Last Week, This Morning

December 16, 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 December 9, the Consumer Financial Protection Bureau entered into a consent order with a company that services and collects student loan debt, including from borrowers who have defaulted on Federal Family Education Loan Program ("FFELP") loans. Borrowers who have defaulted on FFELP loans are generally required to pay "reasonable collection costs," including when they rehabilitate a loan. However, FFELP borrowers who have defaulted have a one-time right to rehabilitate their loans and bring them back to good standing without being charged collection costs if they enter into a payment plan within 65 days of default.

The CFPB alleged that, from 2015 to 2020, the company intentionally delayed borrowers from rehabilitating their student loan defaults in order to push the rehabilitation process beyond the 65-day grace period so that the company could impose collection costs on borrowers. For example, the company's agents allegedly told borrowers they had to fill out rehabilitation forms and send them to the company by mail, when they could have done so over the telephone or by email or fax.

The CFPB alleged that the company's actions violated the Consumer Financial Protection Act's prohibition against unfair and abusive acts and practices and the Fair Debt Collection Practices Act's prohibition against using unfair or unconscionable means to collect a debt.

Without admitting or denying the allegations, the company agreed to an order banning it from servicing, collecting, selling, or buying any federal or private student loan debt. The company will also pay a $700,000 civil penalty and must submit to compliance reporting requirements.

Amicus brief(ly): The only real takeaway from this consent order is ... don't do that. The allegations are serious, and the facts (largely taken from company emails) recited in the consent order reflect a very purposeful effort to delay getting borrowers into payment plans. This is not a "gotcha" consent order with a nuanced legal position for student loan servicers to consider and potentially implement. Rather, the recited facts (which, importantly, the company did not admit or deny) make fairly clear that at least some managers and employees were trying to delay getting defaulted accounts into payment plans until after the 65-day period expired so that the collection fees, in the amount of 16% of the outstanding balance, would attach to the account. The penalties and conduct limitations in this consent order are easy to avoid, and there is not much to learn from the consent order for conscientious student loan servicers looking to improve on current policies and procedures.

On December 9, the Consumer Financial Protection Bureau issued an Advance Notice of Proposed Rulemaking ("ANPR") seeking information in advance of preparing a proposed rule to address the Bureau's concerns regarding the furnishing of credit information involving "coerced debt" to consumer reporting agencies.

The CFPB's press release states that the ANPR is in response to a petition for rulemaking submitted by the National Consumer Law Center and the Center for Survivor Agency and Justice and to "harmful effects of inaccurate credit reporting affecting survivors of domestic violence, elder abuse, and other forms of financial abuse." According to the Bureau, "[a]busers often use coerced debt as a tool of control, forcing their partner or other family members to take out credit cards or loans through threats, physical violence, or manipulation. They may secretly open accounts in survivors' names, force them to sign financial documents, or run up charges on existing accounts."

The ANPR specifically seeks information on amending the definitions of "identity theft" and "identity theft report" in Regulation V, which implements the Fair Credit Reporting Act, as well as other related amendments to Reg. V, to include information stemming from transactions that occurred without the consumer's effective consent. The ANPR asks for public comment on:

• the prevalence and extent of harms to victims of economic abuse, particularly coerced debt, including how the credit reporting system contributes to or reduces those harms;
• evidence regarding the relevance of coerced debt to a victim's credit risk;
• existing protections under federal or state law for victims of economic abuse with respect to consumer reporting information and the barriers that may exist to prevent victims from availing themselves of existing protections;
• challenges facing specific populations as a result of coerced debt;
• the definition of "coerced debt," noting that the petition defines the term as "all non-consensual, credit-related transactions that occur in a relationship where one person uses coercive control to dominate the other person"; and
• potential documentation or self-attestation requirements to show that a person's debt was coerced.

Comments on the ANPR are due by March 7, 2025.

Amicus brief(ly): The CFPB's (surprisingly brief) ANPR follows closely on the heels of the federal agencies' recent guidance statement on elder financial exploitation that offered risk management and other guidance to regulated institutions. This broader rulemaking will address other forms of financial abuse, especially as it relates to victims of domestic violence. The CFPB is seeking information about the prevalence of financial abuse and is looking for feedback on potential solutions to combat that abuse. While the potential outcome of this rulemaking is an amendment to Reg. V, the impacts of financial abuse extend well beyond consumer reporting. This is just the beginning of a rulemaking that could take years to finish, if it moves forward at all. The CFPB is suggesting that existing state and federal laws are insufficient to address the concerns raised in the ANPR and has given the public until March 7, 2025, to provide information that will inform the next steps.

On December 12, the Consumer Financial Protection Bureau adopted a final rule on overdraft fees that applies to banks and credit unions with more than $10 billion in assets. According to the CFPB's press release, the rule "close[s] an outdated overdraft loophole that exempted overdraft loans from lending laws" by not treating overdraft fees as finance charges. The new rule gives covered banks and credit unions three options to manage overdrafts: they can cap their overdraft fee at $5, they can charge a fee that covers no more than their costs or losses, or they can continue to extend overdraft loans if they comply with standard requirements governing other loans, like credit cards, including giving consumers a choice as to whether to open the line of overdraft credit, providing account-opening disclosures that would allow comparison shopping, sending periodic statements, and giving consumers a choice to pay automatically or manually. According to the CFPB, the final rule would save consumers up to $5 billion annually in overdraft fees, or $225 per household that pays such fees. The new rule is effective October 1, 2025.

