This week, New York Governor Andrew Cuomo issued a press release directing the New York Department of State to issue a new regulation impacting consumer reporting agencies.  The new regulation was adopted on an emergency basis and went into immediate effect in order to protect consumers from identity theft and other potential economic harms that may arise following a data breach.

The regulation requires consumer reporting agencies to:

  • Identify dedicated points of contact for the Division of Consumer Protection to obtain information to assist New York consumers in the event of a data breach;
  • Respond within 10 days to information requests made on behalf of consumers by the Division of Consumer Protection;
  • File a form with certain information to the Division of Consumer Protection, including all fees associated with the purchase or use of products and services marketed as identity theft protection products as well as a listing and description of all business affiliations and contractual relationships with any other entities relating to the provision of any identity theft prevention or mitigation products or services; and
  • In any advertisements or other promotional materials, disclose any and all fees associated with the purchase or use of proprietary products offered to consumers for the prevention of identity theft, including, if offered on a trial basis, any and all fees charged for its purchase or use after the trial period and the requisites of cancellation of such continued use.

The protections appear targeted to address alleged abuses by the consumer reporting industry following the recent Equifax data breach.  Cuomo also announced that the Division of Consumer Protection will be issuing a demand letter to Equifax for information to assess the damage and risk of identity theft to New York State consumers resulting from the data breach.

Cuomo did not address the status of previously announced proposed regulations of the consumer credit reporting agencies by the New York Department of Financial Services.

The Democratic attorneys general of 15 states and the District of Columbia have sent a letter to President Trump in which they express their support for the CFPB’s consumer protection mission and criticize the President’s appointment of Mick Mulvaney as CFPB Acting Director.  The 15 states are California, Connecticut, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia, and Washington.  In particular, the AGs contend that various statements made by Mr. Mulvaney about the CFPB “are categorically false, and should disqualify Mr. Mulvaney from leading the agency, even on an acting basis.”

Since the AGs’ presumably realize that their criticism is unlikely to cause President Trump to reconsider his appointment of Mr. Mulvaney, it would appear that the letter’s primary purpose is “saber rattling” by the AGs.  While providing examples of various enforcement matters on which state AGs have worked jointly with the CFPB, the AGs highlight their own “express statutory authority to enforce federal consumer protection laws, as well as the consumer protection laws of our respective states.”  The AGs state that they “will continue to enforce those laws vigorously regardless of changes to the CFPB’s leadership or agenda.  As attorneys general, we retain broad authority to investigate and prosecute those individuals or companies that deceive, scam, or otherwise harm consumers.”

In addition to various federal consumer protection statutes that give direct enforcement authority to state AGs or regulators, Section 1042 of the Consumer Financial Protection Act authorizes state AGs and regulators to bring civil actions to enforce the provisions of the CFPA, most notably its prohibition of unfair, deceptive or abusive acts or practices.  A state AG or regulator, before filing a lawsuit using his or her Section 1042 authority, must notify the CFPB and Section 1042 allows the CFPB to intervene as a party and remove an action filed in state court to federal court.  (AGs and regulators in several of the states joining in the letter to President Trump have already filed lawsuits using their Section 1042 authority.)

On January 11, 2018, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: Who Will Fill the Void Left Behind by the CFPB?  Click here to register.

The AGs warn that “if incoming CFPB leadership prevents the agency’s professional staff from aggressively pursuing consumer abuse and financial misconduct, we will redouble our efforts at the state level to root out such misconduct and hold those responsible to account.”  They further state that “regardless of the future direction or leadership of the CFPB, we as state attorneys general will vigorously enforce state and federal laws to ensure fairness and deter fraud.”  It is also important to note that CFPB staff, who may feel handcuffed by Mr. Mulvaney, can share information with sympathetic state AGs.

 

In September, our Firm announced that, effective January 1, 2018, it will merge with the law firm of Lindquist & Vennum.  I previously had the pleasure of introducing our future colleague and guest blog post author Amy Lauck, whose practice focuses on prepaid cards, mobile banking, and payment systems.

