Alston & Bird Consumer Finance Blog

#CFPA

CFPB Sues MoneyLion over Membership Program, Uses Military Lending Act as Hook

A&B Abstract:

On September 29, 2022, the Consumer Financial Protection Bureau (“CFPB”), sued MoneyLion Technologies Inc. and 37 of its subsidiaries (“MoneyLion”) in New York federal court for violations of the Military Lending Act (the “MLA”) and Consumer Financial Protection Act (“CFPA”).

The Allegations

The CFPB alleges that MoneyLion offered installment loans that consumers could not access unless they enrolled in a membership program with monthly membership fees.  While MoneyLion represented to consumers that they “had the right to cancel their memberships for any reason,” it “maintained a policy prohibiting consumers with unpaid loan balances from canceling their memberships.”

According to the CFPB, MoneyLion’s membership model resulted in violations of the MLA’s 36% APR cap.  Under the MLA’s implementing regulation, APR is calculated as including “fee[s] imposed for participation in [an] arrangement for consumer credit.”  Based on this, the CFPB argues that the membership fees MoneyLion required servicemembers to pay to gain access to installment loans must be included in those loans’ APR.  If correct, those loans’ APR would unlawfully exceed 36%.

The CFPB also alleges that the installment loans to servicemembers violated the MLA by containing unlawful arbitration clauses and failing to contain required disclosures.

Lastly, the CFPB alleges that MoneyLion’s membership model resulted in unfair, deceptive, and abusive acts or practices under the CFPA. Particularly, the CFPB alleges that MoneyLion misled and injured consumers by representing to consumers that they had the right to cancel their memberships when, in fact, they did not.

Takeaways

The MoneyLion suit serves as a good reminder that every lending program should: (i) account for the additional protections provided to uniquely situated borrowers, such as servicemembers under the MLA; (ii) scrutinize any fees paid by consumers that could be viewed as increasing a loan’s APR; and (iii) review representations they make to consumers to align with the commercial realities and the regulatory requirements of the products they offer.

Update Regarding the CFPB’s Buy Now, Pay Later Orders

In a prior post, we reported that the language used in orders recently issued by the CFPB to leading Buy Now, Pay Later (“BNPL”) providers suggested that the CFPB intends to use the information it collects to build enforcement cases rather than monitor market developments. We also reported that if this is the case, it is a departure from historic precedent and can be considered an end-run around the procedural safeguards established by Congress in Section 1052 of the Dodd-Frank Act to ensure that due process is afforded to financial institutions that become the target of CFPB enforcement investigations.

The CFPB’s intentions were apparently confirmed in a January 5 article in Axios about the BNPL orders, which quotes the CFPB’s small dollar, marketplace and installment lending program manager as saying:

It is certainly possible that we could as a result of the data collection take enforcement action.

Assuming this quote is accurate, recipients of CFPB 1022(c)(4) market monitoring orders should be well aware that any information provided to the agency may be used for enforcement purposes.

The CFPB is Sending Mixed Messages on COVID-19 Flexibility

A&B ABstract: The CFPB’s inconsistent statements about the need for flexibility to address the pandemic suggest a deeper game afoot.

 CFPB warns that continued COVID flexibility for financial institutions is not prudent…

On March 31, 2021, the CFPB announced it would be rescinding seven policy statements issued last year that provided financial institutions with flexibilities regarding certain regulatory filings or compliance with consumer financial laws and regulations due to the COVID-19 pandemic. One of the rescinded statements, for example, encouraged financial institutions to “work constructively with borrowers and other customers affected by COVID-19 to meet their financial needs” and to that end, “when conducting examinations and other supervisory activities and in determining whether to take enforcement action, the Bureau will consider the circumstances that entities may face as a result of the COVID-19 pandemic and will be sensitive to good-faith efforts demonstrably designed to assist consumers.”

In explaining the rescissions, Acting CFPB Director Uejio reasoned: “Because many financial institutions have developed more robust remote capabilities and demonstrated improved operations, it is no longer prudent to maintain these flexibilities.” Accordingly, the CFPB provided notice that it “intends to exercise the full scope of the supervisory and enforcement authority provided under the Dodd-Frank Act.”

