In a thoughtful opinion that diverges from how other circuit courts have addressed the issue, the Second Circuit recently issued a ruling clarifying the circumstances when data breach plaintiffs can rely on fear of identity theft to establish Article III standing.

The case is McMorris v. Carlos Lopez & Associates, LLP (CLA).  CLA offers mental and behavioral health services to veterans, service members and their families.  An employee at CLA accidentally emailed a spreadsheet containing social security numbers and other sensitive personal information of 130 CLA employees and former employees to CLA staff.  Plaintiffs later initiated a class action in the Southern District of New York on behalf of all employees and former employees whose personal information was erroneously emailed, asserting negligence and consumer protection claims.  The complaint did not allege that any plaintiffs were the victim of identity theft or that anyone outside of CLA had obtained the spreadsheet.  Rather, plaintiffs asserted that they cancelled their credit cards and purchased credit monitoring to guard against “imminent” identify theft. The Southern District dismissed the complaint on grounds that plaintiff has not asserted an injury sufficient to establish Article III standing.

On appeal, the Second Circuit ruled that fear of identity theft can be sufficient for Article III standing, but held that the plaintiffs hadn’t established a substantial risk of identity theft in this particular case.  Perhaps the most notable aspect of the opinion is the Second Circuit’s contention that the often claimed “circuit court” split on the issue of whether fear of identity theft is sufficient for Article III standing is illusory.  Synthesizing the case law, the Second Circuit found that, in fact, no circuit court had ever held that a plaintiff lacks standing where the plaintiff had adequately plead a substantial risk of identity theft.  In the Second Circuit’s view, the cases instead differ on what constitutes a “substantial risk of identity theft.”

To that end, the Second Circuit identified three factors for courts to analyze in assessing whether there is a substantial risk of identity theft: (1) whether the plaintiff’s data was exposed; (2) whether other consumers’ data that was also exposed has been misused; and (3) whether the data is sensitive and of a type likely to be misused.

Additionally, the Second Circuit addressed another often debated issue in data breach litigation: does spending money to guard against potential harm alone constitute an injury in fact?  The Second Circuit ruled that even de minimis time and money spent to protect against identity theft can establish Article III standing where there is a substantial risk of identity theft.

McMorris may prove to be a landmark opinion.  The Second Circuit’s opinion is the first to set forth a list of factors for courts to assess when determining whether there is a substantial risk of identity theft and it is likely that litigants, and potentially other courts, will cite the McMorris factors in future cases.  Beyond the substantial risk test, plaintiffs and defendants will likely cite different aspects of the Second Circuit’s opinion to advance their arguments.  Data breach plaintiffs will cite McMorris for the proposition that fear of future identity theft can establish standing, and to argue that there is not a circuit court split on this issue.  Defendants on the other hand will cite the Second Circuit’s ruling that out of pocket expenses to guard against identify theft does not automatically create standing.

 

The ruling that a debt collector’s transmittal of debt information to its letter vendor could violate the FDCPA’s limits on third party communications has produced shock waves.  After reviewing the court’s FDCPA analysis, we discuss the decision’s potential application to a range of third party service providers and to first-party creditors and the prospects for rehearing or SCOTUS review.  We also share our thoughts on possible industry strategies for responding to the decision and look at the court’s analysis finding that the plaintiff had standing to bring his FDCPA claim.

Ballard Spahr Senior Counsel Alan Kaplinsky hosts the conversation joined by Stefanie Jackman and Burt Rublin, partners in the firm’s Consumer Financial Services Group.

Click here to listen to the podcast.   Click here to read our blog post about Hunstein.

The California Supreme Court recently agreed to hear an appeal in Pulliam v. HNL Automotive Inc., a case with significant implications for the amount of money a plaintiff can recover when proceeding against a dealer/seller under the FTC Holder Rule.   

Officially titled the “Trade Regulation Rule Concerning Preservation of Consumers’ Claims and Defenses,” the Holder Rule requires sellers that arrange for or offer credit to finance the purchase of consumer goods or services to include a specified “holder notice” in the credit contract.  The notice must state that any holder of the contract is subject to all claims and defenses the consumer could assert against the seller of the financed goods or services, with the consumer’s recovery limited to the amount paid by the consumer under the contract.  

Following a systemic review of the Holder Rule, the FTC published a notice in the Federal Register in May 2019 announcing that it had decided to retain the Holder Rule without modification.  In its discussion of the review, the FTC indicated that several of the comments addressed whether the Rule’s limitation on recovery to “amounts paid by the debtor” precludes consumers from recovering attorney’s fees above that cap.  The FTC expressed its conclusion that if a holder’s liability for attorney’s fees is based on claims against the seller that are preserved by the Holder Rule Notice, then the amount the consumer can recover—including any recovery based on attorney’s fees—cannot exceed the amount the consumer paid under the contract. 