It is now my pleasure to introduce our future colleague Scott Coleman, who accepted my invitation to write a guest blog post about the bank regulatory provisions of the regulatory reform bipartisan bill that the Senate Banking Committee is scheduled to markup next week. For 25 years, Scott has represented banks and bank holding companies in connection with mergers, stock purchase transactions, branch purchase and assumption transactions, capital raising, corporate restructuring, branching, non-bank acquisitions, changes in bank control and charter conversions. He has also represented organizers seeking to form bank holding-companies, apply for deposit insurance, and charter new depository institutions. Scott has expertise in a wide array of bank regulatory requirements, interstate banking and branching, lending limits, Basel III and capital guidelines.

The Illinois House of Representatives and Senate have voted to override the veto by the state’s Republican governor of Senate Bill 1351, known as the Illinois Student Loan Servicing Rights Act.  The override means that the new law will become effective on December 31, 2018.  The bill was drafted by the office of Lisa Madigan, the Democratic Illinois Attorney General, and had strong Democratic support in the state’s House and Senate.

The Act includes the following key provisions:

  • Licensing. The Act makes it unlawful “for any person to operate as a student loan servicer in Illinois except as authorized by this Act and without first having obtained a license in accordance with this Act.”   For purposes of the Act,  a “student loan” includes federal and private student loans, including loans to refinance a student loan.  The Act contains exclusions for various types of entities, such as federal- or state-chartered banks, and for open-end credit and loans secured by real property or a dwelling.  Credit extended by a postsecondary school is also excluded if the credit term is no longer than the borrower’s school program, the remaining principal balance at the time of the borrower’s graduation or completion of the program is less than $1,500 ,or the borrower failed to graduate or successfully complete the program and had a balance due at the time of disenrollment.  The Act authorizes the Secretary of Financial and Professional Regulation, or his or her designee, to license and supervise servicers and issue implementing regulations.
  • Servicing Practices. Article 5 of the Act, titled “Student Loan Bill of Rights,” prohibits certain servicing practices and imposes various requirements.  The Act authorizes the Attorney General to enforce a violation of Article 5 as an unlawful practice under the Consumer Fraud and Deceptive Business Practices Act.  Article 5 prohibits a servicer from engaging in any unfair or deceptive practice toward any borrower or cosigner or misrepresenting or omitting any material information in connection with servicing a loan.   A servicer is also prohibited from misapplying payments to the loan balance and is required to oversee third parties to ensure their compliance with Article 5 when working on the servicer’s behalf.  In addition, Article 5 contains provisions addressing the following specific areas:
    • Payment processing. Provisions include a requirement for prompt and accurate crediting of payments, a prohibition on charging a penalty if within 90 days of a change in address, a payment is received at a previous address, and a requirement to allow borrowers or cosigners to provide instructions for applying payments.
    • Fees. Unless otherwise provided by federal law, a servicer can only charge late fees that are reasonable and proportional to the cost it incurred related to the late payment and cannot charge a borrower or cosigner for modifying, deferring, forbearing, renewing, extending, or amending a loan.
    • Billing statements. A servicer is prohibited from misrepresenting various items of information in billing statements or information “regarding the $0 bill and advancement of the due date on any billing statement that reflects $0 owed.”
    • Payment histories. A servicer must provide a written payment history to a borrower or cosigner at no cost within 21 days of receiving a request.
    • Specialized assistance. A servicer must “specially designate servicing and collections personnel deemed repayment specialists who have received enhanced training related to repayment options.”  The  Act contains a definition of “federal loan borrower eligible for referral to a repayment specialist” that covers a borrower who has certain specified characteristics such as a borrower who requests information about options to reduce or suspend payments, has missed 2 consecutive payments, or is at least 75 days delinquent.  Servicers must provide specified information to such borrowers and make certain assessments regarding available payment options and are prohibited from implementing any compensation plan that incentivizes a repayment specialist to violate the Act.
    • Disclosures related to discharge and  cancellation.  Servicers must make disclosures information related to the Department of Education’s procedures for asserting a defense to repayment or claiming a discharge to borrowers eligible to assert such a defense or claim a discharge.
    • Income-driven repayment plan certifications.  A servicer must disclose the date a borrower’s income-driven payment plan certification expires and the consequences, including the new repayment amount, of failing to recertify.
    • Information provided to private student loan borrowers. A servicer’s website must provide a description of any alternative repayment plan offered by the servicer for private student loans.  The servicer must establish policies and procedures for evaluating private student loan alternative repayment arrangement requests and such arrangements must consider certain specified information.
    • Cosigner release. A servicer’s website must provide information on the availability and criteria for the release of cosigners on private student loans.
    • Payoff statements.  A servicer’s website must indicate that a borrower can request a payoff statement.  The servicer must provide a statement within 10 days, including information needed for the requester to pay off the loan, and must send a paid-in-full notice within 30 days of a payoff.
    • Transfer of servicing. The Act requires specified information to be provided by a transferor and transferee servicer within a specified time period, prohibits the charging of late fees and interest and furnishing of negative credit information in connection with certain payments made after a transfer of servicing, requires prompt transfer of payments received by a transferor servicer, and requires a transferee servicer to establish a process for a borrower to authorize recurring electronic fund transfers (unless the borrower’s authorization was automatically transferred to the transferee servicer.)
    • Requests for assistance and account dispute resolution. A servicer must implement policies and procedures for dealing effectively and timely with requests for assistance that meet certain specified requirements, including providing information about submitting such requests on its website, responding to such requests within specified time frames, and implementing a process for a requester to escalate such a request.  When a request for assistance contains an account dispute, a servicer must comply with specified dispute resolution procedures that must include a process for a requester to appeal a servicer’s determination.  The Act contains requirements that the appeal process must satisfy.
  •  Ombudsman. The Act creates the position of Student Loan Ombudsman within the Attorney General’s office “to provide timely assistance to student loan borrowers.”  The Ombudsman’s responsibilities include attempting to resolve complaints from student loan borrowers and compiling and analyzing complaint data.

