According to a report issued earlier this month, the Maryland Financial Consumer Protection Commission is considering the adoption of the “Model State Consumer and Employee Justice Enforcement Act” developed several years ago by the National Consumer Law Center.

The Model Act proposes a number of “state interventions” aimed at preventing the alleged harms caused by “forced arbitration.”  Based upon the Model Act and the U.S. Consumer Financial Protection Bureau’s since-repealed final arbitration rule, the Commission’s report concludes that “forced arbitration clauses lessen consumer protection.”  It assigns three reasons for this: “(1) many clauses require consumers to pursue what are often small dollar claims individually, without the benefit of a class or group; (2) arbitration can be very expensive due to mandatory fees or requirements to use arbitration in another geographic location; and (3) businesses’ greater familiarity with the process may allow them to prolong the duration of arbitration.”

Fortunately, based on strong opposition by the Maryland Bankers Association and other industry groups, the Commission stopped short of recommending adoption of the model act.  Instead, it has recommended “further study to identify remedies which may serve to establish increased fairness for consumers.”  That is a good thing for consumers – because individual arbitration has been proven to be cheaper, faster and more beneficial to consumers than class action litigation.

The CFPB’s own statistics prove that arbitration is a far superior choice for consumers (though not for the lawyers who represent them in class actions).  After exhaustively studying arbitration and class actions for several years, the CFPB came to these empirical conclusions:

  • Arbitration was found to be faster and less costly than class action litigation.  Disputes were resolved in two to five months instead of two years or more, and consumers paid just $200 in fees or, in many cases, nothing.  By contrast, it cost consumers $400 just to file a complaint in federal court.
  • The average consumer recovery in arbitration was nearly $5,400.  But the average class member received a mere $32 (166 times less).  Most class members did not even get that paltry sum.  According to the CFPB, 87% of class members got no benefits at all.  The lawyers for the class, by contrast, made a whopping $424,495,451 in attorneys’ fees.
  • Moreover, disputes actually get resolved in arbitration.  None of the 562 class actions studied by the CFPB went to trial.  By contrast, of 341 cases resolved by arbitrator, in-person hearings were held in 34% of the cases, and arbitrator reached merits of the claims in 146 cases.  Arbitration produces results, not foot-dragging.

The Commission’s report also suggests that companies win more often in arbitration than consumers.  Not so.  A 2009 Northwestern University School of Law study of more than 300 arbitrations showed that consumers won relief in 53.3% of the cases and recovered their attorneys’ fees in 63.1% of them.  And, a 2005 Harris Interactive poll of 609 consumers who participated in arbitrations found that arbitration was seen by most of the participants as faster, simpler and cheaper than going to court, and two-thirds of them said they would be likely to use arbitration again.

Facts such as these lead to one inexorable conclusion: consumers will be harmed if arbitration is replaced by class action litigation as a way to resolve disputes.  A study by the U.S. Chamber of Commerce showed that 90% of the claims that consumers bring against financial services companies are not even suitable for class action treatment because they involve unique, individualized facts that do not apply to others.  The Commission should consider how these consumers will resolve their disputes if arbitration is eliminated.

The Commission’s report also notes that relatively few consumers avail themselves of arbitration when they have disputes with companies.  But that is due, in large part, to the fact that consumers have not been educated in any systematic fashion on the benefits that arbitration has to offer.  Unfortunately, the CFPB did not take the opportunity to do so.  But consumers who experience arbitration like it.  We strongly suggest that the Commission consider the implementation of a consumer arbitration education program as one of the “remedies which may serve to establish increased fairness for consumers.”

The CFPB and New York Attorney General have agreed to a settlement with Sterling Jewelers Inc. of a lawsuit they filed jointly in a New York federal district court alleging federal and state law violations in connection with credit cards issued by Sterling that could only be used to finance purchases made in the company’s stores.  The proposed Stipulated Final Order and Judgment, which requires Sterling to pay a $10 million civil money penalty to the CFPB and a $1 million civil money penalty to the State of New York, represents the second settlement of an enforcement matter announced by the CFPB under Kathy Kraninger’s leadership as CFPB Director.  (In addition to a civil money penalty, the other settlement required the payment of consumer restitution.)