In Pulliam, after purchasing a vehicle pursuant to a retail installment contract with the dealer, the plaintiff filed a lawsuit against the dealer and auto finance company to which the dealer had assigned the contract.  The plaintiff asserted various claims based on her discovery that the vehicle did  not have cruise control and other features shown in advertisements.  The jury found for the plaintiff on her claim of violation of the implied warranty of merchantability under California’s Song-Beverly Consumer Warranty Act and, in a judgment entered jointly and severally against the dealer and auto finance company, awarded her approximately $22,000 in damages.  On post-trial motions, the court awarded the plaintiff nearly $170,000 in attorney’s fees.  

On appeal, the auto finance company argued that it was not liable for the plaintiff’s attorney’s fees under the Holder Rule.  As an initial matter, the Court of Appeal observed that the dictionary definition of “recovery” “focuses on damages, i.e. restoring money that was taken away from the plaintiff, and does not expressly address attorney’s fees.”  Based on its review of the Holder Rule’s legislative history, the court concluded that the Holder Rule’s limit on recovery applied to consequential damages and not attorney’s fees.  The court was unwilling to give deference to the FTC’s conclusion in the May 2019 notice, stating that “the FTC’s statement regarding attorney’s fees in [the notice] was not an exercise of its substantive expertise, but simply a position taken after limited arguments were made on each side.”  (The court noted that the FTC had not solicited comments on this issue and received six comments from commenters who “had volunteered the information.”)  

The decision in Pulliam creates a split among California’s appellate districts, with the Courts of Appeal in two other districts having issued decisions concluding that the Holder Rule’s limit on recovery does include attorney’s fees.  These cases are Lafferty v. Wells Fargo Bank, N.A., 25 Cal. App.5th 398 (2018) and Spikener v. Ally Financial, Inc., 50 Cal. App. 5th 151 (2020).  

Last month, almost 45 years after the Holder Rule and corresponding FTC staff guidance were issued, the FTC issued a “staff note” in which FTC staff concluded that the TILA exemption for large transactions ( $58,300 for 2021) does not apply to the FTC’s Holder Rule. 

 

A Maryland administrative action recently removed to the state’s federal district court illustrates how Maryland law continues to present challenges for the bank partner structure used by many lenders.

Last month, Bank of Missouri, an FDIC-insured, Missouri state-chartered bank, and Atlanticus Service Corporation and Fortiva Financial, LLC, the Bank’s non-bank service providers, removed an administrative matter filed against them in January 2021 by the Maryland Department of Labor, Office of the Commissioner of Financial Regulation (OCFR) alleging that the Bank and Atlanticus/Fortiva violated Maryland law by failing to hold required Maryland lending and other licenses.  According to the factual allegations in the OCFR’s Charge Letter:

  • The Bank offers in-store retail credit financing as well as store-branded credit cards to Maryland consumers.
  • The Bank retains ownership of the credit accounts and the debtor-creditor relationship with Maryland consumers for the life of the loan account.
  • Atlanticus/Fortiva assists Maryland consumers in obtaining an extension of credit from the Bank by accepting and processing credit applications from consumers.
  • Atlanticus/Fortiva performs all of the collections, servicing, payment and remittance operations in connection with the accounts.

The OCFR charges the Bank with having violated Maryland licensing laws regarding installment loans, consumer loans, and open-end/revolving credit.  As to Atlanticus/Fortiva, the OCFR charges them with violating the licensing requirements of Maryland’s Credit Services Business Act and Collection Agency Licensing Act.  The OCFR claims that the Bank’s failure to hold the required lending licenses makes the loans unenforceable and prohibits Atlanticus/Fortiva from collecting any amounts on the loans.

In their Notice of Removal, the Bank and Atlanticus/Fortiva claim that the Maryland Office of Administrative Hearings functions as a “state court” for purposes of the statute governing federal removal.  They assert that the district court has federal question jurisdiction over the OCFR’s claims against the Bank because those claims are completely preempted by Section 27 of the Federal Deposit Insurance Act, which prescribes the interest rate that state-chartered, federally insured banks can charge and grants such banks interest rate exportation authority.  They also argue that the court should exercise supplemental jurisdiction over the claims against Atlanticus/Fortiva because they are bank service companies and part of the same case or controversy as the completely preempted claims against the Bank.

In 2016, the OCFR brought an enforcement action against CashCall, a nonbank operating a high-rate bank model program.  In the litigation that followed, Maryland’s highest court held that nonbanks cannot market loans originated by a bank without being licensed as credit services businesses, and affirmed $5.6 million in penalties against CashCall.  It also concluded that Maryland’s Credit Services Business Act does not permit a credit services business to assist a consumer in obtaining a loan from any in-state or out-of-state bank, at an interest rate prohibited by Maryland law.

The new Maryland matter demonstrates that participants in bank model programs continue to face state licensing threats.  In addition, legal challenges to the OCC and FDIC “Madden-fix” rules and the OCC’s “true lender” rule continue to create uncertainty for participants.  As a result, participants would be well-advised to revisit their compliance with state licensing laws and their vulnerability to “true lender” and Madden challenges.