 

 

 

 

The District of Columbia Student Loan Ombudsman Establishment and Servicing Regulation Act of 2016 (Servicing Act) became effective February 18, 2017.  The Servicing Act set an October 1 deadline for the Student Loan Ombudsman to prepare course materials to help borrowers understand their student loans and to draft a separate student loan Bill of Rights.  While the course materials apparently have not yet been released, the D.C. Department of Insurance, Securities, and Banking (DISB) did release its “Student Loan Borrower’s Bill of Rights” on October 11.

The list of specific rights set forth by the DISB is preceded by the following statement:

Student loan borrowers in the District of Columbia deserve a loan repayment process built on fairness, professionalism, and transparency. This bill of rights sets out the basic principles and protections that borrowers can rely on as they work to reduce their student debt. Beyond that, student loan servicers in the District are expected to uphold these key tenets with respect to all student loan borrowers and each student loan they service.

The Bill of Rights contains five articles as follows:

  • Article I: Transparent Pricing and Terms – Rates must be disclosed transparently pursuant to the Truth in  Lending Act requirements, there can be no hidden fees, plain-English terms should be used to describe key terms, and pricing and other key terms should be presented clearly and prominently.
  • Article 2: Receive Non-Abusive Products – There should be no debt traps, no “double-dipping” (i.e. no fees can be charged on the borrower’s outstanding principal when refinancing or modifying a loan with a fixed-fee as the primary financing charge unless there is tangible cost benefit to the borrower), and the design of loan products should be consistent with their use.
  • Article 3: Fair and Responsible Underwriting – Financing should be only offered only with high confidence in the borrower’s ability to repay, loans should be aligned with borrower interests and  be right-sized, and servicers and lenders should engage in responsible credit reporting.
  • Article 4: Fair Collection Practices – Servicers should abide by the spirit of the Fair Debt Collection Practices Act, must  vet and oversee the collection practices of third-party collectors and debt buyers, and must maintain and communicate accurate loan information.
  • Article 5: Quality Customer Service – Servicers should provide a confirmation of receipt of a complaint in writing (within five days when possible), research and resolve every complaint in a timely manner, and take proactive steps to inform borrowers of relevant organizational changes that could affect loan repayment, consumer interaction with the servicer, or the transfer of the borrower’s account.  Borrowers shall not be discriminated against based on race, color, religion, national origin, sex, marital status, age, sexual orientation or identity, or any other protected classification.

