According to a Wall Street Journal report, Facebook has agreed to remove age, gender, and zip code targeting for housing, employment, and credit-related advertisements as part of a settlement of a lawsuit filed by the National Fair Housing Alliance, the Communications Workers of America, and other plaintiffs.

While Facebook reportedly did not permit advertisers to target specifically by race, it did allow advertisers to use “ethnic affinity” criteria.  Facebook is reported to also be placing other restrictions on advertisers.  For example, geographic targets will need to have a minimum 15-mile radius from any specific address or city center and the “Lookalike Audience” tool, which lets advertisers try to find Facebook users who resemble customers they already know, will not incorporate factors such as age, religious views, or Facebook Group membership. 

While it is highly debatable whether the Equal Credit Opportunity Act or other fair lending laws apply to social media advertising of this nature, regulators take the position that they do, and they sometimes explore these issues in examinations.  It therefore is critically important for companies to be mindful of fair lending risk when formulating their social media and other advertising plans.

 

 

A group of 24 Democratic state attorneys general and the D.C. attorney general have submitted a comment letter to the CFPB setting forth their opposition to the CFPB’s proposal to delay the compliance date for the ability-to-repay (ATR) provisions of its final payday/auto title/high-rate installment loan rule (Payday Rule).  They conclude their letter by threatening to “closely examine whether to take action to address any unlawful action by CFPB” should the CFPB finalize the proposed delay.  (The AGs state in the letter that they will be submitting another comment letter opposing the CFPB’s proposal to rescind the Payday Rule’s ability-to-repay (ATR) in their entirety.)

The comments made by the AGs include the following:

  • The reasons cited by the CFPB in its proposal for “contradicting” its prior UDAAP analysis and prior analysis for setting the August 19, 2019 compliance date “are woefully insufficient and therefore arbitrary and capricious in violation of the [Administrative Procedure Act].”
  • The AGs reference the CFPB’s statement that certain “potential obstacles to compliance” by the August 19 date, specifically recently-enacted changes to state laws and third-party software vendor issues, were unanticipated when the August 19 date was set.  According to the AGs, the state law changes were not unanticipated and instead were taken into account when the August 19 date was set.  With regard to third-party vendor issues, the AGs assert that the “CFPB’s description of these software and vendor implementation impediments is vague, anecdotal, and unsubstantiated; and therefore, this ‘obstacle’ is not a valid basis for delay.”
  • The proposal fails to provide a factual justification for ignoring the Payday Rule’s findings with respect to consumer benefits.
  • Although the CFPB has not proposed to delay the compliance date for the Payday Rule’s payment provisions, the AGs suggest that the CFPB might attempt to do so during the rulemaking process and assert that “no delay is appropriate to any aspect of the [Payday Rule’s] compliance date” and that the payment provisions should go into effect “as scheduled” on August 19, noting that “lenders will have had 21 months to prepare for the Payment Provisions by the time they become effective.”

To the extent the “action” threatened by the AGs is a lawsuit asserting a challenge under the Administrative Procedure Act to a final rule delaying the compliance date for the ATR provisions, it is uncertain whether the AGs would have standing to bring such a lawsuit.

The New York Department of Financial Services has filed a memorandum of law opposing the OCC’s motion to dismiss the NYDFS’s second lawsuit seeking to block the OCC’s issuance of special purpose national bank (SPNB) charters to fintech companies.

In its motion to dismiss, the OCC argued that the court lacks subject matter jurisdiction over the NYDFS’s claims because (1) the NYDFS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could the NYDFS suffer an injury in fact, and (2) the OCC has not yet received an application for an SPNB charter or granted a charter, thus making the matter not ripe for judicial review.  The OCC also argued that the NYDFS’s claims are time-barred because it can no longer challenge the OCC’s regulation (12 C.F.R. section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act and that the NYDFS’s complaint fails to state a claim because the OCC’s regulation is entitled to deference.

