As we all hit the grocery store for that forgotten cranberry sauce and send a few last urgent work emails, we hope everyone is able to be with friends and family this Thanksgiving. Here at Bradley, we are counting our blessings and looking back at another remarkable year. We are thankful for being able to return to our offices and to visit clients in person this year, but also for Teams calls with distant colleagues and the flexibility to work from home in our slippers. It’s been a very busy year for the financial services industry, and 2023 promises to be even more active. In a year of continued change and uncertainty in the space, here are some things we can all be thankful for.
We’re Thankful for the Chance at Clarity Regarding the CFPB’s Constitutionality
In October 2022, a panel of judges from the Fifth Circuit Court of Appeals held that the CFPB’s funding structure set forth in the Dodd-Frank Act — intentionally designed to bypass the congressional appropriations process and thereby insulate the Bureau from political pressures — violates the United States Constitution. As a result of finding the Bureau’s structure to be unconstitutional, the Fifth Circuit panel invalidated the CFPB’s Small-Dollar Rule. As we previously blogged about and discussed during our webinar, this decision came as a surprise to many and has far-reaching implications for the entire consumer financial services industry, raising questions about the validity of nearly all prior CFPB activity. Since the Fifth Circuit panel decision was released, the CFPB recently petitioned the United States Supreme Court for a writ of certiorari to decide whether the CFPB’s funding structure is constitutional and, if not, what the appropriate remedy should be. The CFPB petition requested that the Supreme Court hear the case in the current term, which means everyone should stay tuned in 2023 if that happens.
We’re Thankful That CFPB COVID-19 Servicing Issues Remained Relatively Quiet
Thankfully, 2022 was a relatively quiet year in the servicing industry with respect to COVID-19. Although the mortgage industry was subject to many of the CFPB’s enhanced contact requirements (early intervention live contact and reasonable diligence in connection with a borrower on an expiring forbearance) for the majority of the year, those requirements have now sunset. Nevertheless, servicers still have lingering aspects of COVID-19 to deal with, including ambiguities around when the CARES Act “covered period” will end, when COVID-19 forbearances will no longer be available options for borrowers, and when the streamline modification exceptions to Regulation X’s anti-evasion clause will no longer apply. Enforcement of the various COVID-19-related laws and policies remains a priority amongst regulators, even though most of that work happens outside of the limelight and without much fanfare. Therefore, servicers should remain vigilant and be prepared when the time comes. There is reason for optimism, though. The CFPB has indicated through a public request for information that there is potential interest and willingness to amend the existing regulatory framework based on lessons learned from the pandemic. This is likely to focus on facilitating the use of no-doc or low-doc streamline loss mitigation options in various contexts, including natural disasters.
We Will Not Run Out of CFPB Anti-Discrimination Guidance to Read Over the Winter
The CFPB has also emphasized that it seeks to further the goals of equity and anti- discrimination. In addition to guidance treating discrimination as a possible “Unfair” act or practice, and new exam manual guidance to this end, the CFPB also provided guidance regarding possible discrimination in the appraisal process. In its blog post from earlier this year, the CFPB explained that, although appraisal discrimination based on racial inequalities has been outlawed for more than 50 years, it is still seeing reports of biased appraisers who “base their value judgments on biased, unfounded assumptions about borrowers and the neighborhoods in which they live.” In particular, the CFPB set forth its concern that that The Appraisal Foundation (TAF) – a private, non-governmental organization that sets professional standards for appraisers – has failed to include appropriate warnings about the requirements of federal law, including the standards and training of appraisers. The CFPB expressed major concern with TAF’s lack of existing anti-discrimination standards and urged TAF to provide clear guidance about existing legal standards related to appraisal bias. The CFPB also committed to further collaboration and study of this issue, including through participation in the Integrity Task Force on Property Appraisal and Valuation Equity. We expect the CFPB’s guidance regarding all things discriminatory to continue into 2023 (and to continue to occupy us during the coldest days of winter), and we are grateful for the continued opportunity to discuss manners in which the consumer financial services industry may reduce some of the regulatory risk associated with this continued emphasis from the CFPB.
