CURRENT MONTH (July 2023)
Federal Agencies Issue Joint Policy Statement for Commercial Real Estate Loan Workouts
By Taylor Bennington, McGlinchey Stafford PLLC
On June 29, 2023, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and National Credit Union Administration (the agencies) jointly issued a final policy statement on prudent commercial real estate (CRE) loan accommodations and workouts. The policy statement is substantially similar to a proposal issued last year and includes minor changes in response to comments. The policy statement updates and supersedes the previous guidance on commercial real estate loan workouts issued in 2009.
The new policy statement addresses supervisory expectations from the agencies with respect to a financial institution’s handling of CRE loan accommodations and workouts including (1) risk management, (2) loan classification, (3) regulatory reporting, and (4) accounting considerations.
Notably, the policy statement adds a section on short-term loan accommodations. An accommodation includes an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower who is experiencing a financial challenge. Short-term loan accommodations could be used as tools before a loan warrants a longer-term or more complex workout arrangement. The policy statement also reflects changes in U.S. generally accepted accounting principles (GAAP) since 2009 and provides three new examples of CRE loan workout arrangements.
The policy statement is applicable to all financial institutions supervised by the agencies and is inclusive of certain changes and explanations resulting from more than twenty unique comments from banking organizations, credit unions, and others.
FedNow®: A Payment Rail is Born
By Katherine Romano Schnack, McGlinchey Stafford, PLLC
The Federal Reserve launched its new real-time payments service, FedNow®, on July 20, 2023. This new instant payment rail settles consumer and business transactions through financial institutions’ Federal Reserve accounts. One stated goal of FedNow® since its earliest planning stages has been to make instant payments ubiquitous—accessible to everyone, everywhere in the United States. The Federal Reserve has made a concerted effort to include smaller financial institutions in FedNow® to reach this goal.
FedNow® payments are required to settle in real time or within seconds. Settlement must occur 24/7/365, which would be prohibitive for financial institutions that do not have the ability to settle transactions around the clock. To address this issue, financial institutions can use a correspondent bank or credit union as an intermediary to process the transactions. Service providers also have stepped in to enable financial institutions to participate in the FedNow® service. At launch, thirty-five financial institution participants, including settlement agents and liquidity providers, the U.S. Treasury Bureau of the Fiscal Service, and sixteen service providers were live on the FedNow® network. Service providers for FedNow® include some of the largest card payment processors in the U.S.
The use cases for FedNow® include all combinations of consumer and business payment transactions, including peer to peer (P2P), account to account (A2A), business to business (B2B), consumer to business (C2B), and business to consumer (B2C). Government and municipal payments are also expected through FedNow®, evidenced by the inclusion of the U.S. Treasury Bureau of the Fiscal Service as an active participant. Payments are irrevocable, posing challenges for managing the risk of unauthorized transactions. Fraud tools specific to FedNow® have been developed to help prevent, detect, and mitigate fraud. For example, a “Negative List” will help FedNow® participant financial institutions and service providers identify and block fraudulent actors. Transaction limits at the network and financial institution level are also primary fraud tools for FedNow®.
FedNow® transactions and participants will be subject to the new Subpart C to Regulation J (12 CFR Part 210), which incorporates the provisions of Uniform Commercial Code (UCC) Article 4A. The applicable UCC Article 4A is provided in Appendix A to the regulation. Regulation J provides that the Electronic Fund Transfer Act (EFTA) may also apply to a FedNow® transaction, and in the event of an inconsistency between the EFTA and Regulation J, the EFTA will prevail. In addition, the Federal Reserve has issued Operating Circular 8 for the FedNow® service to govern all participants. Information about FedNow® is available at FedNowExplorer.org.