In opposing the motion to dismiss, the NYDFS argues:

  • Even if it has not yet suffered actual injury, it has standing because injury to NYDFS is “imminent” as a result of the OCC’s decision to accept applications for SPNB charters.
  • The OCC’s public announcement that it will accept applications for SPNB charters and has taken substantial steps towards issuing such charters makes the matter ripe for judicial review.
  • Because the NYDFS is challenging the OCC’s July 31, 2018 decision to issue SPNB charters and the OCC has admitted that it has never relied on its regulation to issue national bank charters to non-depository institutions, the NYDFS’s action accrued on July 31, 2018 and is not time-barred.
  • The OCC’s interpretation of the business of banking is not entitled to deference because it constitutes “a manifestly unreasonable interpretation of the NBA.”

Based on arguments substantially similar to those it made in moving to dismiss the NYDFS’s lawsuit, the OCC also filed a motion to dismiss the second lawsuit filed by the Conference of State Bank Supervisors (CSBS) to block the OCC from issuing SPNB charters.  In addition to filing a brief opposing the OCC’s motion to dismiss based on arguments substantially similar to those made by the NYDFS, the CSBS filed an alternative motion for leave to conduct jurisdictional discovery.

 

The CFPB’s final prepaid card rule takes effect on April 1.  In this week’s podcast, we look at the top ten issues companies should be considering to confirm compliance and discuss how the CFPB and federal banking regulators are likely to approach compliance using their supervisory and enforcement authorities.

Click here to listen to the podcast.

On March 7, New Jersey Attorney General Gurbir S. Grewal and the Division of Consumer Affairs announced the filing of a lawsuit against two “Buy Here-Pay Here” auto dealerships and their owner for allegedly unconscionable and deceptive lending practices.

The complaint alleges that defendants sold high-mileage, used autos at grossly inflated prices with excessive down payments; financed the sales through in-house loans with high interest rates and “draconian” terms that created a high risk of default; and then repossessed and resold the vehicles over and over again to different consumers in a practice they refer to as “churning.” The defendants also allegedly engaged in deceptive advertising, failed to disclose the damage and/or required substantial repair and bodywork required for used motor vehicles, and failed to provide consumers with complete copies of signed sales documents, including financing agreements. The complaint alleges that these practices violated the New Jersey Consumer Fraud Act, the New Jersey Motor Vehicle Advertising Regulations, the Automotive Sales Regulations, and the state Used Car Lemon law and regulations.

At the crux of this complaint is the State’s belief that defendants expected that their customers would not be able to make their payments – allegedly evidenced by the fact that the dealerships required buyers to sign documents agreeing to not keep any personal possessions in their vehicles and to rekey the vehicles and provide the dealer with a copy of the keys within seven days of purchase. In one of its examples, the State highlights the fact that a used vehicle was sold to “a twenty-two year old consumer making $10 an hour” at an APR of 23.99% with a total payment of $9,848.

In addition to significant civil money penalties, the State is seeking to permanently close the two subject car dealerships and ban the owner from ever operating a car dealership again. We view the case as more evidence that states appear to be stepping up their scrutiny of high-cost financing offered to used car buyers.

The Texas federal district court hearing the lawsuit filed by two trade groups challenging the CFPB’s final payday/auto title/high-rate installment loan rule (Payday Rule) entered an order yesterday continuing the stay of the lawsuit and the August 19, 2019 compliance date for both the Rule’s ability-to-repay (ATR) provisions and its payment provisions.  The order directs the parties to file a joint status report by May 17 “informing the court about proceedings related to the Rule and this litigation as the parties deem appropriate.”

On March 8, the parties filed a new status report setting forth their views on whether the court should continue to stay the lawsuit and the Payday Rule’s August 19 compliance date.  The stays were entered in, respectively, June 2018 and November 2018 “pending further order of the court.”  Early last month, the CFPB issued proposals to rescind the Payday Rule’s ability-to-repay (ATR) provisions in their entirety and delay the compliance date for the ATR provisions until November 19, 2020.  The proposals would leave unchanged the Payday Rule’s payment provisions and their August 19 compliance date.

