Category Archives: Legal News

Americans Are Reaching for Their Credit Cards Again and Debt Is Climbing

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Americans borrowed a lot more money in May, according to new data from the Federal Reserve’s Consumer Credit Report released in July. There was a 10% increase in credit use on a seasonally adjusted annual basis in May 2021. This is the biggest increase since 2016, when consumer credit saw a seasonally adjusted annual increase of 6.9%.

Use of revolving credit such as credit cards is a leading driver of this borrowing, although people are taking out more auto loans as well.

Here’s what this means for individuals and the economy as a whole.

Is increased borrowing good or bad?

In May 2021, the total outstanding balance of consumer credit hit $4.25 trillion. This is higher than the $4.19 trillion in outstanding debt in April 2021, and reflects a sharp increase from $4.186 trillion in the fourth quarter of 2020. This excludes mortgage loans, which make up the largest debt category.

This sharp increase in consumer debt is a major change compared to last year, when consumer credit use declined for the first time since the 2009 recession. While credit use has steadily climbed in 2021, the 10% rise in credit use in May is nearly double the prior increases the Federal Reserve reported.

In some ways, it could be a good sign that people are borrowing more. More debt sometimes suggests that consumers are more optimistic about their financial futures and more confident in the security of their jobs. And as people spend money, it stimulates economic growth that’s good for everyone.

However, it can also be a problem if people turn to credit cards because they can’t afford the basics without them, or if they have to take out very large car loans.

Unfortunately, inflation has begun to affect people’s pocketbooks. The prices of goods and services have risen dramatically this year. That’s due to pent-up demand from COVID-19, pandemic-related supply chain issues, and government stimulus money increasing currency supply and driving up demand.

Some people may be charging more on their credit cards because of how this inflation affects their budgets. And the price of used cars has skyrocketed this year, driving an increase in auto loan borrowing.

Ultimately, individual borrowers should be aware of the risks of increased revolving debt — even if they are optimistic about the economy improving.

Ideally, people shouldn’t borrow more than they can afford to pay back when the credit card bill comes due, avoiding high credit card interest rates. And it’s typically good to keep auto loan balances as low as possible — and to stick to loans with short payoff times — to avoid committing to large monthly payments that could affect other financial goals. With the Federal Reserve data clearly showing a borrowing upswing, it’s worth remembering these basic borrowing ideals to help you stay on firm financial footing.

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Biden to call for greater bank merger scrutiny, customer control of financial data

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President Biden on Friday will ask bank regulators to adopt tighter standards for approving mergers and allow customers to download their financial transaction data from banks.

Biden is set to sign a sweeping executive order intended to boost competition within the U.S. economy, the White House announced Friday. The order includes two provisions intended to slow consolidation in the banking industry and give customers more freedom to switch banks.

Biden’s order will ask the Justice Department, Federal Reserve, Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC) to write new, stricter guidelines for bank mergers. Democrats have called out those regulators for allowing a recent string of high-profile bank mergers that they argue hurts customers by giving a small group of larger firms outsized control.

“Though subject to federal review, federal agencies have not formally denied a bank merger application in more than 15 years. Excessive consolidation raises costs for consumers, restricts credit for small businesses, and harms low-income communities,” the White House said in a Friday summary of the order.

The order will also ask the Consumer Financial Protection Bureau (CFPB) to write rules forcing banks to allow customers to obtain their transaction information. The rules are intended to reduce the costs and trouble of switching banks by giving customers full ownership and access to crucial information.

The Fed, FDIC, OCC and CFPB are all independent agencies, meaning Biden has no power to make them follow through on the order. The president, however, has installed chiefs at the OCC and CFPB who are likely receptive to those requests and can install up to four new members of the Fed board by next year.

Republicans have also expressed concerns about growing consolidation in the banking industry, but have pinned on the costs of complying with regulations and emerging financial technology companies.

Advocates for the banking industry also cited fintechs as a greater threat to market competition than their own firms.

