Financial Services Law

CFPB Issues Semiannual Report, State-Level Snapshot of Complaints

By Charles E. Washburn Jr., Partner, Financial Services Group | Richard Gottlieb, Partner, Financial Services Group

Two new Consumer Financial Protection Bureau (CFPB) reports provide important insights into the CFPB’s and state regulators’ latest activities and enforcement targets.

What happened

The CFPB’s 11th semiannual report to the president and Congress reveals that supervisory actions—covering Oct. 1, 2016, through March 31, 2017—resulted in providers of covered consumer financial products paying more than $6.2 million in redress to more than 16,549 consumers. During the same time frame, the CFPB announced orders through enforcement actions that totaled approximately $200 million in relief for consumers plus $43 million in civil money penalties.

The CFPB ties these actions to alleged violations of various consumer protection laws as well as the Dodd-Frank Wall Street Reform and Consumer Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices, ranging in targets from a prepaid card service that suffered a breakdown to reverse mortgage companies that allegedly used deceptive advertising to credit reporting agencies that in the CFPB’s view deceived consumers about the usefulness and cost of credit scores sold to consumers.

On the regulatory front, the CFPB notes that it issued final rules on Regulation E (addressing prepaid accounts under the Electronic Fund Transfer Act and electronic fund transfers) as well as Fair Credit Reporting Act disclosures.

What the CFPB characterizes as “listening to consumers” (that is, the CFPB complaint portal) remains a top priority for the CFPB, which had received 748,400 complaints from consumers as of March 31, 2017, with about 146,400 narratives. The monthly consumer complaint reports over the last six months have focused on prepaid cards, debt collection, mortgage, credit reporting and credit cards, the 178-page report stated. Although the industry has asserted that many complaints do not involve actual violations, the complaints received through the portal continue to be the focus of the CFPB’s regulatory efforts.

The CFPB report also noted then-pending efforts with regard to rules for payday loans, auto title loans, installment loans, arbitration agreements and overdraft programs. (Since the period covered by the report, the CFPB has of course taken action on arbitration clauses.)

For the June edition of its monthly complaint report, the CFPB elected to provide a state-level snapshot of consumer complaints. For each state and Washington, D.C., the agency detailed total complaints received, changes in the volume of complaints submitted, the products and services generating the most complaints, and company response rates, further highlighting complaints from servicemembers and older Americans.

Take California, for example. Since 2011, the CFPB claims to have processed 159,158 complaints from the state (7,974 from servicemembers and 14,933 from older consumers), with an increase of 7 percent from 2015 to 2016 in the number of complaints. While the products and services complained about in the state track the national trends, Californians have increased their gripes about student loans, credit reporting and prepaid services over the last quarter (up 150 percent, 32 percent and 27 percent, respectively), while complaints about bank accounts or services and payday loans have dropped 16 percent and 14 percent, respectively.

On a nationwide basis, the CFPB has received more than 1,218,600 complaints as of June 1, 2017 with a rise in overall complaint volume of 7 percent between 2015 and 2016 (from 271,600 to 291,400). Debt collection and mortgage complaints account for half of the total complaints submitted—with 316,810 and 272,153 complaints, respectively—followed by credit reporting, credit cards, and bank accounts or services.

On the good news side, covered companies provided a timely response to fully 97 percent of the complaints, said the CFPB, responding to consumers within 15 or fewer days of their complaint. While good news, this response rate has remained consistent since the CFPB began accepting complaints in July 2011. Roughly half (52 percent) of the consumers who submit complaints elect to provide a narrative, an option the CFPB began offering in July 2015.

To read the semiannual report, click here.

To read the monthly complaint report, click here.

Why it matters

Both reports provide insight into the CFPB’s activities and where the CFPB focuses its efforts. In a statement, CFPB Director Richard Cordray noted that consumer complaints drive its work, “help[ing] us prioritize our work to protect others against similar problems,” he explained.

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Payday Lenders’ Operation Choke Point Challenge Survives Dismissal

By John W. McGuinness, Partner, Financial Services Group

Payday lenders can move forward with their suit against federal regulators challenging the controversial Operation Choke Point, a Washington, D.C., federal court judge has ruled.

What happened

A payday lender alleged that the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency violated its right to due process under the Fifth Amendment of the U.S. Constitution.

The plaintiffs alleged, among other things, that the federal banking regulators participated in a campaign to force banks to terminate their business relationships with payday lenders. As part of Operation Choke Point, the defendants engaged in pressure tactics such as threatening banks with painful examinations by supervisors or enforcement actions, the plaintiffs told the court.

The payday lender—now joined by other members of the industry—filed a motion for preliminary injunction to halt the financial regulators from harming their reputation, applying informal pressure to banks to encourage them to terminate business relationships with the plaintiffs, seeking to deny the plaintiffs’ access to financial services and attempting to deprive the plaintiffs of their ability to pursue their line of business.