In the new status report, the parties agreed that it would be appropriate for the stay of the ATR provisions to continue and for the litigation over the ATR provisions to remain stayed until the CFPB concludes its rulemaking.  They disagreed, however, about the reasons for, or the appropriate duration of, the continuation of the stays of the compliance date for the payment provisions and the litigation to the extent it challenges the payment provisions.  The trade groups sought a continuation of the stays until the Bureau completes its rulemaking on the ATR provisions.

While the CFPB did not seek to lift the stays of the litigation challenging the payment provisions and their compliance date, it did not agree that the stays should be continued  until its rulemaking is completed.  Instead, the Bureau stated that it would be appropriate to continue the stay of the litigation challenging the payment provisions until the Fifth Circuit issues its decision in All American Check Cashing, after which the parties would make a recommendation to the court for how such litigation should proceed.  (Oral argument in All American Check Cashing, which involves a challenge to the CFPB’s constitutionality, was held on March 12.)  With regard to the stay of the payment provisions’ compliance date, while telling the court it need not decide now on an expiration date, the CFPB indicated that continuation of the stay would only be warranted  if the trade groups could show various factors, including at least a “substantial case on the merits.”

In its order, the court recites the positions of the parties set forth above and applicable law as the basis for continuing the stay.  While the continuation of the stays is a positive development, covered lenders still have no assurance that they will have a reasonable amount of time to bring themselves into compliance with the payment provisions should the stay be lifted before the compliance date.  It is for that reason that we continue to urge our clients to take all appropriate steps to bring themselves into compliance with the payment provisions well before August 19 of this year.

 

On March 7, 2019, the DOJ announced the largest coordinated sweep of elder fraud cases to date. Joined by the FBI and other federal and state partners, the DOJ held a press conference detailing the results of the coordinated effort. Coordinated law enforcement actions in the past year, they said, resulted in criminal cases against more than 260 defendants who victimized more than 2 million Americans, most of them elderly. In each case, the offenders allegedly engaged in financial schemes that targeted or largely affected seniors. Losses are estimated to have exceeded more than $750 million. The DOJ released an interactive list of the elder fraud cases.

The sweep was primarily focused on the threat posed by technical-support fraud, an increasingly common form of elder fraud in which criminals trick victims into giving remote access to their computers under the guise of providing technical support. The DOJ partnered with the FBI, U.S. Postal Inspection Service, the Department of Homeland Security, state Attorneys General and the U.K.’s City of London Police to investigate and prosecute perpetrators of technical-support fraud.

Since many of those prosecuted as a part of the elder fraud sweep cases – including technical-support fraud and mass mailing elder fraud cases – allegedly involved transnational criminal organizations, the DOJ and Postal Inspection Service worked with numerous countries to secure evidence and extradite defendants. The sweep also took comprehensive action against the money mule network that facilitates foreign-based elder fraud. The DOJ defines a money mule as “someone who transfers money acquired illegally in person, through the mails, or electronically, on behalf of others.” With assistance from the Secret Service and Homeland Security, the FBI and Postal Inspection Service took action against over 600 alleged money mules. Additionally, the sweep benefited from assistance from foreign law enforcement partners.

The sweep also had a public education campaign focused on technical-support fraud. The DOJ coordinated with the FTC and State Attorneys General in designing and disseminating messaging material intended to warn consumers and businesses. Public education outreach is being conducted by various state and federal agencies, to educate seniors and prevent further victimization.

