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1 2015 Commercial & Bankruptcy Law Seminar Consumer Credit Protection Law Update Featuring the Equal Credit Opportunity Act and Regulation B and the Fair Credit Reporting Act 11:00 a.m.- 11:30 a.m. Presented by John Blyth Nyemaster Goode, P.C. 700 Walnut Street, Suite 1600 Des Moines, IA Phone: Friday, May 29, 2015

2 Consumer Credit Protection Law Update Featuring the Equal Credit Opportunity Act and Regulation B and the Fair Credit Reporting Act 2015 Commercial and Bankruptcy Law Seminar - May 29, Presented By: John W. Blyth Nyemaster Goode, P.C. 700 Walnut Street, Suite 1600 Des Moines, IA Phone: Facsimile: Website:

3 I. Federal Consumer Finance Law Regulatory Framework A. Dodd-Frank and the Consumer Financial Protection Act Dodd-Frank: 2,319 Pages, sixteen titles Title X Consumer Financial Protection Act of 2010 (CFPA), 165 pages Every sector of financial industry is touched by the CFPA to some extent B. Bureau of Consumer Financial Protection The Bureau of Consumer Financial Protection (CFPB) is the big regulatory elephant in the room. It assumed oversight of consumer financial protection functions from the Federal Reserve Board, Office of Comptroller of the Currency, the Federal Deposit Insurance Company, Office of the Supervisor, National Credit Union Administration, Federal Trade Commission and Department of Housing and Urban Development. 1 The CFPB is an executive Agency housed within the Federal Reserve System for budgetary purposes 2, but is independent of Federal Reserve system control 3. The CFPB Director is appointed by the President with advice and consent of the Senate and serves a five year term and as head of CFPB. 4 The CFPB has a broad mandate to consistently enforce Federal consumer financial laws to ensure that all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent and competitive. 5 1 Dodd-Frank Section 1061, codified at 12 U.S.C Dodd-Frank Section 1011(a), codified at 12 U.S.C. 5491(a). 3 Dodd-Frank Section 1012(c)(2), codified at 12 U.S.C. 5492(c)(2). 4 Dodd-Frank Section 1011(b), codified at 12 U.S.C. 5491(b). 5 Dodd-Frank Section 1021(a), codified at 12 U.S.C. 5511(a).

4 C. Financial Stability Oversight Council The Financial Stability Oversight Council (FSOC) was established 6 to provide comprehensive monitoring of the stability of the nation's financial system. 7 It has ten voting members consisting of the Treasury Secretary, who also serves as chairperson, Chairman of the Board of Governors; Comptroller of the Currency, Director of the CFPB, Chairman of the Securities and Exchange Commission, Chairperson of the Federal Deposit Insurance Corporation, Chairperson of the Commodity Futures Trading Commission, Director of the Federal Housing Finance Agency, Chairman of the National Credit Union Administration Board, and an independent member having insurance expertise appointed by the President, by and with the advice and consent of the Senate. 8 There are five nonvoting members consisting of the Director of the Office of Financial Research, the Director of the Federal Insurance Office; a state insurance commissioner, a state banking supervisor, and a state securities commissioner. 9 The FSOC may veto any CFPB regulation that would put the safety and soundness of the United States Banking System or the stability of the financial system of the United States at risk. 10 D. Enforcement Authorities The CFPB has primary enforcement authority over large depository institutions (those with total assets of more than $10 billion). 11 Existing prudential regulators have exclusive enforcement authority over small depository institutions. 12 The CFPB and the FTC share enforcement authority over certain non-bank institutions that provide specified services to consumers and certain large non-bank participants defined as such by the CFPB Dodd-Frank Section 111(a), codified at 12 U.S.C. 5321(a). 7 Dodd-Frank Section 112, codified at 12 U.S.C Dodd-Frank Section 111(b)(2), codified at 12 U.S.C. 5321(b)(1). 9 Dodd-Frank Section 111(b)(2), codified at 12 U.S.C. 5321(b)(2). 10 Dodd-Frank Section 1023(a), codified at 12 U.S.C. 5513(a). 11 Dodd-Frank Section 1025(c)(1), codified at 12 U.S.C. 5515(c)(1). 12 Dodd-Frank Section 1026(d)(1), codified at 12 U.S.C. 5516(d)(1). 13 Dodd-Frank Section 1024(c), codified at 12 U.S.C. 5514(c). On October 8, 2014, the CFPB proposed an amendment to its previously adopted regulation defining larger participants for certain consumer financial products or services by adding a new category of larger participants specifically relating to the market for auto lending. Until 2