 

The Department of Education has announced that it has selected former CFPB Director Richard Cordray as the Chief Operating Officer of Federal Student Aid.  In addition to having served as CFPB Director, Mr. Cordray formerly served as Ohio Attorney General.

Rohit Chopra, President Biden’s nominee for CFPB Director, previously served as the CFPB’s Private Education Loan Ombudsman under Mr. Cordray’s leadership.  As Ombudsman, with Mr. Cordray’s support, Mr. Chopra was highly critical of private student loan servicing practices.

We expect Mr. Cordray’s selection by ED to lead to increased cooperation between the CFPB, state attorneys general, state regulators, and ED in supervisory and enforcement matters involving federal student loan servicers and collectors as well as for-profit colleges.  There is also a strong likelihood that Mr. Cordray will help reinvigorate priorities from the Obama Administration that were reversed or weakened under the Trump Administration, such as the gainful employment rule and public service loan forgiveness.

 

The CFPB recently entered into a consent order with Nationwide Equities Corporation (Nationwide), which the CFPB refers to as a mortgage broker and mortgage lender that primarily provides jumbo reverse mortgage loans and Home Equity Conversion Mortgage Loans (HECMs). The CFPB asserts in the consent order that Nationwide engaged in direct mail advertising practices that violated the Mortgage Acts and Practices—Advertising Rule (the “MAP Rule,” also known as Regulation N), the closed-end advertising requirements of Regulation Z under the Truth in Lending Act (TILA), and the prohibition against unfair, deceptive or abusive acts or practices under the Consumer Financial Protection Act of 2010 (the “CFPA”).

With regard to the method and volume of advertising, the CFPB asserts that since December 2015 Nationwide has mailed hundreds of thousands of mortgage advertisements and distributed flyers to older homeowners and financial professionals whose clients were older homeowners in at least 36 states and the District of Columbia. The CFPB also asserts that hundreds of thousands of consumers have received at least one of Nationwide’s direct-mail advertisements, and thousands of consumers have obtained mortgages through Nationwide.

With regard to the asserted violations of the laws noted above, the CFPB claims that the direct mail advertisements and the flyers contain three main types of false, misleading or inaccurate representations:

  1. False or misleading representations about the costs of a reverse mortgage loan and the consequences of nonpayment.
  2. False or misleading representations about the nature of the mortgage credit product offered and the source of communications sent to consumers.
  3. False or misleading representations about the amount of cash or credit available, including the likelihood of obtaining a particular product or term.

The CFPB asserts that the following statements in advertisements constitute the first type of false or misleading representation, because they incorrectly implied that the consumer would not have to pay taxes or insurance:

  • Nationwide offered a loan “that allows senior homeowners to immediately increase their monthly cash flow TAX FREE” and “accomplish their goals without touching savings, investments, or current income.”
  • Nationwide claimed taking out a reverse mortgage loan “[e]liminates monthly mortgage payments” while allowing the borrower to “[s]tay in your home,” with “[l]oan proceeds [that] are tax-free.”

The CFPB noted that a consumer could lose their home to foreclosure for the nonpayment of taxes and insurance.

The CFPB asserts that the following statements in advertisements constitute the second type of false or misleading representation, because the statements misrepresented the nature of the mortgage credit product offered and the source of communications sent to consumers:

  • Certain solicitations sent to consumers with existing reverse mortgage loans provided that “THE TIME HAS COME TO UPDATE YOUR REVERSE MORTGAGE” and later repeated that the consumer’s current loan was “due for an update.”
  • One letter template was stamped “***IMPORTANT NOTICE***” and “DATED DOCUMENT OPEN IMMEDIATELY,” and warned, “[o]ur records indicate that you have not yet called to discuss your eligibility as a homeowner aged 62 or older for your property at [the consumer’s specific address]” and later described the reverse mortgage loan offered by Nationwide as a “Federally Insured Program that allows senior homeowners to immediately increase their monthly cash flow TAX FREE.”
  • Another letter template was purportedly from the “ADMINISTRATIVE OFFICE” and contained sections titled “NOTICE” and “STATUS.” It informed the consumer that her “waiting period expired” and that she had “not accessed [her] equity reserves.” The letter then listed the “equity reserves” seemingly available to the borrower.
  • One letter was purportedly from the consumer’s “Assigned Officer” within an “INFORMATION VERIFICATION DEPARTMENT” and was titled “REQUEST FOR VERIFICATION OF OCCUPANCY” and stamped “VERIFY.” The letter stated that the company “need[ed] to verify that you occupy this property as your Primary Residence” and that there are “current benefits you can take advantage of as long as you still occupy the property. Call us right away . . . so we can verify.”
  • One letter sent to 30,000 consumers with existing reverse mortgage loans claimed to have “exciting news regarding your reverse mortgage,” announcing that the consumer could “TAKE FULL ADVANTAGE OF YOUR REVERSE MORTGAGE” and “be eligible for more cash,” without having to pay any origination charges.
  • Another letter template distributed to 30,000 consumers told consumers with existing reverse mortgage loans that they may be “eligible to receive additional money by accessing more of the equity in your home.” The letter represented that this additional money would “come from the change in value and principal limit and would not change any of the rules or fundamentals of your existing reverse mortgage.”

