The CFPB will hold a public event on June 22, 2017 in Raleigh, N.C. about student loan servicing. The CFPB’s announcement provides no description other than that the event will feature remarks from Director Cordray and North Carolina Attorney General Josh Stein.

The CFPB may be labeling the event a “public event” rather than a “field hearing” because it is not inviting “witnesses” to provide “testimony” as it typically does for field hearings.  However, similar to its field hearings, it is likely the CFPB will use the event as a venue for announcing a new development involving student loan servicing.  Isaac Boltansky of Compass Point has suggested that that the CFPB may announce the release of either an update on the industry’s consumer complaint profile or an updated supervisory highlights report.  It is also possible that the CFPB will discuss the comments it has received in response to the notice it published in the Federal Register in February 2017 regarding its plan to require student loan servicers to report quarterly data on aggregated servicing metrics and borrower outcomes.

Mr. Stein, the North Carolina AG, was among the group of state AGs who sent a letter to U.S. Department of Education Secretary Betsy DeVos in April 2017 criticizing the ED’s withdrawal of various memoranda issued during the Obama Administration regarding federal student loan servicing reforms.  He also recently announced the settlement of a lawsuit involving an alleged student loan debt relief scam.  Mr. Stein might discuss these developments at the CFPB event.

An Illinois federal judge ordered Dish Network to pay the federal government $168 million for violating the FTC’s Telephone Sales Rule (“TSR”).  The judgment is the largest civil penalty ever obtained for a violation of the TSR.  The remainder of the civil penalty was awarded to the states of California, Illinois, North Carolina, and Ohio for violations of the Telephone Consumer Protection Act (“TCPA”) and various state statutes.  In addition to permanently blocking Dish from making calls in violation of the do-not-call laws, the order requires Dish to undergo substantial long-term compliance monitoring.  Among the many costly provisions of the compliance monitoring component of the order, Dish is required to hire a telemarketing-compliance expert to prepare policies and procedures to ensure that Dish and its primary retailers continue to comply with the injunction and the telemarketing laws.

The decision follows a five week bench trial that commenced in January 2016.  A number of factors were central to the district judge’s 475-page opinion.  Significantly, the calls were placed to individuals whose numbers were listed on the National Do Not Call Registry and to individuals who informed Dish that they did not want to receive calls from them.  Notably, the court ruled in favor of the federal government on all of the TSR counts and found more than 66 million TSR violations.  It further chastised Dish for employing call centers without any vetting or meaningful oversight.  The court also admonished Dish for its refusal to take responsibility for the actions of its call centers and retailers.  Such remarks represent a growing trend of courts scrutinizing companies over their monitoring of third-party vendors and their practices.  Just last month, a North Carolina federal judge presiding over a TCPA class action, found Dish vicariously liable for its vendor’s willful and knowing violations of the TCPA and trebled the damages to $1,200 per call—more than $61 million in total.

A Dish spokesman said that Dish “respectfully disagrees” with the Illinois decision and plans to appeal.

Tom Dresslar, the Deputy Commissioner for Policy and Planning at the California Department of Business Oversight, California’s state bank regulator, has retired.  Mr. Dresslar joined the DBO in late 2014 after a long career in California state government and, before that, as the Sacramento Bureau Chief for the Daily Journal, Los Angeles’s daily legal newspaper.  In the consumer financial services world, he is perhaps best known as the leader of the DBO’s 2015 marketplace lending inquiry.  That inquiry resulted not only in the publication of marketplace lending data, but also in an ongoing attempt by the DBO to expand significantly California’s licensing requirements for providing loan-related marketing assistance.  We wish Mr. Dresslar well.

It is not clear who, if anyone, will take on Mr. Dresslar’s role at the Department.  We understand that Jim Sweeney has replaced Mr. Dresslar in his “planning” role, but not in the job of driving future DBO policy.  Given the DBO’s involvement in opposing the OCC’s proposed fintech charter and supporting efforts to streamline state licensing in response to industry concerns, among other things, we will follow this succession issue closely.

The New York Department of Financial Supervision (DFS) has filed a complaint in a New York federal district court to stop the Office of the Comptroller of the Currency (OCC) from implementing its proposal to issue special purpose national bank (SPNB) charters to fintech companies.  The lawsuit follows the filing of a similar action earlier this month by the Conference of State Bank Supervisors (CSBS) in D.C. federal district court.