5 State attorneys generals and state presidential regulators have limited authority to enforce Federal consumer fraud laws against certain covered persons as do state regulators. 14 II. CFPB Specific Rulemaking, Supervisory and Enforcement Authority A. Prohibited Acts The CFPA makes it unlawful for any covered person or service provider to (a) offer or provide to a consumer any financial product or service not in conformity with Federal consumer financial law or otherwise commit any act or omission in violation of a Federal consumer financial law; or (b) to engage in any unfair, deceptive, or abusive act or practice. 15 B. Federal Consumer Financial Laws Scope and Essential Definitions The CFPA, Title X, and enumerated consumer financial laws comprise what Dodd-Frank defines as Federal consumer financial laws. With a few exceptions, the CFPA did not make substantive changes to the enumerated consumer financial laws. 16 The CFPA did add important substantive law provisions to the existing body of consumer financial laws. 1. Enumerated Consumer Laws The enumerated consumer laws component of the Federal consumer financial laws is comprised of: 17 Alternative Mortgage Transaction Parity Act of 1982 (12 U.S. C et seq.) Consumer Leasing Act of 1976 (15 U.S. C et seq.) Sections 502 through 509 of the Gramm-Leach-Bliley Act (15 U.S.C ) except for section 505 as it applies to section 50l(b) Home Mortgage Disclosure Act of 1975 (12 U.S.C et seq.) that amendment is finalized, the FTC will have enforcement authority against those covered persons that are within the scope of the amendment. 14 Dodd-Frank Section 1042(a), codified at 12 U.S.C. 5551(a). 15 Dodd-Frank Section 1036(a), codified at 12 U.S.C. 5536(a). 16 The CFPA did make an important substantive change to the TILA. It increased the threshold for exempt consumer credit transactions from $25,000 to $50,000, effective July 21, Dodd-Frank Section 1100E(a), codified at 12 U.S.C. 1603(3). The exemption threshold is to be adjusted annually effective January 1 of each year based on any annual percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), as published by the Bureau of Labor Statistics. The threshold amount for 2015 is $54, Dodd-Frank Section 1002(12), codified at 12 U.S.C. 5481(12). 3

6 Electronic Fund Transfer Act (15 U.S. C et seq.), except with respect to section 920 of that Act Equal Credit Opportunity Act (15 U.S.C et seq.) Fair Credit Billing Act (15 U.S.C et seq.) Fair Credit Reporting Act (15 U.S.C et seq.), except with respect to sections 615(e) and 628 of that Act (15 U.S.C. 1681m(e), 168lw) Home Owners Protection Act of 1998 (12 U.S. C et seq.) Fair Debt Collection Practices Act (15 U.S.C et seq.) Subsections (b) through (f) of section 43 of the Federal Deposit Insurance Act (12 U.S.C. 1831t(c)-(f)) Home Ownership and Equity Protection Act of 1994 (15 U.S.C note) Real Estate Settlement Procedures Act of 1974 (12 U.S.C et seq.) S.A.F.E. Mortgage Licensing Act of2008 (12 U.S.C et seq.) Truth in Lending Act (15 U.S.C et seq.) Truth in Savings Act (12 U.S.C et seq.) Section 626 of the Omnibus Appropriations Act, 2009 (Public Law Interstate Land Sales Full Disclosure Act (15 U.S.C. 1701). 2. CFPA Substantive Law Additions The CFPA added new categories of regulated activity Fair Lending and Unfair, Deceptive or Abusive Acts or Practices (UDAAP). Fair Housing. The CFPA added a definition of fair lending which means fair, equitable, and nondiscriminatory access to credit for consumers. 18 The CFPB is to establish an Office of Fair Lending and Equal Opportunity within the CFPB with powers and duties to be delegated by the Director. 19 The CFPB is also authorized to engage in investigations and request information relating to fair housing jointly with the Secretary of Housing and Urban Development and the U.S. Attorney General. 20 The ECOA was amended to facilitate enforcement of fair lending laws by requiring financial institutions to collect certain types of 18 Dodd-Frank Section 1002(13), codified at 12 U.S.C. 5481(13). 19 Dodd-Frank Section 1013(c), codified at 12 U.S.C. 5493(c). 20 Dodd-Frank Section 1052(a), codified at 12 U.S.C. 5562(a). 4

7 information about women-owned, minority-owned and small businesses and report the information to the CFPB. 21 Prohibition of Unfair, Deceptive or Abusive Acts or Practices. The CFPA granted the CFPB authority to prevent covered persons from committing unfair, deceptive or abusive acts or practices under Federal law in connection with any consumer transaction involving consumer financial products or services. 22 The CFPB is authorized to promulgate rules applicable to a covered person or service provider identifying as unlawful unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service Consumer Financial Products and Services A consumer financial product or service is any financial product or service that is (a) offered or provided to consumers primarily for personal family or household purposes or (b) involves extending credit and servicing loans, providing real estate settlement services, collecting, analyzing, maintaining or providing consumer report or other account information, or collecting debt in connection with a financial product or service described clause (a). 24 A financial product or service includes extensions of credit and loan services, real estate settlement services and property appraisals, taking deposits, transmitting or exchanging funds, check cashing, guaranty or collection services, financial data processing, and collection and provision of consumer reports and credit histories Covered Persons and Service Providers A covered person is (a) any person or entity that engages in offering or providing a consumer financial product or service and (b) any affiliate of a person or entity described in clause (a) who acts as a service provider to such person or entity. 26 A service provider is any person or entity that provides a material service to a covered person in connection with such covered person s offering or provision of a consumer financial product or service Dodd-Frank Section 1071, codified at 15 U.S.C. 1691c Dodd-Frank Section 1031(a), codified at 12 U.S.C. 5531(a). 23 Dodd-Frank Section 1031(b), codified at 12 U.S.C. 5531(b). 24 Dodd-Frank Section 1002(5), codified at 12 U.S.C. 5481(5). 25 Dodd-Frank Section 1002(15), codified at 12 U.S.C. 5481(15). 26 Dodd-Frank Section 1002(6), codified at 12 U.S.C. 5481(6). 27 Dodd-Frank Section 1002(26), codified at 12 U.S.C. 5481(26). 5

