In the CFPB Playbook: Making Good on Bold Promises
Mired in constitutional challenges since its inception, the Consumer Financial Protection Bureau got some new wind in its sails in the second quarter of 2024 when the U.S. Supreme Court upheld the constitutionality of its funding structure.
The May 16 decision in CFPB v. Community Financial Services Association of America not only resolved what could be the last major challenge to the agency's constitutionality, but as Director Rohit Chopra announced, it also cleared the way for the CFPB to resume a number of high-priority enforcement actions, rulemakings and other initiatives that were stalled or put on hold during the pendency of the case.
The CFPB wasted no time resuming its aggressive agenda in advance of the November election, quickly expanding its reach over buy-now, pay-later, or BNPL, products through an interpretive rule; adding mortgage loans to its efforts to combat so-called junk fees; finalizing its controversial repeat offender registry; and proposing to remove medical debts from consumer reports that are used to underwrite consumers for loans.
But just over a month later on June 28, a new Supreme Court decision in Loper Bright Enterprises v. Raimondo overturned the long-standing standard for administrative deference under 1984's Chevron USA Inc. v. Natural Resources Defense Council, casting a new cloud over the CFPB's future endeavors by opening the door to new challenges of its rulemakings, statutory interpretations, policies and other initiatives as courts — not agencies — will be responsible for resolving statutory ambiguities on a forward basis.
In the meantime, the CFPB continues to charge ahead in working toward its preelection agenda. This article provides a short overview of key developments that will each affect different segments of the consumer financial services industry.
A New Deference Standard Shakes Up the Administrative Law Status Quo
Overturning the long-standing deference standard in Chevron, the high court found in Loper Bright that courts reviewing agency actions pursuant to the Administrative Procedure Act "must exercise their independent judgment" and "may not defer to an agency interpretation of the law simply because a statute is ambiguous."
While this decision does leave room for some degree of persuasive authority deference to agency actions, it nevertheless killed the deference standard that agencies have used for decades, and likely will have a profound impact on questions of administrative law.
As it did with the Dodd-Frank Act, Congress often writes vague or ambiguous statutes on the assumption that an agency with appropriate subject matter expertise in the regulated field will fill in gaps, resolve ambiguities in the law, and exercise its administrative authority to craft workable rules and regulations.
The Loper Bright decision will shift much of that ultimate power to judges who do not have that same level of industry expertise or knowledge, on the assumption that "agencies have no special competence in resolving statutory ambiguities," but "courts do," as the Supreme Court wrote.
Loper Bright could have a significant impact on the CFPB's ability to craft interpretive rules, policy statements, and even notice-and-comment rulemaking under the statutes it administers without ushering in a new wave of challenges to its actions.
The coming months will tell how this new standard evolves and begins to affect the CFPB and other agencies, but the first decision under this new standard went favorably to the bureau, with the U.S. Court of Appeals for the Seventh Circuit upholding in CFPB v. Townstone Financial Inc. and Barry Sturner on July 11 a regulatory provision that extended the Equal Credit Opportunity Act prohibition on discrimination against credit applicants to prospective applicants.
CFPB Flexes Its Muscles Over BNPL Products
The CFPB continued to press ahead with its second quarter agenda despite these changes. With retail commerce increasingly digital and online, BNPL products have become a popular payment method, but a 2022 CFPB study of the BNPL market concluded that it was loosely regulated, resulting in consumers receiving uneven disclosures and protections.
One reason the CFPB drew this conclusion is that BNPL loans are typically crafted to be exempt from the Truth in Lending Act, or TILA, and most state consumer loan regulatory regimes that collectively provide important disclosures and other consumer protections to borrowers because they are payable in four or fewer installments and not subject to interest or other finance charges.
While lack of finance charges has made these products an attractive substitute for credit cards and other payment methods, the CFPB has expressed concern that they lack the disclosure requirements and rights to dispute charges, inaccurate billing statements, and other protections available to credit cardholders or consumers of other products subject to these regulations.
On May 22 — the week after the Supreme Court decision in CFPB v. CFSA affirming the bureau's constitutionality — the CFPB addressed these concerns by issuing an interpretive rule that declares BNPL lenders to be "card issuers" and BNPL accounts to be "credit cards" under TILA and Regulation Z, subjecting them to several consumer protections that apply to credit cards.
The BNPL interpretive rule imposes three new substantive requirements on BNPL providers:
- Dispute investigation: BNPL providers must investigate disputes that consumers initiate, pause payment requirements during the investigation and, where appropriate, issue credits to consumer accounts.
- Refund returned products or canceled services: When consumers return products or cancel services for a refund, BNPL lenders must credit the refunds to consumers' accounts.
- Provide billing statements: Consumers must receive periodic billing statements like the ones received for classic credit card accounts.
Interestingly, the CFPB declined to engage in a discretionary rulemaking specific to the BNPL market and sidestepped the normal notice-and-comment rulemaking process almost entirely, promulgating this rule as a new interpretation of Regulation Z in its current form that takes effect 60 days from publication in the Federal Register.
However, the CFPB also requested public comment, which may be a sign of willingness to adjust its interpretation in the event of unintended negative consequences.
Finally, we note that the overruling of Chevron has altered the standards for deference given to federal agencies like the CFPB in interpreting statutes it administers, including as it relates to interpretive rules.
The consequence of the Loper Bright decision to this interpretive rule or other actions by the CFPB will need to be closely monitored, but the CFPB certainly took a bold and expansive interpretation of statutory terms like "card issuer," "credit card" and "device" to bring BNPL products under these rules, which may be ripe for challenge.
