In December 2013, the Consumer Financial Protection Bureau (CFPB) announced its first settlement in the indirect auto lending industry. The target company was Ally Financial Inc. and Ally Bank (Ally). The CFPB alleged that Ally had engaged in discriminatory pricing by charging minority consumers higher dealer markups for their auto loans. Ally was ordered to pay $80 million in damages to 235,000 minority borrowers and $18 million in penalties.

Last week, the Republican Staff of the U.S. House of Representatives Committee on Financial Services released its second report in two months criticizing the CFPB’s handling of the Ally matter. The two congressional reports punctuate the increasing tension regarding whether and the extent to which “dealer discretion” to increase interest rates gives rise to liability for auto finance companies under fair lending law. The following discusses the genesis of this tension and the regulatory landscape after Ally.

CFPB 2013 Auto Finance Bulletin

In March 2013, the CFPB issued a bulletin on indirect auto lenders’ compliance with the Equal Credit Opportunity Act (ECOA) and its implementing regulation, Regulation B. In pertinent part, the bulletin states that an indirect auto lender’s markup and compensation policies may “alone be sufficient to trigger liability” under ECOA under a disparate impact, or “effects test,” theory of liability. It then outlines steps indirect auto lenders may take to reduce their fair lending risk, such as imposing controls on dealer markup and compensation policies. In the alternative, the CFPB suggests that lenders eliminate dealer discretion to mark up buy rates altogether, and instead move to a flat fee per transaction.

The bulletin has proven controversial. Members of the House introduced a bill in April 2015 seeking to nullify the March 2013 bulletin. The bill, entitled the Reforming CFPB Indirect Auto Financing Guidance Act (HR 1737 (F. Guinta, R-NH)), passed the House on November 18, 2015, by a vote of 332-96. Immediately following the bill’s passage in the House, the Republican Staff of the Committee of Financial Services of the U.S. House of Representatives published two related congressional reports.  The reports pose certain threshold legal questions: for example, whether disparate impact claims are cognizable under ECOA jurisprudence. The reports then suggest that even if such claims were cognizable, it would be difficult to make a prima facie disparate impact auto lending claim due to the challenges with accurately predicting the race and ethnicity of borrowers. The reports were critical of the CFPB’s reliance in Ally on a proxy method that uses a consumer’s last name and address to generate probabilities that the consumer belonged to one or more racial or ethnic groups. According to a November 2014 study commissioned by the American Financial Services Association, this proxy method is subject to “significant bias and estimation error.” The congressional reports suggest that, given the complexities surrounding indirect auto financing, only a direct apples-to-apples comparison – by comparing consumers with similar creditworthiness financing a similar amount at the same dealer at around the same time – would enable one to draw a meaningful conclusion about whether a person was “overcharged” for purposes of ECOA liability.

Regulatory Landscape After Ally

Notwithstanding the challenges presented above, the CFPB will continue its aggressive enforcement against indirect auto lenders. In June 2015, the CFPB extended its supervisory authority over “larger participants” of nonbank auto finance companies. The “larger participants” are approximately 34 entities that make, acquire, or refinance 10,000 or more loans or leases in a year. This expansion of authority enables the Bureau to oversee all activity by these companies to ensure compliance with federal consumer financial laws, including ECOA, the Truth in Lending Act, the Consumer Leasing Act, and Dodd-Frank’s prohibition on unfair, deceptive, or abusive acts or practices. Given the heightened and expanded regulatory scrutiny, auto lenders should consider reducing their risk profile by implementing a robust compliance management system (CMS). In particular, a fair lending compliance program to monitor for fair lending risk may be advisable. The adoption by lenders of a strong CMS with written policies and procedures, including a clear and conspicuous fair lending policy statement, would demonstrate the lenders’ commitment to fair lending practices, and may reduce their risk of exposure.

After working through the night, the Congressional conference committee tasked with negotiating a final financial reform bill voted 27-16 to approve the bill and send it back to each chamber for a final vote on the conference report.

Recaps of the long day and night of negotiations and the final bill are available from Poltico, the Wall Street Journal, and American Banker, among many others.