With regard to solicitations that, in the view of the CFPB, suggested to the consumer that the solicitations were from the consumer’s current reverse mortgage lender offering a loan modification, the CFPB stated that in reality Nationwide was offering an entirely new reverse mortgage that would require a new credit check, appraisal, title search, initial mortgage insurance premium (MIP), and other costs associated with the loan. The CFPB noted borrowers refinancing an existing FHA Home Equity Conversion Mortgage (HECM) with a new HECM are required to pay an initial MIP of two percent of the maximum claim amount, which is the difference between the maximum claim amount for the new HECM loan and the maximum claim amount for the existing HECM being refinanced. It also appears that the CFPB believed that certain statements suggested that Nationwide is, or is affiliated with, a government agency.

The CFPB asserts that the following statements in advertisements constitute the third type of false or misleading representation, because the stated pre-approved amounts were not tailored to the borrowers or their homes:

  • Letters offered multiple consumers of different ages and with home values that varied the exact same “pre-approved” loan amount—$20,752.43. The letters advised consumers that they were “pre-approved” for the stated dollar amount and used phrases like, “We’ve done our homework. Your elevated status of Pre-Approved means you already have what it takes to qualify,” suggesting that the preapproved loan amount was based on some specific characteristics of the borrower or her home.

The CFPB also asserts that the following statements in advertisements constitute the third type of false or misleading representation, because Nationwide did not possess the information necessary to make representations that borrowers were “pre-approved” or eligible for specific terms of credit and, thus, misrepresented that it could arrange or offer a reverse mortgage loan with the specific credit terms referenced:

  • One letter sent to 5,000 borrowers stated that “THE TIME HAS COME TO UPDATE YOUR REVERSE MORTGAGE” and “you have been due for an update for [a number of months over 18].” The letter also included a pie chart indicating that specific amounts were available for distribution to the consumer should she refinance her loan.
  • Another letter sent 30,000 times during the Relevant Period claimed the borrower was “PRE-APPROVED” for a reverse mortgage refinance and was “eligible to receive additional money” which would “come from the change in value and principal limit and would not change any of the rules or fundamentals of your existing Reverse Mortgage.”
  • Another letter distributed to 15,000 consumers listed an “Estimated Available Amount” to the borrower and assured the borrower that “We’ve done our homework.”

The CFPB additionally asserts that the following statements in advertisements constitute the third type of false or misleading representation, because (1) Nationwide made a misleading comparison between a consumer’s current reverse mortgage loan and a hypothetical new reverse mortgage loan that would be available to the consumer, and (2) the statements misrepresented that taking out a second reverse mortgage would result in substantial savings to the consumer:

  • One letter sent to over 16,000 consumers promised that borrowers would achieve an “IMMENSE SAVING” by taking out a new reverse mortgage loan with the company due to HUD changes to MIP requirements, and that if the borrower elected to place the reverse mortgage proceeds in a line of credit, the amount “will continuously grow and earn interest—every single month!” The letter also stated that according to “research” and a “recent review” performed on the borrower’s account, the borrower could “greatly reduce [her] monthly expenses” and “save [] money and equity each month.”

With regard to the solicitations claiming substantial savings, the CFPB stated that the closing costs on a new loan were likely to be significant and could well outweigh the extra cash available through the refinanced loan. The CFPB also stated that the new loan terms Nationwide would offer a consumer would not necessarily be better than the terms of the consumer’s current reverse mortgage loan.

As noted above, the CFPB asserts that Nationwide sent solicitations directly to older homeowners and financial professionals whose clients were older homeowners. When addressing the MAP rule, the CFPB states that the rule’s prohibitions are not limited to advertisements sent directly to consumers, because the rule prohibits misrepresentations “in any commercial communication.” The CFPB notes that under the MAP rule a commercial communication includes statements “designed to effect a sale or create interest in purchasing good[s] or services.”

The MAP rule has a general prohibition against making any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product. The MAP rule also sets forth a non-exclusive list of specific types of misrepresentations that violate the rule. The CFPB asserts violations of the prohibitions against the following specific types of misrepresentations:

