On May 4, 2022, the Senate Banking Committee’s Subcommittee on Financial Institutions and Consumer Protection held a hearing entitled “Examining Overdraft Fees and Their Effects on Working Families.”  A recording of the hearing is available here. 

After opening statements from Subcommittee Chairman Raphael Warnock (D-GA) and Ranking Member Thom Tillis (R-NC), three witnesses offered testimony and responded to questions from the Subcommittee members.  The following witnesses appeared at the hearing:

• Aaron Klein, Senior Fellow in Economic Studies, Brookings Institution 
• Jason Wilk, Founder & Chief Executive Officer, Dave
• David Pommerehn, Senior Vice President and General Counsel, Consumer Bankers Association

Chairman Warnock kicked off the hearing by stating that onerous and opaque overdraft fees keep people in cycles of debt and poverty, and disproportionately impact people of color.  He observed that many banks have moved to eliminate overdraft fees, and applauded those banks for making the right choice to benefit these communities.  In his opening remarks, Ranking Member Tillis recognized the tremendous consumer choice available today as the financial services industry has developed new products.  Responding to Warnock, Tillis stated that the industry has already adopted consumer-friendly overdraft products and practices through competition and innovation and regulation is not needed.  In a nod to the recent CFPB Request for Information Regarding Fees Imposed by Providers of Consumer Financial Products or Services, Tillis concluded that overdraft fees should not be characterized as “junk fees.”

The testimony discussed the volume of overdraft fees charged – up to $30 billion a year according to Aaron Klein from Brookings — as well as the concentration of the impact on the most economically vulnerable individuals.  Chairman Warnock and Senator Warren both cited a CFPB study that found 80% of overdraft fees were charged to 9% of consumers.  However, it was noted throughout the hearing that overdraft fee revenue has been on the decline, in many instances due to voluntary actions within the financial services industry, including eliminating overdraft charges by many banks. 

Aaron Klein testified that banks have already made sweeping changes to their products without regulation or legislation that will substantially reduce usage of overdrafts and overall costs for consumers, quantifying the impact of those voluntary changes at $5 billion a year.  David Pommerehn from the Consumer Bankers Association noted that overdraft products are based on necessity, due to limited small dollar loan options, and provide one of the last viable sources of short term liquidity for many consumers, also highlighting the choice and transparency already surrounding the product based on the requirement to opt-in.  Highlighting some of the innovation in the space, Jason Wilk discussed the products his company, Dave, offers to assist consumers in its mission to “disrupt overdraft,” including linking with their bank accounts to help customers have better visibility into upcoming bills that may lead to an overdraft.

While everyone acknowledged actions taken within the industry to address concerns about overdraft, the witnesses proposed additional policy changes.  Klein highlighted five recommendations, including (1) revising safety and soundness rules to target a small number of banks that make a totality of their profits off of overdraft fees, (2) making credit unions disclose their overdraft data like banks do, (3) having the Fed use its regulatory authority under the Expedited Funds Availability Act to implement real-time payments to address the slow payment system, thereby decreasing the reliance on payday lenders, (4) new regulation to prohibit banks from posting debits before credits and reordering payment flows from largest to smallest when processing transactions, and (5) universal Bank-On-style accounts (no overdraft, low-cost, basic accounts).  Pommerehn advocated for more short term liquidity products, and encouraging policymakers to explore alternatives, including small dollar lending. 

Despite Buy-Now-Pay-Later (BNPL) info flooding the newswires, it holds only a small percentage of the payments landscape with 9% of global e-commerce transactions in 2021 (Juniper Research). However, it is growing fast both in the US and globally.

By 2026, BNPL services will account for over 24% of global e-commerce transactions (Juniper Research) for physical goods by value.

Why the rapid growth estimates? BNPL is becoming “hot” for all generations:

• Adoption in the older generations continues to grow with BNPL services specifically targeting Gen X and baby boomers (eMarketer). 

• Gen Z and millennials make up more than 75% of BNPL users in the US (eMarketer)

• According to a February 2022 Afterpay report, Gen Z BNPL use is up by 900% since January 2020.

There’s a belief in the payments industry that the surge in BNPL adoption was due to increased online shopping during the pandemic. Yet the numbers have grown even as people resumed in-person shopping.

