A group of 20 state attorneys general, the D.C. attorney general, and the Executive Director of the Office of Consumer Protection of Hawaii have sent a letter to U.S. Department of Education Secretary Betsy DeVos criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.

The memoranda were intended to guide the development of provisions in new contracts to be entered into by the ED with servicers it selected for a new federal student loan servicing system and included directions to contractors to designate, train, and appropriately compensate specialized servicing personnel to assist at-risk and certain other borrowers. and standards to provide consistency in the handling, processing, and application of payments by servicers and other servicing practices.  Secretary DeVos had indicated that withdrawal of the memoranda was necessary to “negate any impediment, ambiguity or inconsistency” in the ED’s approach to acquiring new federal student loan servicing capabilities.

In their letter, the state AGs assert that the ED’s “stated rationale does not justify summarily denying student borrowers [the] basic protections [provided by the new servicing standards].”  The state AGs highlight requirements for servicers to apply overpayments to loans with the highest interest rates unless instructed otherwise by the borrower and to inform a borrower of income-driven repayment options before placing the borrower in forbearance or deferment.  They note that ‘[s]ervicers’ failure to comply with such standards may be independent violations of state law.”

 

New Mexico recently became the 48th state to enact a data breach notification law.  This continues the accelerated pace of state data breach legislative activity in the last two years.  Since 2015, at least 41 states have considered legislation relating to data security incidents, and at least 16 states have enacted or amended such laws.

Among the most significant aspects of New Mexico’s brand new “Data Breach Notification Act” is its definition of “Personal Identifying Information.”  The Act follows a growing state trend by including “biometric data” in its definition of “personal identifying information.  In addition, “security breach” is defined as the acquisition of—but not mere access to—unencrypted computerized data or encrypted data if the encryption key is also acquired.  The Act contains an exemption from the requirement to provide notice within 45 calendar days after discovery of the breach for persons subject to the Gramm-Leach-Bliley Act or the Health Insurance Portability and Accountability Act of 1996.

For more information on the new law, see our legal alert.

 

 

We previously reported that the Connecticut Attorney General, on behalf of the Attorneys General of Indiana, Kansas and Vermont, (the “state AGs”) had filed a joint motion to intervene in a CFPB enforcement action to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”).  Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).

The state AGs’ motion and supporting memorandum was filed in CFPB v. Sprint Corporation, a litigation in which the Bureau alleged that Sprint had violated the Consumer Financial Protection Act by allowing unauthorized third-party charges on its customers’ telephone bills.  The associated Stipulated Final Judgment and Order (“Consent Order”) authorized the implementation of a consumer redress plan pursuant to which Sprint would pay up to $50 million in refunds.  The redress plan provided for the payment of refund claims on a “claims made” basis subject to a filing deadline.  Any balance remaining nine months after the claim filing deadline was to be paid to the CFPB.

The Bureau, in consultation with the AGs of all fifty states and the District of Columbia, which were parties to concurrent settlement agreements with Sprint relating to similar billing practice claims, and the FCC, was then to determine whether additional consumer redress was “wholly or partially impracticable or otherwise inappropriate.”  If so, the Bureau, again in consultation with the states and the FCC, was authorized to apply the remaining funds “for such other equitable relief, including consumer information remedies, as determined to be reasonably related to the allegations set forth in the Complaint.”  Any funds not used for such equitable relief were to be deposited in the U.S. Treasury as disgorgement.

In a recent Memorandum and Order recounting the history of the litigation, the district court stated that “the siren song of $15.14 million in unexpended funds [had] lured some new sailors into the shoals of this litigation” because “[d]espite full restitution to Sprint customers and subsequent consultations with the Attorneys General and the FCC, the CFPB could not identify any equitable relief to which $15.14 million in unexpended settlement funds could be applied.”  The court observed that, “[a]pparently, the prospect of simply complying with the Consent Order by paying the funds into the U.S. Treasury lacked sufficient imagination.”

Although the defendant initially filed a memorandum in opposition to the intervention motion, it subsequently filed a joint submission with the state AGs that adopted their proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAGTRI and proposed redirecting the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.  (The court acknowledged that these were perhaps noble causes worthy of consideration.)  The joint submission stated that the CFPB had been consulted about the proposed modification but “[took] no position” on it.  The court characterized its failure to do so as remarkable, given that the Bureau was “the plaintiff in this lawsuit responsible for securing the $50 million settlement.”

The district court thus observed that it had been left “in a quandary” because:

  • The proposal would “alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury”;
  • The proposal may raise an issue under the Miscellaneous Receipts Act, which requires that government officials receiving money for the government “from any source” must deposit such money with the Treasury;
  • The proposed modification “does not appear, at least at first blush, to be ‘reasonably related to the allegations set forth in the Complaint’”; and
  • The defendant had concurrently entered into settlements with the Attorneys General of all 50 states and the District of Columbia and already paid them $12 million to resolve a multi-state consumer protection investigation.