The complaint contains three counts asserted by the CFPB and NYAG alleging unfair or deceptive acts or practices in violation of the Consumer Financial Protection Act based on the following alleged conduct by Sterling:

  • Representing to consumers that they were completing a survey, enrolling in a rewards program, or checking on the amount of credit for which the consumer would qualify when, in fact, either the consumer or a Sterling employee was completing a credit application for the consumer without his or her knowledge or consent
  • Misrepresenting financing terms to consumers, including interest rates, monthly payment amounts, and eligibility for promotional financing
  • Enrolling consumers for payment protection plan insurance (PPPI) without informing them that they were being enrolled or misleading them about what they were signing up for

This alleged conduct is also the basis of two counts alleging state law violations asserted only by the NYAG.

In another count asserted only by the CFPB, Sterling is alleged to have violated TILA and Regulation Z by issuing credit cards to consumers without their knowledge or consent and not in response to an oral or written request for the card.  This alleged TILA/Reg Z violation is also the basis for a count alleging a state law violation asserted only by the NYAG as well as a count alleging a CFPA violation asserted by both the CFPB and NYAG.

In addition to requiring payment of the civil money penalties, the settlement prohibits Sterling from continuing to engage in the alleged unlawful practices and to “maintain policies and procedures related to sales of credit cards and any related add-on products, such as [PPPI], that are reasonably designed to ensure consumer consent is obtained before any such product is sold or issued to a consumer.  Such policies and procedures must include provisions for capturing and retaining consumer signatures and other evidence of consent for such products and services.”  By not requiring consumer restitution, the settlement differs from consent orders entered into by the CFPB under the leadership of former Director Cordray that required restitution by companies that had allegedly enrolled consumers in a product without their consent.

A Minnesota federal district court recently ruled that lead generators for a payday lender could be liable for punitive damages in a class action filed on behalf of all Minnesota residents who used the lender’s website to obtain a payday loan during a specified time period.  An important takeaway from the decision is that a company receiving a letter from a regulator or state attorney general that asserts the company’s conduct violates or may violate state law should consult with outside counsel as to the applicability of such law and whether a response is required or would be beneficial.

The amended complaint names a payday lender and two lead generators as defendants and includes claims for violating Minnesota’s payday lending statute, Consumer Fraud Act, and Uniform Deceptive Trade Practices Act.  Under Minnesota law, a plaintiff may not seek punitive damages in its initial complaint but must move to amend the complaint to add a punitive damages claim.  State law provides that punitive damages are allowed in civil actions “only upon clear and convincing evidence that the acts of the defendants show deliberate disregard for the rights or safety of others.”

In support of their motion seeking leave to amend their complaint to add a punitive damages claim, the named plaintiffs relied on the following letters sent to the defendants by the Minnesota Attorney General’s office:

  • An initial letter stating that Minnesota laws regulating payday loans had been amended to clarify that such laws apply to online lenders when lending to Minnesota residents and to make clear that such laws apply to online lead generators that “arrange for” payday loans to Minnesota residents.”  The letter informed the defendants that, as a result, such laws applied to them when they arranged for payday loans extended to Minnesota residents.
  • A second letter sent two years later informing the defendants that the AG’s office had been contacted by a Minnesota resident regarding a loan she received through the defendants and that claimed she had been charged more interest on the law than permitted by Minnesota law.  The letter informed the defendants that the AG had not received a response to the first letter.
  • A third letter sent a month later following up on the second letter and requesting a response, followed by a fourth letter sent a few weeks later also following up on the second letter and requesting a response.

The district court granted plaintiffs leave to amend, finding that the court record contained “clear and convincing prima facie evidence…that Defendants know that its lead-generating activities in Minnesota with unlicensed payday lenders were harming the rights of Minnesota Plaintiffs, and that Defendants continued to engage in that conduct despite that knowledge.”  The court also ruled that for purposes of the plaintiffs’ motion, there was clear and convincing evidence that the three defendants were “sufficiently indistinguishable from each other so that a claim for punitive damages would apply to all three Defendants.”  The court found that the defendants’ receipt of the letters was “clear and convincing evidence that Defendants ‘knew or should have known’ that their conduct violated Minnesota law.”  It also found that evidence showing that despite receiving the AG’s letters, the defendants did not make any changes and “continued to engage in lead-generating activities in Minnesota with unlicensed payday lenders,” was “clear and convincing evidence that shows that Defendants acted with the “requisite disregard for the safety” of Plaintiffs.”

