CFPB Updates: First Mulvaney Lawsuit, Questions About Disparate Impact

by Manatt, Phelps & Phillips, LLP
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The latest news from the Bureau of Consumer Financial Protection (CFPB or Bureau) includes the first lawsuit filed under the leadership of Acting Director Mick Mulvaney, committee approval of his permanent replacement and the publication of the 17th edition of the Bureau’s Supervisory Highlights.

In addition, a group of 14 state attorneys general reached out to the CFPB with concerns about the use of the disparate impact theory of liability after Mulvaney indicated the Bureau is re-examining its authority to enforce disparate impact violations of the Equal Credit Opportunity Act (ECOA).

What happened

Since Mulvaney took the helm in November 2017, the Bureau had not filed a complaint under his leadership—until now.

The target: related companies and an individual that offered pension advance products to consumers across the country. The defendants represented that their products were not loans, that no applicable interest rate applied and that the cost of the lump-sum advance was less than that of potential alternative sources of funds, such as credit cards.

However, these claims were material misrepresentations in violation of the Consumer Financial Protection Act, the CFPB alleged, because the products were loans and more costly than the alternative financial products that the defendants used for their comparisons. According to the Bureau, some customers were required to pay back advances at an annualized cost of 183 percent and incurred multiple fees, such as monthly management fees, a $300 setup fee and 1.5 percent late fees.

The California federal court complaint also cited violations of the Truth in Lending Act for failing to disclose a measure of the cost of credit, expressed as a yearly rate.

In other Bureau news, the Senate Banking Committee approved Kathy Kraninger, President Donald Trump’s controversial nominee to take a permanent leadership role. The 13-to-12 vote along party lines moves the nomination of Kraninger for CFPB director before the full Senate for consideration.

The Bureau also published its latest edition of Supervisory Highlights, covering the time period between December 2017 and May 2018. Topics included auto loan servicing, credit card account management, debt collection, mortgage servicing, payday lending and small-business lending.

For example, in the area of credit card account management, Bureau exams found that supervised entities failed to properly re-evaluate credit card accounts for annual percentage rate (APR) reductions as required by Regulation Z, where the APRs on the accounts had previously been increased. As for debt collection, CFPB examiners found that larger participants in the debt collection market were “routinely” failing to mail debt verification to consumers from whom they had received written debt validation disputes. And in the area of payday lending, the Bureau said companies were threatening to repossess consumer vehicles despite the fact they did not, as a general matter, repossess vehicles or have business relationships with parties that did; in addition, some companies failed to obtain valid preauthorization before debiting funds.

Finally, Acting Director Mulvaney received a letter from 14 AGs expressing “grave concerns” about his comments suggesting the CFPB is considering ending the use of the disparate impact theory of liability under the ECOA. Reports quoted Mulvaney as saying the Bureau “will be reexamining the requirements” of the statute.

Enforcement of ECOA, which forbids discrimination by creditors on the basis of characteristics including race, color, religion, national origin, sex, marital status and age, “is the primary authority by which CFPB can meet” its congressional charge to ensure fair, equitable and nondiscriminatory access to credit for both individuals and communities, the AGs wrote.

The federal government has interpreted ECOA as providing for disparate impact liability since 1977, according to the letter, and the Bureau is bound to follow the law. The May passage of S.J. Res. 57, repealing the CFPB’s March 2013 bulletin relating to indirect auto lending, “certainly did not revoke the federal government’s formal longstanding regulations interpreting ECOA to provide for disparate impact liability without limitation to the type of lending,” the AGs added.

Nor are there substantive grounds for the Bureau to reconsider the “more than 40 years of consistent interpretation that ECOA provides for disparate impact liability,” a “critically important” theory that is essential to enforcement of the statute, the AGs of California, the District of Columbia, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, North Carolina, Oregon and Rhode Island said, vowing to continue enforcement on their own, if necessary.

“[W]e trust the CFPB’s reexamination will determine that ECOA provides for disparate impact liability,” the AGs wrote. “But the Attorneys General will not hesitate to uphold the law if CFPB acts in [a] manner contrary to law with respect to interpreting ECOA or to fulfilling its Congressional charge to ensure nondiscriminatory lending to the residents of our states.”

The missive followed an earlier letter—also led by North Carolina AG Josh Stein and joined by 16 other AGs—encouraging the Department of Housing and Urban Development (HUD) not to make changes to its 2013 Disparate Impact Regulation in response to the agency’s advance notice of proposed rulemaking reconsidering the 2013 regulation as well as a 2016 supplement.

To read the CFPB complaint, click here.

To read the CFPB’s Supervisory Highlights, click here.

To read the AGs’ letter to the CFPB, click here.

To read the AGs’ letter to HUD, click here.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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