Oddly, the Bill of Rights does not appear to be based on student loan servicing principles articulated by other regulators.  Instead, it seems to borrow copiously from principles for the origination, servicing, and collection of small business loans adopted by the Responsible Business Lending Coalition, a network of for-profit and non-profit lenders, brokers and small business advocates.  Accordingly, because it is not based on anything involving student loan servicing, the Bill of Rights may be on shaky legal ground.

The National Council of Higher Education Resources (NCHER), a national trade association representing higher education finance organizations, has raised questions with the DISB regarding the application of some of the requirements of the Bill of Rights to student loan lenders, as opposed to servicers, which arguably goes far beyond the activities authorized by Congress in approving the Servicing Act given that D.C. laws must be approved by Congress, and has likewise raised questions regarding the conflicts between the requirements of the Bill of Rights and the provisions of the Higher Education Act of 1965 (HEA), which arguably preempt those requirements.  In July 2017, NCHER wrote to the Department of Education to express concern about the broad coverage of recently-enacted state laws requiring servicers of student loans to be licensed and the need for covered entities, which can include guaranty agencies, to comply with varying state-specific requirements that, in some cases, are contrary to the HEA.  In its letter, NCHER urged the ED to issue preemption guidance that would clearly state that “federal student loan servicers and guaranty agencies are governed by the Department’s rules and requirements and those of other federal agencies, and preempt state and local laws and actions that purport to regulate the activities of participants in the federal student loan programs, including federal contractors.”

Meanwhile, the DISB continues to accept Student Loan Servicer License applications.  As we have previously reported, the Servicing Act directed the DISB to issue rules implementing its licensing provisions within 180 days of the Act’s effective date.  Although it did not meet that deadline, the DISB started to accept applications and transition filings for the Student Loan Servicer License on the National Mortgage Licensing System on August 10, 2017.  After nearly a month of accepting Student Loan Servicer License applications, the DISB released a Notice of Emergency and Proposed Rulemaking to implement the Act.  The Student Loan Servicer emergency rules were adopted and made effective September 8, 2017.  The emergency rules still have not been published in the D.C. Register, however, meaning that the deadline for comments has yet to be established.  In its notice setting forth the Student Loan Borrower’s Bill of Rights, the DISB did indicate that it began licensing student loan servicers effective September 8, 2017.

 

 

Earlier this month, the Pennsylvania Department of Banking and Securities issued a letter to “all persons engaged in activity regulated or licensed by the [Department] regardless of the means of delivery of such regulated financial service” which it described as intended to “reiterate[] and remind[]” such persons of its existing licensing guidance.  A number of states, including California, have previously undertaken initiatives to enforce licensing requirements applicable to fintech and other companies.  The Pennsylvania letter is a reminder of the need for such companies to make sure that they have all required licenses for the states in which they operate.

In the letter, the Department comments that “recent public and industry discourse regarding the delivery of financial services via ‘Fintech’ companies has clouded the regulatory environment concerning the regulation and oversight of the financial services and companies via existing consumer protection and licensing statutes.  The notion that a company labels itself as ‘Fintech’ because of the means by which it offers or delivers a financial service does not alter the underlying nature of the transaction or service it is offering.”