The court characterized as “particularly galling” the argument that Fed. R. Civ. P. 60(a) permits the proposed modification to correct a clerical mistake.  It noted that the parties had “unmistakably understood that the Consent Order related to federal claims and that any undistributed settlement funds would be paid to the U.S. Treasury.”

In view of the foregoing, the court concluded that it needed “to hear from the Government” because of “the peculiar posture of the intervention application.”  Specifically, the court noted that the CFPB, as the plaintiff in the action, needed to take a position on the proposed intervenors’ motion and application to modify the Consent Order.  And because the proposed modification would redirect funds earmarked for the U.S. Treasury, the court noted that the United States has a direct interest that should be considered.

Accordingly, the court directed the CFPB and the Department of Justice to respond separately to the proposed intervenors’ motion and application to modify the Consent Order.  Their separate memoranda must be filed by May 10, 2017; the state AGs and the defendant may file responsive memoranda by May 24, 2017.  The court stated that the responsive submission of the Bureau “should advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application.”   We will continue to monitor developments in this case.

 

The Conference of State Bank Supervisors issued a press release this week in which it announced the April 1 release of a new tool within the Nationwide Multistate Licensing System (NMLS) to streamline reporting by money services businesses.  The new tool is called the “Money Services Businesses (MSB) Call Report.”

The press release quotes a Vermont regulator who stated that the call report information “will provide complete and meaningful information on MSBs, including fintech companies licensed to do business as money transmitters, and assist state regulators to better analyze risk, monitor compliance, and make more informed and timely decisions when it comes to MSB supervision.”  The press release also indicated that the new reports “will also provide a unique, detailed snapshot of fintech companies as they mature and evolve.”

Licensees are required to file the new report within 45 days of the end of the first quarter (May 15).   According to the press release, 18 states (covering 25 money transmitter, money service, check casher/seller and currency exchange licenses) have adopted the report for the first quarter of 2017 and seven more states are expected to adopt it in the near future.

The reports include national and state specific MSB activity that is submitted on a quarterly and annual basis.  The MSB Call Report is the first comprehensive report to consolidate state MSB reporting requirements and provide a database of nationwide MSB transaction activity.  More detailed information regarding the MSB Call Report is available on the MSBCR webpage.

The second presentation of the 22nd Annual Consumer Financial Services Institute, sponsored by the Practising Law Institute, will take place in Chicago on May 4-5, 2017.  I am co-chairing the event, as I have for the past 21 years.  Hundreds of people attended the first presentation in NYC, live and on the web, on April 27-28, 2017.  The upcoming Chicago presentation is nearly sold out.

As it did in New York, the Institute will feature a 2-hour program at the beginning of the first day titled “The CFPB Speaks: Recent and Upcoming Initiatives.”  (Read our blog post recapping the NYC presentation here.)  I will moderate a panel discussion of three senior CFPB lawyers and two industry lawyers (one of whom will be my partner Chris Willis) who have extensive experience in dealing with the CFPB.

The CFPB panelists in Chicago will be:

  • Kristen Donoghue, Principal Deputy for Enforcement
  • Kelly T. Cochran, Assistant Director, Office of Regulations
  • Peggy L. Twohig, Assistant Director for Supervision Policy

The Institute will focus on a variety of cutting-edge issues and developments, including:

  • Impact of the election on the CFPB, other federal and state agencies
  • Privacy and data security
  • Fair lending
  • Mortgages
  • Emerging payments
  • State regulatory initiatives and developments
  • Class action developments and settlements
  • Debt collection
  • TCPA and FCRA

We hope you can join us for this informative and valuable program.  PLI has made a special 25 percent discounted registration fee available to those who register using the link that follows.  To register and view a complete description of PLI’s 22nd Annual Consumer Financial Services Institute, click here.

For more information, contact Danielle Cohen at 212.824.5857 or dcohen@pli.edu.

A New York lender licensing proposal that threatened to create new regulatory burdens for financial service providers and to potentially adversely affect credit availability to New York residents and businesses, has been removed from a New York State budget bill.  The amended budget bill, S. 2008-C/A. 3008-C, has passed both houses of the New York State Legislature and been delivered to Governor Cuomo for executive action.  The controversial lender licensing proposal, which appeared in Part EE of the initial proposal, has been “intentionally omitted” from the amended budget bill passed by the Legislature.