“By any analysis, banking is among the most competitive, least concentrated industries in America, as anyone who has shopped for a credit card, mortgage or deposit account knows,” said Greg Baer, president and CEO of the Bank Policy Institute, a non-profit advocacy and research group for the banking industry.

“Moreover, banks continue to lose business to unregulated FinTechs or government-sponsored enterprises, whose presence in the market current DoJ guidelines inexplicably ignore in assessing market competition. Those guidelines should be amended to reflect the underlying law.”

President Biden Signs Bipartisan Bill To Curb Predatory Lending

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By Charlene Crowell

In recent years, consumer finance protections withered through a series of harsh attacks that either outright rejected or significantly diminished financial guard rails in the marketplace. But a new consumer victory, urged by a groundswell of support from everyday people, academicians, and bicameral legislators, signals an important step toward fair financial rules.

On June 30, President Joe Biden’s signature ended an ill-advised rule that favored predatory loans instead of America’s consumers.

“These are so called “Rent-a-Bank” schemes,” said President Joe Biden at the June 30 signing ceremony. “And they allow lenders to prey on veterans, seniors, and other unsuspecting borrowers tapping in the — trapping them into a cycle of debt.  And the last administration let it happen, but we won’t.”

Days earlier on June 24, a bipartisan vote of 218-208 in the U.S. House of Representatives sent a key financial rule change to the President’s desk. Just a few weeks earlier the Senate had passed the same bill with a bipartisan vote. Using authority from the Congressional Review Act, the votes sought to eliminate a recently passed regulation. In this case, the goal was to nix the Office of the Comptroller of the Currency (OCC) “fake lender” rule issued late in the Trump Administration.

As the nation’s seat of government, Capitol Hill is a place where an array of interests vies for both attention and influence. Lean-budgeted but principled public interest organizations can often find themselves disadvantaged by deep pocketed interests.

That’s why it’s important to acknowledge and celebrate overcoming stacked odds to forge changes that result in real life benefits for everyday people and small businesses alike. Especially for Black America and other communities of color, solid steps toward ending billion-dollar financial exploitation are particularly deserving of attention. Historically, we have already borne the brunt of predatory greed.

“Eliminating this harmful OCC rule will prevent more people from being exposed to high-interest loans that pull borrowers down deep into debt and despair,” said Center for Responsible Lending (CRL) Director of Federal Campaigns Graciela Aponte-Diaz. “Nixing the rule will curb the spread of predatory loans that target Black, Latinx, and low-income individuals – many of whom are struggling from the economic downturn. This action will allow states to protect their residents by enforcing their state interest rate laws.”

As reported previously in this column, OCC’s “True Lender” rule, which took effect in late December 2020, gave a green light to predatory lenders. The rule worked by effectively overriding a string of state laws in almost every state enacted to prevent abusive payday, car-title, and installment loans with explosive interest rates of more than 100 percent. Payday and high-cost installment lenders paid fees to banks for use of their name and charter to dodge state interest rate laws by claiming the bank’s exemption from those laws for itself.

Consumer advocates referred to the rule change as a ‘Fake Lender,’ as the real lender is the predatory non-bank lender – not a bank.

Reactions to the successful consumer challenge soon followed. One of the first public comments came as a joint statement from two key U.S. Senators.

“Striking down the Trump ‘Rent-a-Bank’ rule will help prevent predatory lenders from ripping off consumers and charging loan-shark rates under deceptive terms,” noted Senator Chris Van Hollen of Maryland, a member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs and co-sponsor of the resolution.

“The OCC, when it allowed banks to evade state interest rate caps, betrayed hard-working families and attacked states’ ability to protect their citizens from predatory loans,” added Senator Sherrod Brown of Ohio, the committee’s chair. “Congress showed the people we serve that we’re on their side.”

For California’s Congresswoman Maxine Waters, Chair of the House Financial Services Committee, the resolution rids the nation of financial rubbish.

“The Trump-era ‘True Lender’ rule is a back-door way for nonbanks to charge triple-digit interest rates on loans at the expense of consumers in states where voters turned out to pass interest rate cap laws,” said Waters. “No wonder some call this the ‘fake lender’ rule.”