  • The existence, nature, or amount of fees or costs to the consumer associated with the mortgage credit product, including but not limited to misrepresentations that no fees are charged.
  • The terms, amounts, payments, or other requirements relating to taxes or insurance associated with the mortgage credit product, including but not limited to misrepresentations about:
    • Whether separate payment of taxes or insurance is required; or
    • The extent to which payment for taxes or insurance is included in the loan payments, loan amount, or total amount due from the consumer.
  • The amount of the obligation, or the existence, nature, or amount of cash or credit available to the consumer in connection with the mortgage credit product, including but not limited to misrepresentations that the consumer will receive a certain amount of cash or credit as part of a mortgage credit transaction.
  • The existence, number, amount, or timing of any minimum or required payments, including but not limited to misrepresentations about any payments or that no payments are required in a reverse mortgage or other mortgage credit product.
  • The potential for default under the mortgage credit product, including but not limited to misrepresentations concerning the circumstances under which the consumer could default for nonpayment of taxes, insurance, or maintenance, or for failure to meet other obligations.
  • The association of the mortgage credit product or any provider of such product with any other person or program, including but not limited to misrepresentations that:
    • The provider is, or is affiliated with, any governmental entity or other organization; or
    • The product is or relates to a government benefit, or is endorsed, sponsored by, or affiliated with any government or other program, including but not limited to through the use of formats, symbols, or logos that resemble those of such entity, organization, or program.
  • The source of any commercial communication, including but not limited to misrepresentations that a commercial communication is made by or on behalf of the consumer’s current mortgage lender or servicer.
  • The right of the consumer to reside in the dwelling that is the subject of the mortgage credit product, or the duration of such right, including but not limited to misrepresentations concerning how long or under what conditions a consumer with a reverse mortgage can stay in the dwelling.
  • The consumer’s ability or likelihood to obtain any mortgage credit product or term, including but not limited to misrepresentations concerning whether the consumer has been preapproved or guaranteed for any such product or term.
  • The consumer’s ability or likelihood to obtain a refinancing or modification of any mortgage credit product or term, including but not limited to misrepresentations concerning whether the consumer has been preapproved or guaranteed for any such refinancing or modification.

With regard to the Regulation Z closed-end loan advertising requirements, the CFPB asserts a violation of the requirements that an advertisement for credit secured by a first lien on a dwelling must, if applicable, disclose that the advertised payments do not include amounts for taxes and insurance premiums, and that the actual payment obligation will be greater.

With regard to the prohibition against unfair, deceptive or abusive acts or practices under the CFPA, the CFPB simply states that the asserted violations of the MAP rule and the Regulation Z advertising requirements also violate such prohibition.

Among various conduct requirements, Nationwide agreed to designate a senior-level executive as the Advertising Compliance Official. The Advertising Compliance Official must review each mortgage advertisement template before any advertisement based on that template is disseminated to a consumer to ensure that it is compliant with the MAP Rule, Regulation Z, TILA, the CFPA, and the consent order. The Advertising Official also must document the review and, if the advertisement states an amount of cash that a borrower might receive, the documentation must state the method of arriving at that number and include any materials used to determine the availability of that amount.

Nationwide also agreed to pay to the CFPB a civil money penalty of $140,000.

Nationwide does not admit or deny any findings of fact or conclusions of law, except for admitting the facts necessary to establish the CFPB’s jurisdiction over Nationwide and the subject matter of the consent order.

 

The Office of the Comptroller of the Currency has filed a motion to dismiss the lawsuit filed by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court seeking to block the OCC from granting a national bank charter to Figure Technologies Inc.  The lawsuit represents CSBS’s third challenge to the OCC’s authority to issue special purpose national bank (SPNB) charters to non-depository fintech companies.  The first two lawsuits were dismissed on ripeness grounds.

Once again, the OCC argues that CSBS lacks standing and that its claims are not ripe.  The OCC argues that CSBS lacks standing to challenge the OCC’s authority to issue an SPNB charter or approve Figure’s charter application because (1) Figure has applied for a full service bank charter, (2) Figure’s application has not yet been approved, and (3) CSBS’s assertions that either it or any of its members will be injured are pure conjecture.  The OCC further argues that CSBS’s claims are constitutionally unripe because CSBS does not face a sufficiently “imminent” injury in fact and are prudentially unripe because the dispute is unfit for judicial review before a decision is made on Figure’s application.

Unlike the first two complaints, the relief sought by CSBS in its third complaint is not limited to restricting the OCC’s authority to issue bank charters.  In the third complaint, CSBS also asks the court to declare that the OCC’s preemption regulations (12 C.F.R. 7.4007, 7.4008, 34.4) are invalid because (1) they do not comply with the Dodd-Frank Act’s standard limiting preemption to state consumer financial laws that “prevent or significantly interfere with” the exercise of a national bank’s powers, (2) they were promulgated without the OCC undertaking the case-by-case analysis for preemption determinations required by the Dodd-Frank Act, and (3) the OCC has failed to comply with the Dodd-Frank Act’s five-year periodic review requirement.

In its motion to dismiss, the OCC calls this new claim “a thinly veiled attempt to bootstrap a challenge to the OCC’s Preemption Regulations to the pending Figure Application.”  The OCC argues that CSBS lacks standing to challenge the preemption regulations because an OCC decision whether to charter a national bank is not a preemption determination and therefore the requirements for such determinations are not in issue.  It also argues that because Figure’s application has not yet been approved, a challenge to the preemption regulations based on Figure’s charter application is unripe.

