CFPB Monitor

News Guidance Perspectives of CFPB | Ballard Spahr Law Firm Blog

Disparate impact cases against HUD: Illinois federal court issues decision; update on D.C. case

Posted in Fair Lending

Because of their potential impact on the CFPB’s conclusion that the ECOA and Regulation B encompass disparate impact claims, we have been following two insurance industry lawsuits involving a challenge to HUD’s Federal Housing Act (FHA) disparate impact rule, with one lawsuit filed in federal district court in D.C. and the other filed in an Illinois federal district court.

Last week, the Illinois federal court ruled on the summary judgment motion filed by the plaintiff Property Casualty Insurers Association of America, whose members sell homeowners insurance, and defendant HUD’s motion to dismiss or for summary judgment.  The plaintiff had alleged that the HUD rule violates McCarran-Ferguson as applied to the provision and pricing of homeowners insurance.  McCarran-Ferguson generally reserves the regulation of the insurance business to the states and provides that a federal law cannot be construed to “invalidate, impair or supersede” state insurance laws unless the federal law involved “specifically relates to the business of insurance.”  Under McCarran-Ferguson, a federal law is essentially “reverse-preempted” if it “directly  conflict[s] with state regulation” of the business of insurance or when “application of the federal law would frustrate any declared state policy or interfere with a State’s administrative regime.”  Humana Inc. v. Forsyth, 525 U.S. 299 (1999).  The plaintiff also claimed that (1) the disparate impact rule was promulgated in violation of the Administrative Procedure Act (APA) in that HUD failed to give adequate consideration to the  insurance industry’s comments that application of the rule would violate McCarran-Ferguson, and (2) the rule’s burden-shifting framework is contrary to law.  

With regard to the plaintiff’s McCarran-Ferguson preemption claim, the district court dismissed the claim for lack of subject matter jurisdiction because it found that the claim was not ripe.  According to the court, the claim was “best left for a concrete dispute challenging a particular insurance practice.”  With regard to the plaintiff’s APA claim, the court held that HUD acted arbitrarily and capriciously in failing to (a) provide a “reasoned explanation” for preferring a case-by-case approach to determining McCarran-Ferguson issues, (b) give adequate consideration to industry comments regarding the effect of the filed-rate doctrine, which precludes courts from changing rates filed with regulatory agencies, and (c) address industry’s concerns about the inappropriateness of applying disparate impact liability to insurers based on the fundamental nature of insurance.  In referring to the fundamental nature of insurance, the court observed that, “HUD made no effort to evaluate the substance of the insurance industry’s concerns, disregarding them merely because insurers would have an opportunity to raise their arguments as part of the burden-shifting framework.”  Accordingly, the court remanded the case to HUD “for further explanation.” 

Despite the case’s McCarran-Ferguson focus, the court’s ruling on the plaintiff’s challenge to the rule’s burden-shifting framework could have implications that extend beyond the insurance industry.  The plaintiff had argued that HUD’s more challenger-friendly framework was contrary to  the burden-shifting framework for disparate impact claims articulated by the U.S. Supreme Court in Wards Cove Packaging Co. v. Antonio, 490 U.S. 642 (1989).  In particular, the plaintiff noted that under Wards Cove, a challenger would have to attack a specific practice, rather than the decision making process as a whole.  A challenger would also have to show that the challenged practice resulted in a significant disparate impact, rather than just some disparate impact.  A challenger would have to carry the burden of proof at all times, rather than having the burden of proof shift on whether there is are legitimate business reasons for the practice.  A party whose practice was being challenged would not have to show that its legitimate business interest was ”essential” or “indispensible” but must prove its business interest was “necessary” under HUD’s framework.  And a challenger would have to show that any alternative was as “equally effective” as the challenged practice, rather than merely just articulating an alternative practice.  Nonetheless, according to the court, HUD’s framework was entitled to Chevron deference and reflected “HUD’s reasonable accommodation of the competing interests at stake.” 

