Last Week, This Morning

July 22, 2024

Below you will find several key developments in the financial services industry, including related developments in information privacy and data security, from the past week. We add an "Amicus Brief(ly)¹" comment to each item, where we briefly (see what we did there?) note for friends (and again?) of CounselorLibrary the important takeaways from the developments outlined in the email. Our legal reporters - CARLAW, HouseLaw, InstallmentLaw, PrivacyLaw, and BizFinLaw - provide more comprehensive, real-time updates of federal and state laws, regulations, litigation, and other industry items of interest. For a personal guided tour and free trial of any of these legal reporters, please contact Michael Willer at 614-855-0505 or mwiller@counselorlibrary.com.

On July 15, the U.S. Department of Housing and Urban Development filed a lawsuit on behalf of a Black homeowner against an appraiser and his appraisal company, an appraisal management company, and a mortgage lender for discrimination on the basis of race, in violation of the Fair Housing Act, in connection with an appraisal of the homeowner's property for purposes of her application to refinance her mortgage loan.

The complaint alleges that the mortgage lender ordered an appraisal of the homeowner's property from the appraisal management company, which, in turn, selected an appraiser to conduct the appraisal. The appraiser submitted his appraisal report to the appraisal management company and lender with an appraised value that was allegedly significantly lower than the value for which the subject property had been appraised eight months earlier. The complaint alleged that other recent appraisals of the same property had steadily increased in value, yet this appraisal resulted in a significant drop, despite the growth in home values in the city in which the homeowner's property is located. After reviewing the appraisal report, the homeowner informed the lender that she believed the appraisal was discriminatory and had factual inaccuracies, problematic comparable properties, and a low appraised value. The lender allegedly informed the homeowner that she could either: (1) proceed with her refinance loan application using the appraised value she complained was discriminatory, or (2) she could have her loan application cancelled or denied and her discriminatory complaint referred to the lender's client relations department. In the complaint, HUD alleged that these two choices were, in effect, retaliatory actions by the lender against the homeowner for raising concerns about the allegedly discriminatory appraisal. HUD also alleged that, in selecting comparable properties for the appraisal of the homeowner's property that was allegedly located in an area with predominately White residents, the appraiser chose comparable properties only in areas with higher concentrations of Black residents and ignored several closer properties that were in more predominately White areas. HUD alleged that this practice artificially lowered the appraised value of the homeowner's property and deviated from the appraiser's own methodology about the relevant neighborhood when he appraised similar properties with White owners.

The complaint seeks injunctive and other equitable relief as well as damages for the defendants' allegedly discriminatory conduct.

Amicus brief(ly): Readers who follow this topic will recall that the CFPB just finalized its proposed rule on quality control standards for automated valuation models (an appraisal alternative) last week, and it still has a proposal pending related to the use of artificial intelligence in appraisals to avoid bias. But this discrimination case goes back to 2021, before either of those efforts by the CFPB began, and involves an actual appraiser, not a software program, applying his judgment. HUD alleges some damning facts in the charging statement that make it sound like the appraiser abandoned objectivity and rational appraisal methods, including comparables, recently used for homes in the same neighborhood simply because of the borrower's race. That type of discrimination is expressly prohibited by the Fair Housing Act and, if the allegations are true, is an obvious no-no. Appraisal review teams at the lender missed some pretty clear red flags, starting with the appraised property value decreasing by 25% over a single year while property values in the neighborhood generally increased during that same period. Unless the defense has something compelling to say in response that did not come up during HUD's investigation, this one is open-and-shut.

On July 16, Federal Communications Commission Chairwoman Jessica Rosenworcel proposed rules that, if adopted by a vote of the full Commission at its August meeting, would seek comment on the definition and use of artificial intelligence-generated robocalls. According to the FCC's news release, the proposed rules would define AI-generated calls and require callers to disclose to consumers whether they use AI in their robocalls. The proposed rules would also seek comment on how to protect the positive uses of AI, such as the use of AI in calls to consumers with disabilities to promote accessibility of the telephone networks, and on technologies that can protect consumers from unwanted and illegal AI-generated robocalls.

The proposed rules build on information the FCC obtained after issuing a Notice of Inquiry on November 15, 2023, that sought to gather information about how AI technology positively and negatively impacts robocalls and robotexts. The Notice of Inquiry sought comment on how to define AI in the robocall and robotext context, the current state of AI use in calling and texting, the impact of emerging AI technologies on consumer privacy rights under the Telephone Consumer Protection Act, and what, if any, next steps the FCC should take to address these issues.