8 C. CFPB Rulemaking Authority CFPB generally has exclusive rule-making authority under Federal consumer financial laws ( 1022(b)(4)). 28 Federal Trade Commission Act is not a Federal consumer financial law, although FTC authority to prescribe rules under consumer financial laws is transferred to CFPB. 29 Fair Housing Act is not a consumer financial law and enforcement of Fair Housing Act (most notably allegations of discrimination by mortgage lenders) remains with HUD. Amendments to ECOA and Truth-in-Lending Act (TILA) authorize the Federal Reserve Board to make rules to carry out the ECOA (Regulation B) 30 and TILA (Regulation Z) 31 with respect to auto dealers excluded from CFPB authority under Dodd-Frank 1029(a). 32 CFPB has authority under its general rule-making authority to prescribe rules to carry out ECOA (Regulation B) and TILA (Regulation Z) with respect to auto dealers that are not excluded from CFPB authority. D. CFPB Supervisory Examination Authority CFPB has exclusive supervisory authority over insured depository institutions and insured credit unions with total assets of more than $10 billion and their affiliates to require reports and conduct examinations for purposes of assessing compliance with Federal consumer financial laws and detecting and assessing risks for consumer financial products and services. 33 CFPB has supervisory authority over other insured depository institutions and insured credit union compliance limited to requiring reports as necessary to implement Federal consumer financial law and to detect and assess risks to consumers and consumer financial markets. 34 CFPB has supervisory authority over other covered persons offering or providing mortgage-related products, payday and private student 28 Dodd-Frank Section 1022(b)(4), codified at 12 U.S.C. 5512(b). 29 Dodd-Frank Section 1061(b)(5)(B), codified at 12 U.S.C. 5581(b)(5)(B). 30 Dodd-Frank Section 1085(3)(f), codified at 15 U.S.C. 1691b(f). 31 Dodd-Frank Section 1100(A)(7), codified at 12 U.S.C. 1604(i). 32 Dodd-Frank Section 1029(a), codified at 12 U.S.C. 5519(a). 33 Dodd-Frank Section 1025(b)(1), codified at 12 U.S.C. 5515(b)(1). 34 Dodd-Frank Section 1026(b), codified at 12 U.S.C. 5516(b). 6

9 loans and larger participants in markets for other consumer financial products or services as defined by CFPB rule. 35 E. CFPB Enforcement Authority The CFPB has the authority to commence a civil action against any person who violated a Federal consumer financial law to impose a civil penalty or seek legal and equitable relief, including a permanent or temporary injunction. 36 Legal remedies available in a CFPB proceeding include rescission or reformation of contracts, refund of moneys or return of real property, restitution, disgorgement or compensation for unjust enrichment, payment of damages or other monetary relief, public notification regarding the violation, including the costs of notification, and limits on the activities or functions of the person. 37 Civil penalties are to be imposed for each violation as follows: (a) up to $5,000 for each day during which the violation continued, (b) up to $25,000 per day for each reckless violation and (c) up to $1,000,000 per day for each knowing violation. 38 No exemplary or punitive damages are authorized, 39 but the CFPB may recover its costs if it is the prevailing party. 40 The CFPB is not authorized to bring criminal proceedings but if the CFPB obtains evidence that any person has engaged in conduct that may constitute a violation of federal criminal law, the CFPB must refer the case to the US Attorney General. 41 The CFPA is silent as to private rights of action. However, an earlier version of the legislation passed by the House included a provision stating that the CFPA created no private cause of action which was omitted from the CFPA. Violations of the UDAAP prohibitions under the CFPA could be grounds for private causes of action under state unfair and deceptive acts. CFPB has primary enforcement authority over large insured depository institutions, 42 but prudential regulator may recommend 35 Dodd-Frank Section 1024(a)(1), codified at 12 U.S.C. 5514(a)(1). This authority is limited to commencing actions against persons over whom the CFPB otherwise has enforcement authority. 36 Dodd-Frank Section 1054(a), codified at 12 U.S.C. 5564(a). 37 Dodd-Frank Section 1055(a)(2), codified at 12 U.S.C. 5565(b). 38 Dodd-Frank Section 1055(c)(2), codified at 12 U.S.C. 5565(c)(2). 39 Dodd-Frank Section 1055(a)(3), codified at 12 U.S.C. 5565(a)(3). 40 Dodd-Frank Section 1055(b), codified at 12 U.S.C. 5565(b). 41 Dodd-Frank Section 1056, codified at 12 U.S.C Dodd-Frank Section 1025(c)(1), codified at 12 U.S.C. 5515(c)(1). 7

