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 Federal Financial Institutions Examination Council (FFIEC)—the interagency body tasked with setting uniform principles and standards for the examination of financial institutions by federal regulators, including the Consumer Financial Protection Bureau—has adopted a Policy Statement designed to streamline the information presented in examination reports (“ROE”). While the agencies represented by the FFIEC will make any individual adjustments deemed necessary for their existing ROE guidance, financial institutions should be aware of the new format outlined in the Policy Statement which sets forth minimum expectations for what should be included in all ROEs.

In the Policy Statement, the FFIEC explicitly rescinds and replaces the 1993 Interagency Policy Statement on the Uniform Core Report of Examination. The Policy Statement is the latest in a series of FFIEC announcements related to their Examination Modernization Project which was launched to identify and assess ways to improve the effectiveness, efficiency and quality of examination processes, particularly through the use of technology, and to reduce unnecessary regulatory burden on community financial institutions. The Policy Statement list of minimum expectation for ROEs includes:

  • Identifying information about the institution and agency;
  • A statement on the confidentiality of information;
  • Conclusions presented in the order of importance;
  • A brief narrative on the financial institution’s condition and risk profile, including assigned regulatory component and composite ratings;
  • A discussion of the adequacy of the financial institution’s risk management practices;
  • Prominent notice of any issues of supervisory concern or warranting corrective action; and
  • Signatures of the board of directors acknowledging receipt and review.

As with the recent FFIEC’s guidance regarding Home Mortgage Disclosure Act rules (as discussed in our prior blog post), the Policy Statement is an important resource for financial institutions interacting with the FFIEC member agencies.

Early last year, several trade groups, including the National Automotive Dealers Association (NADA), sent letters petitioning the Department of Defense (DoD) to rescind or withdraw Question and Answer #2 (Q&A 2) from its 2016 interpretative rule for the Military Lending Act (MLA) final rule and its December 2017 amendments.  Q&A 2 has generated much uncertainty regarding application of the MLA’s exemption for purchase money transactions that also finance the purchase of GAP insurance.  Last month, NADA sent a letter to DoD to provide market data demonstrating that servicemembers are suffering quantifiable injury as a result of the impact of Q&A 2 on indirect auto financing provided by dealers.

In amended Q&A 2, the DoD addressed the application of the MLA rule’s exemptions for credit transactions that are intended to finance the purchase of a motor vehicle or personal property when the credit is secured by the purchased motor vehicle or personal property.  The amended question asked whether the exemptions would apply where the creditor simultaneously extends credit in an amount greater than the purchase price of the motor vehicle or personal property.  The DoD’s amended answer stated that the exemptions are available where credit beyond the purchase price of the object is used to finance “any costs expressly related to that object…provided it does not also finance any credit-related product or service.”

In the amended interpretive rule, the DoD used a credit transaction that finances the purchase of a motor vehicle (and is secured by that vehicle) and also finances optional leather seats and an extended vehicle warranty as an example of a credit transaction that would be eligible for the MLA exemption.  In contrast, the DoD used a credit transaction that includes financing for GAP insurance or a credit insurance premium as an example of a credit transaction that would not be exempt from the MLA.

In its letter, NADA references a meeting that the DoD held with NADA and other petitioning trade groups in September 2018 at which the DoD indicated that in deciding whether to withdraw Q&A 2, its primary consideration would be the impact of Q&A 2 on active duty servicemembers.  NADA previously asserted to DoD that Q&A 2 has caused dealers throughout the country to discontinue offering GAP insurance to servicemembers covered by the MLA, thereby exposing servicemembers “to significant and unexpected liability that occurs when their vehicles are declared a total loss.”

NADA’s letter provides data “developed by a finance source that engages in indirect vehicle financing transactions.”  NADA states that the financing source analyzed (1) its retail installment sales contracts (RISCs) with active duty servicemembers whose vehicles were declared a total loss by comparing the period before Q&A 2 was issued (in which it took assignments of RISCs involving GAP insurance) and the period after the issuance of Q&A 2 (when it no longer took such assignments), and (2) the marketwide impact of Q&A 2 “based on its informed understanding and assessment of the marketplace.”  According to NADA, this analysis found that Q&A 2 “has exposed approximately 5,000 [active duty servicemembers] who purchased and financed vehicles in 2018 to approximately $15 million in liability from total loss occurrences.”

The Labor, Health and Human Services, Education, and Related Agencies subcommittee of the House Appropriations Committee is scheduled to hold a hearing on March 6, 2019 entitled “Protecting Student Borrowers: Loan Servicing Oversight.”