CFPB Director Chopra Interviews
During the week of July 17, 2023, Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra agreed to interviews with a series of news outlets and provided his perspective on a range of topics. In the most detailed interview, with Law360, Chopra lauded the shift towards more consumer-friendly overdraft policies. “According to Chopra, some banks are even privately thanking the CFPB for turning up the heat on overdraft fees . . . viewing the agency’s efforts as a needed ‘catalyst’ for the industry to break out of what had been a ‘race to the bottom’ on fees.” In his interview with Reuters, Chopra emphasized the need for regulators to closely scrutinize bank mergers, a tone that Reuters reports “contrasts with that of the Treasury Secretary Janet Yellen and Acting Comptroller of the Currency Michael Hsu.” Speaking with Bloomberg, the Director argued that the reduction in the number of CFPB enforcement matters has dwindled by design, with the CFPB focusing on larger institutions.
Consumer Finance Law
CFPB High Court Case Set for Argument, and Republicans Submit Amicus Briefs
On July 14, 2023, the Supreme Court released its monthly argument calendar for October 2023, which set Consumer Financial Protection Bureau et al. v. Community Financial Services Association of America, Ltd. (“CFSA”) et al. for argument on Tuesday, October 3rd. As covered in prior months-in-brief, the Court will consider in CFSA whether the funding structure of the Bureau—drawing from the Federal Reserve System, rather than the annual appropriations process—is impermissible under the Appropriations Clause of the Constitution, and whether the Fifth Circuit was correct in invalidating the Bureau’s Payday Rule on that basis.
Following the submission of CFSA’s brief as respondents on July 3, a number of amicus curiae have submitted briefs in support of the position that the Bureau’s funding structure is unconstitutional. On July 10, a group of 132 Republican senators and congresspeople submitted a brief in support of CFSA and asking the Court to make the Bureau’s funding subject to congressional appropriations. A press release from the group highlights language in their brief describing the Bureau as “in an entirely different league” from other government agencies with insulated funding structures. Other notable support for CFSA’s position came from a July 7 submission from twenty-seven Republican state attorneys general, and a brief submitted on July 10 on behalf of former CFPB Acting Director Mick Mulvaney, who described his former workplace as “one of the most opaque, least transparent, and potentially most abusive agencies in the federal government.”
Bureau Files Amicus Brief on Housing Discrimination
On June 23, 2023, the CFPB submitted an amicus brief in Saint-Jean et al. v. Emigrant Mortgage Co. et al., a case pending before the U.S. Court of Appeals for the Second Circuit. The case arises from a 2016 jury verdict that found that the defendants violated the Equal Credit Opportunity Act (“ECOA”) by targeting Black and Hispanic borrowers and neighborhoods with predatory mortgage products. The jury initially declined to award damages to two plaintiffs in the case because they released claims against the defendants in a loan modification agreement. However, following a ruling by the trial court that the loan modification release was void for public policy reasons, the jury awarded compensatory damages to the two plaintiffs. On appeal, the defendants argued that the plaintiffs’ ECOA claims fell outside of the applicable statute of limitations, that the trial court provided erroneous jury instructions, and that the two plaintiffs originally denied damages should be subject to the loan modification release.
In its amicus brief, the CFPB weighed in on the validity of the loan modification release, arguing that “[t]he policies embodied in ECOA and federal consumer financial protection laws would be undermined by upholding a waiver of civil rights claims in a loan modification agreement related to mortgages.” The Bureau also argues that the trial court’s jury instructions were proper, and that the statute of limitations in the case was subject to equitable tolling. In a June 29 blog post discussing the amicus brief, CFPB general counsel Seth Frotman stated, “Congress’s strong commitment to prohibiting discrimination in the credit markets would be undermined if courts did not allow consumers to challenge harmful conduct in these circumstances.”
CFPB Report Details Increasing Fair Lending Scrutiny
On June 29, 2023, the CFPB issued its Fair Lending Annual Report to Congress, which described the Bureau’s fair lending activities throughout 2022. The Report covers the Bureau’s fair lending oversight efforts in its enforcement, supervision, rulemaking, guidance, stakeholder engagement, litigation, and interagency efforts. In describing the Bureau’s fair lending supervision efforts in 2022, the Report states that the Bureau focused on “mortgage origination and pricing, small business lending (including agricultural lending), policies and procedures regarding geographic and other exclusions in underwriting, and on the use of automated systems and models, sometimes marketed as artificial intelligence and machine learning models.” The Report highlighted the Bureau’s lone fair lending enforcement action in 2022; described an unspecified number of pending fair lending enforcement investigations in the areas of student lending, payday lending, credit cards, small business lending, and mortgage lending; and noted that the Bureau made five fair lending enforcement referrals to the Justice Department throughout the year. The Report also notes that the CFPB, FDIC, Federal Reserve Board, and NCUA collectively made twenty-three fair lending referrals to the Justice Department, a 91% increase compared to the number of referrals in 2020.
