CURRENT MONTH (December 2019)
Banking Law
Banking Regulators Release Statement on Use of Alternative Data in Credit Underwriting
By Eric Mogilnicki and Sam Adriance, Covington & Burling LLP
On December 3, 2019, the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, and the National Credit Union Administration (collectively, the “Regulators”) released a joint statement on the use of alternative data in credit underwriting.
The statement highlights the potential benefits of using alternative data in credit decisions, such as expanded access to credit for consumers without traditional credit histories. The statement focuses in particular on the usefulness of cash flow data to evaluate creditworthiness, explaining that such data is: (1) likely to be accurate because it is specific to the consumer and “derived from reliable sources”; (2) relatively simple to disclose and obtain express permission from consumers to use; and (3) a direct indicator of a consumer’s finances, meaning it “may present lower risks than other data.”
The Regulators also note the consumer protection risks associated with the use of alternative data, and that such use should be thoroughly evaluated by a “well-designed compliance management program.” Finally, the statement notes that “[f]irms may choose to consult with appropriate regulators when planning for the use of alternative data.”
CFPB Proposes Revisions to the Remittance Rule
By Eric Mogilnicki and Sam Adriance, Covington & Burling LLP
On December 3, 2019, the CFPB released a Notice of Proposed Rulemaking (the “NPRM”) proposing changes to the Remittance Rule, which requires that certain businesses that provide remittance transfers make fee and exchange rate disclosures to consumers.
The NPRM proposes two principal changes to the Rule:
- Expansion of Permissible Estimates. The current Rule temporarily permits some banks and credit unions to estimate fees and exchange rates—rather than providing exact amounts—where they “are unable to know, for reasons beyond their control, the amount of currency that will be made available to the designated recipient.” This temporary exception is currently scheduled to expire in July 2020. The NPRM proposes to create permanent exceptions that would allow these institutions to provide estimates where it would be “economically infeasible” to provide exact amounts.
- Expansion of Safe Harbor. The Remittance Rule does not apply to businesses that do not offer remittance transfers “in the normal course of business.” The NPRM proposes to extend that safe harbor to all companies making 500 or fewer transfers annually in the current and prior calendar years.
Comments on the NPRM are due on January 21, 2020.
Consumer Finance
Rotkiske v. Klemm: The FDCP’s One-Year Limitations Period Runs From The Date Of The Alleged Violation, Not Discovery
By Alan Ritchie, Pilgrim Christakis LLP
On December 10, 2019, the U.S. Supreme Court decided Rotkiske v. Klemm, holding that the one-year statute of limitations for the Fair Debt Collection Practices Act (“FDCPA”) begins to run when the alleged FDCPA violation occurs, not when the violation is discovered—absent the application of an equitable tolling doctrine. The decision resolves a split between the Third Circuit and the Fourth and Ninth Circuits.
Klemm & Associates filed a collection suit against Rotkiski and attempted service at an address where Rotkiske no longer resided. An individual other than Rotkiski accepted service and Klemm obtained a default judgment in 2009. Rotkiski claims that he did not learn of the default judgment until 2014, when his application for a mortgage was denied. In 2015, more than six years after the default judgment was entered, but less than one year after Rotkiske purportedly learned of the judgment, Rotkiske filed suit against Klemm alleging it violated the FDCPA. Klemm moved to dismiss the action as untimely under the FDCPA’s one-year statute of limitations. Rotkiske argued that the “discovery rule” should apply to delay the beginning of the limitations period until the date he knew or should have known of the alleged FDCPA violation. The district court rejected Rotkiske’s argument and dismissed the action as time-barred. An en banc Third Circuit affirmed.
In an 8 to 1 decision, the Supreme Court affirmed, holding that the text of the FDCPA’s statute of limitations is unambiguous and starts the limitations period on the date the alleged FDCPA violation actually occurred. The Supreme Court also held that the general “discovery rule” does not apply to the FDCPA’s limitations period because Congress did not expressly include a discovery provision in the statute. The Supreme Court declined to address the question of whether the FDCPA’s limitations period is subject to tolling under a fraud-based equitable tolling doctrine because Rotkiske failed to preserve this issue on appeal. Thus, while the Rotkiske decision conclusively bars the application of the discovery rule to the FDCPA’s one-year statute of limitations, it leaves the door open for the application of a fraud-based equitable tolling doctrine.