10 enforcement action 43 and may initiate enforcement action if CFPB does not initiate action within 120 days of the referral. 44 Prudential regulators have exclusive authority to bring enforcement proceedings against small insured depository institutions. 45 The CFPB is required to notify the prudential regulator if the CFPB has reason to believe a small insured depository institution has engaged in a material violation of a Federal consumer financial law. 46 CFPB has exclusive authority to bring enforcement proceedings against non-depository covered persons. 47 State attorneys general may bring civil actions to enforce the CFPA and implementing regulations against covered persons 48 other than national banks and federal thrifts, 49 but may bring a civil action against national banks and federal thrifts to enforce a regulation under the CFPA only (and not a statutory violation). 50 The state attorney general must first notify the CFPB and the prudential regulator before commencing any action against a covered person to enforce any provision of the CFPB in implementing regulation. 51 State regulators may bring civil action to enforce CFPA and implementing regulations against a covered person that is statechartered, incorporated, licensed or otherwise authorized to do business under state law. 52 The state regulator must first notify the CFPB and prudential regulator before commencing any action against a covered person to enforce any provision of the CFPA or any implementation regulation Dodd-Frank Section 1025(c)(2), codified at 12 U.S.C. 5515(c)(2). 44 Dodd-Frank Section 1025(c)(3), codified at 12 U.S.C. 5515(c)(3). 45 Dodd-Frank Section 1026(d)(1), codified at 12 U.S.C. 5516(d)(1). 46 Dodd-Frank Section 1026(d)(2), codified at 12 U.S.C. 5516(d)(2). 47 Dodd-Frank Section 1024(c), codified at 12 U.S.C. 5514(c). 48 Dodd-Frank Section 1042(a)(1), codified at 12 U.S.C. 5552(a)(1). 49 Dodd-Frank Section 1042(a)(2), codified at 12 U.S.C. 5552(a)(2). 50 Dodd-Frank Section 1042(a)(2)(B), codified at 12 U.S.C. 5552(a)(2)(B). 51 Dodd-Frank Section 1042(b)(1)(A), codified at 12 U.S.C. 5552(b)(1)(A). 52 Dodd-Frank Section 1042(a)(2), codified at 12 U.S.C. 5552(a)(2). 53 Dodd-Frank Section 1042(b)(1)(A), codified at 12 U.S.C. 5552(b)(1)(A). 8

11 III. Equal Credit Opportunity Act (ECOA) and Regulation B and Fair Credit Reporting Act (FCRA) A. Spousal Guarantor as Applicant under the ECOA and Regulation B 1. Statutory and Regulation B Definition and Prohibitions Title VII - Equal Credit Opportunity Act 701. Prohibited discrimination; reasons for adverse action (a) It shall be unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction (1) on the basis of race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract) (Emphasis Added) 702. Definitions (b) The term applicant means any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit. (d) The term credit means the right granted by a creditor to a debtor to defer payment of debt or to incur debts and defer its payment or to purchase property or services and defer payment therefor. Equal Credit Opportunity Act (Regulation B) Definitions (e) Applicant means any person who requests or who has received an extension of credit from a creditor, and includes any person who is or may become contractually liable regarding an extension of credit. For purposes of 202.7(d), the term includes guarantors, sureties, endorsers, and similar parties. (Emphasis Added) Rules concerning extensions of credit (d) Signature of spouse or other person (1) Rule for qualified applicant. Except as provided in this paragraph, a creditor shall not require the signature of an applicant s spouse or other person, other than a joint applicant, on any credit instrument if the applicant qualifies under the creditor s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial 9

12 statement or other evidence of jointly held assets as an application for joint credit. 2. Split Between 9 th Circuit and 6 th Circuit in Application of Chevron U.S.A. v. National Resources Defense Council Framework Hawkins v. Community Bank of Raymore, 761 F. 3d 937 (8 th Circuit 2014), cert granted March 2, 2015 Held: Spousal guarantor is not applicants under ECOA. In applying first step of Chevron framework, Court concluded that the ECOA clearly provides that a person does not qualify as an applicant solely by virtue of executing a guaranty to support another person s debt. Because text of ECOA is unambiguous, Court did not defer to Regulation B interpretation. RL BB Acquisition, LLC v. Bridgemill Commons Development Group, LLC, 754 F. 3d 380 (6th Circuit 2014). Held: Spousal Guarantor can be an applicant under ECOA. In applying Chevron first step, Court concluded that applicant is ambiguous because it could be read to include third parties that did not initiate an application for credit. Under Chevron Step two, Court concluded Regulation B is a permissible interpretation entitled to deference. Hawkins v. Community Bank of Raymore, cert granted March 2, 2015 to decide whether the ECOA applies to loan guarantors. B. FCRA and Employers 1. FCRA Provision The Fair Credit Reporting Act requirements extend beyond credit reporting agencies and creditors and also covers employers that use a consumer report for employment decisions. It imposes requirements that the user of the report must satisfy before requesting a consumer report for the consumer (the employee, prospective or existing), before taking adverse action based on the report and after taking adverse action based on the report. The FCRA provides private rights of action for the consumer to enforce negligent violations (FCRA 617, 15USC 1681o) and willful violations (FCRA 616, 15USC 1681n) of the FCRA requirement by the employer. The employer may be liable for actual damages 10