Based on current growth, Kaleido Intelligence estimates that there will be $680 billion of global BNPL transactions in 2025. And Juniper Research suggests transactions up to $995 billion by 2026. This progression is extreme, so it isn’t a surprise that BNPL usage is outpacing growth of other payment types—even credit card payments.

The In-Store Modern Layaway Plans

So, what is BNPL? It is point-of-sale financing where a consumer is offered a personal loan for the item being purchased and a short term to repay the loan (typically 4-6 payments). BNPL isn’t new or unique, but more like a modern take on the in-store layaways of the past where the consumer gets to take the product home before the loan is paid.

Ultimately, BNPL is a utility that can be quite valuable when used correctly to help retailers increase sales. Merchants seem to love the offerings and have been quick to either create a direct relationship with one BNPL partner (like Target and Affirm) or offer multiple BNPL partners so a consumer can choose the best fit. In the BNPL marketplace, there are new players added every day with no clear frontrunner at this time.

To learn more about BNPL, check out A Guide to Buy Now, Pay Later and Digital Debt Collections.

Broadening Horizons with Non-Traditional Offerings

BNPL is growing beyond the online market and broadening the products offered in the past. BNPL companies, Affirm and Klarna, have both partnered with terminal maker Verifone for in-person transactions. These partnerships allow merchants to offer BNPL options at the time of sale.

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Beyond retail products, providers are springing up to offer BNPL in places not traditionally associated with a layaway style loan. Interestingly, a British BNPL startup called Bumpers helps people pay for car repairs within the BNPL model.

Plus, the rental market provides multiple offerings for both housing and autos. A US BNPL provider, Flex, allows renters to split their rent payments.

BNPL is also becoming popular to reduce anxiety for certain unexpected, yet essential, expenditures. For example, dental work and even veterinarian bills, use BNPL as another option to spread out payments and soften an immediate financial blow without incurring incremental credit card charges.

CFPB Already Showing Interest in BNPL

While growth is fascinating, the question in the US is which regulatory body will take the lead on the BNPL market? The CFPB showed a clear interest when they opened an inquiry late last year into five of the largest service providers: Affirm, Afterpay, Klarna, PayPal and Zip. Each provider was asked to give data to clarify the risks and benefits of the product to consumers.

Pymnts.com reviewed the complaints from the CFPB database and reported “that the main issues consumers complain about are ‘incorrect information in your report’ and ‘attempts to collect debt not owed.’” Based on this data, the processing of the information is the issue, not how BNPL works.

We think that the CFPB will look at the following items as each relates to BNPL:

• Considering the ability for consumers to pay before making the loan

• Ensuring customer receive correct disclosures

• Identifying whether consumers received protections similar to what credit card companies provide

• Confirming that correct rules for late fees and other policies are in place

• Ensuring that the consumer isn’t charged by both their bank and the BNPL provider due to inability to pay

• Understanding the type of data that’s being collected and how BNPL providers use the data 

For more on the CFPB and BNPL, see “The CFPB Is Coming for Fintechs, BNPLs, Telcoms, and More.”

CRAs Join the BNPL Frenzy

Credit reporting agencies (CRAs) are working to get ahead of this market after it took off in such a rapid manner. For example, Equifax announced recently they are accepting tradelines for BNPL. By creating a new industry code, Equifax ensures that loans will not be lumped in with other traditional loan types.

TransUnion and Experian are following suit with similar offerings. However, there isn’t enough data to build out full risk scorecards. Also, given how short-term the loans are, we wonder how data will be accurately reflected in reports.

Credit reporting agencies are touting that incorporating this information into reports can help a consumer with a subpar or thin credit file. Of course, this assumes the consumer pays on time. Given that 34% of BNPL users have been late on at least one payment, how this translates in the market remains to be seen (Credit Karma).

Third Party Debt Collection on Deck for BNPL

Given the tremendous growth in consumer base and available markets, an increase in volume for third party debt collectors is expected. Understanding who and what is being reported to the credit reporting agencies may give them an advantage.

If BNPL providers report to the credit reporting agencies, then credit score impact could be used as leverage to collect debt. Either way, collectors will have to be just as creative as the BNPL companies in product offerings.

