June 2024 Newsletters

Revised OFAC Reporting Requirements

CFPB Tackling Medical Debt Usage in Underwriting

Under its current leadership, the CFPB has long been eyeing the use of medical debt information in credit underwriting, which has now culminated in the recent issuance of a proposed rule to eliminate the exception in Regulation V (which implements the Fair Credit Reporting Act) that allows creditors to obtain and use medical debt information in connection with credit eligibility determinations. The proposed rule would also generally prohibit consumer reporting agencies (CRAs) from including medical debt information on consumer reports. Comments on the proposal are due by August 12, 2024.

The proposed rule would make a few critical changes to Regulation V. First, Regulation V currently contains a definition of “medical information.” While the existing “medical information” definition covers information about medical debts, the proposal would add “medical debt information” as a newly defined term. Regulation V currently contains a “financial information exception for obtaining and using medical information” that generally allows creditors to obtain and use information about medical debts “in connection with any determination of the consumer’s eligibility, or continued eligibility, for credit” so long as certain conditions are met.  The proposal would remove that exception and add a new exception that would allow a creditor to use “medical information” for credit eligibility determinations only if the following three conditions are met:

• The medical information relates to income, benefits, or the purpose of the loan, including the use of proceeds. Medical information about income and benefits includes, for example, the dollar amount and continued eligibility for disability income, workers’ compensation income, or other benefits related to a health or medical condition that is relied on as a source of repayment;
• The medical information is used in a manner and to an extent that is no less favorable than the creditor would use comparable information that is not medical information in a credit transaction, and
• The creditor does not consider the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis when determining the consumer’s eligibility or continued eligibility for credit.

The proposal would add a new provision to Regulation V that would prohibit CRAs from furnishing a consumer report that includes medical debt information to a creditor unless the following two conditions are met:

• The CRA has reason to believe the creditor intends to use the medical debt information consistent with one of the specific exceptions, and
• The CRA is not otherwise prohibited, such as by state law, from furnishing information in a consumer report that would meet the definition of “medical debt information.”

Under the current financial information exception in Regulation V, a creditor can consider medical information relating to expenses, assets, and collateral, including the value, condition, and lien status of a medical device that may be collateral for a loan when making credit eligibility decisions. The effect of the proposed removal of the financial information exception from Regulation V would be to prohibit creditors from obtaining and using medical information relating to expenses, assets, or collateral in making credit eligibility decisions unless a specific exception applies.

The CFPB has said that it will publish separate proposed rules on the other FCRA changes under consideration later this year. Those include broadening the definition of consumer reporting agency to include data brokers, limiting the permissible purposes for which credit reports can be furnished, and changing the rules governing the resolution of consumer disputes about their credit reports.1

More UDAAP Concerns for Contracts

Last week, the Consumer Financial Protection Bureau (CFPB) issued a Circular warning that use of unlawful or unenforceable contractual terms for consumer financial products or services may violate the prohibition against deceptive acts or practices (the “D” in “UDAAP”) in the Consumer Financial Protection Act (“CFPA”). The CFPB intends to take action against companies and individuals that deceptively slip these terms into their fine print.

As a quick review, a representation, omission, act, or practice is deceptive when:

1. The representation, omission, act, or practice misleads or is likely to mislead the consumer;
2. The consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and
3. The misleading representation, omission, act, or practice is material.

Many federal laws invalidate contractual terms that require consumers to waive consumer protections provided under federal law, such as EFTA, SCRA, and TILA. The Circular states that covered persons may violate CFPA by including “unenforceable material terms,” and this cannot be cured by including a provision like “except where unenforceable” because consumers are misled into believing that a contractual provision is lawful when it is not. In the CFPB’s view, consumers are unlikely to be aware of a law that would hold contractual terms unlawful, so if there is a dispute, they are likely to incorrectly conclude they lawfully agreed to waive their rights or protections, making it a deceptive practice.

Per the Circular, CFPB examiners have identified violations of the CFPA’s prohibition on deception stemming from using unlawful or unenforceable contract terms that claim to limit consumer rights and protections afforded by federal or state law. The CFPB provided examples of limiting the right to contest garnishments, creating the misimpression that consumers could not exercise bankruptcy protection rights, waivers of the right to retain counsel, and misrepresenting consumer protections available under laws.

In light of this, you may want to consider reviewing your consumer financial products and services contracts to identify and modify any contract terms that may violate the CFPA’s prohibition on deceptive acts and practices. Note that under this standard banks could be deceptive even if the terms used are provided by one of the industry’s contract form providers or commonly found in industry contracts.

It is common to use language such as “except where prohibited by law” in situations where the law is unclear as to whether a contract provision is lawful or where a bank is using a contract in several states and the contract provision is unlawful in one or more states but not in all states. As stated above, the CFPB will consider this language deceptive. While burdensome, in light of this Circular, you’ll have to consider scrutinizing consumer contracts to identify contract provisions that expressly or implicitly waive consumer rights or increase consumer obligations above what the law may allow and confirm their legality.

FTC Announces Ban on Noncompetes

In the world of banking, we have an alphabet soup of regulations and regulators. One regulator we don’t often hear about is the Federal Trade Commission (FTC). Well, take note because the FTC issued a final rule last month that will prevent most employers from enforcing noncompete agreements against workers, with only limited exceptions. If your bank enters into noncompetes, or if you’ve ever entered one yourself, it is something to pay attention to.

The final rule, which will become effective on September 4^th, will make it unlawful for all “employers,” defined broadly to include any natural person, partnership, corporation, association, or other legal entity within the Commission’s jurisdiction, to:

• Enter into, or attempt to enter into, a noncompete with a worker;
• Maintain a pre-existing noncompete with a worker except for existing noncompetes with “senior executives;” or
• Represent to a worker that the worker is subject to a noncompete.

The final rule defines a “senior executive” as a worker in a policy-making position who received compensation of at least $151,164 in the preceding year (either in total or on an annualized basis). A “policy-making position” means “a business entity’s president, chief executive officer, or equivalent, and any other officer of a business entity who has policy-making authority, or any other natural person who has policy-making authority for the business entity similar to an officer with policy-making authority.”

Existing noncompetes with all other workers become unenforceable upon the final rule’s effective date. Employers must notify workers, including anyone who previously worked for the business enterprise, that their noncompete agreements are no longer enforceable. The final rule provides model language for this notice.

As you may have noticed, the noncompete ban applies only to entities regulated by the FTC, and banks are excluded from FTC jurisdiction. In the rulemaking, the FTC acknowledges that “whether [the federal banking regulators] apply the rule to entities under their jurisdiction is a question for those agencies.” At this point, there is no indication that federal banking regulators will attempt to apply the FTC’s noncompete ban on banks. Banking regulators will likely take a hold-and-see approach while lawsuits challenging the rule are litigated.

The FTC expressly declined to exclude bank holding companies, subsidiaries, and other affiliates of excluded financial institutions from the rule if those entities otherwise fall within the FTC’s jurisdiction. Therefore, while banks are currently excluded, their parent companies and affiliates are subject to the noncompete ban and the enforcement of the FTC. This is an essential consideration for banking organizations with shared employees.