The court rejected the defendants’ argument that they could not be held liable for punitive damages because they had acted in good-faith when not acknowledging the AG’s letters.  In support of that argument, the defendants pointed to a Minnesota Supreme Court case that held punitive damages under the UCC were not recoverable where there was a split of authority regarding how the UCC provision at issue should be interpreted.  The district court found that case “clearly distinguishable from the present case because it involved a split in authority between multiple jurisdictions regarding the interpretation of a statute.  While this jurisdiction has not previously interpreted the applicability of [Minnesota’s payday loan laws] to lead-generators, neither has any other jurisdiction.  Thus there is no split in authority for the Defendants to rely on in good faith and [the case cited] does not apply to the present case.  Instead, only Defendants interpret [Minnesota’s payday loan laws] differently and therefore their argument fails.”

Also rejected by the court was the defendants’ argument that there was “an innocent and equally viable explanation for their decision not to respond or take other actions in response to the [AG’s] letters.”  More specifically, the defendants claimed that their decision “was based on their good faith belief and reliance on their own unilateral company policy that that they were not subject to the jurisdiction of the Minnesota Attorney General or the Minnesota payday lending laws because their company policy only required them to respond to the State of Nevada.”

The court found that the defendants’ evidence did not show either that there was an equally viable innocent explanation for their failure to respond or change their conduct after receiving the letters or that they had acted in good faith reliance on the advice of legal counsel.  The court pointed to evidence in the record indicating that the defendants were involved in lawsuits with states other than Nevada, some of which had resulted in consent judgments.  According to the court, that evidence “clearly show[ed] that Defendants were aware that they were in fact subject to the laws of states other than Nevada despite their unilateral, internal company policy.”

 

 

 

Having declared the CFPB eviscerated by President Trump, Colorado’s newly elected Democratic Attorney General, Phil Weiser, is expected to take an active approach to consumer protection.  In this week’s podcast, Ballard Spahr Partner Matt Morr, based in the firm’s Denver office, discusses Mr. Weiser’s background, key appointees, and likely areas of focus.

To listen to the podcast, click here.

 

 

A coalition of 14 state Attorneys General and the D.C. Attorney General have filed an amicus brief with the U.S. Court of Appeals for the Fourth Circuit in Williams v. Big Picture Loans in which a tribal lender and its tribal service provider have appealed from the district court’s denial of their motion to dismiss the complaint filed by consumers who alleged that the interest rate charged by the lender violated Virginia law.

The defendants argued that the complaint should be dismissed because, as “arms of the tribe,” the lawsuit was barred by sovereign immunity.   In denying the motion to dismiss, the district court ruled that the defendants had the burden of proving that they were shielded by sovereign immunity and had not met that burden.

In their amicus brief, the Attorneys General argue that the district court correctly placed on the defendants the burden of providing their entitlement to sovereign immunity (rather than on the plaintiffs to negate a claim of sovereign immunity).  They also argue that in determining whether the defendants acted as “arms of the tribe,” it was proper for the district court to look beyond the defendants’ official actions (meaning their legal or organizational relationship to the tribe) and consider their practical operation in relation to the tribe.

 

On December 28, 2018, New York Governor Cuomo signed into law amendments to the state’s General Business Law (GBL) that address the collection of family member debts.  The amendments made by Senate Bill 3491A become effective March 29, 2019.

While the legislative history indicates that the amendments are intended to address the collection of a deceased family member’s debts, they are drafted more broadly to prohibit “principal creditors and debt collection agencies” from: (a) making any representation that a person is required to pay the debt of a family member in a way that contravenes the FDCPA; and (b) making any misrepresentation about the family member’s obligation to pay such debts.

The GBL defines a “principal creditor” as “any person, firm, corporation or organization to whom a consumer claim is owed, due or asserted to be due or owed, or any assignee for value of said person, firm, corporation or organization.”  The amendments define a “debt collection agency” as “a person, firm or corporation engaged in business, the principal purpose of which is to regularly collect or attempt to collect debts: (A) owed or due or asserted to be owed or due to another; or (B) obtained by, or assigned to, such person, firm or corporation, that are in default when obtained or acquired by such person, firm or corporation.” 

In 2011, the FTC issued its final Statement of Policy Regarding Communications in Connection With the Collection of Decedents’ Debts to provide guidance on how it would enforce the FDCPA and Section 5 of the FTC Act in connection with the collection of debts of deceased debtors.  The policy statement provides that the FTC will not initiate an enforcement action under the FDCPA against a debt collector who (1) communicates for the purpose of collecting a decedent’s debts with a person who has authority to pay such debts from the assets of the decedent’s estate even if that person does not fall within the FDCPA’s definition of “consumer,” or (2) includes in location communications a statement that it is seeking to identify a person with authority to pay the decedent’s “outstanding bills” from the decedent’s estate.  It also contains a caution that, depending on the circumstances, contacting survivors about a debt too soon after the debtor’s death may violate the FDCPA prohibition against contacting consumers at an “unusual time” or at a time “inconvenient to the consumer.”