Collectors should be prepared to implement the same approaches as the BNPL providers by creating a frictionless approach to collecting. Also, we believe collectors should consider employing user experience expertise to build creative, technology-based solutions for paying debt.

These solutions could cover payment terms and consolidation strategies. More importantly, collectors should look at a solution that is an easy-to-use and accessible place to manage payments from any type of device the consumer uses. Making it easy to pay may be the differentiator for the collector.

Keep Watch on the Activities Swirling Around BNPL

So, what was old is new again with various flavors of BNPL and a host of new challenges. Given the accelerated growth of BNPL, this payment type is here to stay. We will be closely watching—and planning for—new rounds of regulations, changes in credit reporting, continued product evolution and challenges in collections.

——

John Sanders is the CEO and Managing Partner of Bridgeforce. As CEO and a long-time industry leader, John is familiar with all aspects of the financial industry—and brings deep knowledge on topics from underwriting to digital implementations, technology transformation, digital fintech, business optimization, and investment strategies.

Melissa Peirano is the Senior Program Manager at Bridgeforce. With over 20 years’ experience in the payments sector, Melissa held operational leadership, strategic planning and execution, as well as P&L responsibility roles at a number of industry leading organizations, including Global Payments Inc./Heartland Payment Systems.

On May 10, Gov. Ned Lamont signed into law Substitute Senate Bill 6 (Public Act 22-15), Connecticut’s version of comprehensive consumer data privacy legislation.  This makes Connecticut the fifth state to enact such legislation, following California, Virginia, Colorado, and Utah.  The Act will go into effect July 1, 2023.

Applicability

The Act applies to persons that conduct business in Connecticut or persons that produce products or services that are targeted to Connecticut residents and that during the preceding calendar year:

• Controlled or processed the personal data of not less than 100,000 consumers, excluding personal data controlled or processed solely for the purpose of completing a payment transaction; or

• Controlled or processed the personal data of not less than 25,000 consumers and derived more than 25 percent of their gross revenue from the sale of personal data.

Exemptions

The Act does not apply to:

• Nonprofit organizations;

• Financial institutions or data subject to the Gramm-Leach-Bliley Act;

• Institutions of higher education;

• Covered entities and business associates as defined in the Health Insurance Portability and Accountability Act of 1996 (HIPAA) Privacy Rule;

• Boards, agencies, and political subdivisions of the state;

• National securities associations.

Additionally, the Act exempts the following, as well as other, information and data:

• Protected health information under HIPAA, and certain other health related data;

• Personal information used pursuant to the Fair Credit Reporting Act;

• Data processed or maintained for certain employment purposes.

Consumer Rights

The Act provides consumers with the right to:

• Confirm and access personal information being processed;

• Correct inaccuracies;

• Delete personal data provided by the consumer or obtained from other sources;

• Obtain a portable copy of the consumer’s personal data;

• Opt-out of the processing of personal data if the purpose of the processing is: a) targeted advertising; b) sale of personal data; or c) profiling.

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Contract Requirements

A contract between a controller and a processor must ensure:

• Each person processing personal data is subject to a duty of confidentiality;

• Deletion or return of all personal data at the end of the processor’s provisions of services;

• Availability to the controller of information evidencing the processor’s compliance with the Act;

• Processor’s contracts with subcontractors are in writing and mirror the obligations of the processor with respect to personal data;

• Cooperation from the processor with the controller’s reasonable assessment requirements.

Risk Assessments

Under the Act, some processing is considered to present a “heightened risk of harm” to consumers:

• Processing for the purpose of targeted advertising;

• Processing for the purpose of sale;

• Processing for the purpose of profiling, in some instances;

• Processing sensitive data, such as personal data related to race, religion or health conditions, genetic or biometric data, personal data collected from a known child, and precise geolocation data.

When that is the case, a controller is required to conduct and document a data protection assessment to “identify and weigh the benefits that may flow, directly and indirectly, from the processing to the controller, the consumer, other stakeholders and the public against the potential risks to the rights of the consumer associated with such processing, as mitigated by safeguards that can be employed by the controller to reduce such risks.”