Like the CSBS lawsuit, the DFS lawsuit challenges the OCC’s proposal on the grounds that:

  • The National Bank Act (NBA) does not allow the OCC to charter non-depository financial services
  • The OCC’s decision to issue SPNB charters to fintech companies, by enabling non-depository charter holders to disregard state law, violates the Tenth Amendment of the U.S. Constitution under which states retain the powers not delegated to the federal government, including the police power to regulate financial services and products delivered within a state

In defending its authority to charter SPNBs that do not take FDIC-insured deposits, the OCC has relied on 12 C.F.R. Section 5.20(e)(1) which allows the OCC to charter a bank that performs a single core banking function—receiving deposits, paying checks, or lending money.  Similar to the CSBS lawsuit, the relief sought by the DFS lawsuit includes a declaration that the OCC lacks authority under the NBA to issue SPNB charters to fintech companies that do not take deposits, a declaration that 12 C.F.R. Section 5.20(e)(1) is null and void because it exceeds the OCC’s authority under the NBA, and an injunction prohibiting the OCC from issuing SPNB charters as proposed.

We have commented that because the OCC has not yet finalized the licensing process for fintech companies seeking an SPNB charter, the CSBS is likely to face a motion to dismiss on grounds that include a lack of ripeness and/or no case or controversy.  The DFS is likely to also face a motion to dismiss on similar grounds.  Perhaps anticipating an argument that it lacks standing to bring the lawsuit because it cannot show actual harm, DFS alleges not only that the OCC proposal would undermine its ability to protect New York consumers but also that the OCC’s actions will “injure DFS in a directly quantifiable way.”  DFS alleges that because its operating expenses are funded by assessments levied on New York-licensed financial institutions, every company that receives an SPNB charter “in place of a New York license to operate in this state deprives DFS of crucial resources that are necessary to fund the agency’s regulatory function.”

This allegation does not seem sufficient to overcome the lack of ripeness and/or no case or controversy problem that the DFS lawsuit presents.  Indeed, the DFS filed its lawsuit after the architect of the SPNB charter proposal, former Comptroller of the Currency Thomas Curry, was replaced by Acting Comptroller Keith Noreika.  Mr. Noreika has not yet taken any public position with respect to the SPNB charter.  It will not be until the next Comptroller of the Currency is nominated by President Trump, confirmed by the Senate, and takes a position on the SPNB charter that we will be able to realistically assess whether the OCC will continue to pursue the SNPB charter proposal, let alone finalize it.

 

 

 

The New York Department of Financial Services (DFS) announced last week that it is migrating the administration of its non-mortgage related licenses to the Nationwide Multistate Licensing System (NMLS), joining more than 60 other state financial services regulatory agencies that already administer their non-mortgage licenses via the NMLS.  Effective July 1, new applicants for a money transmitter license will be able to apply via the NMLS, and existing licensees will be able to transition their licenses to the NMLS.  DFS has indicated that ultimately it will manage all non-depository licenses via the NMLS.

The announcement also expressed support for Vision 2020, the Conference of State Bank Supervisors’ recently launched initiative to modernize state regulation for non-banks.

It is no secret that the DFS is not reluctant to launch its own initiatives if it believes that there is a gap in regulation, examination or oversight – their cybersecurity regulations – so the DFS embracing the NMLS is a positive for the industry as it relates to uniformity of the licensing application process.

 

 

On May 10, the Conference of State Bank Supervisors (CSBS) announced a series of initiatives (branded as Vision 2020) designed to modernize state regulation of non-banks.  The announcement specifically calls out financial technology firms and appears to be an attempt by state regulators to provide an alternative to the special purpose national bank charter the OCC has proposed to make available to financial technology companies (“fintech charter”).

The CSBS claims that by 2020 state regulators will have adopted “an integrated, 50-state licensing and supervisory system, leveraging technology and smart regulatory policy to transform the interaction between industry, regulators and consumers.”  The CSBS further claims that the Vision 2020 initiatives “will transform the licensing process, harmonize supervision, engage fintech companies, assist state banking departments, make it easier for banks to provide services to non-banks, and make supervision more efficient for third parties.”  Lofty goals to say the least, and ones that the financial services industry most certainly will support.  It remains to be seen, however, whether Vision 2020, which actually includes initiatives that are already in use or have been underway for some time, will move us further towards these goals by 2020, or even later.