With regard to certain of the issues we have been following closely here, in the end, auto dealers will be exempt from the purview of the new Consumer Financial Protection Bureau, but payday lenders and other non-bank financial service providers will be subject to the new regulator. In addition, the Federal Reserve will be permitted to cap interchange fees, except for those on cards issued by governments.

The bill includes myriad other important provisions related to mortgage lending, the activities of banks, insurance regulation, corporate governance, and more. The Wall Street Journal provides an overview of some of the “major” provisions. Over the coming weeks and months we will be taking a closer look at certain aspects of the final bill and their implications, for example, increased litigation risk for financial service providers, including merchants and retailers.

If your company is one of the many companies that participates in originating, guaranteeing or servicing student loans made under the Federal Family Education Loan Program (“FFELP”) you should be aware of a recent putative class action filed in the United States District Court for the Northern District of California. In Sharon Cheslow v. Wells Fargo Bank, N.A., 3:10-cv-593, defendant Wells Fargo Bank N.A. is alleged to have improperly capitalized interest on various types of FFELP loans in violation of numerous California consumer protection and false advertising laws. The putative class consists of residents and non-residents of California who borrowed FFELP loans from Wells Fargo. 

According to U.S. Department of Education, approximately 95 million FFELP loans, including the Stafford Loan, the unsubsidized Stafford Loan, the PLUS Loan and the Consolidation Loan, were made from 2001-2009 for about $436 billion. (Click here for a listing of the top 100 originators of FFELP loans for FY09 AND FY08). The federal government serves as the ultimate guarantor of payment on FFELP loansSee, e.g., 34 C.F.R. § 682.100. In certain instances, interest that accrues on FFELP loans can be capitalized. See, e.g., 34 C.F.R. § 682.202(b).

To date, the exposure of companies participating in FFELP to lawsuits by loan borrowers has been limited by repeated holdings that the federal Higher Education Act (“HEA”), as amended, 20 U.S.C. §§ 1001-1155, of which FFELP is a part, does not provide borrowers with a private right of action. See College Loan Corp. v. SLM Corp., 396 F.3d 588, 593 (4th Cir. 2005) (cataloging decisions). Second, it has recently been held that the HEA preempted a FFELP borrower’s state breach of contract and statutory claims. See Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010). It is expected that both propositions will be tested in Cheslow.

It is also anticipated that Wells Fargo, relying on Chae, will contend that the HEA preempts the plaintiff’s claims. The plaintiff may counter that Chae is inapplicable because her state law claims differ from those in Chae. The plaintiffs in Chae, FFELP borrowers, asserted California state law claims against their loan servicer for allegedly improperly calculating interest, assessing late fees and setting their loan repayment start-date. While the Ninth Circuit in Chae distinguished the Fourth Circuit’s decision in College Loan Corp., the plaintiff in Cheslow may attempt to argue that College Loan Corp. should steer the outcome on the preemption issue, not Chae. In College Loan Corp., 396 F.3d at 599, the Fourth Circuit held that the HEA and regulations promulgated thereunder regarding FFELP did not preempt the breach of contract and other state law claims brought by a FFELP loan originator against other FFELP loan originators and servicers and that the plaintiff could rely on violations of the HEA and related regulations to establish its state law claims against the defendants.

Wells Fargo may also try to limit the scope of the class by arguing that non-California residents cannot sue Wells Fargo on California state law claims in light of the restriction imposed by the Due Process Clause on the extraterritorially reach of a state’s laws.

Wells Fargo has not yet responded to the complaint; its response is due May 10th. We intend to monitor the docket and report on any developments. 

Last month, two subsidiaries of American International Group (“AIG”) agreed to pay $7.1 million to settle claims by the United States Department of Justice (“DOJ”) that the companies unlawfully charged African American borrowers higher mortgage fees over a period of three years as compared to white borrowers. In United States of America v. AIG Federal Savings Bank, 99mc-09999 (D. Del.), DOJ alleged that from 2003 to 2006, AIG Federal Savings Bank (“AIG FSB”) and Wilmington Finance, Inc. (“WFI”) failed to cap the fees which affiliated brokers could charge to borrowers, and failed to monitor the fee amounts charged. DOJ further alleged that during this time, African American borrowers were charged fees on average 20 basis points higher than total broker fees paid by similarly situated white borrowers. In some metropolitan areas, DOJ alleged the discrepancy rose to the level of 75 basis points.

