Alston & Bird Consumer Finance Blog

Consumer Financial Protection Bureau (CFPB)

Joint Trade Associations Reject the CFPB’s “Discrimination-Unfairness” Theory

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In a June 28 letter to Director Chopra and accompanying White Paper and press release, the ABA, CBA, ICBA, and the U.S. Chamber of Commerce have called on the Consumer Financial Protection Bureau (CFPB or Bureau) to rescind recent revisions made to its UDAAP examination manual that had effectuated the CFPB’s controversial theory that alleged discriminatory conduct occurring outside the offering or provision of credit could be addressed using “unfairness” authority. The White Paper characterized the primary legal flaws in the CFPB’s action as follows:

  • The CFPB’s conflation of unfairness and discrimination ignores the text, structure, and legislative history of the Dodd-Frank Act. For example, the Dodd-Frank Act discusses “unfairness” and “discrimination” as two separate concepts and defines “unfairness” without mentioning discrimination. The Act’s legislative history refers to the Bureau’s antidiscrimination authority in the context of ECOA and HMDA, while referring to the Bureau’s UDAAP authority separately.
  • The CFPB’s view of “unfairness” is inconsistent with decades of understanding and usage of that term in the Federal Trade Commission Act and with the enactment of ECOA. Congress gave the CFPB the same “unfairness” authority that it gave to the Federal Trade Commission in 1938, which has never included discrimination. It makes no sense that Congress would have enacted ECOA in 1974 to address discrimination in credit transactions if it had already prohibited discrimination through the FTC’s unfairness authority. For the same reason, Congress could not have intended in 1938 for unfairness to “fill gaps” in civil rights laws that did not exist.
  • The CFPB’s view is contrary to Supreme Court precedent regarding disparate impact liability. The CFPB’s actions and statements indicate it conflates unfairness with disparate impact, or unintentional discrimination. The Supreme Court has recognized disparate impact as a theory of liability only when Congress uses certain “results-oriented” language in antidiscrimination laws, e.g., the Fair Housing Act. The Dodd Frank Act neither contains the requisite language, nor is it an antidiscrimination law.
  • The CFPB’s action is subject to review by courts because it constitutes final agency action – a legislative rule – that is invalid, both substantively and procedurally. The CFPB’s action carries the force and effect of law and imposes new substantive duties on supervised institutions. However, the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking. Additionally, the CFPB’s interpretation is not in accordance with law and exceeds the CFPB’s statutory authority. The CFPB’s action should be held unlawful and set aside.
  • The CFPB’s action is subject to Congressional disapproval under the Congressional Review Act. A Member of Congress can request a GAO opinion on whether the CFPB’s actions are a rule, which can ultimately trigger Congressional review using the procedures established in the Congressional Review Act.

The White Paper concludes:

“Such sweeping changes that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to ‘fill gaps’ it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps. If the CFPB believes it requires additional authority to address alleged discriminatory conduct, it must obtain that authority from Congress, not take the law into its own hands. The associations and our members stand ready to work with Congress and the CFPB to ensure the just administration of the law.”

Take-away:

The position taken in the White Paper that the CFPB’s actions were contrary to law may be an indication that the trade groups intend to mount an APA legal challenge. Alternatively, the arguments made could in theory form a defense to any CFPB supervisory or enforcement action premised upon its new “discrimination-unfairness” theory. Financial institutions subject to CFPB examination would be well-advised to consider the arguments raised by the groups.

Did the CFPB Have Authority to Issue its RFI Regarding Employer-Driven Debt?

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A&B Abstract

The CFPB’s statutory authority to issue a recent request for information (RFI) regarding employer-driven debt is in doubt, which may affect the utility of any comments submitted in response to its request.

Background

On June 9, the CFPB issued an RFI Regarding Employer-Driven Debt. The RFI seeks comment on several areas of inquiry relating to “employer-driven debts,” including prevalence, pricing and other terms of the obligations, disclosures, dispute resolution, and the servicing and collection of these debts.

The CFPB defines employer-driven debts as “debt obligations incurred by consumers in the context of an employment or independent contractor arrangement.” The CFPB further states that these debts “appear to involve deferred payment to the employer or an associated entity for employer-mandated training, equipment, and other expenses.” The CFPB provides two examples of such debts:

  • Training Repayment Agreements that require workers to pay their employers or third-party entities for previously undertaken training provided by an employer or an associated entity if they separate voluntarily or involuntarily within a set time period.
  • Debt owed to an employer or third-party entity for the up-front purchase of equipment and supplies essential to their work or required by the employer, but not paid for by the employer.