To further drive home its point, on April 1, 2021, the CFPB issued a press release and compliance bulletin warning mortgage servicers that “unprepared is unacceptable” with regard to the treatment of mortgage borrowers exiting extended forbearances this fall. The CFPB stated it is “committed to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act (CFPA), to ensure that homeowners facing the ongoing economic impact of the Coronavirus Disease (COVID-19) national emergency receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Except when it is!

On March 2, 2021, the CFPB issued a notice of proposed rulemaking (NPRM) to delay the mandatory compliance date of the General Qualified Mortgage (QM) final rule from July 1, 2021 to October 1, 2022. The reason cited by the CFPB for the compliance delay is the “need to provide maximum flexibility [to financial institutions] to address the effects of the pandemic.” In particular, the CFPB’s proposal states:

“The Bureau is concerned that the potential impact of the COVID-19 pandemic on the mortgage market may continue for longer than anticipated at the time the Bureau issued the General QM Final Rule, and so could warrant additional flexibility in the QM market to ensure creditors are able to accommodate struggling consumers.”

Additionally, on April 7, 2021, the CFPB proposed to delay the effective date of two recent debt collection rules by sixty days, from November 30, 2021 until January 29, 2022. The reason cited by the CFPB for its proposed delay is “to give affected parties more time to comply due to the ongoing COVID-19 pandemic.” In particular, the CFPB’s proposal states:

“Since the Debt Collection Final Rules were published, the global COVID-19 pandemic has continued to cause widespread societal disruption, with effects extending into 2021. In light of that disruption, the Bureau believes that providing additional time for stakeholders to review and, if applicable, to implement the final rules may be warranted. The Bureau believes that extending the rules’ effective date by 60 days, to January 29, 2022, may provide stakeholders with sufficient time for review and implementation.”

What is really going on?

 Both of the CFPB’s delay NPRMs are curious. With respect to the QM delay proposal, a broad coalition of both housing and mortgage industry and consumer and civil rights groups files a joint comment letter stating that the recent enhancements to the General QM definition will replace loans that were designated QM under the temporary GSE Patch, and as a result, the organizations do not believe that extending the July 1 mandatory compliance date is necessary. And as our colleague Stephen Ornstein explained, recent FHFA actions will effectively sunset the GSE Patch on July 1 with or without the CFPB taking action. Further, with respect to the debt collection delay proposal, it is unlikely that 60 extra days before the rules take effect will make any appreciable difference to most market participants, considering that they were already given a full year to implement the rules, and they still won’t take effect for seven months.

The CFPB clearly has a strong desire to revisit both the underlying QM and debt collection final rules issued last year. For instance, as early as February 4, 2021, Acting Director Uejio stated that the CFPB would “[e]xplore options for preserving the status quo with respect to QM and debt collection rules.” And Diane Thompson, the Biden Administration political appointee now overseeing CFPB rulemaking efforts, publicly declared her hatred for the CFPB’s new General QM rule. If the CFPB does revisit these rules, it makes sense to do so soon; completing new rulemakings before the old ones take effect or require compliance could provide the CFPB a significant advantage in framing its mandatory Section 1022 cost-benefit analysis, depending upon the economic baseline established for analyzing the effects of its proposals. However, delaying rules simply for the purpose of changing them in light of the policy preferences of an incoming administration can be viewed skeptically by reviewing courts, since such actions tend to undermine the purposes of the Administrative Procedure Act. Perhaps that is the reason why the CFPB is disclaiming its plans to revisit the underlying rules in its delay NPRMs and, contrary to its own recent policy pronouncements, is relying instead upon the need for institutional flexibility to deal with the pandemic in the limited context of these two rules alone. Given the time constraints involved, the CFPB can be expected to show its full hand and propose changes to the QM and debt collection rules soon after it finalizes its associated delay rules.