 

 

The NY Attorney General and the plaintiffs in Expressions Hair Design v. Schneiderman have filed a joint motion with the U.S. Court of Appeals for the Second Circuit asking the court to vacate the district court’s final judgment in the case, remand with an order to the district court to dismiss the complaint with prejudice, and dismiss the plaintiffs’ appeal as moot.

The complaint in Expressions Hair Design was filed by five merchants and their principals who alleged that New York’s “no credit card surcharge” law was an unconstitutional restriction on speech because it did not allow merchants to tell customers that they are paying more for using credit than for using cash or another payment method.  The district court had entered a judgment declaring the New York law unconstitutional and enjoining its enforcement against the plaintiffs but the Second Circuit reversed, ruling that the law did not implicate the First Amendment because it regulated a pricing practice, not speech.

The U.S. Supreme Court granted the plaintiffs’ petition for certiorari and ruled that the New York law did regulate speech, thereby making it subject to First Amendment scrutiny.  Because the Second Circuit had not considered whether, as a speech regulation, the law survived such scrutiny, the Supreme Court vacated the Second Circuit’s decision and remanded for the Second Circuit to consider that issue.

On remand, the Second Circuit certified to the New York Court of Appeals the question whether a merchant would comply with the New York law if it posted the total dollars-and-cents price charged to credit card customers (rather than posting a single cash price and indicating that an additional amount is added for credit card customers).  The New York court concluded that if a merchant posts its prices and charges lower prices to cash customers, it must post the price charged to credit card customers.  However, while concluding that the law did not allow a merchant to post a single cash price, the New York court determined that it did not prohibit a merchant from using the word “surcharge” or any other words to communicate to customers that the credit card price is higher than the cash price.

The next step in the case would have been for the Second Circuit to decide whether the New York law, as interpreted by the state’s Court of Appeals, was a valid restriction on commercial speech under U.S. Supreme Court precedent.  According to the NY Attorney General’s affirmations accompanying the joint motion, while further briefing was pending, the plaintiffs informed the NY Attorney General that they no longer wished to pursue any of their claims and wanted to dismiss their complaint, with prejudice.  The parties assert that the plaintiffs’ decision to withdraw their complaint moots the case.  Accordingly, they ask the Second Circuit to vacate the district court’s final judgment, instruct the district court to dismiss the complaint with prejudice, and dismiss the plaintiff’s appeal as moot.

The NY Attorney General’s affirmations also state that another factor weighing in favor of vacatur is that the plaintiffs’ decision to withdraw their complaint “should not leave intact a final judgment that declares a duly enacted state statute unconstitutional and enjoins the State and several District Attorneys from enforcing the statute against plaintiffs.”  As this statement suggests, once the district court’s decision is vacated, the NY Attorney General would be free to enforce the New York law against the plaintiffs–and other merchants–as interpreted by the New York Court of Appeals.  In other words, while a New York merchant can lawfully charge more to credit card than cash customers and label the differential amount a “surcharge,” the merchant would violate New York law if it only posted the cash price without also posting the higher price charged to credit card customers.

 

In a January 4 posting, Colorado’s outgoing Attorney General, Cynthia Coffman, issued an administrator’s opinion as to whether Section 5-2-214 of the Uniform Consumer Credit Code prohibits supervised lenders from utilizing post-dated checks, debit authorizations, and other forms of up-front payment authorization, as security for payment of “alternate charge” consumer installment loans. Alternate charge consumer loans under the UCCC allow supervised lenders to charge, among other things, acquisition charges and monthly installment handling charges, when the amount financed is not more than one thousand dollars. The AG expressed that holding a post-dated check –even if that check corresponds to a future regularly-scheduled installment payment — would be strictly prohibited. The AG opined, on the other hand, that the use of up-front payment authorizations — if limited to regularly scheduled payments and revocable by the consumer — would be permissible.

In analyzing the issue, the AG considered whether post-dated checks and up-front payment authorizations would constitute prohibited “collateral” – a term undefined by the UCCC – under C.R.S. § 5-2-214(7). The AG supplemented the UCCC with definitions of “collateral” and “security interest” as drawn from the Uniform Commercial Code. Doing so, the AG concluded that post-dated checks would constitute collateral under all circumstances while up-front payment authorizations would not constitute collateral under certain circumstances. The AG further bolstered her analysis by considering various courts’ interpretation of the federal Truth in Lending Act’s disclosure requirements, as pertaining to post-dated checks and certain debit authorizations.

