishing ethics standards used by most states in licensing appraisers.  Recently it has been receiving comments on its proposed updates of these standards to take effect in 2023.  Responding to this increased scrutiny, in recent years it has made changes to its ethics standards, presumably designed to underscore prohibitions against appraisal discrimination, but instead, it has highlighted a troubling misinterpretation of federal antidiscrimination laws.   

It has proposed adopting the following language:

“An appraiser must not perform an assignment with bias… the current Conduct section of the ETHICS RULE goes on to state: An appraiser must not use or rely on unsupported (emphasis added) conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value.”

I put the “unsupported” in bold.  In responding to the draft, the NCUA joined seven other regulators, including the CFPB, in emphasizing that the use of protected characteristics is never legal.  As they explained in their comment letter to the Foundation:

  “An appraiser’s use  of or reliance on conclusions based on protected characteristics, regardless of whether the appraiser believes the conclusions are supportable, constitute illegal discrimination. These laws also prohibit neutral policies or practices that disproportionately harm a protected group except when justified by business necessity and absent a less discriminatory alternative.”

My guess is that you will see even more emphasis on appraisal practices in the not too distant future. 

On that note, yours truly will be back on Tuesday, after once again celebrating the unofficial Super Bowl three-day weekend holiday.  This year’s Tier I capital prediction, which is approved by NCUA for credit union investment, is Cincinnati 28—Rams 24.

February 11, 2022 at 9:51 am Leave a comment

CFPB and Overdrafts: No More Mr. Nice Guy

Yesterday, the CFPB released two reports detailing the overdraft fee practices of both large and small banks and credit unions. While this in itself is not all that surprising, after all the CFPB has grumbled about overdraft fees since its inception, when coupled with the statements of Director Chopra, it’s clear that overdrafts are going to be a major focus of the Bureau in the coming months.

In fact, the Director sounded very much like a former member of the FTC, when on a conference call with reporters, he reportedly described the continued reliance of big banks and overdraft fees as a market failure which regulators had to address.

While it is not clear what steps the Bureau will take, institutions directly subject to the CFPB’s oversight can expect increased scrutiny. He even suggested that this scrutiny may extend to individual executives who approve practices.

A second noteworthy aspect of the Bureau’s announcement yesterday is a use of core processor data to analyze the practices of smaller banks and credit unions. Specifically, one of the reports is based on the settings used by banks and credit unions to trigger overdraft payments. This information was obtained not from financial institutions but from going directly to their core processors. 

The bottom line is that your credit union should continue to anticipate a world in which it must be less reliant on overdraft fees and in which disclosures accurately describe when overdraft fees will be triggered.

On that note, I am heading to Buffalo where I hope to talk to some of you at this evening’s chapter event.

December 2, 2021 at 9:47 am 1 comment

Life After The CDC Eviction Ban

The Supreme Court yesterday ruled that the CDC exceeded its authority when it enacted a nationwide ban of evictions against tenants who claim to be suffering a COVID-19 related hardship.

The court’s ruling surprised absolutely no one who has been following the issue. Just weeks ago, the court signaled that a similar moratorium was most likely unconstitutional but allowed it to expire so that there was more time to distribute federal aid intended to help states like New York avoid the need for evictions.

The precise legal issue was whether the CDC had the regulatory authority to ban evictions absent Congressional action. The court explained that “it is indisputable that the public has a strong interest in combating the spread of the COVID–19 Delta variant. But our system does not permit agencies to act unlawfully even in pursuit of desirable ends…It is up to Congress, not the CDC, to decide whether the public interest merits further action here.”

The Court’s ruling put the focus squarely back onto the states. Although the Court recently invalidated a New York statute which prohibited evictions of individuals suffering a COVID-19 hardship, the Court’s emergency ruling was not a decision on the merits and the statute under review did not give landlords the ability to contest a hardship determination. 

Without further action by Congress the primary federal regulation of which credit unions have to be mindful is the CFPB’s regulation which takes effect on September 1st, mandating that servicers take additional steps to inform delinquent homeowners of loss mitigation options that may be available to individuals delinquent because of a COVID hardship. Crucially, unlike the eviction moratorium struck down by the Court, the CFPB’s new regulation does not mandate that specific relief be made available.

August 27, 2021 at 9:12 am Leave a comment

End Of CDC Protections Puts Focus Back On NY State

Standing on tenuous legal ground (second entry), the Biden administration announced Saturday that the CDC would no longer be extending the national eviction moratorium beyond July 31st. The announcement means that, absent highly unlikely federal legislation extending the moratorium, the action returns to the state level. Most importantly, with or without the federal moratorium, New York State’s eviction and foreclosure moratorium on most properties remains in effect until August 31st.

These FAQ’s on New York’s Department of Financial Services’ website remind New Yorkers of their rights under state law. The bottom line is, with or without the changes to federal law, August 31st remains the key date for foreclosure and eviction purposes in New York State.

September 1st also remains the key date for mortgage servicers who have to comply with the CFPB’s nuanced regulations intended to provide delinquent homeowners additional notice of forbearance options which may be available to them.

Looking at the big picture, the CFPB remains concerned that nationwide the coming weeks will witness a huge surge of evictions and foreclosure proceedings. It has put servicers on notice that it will be keeping a close eye on their conduct and you can bet that state regulators will be taking a similar approach.

August 2, 2021 at 9:31 am Leave a comment

New Requirements Finalized for Delinquent COVID-19 Homeowners

Hello Folks,

For those of you who do mortgage lending, your summer just got a little busier.  The CFPB has issued highly nuanced amendments to its existing regulations dealing with delinquent borrowers that have to be in place by August 31st.

For months the CFPB has expressed concern that as federal and state laws protecting individuals from foreclosure end, there will be a huge increase in foreclosures that will disproportionately impact minority communities. As originally proposed, the regulations put forward by the CFPB would have had the practical effect of preventing most foreclosures through the end of this year. These final regulations don’t go that far but they impose nuanced amendments for dealing with homeowners impacted by Covid-19 which your policies and procedures will have to reflect. Remember every box you don’t check off represents one more potential delay in a foreclosure.

I will be getting into the weeds in future blogs, but for now, among the most important things to keep in mind is that the regulations implement a streamline loan modification process under which mortgages that meet certain conditions can be evaluated for potential modifications by a servicer who has not received a completed application. Additionally, the regulations prescribe specific information which must be provided to delinquent borrowers. For instance, a servicer must inform a borrower that there are programs for individuals having difficulty making payments because of the Covid-19 emergency; list and describe the applicable programs and tell the borrower of at least one way they can find contact information for homeownership counseling services.

There is much more but for now, I want to make sure you start delving into this regulation if you haven’t done so already.

It’s Back!

New York Congresswoman Carolyn Maloney kicked off the holiday weekend by introducing the “Overdraft Protection Act of 2021.” If enacted, the bill would restrict overdraft fees by, among other things, requiring that such fees be “reasonable and proportional” to the cost of processing these transactions and limiting the number of overdraft fees that can be imposed on any one consumer. Expect an even bigger push to get the legislation done this year.

July 6, 2021 at 9:45 am 2 comments

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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