On September 17th, the Consumer Bankers Association, the American Bankers Association, and a large number of other financial trade associations sent a letter to Speaker of the House Nancy Pelosi (D-CA), Majority Leader Kevin McCarthy (R-CA) and other House Members opposing a proposal under consideration as part of the budget reconciliation package that would require financial institutions and other providers of financial services to track and submit to the Internal Revenue Service (IRS) information on the inflows and outflows of every account above a de minimis threshold of $600 during the year, including breakdowns for cash.

The proposal is purportedly designed as a means to crack down on tax evasion by wealthy taxpayers, but the $600 threshold would reach almost all Americans with a traditional bank account.  The letter criticizes the proposal as creating significant privacy concerns “without proper explanation of how the IRS will store, protect, and use this enormous trove of personal financial information.”  As privacy is often cited as the reason many individuals have chosen not to participate in the traditional financial marketplace, the letters states that the proposal will also “undermine efforts to reach vulnerable populations and unbanked households.”  The letter also notes that the proposal would create significant operational and reputational challenges for financial institutions and increase tax preparation costs for individuals and small businesses.

The Infrastructure Investment and Jobs Act (H.R. 3684) (current version here) was recently approved by the Senate, but must pass the House again in its current form before it can proceed to the President for signature.

 

An Illinois federal district court has ruled that Section 19 of the FTC Act provided an alternate route for the FTC to obtain restitution after its prior restitution award under Section 13(b) of the FTC Act was vacated by the Fifth Circuit because it concluded that monetary relief is not available under Section 13(b).

In FTC v. Credit Bureau Center, LLC, the FTC filed suit against Credit Bureau Center (CBC) for operating a website that offered a free credit report and score but automatically enrolled consumers who applied for the free information in a credit monitoring service for a monthly fee.  The FTC alleged that the website’s marketing and negative option feature violated the FTC Act’s UDAP prohibition and the Restore Online Shopper Confidence Act (ROSCA).  The district court granted judgment in favor of the FTC, issued a permanent injunction, and ordered CBC to pay over $5 million in restitution.

On appeal, the Seventh Circuit affirmed the permanent injunction, but vacated the restitution award after holding that Section 13(b) does not authorize monetary relief.  (The U.S. Supreme Court granted the FTC’s petition for a writ of certiorari and the case was meant to be consolidated with AMG Capital Management v. FTC but the Supreme Court vacated the grant of certiorari.  Subsequently, in AMG, the Supreme Court ruled that Section 13(b) does not authorize the FTC to seek monetary relief such as restitution or disgorgement.)  Following AMG and the Seventh Circuit’s issuance of its mandate, the FTC filed a motion with the district court in its action against CBC to amend the judgment to reimpose the same restitution under Section 19 and ROSCA.

Section 18 of the FTC Act authorizes the FTC to issue rules defining acts or practices that are unfair or deceptive.  If a rule promulgated under Section 18 is violated, the FTC can seek “legal and equitable remedies, including restitution, from violators” under Section 19 of the FTC Act.  Section 5(a) of ROSCA allows the FTC to enforce ROSCA by treating violations of ROSCA as violations of a rule promulgated under Section 18.

The FTC filed its motion to amend the judgment under Rule 59(e) of the Federal Rules of Civil Procedure, which requires the moving party to “clearly establish a manifest error of law or an intervening change in the controlling law or present newly discovered evidence.”  The FTC asserted that it could seek monetary relief for ROSCA violations under Section 19, a provision it did not cite in its complaint.  It also contended that because Section 5(a) of ROSCA incorporates all of its enforcement authority under the FTC Act, the FTC had not only put CBC on notice about the factual basis for its ROSCA claim and the remedy sought (i.e. restitution), but also implicated an alternative route for seeking that remedy.  According to the FTC, it was entitled to the same redress awarded in the prior judgment but under ROSCA and Section 19 rather than Section 13(b).

In response to the FTC’s motion, CBC asserted a number of counterarguments, including that the court could not amend its prior judgment because the Seventh Circuit’s mandate did not permit any further proceedings, the FTC law of the case doctrine precluded the FTC from pursuing relief under an alternative statute, the FTC had waived monetary redress under Section 19 by pursuing such relief under Section 13(b), and unfair prejudice because the FTC had not specifically invoked Section 19 in its complaint.

