Second time’s the charm?  For the second time in less than two years, the U.S. Supreme Court granted certiorari today in a case that presents the question whether plaintiffs suing under the Fair Housing Act  (FHA) may bring disparate impact claims.  

Today’s grant of certiorari was in Mount Holly v. Mount Holly Gardens Citizens in Action, Inc., which concerns a New Jersey township’s plan to redevelop a blighted residential area occupied predominantly by low- and moderate-income minority households.  The justices were poised to decide the FHA disparate impact question last year in Magner v. Gallagher, but the case disappeared from the Court’s docket just a few weeks before its scheduled oral argument on February 29, 2012, when the City of Saint Paul dismissed its appeal. 

As we have noted in our ongoing reports on Mt. Holly, the CFPB has taken the position that a violation of the Equal Credit Opportunity Act (ECOA) and Regulation B (which apply to all types of credit, not just mortgage lending) can also be established through evidence of disparate impact.  Since both the FHA and ECOA lack textual support for use of a disparate impact test, if Mt. Holly, unlike Magner, goes the distance, the Supreme Court’s ultimate ruling will have significant implications for the validity of the CFPB’s position.  Ballard Spahr is representing one of the defendants in the case.

For more on today’s grant of certiorari in Mt. Holly, see our legal alert.

Tomorrow, June 18, the House Financial Services Committee will hold a hearing on “CFPB Budget Review.”  According to the memo to Committee members from Committee Majority Staff, the hearing “will examine the past and planned obligations and expenditures of the Consumer Financial Protection Bureau (CFPB) for fiscal years 2011-14, the purpose and propriety of such obligations and expenditures, and whether the absence of CFPB accountability to Congress has an impact on such obligations and expenditures.”  The only scheduled witness is Stephen Agostini, the CFPB’s Chief Financial Officer. 

As the memo details, the CFPB is principally funded by transfers from the Fed that are capped at a percentage of the Fed’s 2009 operating expenses.  As a condition for approving President Obama’s renomination of  Richard Cordray as CFPB Director, Republicans have demanded several changes to the CFPB.  Those changes include making the CFPB subject to the appropriations process.  Based on the memo, it appears the Republican members of the House Financial Services Committee intend to use the hearing to advance their demands.

The CFPB’s website now has a regulatory implementation page that provides “one stop shopping” for all of its 2013 mortgage rules and related implementation materials.

The page includes links to the rules, small compliance guides, videos, quick reference charts and other related materials.  The CFPB plans to keep the page updated with any new materials.

The CFPB and Federal Deposit Insurance Corporation have jointly launched a new financial resource tool to assist older adults and their caregivers in avoiding elder financial exploitation.  Named “Money Smart for Older Adults,” the tool  is a stand-alone training module that provides information on how to prevent, identify and respond to elder financial exploitation, plan for a secure financial future, and make informed financial decisions. 

It is contemplated that the instructor-led module will be provided to seniors and their caregivers by financial institutions, adult protective service agencies, senior advocacy organizations, law enforcement, and others that serve this population. The module consists of a scripted instructor guide, participant/resource guide, and power point slides. 

We applaud the CFPB’s and FDIC’s efforts to develop new methods for combatting elder financial exploitation using available technology.

It’s not necessary to read more than the cover page to know that the debt collection industry does not fare well in the report issued this week by the New Economy Project (NEP).  The cover page reads: “The Debt Collection Racket in New York: How the Industry Violates Due Process and Perpetuates Economic Inequality.”  The report follows closely on the heels of the joint FTC-CFPB roundtable on the debt collection industry held last week in Washington, D.C. at which documentation used by the debt collection industry was a significant focus. 

The NEP report indicates that its findings are based on statewide data concerning debt collection lawsuits filed in New York City and New York county courts, which it supplemented with a “detailed analysis” of 90 lawsuits filed by debt buyers across New York State. Among the report’s findings are that (1) debt collection lawsuits accounted for 8 out of 10 of all default judgments entered, (2) 42% of debt collection lawsuits resulted in default judgments but debt buyers obtained default judgments in about 62% of their cases, (3) no application by a debt buyer for a default judgment complied with New York law but the courts nevertheless granted default judgment on 97% of the applications, and (4) debt buyers rarely prevailed in contested cases but relied on winning cases by default or by intimidating unrepresented people into reaching settlement agreements. (The report does not attempt to determine whether the defaulting debtors had any defenses to the debts.) 

The report contains a series of recommendations that include:

•             Enactment by the New York legislature of the Consumer Credit Fairness Act  (The Act includes a three-year statute of limitation on consumer debt collection actions,  a new notice to the debtor before entry of a default judgment, pleading requirements for consumer debt collection cases, and evidentiary requirements for a debt buyer to obtain a default judgment.)