Just how much financial harm resulted from the ill-advised rule has been documented by the National Consumer Law Center (NCLC), a member of a diverse coalition that advocated repeal.

According to the NCLC, predatory small business lenders are using the fake lender rule to defend a 268 percent annual percentage rate (APR) on loans totaling $67,000 to a Black restaurant owner in New York, where the criminal usury rate is 25 percent, and secured by property in New Jersey, where the legal limit is 30 percent. The lender pretended that the nominal participation of a bank based in Nevada justified its astronomical rate. Nevada has no interest limits on loans.

In another example, OppLoans (also known as OppFi), an online lender, offers 160 percent APR loans in 26 states that prohibit triple-digit rate loans. This lender has also cited the OCC’s fake lender rule to defend its loan to a disabled veteran in California, where the usury rate on the loan is 24 percent. OppLoans is also evading state rate cap laws supported by broad majorities of voters in Arizona, Montana, Nebraska, and South Dakota. Even in states where legislatures have enacted rate caps, the fake lender rule would have essentially negated those rate cap protections.

For consumer advocates, along with their partners in the civil rights, faith, and veterans’ communities, revoking the fake lender rule is a step toward a national loan rate cap of no more than 36 percent.

Years ago, bipartisan enactment of the Military Lending Act awarded double-digit rate cap protections for men and women in uniform. It’s time for all of America to have the same financial protection.

Charlene Crowell is a Senior Fellow with the Center for Responsible Lending. She can be reached at Charlene.crowell@responsiblelending.org.   

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SCOTUS decision on FHFA’s constitutionality could provide support for validity of pre-Seila Law CFPB actions

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In its decision earlier this week in Collins v. Yellin (previously captioned Collins v. Mnuchin), the U.S. Supreme Court, relying on its decision in Seila Law, held that the Federal Housing Finance Agency’s structure is unconstitutional because the Housing and Economic Recovery Act of 2008 only allows the President to remove the FHFA’s Director “for cause.”  Despite ruling that the FHFA’s structure was unconstitutional, the Supreme Court also held that the proper remedy for the constitutional violation was not to invalidate the FHFA actions challenged by the plaintiffs.

The plaintiffs in Collins were shareholders of Fannie Mae and Freddie Mac seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for Fannie Mae and Freddie Mac that required the entities to pay quarterly dividends to the Treasury equal to their excess net worth after accounting for prescribed capital reserves.  The Third Amendment was adopted by an Acting FHFA Director and subsequent actions to implement the Third Amendment were taken by Senate-confirmed Directors.

According to the Supreme Court, its conclusion that the Acting Director who adopted the Third Amendment was removable by the President at will defeated the plaintiffs’ argument for setting aside the Third Amendment in its entirety.  The Supreme Court also concluded that “there is no reason to regard any of the actions taken by the FHFA [when headed by confirmed Directors] in relation to the third amendment as void.”  The Court stated that “all of the officers who headed the FHFA during the time in question were properly appointed.  Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office.” (emphasis included).  The Supreme Court found “no basis for concluding that any head of the FHFA lacked the authority to carry out the functions of the office.”  Citing Seila Law, the Court stated that “settled precedent also confirms that the unlawfulness of the removal provision does not strip the Director of the power to undertake the responsibilities of his office, including implementing the third amendment.”

The Supreme Court also commented that, in claiming to find implicit support for their position in Seila Law, the plaintiffs “read far too much” into that decision.  It stated that, contrary to the plaintiffs’ argument, its remand of Seila Law so the lower court could decide if the CFPB’s issuance of a CID “had been ratified by an Acting Director who was removable at will by the President” did not implicitly mean that the Director’s action would be void unless lawfully ratified.  According to the Court, “we said no such thing” and “the remand did not resolve any issue concerning ratification, including whether ratification was necessary.“

At the same time, the Supreme Court stated that the plaintiffs might nevertheless be entitled to retrospective relief if they could show that the unconstitutional removal provision caused harm.  The plaintiffs claimed that were it not for the provision, the President might have replaced one of the confirmed Directors who supervised the implementation of the Third Amendment, or a confirmed Director might have altered his behavior in a way that would have benefitted the shareholders.”  The Supreme Court remanded the case to the lower courts to resolve in the first instance whether the provision caused such harm.

