Consumer Compliance Outlook: Third Issue 2022

News from Washington: Regulatory Updates

The Consumer Financial Protection Bureau (Bureau) will issue the final implementing regulations for §1071 of the Dodd‒Frank Act (DFA) by March 31, 2023.

Section 1071 of the DFA directed the Bureau to issue implementing regulations under the Equal Credit Opportunity Act (ECOA) for financial institutions to collect and report data on applications for credit for women-owned, minority-owned, and small businesses. In 2019, when the rulemaking had not yet been initiated, community groups filed a lawsuit to compel the Bureau to issue the regulations. California Reinvestment Coalition v. CFPB (N.D. Cal. 2019). In response to the lawsuit, the Bureau published a proposed rule in the Federal Register in October 2021 to implement §1071. On July 11, 2022, the Bureau entered into a court-approved stipulation with the community group plaintiffs to issue a final rule by March 31, 2023. In the October 2021 rulemaking, the Bureau proposed a mandatory compliance date of 18 months after the date the final rule is published in the Federal Register.

The Bureau issues Advisory Opinion on permissible purposes for furnishing, using, and obtaining consumer reports under the Fair Credit Reporting Act (FCRA).

On July 12, 2022, the Bureau published an advisory opinion in the Federal Register to clarify the legal requirements under the FCRA for using and providing a consumer report.¹ Under §604 of the FCRA (15 U.S.C. §1681b), a consumer reporting agency (CRA) may only provide a consumer report to someone with a permissible purpose, as defined in the FCRA. The Advisory Opinion discusses several circumstances of concern:

A CRA’s use of insufficient procedures to match information about a consumer to the actual consumer, which can result in a CRA providing a report to entities without a permissible purpose.
The use of “possible matches,” where the name of someone in a record is listed in a consumer report as a possible match for the person for whom the consumer report was requested, does not provide a CRA “reason to believe” the information it provides pertains to the consumer and can result in CRAs providing consumer information to users who lack a permissible purpose. This includes providing consumer reports of multiple people as “possible matches” without taking steps to identify the individual subject to the request.

The Advisory Opinion clarifies that the “permissible purposes” for obtaining a consumer report in the FCRA only apply to the consumer for whom the CRA received a request and that a CRA’s use of disclaimers about insufficient matching procedures does not cure a permissible purpose violation. A CRA must have reason to believe that the user requesting a consumer report has a permissible purpose and that all of the information it provided in the consumer report relates to the consumer for whom it received the request. In addition, users of credit reports must ensure that they do not violate the FCRA by using a credit report when they lack a permissible purpose for doing so. The Advisory Opinion also discusses potential criminal liability under §619 of the FCRA (15 U.S.C. §1681q) for knowingly or willfully obtaining information on a consumer from a CRA under false pretenses and under §620 of the FCRA (15 U.S.C. §1681r) for any officer or employee of a CRA who knowingly and willfully provides a person’s information to an unauthorized person.

The Bureau issues its spring 2022 regulatory agenda.

On April 1, 2022, the Bureau released its spring 2022 regulatory agenda, as part of the spring 2022 Unified Agenda of Federal Regulatory and Deregulatory Actions. The Bureau indicated the agenda covers the regulatory matters it reasonably anticipates having under consideration from June 1, 2022, to May 31, 2023. The agenda includes:

Consumer Access to Financial Records. The Bureau is working on a rulemaking to implement §1033 of the Dodd‒Frank Act, concerning consumers’ rights to access their financial records. The Bureau has conducted preliminary work on this rulemaking for several years, including issuing a request for information (RFI) in 2016, publishing consumer protection principles and a summary of comments from the 2016 RFI that informed these principles in 2017, holding a symposium on the issues related to this rulemaking in February 2020, and publishing an advanced notice of proposed rulemaking in November 2020. The Bureau expects to release materials in advance of convening a panel under the Small Business Regulatory Enforcement Fairness Act in late 2022.
Automated Valuation Models (AVMs) under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). The Bureau is working with the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the National Credit Union Administration (NCUA), and the Federal Housing Finance Agency to develop regulations to implement the FIRREA amendments in the Dodd‒Frank Act regarding AVMs. The agencies expect to issue a rulemaking proposal in late 2022.
Property Assessed Clean Energy (PACE) Financing. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 requires the Bureau to issue regulations under the Truth in Lending Act to apply ability-to-repay requirements to residential PACE loans. Residential PACE loans are generally financing that results in a tax assessment on a consumer’s real property and covers the costs of certain energy efficient and environmentally focused home improvements. The Bureau expects to issue a notice of proposed rulemaking by May 2023.
Small Business Lending Data Collection Under the ECOA. The Bureau indicated a final rule is the next stage in the rulemaking process. As discussed earlier, since the agenda was issued, the Bureau agreed to issue the final rule by March 31, 2023.
Adverse Information in Cases of Human Trafficking Under the Fair Credit Reporting Act (FCRA). The Bureau issued a final rule on June 24, 2022, to amend Regulation V to implement a FCRA requirement that assists victims of human trafficking who have adverse information on their consumer reports as a result of the trafficking.

The Board, the FDIC, and the OCC issue host state loan-to-deposit ratios.

On June 28, 2022, the Board, the FDIC, and the OCC issued the host state loan-to-deposit ratios that the agencies use in evaluating compliance with §109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Congress enacted §109 to ensure that an interstate branch would not take deposits from a community without the bank reasonably helping to meet the credit needs of that community. Accordingly, §109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Additionally, branches of banks controlled by out-of-state bank holding companies are prohibited from operating primarily for the purpose of deposit production.

The Bureau issues an advance notice of proposed rulemaking (ANPR) for information about credit card late fees.

On June 29, the Bureau published an ANPR in the Federal Register to solicit information about credit card late fees and late payments. Under the Credit Card Accountability Responsibility and Disclosure Act of 2009, credit card late fees must be “reasonable and proportional” to the card issuer’s costs for a late payment. Issuers must document their costs to show a fee is reasonable and proportionate or use the inflation-adjusted safe harbor in the regulation (currently $30 for the first late payment and $41 for other late payments made within six billing cycles of the initial late payment). The Bureau is soliciting information about late fees to determine whether it should revisit the safe harbor amounts, focusing on the following issues:

the factors card issuers use to set late fees
card issuers’ costs and losses from late payments
deterrent effects of late fees
cardholders’ late payment behavior methods card issuers use to facilitate or encourage timely payments
card issuers’ use of the late fee safe harbor provisions in Regulation Z, and
card issuers’ revenue and expenses related to their domestic consumer credit card operations

The comment period closed on August 1, 2022.

The Federal Financial Institutions Examination Council (FFIEC) releases 2021 data under the Home Mortgage Disclosure Act (HMDA).

On June 16, 2022, the FFIEC released HMDA data for 2021 from 4,338 HMDA filers, including these summary statistics:

The number of filers declined by about 3.1 percent from 4,475 in 2020 to 4,338 in 2021.
There were 23.3 million home loan applications reported, of which 21.1 million were closed-end, and 1.8 million were open-end, with an additional 350,000 loans that did not indicate if they were closed end or open end.
Nondepository, independent mortgage companies accounted for 63.9 percent of first-lien, one- to four-family, site-built, owner-occupied home-purchase loans, compared with 60.7 percent in 2020.
The share of first-lien, one- to four-family, site-built, owner-occupied closed-end home purchase loans for Black or African American borrowers rose from 7.3 percent in 2020 to 7.9 percent in 2021, the share made to Hispanic borrowers increased slightly from 9.1 percent to 9.2 percent, and those made to Asian borrowers increased from 5.5 percent to 7.1 percent.
In 2021, Black or African American and Hispanic applicants experienced denial rates for first-lien, one- to four-family, site-built, owner-occupied conventional, closed-end home purchase loans of 15.7 percent and 9.8 percent, respectively, while the denial rates for Asian and non-Hispanic applicants were 7.5 percent and 5.6 percent, respectively.

