Last Week, This Morning

September 9, 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.

The Consumer Financial Protection Bureau recently obtained a consent order with New Day Financial, LLC, a non-bank mortgage lender that offers mortgage loans guaranteed by the Department of Veterans Affairs, to resolve allegations that the lender misrepresented the payment terms of certain VA cash-out refinances of home mortgages, in violation of the Consumer Financial Protection Act.

The CFPB alleged that certain states in which New Day offered its cash-out refinance loans - North Carolina, Maine, and Minnesota - require a lender to complete a borrower "net benefit" analysis worksheet showing the financial benefit of a refinance to the borrower. The CFPB alleged that the net benefit worksheet that New Day provided to borrowers in North Carolina and Maine up through 2020, and Minnesota up through 2018, misstated how a borrower's "previous" monthly mortgage payment would compare to a "new" monthly mortgage payment after refinancing. Specifically, the net benefit worksheet provided by New Day included a side-by-side comparison of the "new" monthly mortgage payment after a cash-out refinance, which included only principal and interest, and the "previous" monthly mortgage payment, which included principal, interest, taxes, and insurance. According to the CFPB, omitting taxes and insurance payments from the "new" monthly payment calculation in the net benefit worksheet made the cash-out refinance loans appear less expensive relative to the borrowers' original mortgages, when they were often more expensive.

The consent order requires New Day to pay a $2.25 million penalty to the Bureau's victims relief fund and to cease its alleged illegal conduct.

Amicus brief(ly): The CFPB in this consent order relies on state law compliance matters to make its federal case, which is not a common approach for the CFPB. (The CFPB is not typically focused on compliance with specific state laws, but the state laws referenced in this consent order helped make its case.) What is common, however, and regrettable, is the salacious headline and press release labeling the lender a "repeat offender" that "baited" veterans into taking cash-out refinance loans by "hiding" the true costs of the loans, while quietly adding that borrowers "may" have faced higher overall costs after refinancing. If borrowers did not actually pay more, and if borrowers did understand from all of the papers in front of them at closing the costs of their refinance and their monthly payment obligations, then the CFPB may not have been entirely fair in its statement of the case in its press release. All of that aside, the marketing takeaway is to make sure you're allowing consumers to compare apples to apples and oranges to oranges.

On September 5, the Consumer Financial Protection Bureau issued its annual report summarizing its activities, as well as activities by other agencies, in 2023 related to the Fair Debt Collection Practices Act. The introductory portion of the report focuses on medical and rental debt collection. In particular, with respect to medical debt collection, the CFPB states that its research, along with consumer complaints, indicates that debt collectors are attempting to collect medical debt that is not owed, medical bills that have already been paid by or that are eligible for non-profit hospitals' financial assistance programs, and bills arising from patients' use of medical payment products that should not have been offered to patients without considering whether they may be eligible for financial assistance. With respect to rental debt collection, the CFPB states that its research and consumer complaints show that landlords and management companies may have engaged in illegal price-fixing by using "revenue management software" to collect improperly inflated amounts that ultimately end up in collection and have been adding "junk fees," including fees from rental payment processing servicers that are required as a condition for rent payment, that may not be allowed under the lease or local law.

In addition to addressing medical and rental debt collection, the report offers background on the debt collection market, provides information on debt collection complaints received, discusses FDCPA violations identified during examinations, summarizes enforcement activities addressing debt collection activity brought by the CFPB and the Federal Trade Commission, identifies consumer education efforts undertaken by the CFPB, and reviews the CFPB's rulemaking, research, and policy initiatives relating to debt collection.

The report concludes with the CFPB referring to the increased financialization of various consumer financial markets, through new or increased offering of financial products and services to consumers, as a "significant trend" and stating that these new financial products may result in debt collectors collecting amounts that are not actually owed or not properly verified, in violation of the FDCPA.

Amicus brief(ly): Issues that arise in connection with the collection of consumer medical debt remain hot-button concerns for the CFPB and other regulators. The focus remains on cases where consumers complain that a debt collector is asking for an amount the consumer does not owe or where the collector is asking for payment from the wrong person - which can happen from time to time but is clearly an exception and not the rule. But the CFPB prefers the message that debt collectors are in the business of trying to hurt consumers, whether or not that is their purpose. (We have it on good authority that hurting consumers is not actually what debt collectors are after.) The CFPB's reporting on payment processors in the property management and rent collection business serves as a useful reminder of the FDCPA's requirement that, in order for a debt collector to collect a fee, that fee has to be expressly authorized by the agreement or state law. Creditors, residential lessors, and others would do well for themselves and their servicing and collection partners to ensure that if a fee is allowed (or at least not prohibited) under state law for a payment or other service consumers might want to use, the consumer agreement includes an agreement to pay that fee.