The proposal would have revised the New York Licensed Lender Law to significantly expand the scope of its licensing requirements.  The proposal would have extended the lender licensing requirement for the first time to: (1) lenders making consumer-purpose loans of $25,000 or less to individuals at interest rates of 16 percent per annum or less; (2) lenders making business-purpose loans of $50,000 or less to corporations, limited liability companies, and certain other business entities (regardless of interest rate); (3) lenders making business-purpose loans of $50,000 or less to individuals and sole proprietorships at interest rates of 16 percent per annum or less; and (4) persons that solicit loans in those amounts and also purchase or otherwise acquire such loans or other “forms of financing”, or arrange or otherwise facilitate the funding of such loans.

The current licensing requirement under the New York Licensed Lender Law is limited to certain loans made at rates of interest that the lender is not otherwise authorized by law to charge without a license.  This interest rate trigger means, for example, that the licensing requirement does not apply to loans made at interest rates of up to 16 percent per annum because a lender is permitted to make such loans pursuant to the New York General Obligations Law.  It also means that loans made by out-of-state state-chartered banks, whose interest rate authority is derived from federal law, do not trigger the lender licensing requirement.  The proposal would have removed the licensing rate trigger from the Licensed Lender Law, thereby significantly expanding its scope.

The Superintendent of the New York Department of Financial Services (NYDFS) recently argued that the OCC proposal to grant special purpose national bank charters to financial technology (fintech) companies would have significant negative effects, including on existing state regulatory regimens applicable to nonbanks, and would encourage fintech companies to engage in regulatory arbitrage to avoid state consumer protection and usury laws.  Although there had been proposals in prior years to repeal the interest rate trigger from the New York Licensed Lender Law and to raise the dollar limits on covered loans, the New York budget bill proposal was viewed as a direct response to the perceived threat of the OCC proposal.  Thus, this may not be the last attempt by the New York authorities to enact legislation to broaden the scope and reach of their licensing and related requirements, should the OCC continue to implement its special purpose charter proposal.

The budget bill also initially contained a proposal that would have empowered the NYDFS to license servicers of student loans made to New York residents.  The proposed student loan servicer licensing requirement, which appeared in Part Z of the initial proposal, also has been “intentionally omitted” from the amended budget bill passed by the Legislature.

Since the CFPB issued its final rule for general purpose prepaid accounts on October 5, 2016, it has faced attacks from Congress and criticism from industry participants

On April 5, in a letter to Congressional leaders, attorneys general (AGs) from 17 states (Iowa, California, Maine, Hawaii, Maryland, Massachusetts, Illinois, Minnesota, Mississippi, Vermont, New York, Virginia, North Carolina, Washington, Oregon, Pennsylvania, and Rhode Island) and the District of Columbia urged Congress to cease its efforts to nullify the rule under the Congressional Review Act (CRA).

The CRA establishes a special set of procedures through which Congress can nullify final regulations issued by a federal agency.  Multiple joint resolutions have been introduced to disapprove of the final rule under the CRA – Representatives Tom Graves (R-Ga) and Roger Williams (R-Tx) introduced House Joint Resolution 62 and House Joint Resolution 73, respectively, and Senator David Perdue (R-Ga) introduced Senate Joint Resolution 19.  The Senate Joint Resolution was recently brought out of Committee and to the floor for consideration by way of a discharge petition filed by Senate Banking Chairman Mike Crapo.

In their letter, the AGs urge Congressional leadership of both parties to oppose these joint resolutions in order not to “eradicate important protections that have been proposed for consumers who use prepaid cards.”  The AGs assert that there are numerous issues related to prepaid cards, which are increasingly used to receive payroll funds, Federal financial aid, and payday loans.  The letter focuses on the use of prepaid cards in the payday loan context, specifically criticizing hybrid cards that enable a payday lender to “take consumers’ wages, which have been loaded onto a prepaid card, before consumers can even use them to cover their basic living expenses.”  The AGs also criticize overdraft protection features on prepaid accounts, citing the statistic that consumers using those features incur an average of 7 overdraft fees per year.

In order to protect consumers from these “predatory” practices, the AGs emphasize the need for additional regulation of the prepaid industry.  They note that the final rule covers a broad range of prepaid accounts, including certain mobile wallets and person-to-person payment products. The AGs commend the CFPB’s “careful approach to implementation demonstrat[ing] its dedication to crafting a rule that protects consumers and encourages a thriving, responsible industry.”  The AGs suggest that the rule, as crafted, will not only protect the unbanked but also promote the popularity of prepaid accounts.  The letter further defends the CFPB, noting that the agency has indicated that it is amenable to making substantive changes to the rule, and has proposed to delay the rule’s implementation date in response to feedback from the prepaid industry.

The AGs stress that if the rule is nullified by a CRA vote, “the agency is forever barred from enacting a substantially similar rule unless Congress authorizes it.”  It remains to be seen whether Congress will heed the AGs’ concerns, but this is a clear signal that the AGs are paying close attention to prepaid accounts and will step up oversight if the rule fails.

