The CFPB and Utah AG’s Office have announced that they will hold the first joint office hours as part of the American Consumer Financial Innovation Network (ACFIN).  The joint office hours will be held on January 30, 2020 in Salt Lake City, Utah.

The CFPB announced ACFIN’s creation last September, in conjunction with finalizing revisions to its trial disclosures and no-action letter policies and its proposal to create a new fintech sandbox policy.  ACFIN is a network of federal and state regulators that may include state attorneys general, state financial regulators, and federal financial regulators.  Its stated objectives include establishing coordination among members to facilitate innovation, minimize regulatory burdens, and bolster regulatory certainty for consumer financial products and services.  According to the Bureau’s press release, ACFIN’s members currently include attorneys general from Alabama, Alaska, Arizona, Colorado, Georgia, Indiana, South Carolina, Tennessee, and Utah, and state financial regulators from Florida, Georgia, Missouri, and Tennessee.

The joint office hours are intended to give innovators an opportunity to discuss issues such as financial technology, innovative products or services, regulatory sandboxes, no action letters, and other matters related to financial innovation with officials from the CFPB and state partners.  Last June, Utah became the third state to create a regulatory sandbox program for fintechs, after Arizona, which enacted sandbox legislation in March 2018, and Wyoming, which enacted sandbox legislation in February 2019.

 

 

The U.S. Court of Appeals for the Seventh Circuit affirmed the district court’s judgment on the pleadings in favor of the defendants (a debt buyer and a collection agency) in a putative class action that alleged the defendants had violated the Fair Debt Collection Practices Act by sending the named plaintiff a collection letter identifying both the original creditor and the debt buyer.

In Dennis v. Niagara Credit Solutions, Inc., the collection letter sent by the collection agency identified the bank that originated the debt as the “original creditor” and the debt buyer that purchased the debt from the bank after the plaintiff’s default as the “current creditor.”  The plaintiff claimed that listing two separate entities as “creditor” violated the FDCPA requirement to send the consumer a written notice containing “the name of the creditor to whom the debt is owed.”  According to the plaintiff, listing two entities as the “creditor” when “one of them [was] a debt buyer, which would likely be unknown to the consumer—and not explaining the difference between those two creditors, then stating that the [collection agency] was authorized to make settlement offers on behalf of an unknown client—could very likely confuse a significant portion of consumers who received the letter as to whom the debt was then owed.”

The Seventh Circuit affirmed the district court’s entry of judgment on the pleadings in favor of the defendants.  It agreed with the district court that the letter could have made the relationships among the parties clearer by spelling out that the debt buyer had purchased the debt from the bank and that the debt buyer was the collection agency’s client.  Nevertheless, the Seventh Circuit held that the FDCPA “does not require such a detailed explanation of the transactions leading to the debt collector’s notice” and that “[r]ather, it requires clear identification of the current creditor, and this letter complied.”

 

 

 

In this podcast, we review Madden, its implications and the OCC’s reaction, and discuss the proposals to undo Madden, including the agencies’ troublesome comments, remaining problems and what the agencies can do to fix them.

Click here to listen to the podcast.

The New York Department of Financial Services has sent a letter to the institutions that it regulates requiring each such institution, by February 7, 2020, to provide to DFS a description of its “plan to address its LIBOR cessation and transition risk.”  (LIBOR is the acronym for the London Inter-Bank Offered Rate.)

The letter references the 2017 announcement by the United Kingdom’s Financial Conduct Authority (the regulator that oversees the LIBOR panel) that, by the end of 2021, it will discontinue the index.  The letter also references the new index named the Secured Overnight Financing Rate (SOFR) created by the Federal Reserve Board of Governors and the Federal Reserve Bank of New York (FRBNY) in conjunction with the Treasury Department.  The FRBNY began publishing the SOFR in April 2018 and the working group convened by the Federal Reserve Board and FRBNY to address the transition from LIBOR has recommended it as a replacement for LIBOR.

In the letter, the NYDFS discusses the types of transactions that will be impacted by the discontinuation of LIBOR, which include consumer loans and residential mortgage loans, and emphasizes the significant risks the discontinuation presents if not appropriately managed.  It observes that the transition from LIBOR “requires a significant amount of work, which should have already commenced.”  The NYDFS states that, due to such risks, it has issued the letter “to seek assurance that regulated institutions’ boards of directors, or the equivalent governing authorities, and senior management fully understand and have assessed the risks associated with LIBOR cessation, have developed an appropriate plan to manage them and have initiated actions to facilitate transition.”