In the area of rulemaking, the Report described the Bureau’s efforts to promulgate a rule under section 1071 of the Dodd-Frank Act, which requires financial institutions to compile, maintain, and submit to the Bureau data on credit applications for women-owned, minority-owned, and small businesses. The Report also pointed to a recent interagency proposal regarding quality control standards for automated valuation models. The Report further highlighted the substantial volume of fair-lending-related guidance the Bureau promulgated in 2022, including a Consumer Financial Protection Circular on adverse action notification requirements, an advisory opinion under ECOA and its implementing Regulation B, an interpretive rule on the applicability of the Consumer Financial Protection Act’s “time or space” exception for digital marketing providers, various issues of the Bureau’s Supervisory Highlights, and numerous HMDA compliance resources.
In a section entitled “Looking Forward: The Future of Fair Lending,” the Report emphasizes the threats of discrimination posed by “[t]he ubiquity of advanced technologies throughout the consumer financial services marketplace,” noting that “[t]hough some technologies may be billed as new, the risks of predation and exclusion that they may pose are not.” The Report states that the “CFPB will remain vigilant against these risks and encourages innovation that follows the law, promotes competitive markets, and delivers long-term benefits to consumers and small businesses in the form of sustainable financial products and services.”
CFPB Director Chopra Delivers Remarks at CFPB Hearing on Medical Debt
On July 11, 2023, the CFPB held a hearing to discuss medical billing and collection practices. In his prepared remarks, CFPB Director Rohit Chopra linked mistakes or predatory practices in medical billing and collections—such as asking patients to pay a bill that should have been covered by insurance—to the significant amount of medical debt owed by consumers. Director Chopra explained that this medical debt not only places financial burdens on those consumers, but it may also lead to them delaying or declining needed medical care. He went on to highlight CFPB research showing that medical credit products often have less favorable terms than other general purpose credit products and, in particular, can often result in significant deferred interest.
The hearing came on the heels of an interagency Request for Information issued by the CFPB, Department of Treasury, and Department of Health and Human Services on July 7, asking for public input on medical credit cards, loans, and other financial products used to pay for health care. As highlighted by Director Chopra in his remarks, the CFPB is part of an “all-of-government effort” seeking to lower the burden of medical debt and the costs of healthcare.
CFPB Sues Snap Finance for “Lease-to-Own” Financing Practices
On July 19, 2023, the CFPB sued Snap Finance (“Snap”), a finance company that partners with thousands of merchants to offer point-of-sale, “lease-to-own” finance products, for engaging in allegedly illegal advertising and servicing activities. The Bureau’s complaint alleges, among other things, that Snap:
- Distributed to merchants deceptive advertising materials that obscured the true cost of credit.
- Obscured the terms and conditions of financing by using a tablet-based, rather than written, term disclosure system, through which merchants could sign and submit the financing agreement on consumers’ behalf without their review.
- Misrepresented that consumers could not terminate the agreement or return merchandise to the merchant.
- Engaged in illegal debt collection practices, including by “threatening to take actions against consumers that Snap . . . does not take in collections.”
The CFPB also alleges that Snap failed to make disclosures required by the Truth in Lending Act; conditioned the extension of credit on the consumer’s agreement to preauthorized fund transfers in violation of the Electronic Fund Transfer Act and Regulation E; and failed to adhere to the accuracy requirements the Fair Credit Reporting Act imposes on data furnishers. The complaint seeks consumer redress, injunctive relief, and civil money penalties.