Alternatively, the OCC argues that the complaint should be dismissed for failure to state a claim.  In support, the OCC makes the following principal arguments:

  • The National Bank Act (NBA) gives the OCC authority to issue SPNB charters to non-depository companies.  (In its complaint, CSBS alleged that there was uncertainty as to whether Figure Bank will accept deposits but claimed that regardless of whether Figure Bank would accept deposit, “it is clear that Figure Bank has applied for a [SBNB charter] because it will not be FDIC-insured.”)
  • In response to CSBS’s argument that the OCC lacks authority to issue SPNB charters to uninsured depository institutions:
    • The OCC has authority to reasonably interpret the NBA to determine that a national bank is not required to obtain deposit insurance to lawfully commence “the business of banking.”
    • No provision in the Federal Deposit Insurance Act (FDIA) requires a depository national bank to obtain FDIC insurance. The 2019 Federal Deposit Insurance Improvement Act (FDICIA) amended the FDIA to change the framework that previously provided for automatic deposit insurance for national banks upon receipt of an OCC charter to a framework that gives national banks discretion whether to apply for deposit insurance.
    • The Federal Reserve Act (FRA) also does not require national banks to be insured.  Language in the FRA language cited by the CSBS as imposing such a requirement on national banks directly conflicts with the current deposit insurance framework as set forth in the FDICIA.
  • CSBS’s challenge to the preemption regulations is time-barred.
  • CSBS’s view that the Dodd-Frank Act requires a strict application of the phrase “prevent or significantly interfere” to correctly apply the Barnett preemption standard is inconsistent with the Barnettdecision itself and the legislative history of the Dodd-Frank Act provision.  The phrase “prevent or significantly interfere” does not exclude other preemption formulations referenced in Barnett.  The preemption regulations were consistent with the Barnett standard when they were promulgated in 2004 and because the Dodd-Frank Act did not change this standard but in fact codified it, the preemption regulations remain consistent with the Dodd-Frank Act.
  • The case-by-case analysis and five year periodic reviews required by the Dodd-Frank Act only apply to OCC preemption determinations made after July 21, 2011.  Accordingly, they do not apply to the preemption regulations promulgated in 2004.  The OCC’s 2011 amendments to the preemption regulations did not themselves preempt any additional laws and therefore were not preemption determinations for purposes of the Dodd-Frank Act.

In March 2021, the U.S. Court of Appeals for the Second Circuit heard oral argument in the OCC’s appeal from the district court’s final judgment in the lawsuit filed by the New York Department of Financial Services (DFS) seeking to block the OCC’s issuance of SPNB charters to non-depository companies.  After finding that the DFS had standing to file its lawsuit, the district court concluded that the term “business of banking” as used in the NBA only makes depository institutions eligible to receive national bank charters.  Although the district court reached this conclusion in denying the OCC’s motion to dismiss, the court subsequently, with the OCC’s and DFS’s consent, entered a final judgment against the OCC.  This allowed the OCC to file an appeal.

The California Department of Financial Protection and Innovation announced last week that it has entered into a consent order with Lambda, Inc., which does business as Lambda School, to settle the DFPI’s claims that a provision in Lambda’s student financing contracts was misleading.  The consent order also resolves the DFPI’s claim that Lambda’s marketing materials were misleading.  The DFPI’s claims were brought under the new California Consumer Financial Protection Law, which took effect on January 1, 2021 and prohibits providers of financial products and services from engaging in unfair, deceptive, or abusive acts or practices.

According to the consent order, Lambda offers California students the option of financing the cost of attending its online computer coding school through a contract in which the student agrees to pay Lambda a percentage of the student’s future income up to a specified amount (Contract).  (Lambda offers California students the option to defer tuition through income-based retail installment contracts.  Non-California students may enter into income share agreements.  Lambda discontinued ISAs for California students as a condition of receiving approval to operate from the California Bureau of Private Postsecondary Education in August 2020.)

In the consent order, the DFPI alleged that the Contract was misleading because it incorrectly stated that the student’s payment obligation was nondischargeable in bankruptcy.  The DFPI also alleged that Lambda’s marketing materials were misleading because they included representations implying Lambda’s program was “free” when, in fact, students entering into Contracts would be required to make payments if they earned above a certain income threshold.

The consent order requires Lambda to notify students who entered into a Contract that the bankruptcy dischargeability provision is not accurate.  It also requires Lambda to retain a third party to review the terms of the Contract to ensure that it complies with all applicable laws and to conduct a review of its marketing materials to ensure that they are accurate and not likely to mislead consumers.

 

 

On April 23, 2021, the California Department of Financial Protection and Innovation (“DFPI”) issued proposed regulations to implement the Debt Collection Licensing Act (“DCLA”).

Debt collector licenses are required beginning on January 1, 2022 but a debt collector that applies for a license before that date can continue to operate while the application is pending.  In its Notice of Rulemaking Action, the DFPI states that it anticipates that final rules will become effective on or about November 19, 2021, thereby allowing debt collectors to apply for a license before January 1, 2022.