The consent order requires AIG FSB and WFI to pay $6.1 million to compensate roughly 2,500 African American borrowers who were overcharged, and to contribute at least $1 million towards programs designed to provide financial education to consumers. AIG FSB and WFI also represented that they have exited the wholesale-lending business and agreed that if they seek to return, they must notify the government and change their business practices.

 The AIG settlement is the largest monetary settlement ever obtained by DOJ for the compensation of victims of lending discrimination. Thomas Perez, the DOJ assistant attorney general for civil rights, stated that this is the first time DOJ has held a lender accountable for allegedly discriminatory conduct by its affiliated brokers, and warned that if need be, this will not be the last time. He further remarked that the prior administration made no meaningful effort to crack down on racially discriminatory lending, which contributed to the current national housing and economic crisis. Mr. Perez announced that there are 45 pending cases along the same lines, and that "lenders who ignored the discriminatory practices of brokers must be held accountable."

Other federal and state regulators are expected to take similar steps. For example, Robb Adkins, executive director of the Obama Administration’s Financial Fraud Enforcement Task Force (FFETF), stated that the settlement should be seen as a "warning shot" to those who would engage in fraud or discrimination, and that the FFETF, comprised of representatives from a variety of federal and state regulatory and law enforcement bodies, is redoubling its efforts to prosecute similar conduct.

Recently, the United States Supreme Court, in its decision styled Andrew M. Cuomo v. The Clearing House Association, L.L.C., No. 08-453, reaffirmed that federal banking regulations do not pre-empt states from enforcing their own fair-lending laws against national banks.

This dispute arose following the New York State Attorney General’s attempt to investigate several banks’ residential real-estate lending practices in 2005. The Attorney General’s office had suspected discriminatory lending practices after reviewing reports that showed minority borrowers received a larger percentage of high-interest home loans than white borrowers. As part of that probe, the Attorney General sent letters to several national banks, in lieu of a subpoena, requesting that they provide certain non-public information regarding their mortgage lending practices. In response, the federal Office of the Comptroller of the Currency (“OCC,” the chartering authority and federal regulator of national banks) and the Clearing House Association (a banking trade group) sued to block the Attorney General’s investigation, claiming that an OCC regulation promulgated under the National Bank Act pre-empted any state regulation or enforcement against national banks.

Continue Reading State Regulators’ Powers Over National Banks Reaffirmed by U.S. Supreme Court

Which among the following businesses are potentially subject to consumer financial services laws, rules, and regulations?

A. a retail clothing chain
B. a bank or mortgage company
C. an internet retailer
D. a fast food franchisor
E. all of the above

If you answered E, “All of the above,” you are CORRECT. However, many companies do not realize their businesses are subject to consumer financial services laws. Consequently, their businesses may not be compliant and may be subject to litigation risk.

The focus of the Consumer Finance Law Blog is to keep – all on one site – traditional and non-traditional financial service providers subject to consumer financial services laws abreast of recent developments in:

  • State consumer protection statutes and regulations
  • State privacy statutes
  • Privacy and consumer protection litigation
  • Card Association Rules
  • Equal Credit Opportunity Act
  • Electronic Funds Transfer Act
  • Fair Credit Reporting Act
  • Fair Credit Transactions Act
  • Fair Debt Collection Practices Act
  • Payment Card Industry Data Security Standard
  • State Money Transmitter Statutes
  • State Retail Installment Sales Act
  • State and Federal Unfair and Deceptive Trade Practices Acts
  • TILA, RESPA, and related federal and state consumer disclosure and notice requirements
  • Insurance coverage issues
  • Legislation that may impact company compliance or create new litigation risk.

We welcome you and hope that you find our posts interesting, educational, and thought provoking. We also welcome your feedback and invite you to suggest topics or recent decisions of interest that you would like us to address.