The Attorney General may require the disclosure of an assessment if relevant to an investigation, but the assessment is confidential and not subject to public disclosure.

Enforcement

The Attorney General has the exclusive authority to enforce the Act but must first provide a 60-day opportunity to cure if, in the Attorney General’s opinion, cure is possible.  The cure provision sunsets Dec. 31, 2024. 

In the absence of a cure, a violation is enforced as an unfair trade practice pursuant to Conn. Gen. Stat. § 42-110b, allowing for a temporary restraining order or permanent injunction which, if violated can result in a civil penalty of not more than $25,000 per violation.  Additionally, a violative act or practice that was willful may result in a civil penalty of not more than $5,000 per violation.

In Ramones v. AR Res., Inc., No. 19-62949-CIV-SCOLA/SEITZ (S.D. Fla. Apr. 8, 2022), the court refused to set aside an award of punitive damages based on violations of the Fair Credit Reporting Act, but it reduced the jury’s award from $700,000 to $450,000.

The case arose out of a dispute concerning medical debts incorrectly included on the credit reports of plaintiff Francisco Javier Perez Ramones. The plaintiff’s 83-year-old father incurred numerous medical bills placed in collections with defendant AR Resources, Inc. (ARR). ARR reported 19 of these accounts as belonging to the son. Ramones challenged the validity of the debts with Trans Union and Experian on 31 separate occasions, and when the reporting was not corrected, he filed suit against ARR, asserting that the debt collector failed to conduct reasonable dispute investigations in violation of Section 1681s-2(b) of the FCRA.

During the proceedings, Ramones presented evidence showing that ARR’s investigators never reviewed the customer message fields related to the disputes and verified the erroneous information despite the fact that Ramones has a different name, a different Social Security number, and a different date of birth than his father. Based on this evidence, the court granted partial summary judgment in favor of Ramones as to liability. The case proceeded to trial on damages only, and the jury awarded Ramones $80,000 in actual damages and $700,000 in punitive damages.

After trial, the court denied ARR’s renewed motion for judgment as a matter of law, as well as and its alternative motion for a new trial, finding that Ramones has submitted sufficient evidence to support the jury’s award of actual damages. Further, with regard to punitive damages, the court held that an award of $700,000 was appropriate because ARR’s conduct — which included a standard policy of continuing to report information as accurate even when it observed discrepancies as to the consumer’s identity — “was highly reprehensible as [ARR] was, at best, callous, in the manner that it processed customer’s disputes.” Nevertheless, the court determined that because the $700,000 awarded was 8.75 times the actual damages, the size of the award exceeded the amount permitted in the Eleventh Circuit. After reviewing similar cases within the circuit, the court reduced the award to $475,000, which represents a ratio of 5.9 to 1 of punitive to actual damages.

Show Notes:

The co-Founders of @Creditas, India’s leading technology provider in the delinquent management space, are our guests to kick off the 3rd season of @ClarkHillLaw’s #CreditEcoToGo. Anshuman Panwar and Madan Srinivasan share their observations of the US collections market, where they hope to launch shortly, and the unique architecture of their technology that was built with the consumer in mind. Madan tells us that the US market has all the correct building blocks; the key is how to stitch them together to create a frictionless system that is not based upon morality. Anshuman uses the term “#neocollections” which puts the power back into the hands of the consumer through a complete digital solution. Both believe that this new approach to technology will be a disrupter in the marketplace.  

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DISCLAIMER – No information contained in this Podcast or on this Website shall constitute financial, investment, legal and/or other professional advice and that no professional relationship of any kind is created between you and podcast host, the guests or Clark Hill PLC. You are urged to speak with your financial, investment, or legal advisors before making any investment or legal decisions.

DALLAS, TX — Malone Frost Martin PLLC (MFM), a leading industry defense and compliance law firm, is very pleased to announce the addition of Chelsey Pankratz who will head up MFM’s new satellite office location in Jacksonville, Florida at 301 W. Bay Street, Suite 14147, Jacksonville, FL, US 32202.

Chelsey joins MFM with several years of industry experience working on behalf of accounts receivable management companies in a defense and compliance capacity.  She previously provided outsourced legal services to agencies in the Jacksonville area that included defense litigation, compliance advice, and policy creation. 