The district court agreed with the FTC that the Seventh Circuit’s mandate did not preclude it from granting the same relief under Section 19 that it had previously granted under Section 13(b) because the Seventh Circuit did not address whether the FTC could pursue monetary relief under Section 19.  It also rejected all of CBC’s other arguments and concluded that “because the complaint sufficiently tied the FTC’s factual allegations and claims for relief to the ROSCA violation, the invocation of section 5(a) of ROSCA was enough to put CBC on notice about ‘the methods of enforcement and nature of relief available under Section 19.’”  The district court stated that it was “persuaded that it has the authority to amend the prior judgment under Rule 59(e) due to the intervening change in the law” and amended its prior judgment to award the same consumer redress under ROSCA and Section 19.”

For cases that involve violations of FTC rules, such as the Telemarketing Sale Rule and rules implementing the Children’s Online Privacy Protection Act, or statutes such as ROSCA that include language treating a statutory violation as a violation of a consumer protection rule under the FTC Act, the FTC can be expected to continue to file actions in federal district court seeking either consumer redress under Section 19 or civil penalties under Section 5(m)(1)(A) of the FTC Act.  For cases that do not involve rule violations (i.e. cases only alleging UDAP violations), in order to obtain monetary redress, the FTC will need to first establish the respondent’s UDAP liability in the administrative action (and any appeals), before it can seek monetary relief in federal district court pursuant to Section 19.

AB-1864, which took effect on January 1, 2021 and significantly expanded the powers of the California Department of Financial Protection and Innovation, required the DFPI to establish a “Financial Technology Innovation Office.”

Adam Wright, Senior Counsel, recently joined the Department’s new Office of Financial Technology Innovation, having previously served as an enforcement attorney with the DFPI.  In his new role, Adam will be hearing feedback from companies doing business in California and engaging with industry stakeholders to help them bring innovative products to market.  These discussions may include regulatory questions.

The new Office holds weekly office hours (currently on Tuesdays), and those wishing to meet with a member of the Office during office hours can use the contact form on the Office’s website or can send an email to Adam or Christina Tetreault, who heads the Office.

The Ballard team has significant experience dealing with the DFPI, including matters with Adam.  We can facilitate meetings with Adam and the Office of Financial Technology Innovation, and also have discussions with the DFPI on a “no-name” basis.

In a decision issued earlier this summer, the U.S. Court of Appeals for the Seventh Circuit vacated the district court’s order awarding restitution, mandating civil penalties, and issuing an injunction in an action brought by the CFPB against two mortgage-assistance relief companies and four lawyers associated with the companies.  The decision imposes significant limitations on the Bureau’s ability to recover both monetary and injunctive relief in enforcement actions.

In CFPB v. Consumer First Legal Group, LLC, the CFPB filed an enforcement action in 2014 in which it alleged that the defendants violated Regulation O while providing mortgage-assistance relief services by making misrepresentations about their services, failing to make mandatory disclosures, and collecting unlawful advance fees.  The district court ruled that the companies had committed the substantive violations alleged by the CFPB and that the lawyer defendants could be held personally liable for such violations and were not exempt from Regulation O because the work they completed did not qualify as the “practice of law.”  It ordered restitution in the amount of $21.7 million, assessed civil penalties totaling $34.1 million allocated among the four lawyers and a civil penalty of $3.1 million against one of the companies, and permanently enjoined three of the lawyers from providing debt relief services.

While affirming the defendants’ liability on the substantive violations alleged by the CFPB, the Seventh Circuit vacated all aspects of the district court’s remedial order.  The district court’s restitution award was based on the defendants’ “net revenues” during the relevant period, meaning gross receipts minus any refunds issued.  The Seventh Circuit concluded that based on the U.S. Supreme Court’s decision in Liu v. SEC, which was issued after the district court issued its restitution award, the award should have been based on the defendants’ net profits.  In Liu, the Supreme Court concluded that disgorgement is “equitable relief” available to the SEC provided it is limited to net profits from wrongdoing after deducting legitimate expenses.  The Seventh Circuit rejected the Bureau’s attempt to distinguish restitution from disgorgement, stating that Liu’s reasoning was “not limited to disgorgement and purported to set forth a rule applicable to all categories of equitable relief, including restitution.”