CFPB Brings Action Against Connecticut Mortgage Lender

The number of enforcement actions by the Consumer Financial Protection Bureau (CFPB) more than doubled from 2019 to 2020. The CFPB made clear that cracking down on deceptive and unfair acts and practices under the Consumer Financial Protection Act of 2010 (CFPA) remains a core focus, with 11 of the 15 complaints it filed last year alleging such violations.

Earlier this month, the CFPB filed another lawsuit alleging unfair and deceptive acts or practices in violation of the CFPA. At the dawn of a new year and a new Administration, this litigation may be the proverbial canary in the coalmine for others in the financial services industry. As the case proceeds and briefing is filed, the tone and focus of the new Administration may be brought to light.

In a Client Advisory, our Financial Services Litigation Team examines the latest effort by the CFPB to crack down on deceptive and unfair acts and practices.

CFPB Changes Tack on For-Cause Removal Provision

A&B ABstract: In a reversal of its previous position on the issue, the CFPB publicly asserted last month in two separate venues that the for-cause removal provision of the Consumer Financial Protection Act is unconstitutional.

On September 17, 2019, CFPB Director Kathleen Kraninger sent two letters (the “Letters”) to Speaker of the House Nancy Pelosi and Senate Majority Leader Mitch McConnell.  In the Letters, Director Kraninger explained that the CFPB had about‑faced in its position on the constitutionality of what is known as the for-cause removal provision of the Consumer Financial Protection Act (“CFPA”).  This provision permits the President to remove the Director of the CFPB, but only for cause.  Previously, the CFPB defended this provision’s constitutionality.  The CFPB now asserts that the provision is unconstitutional.  Further, the CFPB has asserted this new position in a brief filed before the Supreme Court in response to a petition for certiorari filed in CFPB v. Seila Law, No. 19-7 (S. Ct.) (filed September 17, 2019) (the “Seila Law brief”).

CFPB v. Seila Law

In Seila Law, the Seila Law firm refused a CFPB civil investigative demand (“CID”).  Seila Law asked the CFPB to set aside the demand under 12 U.S.C. § 5562(f) and 12 C.F.R. § 1080.6(e).  The Director of the CFPB denied the request, and Seila Law submitted partial responses, reiterated its objections, and declined to provide further information or documents.  The CFPB filed a petition to enforce the CID in federal district court and prevailed.  Seila law appealed to the Ninth Circuit, which affirmed based primarily on the majority opinion from the D.C. Circuit en banc decision PHH Corp. v. CFPB, and then Seila Law filed its petition for certiorari.  On September 17, 2019, the DOJ filed the Seila Law brief on behalf of the CFPB.

Various Positions Taken in Seila Law

In the Letters, Kraninger summarized the arguments made in the Seila Law brief and explained that she has “directed the Bureau’s attorneys to refrain from defending the for-cause removal provision in the lower courts.”  Given this major concession regarding the constitutionality of the CFPB’s structure, it is unclear whether parties subject to CFPB investigation may successfully resist CFPB authority.

The CFPB has taken the position that “a Supreme Court decision holding that the for-cause removal provision is unconstitutional should not affect the Bureau’s ability to carry out its important mission [of consumer protection,” because “if the Court holds the for-cause removal provision unconstitutional, the CFPA should remain ‘fully operative’ and the Bureau would ‘continue to function as before, just with a Direct who ‘may be removed at will by the President.’”  See Letters (quoting Free Enterprise Fund v. Public Co. Accounting Oversight Bd., 561 U.S. 477, 508 (2010)).  As a result, even if the Supreme Court held that the for-cause removal provision was unconstitutional, Seila Law (and others) would still be required to respond to CFPB CIDs.

Others, however, have taken the position that if the provision is unconstitutional, then the CFPB’s authority is severely diminished.  For example, the State of Texas’s amicus brief in Seila Law took the position that the for-cause removal provision renders the CFPB unconstitutional; as a result, there is no obligation for Seila Law to answer the CFPB’s CID.  See Texas Amicus Br. at 16.

Takeaway

Despite the CFPB’s reversed position, it remains unclear whether the for-cause removal provision is unconstitutional, and if so, what affect that has on the CFPB’s authority.  For now, we will be monitoring the case for developments, including to see if the Supreme Court will take the question.