But U.S. District Court Judge Gladys Kessler denied the motion in February. According to the court, the plaintiffs’ evidence was too speculative and conclusory to justify an injunction. “Plaintiffs’ submissions do not establish a likelihood of success on the merits—or even a ‘serious legal question’ on the merits,” the court held. “[T]he fact that some discrete number of banks refuse to transact with [the plaintiffs] tells us almost nothing about how many banks remain willing to transact with payday lenders.”

Hoping for a similar victory, the federal regulators moved to dismiss the new payday lenders that were added to the suit, for lack of subject matter jurisdiction and failure to state a claim, and moved for summary judgment against the plaintiffs. In their motion to dismiss against the new plaintiffs, the defendants argued that the plaintiffs’ allegations regarding the potential for future loss of access to the banking system and a future preclusion from the payday lending industry are not a “real and immediate threat of injury” and, therefore, those plaintiffs lacked standing. Judge Kessler denied the motion, finding that with just one exception, all the new plaintiffs had standing. Moreover, the court held that the plaintiffs stated a claim upon which relief could be granted and that the evidence was insufficient to grant summary judgment to the defendants.

The plaintiffs’ allegations of future harm are not too uncertain to be implausible, the court said, noting that they have already lost bank accounts and that the plaintiffs have alleged sufficient facts to plausibly tie these losses to the actions of the defendants under the auspices of Operation Choke Point. “If those losses continue, it is certainly plausible that the [plaintiffs] will effectively be cut off from the banking system and/or put out of business,” the court held. “That is sufficient to state a claim.”

Rejecting the regulators’ argument that the statements identified by the defendants are not stigmatizing, or directed to individual plaintiffs, and, therefore, could not demonstrate a due process violation, the court held it was too early in the litigation for the court to resolve this issue.

The plaintiffs’ allegations contained a variety of statements, “some that can be labeled stigmatizing, and others that can be labeled as mere pressure; some that were made to regulated banks, and some that were made wholly within the agency; some that appear to be about individual banks, and others that apply generally to the payday lending industry as a whole,” Judge Kessler explained. “Ultimately, the Court finds that the totality of the statements presented make it plausible that [the defendants] stigmatized [the plaintiffs], resulting in a deprivation of a liberty interest.”

Why the different results in the motion for a preliminary injunction and the motion to dismiss? “[B]ecause of the different standards employed when reviewing a motion for preliminary injunction—‘likelihood of success on the merits’—and when reviewing a motion to dismiss—‘plausibility,’” the court explained. “The plausibility requirement is not a probability requirement. … Because [the plaintiffs’] allegations are sufficiently plausible, though just barely, [the defendants’] Motion to Dismiss must be denied.”

One of the new plaintiffs did not survive the dispositive motion, however. As it was not actually a payday lender, the court dismissed it from the suit for its failure to state a claim.

Turning to the summary judgment motion against the plaintiffs, the defendants argued that the plaintiffs cannot show that they have suffered a deprivation of liberty without due process. Judge Kessler rejected this argument, holding that the defendants’ evidence—“[h]owever compelling”—was insufficient.

“The crux of Plaintiffs’ argument is that if Operation Chokepoint continues unabated, they will be effectively cut off from the banking system or broadly precluded from the payday lending industry in the future,” the court said. “The fact that [the defendants] can definitely prove that those harms have yet to befall Plaintiffs does not refute this claim. Without knowing more fully Plaintiffs’ past ability to access the banking system, how that ability has changed, and whether those changes were the result of [the defendants’] actions, the Court is unable to definitely say that Plaintiffs will not be effectively cut off from the banking system. Similarly, the undisputed material facts identified by [the defendants] do not enable the Court to definitely conclude that Plaintiffs will not be put out of business by continued regulatory pressure from [the defendants].”

An alternative argument that some of the plaintiffs have not been broadly precluded from pursuing their chosen line of business because they were able to pursue other lines of business “has no merit,” the court added. “These plaintiffs may well have other lines of business that they are able to pursue should [the defendants] force the closure of their payday lending operations. However, the Due Process Clause protects one’s right to pursue a livelihood of one’s choice.”

Or as Judge Kessler noted, “[I]t would be of little consolation to an attorney, driven from his practice by improper governmental stigma, that McDonald’s is still hiring.”

Because the court could not say as a matter of law that the plaintiffs have no right to relief, the motion for summary judgment was denied.

To read the memorandum opinion, click here.