“I am thrilled to be joining the MFM team, and to help further serve our ARM industry clients here in Florida.” Said Chelsey Pankratz. 

“While the statutory construct of the laws that govern the ARM industry are not complex, the ARM business itself is complex.  Having attorneys like Chelsey that understand the complexity of the business is a differentiator for our clients. We are very excited to have Chelsey join our team and manage our new office in Jacksonville, Florida,” said Mike Frost, Partner at MFM.  

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“We have been wanting to open a Florida office for a long time, and we found the right fit with Chelsey,” said Xerxes Martin, Partner at MFM. “MFM looks forward to assisting our ARM industry clients with her Florida presence and experience.”

For more information related to the services provided by Malone Frost Martin PLLC please contact:

Mike Frost

Partner

Direct: (214) 346-2640

Cell: (319) 883-0306

mfrost@mamlaw.com

On May 9, 2022, the CFPB announced it issued an advisory opinion stating that in its opinion, the Equal Credit Opportunity Act (ECOA) applies to every aspect of dealing with a creditor, not just to the credit application process. The advisory opinion indicates ECOA protections apply to revocation, collection procedures, alteration or termination of credit, and anything else that takes place after credit has been extended.  

ECOA  bans credit discrimination based on race, color, religion, national origin, sex, marital status, and age. It also protects those receiving money from any public assistance program or exercising their rights under certain consumer protection laws. According to CFPB Director Rohit Chopra, the advisory opinion “makes clear that anti-discrimination protections do not vanish once a customer obtains a loan.”

To explain why anti-discrimination protections continue after a customer obtains a loan, the advisory opinion walked through the history of ECOA, Regulation B, and their amendments. Specifically, the opinion points out how ECOA and Regulation B refer to accounts in the past tense and refer to debtors. According to the CFPB, despite this “well-established interpretation,”  the advisory opinion is necessary because some creditors fail to acknowledge that ECOA and Regulation B plainly apply to events that take place after credit has been granted.

As a reminder, the CFPB also pointed out that in addition to protecting borrowers after applying for and receiving credit, ECOA requires lenders to provide “adverse action” notices to borrowers with existing credit. These notices should be sent when credit is denied, an existing account is terminated, or an account’s terms are unfavorably changed.

The full advisory opinion can be found here.

insideARM Perspective:

This advisory opinion should not be read in a vacuum. Considering the  CFPB’s other recent announcements that (1) its UDAAP authority allows it to review for discrimination and (2) that it has the power to supervise all nonbank financial institutions which pose a risk to consumers, the picture of where this CFPB is going is becoming more evident. It seems this version of the CFPB plans to laser focus on the effects practices and policies have on consumers, and if it finds the net effect of procedures to be unfair, it will take action.  

The issue, of course, is not that anyone wants to mistreat people or wants to discriminate. Any such entity doing so is a bad actor and should be treated as such. Instead, the issue here is that those subject to the CFPB’s scrutiny still don’t know the proverbial rules of the game. While the CFPB has made its desire to look at the net result clear, it hasn’t alerted those subject to its oversight of which processes they will be looking at, what they will consider unfair, or any other insight into their expectations regarding processes and policies. Without this insight, we will continue to see rule-making by enforcement, which is not good for the industry or the consumers the CFPB is there to protect.

Any entity subject to the CFPB’s oversight should heed these warnings, watch developments closely, and ensure they are prepared to handle compliance proactively. We will continue to keep you informed about the CFPB’s actions. 

——–

Looking for guidance on how the CFPB’s new oversight initiatives can affect your CMS?  Subscribe to Research Assistant – insideARM’s source for premium, practical compliance guidance and in-depth, weekly peer group discussion.

When the CFPB announces new expectations, it’s a good time to think about the gaps in your CMS, too. Find out how to start your own assessment with the on-demand  Research Assistant webinar, A Complete Guide to Risk and Gap Assessments – How to Get Started. Get it here.

On May 12 at 2pm ET, learn how Risk and Gap Assessments can help you find large gaps and manage all the relevant laws in the new Research Assistant webinar, A Complete Guide to Risk and Gap Assessments Part II. Register here.  