Supervised lenders should take heed of the administrator’s opinion, and how it may impact the making and administration of alternate charge consumer installment loans under the watchful eye of Colorado’s new Attorney General, Phil Weiser. In particular, those supervised lenders who routinely utilize debit authorizations should be mindful that their written loan agreements expressly state that the consumer may revoke a debit authorization at any time, and should instruct their officers not to utilize debit authorizations to make a debit from the consumer’s bank account should the consumer fail to make a regularly-scheduled installment payment.

In November 2018, the U.S. Supreme Court heard oral argument in the case of Timbs v. Indiana, which presents the issue of whether the prohibition on excessive fines in the Eighth Amendment of the U.S. Constitution is incorporated against the States under the Fourteenth Amendment.   Although it involves a civil asset forfeiture arising from the petitioner’s criminal conviction, the case could have significant implications for consumer financial services companies facing fines and penalties sought by State attorneys general and regulators.

In this week’s podcast, we review the litigation and lower court decisions and discuss how the case could provide companies with a constitutional basis for challenging such fines and penalties as State attorneys general and regulators ramp up their supervisory and enforcement activity to fill the void created by a less aggressive CFPB.

To listen to the podcast, click here.

 

 

 

The OCC has filed a motion to dismiss the lawsuit filed in D.C. federal district court in October 2018 by the Conference of State Bank Supervisors (CSBS) to stop the OCC from issuing special purpose national bank (SPNB) charters to fintech companies.

The CSBS had previously filed a lawsuit challenging the OCC’s authority to grant SPNB charters to fintech companies at a time when the OCC had not yet decided whether it would move forward on its charter proposal.  That lawsuit was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.  The new lawsuit was filed in response to the OCC’s July 2018 announcement that it would begin accepting applications for SPNB charters from fintech companies.

In its brief, the OCC makes the following principal arguments in favor of dismissal:

  • CSBS cannot have standing to sue until the OCC approves an application for an SPNB charter because only then could a CSBS member suffer an injury in fact.
  • Because the OCC “remains several stages away from actually granting an SPNB Charter” and “has not finalized its decision to issue an SPNB Charter to a particular applicant,” the matter remains both constitutionally and prudentially unripe for judicial review.
  • Because the OCC’s July 2018 announcement was not a final agency action within the meaning of the Administrative Procedure Act, it is not subject to judicial review under the APA’s arbitrary and capricious standard.
  • The OCC’s July 2018 announcement does not represent a preemption determination to which notice and comment procedures apply “because the question of whether granting a proposed national bank will result in the preemption of any particular state consumer financial law is not relevant to the chartering process.”  (According to the OCC, in deciding whether to grant a charter, its focus is on ”the proposed institution’s prospects and whether it will operate in a safe and sound manner.”)
  • The OCC’s rule (12 C.F.R. Section 5.20(e)(1)) interpreting the term “business of banking” in the National Bank Act by reference to three core banking functions—receiving deposits, paying checks, or lending money—represents a reasonable interpretation of such term and supports treating any one of such functions as the required core activity for purposes of the OCC’s chartering authority.  Nothing in the NBA identifies deposit-taking as an indispensable function for a national bank to be engaged in the “business of banking.”

In September 2018, the New York Department of Financial Services (DFS) filed a second in a New York federal district court to block the OCC’s issuance of SPNB charters.  Like the first CSBS lawsuit, the first DFS lawsuit challenging the OCC’s authority to grant SPNB charters was dismissed for failing to establish an injury in fact necessary for Article III standing and for lacking ripeness for judicial review.

]Last month, the OCC submitted a letter to the court indicating that it intends to file a motion to dismiss the DFS lawsuit. The grounds for the motion set forth in the OCC’s letter substantially mirror its arguments for dismissal above in the CSBS lawsuit.  The DFS also submitted a letter to the court in which, in addition to outlining the arguments it would make in opposing an OCC motion to dismiss, it indicated that it intends to file a motion for a preliminary injunction to prevent the OCC from issuing any SPNB charters while the lawsuit is pending.

The next step in the case is likely to be the entry of an order by the court setting a motion schedule.  However, based on a docket entry indicating that a standing order was entered on December 27 requiring the U.S. Attorney’s Office to notify the court immediately upon the restoration of DOJ funding, it appears any further developments will not occur until the partial government shutdown ends.