The validity of actions taken by the CFPB before the Supreme Court’s Seila Law decision is currently being challenged in at least three cases: RD Legal FundingSeila Law, and All American Check Cashing.  (RD Legal has filed a petition for certiorari in the Supreme Court and Seila Law is also expected to file a cert petition.)  All of the challenged CFPB actions in these cases were taken under former Director Cordray’s leadership after he was reappointed by President Obama and confirmed by the Senate.  The businesses challenging the actions have argued that any purported ratification by former Acting Director Mulvaney or former Director Kraninger was ineffective because, as agents of the CFPB, they could not ratify an act that the CFPB, as principal, could not take at the time such act was done due to its unconstitutional structure.  The Supreme Court’s decision in Collins would seem to undercut the argument that the CFPB’s unconstitutional structure made it unable to take such actions.  In addition, the ratification of these actions by former Acting Director Mulvaney or former Director Kraninger at a time when they were removable by the President at will might make it difficult for the businesses to show that they were harmed by the removal provision.

4th Circ. Declines To Find FCRA Claim Is Time-Barred

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In Harris v. Piedmont Finance CNAC, 2021 WL 2459797 (E.D.N.C. June 16, 2021), Darryl C. Harris (“Plaintiff”) alleged Piedmont Finance CNAC (“Defendant”) failed to notify him that Defendant reported that Plaintiff’s truck had been repossessed to a credit reporting agency and further alleged that Defendant failed to promptly correct the purportedly inaccurate reporting.  Defendant moved to dismiss the complaint based on the statute of limitations and in the alternative, argued that Plaintiff’s claims were subject to a binding arbitration agreement.

In first addressing the statute of limitations defense, the Court liberally construed Plaintiff’s pro se complaint and concluded Plaintiff attempted to assert several “claims” under the Fair Credit Reporting Act (“FCRA”), but the only viable claim was under 15 U.S.C. § 1681s-2(b)(1) for failure to investigate his dispute.  Defendant argued this claim was barred by the two (2) year statute of limitation.  Importantly, the complaint was “silent with respect to dates or time periods of the alleged conduct in this case.”  The Court then noted that it was often not “appropriate” to raise a statute of limitations affirmative defense by way of a 12(b)(6) motion to dismiss unless the “face of the complaint” clearly gives rise to the defense.  Although Defendant put forth several facts in the background section of its motion to dismiss that were not contained in the complaint, the Court concluded the Complaint’s silence as to the key dates thwarted Defendant’s statute of limitations defense at such an early stage of the litigation.

The Court then addressed Defendant’s motion to compel arbitration.  Plaintiff argued he was not bound by the arbitration agreement because Defendant “breached” the terms of the contract.  Citing both United States Supreme Court and 4th Circuit precedent concerning arbitration, the Court concluded Plaintiff failed to put forth any evidence the contract was the result of the fraud, duress, or contained unconscionable terms.  Accordingly, the Court found a valid arbitration agreement existed between the parties and that the arbitration agreement covered the current dispute based on the plain language of the arbitration provision.

In the motion to compel, Defendant sought dismissal of the federal lawsuit, however, the Court concluded a stay was appropriate and ordered the parties to provide periodic updates to the Court concerning the status of the arbitration proceedings.

Practice Note:  Given the deferential treatment of pro se complaints, especially those involving consumer protection claims, it is difficult to successfully raise a statute of limitations defense by way of a 12(b)(6) motion even if the underlying facts show the claim is time-barred.

Copyright © 2021 Womble Bond Dickinson (US) LLP All Rights Reserved.National Law Review, Volume XI, Number 176