The Department states that it is “reiterating its previous guidance that a regulated financial service activity offered to consumers of the Commonwealth will be regulated in accordance with the statute governing the offering of that service regardless of the person offering such service or the means by which such service is offered.”  The Department states further that “a person that offers a financial service to the residents of Pennsylvania…regardless of whether they designate themselves as a ‘Fintech’ company or any other type of nomenclature, must be licensed in accordance with the appropriate statute and comply with all the provisions of the law under which they are regulated.  Compliance is required based upon the activity conducted and not the means in which that activity is conducted.”

In the letter, the Department cites to its previous guidance supporting this position.  Such guidance includes a 2008 notice regarding the need for nondepository entities charging more than 6% simple interest per annum on nonmortgage loans made to Pennsylvania residents to be licensed under the Pennsylvania Consumer Discount Company Act regardless of the method used to make the loans.  The Department’s position was upheld by the Pennsylvania Supreme Court.

The Conference of State Bank Supervisors has released a list of 33 companies that will serve as members of its Fintech Industry Advisory Panel.

According to the CSBS, the Advisory Panel’s purpose is “to support state regulators’ increased efforts to engage with financial services companies involved in fintech.”  More specifically, over the next twelve months, Advisory Panel members will participate in at least two in-person meetings with members of the CSBS Emerging Payments and Innovation Task Force and other state banking commissioners “to identify actionable steps for improving state licensing, regulation, and non-depository supervision and for supporting innovation in financial services.”  The Task Force consists of regulators from ten states, including the Superintendent of the New York Department of Financial Services.

The CSBS and the NY DFS have filed separate lawsuits challenging the OCC’s authority to grant special purpose national bank charters to nondepository fintech companies.  The OCC has filed motions to dismiss both lawsuits.

Last Friday, as expected, the FTC announced the launch of a coordinated federal-state law enforcement initiative targeting deceptive student loan debt relief companies.  According to the FTC, 11 states and the District of Columbia are participating in the initiative, which is being called “Operation Game of Loans.”  The participating states are Colorado, Florida, Illinois, Kansas, Maryland, North Carolina, North Dakota, Oregon, Pennsylvania, Texas, and Washington,

The initiative includes seven FTC actions, including an action filed by the FTC earlier this month in Florida federal court, and 29 actions by state AGs.

A recent flurry of FTC enforcement activity targeting companies offering student loan debt relief services suggests such companies could be the subject of the announcement scheduled for tomorrow “of a major coordinated consumer fraud enforcement initiative” between the FTC and state attorneys general.

The announcement was originally scheduled to be made on October 11 at a press conference in Chicago, Illinois featuring Thomas Pahl, Acting Director of the FTC’s Bureau of Consumer Protection, and Illinois Attorney General Lisa Madigan.  However, after postponing the press conference and rescheduling it for October 13, the FTC issued an update stating that the FTC “and attorneys general in 11 states and the District of Columbia will issue an announcement” on October 13 that “will be posted on FTC.gov.”  The FTC also indicated that “[s]enior officials from the FTC and the offices of the state attorneys general will be available for telephone interviews upon request.”

Earlier this month, the FTC filed a complaint in a Florida federal court for a permanent injunction and other equitable relief against Student Debt Doctor LLC and its individual principal alleging that the defendants conducted a deceptive student loan debt relief operation.  At the FTC’s request, the court entered an ex parte order temporarily freezing the company’s assets and appointing a receiver.  The FTC filed at least two other actions in federal courts in September 2017 against companies and individuals also alleged to have conducted deceptive student loan debt relief operations.

An Assistant Illinois Attorney General, in a letter sent to Experian’s CEO on behalf of the Illinois AG and the AGs of 35 other states and the District of Columbia, has asked Experian not to charge any credit freeze-related fees.

In the letter, which references the recent Equifax data breach, the Assistant Illinois AG notes that seven states currently prohibit consumer reporting agencies from charging fees to place a credit freeze and at least two others have introduced legislation that would require CRAs to offer free credit freezes.

In addition to Illinois, the other states joining the letter were: Arkansas, Colorado, Delaware, Florida, Hawaii, Idaho, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, Wisconsin, and Wyoming.