A roundup of recent developments in consumer finance.
The following is a roundup of recent developments in consumer finance.
Fourth Circuit Determines Multi-Purpose Loan Qualifies for MLA Auto Loan Exception
On April 12, 2023, the US Court of Appeals for the Fourth Circuit held that a loan to a military servicemember that financed both the purchase of a car and the items below is exempt from the requirements of the Military Lending Act (MLA) under an exception for a loan for the express purpose of financing a car purchase (10 U.S.C. § 987(i)(6)):
The purchase of insurance to cover the remaining amount of the loan if the car were totaled or stolen (known as Guaranteed Asset Protection (or GAP)).
Interpreted "express purpose" to mean "specific purpose" rather than "sole purpose," finding that the MLA exception is a conditional statement rather than a directive. Since the loan financed the servicemember's car purchase, the loan satisfied the condition and no further inquiry was needed to determine the applicability of the MLA exception.
Determined that a loan to purchase a car can qualify for the MLA exception even if it finances other things.
A dissenting opinion argued that the MLA exception should be construed narrowly and that the Fourth Circuit's decision risked allowing lenders to evade the MLA's requirements by financing other products as part of a car loan.
Sixth Circuit Determines One Unwanted Call Sufficient for FDCPA Standing
On March 24, 2023, the US Court of Appeals for the Sixth Circuit held that one telephone call placed to a consumer by a medical debt servicer after the consumer thought the consumer's attorney sent a cease-and-desist letter to the servicer sufficed to confer standing for a claim under the Fair Debt Collection Practices Act (FDCPA) (15 U.S.C. §§ 1692 to 1692p), even though the servicer never received the letter because the consumer's attorney sent it to the wrong person (Ward v. NPAS, Inc., 63 F.4th 576 (6th Cir. Mar. 24, 2023)).
According to the Sixth Circuit:
The consumer alleged the requisite concrete injury based on the common law tort of intrusion upon seclusion.
An unwanted telephone call is a type of invasion of privacy the tort seeks to prevent.
Even though a single unwanted telephone call likely would not suffice to make the servicer liable under common law, for the purpose of standing, the harm to the consumer only needs to be of the kind that the common law seeks to protect rather than the degree of common law protection. The Sixth Circuit decision references a Tenth Circuit decision that a single unwanted telephone call creates standing under the FDCPA (Lupia v. Medicredit, Inc., 8 F.4th 1184, 1190 to 1193 (10th Cir. Aug. 27, 2021)).
It did not matter that the servicer did not receive the cease-and-desist letter. Receipt of the letter goes to the merit of the consumer's claim, not whether the consumer has standing.
However, the Sixth Circuit affirmed a grant of summary judgment in favor of the servicer by the US District Court for the Middle District of Tennessee (Ward v. NPAS, Inc., (M.D. Tenn. Oct. 29, 2021)) because FDCPA liability only attaches to a debt collector and the servicer was not a debt collector since:
The consumer's debt needed to be in default when the creditor referred the debt to the servicer.
Nothing in the record suggested that the creditor considered the debt to be in default when it referred the debt to the servicer.
The agreement between the consumer and the creditor indicated that the debt was not in default while the servicer held the debt.
Third Circuit Holds Failure to Itemize Renewal Fee Components Does Not Violate TILA
On a credit card account renewal, TILA and Regulation Z only require a creditor to disclose the applicable terms if the account were renewed. They require disclosure of:
when the account will expire if not renewed;
any annual, periodic, maintenance, or other fee or charge for the account; and
how a consumer can terminate continued credit availability.
The creditor's notice to the plaintiff disclosed the required items.
Although TILA and Regulation Z impose an itemization requirement for periodic disclosures, neither imposes such a requirement for a renewal.
TILA and Regulation Z do not impose the same disclosure requirements on renewal notices as they do on solicitations and applications because a consumer needs more detailed information when opening a credit account than when renewing it.
OCC Elevates Fairness in Banking
At the National Community Reinvestment Coalition (NCRC) conference on March 30, 2023, Acting Comptroller Michael Hsu delivered remarks on elevating fairness in banking. Hsu explained that fairness is a core part of the mission and activities of the Office of the Comptroller of the Currency (OCC), including:
Leadership and people. The establishment in 2016 of a Compliance and Community Affairs department (CCA) "built institutional muscle at the OCC to engage on fairness and compliance issues on equal terms to financial safety and soundness." Former heads of CCA now direct OCC supervision and policy and serve as members of the executive committee.
Strategic plan. The OCC Strategic Plan 2023-2027 notes as a goal that the "renewed focus on fairness reinvigorates the agency's mission and demonstrates leadership as the evolution of the banking system further integrates fairness with safety and soundness."