Specifically, the DFPI is proposing to add the following sections to subchapter 11.3 of title 10 of the California Code of Regulations setting forth the requirements for obtaining a debt collection license under the DCLA:

  • Section 1850 – Defines terms used in the regulations.
  • Section 1850.6 – Requires electronic filing of license application and related information through the Nationwide Multistate Licensing System (NMLS).
  • Section 1850.7 – Sets forth the license application and information requirements.
  • Section 1850.8 – Requires appointment of the commissioner as agent for service of process.
  • Section 1850.9 – Requires fingerprinting through the California Department of Justice.
  • Section 1850.10 – Requires investigative background report for non-residents of the U.S.
  • Section 1850.11 – Provides notices concerning information practices and privacy.
  • Section 1850.12 – Sets forth the process to challenge information in NMLS.
  • Section 1850.13 – Provides for sharing information with other government agencies.
  • Section 1850.14 – Clarifies “financial responsibility” for purposes of denying a license.
  • Section 1850.15 – Sets forth grounds for denying a license.
  • Section 1850.16 – Requires designated email address to receive communications from the department.
  • Section 1850.30 – Provides process for reporting changes to information in the license application.
  • Section 1850.31 – Provides process for reporting new officers, directors and other key personnel.
  • Section 1850.32 – Provides process to register new branch office or change of existing branch office.
  • Section 1850.50 – Requires surety bond of at least $25,000 and sets forth the bond form.
  • Section 1850.60 – Provides license is effective until revoked, suspended or surrendered.
  • Section 1850.61 – Provides process to surrender license.

The 45-day public comment period for the proposal ends on June 8, 2021.  Comments can be sent by email to regulations@dfpi.ca.gov or by regular mail to Department of Financial Protection and Innovation, Attn: Sandra Sandoval, 300 S. Spring Street, Suite 15513, Los Angeles, California 90013.

We know that many in the industry have a number of questions about whether they will need to obtain a license, how existing licenses may (or may not) obviate the need to obtain a license, the scope of exemptions, and a host of other topics.  This is a critical opportunity to raise those questions and advocate for the desired outcome.  Our firm is already working with the DFPI on a number of matters and stands ready to assist in the comment submission process.

As discussed in our earlier blog, the Senate Banking, Housing and Urban Affairs Committee held a hearing on April 28, 2021 entitled “The Reemergence of Rent-a-Bank?”.

The hearing focused primarily on the final “True Lender” rule issued by the OCC on October 27, 2020, which was effective December 29, 2020. The True Lender rule clarifies when, under existing law, a national bank is the “true lender” that makes a loan in the context of an arrangement between the bank and a non-bank entity that facilitates or services the loan. Since the non-bank entity frequently is a fintech, these arrangements often are referred to as bank-fintech partnerships or marketplace lending arrangements. Democrats have launched an effort to invalidate the True Lender rule by means of Congressional action under the Congressional Review Act (CRA). Separately, eight attorneys general representing seven states and the District of Columbia  have filed an action in federal district court in the Southern District of New York seeking to set aside the rule.

Predictably, at the hearing, True Lender rule detractors (the Democratic committee members and their witnesses) called upon Congress to overturn the True Lender rule, using the majority of their speaking time to claim the True Lender rule would enable (and to generally decry the evils of) unfair rent-a-bank schemes, as well as predatory lending, payday lending, usury, and debt traps. These speakers consistently conflated payday lending and bank-fintech partnership lending, and ignored correction of this mis-characterization by other witnesses.

True Lender rule proponents (the Republican committee members and their witnesses) explained the True Lender rule and its benefits to consumers, the banking system, and the economy as a whole. They pointed out that states’ establishment and enforcement of lower rate caps (which True Lender rule opponents believe would accelerate if the True Lender rule were to be invalidated) will not result in the availability of lower cost credit; rather, this is likely to eliminate availability of credit to those who need it most.

A video recording of the hearing, written versions of the opening remarks of Committee Chairman Sherrod Brown (D-OH) and Ranking Member Patrick J. Toomey (R-PA), and the written testimony submitted by the witnesses, are available on the Committee website.

In his introduction, Committee Chairman Sherrod Brown (D-OH) expressed concerns that the True Lender rule would give a “free pass” to predatory payday lenders and so-called “rent-a-bank schemes”.

Ranking Member Patrick J. Toomey (R-PA) explained this is not the case: Under the True Lender rule, the OCC “holds a national bank responsible for a loan when, at the time the loan is originated, [the national bank] is named in the loan agreement or it funds the loan.” These loans are subject to OCC supervision to ensure the national bank complies with fair lending requirements and all other federal consumer protection laws. The rule disallows “rent-a-bank schemes” where the bank allows its name to be used on loan documents but disclaims any compliance responsibility for loans, as pointed out in a recent letter to the Committee from Blake Paulson, Acting Comptroller of the Currency. Senator Toomey explained the importance of the True Lender rule in facilitating credit availability on reasonable terms, in particular to higher-risk, marginalized consumers.

North Carolina Attorney General Josh Stein worried that the True Lender rule provides a get-out-of-jail-free card to predatory lenders, and claimed the rule exceeds the OCC’s authority – an argument addressed and refuted in detail by the OCC in the Supplementary Information accompanying the rule when published.