CFPB and 11 States Sue Prehired for Deceptive Marketing and Debt Collection Practices
On July 13, 2023, the CFPB, ten state attorneys general, and the California Department of Financial Protection and Innovation filed a complaint against Prehired, LLC and affiliated companies in the U.S. Bankruptcy Court for the District of Delaware. The CFPB and its state co-plaintiffs allege that Prehired engaged in unfair and deceptive practices under the Consumer Financial Protection Act (“CFPA”), engaged in deceptive debt collection practices under the Fair Debt Collection Practices Act (“FDCPA”), and failed to make disclosures required by the Truth in Lending Act (“TILA”) and its implementing Regulation Z.
The complaint explains that Prehired, before going bankrupt, ran a for-profit online vocational training program for software sales representatives. In marketing that program, Prehired falsely claimed that graduates would go on to earn six-figure salaries. Moreover, Prehired offered financing for the program through income-share agreements that it falsely represented would not require payments unless and until students received a high-income job. Ultimately, Prehired students left the program without a meaningful improvement in their job prospects, and with significant debt, which Prehired aggressively pursued via affiliated debt collectors, including by suing consumers in Delaware, which in many instances was far from where the students lived and had attended online classes.
The complaint seeks permanent injunctive relief preventing the collection or sale of any outstanding student debts to Prehired or its affiliates, restitution to harmed students, disgorgement of Prehired’s profits from the program, and a civil penalty to be paid to the Bureau.
Senate Democrats Call for CFPB to Protect Consumers from AI Voice Cloning Scams
On July 6, 2023, Democratic Senators Sherrod Brown, Bob Menendez, Jack Reed, and Tina Smith issued a letter to CFPB Director Rohit Chopra regarding the emergence of artificial-intelligence-powered voice cloning technology and its potential use in financial scams. In the letter, the senators voice concerns regarding the “new, threatening dimension to [financial] scams” posed to consumers by voice cloning technology, which can be used to mimic voices of specific individuals. They also note that “financial institutions themselves may be vulnerable to breaches powered by artificially generated voice clips.” The senators call on the CFPB to “review the risks posed by this new technology as soon as practicable and take action under the CFPB’s existing authorities to protect consumers.”
En Banc Eleventh Circuit Holds Receipt of a Single Text Message Sufficient to Confer Article III Standing
By Alan Ritchie, Pilgrim Christakis LLP
On July 24, 2023, the Eleventh Circuit Court of Appeals sitting en banc unanimously held in Drazen v. Pinto that receipt of a single unwanted text message is sufficient to confer Article III standing. The district court had approved a Telephone Consumer Protection Act class action settlement over a class member’s objections. On appeal, a Circuit Court panel vacated the district court’s approval of class certification and settlement, holding that the class settlement definition did not meet Article III standing requirements because it included class members who received only one text message.
In reversing the panel’s decision on rehearing en banc, the Circuit Court unanimously held that receipt of a single unwanted text message is sufficient to confer Article III standing. The Circuit Court cited the Supreme Court’s decision in TransUnion LLC v. Ramirez and held that an intangible harm can satisfy Article III’s “concreteness requirement” if it has a “close relationship” to a harm “traditionally” recognized as providing a basis for a lawsuit. Plaintiffs argued that the class members who received only one unwanted text message suffered a privacy invasion closely related to the harm associated with intrusion upon seclusion. Defendant argued that receipt of a single text message lacks such a close relationship because intrusion upon seclusion requires that the privacy invasion be highly offensive to a reasonable person, and receipt of a single text message is not. The Circuit Court rejected the defendant’s argument and held that the harms need only share a close relationship “in kind, not degree,” to satisfy Article III’s concreteness requirement. The Circuit Court held that while a single unwanted text message may not be “highly offensive” to a reasonable person (and thus may not satisfy the common law elements of intrusion upon seclusion), it is nonetheless “offensive to some degree,” and therefore resembles the “kind” of harm associated with intrusion upon seclusion. The Circuit Court concluded that receipt of a single unwanted text message causes a concrete injury sufficient to confer Article III standing.