The witnesses for the hearing are:

  • Colleen Campbell, Director, Postsecondary Education, Center for American Progress
  • Preston Cooper, Research Analyst in Higher Education Policy, American Enterprise Institute
  • Joanna Darcus, Massachusetts Legal Assistance Corporation Racial Justice Fellow, National Consumer Law Center
  • Bryon Gordon, Assistant Inspector General for Audit, Department of Education Office of Inspector General
  • Shennan Kavanagh, Deputy Chief of the Consumer Protection Division, Office of Massachusetts Attorney General Maura Healy

 

 

In September 2018, in Marks v. San Diego Crunch, a unanimous Ninth Circuit three-judge panel held that the TCPA’s definition of an automatic dialing system (ATDS) includes telephone equipment that can automatically dial phone numbers stored in a list, rather than just phone numbers that the equipment randomly or sequentially generates.  This decision departed sharply from the post-ACA International decisions by the Second and Third Circuits, which had narrowed the definition of an ATDS.  Although the defendant in the case filed a petition for certiorari with the U.S. Supreme Court in January 2019, the parties have since settled, thereby leaving Marks as precedential law in the Ninth Circuit.

In response to Marks, the FCC asked for comments on what constitutes an ATDS under the TCPA and is believed to be considering rulemaking on the ATDS definition.  Even if the FCC adopts a rule rejecting Marks, courts in the Ninth Circuit and elsewhere will have to decide whether to defer to the FCC’s rule.

The issue of what deference courts must give FCC rulings on TCPA issues is currently before the U.S. Supreme Court in PDR Network v. Carlton & Harris ChiropracticThe case involves the definition of an “unsolicited advertisement” for purposes of the TCPA ban on unsolicited fax advertisements.  Applying step one of a Chevron deference analysis, the district court found that the TCPA’s definition of “unsolicited advertisement” was unambiguous, and therefore it was not required to defer to the FCC’s interpretation and granted the defendant’s motion to dismiss.  The U.S. Court of Appeals for the Fourth Circuit reversed, ruling that the Hobbs Act precluded the district court from “even reaching the step-one question [of Chevron]” and required it to defer to the FCC rule.

The Supreme Court granted certiorari to decide whether the Hobbs Act required the district court to accept the FCC’s TCPA interpretation.  The Hobbs Act provides a mechanism for judicial review of certain agency orders, including all FCC final orders under the TCPA.  An aggrieved party can challenge such an order by filing a petition in the court of appeals for the judicial circuit where the petitioner resides or has its principal office or in the U.S. Court of Appeals for the District of Columbia Circuit.  Under the Hobbs Act, such courts have “exclusive jurisdiction” to “enjoin, set aside, suspend (in whole or in part), or to determine the validity of” the orders to which the Act applies, including the FCC’s TCPA interpretations.  Oral argument is scheduled to be held in the Supreme Court on March 25.

Even if the Supreme Court were to reverse the Fourth Circuit in PDR Network and rule that a district court can apply a Chevron analysis to FCC rulings, a Chevron analysis should weigh in favor of deference to a new FCC ruling on the ATDS definition assuming, in step one of such analysis, the court agreed with the Ninth Circuit’s view in Marks that the statutory definition is ambiguous.  Under Chevron step two, a court would be required to defer to the FCC’s ruling unless it found the ruling not to be permissible or reasonable.

In Marks, after concluding that the statutory definition of an ATDS was ambiguous, the Ninth Circuit based its broad interpretation of the ATDS definition on the “context and structure of the [TCPA’s] statutory scheme.”  Thus, if the Supreme Court were to rule that FCC rulings are subject to a Chevron analysis, there would continue to be a risk that in conducting Chevron’s step two analysis, a court might be unwilling to defer to an FCC rule rejecting Marks’ interpretation because it finds that the rule is not reasonable based on the TCPA’s “context and structure.”

 

 

A new executive order signed by President Trump on February 11, 2019 is intended to maintain American leadership in artificial intelligence (AI) research and development (R &D).  The order directs certain federal agencies to pursue various strategic objectives to promote and protect American advancement in AI.  Those agencies are to be identified by the National Science and Technology Council Select Committee on Artificial Intelligence Select Committee.  In addition, any of such agencies that perform R&D are directed to make AI an R&D priority.