Reforming overdraft protection. The OCC is encouraging supervised banks to reform overdraft protection programs to improve fairness by making them more pro-consumer. Specifically, the OCC and other regulators have identified heightened regulatory risks posed by authorize positive, settle negative (APSN) practices, re-presentment fees, and unlimited overdraft fees (see Legal Update, CFPB Issues Guidance on Overdraft and Depositor Fees).
Fighting lending discrimination. The OCC is strengthening its supervisory processes and resources toward compliance with fair lending laws by:
expanding access to low- to no-cost bank accounts.
Pennsylvania District Court Rules Consumer Reporting Agency Must Reinvestigate Hard Inquiries
On April 11, 2023, the US District Court for the Eastern District of Pennsylvania held that a consumer reporting agency (CRA) willfully violated the Fair Credit Reporting Act (FCRA) (15 U.S.C. §§ 1681 to 1681x) when it did not reinvestigate a consumer's dispute regarding the inaccuracy of a notation the CRA placed on the consumer's credit file that a subscriber or end user accessed the consumer's credit file (hard inquiry) as required by Section 611(a)(1)(A) of the FCRA (15 U.S.C. § 1681i(a)(1)(A)) (dispute reinvestigation section) (Norman v. Trans Union, LLC, (E.D. Pa. Apr. 11, 2023)). The CRA had a policy to not reinvestigate any hard inquiry dispute and to respond to any such dispute by sending the consumer a letter offering an identity theft product.
The Pennsylvania district court noted that a CRA willfully violates the FCRA if its reading of the statute is objectively unreasonable. It found the CRA's interpretation that the dispute reinvestigation section did not require reinvestigation of hard inquiry disputes to be unreasonable because:
The dispute reinvestigation section is unambiguous and requires a CRA to reinvestigate "any dispute". The Pennsylvania district court rejected the CRA's argument that its reinvestigation obligation:
only requires it to notify a furnisher of information if a consumer disputes the information provided by the furnisher; and
does not require reinvestigation of disputed internal notations such as hard inquiries.
Third Circuit precedent should have put the CRA on notice that it must reinvestigate hard inquiry disputes. This precedent:
requires a CRA to do more than merely convey the dispute to the original source; and
refutes the CRA's position that internally entered information is outside the scope of the dispute reinvestigation section.
The Pennsylvania district court also rejected the CRA's defense based on its policy's consistency with that of other CRAs, ruling that the consistency of a CRA's policy with that of other CRAs does not prevent a finding of a willful violation when that policy conflicts with the unambiguous text of the dispute reinvestigation section and Third Circuit precedent.
CSBS State Examination System Adds Consumer Finance Standards
On April 3, 2023, the Conference of State Bank Supervisors (CSBS) published a blog post on updates to the State Examination System (SES). The SES, launched by the CSBS in 2020, is a new technology platform through which state regulators can efficiently and securely coordinate their supervisory oversight of non-bank financial services companies. The system connects state regulators to companies under supervision and is designed to promote coordinated examinations, investigations, enforcements, and other supervisory actions across states. SES includes common examination standards for mortgage companies, debt companies, and money services businesses. State adoption of these common exam standards achieves a more uniform supervisory process and minimizes the need for companies to respond to differing, state-specific exam standards.
According to the blog post:
As of April 2023, 53 state agencies have adopted SES and more than 3,800 company exams have been conducted through the system.
In October 2022, SES added common examination standards for the consumer finance industry focused primarily on federal regulations and standards used to assess a financial institution's compliance management system.
While most state agencies have adopted the common examination standards, they need to apply the standards as a rule during exams and only use their state-specific requirements as an exception.
The CSBS is offering assistance to help states adopt the common standards by showing them how the standards are structured in SES and how best to use system functionality to conduct consumer finance exams.
Credit Agencies Remove Medical Debt from Consumer Credit Reports
Extending and arranging for students to take out credit to pay for a nursing program with federal and private student loans.
Adopting new policies, while students were enrolled, that increased the amount of time and money it would take students to complete the program.
Intentionally targeting the program to individuals on the basis of race, with the understanding that they were highly likely to require an extension of credit to pay for the program.
The Statement of Interest addresses two legal issues:
To state a claim under ECOA, a plaintiff need allege only facts to plausibly suggest that a defendant discriminated on a prohibited basis with respect to an aspect of a credit transaction; they need not allege the elements of a prima facie case, which is an evidentiary standard and not a pleading requirement.
ECOA's prohibition on discrimination "with respect to any aspect of a credit transaction" applies to every aspect of an applicant's dealings with a creditor, not merely the loan terms in the contract.
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Resource ID w-039-0230Document Type Legal update: archive