LAS VEGAS–Credit unions and CUSOs here were given an update on the latest legal issues affecting their operations and decision-making.
The review of what is taking place in the legal domain is an annual feature of the NACUSO Network conference. Sharing their insights were attorneys Amanda Smith, Jennifer Winston and Mike Heller, all of Messick, Lauer & Smith, which has a long relationship with NACUSO.
Smith focused on the potential legal fate of the Consumer Financial Protection Bureau (CFPB), where the key legal issue is the constitutionality of its funding. That question has led to a split in rulings by circuit courts and is now before the Supreme Court, which will hear arguments in the Autumn with a ruling expected in the Spring of 2024.
At the core of the legal divide is the funding of the CFPB, which operates outside of the congressional appropriations process. A group representing payday lenders is arguing CFPB rulemaking is invalid because the entire agency is unconstitutional.
What About NCUA?
“NCUA also receives its funding outside of appropriations, but the court said other agencies are more narrow in scope than the CFPB,” said Smith. “The rationale of the court is really, really critical. (The plaintiff is saying) if not for this ill-gotten money, the CFPB wouldn’t be able to do much of anything. With that, virtually any action the CFPB has taken to date could be invalid. What does this all mean for the fate of the CFPB? All challenges in Fifth Circuit are likely to be upheld, but (the court) does not hold much clout outside of Mississippi, Louisiana and Texas. The plaintiff has to show harm due to the funding mechanism.”
The Focus of the CFPB
While the funding issue awaits a Supreme Court ruling, Winston said the CFPB has not been acting like they are going to be found unconstitutional anytime soon.
“What we have seen the CFPB do is they have been expanding their enforcement and examination authorities over non-bank entities and fintechs,” said Winston. “(CUSOs) are definitely in the CDPB focus now. This was a dormant authority that is not going to be dormant much longer.”
One Example
For example, Winston said any CU or CUSO using take-it-or-leave-it contract forms should recognize the Bureau is going to want those registered and will be focused on them. Separately, as CUToday.info has reported, the CFPB also recently announced a focus on data brokers.
“In addition, we are seeing a major expansion of what is deemed to be a UDAPP violation,” Winston told the meeting. “I consider this to be another way of making new rules. Typically, when you are a federal agency there is a notice and comment period, which they then take into consideration ahead of a final rule. That is the legal, valid way to make new rules. What we are seeing with the CFPB in what I think is making new rules by interpreting the existing rules.”
What to Watch
According to Winston, those include:
- Circulars (readers can search Circulars on CUToday.info for all CFPB rulings). “We’re seeing some novel interpretations in these circulars,” including related to negative option marketing, overdrafts and more, Winston said.
- Advisory opinions. These are to help regulated agencies understand regulatory options.
- Supervisory Guidance and Compliance Bulletins. These explain how the CFPB will exercise its authorities.
- Regulation by Enforcement. In 2021, 90% of CFPB enforcement actions were against non-bank entities.
“We have not seen this shift from the NCUA and we don’t expect to see a huge shift,” said Winston.
Finally, Winston pointed to NCUA’s focus on succession planning and urged CUs to get a plan in place.
Lending Risk
In his remarks, Mike Mulvey put the spotlight on the guidance being provided by the CFPB on CUSOs and lending.
“The first thing they want to bring to everyone’s attention is credit risk,” said Mulvey. “You want to make sure you’re following all the criteria and documents. You want to understand the credit risk the CUSO intends to engage in. If the business doesn’t go well, you are sacrificing your investment. From a strategic risk factor standpoint, they want to make sure anyone interacting with a CUSO understands the operations. They want to make sure credit unions think about an exit strategy if a relationship doesn’t go in the way anticipated, including disposing of the loans acquired.”
Compliance Reminder
From a compliance perspective, Mulvey noted lending CUSOs don’t have to follow the Federal Credit Union Act or NCUA guidelines, but the CUs that purchase loans from these CUSOs do.
“So, the CUSO should not be thought of as a way to get around these rules,” Mulvey said.
Finally, he reminded that with fair lending every CU and CUSO should be making sure when using AI or machine learning that the CU understands the model and the risk associated with the algorithm, and that they understand it in layman’s terms.
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