•             New court rules imposing evidentiary requirements on debt buyers

•             New regulatory requirements for debt collection by debt buyers 

Documentation requirements for debt collection by creditors, debt collectors and debt buyers and evidentiary requirements for debt collection lawsuits by debt collectors and debt buyers were also part of the Model Family Financial Protection Act proposed by the National Consumer Law Center last year. 

The NEP report is likely to further increase the already heightened scrutiny  the debt collection industry is facing from federal and state regulators, including the CFPB and FTC, state courts and legislators and attorneys for debtors. 

On Monday, June 17, we expect the U.S. Supreme Court to announce whether it will grant the petition for certiorari in Township of Mount Holly v. Mt. Holly Gardens Citizens
in Action, Inc.  The petition is among the certiorari petitions slated to be considered by the Justices at their conference today.  The court’s standard procedure is to announce the results of its Thursday conferences on the following Monday at 10 am. 

The case challenges the validity of HUD’s interpretation that disparate impact can be used to establish liability under the Fair Housing Act (FHA), even if there is no discriminatory intent.  The CFPB has taken the position that a violation of the Equal Credit Opportunity Act (ECOA) and Regulation B, which apply to all types of credit, including mortgage lending, student loans, auto loans and credit cards, can similarly be established through evidence of disparate impact.  Since both the FHA and ECOA lack textual support for use of a disparate impact test, if the Supreme Court agrees to hear Mt. Holly, its ultimate ruling will have significant implications for the validity of the CFPB’s position.

MFY Legal Services, an organization whose services include providing free legal assistance to New York City residents, has appealed the CFPB’s decision to withhold mortgage complaint narratives it requested pursuant to the Freedom of Information Act (FOIA).  MFY is represented in the appeal by the American Civil Liberties Union. 

According to MFY’s appeal letter, the FOIA request sought complaints filed with the CFPB concerning mortgage products, loan modifications, collection or foreclosure
between December 1, 2011 and April 5, 2013.  While the CFPB provided certain complaint data in response to the request, it declined to provide the complaint narratives and indicated it was withholding the narratives pursuant to the Privacy Act which prohibits the disclosure of information about individuals that is subject to a FOIA exemption.  

Relying on FOIA Exemption 6, which prohibits the disclosure of certain information that would constitute “a clearly unwarranted invasion of personal privacy,” the CFPB stated that, in addition to information that is clearly personally identifiable information, the narratives could also contain such information that the CFPB cannot discern as such.  MFY’s letter indicates that the CFPB refused to release even “seemingly innocuous” portions of narratives until its study determined it could reliably recognize and redact all personally identifiable information. 

When it released its final policy statement on the public release of consumer complaint data in March 2013, the CFPB indicated that it would not publish narrative data “until such time as the privacy risks of doing so have been carefully and fully addressed.”  The CFPB stated that it would assess the feasibility of redacting personally identifiable information and “narrative information that could be used for re-identification” and consider whether there are ways to give consumers submitting complaints a meaningful choice of narrative disclosure options.  Industry has been strongly opposed to the CFPB’s public release of complaint narratives. 

MFY argues in its appeal that FOIA Exemption 6 does not give the CFPB a basis to completely withhold complaint narratives and it must therefore produce the narratives with names, account numbers, loan numbers, and other directly identifying information redacted.

The CFPB has issued two more Small Entity Compliance Guides on its mortgage-related rules.  The latest guides cover the mortgage servicing rule and loan originator compensation rule finalized by the CFPB in January 2013. 

As did the CFPB’s previously-released guides, the new guides caution that they are not substitutes for the underlying rules.

As we reported, the CFPB has asked the Office of Management and Budget to approve the Bureau’s plans to conduct a national telephone survey of 1,000 credit card holders as part of its study of the use of mandatory arbitration agreements in connection with the offering of consumer financial products and services.  It is also seeking comments on its approval request, which must be filed by August 6, 2013. 

The survey is intended to explore consumer awareness of and perceptions regarding dispute resolution provisions in credit card agreements.  The CFPB’s documentation in support of its request to OMB includes a justification for the study.  In the justification, the CFPB states that while other studies have looked at the prevalence of arbitration provisions in various markets or explored arbitration outcomes, “little empirical research has focused on consumer awareness and assessment of arbitration provisions, including consumer awareness when choosing credit card products.”  The CFPB explains why its proposed study would not duplicate previous studies. 

The documentation indicates that the CFPB has not yet retained a contractor for the survey and “will rely heavily on the experience and expertise of the proposed contractor regarding the design and content of the proposed survey.” The documentation describes the methods for selecting survey respondents and procedures for collecting information that the CFPB plans to use, and includes a preliminary version of the proposed questionnaire with an explanation of the goal of each survey question.

