Compliance Solutions quarterly newsletter — June 2024

Deposit

Regulation CC amendments will impact funds availability disclosures and deposit hold notices

On May 13, 2024, the Federal Reserve Board (FRB) and Consumer Financial Protection Bureau (CFPB) jointly issued a final rule amending Regulation CC. The amendments implement a statutory requirement of the Expedited Funds Availability Act (Act), which requires that the dollar thresholds set out in the Act be adjusted for inflation every five years. The dollar thresholds include amounts of funds from deposits that must be made available for withdrawal by accountholders within prescribed time frames. The amendments will be effective July 1, 2025.

Financial institutions will be required to modify initial funds availability disclosures and deposit hold notices to reflect the adjusted dollar thresholds and notify accountholders of these changes. Additionally, they will need to ensure that corresponding system updates are made to align with the changes.

Inflation-based adjustments

Regulation CC provides that applicable dollar thresholds are subject to adjustments every five years based on changes in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The adjustments that take effect July 1, 2025, are based on changes in the CPI-W for the period July 2018 to July 2023.

The following chart summarizes the latest adjustments to the dollar threshold amounts:

Change-in-terms notices

Financial institutions will be required to notify existing accountholders of changes in their funds availability disclosures. Regulation CC generally requires that written notice be sent at least 30 days before implementing a change; however, any change which expedites the availability of funds must be disclosed no later than 30 days after implementation. The notice may be provided in any form as long as it is clear and conspicuous. You may wish to engage legal counsel as needed for guidance in drafting and delivering this notice to accountholders.

Document updates

We will provide further guidance regarding updates to funds availability disclosures and deposit hold notices in advance of the final rule’s July 2025 effective date. No action is needed at this time.

Question of the quarter

Question: Our financial institution is required to comply with Google’s privacy policy requirements for financial apps that are available within the Google Play Store, including disclosure of the data that is shared, used, and collected. Are we able to include this type of disclosure in the “Other Important Information” box on our Privacy Notice Disclosure?

Answer: No. The Privacy Notice Disclosure is designed to comply with the Gramm-Leach-Bliley Act and its implementing regulation, Part 1016. The Appendix to Part 1016 includes general instructions for each section of the disclosure. The instructions specifically state that only the following may appear in the “Other Important Information” box: (1) State and/or international privacy law information, and/or (2) Acknowledgment of receipt form. Therefore, the disclosures required by Google are not allowed to be included in the box. Rather, they should be set out in a separate privacy policy (e.g., an online/mobile banking privacy policy).

Lending

CFPB’s final rule on credit card late fees and current litigation

On March 5, 2024, the CFPB issued the Credit Card Penalty Fees Final Rule (“final rule”), which amends Regulation Z. The effective date of the final rule is May 14, 2024.

Summary of the final rule

The final rule focuses on late fees by limiting larger card issuers to an $8.00 flat fee for late payments. A larger card issuer is a card issuer that, together with its affiliates, has one million or more open credit card accounts. Card issuers who, along with their affiliates, have less than one million open credit card accounts are defined by the final rule as smaller card issuers.

The CFPB found that many issuers hiked their late fees in lockstep each year without evidence of increased costs. The CFPB’s final rule eliminates the automatic annual inflation adjustment for the $8 late fee threshold. This adjustment was added by the Federal Reserve Board and is not required by law. The CFPB will instead monitor market conditions and adjust the $8 late fee immunity threshold as necessary.

Smaller card issuers charging late, and other penalty, fees are still subject to the penalty fee safe harbors in § 1026.52(b)(1)(ii). The final rule increases those safe harbors to $32.00 for the first violation and $43 for a violation of the same type occurring within the next six billing cycles. The penalty fee safe harbor amounts in §§ 1026.52(b)(1)(ii)(A) and (B) remain subject to annual adjustment to reflect changes in the Consumer Price Index; however, the $8.00 late fee limitation for larger card issuers will not be adjusted. For penalty fees that are not late fees, larger card issuers may charge up to the safe harbor amounts in § 1026.52(b)(1)(ii).