With regard to civil penalties, the district court had concluded that three of the lawyers had acted recklessly with respect to their violations, the fourth lawyer was liable for his violations only under a strict liability theory, and the company had committed reckless violations.  The CFPA established three tiers of penalties: strict-liability violations at $5,000 per day; reckless violations at $25,000 per day; and knowing violations at $1 million per day.  The defendants argued that they were not aware of a risk that their conduct was illegal because Regulation O prohibits conduct that is commonplace for lawyers, such as requiring advance retainer payments.  They also argued that because Regulation O is a complicated regulatory regime, their violations resulted from misunderstanding the regulation’s applicability rather than recklessness.

The Seventh Circuit concluded that although their conduct did not constitute the “practice of law,” it was “a step too far to say that they were reckless—that is, that they should have been aware of an unjustifiably high or obvious risk of violating Regulation O.” (emphasis provided).  Accordingly, the Seventh Circuit vacated the district court’s  recklessness findings with respect to the three lawyers and the company and directed the district court, on remand, to apply the daily penalty for strict-liability violations.  The Seventh Circuit also agreed with the defendants that the district court had used incorrect time periods to calculate the amount of the penalties and directed the district court to measure those periods differently on remand.

The Seventh Circuit also found that the injunction issued by the district court was too broad.  The three lawyers permanently banned from providing debt relief services argued that the record did not support such a broad injunction and that it would create undue hardship for them as career bankruptcy lawyers.  Having found the defendants’ violations were not knowing or reckless, the Seventh Circuit concluded that such a broad injunction “is not necessary to protect the public against future harm.”  It also observed that the companies were out of business and “were not a complete scam,” having obtained mortgage modifications for hundreds of consumers.  The Seventh Circuit ruled that the injunction “need only ensure that the individual defendants do not stray beyond the scope of the [CFPA] and its implementing regulations.”

More industry players have been litigating cases with the CFPB over the past few years, and decisions like this seem to suggest that litigating with the Bureau is sometimes necessary, especially when there is a significant mismatch between the Bureau’s and the industry member’s view of appropriate remediation.  We believe there is every reason to predict more Bureau cases going to litigation, reinforced by decisions like this, which make the prospect of litigating a CFPB enforcement matter seem more attractive to enforcement targets.

 

The two trade groups challenging the payment provisions in the CFPB’s 2017 final payday/auto title/high-rate installment loan rule have filed an appeal with the Fifth Circuit from the Texas federal district court’s final judgment granting the CFPB’s summary judgment motion and staying the compliance date for the payment provisions until 286 days after August 31, 2021.

The trade groups have also filed a motion asking the district court to extend its stay of the compliance date until 286 days after the appeal is fully and finally resolved in order to maintain the status quo pending appeal.  They ask the district court to rule on their motion at its earliest convenience, and no later than September 27, 2021.  In the motion, the trade groups state that they have conferred with counsel for the CFPB and that the CFPB’s counsel has indicated that the CFPB opposes the stay.

 

We discuss recent and ongoing enforcement activity of the PA AG involving consumer financial services.  Our conversation focuses on activity directed at: auto title lenders for alleged violations of PA usury law; national banks for alleged CARD Act violations; furniture retailers for alleged “hang tag” law violations; home sellers for alleged violations of mortgage laws arising from the use of contracts for deed; and phone scams.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.

Click here to listen to the podcast.

On Monday, the White House announced the nomination of Alvaro Bedoya to serve as FTC Commissioner.  Mr. Bedoya is slated to fill the seat on the Commission currently held by Rohit Chopra, which Mr. Chopra will vacate upon his confirmation as CFPB Director.  Mr. Chopra is expected to be confirmed as CFPB Director before the end of the year.

If confirmed, Mr. Bedoya would join the two other Democratic FTC Commissioners, Lina Khan, Chair of the Commission, and Rebecca Slaughter, and allow Democrats to maintain a 3-2 majority.

Mr. Bedoya is currently a law professor at Georgetown University Law School, where his research has focused on how technologies such as facial recognition have led to discrimination against immigrants and people of color.  He was the founding director of Georgetown University’s Center on Privacy & Technology.  Mr. Bedoya also served as the first Chief Counsel for the Senate Judiciary Committee’s Subcommittee on Privacy, Technology & the Law.  As a result, some observers view Mr. Bedoya’s nomination as a precursor to greater FTC focus on potential discrimination arising from the use of  artificial intelligence and other technological innovations as well as privacy considerations for both consumer protection and competition among Big Tech companies.