Amicus brief(ly): This move by the FCC continues its work focusing on the use of AI and follows Colorado's adoption of an AI law at the end of May. Both the Colorado statute and the proposal from the FCC (if adopted) require some form of disclosure to consumers that the caller is using AI for the call on the premise that consumers will use that information to decide whether to take or respond to the call. At this relatively early stage in the FCC's rulemaking, industry comments could impact the direction of the ultimate FCC rule. But wherever the FCC lands in a final rule, we can and should expect more of this type of consumer protection measure, at least at the state level, as industries expand their reliance on AI to gain efficiencies. And in the aftermath of the U.S. Supreme Court's recent dismantling of the concept of Chevron deference to agency discretion in its Loper Bright decision, we expect lawsuits challenging any federal rulemakings to be tied up in the courts for years.

On July 18, the Consumer Financial Protection Bureau proposed an interpretative rule that takes the position that almost all earned wage access products are consumer credit and subject to the Truth in Lending Act. The proposed interpretive rule would apply to EWA products that involve both: (1) the provision of funds to the consumer in an amount that is based, by estimate or otherwise, on the wages that the consumer has accrued in a given pay cycle; and (2) repayment to the third-party provider via some automatic means, like a scheduled payroll deduction or a preauthorized account debit, at or after the end of the pay cycle. The proposed interpretive rule would expressly replace the CFPB's 2020 advisory opinion on EWA products, which states that EWA products that meet certain criteria are not an extension of credit (and thus not subject to TILA). In doing so, the CFPB applies a broader interpretation of what constitutes "debt," and consequently "credit," under TILA than it had in the previous guidance.

As discussed in the proposed interpretive rule, TILA defines "credit" as "the right granted by a creditor to a debtor to defer payment of debt or to incur debt and defer its payment," and Regulation Z offers a virtually identical definition. However, neither TILA nor Reg. Z define "debt." The proposed interpretive rule states that "if Congress had intended to substantially narrow the types of transactions that could constitute 'debt,' it could have done so by defining the term in TILA." Accordingly, the proposed rule interprets "debt," for purposes of TILA, to broadly include "any obligation by a consumer to pay another party."

In the CFPB's 2020 advisory opinion, the agency reasoned that if an employee had already performed the work that was the subject of an EWA transaction, there would be no "liability" for the employee in the transaction. The 2020 advisory opinion took the position that an EWA product does not involve the offering or extension of credit under TILA or Reg. Z if the following conditions are met: (1) providing the consumer with no more than the amount of accrued wages earned; (2) provision by a third party fully integrated with the employer; (3) no consumer payment, voluntary or otherwise, beyond recovery of paid amounts via a payroll deduction from the next paycheck; (4) no other recourse or collection activity; and (5) no underwriting or credit reporting. Taking the broader view of "debt," the proposed interpretive rule determines that the 2020 advisory opinion was incorrect to conclude that "debt" requires liability. As such, the proposed interpretive rule finds that EWA transactions, which involve an element of contingency, are "credit" because, even when the obligations to repay are satisfied by payroll deductions, there are still acts of repayment.

In changing course, the CFPB notes in the proposed interpretive rule that the 2020 advisory opinion narrowly contemplated a product that was administered through employers and that many new products that involve consumer payment have been introduced to the market. The proposed interpretive rule points out the most important feature of these new EWA products: fees and tips consumers pay incident to the transaction. The obligations under Reg. Z generally apply to providers who regularly offer or extend consumer credit subject to a finance charge. A "finance charge" is the cost of consumer credit as a dollar amount, and it includes "any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit." The CFPB interprets "incident to ... the extension of credit" broadly and concludes that, at a minimum, any payment exacted by the creditor that is greater than repayment of the amount advanced and that is "substantially connected" must be part of the finance charge.

In addition, the proposed interpretive rule finds that a charge could be part of a finance charge even if the credit can be obtained without making such a payment. The CFPB reasons that so long as the creditor can "impose" the cost on a consumer, those charges need not be a condition of the extension of credit; they can be merely in connection with the extension of credit. The CFPB also notes in the proposed interpretive rule that the two costs consumers may incur in EWA transactions - "expedited funds delivery fees" and "tips" - are substantially connected to the extension of credit.

The CFPB is soliciting comments on the proposed interpretative rule, which are due by August 30, 2024.

Amicus brief(ly): Is anyone surprised at the CFPB's revised angle on earned wage access products? Speaking of Loper Bright, it seems like it will only be a matter of time before this interpretive ruling, which does not take the same administrative steps as a full-blown Administrative Procedures Act rulemaking, sees a long, drawn-out challenge in court. Focusing on the substance of the proposed interpretive rule, the CFPB attributes its course change to the increasing number of non-employer providers offering EWA products through employers, where it had perceived the product to be an employer product a few years ago. That alone does not seem like a good reason to recharacterize EWA products as credit subject to TILA, but when taken together with the CFPB's comments about the costs of the product (i.e., expedited funds delivery fees and tips), we can follow the logic with some strain. We will follow this one with interest, not just because of the potential outcomes for regulation of EWA products but, if we are right about challenges to this proposal, to see how the courts deal with this kind of agency action in the aftermath of Loper Bright.