Two state-chartered banks recently filed complaints for declaratory judgment and injunctive relief against the Administrator of the Uniform Consumer Credit Code for the State of Colorado, Julie Ann Meade.  The complaints were filed in Colorado federal court and seek to permanently enjoin enforcement actions brought by Meade against the banks’ non-bank partners who, according to the complaints, market and service loans originated by the two banks and which the banks sometimes sells to their partners.

In her enforcement actions, Meade took the position that the two banks are not the “true lenders” of the loans, and that, pursuant to the Second Circuit’s decision in Madden v. Midland Funding, LLC, the banks could not validly assign their ability to export interest rates as state banks under federal law.  Accordingly, the enforcement actions assert that the loans sold to the banks’ partners are subject to Colorado usury law despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act (Section 27).

In their complaints, the banks allege that Meade’s enforcement actions disregard their right under Section 27 to export their respective home state’s interest rates to borrowers in other states and the “valid-when-made” doctrine which provides that a loan that is non-usurious when made cannot later become usurious after assignment. The banks contend that the doctrine is incorporated into Section 27.  Accordingly, the banks argue that Meade’s enforcement actions against their partners for alleged violations of Colorado law are preempted by federal law.

For a fuller discussion of and links to the complaints, see our legal alert.

We have expanded CFPB Monitor. This new blog—Consumer Finance Monitor—includes all the news in the CFPB Monitor. It also features a Federal CFS Monitor for analysis on the many other federal agencies that regulate our industry and a State CFS Monitor,  which covers state agency and attorney general developments. News is segmented by topic and agency on the right. A full compilation is below. Thank you for visiting and we hope you enjoy our new blog.

The Democratic Attorneys General of 16 states and the District of Columbia have filed a motion with the D.C. Circuit seeking to intervene in the PHH appeal.  The states are Connecticut, Delaware, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Mississippi, New Mexico, New York, North Carolina, Oregon, Rhode Island, Vermont, and Washington.

According to the AGs, they had little reason to intervene when PHH originally filed its appeal in June 2015 because the CFPB then had an independent Director and was fully committed to defending the CFPB’s constitutionality.  They assert that the situation has changed due to the Presidential election, with President Trump having expressed strong opposition to Dodd-Frank reforms and media reporting that he is considering the removal of Director Cordray as soon as possible.  More specifically, they claim that the new Administration “has indicated that it may not continue an effective defense of the statutory for-cause protection of the CFPB director” and “[a] significant probability exists that the pending petition for rehearing will be withdrawn, or the case otherwise rendered moot, in a way that directly prejudices the interests of the State Attorneys General and the citizens of the States that they represent.”

The AGs argue that they satisfy the standard for intervention on appeal as of right because:

  • Although a motion to intervene must be filed within 30 days after a petition for review is filed, the motion is timely because the court has discretion to extend the deadline for good cause.  Such cause exists because there was no reason for the AGs to believe until after the presidential election “that their interests would not be represented in full.”
  • They have a legally protected interest in the litigation based on their role in enforcing consumer protection laws.  The AGs claim that because the CFPA requires a state AG to notify the CFPB when the AG is using his or her Section 1042 authority to enforce the CFPA and allows the CFPB to intervene as a party, “[r]emoval of the Director’s independence as a result of this Court’s ruling would…effectively giv[e] the President veto power over the State Attorneys’ General enforcement of the CFPA.”  They also note that because the CFPA directs the CFPB to coordinate regulatory actions with state AGs, the D.C. Circuit’s ruling threatens the AGs’ ability to bring coordinated regulatory actions “free from political influence and interference.”
  • If the CFPB chooses to no longer defend the case, the interests of the state AGs and state citizens will be seriously impaired because by “permitting the immediate termination of the Director at will,” the panel’s decision not only compromises the CFPB’s independence but also “will likely derail pending policy initiatives and enforcement actions and possibly call into question the validity of past initiatives.”
  • Because “[t]here is reason to believe that the new administration will not maintain its defense of the CFPB,” the interests of the state AGs are unlikely to be adequately represented by the executive branch.

The AGs also argue in the alternative that they satisfy the requirements for permissive intervention because, in arguing like the CFPB and United States that the D.C. Circuit’s constitutionality ruling is wrong, they “would have a defense that would share a common question of law with the main action.”

Since the AGs indicate in their motion that they do not intend to file additional briefs unless the D.C. Circuit “orders briefing for the en banc proceedings,” the motion seems unlikely to significantly delay a ruling on the CFPB’s petition for en banc rehearing.  Pursuant to the D.C. Circuit’s order granting PHH’s motion for leave to file a supplemental response to the CFPB’s petition, PHH must file its supplemental response by January 27.  Presumably, the D.C. Circuit will rule on the petition soon thereafter.