Most significantly, the NYDFS states that it “requires that each regulated institution submit a response to the Department describing the institution’s plan to address its LIBOR cessation and transition risk” and lists five items that the plan should describe. (emphasis added)  The regulated institutions that must submit their plans consist of:

  • Depository institutions (including banks, credit unions and savings associations)
  • Non-depository institutions (including licensed lenders, sales finance companies and premium finance companies, mortgage companies, money transmitters and virtual currency companies)
  • Property insurance companies
  • Health insurance companies
  • Life insurance companies and pension funds

The five items that a plan should describe are:

  • Programs that would identify, measure, monitor and manage all financial and non-financial risks of transition
  • Processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties
  • Processes fro communications with customers and counterparties
  • A process and plan for operational readiness, including related accounting, tax and reporting aspects of such transition
  • The governance framework, including oversight by the board of director, or the equivalent governing authority, of the regulated institution

Regulated institutions could face similar requirements from the CFPB, federal banking agencies, and/or regulators in other states.  The significant risks presented by the transition from LIBOR include safety and soundness risks as well as legal, reputational, and operational risks.  As a result, regardless of the need for institutions to provide information to their regulators regarding LIBOR transition plans, the transition demands careful consultation with counsel regarding how best to proceed.  We have been working closely with clients to assist them with this process.

 

On December 30, 2019, the California Department of Business Oversight (DBO) announced two actions regarding companies offering unregulated, point-of-sale financing to California residents.  In the first action,  the DBO denied the application of Sezzle Inc. for a lender’s license under the California Financing Law (CFL).  According to the DBO in its Statement of Issues, license denial was warranted because Sezzle had engaged in unlicensed point-of-sale lending.  In a parallel second action, the DBO issued a legal opinion advising another, unnamed company that its point-of-sale products also constitute “loans” and require a CFL license to be offered in California.

We question both actions.  As to the Sezzle license denial, our criticisms include but are not limited to the following:

  • The DBO found that Sezzle’s customers and merchants do not enter into contracts with each other that are assigned to Sezzle.  There are two problems with this finding: (1) if the finding is correct, it would justify by itself the conclusion that the transactions are loans rather than credit sales (and avoid the need for further analysis), and (2) for residents of California and three other states, the Sezzle User Agreement (at least in its current form) provides that the credit will be through retail installment contracts assigned by Sezzle’s merchants to Sezzle.  Thus, as a factual matter the DBO’s finding is open to question.
  • The DBO stated that at least one Sezzle merchant allows Sezzle financings in amounts as low as $35 and that, on these financings, the effective APR would be approximately 600% if Sezzle charged all applicable fees.  In fact, the User Agreement provided, consistent with Sezzle’s advertising, that consumers making payments on time would be charged no interest and no fees—not effective triple-digit APRs.  We note that this is not a case involving hidden merchant upcharges on credit transactions.  Indeed, the DBO explicitly acknowledged that Sezzle prohibits its merchants from charging a higher credit sale price.  Accordingly, this product appears to be consumer-friendly and not unfair, deceptive or abusive in any way.
  • In light of the absence of a clear violation of law or any apparent consumer harm, the denial of a CFL license seems unduly harsh.

We think the legal opinion is equally flawed.  It points to a number of “relevant factors” in determining whether a transaction is a credit sale or a loan but fails to provide a cogent explanation why these factors mandate characterization of the transactions as loans under California law:

  • The intent of the parties: The opinion says a relevant factor is whether the parties intended the arrangement to be a loan and cites Milana v. Credit Disc. Co., 27 Cal. 2d 335 (1945).  Milana did not involve a credit sale to a consumer and instead involved a purchase of receivables where the seller had to repurchase from the buyer any receivables that went into default and had to unconditionally guaranty that the buyer would collect all of the receivables it purchased.  The transaction in Milana clearly evidenced an attempt to evade usury laws.  However, the DBO apparently thought this factor militated in favor of loan classification despite its acknowledgement that the “products are not presented to customers at checkout as loans.”
  • Whether the merchant and third party are closely related or have a preexisting relationship: The DBO cites Glaire v. La Lanne-Paris Health Spa, 12 Cal. 3d 915 (1974) for the assertion that a close relationship between the finance company and its merchants, memorialized by a contract that exists before the customer begins a purchase, is indicative of a loan rather than a credit sale.  Glaire seems inapposite since it involved two interlocking corporations with common ownership and control and a situation where there were few “cash sales” and the vast majority of the transactions were financed before being sold at a substantial undisclosed discount.  Regarding this factor, the DBO fails to address that (1) the leading California and most recent recharacterization case included in its opinion, Boerner v. Colwell Co., 21 Cal.3d 37 (1978), refused to recharacterize credit sales as loans despite the existence of a close preexisting relationship between the seller and the finance company and (2) virtually all credit sale financing programs involve such relationships.
  • Whether the third party assumes the contract at the point of sale or later: The DBO suggests that the seller’s discounted sale of credit sale contracts at the point of sale is indicative of transactions properly classified as loans.  However, Glaire, the sole case the DBO cites in support of this conclusion, was inapposite for the reasons discussed above.  Additionally, the DBO’s attempt to distinguish Boerner “because the question in that case was whether the usury laws applied” (i.e., whether the transaction was a loan or a credit sale) is weak.  Boerner contemplated transactions with contemporaneous assignments to the company underwriting the credit and nonetheless found them to be credit sales rather than loans.
  • Whether the third party underwrites the transaction in the manner of underwriting a loan: The DBO states that when a third party provides the contract and evaluates the creditworthiness of the customer, such conduct indicates the transaction is a loan.  It only cites a 1946 Attorney General Opinion but acknowledges that the California Supreme Court subsequently reached a contrary result in Boerner.
  • Whether the transaction would be regulated under another law: Finally, the DBO states that the application of another statutory scheme to the transactions would be a factor weighing in favor of finding the transactions to fall outside the CFL.  We take some comfort that the new DBO guidance is likely limited to transactions that would not otherwise be subject to California credit sale laws.  However, we note that, once again, the DBO position is in tension with Boerner, where the California Supreme Court did not find it significant that the subject transactions were exempt from both California credit sale and usury laws.  Rather than using the unregulated nature of the conduct as a justification for treating the transactions as loans subject to California usury laws, the Court concluded that that the Legislature is free to regulate in this area if it wishes.  The DBO also fails to acknowledge that the California Supreme Court held similarly in an even more recent case. Sw. Concrete Prods. v. Gosh Constr. Corp., 51 Cal. 3d 701, 707 (1990) (“[The transaction] is exempt from the usury laws because it was a bona fide credit sale.  This is true regardless of whether the Unruh Act applies to the transaction.”)

In summary, the DBO has gone out of its way to classify as loans consumer-friendly transactions structured as credit sales.  In doing so, it has injected unnecessary uncertainty into a previously settled area of the law.  We hope that the DBO will reconsider its actions or that Sezzle will appeal and overturn the DBO’s license denial.

At its conference this Friday, January 10, the U.S. Supreme Court is expected to consider the petition for a writ of certiorari filed by the plaintiffs in Collins v. Mnuchin and the petition filed by the FHFA and Treasury Department.  The case dockets indicate that briefing on the petitions was submitted for Friday’s conference.

In its en banc decision in Collins, the Fifth Circuit held the FHFA’s structure is unconstitutional.  The FHFA was created by the Housing and Economic Recovery Act of 2008 (HERA) to oversee two of the housing government services enterprises (GSEs).  Like the CFPB, the FHFA was established as an “independent agency” led by a single Director appointed by the President subject to Senate confirmation for a five-year term and who can only be removed by the President “for cause.”  The parties who challenged the FHFA’s constitutionality were shareholders of the GSEs seeking to invalidate an amendment (Third Amendment) to a preferred stock agreement between the Treasury Department and the FHFA as conservator for the GSEs that required the GSEs to pay quarterly dividends to the Treasury equal to the GSEs’ excess net worth after accounting for prescribed capital reserves.

While ruling that the FHFA’s structure is unconstitutional, the en banc Fifth Circuit concluded that the appropriate remedy for the constitutional violation was to sever HERA’s for-cause removal provision but not to invalidate the Third Amendment.  The Fifth Circuit also reversed the district court’s dismissal of the shareholders’ statutory claim against the FHFA that the Third Amendment exceeded the FHFA’s conservatorship authority but affirmed the district court’s dismissal of the shareholders’ statutory claim against the Treasury.

In their cert petition, the plaintiff shareholders challenge the Fifth Circuit’s severance analysis and refusal to invalidate the Third Amendment based on the FHFA’s unconstitutionality.  In their cert petition, the FHFA and Treasury challenge the Fifth Circuit’s reversal of the district court’s dismissal of the plaintiffs’ statutory claim against the FHFA and argue that the issue of the shareholders’ ability to assert a statutory claim to challenge the Third Amendment merits review apart from the constitutionality issues.  The plaintiffs and the FHFA/Treasury opposed each other’s cert petition.  (In the Fifth Circuit, the FHFA defended its constitutionality while the Treasury agreed with the plaintiffs that the FHFA’s structure is unconstitutional.  In opposing the plaintiffs’ cert petition, the FHFA and Treasury argued that it was unnecessary for the Supreme Court to grant the petition to decide the constitutionality issue because that issue was already before the Court in Seila Law.)