On April 7, the Consumer Finance Protection Bureau (CFPB or Bureau) filed an amicus brief in an appeal, pending before the Court of Appeals for the Eleventh Circuit in which the Bureau argued that the Fair Credit Reporting Act (FCRA) does not exempt furnishers from investigating disputes based on legal questions as opposed to factual inaccuracies. Section 1681s-2(b)(1) of the FCRA states that a furnisher of consumer information must conduct an investigation of disputed information upon receiving notice from a consumer reporting agency (CRA) that the consumer has disputed the accuracy of the information. Many courts have interpreted this to require furnishers to reasonably investigate factual questions, but not disputed legal issues (e.g., whether a consumer is liable for a reported debt). By contrast, the CFPB’s brief asks the Eleventh Circuit to “clarify that furnishers are required to conduct reasonable investigations of both legal and factual questions posed in consumer disputes.”

The subject plaintiff allegedly suffered identity theft that she discovered in 2016. The identity thief — an employee of the plaintiff — opened a credit card in the plaintiff’s name, and over the course of several years, accumulated over $30,000 in debt, while also making some payments from business bank accounts controlled by the plaintiff. When the plaintiff became aware, she notified the issuing bank, and the account was closed. The employee was ultimately convicted of identity theft. The bank, however, continued to furnish information about the outstanding debt to the credit bureaus. The plaintiff filed multiple disputes with the credit bureaus regarding the debt, which were then transmitted to the bank. Although the bank acknowledged that the plaintiff’s employee had opened the credit card account without the plaintiff’s consent, it concluded that the plaintiff was nevertheless responsible for the debt due to her negligent supervision of her employee and failure to object to continuous payments from bank accounts controlled by the plaintiff. Thus, the bank “verified” the debt and continued to furnish the information.

After the plaintiff filed suit, the bank moved for summary judgment, asserting multiple arguments, including that the plaintiff’s dispute turned on the disputed legal question of the plaintiff’s liability for the account rather than on a factual inaccuracy, as well as that the FCRA does not impose a duty on furnishers to investigate the accuracy of legal questions raised in consumer disputes. The district court granted summary judgment to the bank, concluding that it had “conducted a reasonable investigation as required under the procedural requirements of the FCRA.” In reaching this conclusion, the district court described the investigation duties imposed on furnishers under the FCRA as “procedural” and “far afield” from legal “questions of liability under state-law principles of negligence, apparent authority, and related inquiries.” Citing the First Circuit’s decision in Chiang v. Verizon New England, Inc., 595 F.3d 26 (1st Cir. 2010), the district court concluded that “a consumer cannot prevail on an FCRA claim by raising disputed legal questions as part of the dispute process instead of pointing to factual inaccuracies contained within the credit report.”

On appeal, the CFPB filed an amicus brief, arguing that furnishers are statutorily obligated to investigate both legal and factual questions raised in consumer disputes. The CFPB’s brief acknowledges that several federal courts have distinguished between “factual” and “legal” questions in determining the obligation of CRAs to investigate disputes under 15 U.S.C. § 1681i and that other decisions, including Chiang and unpublished decisions of the Eleventh Circuit, likewise recognize such a distinction in the context of furnisher investigations under Section 1681s-2(b)(1). Nevertheless, the CFPB argues that these cases in the furnisher investigation context were “incorrectly decided” because the FCRA does not make any such distinction. The CFPB argues that unlike CRAs, furnishers are qualified and obligated to assess issues, such as whether a debt is actually due or collectible, and routinely do assess such issues. The CFPB also goes further and suggests that even in the context of CRA investigations under Section 1681i, a formal distinction between legal and factual investigations is inappropriate and argues that a CRA has a duty to conduct a “reasonable investigation” of a legal dispute even if it does not have a duty to provide a legal opinion on the merits of the dispute. Finally, the CFPB urges the court to reject a “formal distinction” between factual and legal investigations because of the practical difficulty in distinguishing between them.