Card issuers still have the option to impose penalty fees based on the total costs incurred as a result of that type of violation by conducting a cost analysis pursuant to § 1026.52(b)(1)(i). It is important to note that the final rule amends the Official Commentary to § 1026.52(b)(1)(i) to state that collection costs incurred after an account is charged off may not be included in the cost analysis.

Challenge to the final rule

Two days after the final rule was issued, a lawsuit challenging the final rule was filed in federal district court in Fort Worth, Texas. Plaintiffs assert that the final rule should be vacated because, among other reasons, the CFPB’s funding mechanism is unconstitutional. The question regarding the constitutionality of the CFPB’s funding structure is an issue awaiting a decision from the Supreme Court of the United States (CFSA v. CFPB). Additionally, Plaintiffs argue that financial institutions do not have adequate time to prepare and comply with the final rule.

Plaintiffs also asked the Court to stop the final rule from going into effect while the lawsuit was pending. In the CFPB’s opposition to Plaintiffs’ motion, it stated that the federal district court in Fort Worth, Texas, was an improper venue. The Court raised its concerns regarding venue and attenuated connections to the case. Subsequently, the CFPB moved to transfer the case to the District Court of the District of Columbia.

Shortly after the CFPB’s motion to transfer, the Plaintiffs filed a notice that they are appealing to the Fifth Circuit, claiming that the Court’s denial of Plaintiffs’ motion for expedited consideration of the preliminary injunction equates to the Court denying Plaintiffs’ request for meaningful relief.

The Court granted the CFPB’s motion to transfer, stating, “[v]enue is not a continental breakfast; you cannot pick and choose on a Plaintiffs’ whim where and how a lawsuit is filed.” However, the Fifth Circuit vacated the Court’s order to transfer the case in an opinion written by Judge Willett.

It has been reported that Judge Willett owns many shares in a larger card issuer impacted by the CFPB’s final rule. Parties filed letter briefs on the matter by the Clerk of the Fifth Circuit. Ultimately, the Committee on Codes of Conduct of the Judicial Conference of the United States determined that Judge Willett’s recusal in the case is not required.

On April 30, 2024, the Fifth Circuit vacated the district court’s order denying Plaintiffs’ motion for expedited consideration of the preliminary injunction and remanded the case to the district court. The Fifth Circuit directed the district court to rule on the Plaintiffs’ motion for preliminary injunction by May 10, just four days before the final rule’s effective date.

The Plaintiffs’ preliminary injunction was granted on May 10, 2024, resulting in a stay of the CFPB’s final rule. Judge Pittman of the federal district court found that the Plaintiffs had met the requirements necessary for preliminary injunctive relief. The Plaintiffs’ substantial likelihood of success on the merits is based on the Fifth Circuit’s holding that the CFPB’s funding structure is unconstitutional in CFSA v. CFPB. The Plaintiffs’ other arguments under the CARD Act, TILA, and APA were not addressed by the Court but were remarked to be “compelling.”

Next steps

Given the status of the litigation challenging the final rule and the recent United States Supreme Court decision on the CFPB’s funding structure, card issuers that meet the definition of a larger card issuer will want to begin taking steps to comply with the final rule.

If you have questions or to update your documents, contact us.

CFPB’s funding structure upheld by U.S. Supreme Court

On Thursday, May 16, 2024, the Supreme Court of the United States (SCOTUS), in a 7-2 decision, upheld the funding structure of Consumer Financial Protection Bureau (CFPB).

Fall 2022

The Fifth Circuit Court of Appeals ruled the funding mechanism of the CFPB unconstitutional. The Court also vacated the CFPB’s 2017 Payday Lending Rule.