California's legislature passed S.B. 1286, which expands the scope of the Rosenthal Fair Debt Collection Practices Act to cover the collection of certain commercial-purpose debts. Unless vetoed by Governor Gavin Newsom, this legislation will take effect on January 1, 2025. Unlike the federal Fair Debt Collection Practices Act and many state debt collection laws, the RFDCPA applies to a person collecting its own debts in its own name as well as to a person collecting debts on behalf of another or a person collecting its own debts under a different name. As a result, this bill would impact providers of small business financing that service and collect their own accounts.

The current version of the RFDCPA applies to "consumer credit" and "consumer debt." S.B. 1286 expands the RFDCPA to cover "covered commercial credit" and "covered commercial debt" as well. Those terms would each mean money, property, or their equivalent due or owing or alleged to be due or owing from a natural person to a lender, a commercial financing provider, or a debt buyer by reason of a covered commercial credit transaction. The term "covered commercial credit transaction," in turn, means a credit transaction of $500,000 or less primarily for other than personal, family, or household purposes. Note that these definitions are broad enough to cover sales-based financing transactions and leases as well as traditional loans. Note also that the bill defines "debtor" to include guarantors of covered commercial credit transactions.

The RFDCPA includes provisions closely resembling provisions of the federal FDCPA. For example, the RFDCPA prohibits certain types of threats to and harassment of debtors. The RFDCPA also requires a debt collector to provide certain information to the debtor, such as the amount of the debt and the name of the creditor. However, the RFDCPA also includes provisions distinct from anything in the FDCPA. For example, the RFDCPA requires specific disclosures that a debt collector must provide if it attempts to collect a time-barred debt.

A violation of the RFDCPA is subject to the same remedies as a violation of the 2001 version of the FDCPA, including a lawsuit by the debtor. The RFDCPA also provides for statutory damages between $100 and $1,000 per violation. Like the FDCPA, the RFDCPA provides a defense for a debt collector that can show that a violation was the result of a bona fide error and occurred despite procedures designed to prevent such an error.

Amicus brief(ly): California accomplished what the CFPB would love to do but really can't: California expanded its consumer debt collection statute to include certain commercial debt collection activity. The federal FDCPA limits the collection of "debt" that it subject to the Act to consumer-purpose debt. For the CFPB to be able to expand its Regulation F to capture commercial debt collection, it needs Congress to expand the definition of "debt" in the statute. Short of that, the CFPB will be exceeding its rulemaking authority and should expect litigation challenging any such rulemaking. This issue may not be big enough to get into federal legislation that has any chance of becoming a law. In the interim, California has capably expanded its regulation of certain small business financing transactions to now include servicing and collection. While many servicers and collectors of small business debt have typically complied with California's Rosenthal Act and the FDCPA as a "best practice," it is now a requirement to do so with potential statutory damages attached.

On August 30, the attorneys general of 14 states submitted a comment letter to the Consumer Financial Protection Bureau supporting the Bureau's proposed interpretive rule on earned wage access products - "Truth in Lending (Regulation Z); Consumer Credit Offered to Borrowers in Advance of Expected Receipt of Compensation for Work" - published on July 31, 2024. The proposed interpretive rule would clarify that TILA applies to these types of financial products.

The AGs state in the comment letter: "We support the CFPB's conclusion that Earned Wage Advance ('EWA') products involve the extension of credit and that charges incident to the extension of credit, including the payment of expedited funds delivery fees and so-called 'tips,' amount to finance charges. The proposed interpretive rule would reduce the risk that consumers would become confused or misled as to the nature of these products and thereby become locked in debt-traps. The proposed interpretive rule would also complement State laws and regulations, helping ensure that a new generation of technologically savvy predatory payday lenders do not proliferate."

Certain features of EWA products, specifically delivery fees for expedited funds and "tips," are areas of concern for the AGs. With respect to expedited funds delivery fees, the AGs state that "EWA providers' reliance on the argument that their products are necessary to meet consumers' short-term liquidity needs underscores the propriety of including expedited funds delivery fees in any finance charge calculation." The AGs also state that the solicitation of "tips" by EWA providers "have the effect of manipulating or pressuring consumers to make such payments. Some EWA sellers have designed their apps such that a 'tip' amount must be selected to complete the transaction, with the default set to a non-zero number or a suggested tip pre-selected. EWA sellers have also attempted to misleadingly suggest that tips are in some way earmarked to help other consumers, with 38% of respondents of one survey who tipped reporting that they did so to 'pay it forward to another user.'"

Amicus brief(ly): It is not surprising that some state AGs support the CFPB's expansive interpretation stating that EWA products are effectively loan products. While several states have adopted EWA laws regulating the product as it is - not as a "loan" or "lending product" - other states have been more inclined to adopt the CFPB's position. If a tip or gratuity paid to the provider is truly optional, a provider may have a hard time disclosing the tip or gratuity as a "finance charge." Late fees, for example, are not "finance charges" to be disclosed in account opening disclosures because they are contingent fees that the lender and borrower cannot be sure at consummation that the consumer will ever have to pay. Providers and trade groups have offered their comments to the CFPB as well, hoping to balance the information the CFPB has received in connection with its proposed interpretive rule. We will see where the CFPB lands when it finalizes the interpretive rule.

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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.