But We Are Most Thankful That the Courts Will Provide Guidance on the CFPB’s UDAAP Authority
While we expect the CFPB to continue its drive to police discrimination in the credit markets, we also expect that courts might curtail some of the Bureau’s attempts to utilize its UDAAP authority. In March of this year, the CFPB issued a revised UDAAP exam manual, explaining that it was changing its regulatory approach to more closely “scrutinize” discriminatory practices. In particular, the Bureau issued a revised UDAAP exam manual in which it took the position that discrimination – both intentional and unintentional, as well as allegedly discriminatory practices that might otherwise fall outside of the Equal Credit Opportunity Act (ECOA) – met the legal criteria for “Unfairness.” The announcement – particularly the Bureau’s position that it would expand its efforts to combat discrimination outside of the scope of ECOA – represents a substantial expansion of the regulator’s authority to police practices that it deems discriminatory. Unsurprisingly, a group of trade associations led by the U.S. Chamber of Commerce, the American Bankers Association, and the Community Bankers Association filed suit in the Eastern District of Texas, alleging, among other things, that the CFPB violated its statutory authority in issuing the revised UDAAP manual to include discrimination under the rubric of “Unfairness.” We anticipate that the courts will provide much-needed guidance, but in the meantime, you can put your feet up, open up the ol’ laptop, and spend your post-Thanksgiving lunch listening to Bradley’s analysis of the new UDAAP guide.
Our Clients Are Creating Innovative Consumer Credit Products
Earlier this year, Gov. Michelle Lujan Grisham signed House Bill 132, which will slash the annual percentage rate (APR) applicable to loans made under New Mexico’s Small Loan Act of 1955 (SLA) and Bank Installment Loan Act of 1959 (BILA). While lenders may currently charge a maximum APR of 175% on loans up to $5,000 made under SLA and BILA, effective January 1, 2023, the maximum APR will fall to just 36% and apply to loans up to $10,000. The legislation also includes anti-evasion provisions which seek to eliminate potential loopholes around the 36% APR cap by targeting use of the bank partnership model.
Although New Mexico is not the first state to set stringent interest rate caps on consumer loans (others include California, Illinois, and Colorado), it likely is not the last. Rate cap legislation is poised to reduce the availability of credit in the market, especially for underbanked consumers and those with lower credit scores. Stakeholders should work closely with trade groups and their counsel to help ensure that financial institutions and their partners are able to provide access to credit in new and innovative ways designed to better serve consumers.
We’re Thankful to Understand Bankruptcy’s Automatic Stay (So We Don’t Violate It and Can Seek Relief from It) and Still Get Paid (Hopefully) When Our Customers File for Bankruptcy
Even though ignorance is sometimes bliss, where the law is concerned, ignorance can be fatal. That is why we’re thankful to understand bankruptcy’s automatic stay. This knowledge helps us avoid inadvertent violations of the stay, which can be quite costly to litigate and can result in significant penalties. Usually, when a bankruptcy case is filed, the automatic stay immediately arises and prevents creditors from seeking collections against the bankrupt debtor and the debtor’s property. However, the Bankruptcy Code provides for creditors to obtain relief from the automatic stay under certain circumstances.
Based on the stage of the bankruptcy case and the type of property securing a creditor’s claim, creditors can maximize their recovery against a bankrupt debtor, and receive payment sooner, by moving for relief from the automatic stay. Even when it doesn’t make sense to move for stay relief, creditors can often recover at least some of the debts they are owed by filing a proof of claim describing their debts in an asset Chapter 7 case, Chapter 13 case, Chapter 11 case, or Subchapter V case. Although a bankruptcy filing can initially halt creditors’ collections in their tracks, we’re thankful that the Bankruptcy Code is balanced to provide tools that not only to protect debtors but also allow for equitable recovery for creditors.