Among others, Vision 2020 purports to include the following: 1) a redesign of the Nationwide Multistate Licensing System (NMLS); 2) harmonization of multi-state supervision; 3) formation of a fintech industry advisory panel focused on lending and money transmission, with the goal of identifying challenges related to licensing and multi-state regulation and providing feedback on state efforts to modernize the regulatory structure; 4) enhancing the CSBS regulatory agency accreditation program; 5) facilitate banks providing services to non-banks; 6) increasing efforts to address de-risking; and 7) supporting federal legislation facilitating coordinated supervision of bank third party service providers by state and federal regulators.

It bears noting that the redesign of the NMLS (called NMLS 2.0) has been underway (even if not formally) for some time, and long before the OCC first proposed offering a fintech charter.  Moreover, 62 (and counting) state agencies over more than 40 states and territories already use the NMLS for the administration of non-mortgage licenses. While migration by states to the NMLS for administration of its non-mortgage licenses will no doubt continue, the driver for that was not the need to find a way to regulate fintech companies, but rather the need for significant improvements to NMLS’s functionality and utility.

The CSBS has also been focusing on the harmonization of multi-state supervision for many years.  In the mortgage industry, for example, these efforts have included formation of the Multi-State Mortgage Committee, publication of a model mortgage exam manual, publication of model examinations guidelines, and promotion of model state laws.  Despite these efforts, those in the mortgage industry can attest to the fact that harmonization and uniformity is still more aspirational than a reality.

Some have suggested that Vision 2020 is intended to entice fintech companies to elect state regulation over seeking a fintech charter.  Whether or not that is the case, Vision 2020 certainly is an attempt by the CSBS to make the case that state regulators are in the best position to regulate fintech companies and that they are prepared to modernize and harmonize their laws and regulations.  Given the significant harmonization and modernization work that still remains to be done in the mortgage industry after many years of effort, I have significant reservations about the likelihood of “an integrated, 50-state licensing and supervisory system” by 2020.

 

 

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 against Sprint 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”).  We subsequently reported that the CFPB and the DOJ had been directed to state, in separate submissions, their positions with respect to the state AGs’ modified proposal to redirect $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students.

In its Memorandum on the Joint Motion to Intervene to Modify Stipulated Final Judgment and Order, the CFPB stated that the Consent Order should not be modified because Fed. R. Civ. P. 60(a) “does not, in the Bureau’s view, provide grounds for the proposed modification.”  Rule 60(a) permits a court to “correct a clerical mistake or a mistake arising from an oversight or omission” in a judgment, order or other part of the record.

The Bureau also noted in its submission that it had not proposed to apply the unused settlement funds to other equitable relief reasonably related to the allegations set forth in the complaint and therefore the Consent Order provision authorizing alternative uses of that nature was not at issue.  The Bureau concluded its submission by stating that it would direct the Defendant to pay the unused settlement funds to the U.S. Treasury if the Court declined to modify the Consent Order.

In a separate submission titled “Statement of Interest of the United States of America,” the DOJ initially asserted that the motion to intervene should be denied as untimely.  It then proceeded to argue that Rule 60(a) is limited to modifications that implement the result intended by the court when the order was entered, and does not allow changes that alter the original meaning of the judgment.  The DOJ further noted that the state AGs had not identified any clerical error or mistake arising from an omission or oversight.  Instead, the DOJ noted, the provision at issue requiring that unused settlement funds be deposited in the U.S. Treasury as disgorgement “is a standard term that appears in numerous CFPB consent orders.”  Finally, the DOJ asserted that “[n]othing in the Consent Order suggests that NAGTRI or NAAG is an intended beneficiary” and, as the Court itself had noted, the proposed modification “seeks to alter the Consent Order in a fundamental way by redirecting elsewhere” unused settlement funds of $15.14 million that would otherwise be deposited in the U.S. Treasury.