On the same day the rule was finalized, the Consumer Bankers Association, American Bankers Association, America's Credit Unions, Mississippi Bankers Association, Arvest Bank located in Arkansas, Bank of Franklin located in Mississippi, and The Commercial Bank located in Mississippi jointly filed a lawsuit against the CFPB challenging the final rule.

Amicus brief(ly): Knowing that this rulemaking was coming, the trade groups and several banks were ready to go with their lawsuit to challenge the final rule, which may not survive the pending change in administration anyway. The debate about overdraft protection will rage on - is it good for consumers, or does it cause harm? The banks and credit unions absolutely have a point about overdraft protection: consumers do not have a right to spend more than what is in their accounts, and there is a cost associated with accommodating overdrafts. Given that the cost of a sugary coffee drink exceeds $5 these days, it is natural to wonder whether $5 might be a little too stingy to compensate a financial institution for processing costs. On the other hand, consumers can request an overdraft line of credit from institutions that offer such credit and go into overdrafts knowing exactly what they are getting into. Without overdraft services - a real potential outcome of this final rule - many consumers will be hurting worse than they would by paying overdraft fees. We will see how this shakes out in court and after the administration change. More to come.

The Department of Justice and the Consumer Financial Protection Bureau recently issued a joint letter to certain financial services providers to remind them of the interest rate protections available to servicemembers, recent veterans, and their spouses (collectively, "servicemembers") under the Servicemembers Civil Relief Act and to encourage providers to evaluate their practices to ensure compliance with the SCRA.

In the letter, the agencies detail the interest rate benefit available to servicemembers under the SCRA, specifically noting that: (1) the Act limits the amount of interest that may be charged on certain financial obligations that were incurred before military service to no more than 6 percent per year, including most fees; (2) servicemembers are required to submit a specified notice and documentation of their military service to creditors in order to receive the interest rate benefit; and (3) creditors must respond to a servicemember's proper request by forgiving, not deferring, interest greater than 6% per year, forgiving interest retroactively back to the first day of SCRA eligibility, and reducing the monthly payment by the amount of interest forgiven (and cannot accelerate payment of principal).

The agencies also clarify certain "misunderstood" details about the SCRA's interest rate benefit, including protections to servicemember spouses who have co-signed the servicemember's loan or obligation, the date SCRA protections begin for servicemembers, National Guard member eligibility for interest rate benefits, veteran eligibility for interest rate benefits, and verification of a servicemember's military status using the Defense Manpower Data Center ("DMDC").

Finally, the agencies suggest two ways for creditors to offer greater protections to servicemembers than those guaranteed by the SCRA: (1) "proactively checking accounts using the DMDC and automatically applying the SCRA interest rate cap to all eligible servicemembers;" and (2) "automatically apply[ing] the SCRA interest rate cap to all eligible accounts held at that institution if a servicemember invokes protections for a single account."

Amicus brief(ly): This missive is not coming out of left field. The DOJ has had a Servicemembers and Veterans Initiative in place for a number of years now (see https://www.justice.gov/servicemembers) and has stayed active in seeking recovery for servicemembers whose vehicles have been repossessed and/or sold without a court order and whose creditors have not reduced interest to 6%. The CFPB has also noted servicemember account servicing problems in its periodic Supervisory Highlights, exam findings, and published consent orders. Many creditors already proactively review the DMDC database to check their customer bases against the directory to make sure that they are reducing interest on accounts appropriately (even before receiving orders from servicemembers), but for any readers who are not, it is a good recommendation. The same holds true for servicemembers with multiple accounts with the same creditor - careful creditors and servicers have procedures in place to check for other accounts when a servicemember requests SCRA benefits or when their active sweeps identify customers who are servicemembers and then apply the interest rate and other protections across all accounts, as appropriate.

The Federal Housing Administration recently issued Mortgagee Letter 2024-25 to extend the foreclosure moratoriums for properties located in Federal Emergency Management Agency-designated areas impacted by Hurricanes Helene and Milton. The moratoriums will remain in effect through April 11, 2025. The Mortgagee Letter applies to all FHA Title II Single Family forward and Home Equity Conversion Mortgage programs.

HUD provides an automatic 90-day foreclosure moratorium beginning on the date the president declares that a major disaster area exists. Between September 28, 2024, and October 11, 2024, President Biden declared Florida, Georgia, North Carolina, South Carolina, Tennessee, and Virginia major disaster areas due to Hurricanes Helene and Milton.

Amicus brief(ly): This year's hurricane season was particularly tough on the Southeast, with Hurricanes Helene and Milton bringing serious devastation, especially in Florida and North Carolina. HUD's foreclosure moratorium is welcome for both servicers and affected homeowners who are still dealing with the impacts of those severe storms. As always, the government action here is a useful reminder to tune up your account servicing policies where they address national disasters and other hardships that make it difficult or impossible for homeowners to keep up with payments.

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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.