The CFPB states that it is seeking input from the public as part of its mandate to “monitor[] markets for consumer financial products and services to ensure that they are fair, transparent, and competitive.” This statement is an amalgamation of two separate statutory provisions. The first, found in Section 1021(a) of the Dodd-Frank Act states that the CFPB shall use its authorities consistently for the purpose of ensuring that “markets for consumer financial products and services are fair, transparent, and competitive.” The second, found in Section 1022(c), states that in order to support its rulemaking and other functions, the CFPB shall “monitor for risks to consumers in the offering or provision of consumer financial products or services, including developments in markets for such products or services.” Note that both provisions refer to consumer financial products and/or services. Sections 1002(5) and (15) define a “consumer financial product or service” in the context of extending credit as a loan that is “offered or provided for use by consumers primarily for personal, family, or household purposes.”

The CFPB’s RFI does not explain how debts incurred by employees for the purchase of essential work training or equipment constitute consumer credit. However, the CFPB’s own rules are illustrative. For instance, Regulation Z, which implements the Truth In Lending Act, defines consumer credit as credit “offered or extended to a consumer primarily for personal, family, or household purposes.” 12 C.F.R. 1026.2(a)(12). Regulation Z further sets forth factors for distinguishing business-purpose loans from consumer-purpose loans. 12 C.F.R. 1026.3(a) and Official Interpretation 3(a)-3. For example, one factor to be considered is the relationship of the borrower’s primary occupation to a financed acquisition. According to the CFPB, “the more closely related, the more likely it is to be business purpose.” Also, according to another factor, credit extensions by a company to its employees constitute consumer-purpose credit only “if the loans are used for personal purposes.”

As described by the CFPB, debts incurred by employees to defer payment to employers for employer-mandated training, equipment, and other expenses do not appear to be consumer-purpose loans because they finance acquisitions that are directly related to the employees’ jobs and are not used for personal purposes. Accordingly, employer-driven debt does not appear to be either consumer credit or a consumer financial product or service. Because the CFPB’s statutory purpose and market monitoring authority are limited to “consumer financial products and services,” and because the CFPB referred to no other legal authority in its RFI, the CFPB does not appear to have articulated an adequate statutory basis for its issuance.

If the CFPB lacks jurisdiction over the subject matter of the RFI, then it is also prohibited from expending funds to issue the RFI. Section 1017(c) provides that CFPB funds can only be used to pay for expenses incurred in “carrying out its duties and responsibilities.” If employer-driven debt is not a consumer financial product or service, then monitoring such debt is not within the duties or responsibilities of the CFPB, and the CFPB may not expend funds in issuing its RFI.

Takeaway

Monitoring the operation of labor markets or the effects of the emergence of employer-driven debt may be useful. However, Congress appears not to have assigned the CFPB this task, which raises questions about the legality of the CFPB’s RFI and the utility of any comments submitted in response.

Second Juneteenth Holiday Raises Tricky Compliance Issues

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A&B Abstract

The second observance of the Juneteenth National Independence Day (Juneteenth) holiday is Monday, June 20, 2022.  President Biden signed legislation making Juneteenth National Independence Day a federal national holiday last year. Because the fixed date holiday falls on a Sunday, the second observance of Juneteenth raises tricky compliance issues for the timing of certain disclosures provided in connection with residential mortgage transactions.

Background

Under the Truth in Lending Act (TILA) Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure Rule (TRID), generally, the creditor is responsible for ensuring that it delivers or places in the mail the loan estimate (LE) no later than the third business day after receiving the consumer’s application. Further, creditors must ensure that the consumer receives the closing disclosure (CD) at least three business days before consummation of the transaction. In addition, for certain refinancings, Regulation Z permits the consumer to rescind (cancel) the transaction within three business days after consummation.

For purposes of providing the LE, a business day is a day on which the creditor’s offices are open to the public for carrying out substantially all of its business functions. However, the term “business day” is defined differently for other purposes, such as counting days to ensure the consumer receives the CD on time and the consumer’s exercise of the right to rescind the transaction. For these purposes, “business day” means all calendar days except Sundays and the legal public holidays specified in 5 U.S.C. 6103(a): New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Juneteenth, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day.

Last year, Juneteen fell on a Saturday which created confusion due to President Biden signing the holiday into law only earlier two days on June 17, 2021.  Notably, Comment 2(a)(6)-2 of the Official Staff Commentary to Regulation Z indicates that when one of the federal holidays (July 4, for example) falls on a Saturday, federal offices and other entities might observe the holiday on the preceding Friday (July 3). In these cases, the observed holiday (in the example, July 3) is a business day. Following that logic, in 2021, the observed Juneteenth holiday (Friday, June 18) was a “business day” and the actual stated holiday (Saturday, June 19) was the “holiday” for purposes of the CD and right of rescission waiting periods.

Nevertheless, to address some of the confusion created by the hasty promulgation of the new holiday, the Consumer Financial Protection Bureau (CFPB) issued an interpretive rulemaking on August 5, 2021, indicating, for purposes of the 2021 Juneteenth holiday, that “for rescission of closed-end mortgages and TILA-RESPA Integrated Disclosures, whether June 19, 2021, counts as a business day or federal holiday depends on when the relevant time period began. If the relevant time period began on or before June 17, 2021, then June 19 was a business day; after June 17, 2021, then June 19 was a federal holiday.”