The DOJ concluded its submission with observations relating to the Miscellaneous Receipts Act.  Specifically, the DOJ noted that, “while [its] Statement of Interest is submitted on behalf of the United States as a whole, the CFPB is submitting a separate response opposing modification of the Consent Order.”  As a result, and in view of the fact that it believed there is no ground under Rule 60(a) to permit the proposed modification, the DOJ suggested that the Court need not address the issue of whether the proposed modification would implicate the Miscellaneous Receipts Act.

The DOJ noted, however, that “because the funds at issue have been constructively received by the United States, the Miscellaneous Receipts Act in any case would preclude the CFPB from directing the funds anywhere but the U.S. Treasury, including to NAAG or NAGTRI.”  “If NAAG wishes to fund its program with federal dollars,” the DOJ remarked, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.”

The state AGs and the Defendant may file responsive memoranda by May 24, 2017.  We will continue to monitor developments in this case.

 

 

 

 

Significant changes to West Virginia’s debt collection law will take effect on July 4, 2017.  Senate Bill 536, approved by the state’s governor on April 21, 2017, includes the following amendments:

  • The definition of “debt collector” is amended to exempt attorneys “representing creditors provided that the attorneys are licensed in West Virginia or otherwise authorized to practice law in the State of West Virginia and handling claims and collections in their own name as an employee, partner, member, shareholder or owner of a law firm and not operating a collection agency under the management of a person who is not a licensed attorney.”
  • The time period after which a debt collector may not communicate with a consumer represented by an attorney is increased from 72 hours to “three business days after the debt collector receives written notice from the consumer or his or her attorney that the consumer is represented by an attorney specifically with regard to the subject debt.”  The amendment also requires the notice to “clearly state the attorney’s name, address and telephone number and be sent by certified mail, return receipt requested, to the debt collector’s registered agent, identified by the debt collector at the office of the West Virginia Secretary of State or, if not registered with the West Virginia Secretary of State, then to the debt collector’s principal place of business.”
  • The requirement to include specified disclosures in a written communication with the consumer regarding a debt that is beyond the statute of limitations for filing a legal action for collection is extended to all written communications (instead of only the initial written communication).
  • Creditors and debt collectors are given a right to cure violations.  Before bringing an action for a violation of the debt collection law, a consumer must send a written notice to the creditor or debt collector identifying the alleged violation and factual basis for the alleged violation and give the creditor or debt collector 45 days to make a cure offer.  A cure offer not accepted by the consumer within 20 days is deemed refused or withdrawn.  If a collection lawsuit has already been filed against the consumer and a violation of the debt collection law is asserted as  counterclaim, the creditor or debt collector has 20 days to make a cure offer.  Related issues such as the tolling of the statute of limitations while a cure offer is pending and the admissibility of a cure offer in an action for a violation of the debt collection law are also addressed in the amendment.

 

A D.C. federal district court has rejected a trade group’s attempt to invalidate a November 2016 FTC opinion in which the agency concluded that outbound telemarketing calls made using soundboard technology are subject to the prior written consent requirement for robocalls in the FTC’s Telemarketing Sales Rule (TSR).

The TSR’s robocall written consent requirement applies to “any outbound telephone call that delivers a prerecorded message.”  The FTC’s 2016 opinion revoked a 2009 opinion in which it had concluded that because soundboard technology allows the caller and recipient to have a two-way conversation, such calls were not subject to the TSR’s robocall consent requirement.  (In calls using soundboard technology, the caller can play pre-recorded audio clips in response to the call recipient’s statements and break in to the call when needed to speak directly to the recipient.)  The FTC changed its position in response to an increasing number of consumer complaints that consumers were not receiving appropriate responses to their questions and comments and live operators were not intervening in the calls as well as evidence that callers using soundboard technology were handing more than one call at a time.  In its 2016 opinion, the FTC made the revocation of its 2009 opinion effective on May 12, 2017 so that industry would have time to make the changes necessary to bring itself into compliance.

In reaching its decision, the district court first determined that the FTC’s 2016 opinion was a reviewable “final agency action” because it took a “definitive position that telemarketing calls deployed with soundboard technology are subject to the robocall regulation.”  More specifically, “telemarketing companies must either undertake the expense of coming into compliance with the agency’s new position or risk enforcement action.”

