Last Week, This Morning

September 3, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On August 26, the U.S. District Court for the Southern District of Texas granted summary judgment in favor of the Consumer Financial Protection Bureau with respect to claims brought by various banking-related entities alleging that the Bureau's Small Business Lending Rule ("SBL rule") - issued in March 2023 and promulgated pursuant to Section 1071 of the Dodd-Frank Act - violated the Administrative Procedure Act. In light of the U.S. Supreme Court's decision in CFPB v. Community Financial Services Association of America, Ltd., upholding the constitutionality of the CFPB's funding structure, the federal district court also rejected the plaintiffs' claim that the SBL rule is invalid because the CFPB itself is unconstitutional.

The SBL rule requires covered financial institutions to collect certain data on credit applications from small businesses and report that data to the CFPB. In July 2023, the federal district court stayed the SBL rule pending the outcome of the Supreme Court's decision in CFPB v. Community Financial Services Association of America, Ltd., noting that if the Supreme Court overturned the then-controlling Fifth Circuit precedent holding that the CFPB employed an unconstitutional funding structure, then the CFPB must extend the compliance deadlines for the SBL rule by the same number of days as the duration of the stay. After the Supreme Court's ruling, the CFPB set new compliance dates for financial institutions to become compliant with the SBL rule. Compliance deadlines are tiered, based on volume of loan origination. Financial institutions with the highest volume of small business loans are required to begin collecting data by July 18, 2025, moderate volume financial institutions by January 16, 2026, and smallest volume financial institutions by October 18, 2026. The deadline for reporting small business lending data to the CFPB is June 1 following the calendar year for which data are collected.

The CFPB also recently announced the availability of the beta platform for the SBL rule. The CFPB invites financial institutions and their technology partners to test the beta platform and share feedback with the Bureau to help identify areas of potential enhancement and improve the data filing process.

Amicus brief(ly): With this CFPB legal victory, we are getting closer to implementation of the SBL rule and its data collection and reporting requirements. The federal district court in Texas rejects the plaintiffs' arguments about the CFPB's authority to write the rule in the first place, looking to the statutory authority in Section 1071 of the Dodd-Frank Act, and finds "unambiguous" text requiring small business lenders to collect and report certain borrower information. The court also sets aside the plaintiffs' APA challenges, finding that the CFPB was not "arbitrary and capricious" in writing the SBL rule, which went through the APA rulemaking process, because "the record illustrates that the agency has adequately considered the relevant issues, including those raised in the comments that Plaintiffs accuse them of avoiding." The numerous plaintiffs in this challenge are likely to at least consider an appeal to the U.S. Court of Appeals for the Fifth Circuit, but small business lenders should be preparing to comply with the SBL rule in the face of that uncertainty. The industry may be running out of arguments that will slow implementation down.

On August 27, the Consumer Financial Protection Bureau issued a report on cash-back fees imposed by retailers when consumers make purchases with a debit or prepaid card and request cash back at the register. The report provides an overview of consumers' use of cash back, the benefits and costs of such transactions to retailers, and the practices of other market actors that do not charge fees for this service. The CFPB sampled eight large retail companies and assessed their practices for charging cash-back fees. The report finds that three retail chains in the sample charged cash-back fees (two dollar store chains and one grocery store chain), collecting millions in fees annually; cash-back fees were imposed on low withdrawal amount options, commonly between $5 and $50, that are pre-determined by the retailer, resulting in possible repeat withdrawals by consumers who are subject to a new fee each time; and consumers with lower incomes and in rural areas may encounter more cash-back fees because, according to the CFPB, dollar stores are more frequently located in small, rural towns with low-income communities, and these areas are more likely to have fewer bank branches. The CFPB also notes that retailers providing cash back are filling a void in consumer access to cash, stating that there is an "underlying failure of banks and credit unions to adequately supply cash throughout the country in an affordable manner."

Amicus brief(ly): What's the rumpus? As has become the custom for CFPB reports like this one, the CFPB appears to have identified an issue that may not be a real issue and for which it offers no solution (but you can sort of feel the agency queuing up a topic for potential future regulation). Specifically, some retailers charge a fee if you pay with a debit card and want some cash back from the cashier (or the self-help register). Others do not. The fact that the retailers charging the fees are Dollar General and Dollar Tree, which generally cater to a lower-income clientele, appears to trouble the CFPB. The report includes conditional language - like "these fees may be borne by economically vulnerable populations and those with limited banking access" - at most inflection points, suggesting that the Bureau has not decided yet how committed it is to the idea that this practice is somehow predatory. But that uncertainty does not stop the CFPB from taking readers directly to the watering hole where they can decide whether to drink or not. The report implies that consumers ought to have cost-free access to cash in case they need it and sweeps aside the notion that it may cost money for a retailer (that is not a bank or credit union) to handle cash in sufficient amounts to provide that ancillary service. If the CFPB decides that imposing a fee for providing a completely voluntary service that is not germane to a retailer's principal business, in amounts that appear to average something lower than a typical ATM cash withdrawal fee, why would retailers continue to provide that service? If the CFPB ignores the forest for the trees on this issue, the consumers whose access to cash the CFPB is trying to protect may lose that valuable and inexpensive service altogether. We'll see.