The CFPB’s arguments urge a decision contrary to the decisions of several federal courts that have distinguished between legal and factual questions in the context of both CRA and furnisher investigations under the FCRA.[1] If the Eleventh Circuit accepts these arguments, it would create a circuit split with the First Circuit, and it would create significant uncertainty for furnishers attempting to comply with the FCRA by placing upon them a more onerous obligation than other courts have adopted. Further, a decision accepting the CFPB’s arguments could draw into question the distinction between legal and factual issues in the context of CRA investigations under Section 1681i as well, creating an even deeper split from existing precedent. The amicus brief is another example of the CFPB’s recent efforts to shape the state of the law governing the consumer reporting industry through both rulemaking and litigation.

[1]E.g., Leones v. Rushmore Loan Management Servs., LLC, 749 F. App’x 897, 901-02 (11th Cir. 2018) (distinguishing between factual inaccuracy and disputed legal questions in context of furnisher investigations); Chiang v. Verizon New England, Inc., 595 F.3d 26, 38 (1st Cir. 2010) (Like CRAs, furnishers are ‘neither qualified nor obligated to resolve’ matters that ‘turn[ ] on questions that can only be resolved by a court of law.’); Mohnkern v. Equifax Info. Servs., LLC, No. 19-CV-6446L, 2021 U.S. Dist. LEXIS 218532, at *15 (W.D.N.Y. Nov. 10, 2021) (adopting Chiang‘s approach after surveying the case law and finding it “represent[s] the prevailing view when courts deal with the type of claim asserted against furnishers like plaintiffs’ here).

In a new blog post published on the Consumer Law & Policy Blog, Professor Jeff Sovern advocates very strongly in support of interpreting the “unfairness” prong of UDAAP to encompass discrimination in connection with credit and non-credit consumer financial products and services offered by banks and other persons covered by the Consumer Financial Protection Act (CFPA).  He supports his position by relying on the plain language of “unfair” (which is not inextricably tied to credit products) and the common sense notion that companies should not be able to discriminate in any fashion in connection with offering of consumer financial products or services.

Professor Sovern’s argument misses the point.  The consumer financial services industry is not seeking a “pass” when it comes to any form of discrimination.  Instead, the industry simply wants to know what are the “rules of the road.”  The Equal Credit Opportunity Act is a very specific anti-discrimination statute that proscribes certain types of credit discrimination.  It has been implemented through a detailed regulation (Reg B) that has been on the books for many decades.  It only prohibits discrimination on certain bases: race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the fact that all or part of the applicant’s income derives from any public assistance program; or the fact that the applicant has in good faith exercised any right under the CFPA or any state law upon which an exemption has been granted by the CFPB.

As an initial matter, I find considerable merit in the argument that if Congress considered discrimination to be “unfair,” it would have been unnecessary for Congress to enact laws such as the Equal Credit Opportunity Act to specifically prohibit discrimination.  According to Professor Sovern, this argument is flawed because the ECOA does more than just prohibit discrimination in credit transactions, such as providing injured consumers with a private right of action, and therefore would have been needed even if Congress considered discrimination something the CFPB could address through its UDAAP authority.  It would have been needed, says Professor Sovern, because the CFPA does not provide consumers with a private right of action for UDAAP claims and “Congress wanted injured consumers to have a private claim” which is provided in the ECOA.

The difficulty I have with Professor Sovern’s reasoning is that if UDAAP covers discrimination more broadly than the ECOA, why wouldn’t Congress have wanted injured consumers to also have a private right of action to use UDAAP to challenge any discrimination they could not challenge under the ECOA?  In other words, it seems to me that the absence of a private right of action in the CFPA for UDAAP claims provides strong support for the position that UDAAP does not cover discrimination.

But even assuming arguendo that the interpretation of UDAAP advocated by the CFPB and Professor Sovern is correct, what would that mean?  It is unclear whether the ECOA covers discrimination based on marketing or whether it applies only once someone has applied for credit.  Would UDAAP now fill that void?  And what about the further question of whether the disparate impact theory applies to ECOA and, if not, whether it nevertheless would apply to UDAAP.  Those are just a few of the questions the CFPB’s and Professor Sovern’s interpretation raises for consumer credit.