The court noted that among the recent decisions that have applied the same approach adopted by HUD is the Fifth Circuit’s decision in Inclusive Communities Project v. Texas Dep’t of Housing and Community Affairs.  The petition for certiorari filed in that case in May 2014 by the Texas Department of Housing and Community Affairs is slated for consideration by the Supreme Court at its September 29 conference.  The case presents the Supreme Court with its third opportunity since 2012 to decide whether disparate impact claims are available under the FHA and (by analogy) the ECOA. 

The D.C. case challenging HUD’s disparate impact rule was filed in June 2013 by two insurance industry trade associations.  The complaint alleged that the text of the FHA does not proscribe facially-neutral practices that have discriminatory effects.  It also alleged that HUD rule is invalid as applied to insurance companies that issue homeowners insurance because it conflicts with McCarran-Ferguson.  On July 22, 2014, the district court heard oral argument on the plaintiffs’ summary judgment motion and HUD’s motion to dismiss or for summary judgment. 

As we have previously observed, if the district court in the D.C. action were to grant summary judgment to the plaintiffs solely on the basis that the HUD disparate impact rule is invalid under McCarran-Ferguson as applied to members of the plaintiff trade associations, its ruling would be inconsequential to lenders since it would not address whether disparate impact claims are cognizable under the FHA.  We had expressed concern that a decision by the Illinois district court invalidating the HUD rule on McCarran-Ferguson grounds might have prompted the district court in D.C. to base its ruling on McCarran-Ferguson grounds as well rather than address the broader issue of whether disparate impact claims are cognizable under the FHA.  The Illinois district court’s decision that McCarran-Fergusson issues are not ripe may now prompt the D.C. district court to reach that broader issue.



CFPB enforcement head underscores CFPB’s limited use of “abusive ” prong of UDAAP

Posted in CFPB Enforcement, UDAAP

Tony Alexis, the head of enforcement at the CFPB, spoke today in Chicago at a program sponsored by the Committee on Consumer Financial Services at the American Bar Association Section of Business Law’s Annual Meeting. The topic was the “Use of UDAP/UDAAP by Federal and State Regulators.” Mr. Alexis emphasized that the Bureau has very sparingly used the “abusive” prong of its UDAAP authority – in only three enforcement actions: (Ace Cash Express, American Debt Solutions and CashCall). There was an extended discussion of the CashCall action which is predicated on the CFPB’s claim that the payday loans were void under state law and that there was no merit to CashCall’s claim that the interest rate was lawful under tribal law which preempts state usury laws. It was pointed out by one of the other panelists that CashCall has a plausible argument to the effect that the loans were lawful. Where will the CFPB draw the line? Will they require that lenders disclose in writing any questions regarding the enforceability of provisions in the consumer contract?

Update on Illinois AG lawsuit using Dodd-Frank authority

Posted in UDAAP

As we previously reported, among the lawsuits that have been brought by a state attorney  general and a state regulator using their Dodd-Frank enforcement authority is a lawsuit initially filed by the Illinois AG in state court against a for-profit college and its owners.  Under Dodd-Frank Section 1042, a state AG or regulator is authorized to bring a civil action for a violation of the Dodd-Frank prohibition of unfair, deceptive or abusive acts or practices (UDAAP). 

In March 2014, the state court granted the AG’s motion to further amend her complaint to add new counts alleging that the defendants’ practices were unfair and abusive under Dodd-Frank and in May 2014, the defendants removed the case to a federal district court in Illinois.

Last week, the federal district court issued a decision denying both the defendants’ motion to dismiss and the AG’s motion asking the court to sever the claim in Count I of the amended complaint, decline to exercise supplemental jurisdiction over the claim in Count II, and remand both claims to state court.    

In denying the motion to dismiss, the court rejected the defendants’ argument that Section 1042 only allows a state AG to sue on behalf of the CFPB and not on behalf of itself when it enforces provisions of Dodd-Frank Title 10.  It also rejected the defendants’ argument that the Dodd-Frank UDAAP prohibition is unconstitutionally vague, observing that the provision was subject to “a lenient vagueness test” which it easily passed.  Also rejected by the court were the defendants’ arguments that the AG’s enforcement of Title 10 violated the Illinois Constitution and that the AG’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA) was insufficiently pled.