Why it matters

In a victory for the payday lenders, the opinion allows the case to proceed into discovery. While the litigation will move forward, Judge Kessler has made no secret of the fact that the court does not believe the plaintiffs can prevail based on their current allegations, both in her denial of the injunction (holding that the payday lenders not only did not establish a likelihood of success on the merits, they also failed to demonstrate “even a ‘serious legal question’ on the merits”) and the denial of the motion to dismiss (characterizing the plaintiffs’ allegations as “just barely” sufficiently plausible to survive dismissal).

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Lawmaker Investigates Small-Business Fintech Lending

By Craig D. Miller, Partner, Financial Services Transactions

Expressing concern about potential discrimination, one federal lawmaker has decided to take a closer look at small-business financial technology lending, sending letters to several fintechs with a series of questions.

What happened

Are fintech lenders discriminating against small businesses? Worried they may be, Rep. Emanuel Cleaver II (D-Missouri) sent letters to five companies, asking a series of questions about their company profile, how they protect borrowers from discrimination, and their approach to transparency and sunshine in lending.

“While FinTech lending can create the opportunity for more small business credit, I’m concerned that some FinTech lenders may be trapping small business owners in cycles of debt or charging higher rates to entrepreneurs of color,” he wrote. Rep. Cleaver expressed particular interest in payday loans for small businesses, a product known as “merchant cash advance,” where loans are provided to small businesses in exchange for a percentage of their future credit card sales receivables.

“The payday loan industry has often targeted communities of color with high rates and fees, and Congress needs further information that small business payday lending is operating with transparency and free of discrimination,” the legislator wrote. “Current law does not provide certain protections for small business loans, compared to other consumer laws.”

Unlike consumers who use credit products, small business borrowers are typically not protected by the disclosure requirements of the Truth in Lending Act (TILA), for example, or subject to supervisory exams like those required for community banks and credit unions to evaluate a fintech’s compliance with the Equal Credit Opportunity Act.

To alleviate his concerns, Rep. Cleaver asked for details about each company’s profile, such as the products offered to small businesses, the overall origination on products marketed to small businesses and the median annual percentage rate (including fees), and whether the company offers a product that is repaid based on future credit card receivables.

Each recipient was asked to discuss its “typical approach to ensuring that people of color, women, and other protected classes are not subject to higher interest rates or denial rates, compared to similarly-situated borrowers,” as well as whether publicly available data is used to help proxy for race and ethnicity. What percentage of loans and advances are originated to borrowers and women of color, Rep. Cleaver wondered, and for 2016 originations, what was the typical rate charged to borrowers of color compared with the overall borrower population?

The lawmaker also queried the companies’ approach to transparency, with questions about whether disclosures similar to those mandated by TILA are provided to small business borrowers, if lending agreements require borrowers to resolve disputes through arbitration, and what the typical fee schedule is for small-business lending products. Finally, the letters asked if the fintech company typically pulls a consumer credit report when originating small-business loans and whether it furnishes credit information to credit reporting agencies upon loan repayment.

Rep. Cleaver requested a response no later than Aug. 10.

Why it matters

As fintech lending continues to expand with an assortment of different products and services, one can expect federal and state legislatures, lawmakers and government agencies to increase their focus on and oversight over these businesses. While Rep. Cleaver acknowledged the opportunities created by fintech for small businesses, he expressed concern that because small businesses do not have the same protections as consumers, they may be facing discrimination in the lending process. The lawmaker—who wrote to the Consumer Financial Protection Bureau (CFPB) earlier this year asking that it undertake its own examination of the industry—wondered if additional supervision and oversight may be necessary. “FinTech companies geared toward lending to small businesses by using certain biased algorithms for creditworthiness have the potential of charging disproportionately higher rates to minority-owned businesses,” Rep. Cleaver said in a statement about his letters. “It is therefore important to determine if minority-owned small businesses are being charged higher rates, or if they have been subject to predatory fees by these FinTech firms.”

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Pot-Friendly Credit Union Gets Second Chance at Master Account

By Craig D. Miller, Partner, Financial Services Transactions

A credit union seeking to provide banking services to marijuana-related businesses is flying high after the U.S. Court of Appeals, Tenth Circuit, reversed an order dismissing its suit requesting a master account at the Federal Reserve Bank of Kansas City.

What happened

Denver-based The Fourth Corner Credit Union, formed to help marijuana-related businesses (MRBs) in need of financial services, applied to the Federal Reserve Bank of Kansas City for a master account in order to have access to the Federal Reserve System’s services. But the Reserve Bank denied the application, despite the fact that Fourth Corner had been granted a license by the applicable Colorado regulator.

Fourth Corner responded with a lawsuit seeking a declaratory judgment that it was entitled to a master account and an injunction requiring the Reserve Bank to issue it one. The credit union alleged violations of its due process rights and the Administrative Procedure Act.