Yesterday, just after midnight, the CFPB released its initial data findings from its 15-month (and counting) Study of Overdraft Programs.  

In a welcome departure from its April white paper on payday and deposit advance loans, the overdraft white paper is entirely devoid of a hostile tone, attacks on the industry or prejudgments on the basis of incomplete data.  Nevertheless, the overdraft report and accompanying factsheet strongly hint that rule-making is likely down the road. 

Thus, the report states (p. 4) that the CFPB intends to promote “more uniform treatment” of overdraft issues across financial institutions, and the factsheet uses language conceptually similar to the definition of “abusive” in Dodd-Frank, expressing doubts (p. 2) about “the ability of consumers to anticipate and avoid overdraft costs.”  The reports’ Executive Summary concludes (p. 7):

In announcing the launch of this study, CFPB Director Cordray observed that “overdrafts can provide consumers with needed access to funds.”  Nothing in this report implies that banks and credit unions should be precluded from offering overdraft coverage.  Moreover, our study notes progress in some areas in recent years in protecting consumers from harm.  Nonetheless, our findings with respect to the number of consumers who are incurring heavy overdraft fees or account closures and the wide variations across institutions indicate that certain practices and procedures merit further analysis to determine whether they are causing the kind of consumer harm that the federal consumer protections laws are designed to prevent.

The CFPB report draws principally upon information provided by nine of the largest banks in the country (so-called “study banks”) but also summarizes information from a larger universe of banks who responded to a CFPB request for information and from bank analysts and other third parties.  It contains a wealth of data on overdrafts and variances from institution to institution.  Generally on the basis of study bank data from 2011, it concludes (pp. 4-7):

• Overdrafts are costly—amounting to $225 on average in 2011 for consumers incurring overdraft or NSF fees but varying as much as $201 between study banks.
• A substantial portion of consumers who incurred overdraft or NSF fees in 2011 (either 27.8% or 13.5%, depending upon the measurement method) were “heavy” overdrafters who incurred more than ten overdrafts in 2011.
• Study banks involuntarily closed 6.0% of their consumer checking accounts in 2011, mostly due to unpaid negative balances, with one study bank closing 14 times the percent of its accounts closed by another study bank.
• Consumers who opened checking accounts in 2011 “varied dramatically” from one study bank to another in terms of the frequency they requested study banks to cover one-time debit and ATM overdrafts, for a fee.  Opt-in rates ranged from single-digit percentages to more than 40%.
• The CFPB compared overdraft fees during the first and second halves of 2010 for heavy overdrafters who chose to “opt in” and those who did not opt in. While overdraft and NSF fees declined for both groups, the six-month decline for those who did not opt in exceeded the decline for opt-ins by $347 on average (or nearly $700 on an annualized basis).
• Numerous bank practices and policies affect overdraft and NSF fee levels, including: (1) when deposit funds become available; (2) how banks treat holds resulting from debit card authorizations; (3) item posting order; (4) the method and liberality used by banks in setting overdraft coverage levels; (5) whether fees are charged for de minimis or short-term overdrafts; (6) whether and how fees are charged for extended overdraft periods; (7) how overdraft protection programs are promoted.  The CFPB observed that these policies and practices varied significantly and sometimes dramatically from one study bank to another.  For example, the percentage of accounts with overdraft protection arrangements involving linked deposit accounts ranged by nearly 40 percentage points across study banks. 

Considerably more information is contained in the report.  Nevertheless, much work remains ahead for the CFPB.  It intends to review 1.5 million accounts and 1 billion transactions in study bank accounts.  It will also need to assess the extent to which bank-to-bank differences are attributable to bank policies, on the one hand, or to customer characteristics. 

While regulation appears likely—I certainly hope the CFPB does not impose its policy preferences through informal “guidance” or enforcement actions—the CFPB report gives no hint of what type of regulation the CFPB might propose.  Many options are available to the CFPB, from disclosure requirements, to limits on the number of fees that can be charged on a daily or other periodic basis, to expansion and/or modification of FDIC requirements for state non-member banks and other possibilities.  Great thought and creativity will be required for the CFPB to appropriately protect consumers without depriving them of valuable overdraft services or unduly impairing bank revenues.

Wherever the CFPB ultimately goes in its rule-making process, banks cannot be comfortable that the CFPB and the federal banking agencies will exempt them from UDAAP enforcement actions arising from their overdraft practices.  We have represented banks who have had to deal with these issues in an enforcement and pre-enforcement context and have helped a number of clients review and improve their overdraft practices from soup to nuts.  Banks need to be proactive not only in dealing with the rule-making down the road but also in making sure their houses are in order today.