13 sustained by the consumer or statutory damages of not less than $100 nor more than $1,000 for willful violations, punitive damages and reasonable attorneys fees and costs. Employer liability for negligent violations is limited to actual damages and reasonable attorneys fees and costs. Plaintiff class actions almost always allege willful violations with an eye on the statutory damages. 2. Supreme Court Grants Certiorari in Spokeo, Inc. v. Robins, No (April 27, 2015) The Supreme Court granted certiorari in Spokeo on the question whether class action plaintiffs can sue for statutory damages when they can show no actual injury or harm, but only statutory noncompliance. A decision requiring that plaintiffs must show actual injury/damages, not just a statutory violation, would likely have a very chilling effect on class action lawsuits involving workplace FCRA violations. Statutory damages are not provided for negligent violations. IV. Recent Developments A. Unfair, Deceptive or Abusive Acts or Practices Dodd-Frank added new substantive provisions that make it unlawful for any provider of consumer financial products or services or a service provider to engage in any unfair, deceptive or abusive act or practice ( UDAAP ). 54 The CFPB has rule-making authority and, with respect to entities within its jurisdiction, enforcement authority to prevent UDAAP in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. 55 The Dodd-Frank UDAAP provision is broad and vague, but the CFPB has not yet exercised its rule-making authority to define prohibited UDAAP. Covered persons must instead look to recent CFPB enforcement actions for guidance UDAAP development on a case-by-case basis. Notably, many UDAAP enforcement actions have also involved violations of specific Federal consumer financial laws. Some UDAAP enforcement actions use alleged UDAAP violations to reach covered persons to whom Federal consumer financial laws might not apply directly. The subject matter of some representative UDAAP enforcement actions and CFPB supervisory observations are highlighted below. 54 Dodd-Frank Section 1031(a), codified at 12 U.S.C. 5531(a). 55 Dodd-Frank Section 1031(b), codified at 12 U.S.C. 5531(b). 11

14 Debt Collection/Settlement/Relief Deceptive practices - attorneys included misrepresentations by attorneys in collection lawsuits.56 The CFPB filed a complaint against the debt collection law firm Frederick J. Hanna & Associates, P.C. and its three principal partners. The complaint alleges that the firm operated less like a law firm than a factory in filing collection lawsuits against hundreds of thousands of Georgia consumers to collect debts that the consumers allegedly owed to others. The attorneys allegedly knew or should have known that many of the affidavits obtained for the collection lawsuits were executed by persons who lacked personal knowledge of the facts. The attorneys also allegedly obtained affidavits received from their debt collection clients without first determining whether any underlying documentation for the debt to be collected was available, nor did they review the contracts governing the sale of accounts to determine whether those contracts disclaimed any warranties regarding the accuracy or validity of the debts. The attorneys allegedly represented in their collection lawsuits that attorneys were meaningfully involved in the preparation and filing of the lawsuits when in fact the attorneys lacked meaningful involvement. engaging in deceptive acts and practices in the course of its debt collection activities. The attorneys lack of meaningful attorney involvement in preparing and filing the collection lawsuits and their use of affidavits allegedly constituted violations of the Fair Debt Collection Practices Act, the CFPB alleged the following deceptive acts in violation of the Dodd-Frank Act. These Fair Debt Collection Practices Act allegedly constitute deceptive acts and practices in violation of sections 1031(a) of the CFPA (12 U.S.C. 5531(a)) and 1036(a)(1)(B) of the CFPA (12 U.S.C. 5536(a)(1)(B)). Mortgage Servicing/Origination/Relief Auto Leasing and Loans/Ancillary Products/Debt Collection Credit Card Add-Ons Retail Installment Credit/Debt Collection Payday Loans/Debt Collection 56 Complaint, Consumer Financial Protection Bureau v. Frederick J. Hanna & Associates, P.C., Case No. 1:14-cv AT-WEJ (N.D. GA, July 14, 2014), available at 12