The CFPB is funded through the Federal Reserve and not through the Congressional appropriations process. The Fifth Circuit ruled this structure violates the Constitution’s doctrine of separation of powers. In the opinion, the agency is described as double insulated: first, insulted from appropriations review and second, that the agency’s self-determined funding budget is drawn from the Federal Reserve, which itself is outside the appropriations process. This double insulation provides unhindered authority.

The Fifth Circuit invalidated the remaining portions of the Payday Lending Rule. The invalidation of the rule was a result of the CFPB using unconstitutionally granted funds to promulgate it. Ultimately, the Court determined the unconstitutional funding of the CPFB inflicted harm.

Spring 2023

In CFPB v. Law Offices of Crystal Moroney, the U.S. Court of Appeals for the Second Circuit ruled the CFPB’s funding structure was constitutional. Moroney filed a motion seeking a stay of the mandate to allow a petition for a writ of certiorari to the U.S. Supreme Court.

The CFPB filed a brief with the SCOTUS seeking reversal of the Fifth Circuit’s decision in CFSA v. CFPB. The CFPB argues that the Fifth Circuit Court of Appeals erred in invalidating the CFPB’s funding mechanism and vacating the Payday Lending Rule. The CFPB presents the following principles of support for the constitutionality of its funding structure:

• Congress’s authority to determine the specificity, length, and source of appropriations it makes by law is not limited by the Appropriations Clause’s text,
• Established practice confirms the natural reading of the constitutional text,
• Precedent agrees with constitutional text and history, and
• Congress lawfully funded the CFPB through a standing lump-sum appropriation.

Spring 2024

Today, the SCOTUS upheld the funding structure of the CFPB. The high court’s decision reverses the ruling of the Fifth Circuit Court of Appeals that the CFPB’s funding mechanism was unconstitutional.

The scope of the issue in front of the SCOTUS was limited to deciding whether the statute that provides funding to the CFPB violated the Appropriations Clause. The majority opinion was written by Justice Clarence Thomas, relying on both the text of the Constitution and early English and United States history and congressional practice. Justice Thomas states that “specifying the source and purpose is all the control the Appropriations Clause requires.” 601 U. S. ____ (2024)*.

The SCOTUS did not find any of the three principal arguments from the CFSA to be persuasive. The first argument being the CFPB circumvented law by deciding their annual funding from the Federal Reserve System and not Congress. The Court reiterates that Congress did in fact determine the amount of annual funding for the CFPB by imposing a statutory cap and therefore did not violate the Appropriations Clause. The second argument was the CFPB funding structure is an invalid appropriation because there is not a time limit. Justice Thomas’ opinion referenced the text of the Constitution and the First Congress’ practice to highlight that there are other examples of appropriations not limited in time, like the Customs Service and the Post Office. The final argument was that the CFPB funding mechanism bypasses the separation of powers. The Court found the “associations offer no defensible argument that the Appropriations Clause requires more than a law that authorizes the disbursement of specified funds for identified purposes.” (Page 19)*

Justice Thomas maintains that “[u]nder the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes. The statute that provides the Bureau’s funding meets these requirements. We therefore conclude that the Bureau’s funding mechanism does not violate the Appropriations Clause.” (Page 5)*

In a concurring opinion, Justice Kagan writes: “For over 200 years now, Congress has exercised broad discretion in crafting appropriations. Sometimes it has authorized the expenditure of a sum certain for an itemized purpose on an annual basis. And sometimes it has departed from that model in one or more ways. All the flexibility and diversity evident in the founding period has thus continued unabated, making it ever more obvious that the CFPB’s funding accords with the Constitution.” (Page 2)*

The dissenting opinion by Justices Alito and Gorsuch asserts that the CFPB’s “novel statutory scheme” gives the CFPB power to “bankroll its own agenda without any congressional control or oversight.” (Page 1)*

As for the impact of the ruling, a loss for the CFPB could have cast doubt on years of agency work, including rules governing credit cards, banking, and loans. Today’s decision could shed light on another CFPB case pending in the Fifth Circuit concerning credit card late fees.