In denying the AG’s remand motion, the court rejected the AG’s argument that the facts underlying the claim in Count I, involving alleged misrepresentations and material omissions to students about the defendants’ criminal justice degree program, did not form “a common nucleus of fact” with those alleged in other counts and therefore the claim should be severed because it was outside of the court’s supplemental jurisdiction.  The court labeled this argument a “nonstarter” based on the state court’s having allowed the AG to join her claims in one lawsuit.   

The court also rejected the AG’s argument that because the claim in Count II raised “an issue of first impression in Illinois,” it should be decided by an Illinois state court.  The court agreed that whether extending loans to borrowers without considering their ability to pay was an unfair practice under the ICFA was a novel issue of Illinois law.  However, it concluded that “[g]iven Count II’s unremarkable nature, the wealth of case law interpreting the ICFA, the commonality of the claims in this suit, and the efficiency of litigating them together,” the lack of controlling  precedent did not provide a basis for the court to decline to exercise supplemental jurisdiction over Count II.

House members propose bill to nullify CFPB indirect auto finance guidance

Posted in Auto Finance

A bipartisan group of fourteen House members have introduced a bill (H.R. 5403) that would nullify the CFPB’s indirect auto finance guidance issued in March 2013 and require the CFPB to provide for a notice and comment period before issuing any new guidance on indirect auto finance. 

Entitled the “Reforming CFPB Indirect Auto Financing Guidance Act,” the bill also includes requirements for the CFPB when proposing and issuing such guidance to (1) make publicly available “all studies, data, methodologies, analyses, and other information” it relied on, (2) consult with the Fed, FTC and DOJ, and (3) conduct a study of the guidance’s impact  on consumers and “women-owned, minority-owned, and small businesses.”


Brookings student loan study updated; CBA launches website to dispel student loan myths

Posted in Student Loans

We previously wrote about the June 2014 Brookings Institution report which suggested that charges coming from various quarters, including the CFPB, that student loan debt is causing young adults to postpone home ownership are overblown.  The report found that the typical household with debt is no worse off today than a generation ago, with increases in lifetime earnings more than offsetting increases in debt, and monthly payment burdens kept manageable by longer repayment periods. 

The report’s authors recently updated the report with data that was not previously available.  More specifically, the 2014 report was based only on data through 2010, the last year for which data from the Survey of Consumer Finances (SCF) was available when the report was prepared.  The update uses recently released 2013 SCF data.  Most significantly, the authors found that such data “confirmed that Americans who borrowed to finance their education are no worse today than they were a generation ago.  Given the rising returns to postsecondary education, they are probably better off, on average.” 

The myths about student loan debt are also the target of a new website launched by the Consumer Bankers Association.  The website includes a page entitled “Myth vs. Facts” and a page that provides information about the private student loan market.

Rep. Maloney urges CFPB to limit overdraft fees and expand opt-in rules

Posted in Overdrafts

Democratic Congresswoman Carolyn Maloney of New York sent a letter to Director Cordray yesterday urging the CFPB to limit overdraft fees and expand opt-in requirements as part of a proposed overdraft rule. 

In calling for overdraft fee limits, Ms. Maloney referenced the report issued by the CFPB this past July which found a median overdraft fee of $34 and a median amount of debit card transactions leading to an overdraft fee of $24.  She also referenced the CFPB’s statement in its press release accompanying the report that “If a consumer were to borrow $24 for three days and pay a $34 finance charge, such a loan would carry a 17,000 percent APR.”  According to Ms. Maloney, “in light of the data in the Bureau’s report,” the CFPB should require by rule that all overdraft fees be “reasonable and proportional” to the amount of the overdraft. 