On July 17, Indiana Attorney General Todd Rokita announced that he obtained a settlement with four used car stores doing business as Honest Abe Auto Sales for "engaging in dishonest and deceitful conduct." In the press release announcing the settlement, the AG claimed that Honest Abe engaged in bait-and-switch sales tactics, falsely advertised prices, and preyed on subprime credit customers. Specifically, the AG claimed that Honest Abe advertised specific prices for vehicles, but when consumers with subprime credit attempted to buy those vehicles, Honest Abe raised the prices by thousands of dollars and failed to disclose the price increase as a cost of credit.

Under the terms of the settlement, Honest Abe will pay restitution to the over 250 affected consumers in the total amount of $470,646 and is enjoined from engaging in similar deceptive conduct in future advertising and sales, including:

• failing to provide accurate itemizations of amount financed on all future retail installment contracts;
• failing to ensure all advertisements comply with Section 1026.24 of federal Regulation Z and only include terms that are actually available to consumers;
• failing to disclose finance charges and annual percentage rates accurately on all future retail installment contracts;
• contracting for and imposing credit service/finance charges in excess of the maximum amount permitted under Ind. Code § 24-4.5-2-201 and as adjusted by Ind. Code § 24-4.5-1-106;
• advertising a vehicle for a specific price if a consumer cannot purchase the vehicle at the advertised price for either cash or credit;
• failing to include within the advertised price of its vehicles the costs of Honest Abe's documentation fee; and
• committing an unfair, abusive, or deceptive act, omission, or practice in connection with a consumer transaction, in violation of Ind. Code § 24-5-0.5-3(a).

Amicus brief(ly): State attorneys general have been focused on the type of dealer conduct alleged in this settlement for decades. Some AGs rely on regulations specifically prohibiting deceitful conduct (see Oregon's AG regulations), and others rely on more general state UDAP laws for recourse when they identify bait-and-switch and other behavior designed to mislead consumers. This settlement is a useful reminder to be very careful and accurate in dealer advertising, and the enumerated restrictions in the settlement would work well for any dealer's self-audit designed to ensure compliant practices.

Connecticut's new commercial financing disclosure law took effect on July 1, 2024, although many of its requirements, including the disclosure requirements, will not take effect until October 1, 2024. A sales-based financing provider or broker may now register with the Connecticut Department of Banking, as the new law requires. Providers and brokers must register by October 1, 2024.

A provider or broker must register through the Nationwide Multistate Licensing System & Registry. Registration through the NMLS requires disclosure of certain information, including identification of individuals in certain company roles and explanations of events such as court orders, regulatory actions, and civil settlements involving the company.

A provider or broker must pay an initial registration fee of $1,000 and an annual registration fee of $500 by September 15 every year following initial registration. Failure to pay the annual registration fee by the deadline results in automatic expiration of a registration. Information regarding registration is available here.

In addition, Missouri Governor Mike Parson recently signed Senate Bill 1359, which includes the Commercial Financing Disclosure Law. The law requires disclosures by providers of sales-based financing and commercial-purpose closed-end and open-end loans. A provider is subject to the law if the provider originates more than five commercial financing transactions to businesses located in Missouri in a calendar year. Transactions of more than $500,000 are exempt.

Under the new law, a provider must disclose the following at or before consummation of a commercial financing transaction:

• the total funds provided to the recipient;
• the funds disbursed, if less than the funds provided;
• the total amount payable to the provider under the agreement;
• the total cost of the financing, expressed in dollars;
• the payment schedule or estimated payment schedule; and
• whether the recipient will or may pay a cost or receive a discount if the recipient prepays.

The law does not require disclosure of actual or estimated APR.

Brokers must register with the Division of Finance of the Missouri Department of Commerce and Insurance and file surety bonds. The registration and bonding requirements do not apply to providers.

Violation of the new law is punishable by a fine of up to $500 per incident and up to $20,000 for all violations resulting from the use of the same set of documents or materials. If the violator has received written notice of a prior violation from the attorney general, the maximum fines increase to $1,000 per incident and $50,000 for all violations resulting from the use of the same set of documents or materials.

The new law will take effect six months after the Division of Finance finalizes rules under the law or on February 28, 2025, if it does not intend to promulgate rules.

Amicus brief(ly): State regulation of small business financing continues with this new Missouri law that follows the template from other states but requires a little less than some others. Notably and importantly, the Missouri statute omits the disclosure of an APR in the transaction documents, which is a relief for providers that know how hard it is to calculate or estimate that amount in certain business finance transactions that are not direct loans. Providers in Connecticut should be getting ready to register in the next couple of months, now that NMLS registration is open, and gearing up for the October 1 effective date for the disclosure rules.

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¹ For the unfamiliar, an “Amicus Brief” is a legal brief submitted by an amicus curiae (friend of the court) in a case where the person or organization (the “friend”) submitting the brief is not a party to the case, but is allowed by the court to file the brief to share information or expertise that bears on the issues in the case.