The Bureau issues its annual report on consumer complaints of servicemembers for 2021.

Section 1013(d) of the Dodd‒Frank Act requires the Bureau to monitor complaints of servicemembers and their families. In response, the Bureau annually publishes a report analyzing the complaints it has received from servicemembers and their families. On June 13, 2022, the Bureau issued its 2021 report. The report highlighted the following issues:

Credit reporting: Servicemembers submitted more than 17,000 credit or consumer reporting complaints, the top topic for complaints.
Investigations of national consumer reporting agencies: Credit reporting companies were not responsive to servicemembers’ requests for investigations. Complaints indicated that investigations took too long and failed to correct errors on their credit reports. Servicemembers reported that they feared that inaccurate medical billing information on their credit reports could cause harm to their careers.
Medical billing errors and inaccuracies on credit reports: Servicemembers experienced debt collection and credit reporting activity for unpaid medical bills. In 2021, more than half of medical debt collection complaints from servicemembers were about debts the individuals reported they did not owe. Many complaints involved communication issues between private health-care providers and TRICARE, the health insurance program for active-duty military.

To address these concerns, the report includes the following recommendations:

Medical providers and third-party billing companies should have adequate systems in place to serve servicemembers, veterans, and military families enrolled in TRICARE and the Veterans Choice Program:Complaints suggest that billing issues often occur when providers or third-party billing companies fail to work with TRICARE or the Veterans Choice Program to get paid for servicemembers’ care.
Medical providers, as well as nationwide credit reporting companies, should consider emulating recent changes by the Department of Veterans Affairs:Veterans Affairs recently implemented a new rule that includes requirements to exhaust all other collection efforts and to review patients’ ability to repay before reporting a medical debt as unpaid. Delayed reporting of servicemembers’ allegedly unpaid medical bills to credit reporting companies for a period of time can afford servicemembers an opportunity to address inaccuracies.

Bureau issues guidance on adverse action notice (AAN) requirements for credit decisions based on complex algorithms.

On May 26, 2022, the Bureau issued Circular 2022-03 to clarify the AAN requirements when a creditor uses a complex algorithm in its credit decision.² Some creditors rely on complex algorithms in making credit decisions. When adverse action is taken based on the algorithm, the specific reason for taking adverse action may not always be clear. Circular 2022-03 clarifies that the “adverse action notice requirements of ECOA and Regulation B, however, apply equally to all credit decisions, regardless of the technology used to make them. Thus, ECOA and Regulation B do not permit creditors to use complex algorithms when doing so means they cannot provide the specific and accurate reasons for adverse actions.” (Emphasis added). The circular notes the Official Staff Commentary requires that “[t]he specific reasons disclosed … must relate to and accurately describe the factors actually considered or scored by a creditor.” Comment 9(b)(1)-2. The Commentary also provides that when a credit scoring system is used, “no factor that was a principal reason for adverse action may be excluded from disclosure. The creditor must disclose the actual reasons for denial (for example, “age of automobile”) even if the relationship of that factor to predicting creditworthiness may not be clear to the applicant.” See Comment 9(b)(2)-4. The circular concludes that “a creditor’s lack of understanding of its own methods is therefore not a cognizable defense against liability for violating ECOA and Regulation B’s requirements.”

Endnotes

¹ The Bureau’s Advisory Opinions are “interpretive rules under the Administrative Procedure Act that respond to a specific need for clarity on a statutory or regulatory interpretive quest.”

² The Bureau issues Consumer Financial Protection Circulars for parties with enforcement authority for federal consumer financial laws for which the Bureau has rulemaking authority “to promote consistency in approach across the various enforcement agencies.”