It then rejected the trade group’s claim that the FTC’s action violated the Administrative Procedure Act (APA) because the FTC did not follow the notice and comment process.  According to the court, because the 2009 opinion revoked by the 2016 opinion was clearly an “interpretive rule” rather than a “legislative rule,” the FTC’s “decision to rescind that opinion did not change the fundamental character of the agency’s action and transform an interpretive rule into a legislative one.”  As a result, the FTC was not required to follow the APA notice and comment procedures before issuing the 2016 opinion.

The district court also rejected the trade group’s claim that subjecting soundboard technology to the TSR robocall written consent requirement violated the First Amendment because it constituted an impermissible content-based restriction on the speech of the trade group’s members engaged in charitable fundraising.  According to the trade group, the TSR robocall consent requirement represented a content-based regulation because it applied to calls soliciting donations from new donors but did not apply to calls soliciting donations from prior donors or members of the non-profit on whose behalf the call is made.  The trade group argued that the carve-out for solicitation calls to prior donors and members constituted a content-based restriction on speech because the FTC must look at what is said in the call (i.e. whether the caller requests a first-time donation or a repeated donation) to determine if the written consent requirement applies.

The court concluded that the distinction between existing and other donors was relationship-based and not content-based.  As a result, it was only subject to intermediate scrutiny under the First Amendment.  The court found that the distinction satisfied such scrutiny because it was narrowly tailored to serve a significant governmental interest (namely, “protecting against unwarranted intrusions into a person’s home or pocket”) and left open ample alternative channels of communication (such as media advertising, mailing, and use of live callers instead of pre-recorded messages).

 

The Administrator of the Uniform Consumer Credit Code for the State of Colorado, Julie Ann Meade, has filed motions to dismiss the complaints filed in federal court by two state-chartered banks seeking to permanently enjoin enforcement actions brought by the Administrator against the banks’ nonbank partners.  According to the complaints, these nonbank partners market and service loans originated by the banks, and the banks sometimes sell these loans to their partners.

In the enforcement actions, the Administrator takes the position that the banks are not the “true lender” 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 under federal law.  Accordingly, the enforcement actions assert that the loans sold to the banks’ partners are subject to Colorado usury laws despite the fact that state interest rate limits on state bank loans are preempted by Section 27 of the Federal Deposit Insurance Act.  The banks’ complaints allege that the Administrator’s enforcement actions disregard two fundamental principles of banking law—the banks’ right to “export” their respective home state’s interest rates to borrowers in other states under Section 27, and the “valid-when-made” rule.

In her motions to dismiss, the Administrator makes the following arguments:

  • Under the “well-pleaded complaint rule,” the court has no subject matter jurisdiction over the complaints because they seek to assert a federal preemption defense to the enforcement actions and such a defense does not, by itself, give rise to a federal question.  The Administrator argues that although the U.S. Supreme Court has held that state usury claims against a national bank are completely preempted notwithstanding the well-pleaded complaint rule, complete preemption does not apply to state usury claims against state-chartered banks.
  • The banks lack standing because the enforcement actions are only directed against the non-bank partners and any injury alleged by the banks, such as the actions’ impact on the secondary investor market or loss of revenue, is too attenuated.
  • The complaints fail to state a claim under Rule 12(b)(6) because under relevant federal banking laws and case law (such as Madden), only banks have interest exportation rights and such rights do not preempt state law as applied to non-banks.  In addition, the U.S. Supreme Court cases cited by the banks to support their “valid-when-made” argument are not relevant precedent because they addressed whether promissory notes created in non-usurious loans become unenforceable when used as collateral or discounted in subsequent usurious transactions.  (According to the Administrator, the OCC, in arguing in its amicus brief filed with the Supreme Court in Madden that the “valid-when-made” rule applies to assignees of national bank loans, relied upon a similar “misunderstanding of the holding” in such cases.)
  • The non-banks removed the enforcement actions to federal court and the Administrator has filed remand motions.  Assuming the remand motions are granted, the court should abstain from hearing the complaints under the Younger doctrine because there would be a state proceeding that provides an adequate forum for the banks’ federal claims and the state proceeding involves important state interests.  Alternatively, the court should decline to exercise its jurisdiction under the Declaratory Judgments Act because a declaration is not needed to resolve the legal issues raised in the case as they will necessarily be decided in the enforcement action.

We will continue to follow the banks’ lawsuits and the Administrator’s enforcement actions.