The CFPB’s and Professor Sovern’s interpretation raises even more questions in the context of discrimination involving non-credit products such as deposits, prepaid cards, and remittances.  For example, many banks have a policy of not opening deposit accounts for someone who does not reside within the bank’s market area.  Would that be considered a UDAAP violation?  While there is a well-established body of law pertaining to the application of ECOA, there is absolutely no body of law pertaining to how the unfairness prong of UDAAP applies to non-credit products.  Although the CFPA became law in 2011, I’m not aware of a single instance in which the CFPB has used its UDAAP authority to proceed against a person based on non-credit discrimination.  Furthermore, I’m not aware of the FTC using its UDAP authority under Section 5 of the FTC Act (which was enacted more than 100 years ago) to ferret out discrimination dealing with either credit or non-credit products.

Given the complexity of the questions the CFPB’s expansion of UDAAP raises, it seems obvious that this type of a drastic change should be done through a rulemaking and not through an amendment to an examination manual.

Just like everyone else, you’re being flooded with credit reporting disputes. Disputes volumes continue to exhaust dispute processing operations. And volumes and complaints continue to rise. In 2021, the CFPB received more than 500,000 credit or consumer reporting complaints as compared to 319,000 in 2020 (roughly 57% increase).

If done right, you can use our 3 key elements to increase disputes management efficiency.

Increase Operational Efficiency by up to 30% with a Seamless Approach

Consumer reporting disputes are rolling in fast. Your team is moving through cases, sorting documentation from multiple sources, and doing their best to avoid discrepancies or data mistakes that could lead to unhappy customers and complaints to regulators. You’re wondering how to streamline the disputes process so that you can manage more volume without overtaxing your agents.

The good news is that we’ve seen many ways dispute management teams can make their operations more efficient. Several tactics are cost-effective and won’t burden existing IT infrastructure.

But there are three key areas that will help you gain traction and up to 30% efficiency. We’ve recommended this seamless approach to clients from dozens of engagements in disputes management.

1. Disputes processing effectiveness
2. Data quality management
3. Forecasting and planning

1. Maximize Disputes Processing Effectiveness

Your dispute processing effectiveness is a good indicator of operational efficiency. There are two ways to ensure that end-to-end, your disputes processing is as effective as it can be.

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First, deploy a dispute case management system. Your system should allow for automated uploads of indirect disputes from e-OSCAR® and input of direct disputes manually or automated from other systems. Additionally, the system should populate dispute cases with data from all relevant systems of record. That way, all borrower disputes are visible in a single system, eliminating the need for cross-referencing in multiple systems. The workflow solution also eliminates time-consuming manual input, while reducing errors with efficiency improvements that can range from 10-50% depending on your current situation.

The success of your case management system relies on how you use it.

So, second, after you deploy your system, turn your focus to the tools within the system to further efficiencies.

Focus on implementing a dispute queue structure and consolidating duplicate disputes within your system. Both will help you and your team “trim the fat” – cutting down on excess and redundant work. Look out for a future blog that details how to do both of these things.

2. Data Quality Management to Confirm Accuracy of Furnished Data

The importance of furnishing data quality and accuracy can’t be understated. When furnishing accurate data to CRAs, you have peace of mind that you’ve reduced your compliance risk and overall disputes volumes.

Adding systematic reviews of data and coding into your data quality management routines will confirm your furnished data is accurate. We tell clients they should be performing routine comprehensive data assessments and we suggest conducting Metro 2® code mapping reviews to certify alignment between system of record and furnished data.

3. Forecasting and Planning to be Prepared for any Volume

The last recommendation to boost disputes management efficiency is to make sure you understand your process and the way your team operates by consistently evaluating your internal dispute processing.

Analyze volumes and processing time by dispute type. For example, the most voluminous dispute type might be “account isn’t mine,” or your team might take the most time to resolve late payment disputes. Or, dealing with a multitude of repeat disputes could be dragging down your efficiency.

Whatever the case, knowing what you’re working with sets you up to forecast volumes and evaluate the efficacy of current processes. Calculate whether your methods as they stand can keep up with current demand, or if they’re being stressed. Use this to review processing changes and assess further efficiency opportunities.

With this evaluation, you can segment disputes to establish more streamlined processing and consider new strategies for handling different types of disputes. Additionally, an overall assessment facilitates understanding of processing gaps to identify issues early on and ensures compliant processing.