The coordinated effort reflects the increasing focus of federal and state regulators on elder financial abuse. In February, the CFPB’s Office of Financial Protection for Older Americans issued a report providing guidance to financial institutions on combating elder abuse. As we have previously observed, elder financial abuse prevention can be viewed as falling within a financial institution’s general obligation to limit unauthorized use of customer accounts as well as its general privacy and data security responsibilities. Thus, a financial institution that fails to proactively implement an elder financial abuse prevention program risks regulatory investigation. Additionally, a depository institution subject to CFPB supervision should expect CFPB examiners to look at its program for preventing elder financial abuse. Further, many states have laws that address elder financial abuse, in some instances requiring mandatory reporting, without providing protection to the bank, while in others including providing immunity for banks who implement transaction holds when staff members observe financial exploitation.

The CFPB and New York Attorney General have filed their opening briefs in their appeals to the Second Circuit in RD Legal Funding.  The CFPB filed an appeal from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  The NYAG filed an appeal from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

Both the CFPB and NYAG argue that the CFPB’s structure is constitutional under controlling U.S. Supreme Court precedent and that if the Second Circuit determines that the Dodd-Frank Act’s for-cause removal provision that limits the President’s authority to remove the CFPB Director is unconstitutional, it should sever the provision rather than strike all of Title X as Judge Preska did.

The NYAG makes the following two additional arguments:

  • Even if the Second Circuit concludes that the for-cause removal provision cannot be severed from Title X, it should not invalidate Dodd-Frank Sections 1041 or 1042.  As noted above, Section 1042 authorizes state AGs to enforce the CFPA’s UDAAP prohibition.  Section 1041 preserves state consumer protection laws to the extent they are not inconsistent with the  provisions of Title X.  The NYAG argues that these provisions are “wholly unrelated” to the for-cause removal provision.
  • Even if the Second Circuit concludes that the CFPB’s structure is unconstitutional and strikes Title X in its entirety, the Second Circuit must nevertheless reverse the district court’s dismissal of the NYAG’s state law claims for lack of subject matter jurisdiction.  According to the NYAG, the district court has jurisdiction because such claims involve an embedded federal issue, namely whether the federal Anti-Assignment Act (AAA) voids only the assignment of a substantive claim against the United States, or whether it also voids the assignment of the proceeds of such a claim in a private contract.  (RD Legal Funding purchased at a discount, for immediate cash payments, benefits to which consumers were ultimately entitled under the September 11th Victim Compensation Fund of 2001 (VCF).  The district court concluded that the assignments of VCF benefits were void under the AAA.)

The CFPB’s defense of its constitutionality is at odds with the position of the Department of Justice.  In opposing the petition for certiorari filed by State National Bank of Big Spring (which the Supreme Court denied), the DOJ argued that while it agreed with the bank that the CFPB’s structure is unconstitutional and the proper remedy would be to sever the Dodd-Frank for-cause removal provision, the case was a poor vehicle for deciding the constitutionality issue.  If the CFPB’s structure is found to be unconstitutional, and severing the for-cause removal provision is determined to be the appropriate remedy, a Democratic President might have the ability to remove Ms. Kraninger without cause before the end of her five-year term.

The Bureau’s constitutionality is also currently before two other circuits, the Ninth and Fifth Circuits.  On January 9, 2019, the Ninth Circuit heard oral argument in Seila Law.  On March 12, 2019, the Fifth Circuit heard oral argument in All American Check Cashing’s interlocutory appeal.

 

 

The parties in Madden v. Midland Funding, LLC. have filed a joint motion with the New York federal district court seeking preliminary approval of a class settlement.

The plaintiffs’ class action complaint in Madden alleged that a debt buyer, which had purchased the plaintiffs’ charged-off credit card debt from a national bank, violated the Fair Debt Collection Practices Act (FDCPA) by falsely representing the amount of interest it was entitled to collect.  The complaint also alleged violations of New York usury law.  In an unexpected outcome, the Second Circuit held that the purchaser of charged-off debt from a national bank does not inherit the preemptive interest rate authority of the national bank under Section 85 of the National Bank Act (NBA).  Accordingly, the debt buyer could be subject to the usury limitations provided by state law.  In June 2016, the U.S. Supreme Court denied the defendants’ petition for certiorari.