Last week, the Federal Reserve Board published a paper on partnerships between community banks and fintech companies, “Community Bank Access to Innovation through Partnerships.”  The Fed’s publication of the paper is another indication of the increased attention that regulators are paying to bank relationships with fintechs.  It follows the publication at the end of last month of a guide by the Fed, OCC, and FDIC that is intended to assist community banks in conducting due diligence when considering relationships with fintechs.

The Fed paper is based on outreach to community banks in which the discussions focused on the strategic and tactical decisions that support effective partnerships.  The paper discusses three broad partnership types and their associated benefits, risks, and challenges as perceived by bankers as well as bankers’ views on the key considerations in establishing effective fintech partnerships.

The three partnership types discussed are:

  • Operational technology partnerships aimed at enhancing a bank’s processes, monitoring capabilities, or technical infrastructure
  • Customer-oriented partnerships in which a community bank engages a fintech to enhance various customer-facing aspects of its business (e.g., account opening) and the bank continues to interact directly with its customers
  • Front-end fintech partnerships in which a bank’s infrastructure is combined with technology developed by a fintech, with the fintech interacting directly with the end-customer in the delivery of banking products and services

The three key considerations in establishing effective fintech partnerships identified by bankers are:

  • A commitment to innovation that is shared by the bank’s senior management and board of directors, has staff buy-in, and is supported by an environment in which technology professionals are part of the bank’s strategy and broader team
  • An alignment of priorities and objectives between the fintech and bank, such as mutual emphasis on the importance of compliance with banking regulations
  • A thoughtful approach to connectivity in which connections with fintechs are part of an integrated process that allows information to flow across systems and siloed bank processes are eliminated when possible

The CFPB has filed a lawsuit against Oakland, CA-based online lender LendUpLoans alleging that LendUp is in violation of a 2016 Consent Order that required the lender to pay over $3.5 million in consumer redress as well as civil penalties and to cease  misleading consumers with alleged false claims about the cost of loans and the benefits of repeat borrowing.

In the Complaint filed last week in the U.S. District Court for the Northern District of California, the CFPB accuses LendUp with continuing to engage in the same illegal and deceptive marketing that was the basis of the 2016 Consent Order as well as allegedly failing to provide timely and accurate notices to consumers whose loan applications were denied.  The Complaint alleges violations of the Consumer Financial Protection Act, the Equal Credit Opportunity Act (“ECOA”) and ECOA’s implementing regulation, Regulation B.  The CFPB  seeks an injunction, damages or restitution to consumers, disgorgement of ill-gotten gains, and the imposition of a civil money penalty.

LendUp offers consumers single-payment and installment loans, marketing itself as an alternative to payday lenders, and using the brand identity “The LendUp Ladder.”  The company’s website tells consumers that the LendUp Ladder “incentivize[s] responsible actions and enable[s] borrowers to earn access to apply for larger loans at lower interest rates over time.”

The CFPB alleges that this statement is not only misleading, but patently false.  Its investigation found that 140,000 repeat borrowers were charged the same or higher interest rates for loans despite working their way up the levels of the LendUp Ladder. The investigation also found that many borrowers had their access to larger loans reduced, even after reaching the highest level of the LendUp Ladder.  In addition, the CFPB alleges that LendUp failed to provide timely adverse action notices on over 7,400 loan applications, and issued over 71,800 adverse action notices without accurately describing why the loan was denied, in violation of ECOA and Regulation B.

In a press release, Acting Director Dave Uejio accused LendUp of “structur[ing] its business around wholesale deception and keeping borrowers in cycles of debt,” adding that the Bureau “will not tolerate this illegal scheme or allow this company to continue preying on vulnerable consumers.”

The OCC’s true lender rule was intended to create a bright line test for when a national bank or federal savings association should be considered the “true lender” in the context of third party partnerships but Congress overturned the rule.  After reviewing the relevant background, we examine the Congressional override’s implications for future federal true lender rulemaking and its impact on existing law, key federal and state court challenges and decisions, state legislative and administrative developments, and risk mitigants for bank/nonbank partnerships, including potential loan program structures.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation, joined by Jeremy Rosenblum and Ron Vaske, partners in the firm’s Consumer Financial Services Group, and Mindy Harris, Of Counsel in the Group.

Click here to listen to the podcast.