On August 27, the Federal Trade Commission issued a final rule to update the fees charged to entities accessing the National Do Not Call Registry, effective October 1, 2024. All telemarketers calling consumers in the U.S. are required to download the numbers on the DNC Registry to ensure that they do not call consumers who have registered their phone numbers. Telemarketers must subscribe each year for access to the DNC Registry numbers. The first five area codes are free, and exempt organizations may obtain the entire list for free. The cost of accessing a single area code will increase by $2 to $80. The maximum charge to any single entity for accessing all area codes nationwide will increase by $636 to $22,038. The fee for accessing an additional area code for a half year will increase by $1 to $40.

Amicus brief(ly): The cost of this necessary service is getting a little more expensive for telemarketers and their customers, but it is what it is. These are marginal incremental cost increases for access to the required federal database. Compliance with the Telemarketing Sales Rule's do-not-call provisions is important not just under federal law; in a number of states, compliance with those provisions is also a state law requirement. If none of this sounds familiar, we commend you to the FTC's Q&A on TSR compliance.

On August 29, the Federal Housing Administration released a Mortgagee Letter that establishes an optional interim process for releasing an FHA subordinate Secretary-held lien after a mortgagee has completed a nonjudicial foreclosure sale where there are no surplus funds available to satisfy HUD's subordinate lien. The provisions of the Mortgagee Letter apply to all FHA Title II Single Family forward mortgage programs and may be implemented on September 4, 2024. The provisions will remain in effect until HUD publishes future guidance regarding subordinate Secretary-held liens for nonjudicially foreclosed properties.

Amicus brief(ly): This Mortgagee Letter establishes a rather simple process for obtaining a lien release when it is clear that a non-judicial foreclosure sale will not generate enough proceeds to pay anything on a junior-lien FHA loan. The letter follows a decision from the U.S. Court of Appeals for the Eighth Circuit from a year ago where the court held that a non-judicial foreclosure sale cannot extinguish a junior lien on real property held by the U.S. (as in the case of an FHA loan), and HUD recognizes that "immediate adverse financial and market impacts may result from proceeding with a judicial foreclosure" in cases where a non-judicial foreclosure already took place and netted $0 to pay the junior-lien FHA loan. So, HUD issued this guidance to keep things moving for now and will be back with a clearer permanent policy on foreclosure that will be open for public feedback.

On August 25, the Colorado Department of Law revised Uniform Consumer Credit Code rules pertaining to recordkeeping requirements and permissible GAP charges and adopted a new rule relating to consumer legal funding transactions.

First, UCCC recordkeeping requirements for creditors under 4 CCR 902-1:10 have been revised, and the revisions are effective February 1, 2025 (the remaining new rules are effective September 14). The revised rule provides that: a creditor may maintain records in hard copy or electronic format; the examples of documents creditors should maintain is not an exhaustive list, and creditors should maintain all documents required to demonstrate compliance with the UCCC; and it is a violation of the rule if a creditor does not maintain information that is "reasonably available to the Administrator" of the UCCC. With respect to the examples of documents creditors should maintain, the revised rule now requires payment and account history records to include payment attempts and returns, deferral fees, the remaining balance after each transaction, the date(s) funds were disbursed, the date(s) consumers received funds, if different, and the date(s) of all other transactions affecting the balance. In addition, the revised rule requires collection attempts and collection activity to be documented in a record log, including, but not limited to, collection letters, emails, in-office conversations, phone calls, right to cure notices, and texts. The revised rule adds provisions requiring creditors to maintain a record log listing in chronological order all loans and credit extensions to consumers, daily activity logs, check and cash disbursement registers, and bank records, including bank statements and deposit slips reflecting disbursements of loan proceeds and payments. For GAP agreements, creditors must maintain and/or make reasonably available to the Administrator any GAP agreements with consumers, agreements with GAP administrators related to GAP, correspondence with consumers related to GAP, correspondence with GAP administrators, and records of GAP fees received, refunds paid, benefits paid, and any deductions to the benefit.

A new rule - 4 CCR 902-1:19 - governing consumer legal funding transactions has been created. The new rule addresses permitted charges for a deferral that a creditor may assess to a consumer in connection with a legal funding transaction. Under the new rule, a "deferral" is defined as "the deferral of any periodic payment to a single installment owed at the end of the loan term if the consumer does not pay on the originally scheduled due date." The new rule also sets forth the requirements for refinancing a consumer legal funding transaction, allows a consumer to prepay a legal funding transaction, in full or in part, either from the proceeds of the associated legal claim or otherwise without penalty, and sets forth prohibited acts by creditors with respect to such transactions.

Finally, in the rulemaking, the Department of Law clarifies that 4 CCR 902-1:8 regarding permissible charges for GAP applies only to transactions entered into before January 1, 2024, the effective date of 2023 House Bill 23-1181, a form of comprehensive GAP regulation through which the state effectively replaced its rule authorizing charges for GAP and made the new GAP statute part of the state's UCCC.

Amicus brief(ly): The Department of Law analogizes the deferral fee for litigation funding transactions to a late payment fee in a simple-interest transaction or an actual payment deferral fee in a precomputed transaction, seeking to allow providers some recovery for deferring payments that have come due. The enhanced recordkeeping requirements clarify the kinds of account-level records creditors and servicers must retain for payment and payment histories, collection attempts, GAP sales, and correspondence related to GAP premium refunds (the latter of which has been a hot topic in government examinations and investigations for a few years now). It's a fair amount of new detail, and it will take some time to adjust system programming for the recordkeeping changes, so the reprieve until February 1 is welcome.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.