In the interim, BNPL lenders need to assume that they will be subject to the requirements set forth in the interpretive rule unless the rulemaking is challenged and stayed by a court, and compliance with these provisions is already proving to be an industrywide challenge given that the vast majority of BNPL lenders are not currently equipped to comply with the credit card-related requirements cited in the BNPL interpretive rule.
Chopra's Junk Fee Initiative Makes Its Way to Mortgage Closing Costs
The CFPB also continued its ongoing efforts to combat junk fees, which Chopra has defined as "unavoidable, surprise, excessive, or unnecessary charges imposed for fake or even worthless services."
Already a major theme of Chopra's CFPB, junk fees are featured on a dedicated web page detailing the bureau's efforts, as well as active rulemakings relating to insufficient funds fees, overdraft fees, and credit card late fees as parts of this initiative.
To date, most of the CFPB's efforts have focused on banking, credit cards and personal loans, but on May 30, the CFPB announced a new request for information that seeks input from the public, including borrowers and lenders, about how mortgage closing costs may be inflated and constraining the mortgage lending market.
Specifically, the CFPB asks for information about:
- Which fees are subject to competition: The CFPB is interested in the extent to which consumers or lenders currently apply competitive pressure on third-party closing costs. The CFPB also wants to learn about market barriers that limit competition.
- How fees are set and who profits from them: The CFPB wants to learn about who benefits from required services and whether lenders have oversight or leverage over third-party costs that are passed onto consumers.
- How fees are changing and how they affect consumers: The CFPB wants information about which costs have increased most in recent years and the reasons for such increases, including the rise in cost for credit reports and credit scores. The CFPB is also interested in data on the impact of closing costs on housing affordability, access to homeownership or home equity.
While this is initially styled as a request for information, it may signal additional rulemaking or other activity down the road relating to mortgage loans similar to those already in place.
Notably, the CFPB appears interested in credit report fees, discount points that borrowers may pay to reduce rates on their loans, title insurance costs that are passed on to borrowers, and other origination and settlement service fees that may be charged to borrowers at closing.
Unlike other financial products under the CFPB's junk fees microscope, however, any effort by the bureau to eliminate or reduce these and other closing cost fees will need to be carefully balanced against a number of other factors in the heavily regulated residential mortgage market.
In terms of regulatory considerations, the CFPB will need to consider its own TILA-Real Estate Settlement Procedures Act integrated disclosure rules, as well as other provisions in Regulation Z that already address what mortgage closing fees, including discount points, are included or excluded from certain calculations like annual percentage rate and points and fees, as well as requirements pushed down by government-sponsored enterprises and other investors that govern the secondary mortgage market.
These efforts may be further hamstrung by the Loper Bright decision, which altered the deference standards given to the CFPB in resolving statutory ambiguities.
In addition, the CFPB issued "Supervisory Highlights" that characterized certain fees charged by mortgage servicers as junk fees, including prohibited fees for property inspections and late fees that exceeded amounts allowed by their mortgage loan agreements. According to these highlights, mortgage servicers also allegedly failed to explain the reasons for fees by not describing them adequately on statements.
CFPB Proposes to Exclude Medical Debt From Consumer Reports
On June 11, the CFPB took action to remove medical debts from consumer reports that are relied on by lenders to make credit decisions in loan applications by proposing a rule that the CFPB believes would "remove medical bills from most credit reports, increase consumer privacy protections, help to increase credit scores and loan approvals, and prevent debt collectors from using the credit reporting system to coerce people to pay."
Among other things, the proposal would stop credit reporting companies from sharing medical debts with lenders and prohibit lenders from making lending decisions based on medical information.
The comment period for the proposal runs until Aug. 12, and the CFPB will then be tasked with considering comments submitted and finalizing the rule, which is unlikely to be complete prior to the November election.
Among other things, the CFPB will need to consider whether there is risk in removing medical debts from consumer reports that creditors rely upon to determine whether consumers have the ability to repay loans, particularly for mortgages and credit cards where applicable regulations require that they do so.
The proposal allows creditors to continue considering this information to comply with these requirements, but it is unclear how they will obtain and verify such information if removed entirely from a consumer's credit file.
CFPB Finalizes Data Repository for Repeat Offenders
On June 3, the CFPB finalized its December 2022 proposal to establish a so-called repeat offender registry requiring certain nonbank covered entities to report all final public written orders and judgments — including any settlements, consent decrees, or stipulated orders and judgments — obtained or issued by any federal, state or local government agency for violation of a number of enumerated consumer protection laws, including those related to unfair, deceptive, or abusive acts or practices.
The final rule, which is scheduled to take effect on Sept. 16, will establish a database accessible by the CFPB and other state and federal regulators, and require covered nonbanks to report all final, public orders issued by an agency or court after Jan. 1, 2017, that are still in effect on the effective date.
Entities under these orders will be required to report information about the institution and the order, and, for certain larger participants, an annual written statement attested to by an executive officer.
This registry will provide a powerful tool for financial regulators including the CFPB (but also the Federal Trade Commission, state regulators and prudential regulators that are increasingly interested in third-party oversight over nonbank entities that contract with their regulated institutions), as well as litigants looking to mine for companies that have enforcement histories and may not be complying with their consent orders or judgments.
In addition, the CFPB has continued to actively pursue enforcement actions against companies that had previously settled with it, but, according to the CFPB, violated the terms of their consent orders or engaged in a repeat violation of law.
"In the CFPB Playbook: Making Good on Bold Promises" by R. Andrew Arculin and Paula Vigo Marqués was published in Law360 on July 12, 2024.