Lisa F. Stifler, Director of State Policy at the Center for Responsible Lending, a non-profit affiliated with a network of credit unions, voiced similar fears, including  that the True Lender rule would support predatory lending and payday loans at excessively high rates to small businesses as well as consumers.

Reverend Dr. Frederick D. Haynes, III cited opposition to payday lending and predatory lending by the faith-based groups he represents, mentioned concerns that the True Lender rule would “enable predatory lenders to ignore state interest rate caps by paying a bank willing to masquerade as the ‘true lender’ ”, and called on Congress to pass a 36% rate cap in addition to supporting a resolution to overturn the True Lender rule.

Brian Brooks, former Comptroller of the Currency, explained how the True Lender rule (issued during his tenure as Comptroller) operates in conjunction with the OCC’s Valid-When-Made rule and national bank rate exportation powers under the National Bank Act; the vital role of the True Lender rule in enabling expansion of credit availability to lower-income consumers on reasonable terms, with service improvements, tools and educational features enabled by fintechs; and the rule’s importance to bank balance sheet management and the safety and soundness of the banking system.  He pointed out that contrary to the claims of the rule’s opponents, the rule negates “rent-a-charter schemes” because it makes clear that the bank, as true lender, retains all compliance obligations with respect to the loans and “can’t walk away” from this responsibility:

But another purpose of the True Lender Rule was to address allegations about “rent-a-charter” schemes. While “rent-a-charter” is not a legal or technical concept, OCC staff took the concept to refer to situations in which a nonbank paid a fee to a bank for the sole purpose of evading legal requirements, without the bank actually being involved in loan underwriting, risk management, or legal compliance. In short, the OCC took “rent-a-charter” to mean an arrangement in which the nonbank was seeking to ensure that no one was actually responsible for consumer protection or other compliance obligations. That is precisely why the OCC, in issuing the True Lender Rule, expressly stated that it would “hold [] banks accountable for all loans they make, including those made in the context of marketplace lending partnerships or other loan sale arrangements.” Specifically, the OCC emphasized its “expectation that all banks [will] establish and maintain prudent credit underwriting practices and comply with applicable law, even when they partner with third parties.” If not, “the OCC will not hesitate to use its enforcement authority consistent with its longstanding policy and practice.” This is in contrast with historical practice in which banks sought to minimize their role in loan origination at the same time their marketing partners sought to disclaim responsibility as the true lender. Under the True Lender Rule, the days of each party pointing the finger at the other are over; borrowers and regulators now know who is responsible if the bank either is named on the note or funds the loan on the date of origination.

Mr. Brooks corrected the impression conveyed by other witnesses that the True Lender rule somehow would support abusive payday lending, explaining that national banks are not allowed to make the types of loans generally described as payday loans (and therefore could not make them in the context of a bank – fintech partnership), and noting that payday lenders are state-licensed entities, therefore the licensing state has the responsibility to supervise them and the authority to revoke their licenses.

Dr. Charles W. Calomiris referred committee members to his written testimony, which summarizes research demonstrating that lower income borrowers suffer disproportionately from unreasonable usury rate caps. He also refuted earlier speakers’ claims that bank-fintech partnerships promote payday loans: “The new fintechs should not be confused with payday lenders: they are the competition to payday lenders.” He cited new products offered by innovative fintechs that provide value and lead to improved financial inclusion for unbanked or underbanked consumers, detailed in an appendix provided with his written testimony.

Committee member questions addressed to the witnesses, and the responses, generally followed the same themes.

In response to a question from Senator Brown, AG Stein stated his belief that the True Lender rule will make it challenging for states to pursue predatory rent-a-bank schemes, and asserted that the state of North Carolina has made a conscious choice in its legislative approach to intentionally cause a shortage of high-cost loans, thereby making it more difficult or impossible for low- to moderate-income, higher-risk consumers to obtain loans. Senator Toomey then asked Mr. Brooks whether the choice described by AG Stein was “patronizing”; Mr. Brooks responded that consumers should be allowed to make their own decisions.

Senator Thom Tillis (R-NC), in questions to Mr. Brooks, emphasized the importance of credit availability, which would be supported by the True Lender rule. Mr. Brooks noted the True Lender rule will further the OCC’s goal of encouraging national banks to engage in small dollar personal lending, which would benefit consumers because the loans would be made by well-supervised entities.

Senator Elizabeth Warren (D-MA), in questions to Mr. Brooks, expressed doubt as to whether the OCC’s supervision of national banks is sufficiently zealous to protect consumers.

The Committee members’ comments and questions made it clear that their respective minds already are made up as to how they would vote on a CRA resolution to invalidate the True Lender rule, regardless of the data and information provided by the witnesses. At this writing, most observers predict that the True Lender rule will not be overturned, either because Congressional leaders do not think it merits floor time and think a Biden-appointed Comptroller will take care of their concerns, or, if put to a vote, because moderate Democrats understand the economic issues and will not support invalidating the rule.

The deadline for a CRA vote is estimated to be in mid- to late May.