Among other things, the executive order also:

  • directs the heads of all federal agencies to “review their Federal data and models to identify opportunities to increase access and use by the greater non-Federal AI research community in a manner that benefits that community, while protecting safety, security, privacy, and confidentiality.”  More specifically, the agencies are directed to “improve data and model inventory documentation to enable discovery and usability, and [to] prioritize improvements to access and quality of AI data and models based on the AI research community’s user feedback.”
  • directs the OMB Director, in coordination with other officials, to issue a memorandum to the heads of all agencies that (1) informs the development of regulatory and non-regulatory approaches by such agencies regarding technologies and industrial sectors that are either empowered or enabled by AI and advance American innovation, and (2) considers ways to reduce barriers to the use of AI.  A draft of the memorandum is to be issued for public comment before it is finalized.
  • directs the Secretary of Commerce, through the Director of the National Institute of Standards and Technology, to issue a plan for federal engagement in the development of technical standard and related tools in support of reliable, robust, and trustworthy systems that use AI technologies.

Last summer, the U.S. Treasury Department issued a report that recommended sweeping regulatory changes intended to promote innovation in the consumer financial services market, reduce regulatory burdens on consumer financial services providers, and update regulations applicable to various types of consumer lending and related consumer financial products and services.  That report included a section focused on big data, machine learning, and AI in which the Treasury stated that it recognized the significant benefits that the increased application of AI and machine learning technologies can provide.  It urged regulators not to impose unnecessary burdens or obstacles to the use of AI and to provide greater regulatory clarity that would enable further testing and responsible deployment of such technology.

Members of Ballard Spahr’s Consumer Financial Services Group have counseled clients on issues arising from applications of AI in the consumer finance space.  In July 2018, the Group conducted a webinar, “Artificial Intelligence in the Consumer Financial Services Industry,” in which the topics included (1) applications of AI to marketing, underwriting, servicing, and collections, and (2) compliance issues arising from the use of AI, including managing fair lending and discrimination risks, delivering adverse action notices, handling of data sharing and data security risks.

 

The FCC’s creation of a database of disconnected phone numbers is expected to significantly reduce the potential TCPA exposure companies face for unknowingly calling a customer at a reassigned phone number.  In this week’s podcast, we review the relevant TCPA legal background, explain how the database will operate and the requirements for obtaining a safe harbor from TCPA liability, and discuss proactive steps companies can take in advance of the database launch.

Click here to listen to the podcast.

 

The Student Borrower Protection Center (SBPC)—an organization established by former CFPB Student Loan Ombudsman Seth Frotman—recently published an article examining the Department of Education’s oversight of “lead generators.”  Lead generators are outside entities that help for-profit colleges manage “pre-enrollment activities” such as “recruiting and advising students,” “determining eligibility for federal aid,” and “delivering the Title IV funds.”  The article highlights state and FTC enforcement actions against lead generators and suggests that these entities qualify as third-party servicers under Department of Education regulations.

The article characterizes the Department of Education’s current oversight of the industry as “haphazard and wholly inadequate.”  It calls on the Department to (1) treat lead generators as third-party servicers, (2) require that schools disclose contracts with lead generators, and (3) compel lead generators to conduct annual compliance audits.

In addition, the article urges Congress and the Department’s Inspectors General to investigate why the Department has “failed to hold these lead generators and schools” accountable.  Finally, it asks that Congress amend the Higher Education Act to eliminate much of the Department’s discretion with regards to oversight of third-party servicing.

Institutions and third-party servicers are jointly and severally liable for a servicer’s violations of the Higher Education Act.  See 34 C.F.R. § 668.25(c)(3), (d)(2)(ii).  Thus, a decision by the Department of Education or Congress characterizing lead generators as third-party servicers would likely carry a significant compliance burden for both lead generators and contracting schools.

The CFPB and the federal banking agencies—the FDIC, Fed, and OCC— remain open during the government shutdown as their funding does not come from congressional appropriations.  However, the shutdown has resulted in the closing of the FTC.

Also closed during the shutdown are many HUD operations and activities.  Certain lending-related operations will continue during the shutdown such as the endorsement of FHA-insured loans (with the exception of Home Equity Conversion Mortgages and Title I loans) and Ginnie Mae will continue to operate.  Other federal lending programs impacted by the shutdown include those administered by the Small Business Administration which is closed during the shutdown.