The proposed Settlement Class would be defined as:

All persons residing in New York who were sent a letter by Defendants attempting to collect interest in excess of 25% per annum regarding debts incurred for personal, family, or household purposes, whose cardholder agreements: (i) purport to be governed by the law of a state that, like Delaware’s, provides no usury cap; or (ii) select no law other than New York.  This class comprises two subclasses [with one subclass for claims arising out of New York usury law violations during a specified period and the other subclass for claims arising out of FDCPA violations during a specified period.]

The settlement provides for three main forms of relief:

  • $555,000 in monetary relief
  • $9,250,000 in balance reduction relief/credits
  • Ongoing compliance of defendants’ policies and practices with applicable law regarding collection of interest on settlement class member accounts

We continue to urge the OCC to confront true lender and Madden risks directly.  This could (and should) be accomplished through adoption of a rule: (1) providing that loans funded by a bank in its own name as creditor are fully subject to Section 85 and other provisions of the National Bank Act for their entire term; and (2) emphasizing that banks that make loans are expected to manage and supervise the lending process in accordance with OCC guidance and will be subject to regulatory consequences if and to the extent that loan programs are unsafe or unsound or fail to comply with applicable law.  (The rule should apply in the same way to federal savings banks and their governing statute, the Home Owners’ Loan Act.)  In other words, it is the origination of the loan by a supervised bank (and the attendant legal consequences if the loans are improperly originated), and not whether the bank retains the predominant economic interest in the loan, that should govern the regulatory treatment of the loan under federal law.

 

Like his FY 2018 and FY 2019 budgets, President Trump’s FY 2020 budget would make the CFPB subject to the regular Congressional appropriations process.

Pursuant to Section 1017 of the Dodd-Frank Act, subject to the Act’s funding cap, the Fed is required to transfer to the CFPB on a quarterly basis “the amount determined by the [CFPB] Director to be reasonably necessary to carry out the authorities of the Bureau under Federal consumer financial law, taking into account such other sums made available to the Bureau from the preceding year (or quarter of such year.)”

The FY 2020 budget contains a line item for “Restructure the Consumer Financial Protection Bureau” that shows a $23 million reduction in funding in FY 2020.  A document accompanying the budget entitled “2020 Major Savings and Reforms” states that the proposed budget would “cap transfers by the Federal Reserve Board to the CFPB during 2020 to $485 million, equivalent to the 2015 level.”  This would be followed by a $508 million funding reduction in FY 2021 and increasing funding reductions each year up to a $607 million reduction in FY 2029.  (The reductions are based on the estimated funding that would be available to the CFPB from the Fed under current law.)  Over the ten-year period, total funding reductions are projected to be about $5 billion, which is less than the approximately $6.5 billion in ten-year reductions estimated in the FY 2019 budget.

The accompanying document describes the “restructure” to which the FY 2020 budget is referring is as “limit[ing] its mandatory funding in 2020, and provid[ing] discretionary appropriations beginning in 2021.”  Of course, legislative action would be required to implement the President’s proposed “restructuring.”  During former Director Cordray’s tenure, numerous bills were introduced by Republican lawmakers that sought to make the CFPB subject to the regular appropriations process.  At Director Kraninger’s recent appearance before the House Financial Services Committee, several Republican Senators were critical of the CFPB’s insulation from the appropriations process.

The appropriations bill signed into law by President Trump in February that ended the partial government shutdown includes a provision dealing with CFPB funding requests.  It provides that during FY 2109, when the CFPB Director requests a funds transfer from the Fed, the CFPB “shall notify the Committees on Appropriations of the House of Representatives and the Senate, the Committee on Financial Services of the House of Representatives, and the Committee on Banking, Housing, and Urban Affairs of the Senate of such request.”  Such notification must also be posted on the CFPB’s website.

 

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