15 B. RESPA and TILA Integrated Disclosure 1. Background Dodd-Frank directed the CFPB to integrate the mortgage loan disclosures under TILA and RESPA Sections 4 and 5 and propose for public comment rules and model disclosures that integrate these disclosures by July 21, The CFPB issued proposed rules and forms on July 9, The CFPB adopted a final rule on December 21, 2013 with new, integrated disclosures (the TILA-RESPA rule). 57 The new TILA-RESPA rule is effective August 1, Highlights The new rule generally applies to most closed-end consumer mortgage loans, but does not apply to home equity lines of credit, reverse mortgages, mortgage loans secured by a mobile home or unattached dwelling, loans made by a lender making fewer than six mortgages a year and certain no-interest second mortgage loans made for the purpose of down payment assistance, property rehabilitation, energy efficiency or foreclosure avoidance. Current disclosure requirements under TILA and RESPA require lenders make two sets of disclosures, one at the time of application using two different forms, the initial TILA statement and the RESPA Good Faith Estimate, and another at or near closing also using two different forms, a final TILA statement and the RESPA HUD settlement statement. The new Loan Estimate form replaces the initial TILA statement and the RESPA Good Faith Estimate forms and incorporates additional disclosures required under Dodd-Frank. Similarly, the new Closing Disclosure replaces the final TILA statement and the RESPA HUD settlement statements and incorporates additional disclosures required under Dodd- Frank. The Loan Estimate must reflect a good faith estimate of the closing costs. For this purpose, an estimate is in good faith if the actual closing costs paid by the consumer does not exceed the estimate, subject to certain permitted tolerances. The Loan Estimate form must be given within three days after the loan application is made. The Closing Disclosure must be given at least three days before closing. 57 Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) (78 FR 7973, Dec. 31, 2013). 13

16 3. CFPB Compliance Guide The CFPB has published a TILA-RESPA Integrated Disclosure rule Small entity compliance guide (March 2015) ( that provides a helpful summary of the new TILA-RESPA rule. Reference is made to the guide for a more detailed discussion of the new TILA-RESPA rule and the new disclosure forms. C. Ability-to-Repay and Regulation Z: Installment Sale of Personal Residence 1. Dodd-Frank and Regulation Z Dodd-Frank amended the Truth-in-Lending Act to prohibit creditors from making residential mortgage loans unless the creditor makes a reasonable and good faith determination, based on verified and documented information, that the consumer will have a reasonable ability to repay the loan according to its terms. 58 Dodd-Frank also amended the Truth-in-Lending Act to establish a presumption of compliance with the ability to repay requirement for a category of mortgage defined as a qualified mortgage. 59 The CFPB amended Regulation Z to implement Dodd-Frank Ability-to-Repay effective January 10, Seller Financiers There has been some suggestion that a seller who finances a buyer s purchase of a personal residence through a mortgage loan or installment sale would be subject to the TILA and Regulation Z Ability-to-Repay determination requirement. However, Regulation Z defines a creditor as a person who regularly extends consumer credit and for this purpose a person regularly extends consumer credit only if the person extended credit more than five times during the preceding calendar year or current calendar year. 61 A seller should not be a creditor in most private contract home sales and should not be subject to the Ability-to-Pay requirement. D. Auto Finance Auto Dealer Coverage under Federal Consumer Financial Laws 1. Direct and Indirect Auto Lending 58 Dodd-Frank Section 1411(a)(2), codified at 15 U.S.C. 1639c(a). 59 Dodd-Frank Section 1412(b), codified at 12 U.S.C. 1639c(b). 60 Ability-to-Repay and Qualified Mortgage Standards Under Truth-in-Lending Act (Regulation Z) 78 Fed. Reg (January 30, 2013); 12 C.F.R See 12 C.F.R (a)(17)(i) and (iv). 14

17 The CFPA and enumerated consumer laws blanket auto dealers, direct auto lenders and indirect auto lenders that purchase retail credit and retail leases originated by auto dealers with a kind of crazy quilt of rulemaking, supervisory and enforcement authorities spread among the CFPB and other federal agencies. There are two common models of auto finance, indirect lending and direct lending. With indirect lending, the dealer typically collects basic information regarding the applicant (by completing a credit application) and forwards that information to prospective indirect auto lenders. The auto dealer originates a retail installment contract or retail lease contract with the consumer/applicant and assigns the contract to the indirect lender who has agreed to accept the assignment. With direct lending, the dealer may or may not collect information about the consumer for the direct lender. Alternatively, the consumer arranges financing directly with the lender. In direct lending, the lender and consumer enter into a two-party finance contract. The dealer is not a party to the finance contract, so there is no assignment to the lender. 2. Auto Dealer Regulation Section 1029(a) Exclusion from CFPB Authority. Auto dealers that originate retail installment contracts or retail lease contracts with consumers and routinely assign them to indirect lenders that are not owned or controlled by the dealer are excluded from all CFPB rulemaking, supervisory, enforcement and other authority. 62 Section 1029(b) Exception to Section 1029(a) Exclusion. The auto dealer exclusion from CFPB authority does not apply to auto dealers that originate retail installment contracts or retail lease contracts with consumers and either retain the contract or assign them contract to an indirect lender controlled by the dealer, provide consumers with real property mortgages or offer or provide consumers with a consumer financial product not related to the sale, financing, leasing or servicing of motor vehicles. 63 These auto dealers may be subject to CFPB rulemaking, supervisory, enforcement and other authority as otherwise applicable to covered persons. 62 Dodd-Frank Section 1029(a), codified at 12 U.S.C. 5519(a). 63 Dodd-Frank Section 1029(b), codified at 12 U.S.C. 5519(b). 15