 

 

 

Attorneys for defendants, U.S. Comptroller and the Office of the Comptroller of the Currency (together “the OCC”), in the pending Southern District of New York lawsuit, Vullo v. OCC, submitted a letter to the court announcing their intent to move to dismiss the complaint brought by New York’s Superintendent of the Department of Financial Services (“DFS”). This is the second lawsuit brought by Superintendent Vullo against the OCC and mirrors the litigation being pursued by the Conference of State Bank Supervisors (CSBS) in the District of Columbia. DFS’s lawsuit alleges that the OCC’s decision to accept applications for “Special Purpose National Bank Charters” (or “fintech charters”) from non-fiduciary institutions that do not accept deposits exceeds the OCC’s authority under the National Banking Act (“NBA”) and would violate the Tenth Amendment by removing such institutions from state regulatory oversight. The first lawsuit, Vullo v. OCC et al. (“Vullo I”), was dismissed without prejudice last December when Southern District of New York Judge Buchwald ruled that DFS lacked standing to assert its claims, which were unripe for judicial determination.

In its letter, the OCC announced its intention to file a motion to dismiss the latest DFS complaint on substantially identical grounds to those it advanced in Vullo I. The OCC intends to argue that: (1) DFS lacks sanding to bring these claims as it has not suffered an injury in fact; (2) the OCC interpretation of the ambiguous term “business of banking” in the NBA is reasonable, and the OCC therefore has authority under the NBA to issue fintech charters; (3) DFS’s challenge is barred by the applicable statute of limitations; and (4) the OCC’s decision to issue fintech charters would not violate the Tenth Amendment because of the Supremacy Clause and the authority granted to the OCC by the NBA. While DFS had tried to cure its standing issues in the most recent complaint by emphasizing the OCC’s decision to issue fintech charters was the “agency’s final decision,” the OCC has signaled in its letter that it believes the DFS complaint remains premature. The OCC’s letter emphasizes that while “it will accept applications for fintech charters, [the agency] has not actually received any such applications, let alone granted one.” Accordingly, the OCC will argue that any harm DFS describes in its complaint or in its response to the motion to dismiss remains “future-oriented and speculative.”

DFS filed its own letter in response, announcing not only DFS’s strategy for overcoming the OCC’s anticipated motion to dismiss, but also its intent to file a motion for preliminary injunction in order to prevent the OCC from issuing any fintech charters while the lawsuit is pending. DFS focused on the reasoning of Judge Buchwald’s Vullo I opinion and highlighted several subsequent changes to the regulatory landscape that should change the result. In particular, DFS noted that at the time Judge Buchwald found DFS’s claims unripe: (1) the OCC had not yet announced its intent to accept applications from non-depository institutions; (2) the relevant supplement to the OCC licensing manual was still in “draft” form; and (3) the Comptroller at the time was a nominee who had made no public statements regarding whether to offer charters to non-depository institutions. In contrast, presently the OCC has announced that it is accepting fintech charter applications, the manual detailing procedures for the process has been finalized, and the then-nominee-now-Comptroller has made several public statements regarding the OCC’s intent to issue fintech charters. DFS will argue that, based on these changes to the facts underpinning Judge Buchwald’s determination, DFS now has standing to make its claims against the OCC.

DFS also strongly implied that the OCC had been less-than-forthright with the court in its letter when the OCC stated that DFS lacked standing (in part) because the OCC had not actually received, much less granted, any applications for fintech charters. DFS cited to reports that the OCC has already singled-out the first entity to receive a fintech charter, and characterized the OCC’s representation to the Court that no fintech charters were currently being considered as “brutishly inconsistent” and duplicitous.

Regarding the merits of the claims (on which DFS will have to prove a substantial likelihood of success if it does indeed seek a preliminary injunction), DFS signaled in its letter that it intends to focus primarily on the history of the NBA, the OCC’s traditional deference to congressional authority when regulating non-depository institutions, and the degree to which the OCC’s actions in the realm of offering fintech charters has no precedent. In emphasizing the need for a preliminary injunction, DFS characterized the OCC’s “unprecedented issuance” of fintech charters as “destructive to New York and New Yorkers” insofar as it would preempt state laws that “powerfully protect” consumers from the industry’s “well-known abuses.”

The OCC anticipates filing its motion to dismiss in early December, though the court has neither ruled on the parties’ jointly proposed briefing schedule, nor DFS’s request for a pre-motion conference or briefing schedule on the motion for preliminary injunction.

While the OCC’s position that the DFS lawsuit is not yet ripe for adjudication because the OCC has not yet approved a fintech charter may have some merit, it is important to the industry that the legal question of the OCC’s authority to issue such a charter get resolved expeditiously. Until that happens, there is likely to be limited interest on the part of the industry in pursuing such a charter.