A district court threw out the suit, finding that it could not force the Reserve Bank to violate the Controlled Substances Act (CSA) by granting a master account that would be used to serve businesses illegal under federal law. Fourth Corner—which had already filed an amended complaint in which it promised to comply with all federal and state laws in order to obtain a master account—appealed.

The Tenth Circuit reversed, albeit with each member of the three-judge panel authoring a separate opinion. One judge voted to affirm the dismissal with prejudice, while a second wrote that the complaint should not have been dismissed because the dispute was not ripe for decision; the third believed dismissal was unwarranted. The upshot for the credit union: permission to replead its case.

“By remanding with instructions to dismiss the amended complaint without prejudice, our disposition effectuates the judgment of two panel members who would allow the Fourth Corner Credit Union to proceed with its claims,” the court explained in a per curiam opinion.

In the first of the three separate opinions, Judge Nancy Moritz said the district court should be affirmed. “By its own allegations, the Credit Union would use the court’s equitable relief to facilitate illegal activity,” she wrote. “If given a master account, the Credit Union ‘intends to provide banking services to compliant state licensed cannabis and hemp businesses.’ But even if these businesses are ‘compliant’ with Colorado law, their conduct plainly violates the CSA.”

Judge Moritz was not persuaded by the credit union’s amended complaint and affirmation at oral argument that it will not serve MRBs unless doing so is legal. “[T]he Credit Union’s equivocations don’t allay my concern that the equitable relief it seeks will facilitate illegal activity,” the judge said. “After setting aside the Credit Union’s non-committal, conclusory allegations, the amended complaint tells a clear story. The Credit Union ‘intends to provide banking services to compliant state licensed cannabis and hemp businesses, their employees, [and] industry vendors.’ The district court correctly declined to facilitate this illegality.”

In a second opinion, Judge Scott M. Matheson Jr. took the position that the court should dismiss the case on ripeness grounds. Fourth Corner sued after its application for a master account was denied. But instead of reapplying for an account to alleviate the Reserve Bank’s concern about MRBs, the credit union amended its complaint to allege it will only serve MRBs if doing so is legal.

“Assuming this allegation is true, as we must, it raises ripeness concerns because this case has become divorced from the factual backdrop that gave rise to the original dispute,” the judge wrote. “As the Reserve Bank points out, the new Credit Union—the Credit Union that excludes MRBs from its membership until serving them becomes legal—is a ‘fundamentally different[] entity’ than the one the Reserve Bank turned down.”

The amended complaint left the case no longer based on sufficiently developed facts, Judge Matheson argued. “In particular, the amended complaint does not and cannot tell us whether the Reserve Bank would grant a master account on the condition that the Credit Union will not serve MRBs unless doing so is legal. … If the Credit Union were to apply again based on its new ‘only if legal’ position, the Reserve Bank may issue a master account, in which case there would be no dispute and a decision here would be only advisory. Or it might reject a master account for some other reason, in which case there may be a dispute, though different from the one that prompted this litigation. We cannot know what the facts would be, making this case premature.”

To remedy this snafu, the judge voted to dismiss the appeal as premature and remand to the district court to vacate the judgment and dismiss without prejudice.

For the second vote to vacate and dismiss without prejudice—effectively keeping the case alive—Judge Robert E. Bacharach took a different approach, writing that the district court should have presumed that Fourth Corner would follow the law, as it indicated in its amended complaint that it would obey a ruling that servicing MRBs is illegal.

Documenting the amended complaint’s multiple commitments from the credit union to obey the law, the judge said a district court could freely decide whether Fourth Corner actually intended to obey federal law at a bench trial but was not free at the motion to dismiss stage to evaluate the validity of the credit union’s assertion. “At this stage, the district court must accept as true all of Fourth Corner’s well-pleaded factual allegations and view them in the light most favorable to Fourth Corner,” he wrote. “The district court was not free to scuttle these requirements.”

The judge also took issue with the Reserve Bank’s position that Section 342 of the Monetary Control Act of 1980 creates discretion on whether to issue a master account, writing that Section 248a(c)(2) “unambiguously” entitles Fourth Corner to a master account, ensuring universal access to certain bank services and providing uniform pricing for them.

To read the opinion in The Fourth Corner Credit Union v. Federal Reserve Bank of Kansas City, click here.

Why it matters

The case encapsulates the tug-of-war between conflicting federal and state laws with regard to marijuana and the uncomfortable position financial institutions are left in as they wait and see who will prevail. This uncertainty has largely resulted in marijuana-related businesses remaining “unbanked” throughout the United States. Although the Fourth Corner will get another shot at its lawsuit, the courts have made it clear that to successfully obtain a master account, the credit union will need to promise to abide by federal law—leaving it unable to serve marijuana-related businesses.

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