The Official Staff Commentary does not address a scenario when the actual federal holiday falls on a Sunday but is observed on a Monday.  According to the Bankers Online website, the Consumer Financial Protection Bureau has indicated that, when a fixed-date holiday falls on Sunday but is observed on Monday, the observed holiday (for example, Independence Day observed on Monday, July 5, 2021, or Juneteenth observed on June 20, 2022) is a business day in cases where the more precise rule applies.

Takeaway

For residential mortgage transactions that are anticipated to close in the coming week, it is essential that creditors treat the actual Juneteenth holiday (June 19) as a federal holiday for purposes of the timing requirements of providing the CD (with the observed holiday of Monday, June 20 being treated as a “business day”) and allowing sufficient time to elapse for the borrower’s right to rescind the transaction.  Further, if a creditor’s offices are open to the public for carrying out substantially all of its business functions on the observed Juneteenth holiday (June 20), June 20 should be included as a business day for purposes of providing the LE.

CFPB Continues Scrutiny of Algorithmic Technology

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On May 26, 2022 the Consumer Financial Protection Bureau released a Consumer Financial Protection Circular stating that creditors utilizing algorithmic tools in credit making decisions must provide “statements of specific reasons to applicants against whom adverse action is taken” pursuant to ECOA and Regulation B. The CFPB previously stated that circulars are policy statements meant to “provide guidance to other agencies with consumer financial protection responsibilities on how the CFPB intends to enforce federal consumer financial law.” The circular at issue posits that some complex algorithms amount to an uninterpretable “black-box,” that makes it difficult—if not impossible—to accurately identify the specific reasons for denying credit or taking other adverse actions. The CFPB concluded that “[a] creditor cannot justify noncompliance with ECOA and Regulation B’s requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.”

This most recent circular follows a proposal from the CFPB related to review of AI used in automated valuation models (“AVMs”). As we noted in our previous post on that topic, the CFPB stated that certain algorithmic systems could potentially run afoul of ECOA and implementing regulations (“Regulation B”). In that prior outline of proposals with respect to data input, the CFPB acknowledged that certain machine learning algorithms may often be too “opaque” for auditing. The CFPB further theorized that algorithmic models “can replicate historical patterns of discrimination or introduce new forms of discrimination because of the way a model is designed, implemented, and used.”

Pursuant to Regulation B, a statement of reasons for adverse action taken “must be specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor’s credit scoring system are insufficient.” In the circular, the CFPB reiterated that, in utilizing model disclosure forms, “if the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed.” In another related advisory opinion, the CFPB earlier this month also asserted that the provisions of ECOA and Reg B applies not just to applicants for credit, but also to those who have already received credit. This position echoes the Bureau’s previous amicus brief on the same topic filed in John Fralish v. Bank of Am., N.A., nos. 21-2846(L), 21-2999 (7th Cir.). As a result, the CFPB asserts that ECOA requires lenders to provide “adverse action notices” to borrowers with existing credit. For example, the CFPB asserts that ECOA prohibits lenders from lowering the credit limit of certain borrowers’ accounts or subjecting certain borrowers to more aggressive collections practices on a prohibited basis, such as race.

The CFPB’s most recent circular signals a less favorable view of AI technology as compared to previous statements from the Bureau. In a blog post from July of 2020, the CFPB highlighted the benefits to consumers of using AI or machine learning in credit underwriting, noting that it “has the potential to expand credit access by enabling lenders to evaluate the creditworthiness of some of the millions of consumers who are unscorable using traditional underwriting techniques.” The CFPB also acknowledged that uncertainty concerning the existing regulatory framework may slow the adoption of such technology. At the time, the CFPB indicated that ECOA maintained a level of “flexibility” and opined that “a creditor need not describe how or why a disclosed factor adversely affected an application … or, for credit scoring systems, how the factor relates to creditworthiness.” In that prior post, the CFPB concluded that “a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant. This flexibility may be useful to creditors when issuing adverse action notices based on AI models where the variables and key reasons are known, but which may rely upon non-intuitive relationships.” That post also highlighted the Bureau’s No-Action Letter Policy and Compliance Assistance Sandbox Policy as tools to help provide a safe-harbor for AI development. However, in a recent statement, the CFPB criticized those programs as ineffective and it appears those programs are no longer a priority for the Bureau. So too, that prior blog post now includes a disclaimer that it “conveys an incomplete description of the adverse action notice requirements of ECOA and Regulation B, which apply equally to all credit decisions, regardless of the technology used to make them. ECOA and Regulation B do not permit creditors to use technology for which they cannot provide accurate reasons for adverse actions.” The disclaimer directs readers to the CFPB’s recent circular as providing more information. This latest update makes clear that the CFPB will closely scrutinize the underpinnings of systems utilizing such technology and require detailed explanations for their conclusions.