Ms. Maloney also urged the CFPB to expand opt-in requirements so they also apply to checks and ACH transactions.  She indicated that the CFPB’s finding that overdraft and NSF fees constituted 41 percent of the total checking account fees of consumers who had not opted in to overdraft protection demonstrates the need to expand the current Reg E opt-in requirement.   

As we recently reported, while overdraft rulemaking by the CFPB appears increasingly likely, it does not appear to be imminent.  In its latest rulemaking agenda, the CFPB gave a February 2015 timetable for further “prerule activities” relating to overdraft practices.

CFPB and Fed announce increases in Regs Z and M 2015 dollar thresholds

Posted in CFPB Rulemaking

The CFPB and Fed have announced increases in the dollar thresholds in Regulation Z (Truth in Lending Act) and Regulation M (Consumer Leasing Act) for exempt consumer credit and lease transactions. The adjustments reflect the annual percentage increase in the consumer price index as of June 1, 2014 and will take effect on January 1, 2015.  The adjustments are issued jointly by the two agencies because, while Dodd-Frank generally transferred TILA and CLA rulemaking authority to the CFPB, the Fed retains authority to issues rules for certain motor vehicle dealers.

Both threshold are increased by $1,100 so that in 2015, Regs Z and M will apply to, respectively, credit transactions and consumer leases of $54,600 or less. (Private education loans and loans secured by real property or personal property used or expected to be used as a principal dwelling are subject to TILA regardless of the amount of the loan.)




CFPB issues updated guides on the TILA-RESPA Integrated Disclosure Rule

Posted in CFPB General, CFPB Rulemaking

CFPB Issues Updated Guides on the TILA-RESPA Integrated Disclosure Rule

The CFPB has released its updated Small Entity Compliance Guide for the TILA-RESPA Integrated Disclosure Rule and Guide to the Loan Estimate and Closing Disclosure.  These resources replace the editions that were published in the spring of 2014. The CFPB also issued a disclosure timeline resource that illustrates the process and timing of disclosures for a specific real estate purchase transaction under the TILA-RESPA Integrated Disclosure Rule that takes effect on August 1, 2015.  These resources are updated to reflect certain clarifications to the rule that were discussed in depth at a recent FAQ webinar co-hosted by the CFPB staff and Federal Reserve Board.

The updated guides, the timeline, and other resources on TILA-RESPA Integrated Disclosure Rule impletion are available here.

House to hold Sept. 10 hearing on credit reporting

Posted in Credit Reports

On Wednesday, September 10, the House Financial Services Committee will hold a hearing entitled “An Overview of the Credit Reporting System.” The scheduled witnesses are:

  • Stuart Pratt, President and Chief Executive Officer, Consumer Data Industry Association
  • J. Howard Beales, Professor of Strategic Management and Public Policy, George Washington University
  • John A. Ikard, President and Chief Executive Offier, FirstBank Holding Company, on behalf of the American Bankers Association
  • Chi Chi Wu, Staff Attorney, National Consumer Law Center

Given that the CFPB has made credit reporting a priority, we find it surprising that the witness list does not include a CFPB representative.

Director Cordray to testify at Sept. 9 Senate hearing

Posted in Auto Finance

The Senate Committee on Banking, Housing, and Urban Affairs will hold a hearing tomorrow on “Wall Street Reform: Assessing and Enhancing the Financial Regulatory System.” 

The list of witnesses includes CFPB Director Richard Cordray.  He is likely to be questioned about upcoming CFPB initiatives, including the proposed larger participant rule for auto finance that the CFPB is expected to release next week in conjunction with its September 18 field hearing on auto finance.  On September 30, we will be holding a webinar entitled
“Auto Finance I: How the CFPB’s Larger Participant Rule for the Auto Finance Market Will Change the Game for Nonbank Auto Finance Companies.”  The registration form is available here.  

The other listed witnesses are: Daniel K. Tarullo, Fed Governor, Martin J. Gruenberg, FDIC Chair, Thomas J. Curry, Comptroller of the Currency, Mary Jo White, SEC Chair, and Timothy G. Massad, CFTC Chair.