The proliferation of the “Commercial Financial Disclosure” and when it goes wrong

Back in 2018, California passed the nation’s first Commercial Financing Disclosure Law (CFDL). Since then, 6 other states have enacted some version of a CFDL and 8 states currently have similar bills pending. Generally speaking, CFDLs require certain lenders to provide “Truth in Lending Act” style disclosures to borrowers in particular commercial transactions. The underlying purpose of the CFDLs appears to be protecting small businesses from predatory financing from non-traditional, unregulated lenders. For example, commercial venture lenders providing loans in exchange for certain percentages of the business’s future receivables or sales. Until recently, CFDLs have not applied to depository or financial institutions acting under state or federal banking and credit union charters.

That all changed when Florida passed its version of the CFDL, which became effective on January 1, 2024. Early versions of the Florida CFDL bill had included the broad definition of “depository institution” which would have exempted any state or federally chartered bank or credit union from the requirements of the Florida CFDL. Inexplicably, during the legislative process, the bill was amended so that the definition of a depository institution was narrowed significantly. The new definition of “depository institution” included only financial institutions holding a Florida or federal charter. The resulting effect of this narrowed definition was that institutions chartered in states other than Florida but authorized to conduct business in Florida were no longer defined as “depository institutions” for the purpose of the disclosure law and therefore no longer fell under the “federally insured depository institutions” exemption provided in the law.

As TruStage Compliance Solutions had not seen previous iterations of CFDLs apply to any federally or state chartered financial institutions, clarification and guidance was requested from the Florida Attorney General’s Office, the Florida Chief Financial Officer’s office, and the offices of the legislators that sponsored the Florida CFDL on how to interpret the exemption as it applied to non-Florida chartered depository institutions. The Florida CFDL, as originally passed, raised some constitutional concerns by providing preferential treatment to federal or Florida state-chartered institutions relative to non-Florida state-chartered institutions. Ultimately, Florida state officials were not able or willing to provide guidance regarding the application of the Florida CFDL to any non-Florida state-chartered institutions.

In late 2023 Florida introduced an amendment to the Florida CFDL (2023 HB939), seemingly after recognizing the issues and concerns related to the restrictive “depository institution” definition. This amendment was at the urging of Florida’s CFO office to expand the definition of a “depository institution” to include banks and credit unions chartered in any state. The bill including this amendment to the CFDL was passed by the Florida legislature and signed into law by Governor Ron DeSantis on May 3rd, 2024. Its provisions will become effective on July 1st, 2024, at which point, the ambiguities and concerns of the Florida CFDL related to non-Florida state chartered financial institutions can be put to rest since all federal and state-chartered depository institutions will be exempt from complying with the Florida CFDL.

As detailed above, in instances where laws are not carefully drafted, leading to ambiguity, uncertainty, and unintended consequences, they may subject traditional financial institution lenders to the requirements of CFDLs and similar laws without much warning or guidance. TruStage Compliance Solutions will continue to track and analyze similar versions of CFDLs being introduced in other states and will notify financial institutions to the extent that any proposed CFDLs could potentially impact traditional commercial lending transactions.

Business lending document update

TruStage Compliance Solutions empowers lenders to document unique and complex business loans that would otherwise be time intensive and cost prohibitive. Offering, documenting, and booking compliant extensions of credit that meet both state and federal requirements is a core competency of business lending. TruStage Compliance Solutions strives to make the loan documentation process simple, reliable, and compliant. We have taken a holistic approach to enhance our business lending content library serving both our classic and dynamic document clients.

We have enhanced provisional language for readability, consistency, and lender flexibility based on market feedback, lender preferences, and proactive industry research. Whether you rely on our cloud-based transaction risk management software or a direct integration of our documents to your loan origination system, the document content you receive is now substantively aligned regardless of financial institution type, lending state, loan size, or loan type.