Having already granted the certiorari petition in Seila Law to decide the question of the CFPB’s constitutionality and the question of whether severance of the Dodd-Frank Act’s for-cause removal provision would be the appropriate remedy for a constitutional violation, and since the Third Amendment’s validity could be impacted by the resolution of those questions, a possible result would be for the Supreme Court to grant the petitions and hold them pending its ruling in Seila Law.

 

 

Yesterday, Andrew Smith, Director of the FTC’s Bureau of Consumer Protection, announced the following three major improvements that have been made to FTC orders in data security cases:

  1. Specificity: To counter past criticisms that FTC orders to implement comprehensive information security programs were too vague, FTC orders will now require specific security safeguards that address specific allegations in the complaint brought against each company.
  2. Third-party assessor accountability: FTC orders will now give the FTC authority to approve (and re-approve every two years) the third-party assessors that are tasked with reviewing comprehensive data security programs.  Assessors can no longer be a rubber stamp, but must provide the FTC with documents supporting conclusions reached in any assessment, so that the FTC can investigate compliance with and enforce its orders.
  3. Executive responsibility: Copying other legal regimes, such as the New York Department of Financial Services Cybersecurity Regulations, FTC orders will now require companies to present to their Boards about their written information security program every year, so that senior officers can provide annual certifications of compliance to the FTC.  (Director Smith stated that he believes that holding individuals personally accountable under oath is an effective compliance mechanism to incentivize high-level oversight of, and appropriate attention to, data security.)

In his announcement, Director Smith referenced several FTC 2019 data security orders that reflect these improvements.  Companies that find themselves subject to FTC investigation should be mindful of and prepared for the evolving nature of the FTC’s data security orders in the areas involved in these orders.

 

The House Financial Services Committee has announced that it will hold the following hearings this month:

  • On January 14, the Subcommittee on Consumer Protection and Financial Institutions will hold a hearing entitled, “The Community Reinvestment Act: Reviewing Who Wins and Who Loses with Comptroller Otting’s Proposal.”  (On January 29, from 12 p.m. to 1 p.m. ET, Ballard Spahr will hold a webinar on the CRA proposal.  Click here to register.)
  • On January 29, the full Committee will hold a hearing entitled, “The Community Reinvestment Act: Is the OCC Undermining the Law’s Purpose and Intent?”
  • On January 30, the full Committee will hold a hearing entitled, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.”  (The hearing is likely to address the rules proposed by the OCC and FDIC in November 2019 to eliminate the uncertainty created by the Second Circuit’s decision in Madden v. Midland Funding.  Click here to read our blog post about the proposals.)
  • On January 31, the Task Force on Financial Technology will hold a hearing entitled, “Is Cash Still King? Reviewing the Rise of Mobile Payments.”

Our podcast looks at types of alternative data (AD) and industry sources, key points of the recent interagency statement on using AD for credit decisions and CFPB actions to encourage such use, FCRA/ECOA/UDAAP concerns and steps to address them, use of social media data, and the relationship between AD and artificial intelligence.  We also assess the regulatory concerns impeding industry’s use of AD.

Click here to listen to the podcast.

The CFPB has released its eighth annual report to Congress on college credit card agreements.  The annual report is mandated by the CARD Act.  (The first two reports were issued by the Federal Reserve Board.)

The CARD Act requires mandatory reporting to the CFPB by card issuers on agreements with institutions of higher learning or certain affiliated organizations (such as alumni associations).  The information in the report is current as of the end of 2018.  Since its report on 2016 data, the Bureau’s annual reports only discuss college credit card agreements and do not include information on other financial products marketed to students such as debit cards.

The CFPB’s findings based on the agreements and related information that issuers are required to submit annually to the CFPB include:

  • The total number of issuers participating in this market declined from 2017 to 2018, a reversal of the general trend of the number of issuers in this market increasing since 2009.
  • No new issuers submitted data to the Bureau and two issuers exited the market.
  • The total number of agreements declined from 2017 to 2018, representing the resumption of a trend of decline from 2009 that was only interrupted in 2017.
  • Agreements between issuers and alumni associations continued to dominate this market by most metrics.

The CFPB notes that 2018 represented the first year since 2011 in which year-over-year declines were registered in all of the following metrics: number of issuers, agreements in effect, year-end open accounts, payments by issuers, and new accounts opened.