18 3. TILA and ECOA Coverage of Auto Dealers Any auto dealer extending consumer credit more than 25 times during any calendar year that either carries a finance charge or that is repayable in more than four installments with or without a finance charge is a creditor for purposes of the Truth-in-Lending Act and its implementing regulation, Regulation Z, and is subject to the requirements of both laws. 64 An auto dealer that regularly extends, renews, or continues credit or regularly arranges for the extension, renewal, or continuation of credit is a creditor under the Equal Credit Opportunity Act. 65 An auto dealer will be a creditor under Regulation B if the dealer, in the ordinary course of business, regularly participates in a credit decision, including setting the terms of the credit, refers applicants or prospective applicants to creditors or selects or offers to select creditors to whom requests for credit may be made Regulation B and Regulation Z Rulemaking and Enforcement Authority CFPB Rulemaking and Enforcement Authority. Auto dealers not excluded from CFPB authority are subject to applicable rules promulgated by the CFPB implementing Federal consumer financial laws. 67 Auto dealers not excluded from CFPB authority are subject to CFPB supervision and enforcement authority if the dealer meets the CFPB s definition of larger participant under its rule yet to be finalized. 68 FTC Enforcement of the ECOA and Regulation B and TILA and Regulation Z. The FTC has authority to enforce the ECOA and regulations issued thereunder and the TILA and regulations issued thereunder against persons under its jurisdiction to which Congress has not assigned enforcement to some other government agency. 69 The FTC has enforcement authority against auto dealers excluded from CFPB authority U.S.C. 1602(g); 12 C.F.R (a)(17)(i) and (v), with respect to auto dealers excluded from CFPB authority and 12 C.F.R (a)(17)(i) and (v), with respect to auto dealers that are not excluded from CFPB authority U.S.C. 1691a(d) C.F.R (l), with respect to auto dealers excluded from CFPB authority, and 12 C.F.R (l), with respect to auto dealers not excluded from CFPB authority. 67 Dodd-Frank Section 1029(b), codified at 12 U.S.C. 5519(b). 68 Dodd-Frank Section 1024(b), codified at 12 U.S.C. 5514(b) with respect to CFPB Supervision, and Dodd-Frank Section 1024(c), codified at 12 U.S.C. 5514(c), with respect to CFPB enforcement; 12 C.F.R The CFPB has proposed an amendment that would define larger participants of the market for automobile financing. See Defining Larger Participants of the Automobile Financing Market and Defining Certain Automobile Leasing Activity as a Financial Product or Service, 79 Fed. Reg (Oct. 8, 2014) (to be codified at 12 C.F.R. Parts 1001 and 1090). 69 Dodd-Frank Section 1085(4)(B), codified at 15 U.S.C. 1691c(c) as to ECOA, and Dodd Frank Section 1100A(8)(B), codified at 15 U.S.C. 1607(c) with respect to TILA. 16

19 Federal Reserve Board Limited Rulemaking Authority. The Federal Reserve Board is authorized to prescribe regulations under the ECOA (Regulation B) and the TILA (Regulation Z) with respect to auto dealers excluded from CFPB authority. 70 E. Evidence of Discrimination and Violations of ECOA Fair Lending Requirements 1. General Fair Lending Prohibitions The fair lending requirements of the ECOA make it illegal for a creditor to discriminate in any credit transaction against any applicant because of race, color, religion, national origin, sex, marital status, age (if the applicant is old enough to enter into a contract), receipt of income from any public assistance program; or the exercise in good faith of a right under the Consumer Credit Protection Act. 71 On December 21, 2011, the CFPB adopted Regulation B implementing the ECOA. 72 In so doing, the CFPB reaffirmed the disparate treatment and disparate impact theories of liability for discrimination in connection with the extension of credit prohibited by the ECOA originally adopted by the Federal Reserve Board under its prior authority to implement the ECOA. 73 The CFPB subsequently confirmed its intention to adopt all three methods of proving lending discrimination under the ECOA overt discrimination, disparate treatment and disparate impact - set out in the Interagency Task Force on Fair Lending, Policy Statement on Discrimination in Lending, 59 Fed. Reg. 18,266 (Apr. 15, 1994). 74 Under the Policy Statement as discussed in CFPB Bulletin : Overt discrimination occurs when the lender openly discriminates on a prohibited basis or even when the lender expresses - but does not act on - a discriminatory basis. Disparate treatment occurs when a lender treats a credit applicant differently based on one of the prohibited bases. No showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself is required. It is considered by courts to be intentional discrimination because no credible, 70 Dodd-Frank Section 1085(3)(f), codified at 15 U.S.C. 1691b(f), with respect to Regulation B, and Dodd-Frank Section 1100A(7), codified at 15 U.S.C. 1604(i), with respect to Regulation Z U.S.C. 1691(a)(1). 72 Adopted as interim final rule codified 12 C.F.R. Part Fed. Reg , December 21, See 12 C.F.R (a) and 202.6(a). 74 CFPB Bulletin (Fair Lending), Lending Discrimination, April 18,