9th Circuit Holds Creditor Has Burden of Establishing a Permissible Purpose for Obtaining Credit Report
By Marielise Fraioli, Pilgrim Christakis LLP
On December 11, 2019 the U.S. Court of Appeals for the Ninth Circuit denied defendant’s petition for rehearing in Nayab v. Capital One, standing by its split panel decision reviving a putative class action Fair Credit Reporting Act (“FCRA”) claim that was previously dismissed for lack of standing and failure to state a claim.
The Ninth Circuit, in a case of first impression in that circuit, found that where a consumer alleged defendant had violated the FCRA by obtaining her credit report without her consent and not for a permissible purpose under the Act, she had alleged a concrete harm sufficient to confer Article III standing. In doing so, the court reasoned that because the FCRA “prohibits obtaining a credit report for a purpose not otherwise authorized” this protects a “consumer’s substantive privacy interest” and violation of this interest is sufficient to confer standing.
Finding the plaintiff had standing to proceed, the court then turned to whether the consumer must “plead the third-party’s actual unauthorized purpose in obtaining the credit report to survive a motion to dismiss.” The court answered “no,” finding plaintiff’s complaint, silent as to defendant’s purpose for accessing her credit, was sufficiently pleaded because it gave “rise to a reasonable inference that the defendant obtained” her credit in violation of §1681b(f)(1). And so, the Ninth Circuit shifted the burden away from plaintiff to plead defendant’s unauthorized purpose, instead placing the onus on the defendant to plead that it had an authorized purpose when it acquired plaintiff’s credit report.
Bureau Releases Special Consumer Reporting Edition of Supervisory Highlights
By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP
On December 9, 2019, the Bureau released a special edition of its Supervisory Highlights focusing on consumer reporting issues. The report describes a number of the Bureau’s supervisory observations made during recent examinations of furnishers and consumer reporting agencies (“CRAs”).
With respect to furnishers, the report notes that some furnishers, including auto loan, debt collection, deposit account, and mortgage furnishers, have not adopted written policies and procedures regarding the accuracy and integrity of consumer credit information that meet the requirements of the Fair Credit Reporting Act (the “FCRA”) and Regulation V. In addition, the report describes recent examples where furnishers reported information with actual knowledge of errors, failed to correct and update incorrect information previously reported, and failed to respond appropriately to accuracy-related disputes from consumers, among other issues.
With respect to CRAs, the report noted that one or more nationwide specialty CRAs had not followed reasonable procedures to assure maximum possible accuracy. CFPB examiners also found weaknesses in at least one CRA’s procedures to limit the furnishing of consumer reports to permissible purposes, and to block the reporting of information resulting from identity theft, among other issues.
Director Kraninger Marks First Year at the CFPB
By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP
Tuesday, December 10, 2019, marked the close of CFPB Director Kathleen Kraninger’s first year as CFPB Director. To commemorate the occasion, the Director released a statement in which she commended the Bureau’s employees, and looked forward to the Bureau’s continued work over the remainder of her five-year term.
Accompanying Director Kraninger’s statement is a lengthy list of accomplishments over the past year, grouped in the following categories: (i) providing clear rules of the road through rulemaking, (ii) creating a culture of compliance, (iii) enforcing the law against bad actors, (iv) educating and empowering consumers to make better informed financial decision, (v) enhanced interagency coordination, and (vi) promoting a more inclusive, effective, and efficient organization.
PayPal Files Suit Challenging Bureau’s Prepaid Rule
By Eric Mogilnicki and Cody Gaffney, Covington & Burling LLP
On December 11, 2019, PayPal, Inc. filed a lawsuit in the U.S. District Court for the District of Columbia challenging the Bureau’s Prepaid Rule (the “Rule”) on administrative and constitutional grounds. The Rule, which was implemented in April 2019, imposes disclosure requirements with respect to general purpose reloadable cards (“GPR cards” or “prepaid cards”). PayPal’s complaint alleges that the application of the Rule’s required disclosures to digital wallet products is inappropriate and has caused confusion among PayPal’s customers.
In its suit, PayPal alleges that the Rule exceeds the Bureau’s statutory authority under the Electronic Fund Transfer Act and Truth in Lending Act, and that the Rule is arbitrary and capricious in failing to consider the unique characteristics of digital wallets, and to appropriately weigh the burdens of the Rule against its benefits. Finally, PayPal alleges that the Rule violates the First Amendment by requiring PayPal to make misleading and inapplicable disclosures. PayPal seeks declaratory and injunctive relief, as well as litigation costs and attorney’s fees.