20 nondiscriminatory reason explains the difference in treatment on a prohibited basis. Disparate impact occurs when a lender applies a policy or practice equally to credit applicants, but the policy or practice has a disproportionate adverse impact on applicants in a protected class. Policies and practices that are neutral on their face and that are applied equally may still, on a prohibited and unlawful basis, disproportionately and adversely affect a person's access to credit. It not necessary to show that the lender intended to discriminate to establish unlawful disparate impact in violation of the ECOA. 2. Class Actions Based on Disparate Impact After Wal-Mart Stores, Inc. v. Dukes. The Supreme Court in Wal-Mart Stores, Inc. v. Dukes 75 denied class action status in a lawsuit alleging disparate impact affecting female employees in violation of Title VII of the 1964 Civil Rights Act. The basis for class certification was statistical evidence showing pay and promotion disparities and a sociologist s social framework analysis that purported to show that Wal-Mart was vulnerable to gender discrimination leading to an unlawful disparate impact on female employees. The Court ruled that the mere showing that Wal-Mart s policy giving local supervisors discretion over employment matters produced an overall sex based disparity did not establish that the employer operated under a general policy of discrimination as required to satisfy the commonality requirement and permit class certification. Although Wal-Mart involved a class action alleging unlawful discriminatory employment practices in violations of Article VII, it was based on the disparate impact theory that has served as the basis for fair lending class actions alleging violations of the ECOA. Wal-Mart has had a significant impact on fair lending class actions that allege disparate impact based on statistical disparities in loan pricing and fees under a lender s discretionary pricing policy. Based on Wal-Mart, courts are no longer allowing plaintiffs to show disparate impact and discretionary pricing alone to permit class certification. 76 Instead, courts are uniformly requiring plaintiffs to satisfy the commonality requirement by showing a common 75 Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct (2011). 76 See In re Countrywide Financial Mortgage Lending Practices Litigation, 708 F.3d 704 (6 th Circuit 2013), Barrett v. H&R Block, Inc., 1 st Circuit, No , February 7, 2013, denying petition to review District Court decertification of a class in an action brought pursuant to the ECOA and FHA, and Rodriguez v. National City Bank, 726 F.3d 372 (3 rd Circuit 2013). Each involved unsuccessful appeals of denials of class certification in fair lending class actions following Wal-Mart. 18

21 practice of exercising discretion that has a disparate impact before class certification will be permitted. 3. Enforcement Actions Commonality is, of course, not an issue in enforcement actions. However, the disparate impact theory of liability for discrimination in violation of the ECOA is an issue. The CFPB and other agencies have applied the disparate impact theory long recognized as a valid theory in Title VII employment cases to fair lending actions under the FHA and ECOA against banks, mortgage companies, finance companies and indirect auto lenders. CFPB Bulletin provides a prime example of how one enforcement agency, the CFPB, is extending the reach of the disparate impact theory. 77 The Bulletin provides guidance to indirect auto lenders whose policies allow a dealer to markup the actual interest rate to the consumer above the lender s buy rate. The Bulletin indicates the CFPB s intention to hold indirect auto lenders liable under the ECOA if their dealer markup and compensation policies result in pricing disparities on a prohibited basis. The FHA and ECOA fair lending statutory provisions are very similar, but both have important omissions that differentiate each from the Title VII text on which the disparate impact theory is based. 78 All federal circuit courts recognize the disparate impact theory under the FHA, most recently reconfirmed by the Fifth Circuit in The Inclusive Communities Project, Inc. v. Texas Department of Housing and Community Affairs, 747 F.3d 275 (5th Cir. 2014). The U.S. Supreme Court granted certiorari in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., 135 S. Ct. 46, No ,on October 2, 2014 to determine whether the FHA permits disparate impact claims. A decision is expected in June. 77 CFPB Bulletin (March 21, 2013). 78 The US Supreme Court first adopted the disparate impact theory of liability as a basis for liability for discrimination in Griggs v. Duke Power Co., 401 U.S. 424, 91 S. Ct. 849 (1771), an employment case alleging discrimination in violation of Title VII of the Civil Rights Act of The Court s subsequent decision in Smith v. City of Jackson, 544 U.S. 228, 125 S.Ct. 279 (2005) made an important clarification that Title VII contained two different statutory provisions prohibiting discrimination. The Griggs decision adopting the disparate impact theory was based on a statutory provision (Section 703(a)(2) of Title VII) that prohibited the employer from taking action that negatively affects a person s employment on a prohibited basis and that intent to discriminate was not required under this particular statutory provision. The Supreme Court in City of Jackson concluded that a provision of the ADEA similar to Section 703(a)(2) of Title VII (Section 4(a)(2) of the ADEA prohibiting discrimination on the basis of age that adversely affected the person s employment) likewise permitted disparate impact claims. However, neither the FHA nor the ECOA contains a statutory provision similar to Section 703(a) of Title VII or Section 4(a)(2) of the ADEA. 19

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