By an overwhelming vote (approximately 1,4270,000 million to 433,000), Colorado voters passed Proposition 111, a ballot initiative that places a 36 percent APR cap on payday loans.  The question presented to voters was:

Shall there be an amendment to the Colorado Revised Statutes concerning limitations on payday lenders, and, in connection therewith, reducing allowable charges on payday loans to an annual percentage rate of no more than thirty-six percent?

As described on the Colorado Secretary of State’s website, Proposition 111 “would restrict the charges on payday loans to a yearly rate of 36 percent and would eliminate all other finance charges and fees associated with payday lending.”

Colorado’s Attorney General has indicated that at least half of all retail lenders closed their doors following the enactment of legislation in 2010 that restricted payday loan fees to an average APR of about 120%.  We suspect that Proposition 111 will have a similar effect, with only the most efficient operators remaining that can rely on sheer volume, sophisticated underwriting, and other product structures available under the Colorado Consumer Credit Code.

According to American Banker, the passage of Proposition 111 makes Colorado the fifth state to impose rate caps on payday loans through a voter referendum.  The other states to have done so are South Dakota, Ohio, Arizona, and Montana.

 

 

It has been reported that, without announcement or warning, the regulations applicable to third-party debt collectors in Massachusetts may have changed.  While the state’s Division of Banks (DOB) and the state’s Attorney General (AG) have traditionally regulated, respectively, third-party debt collectors and first-party creditors, the AG is reported to have changed its website recently to include third-party debt collectors as entities that it regulates.

Such a change could have significant implications because the AG’s rules differ from the DOB’s rules.  For example, the verification requirements under the AG’s rules contain more procedures than the DOB’s rules.  We expect industry trade groups to seek clarification from the DOB and AG.

 

 

 

 

While the pace of the CFPB’s fair lending activities has slowed under its new leadership, significant fair lending developments are occurring elsewhere.  In this week’s podcast, we discuss several of those developments and their broader implications.  Our discussion focuses on New York and Connecticut fair lending developments involving auto finance, a private redlining lawsuit, and the FDIC’s recent report on the use of digital footprint data for credit underwriting.  We conclude with a discussion of a letter recently issued by the Department of Justice to a Congressman regarding the website accessibility standards that companies must follow to be compliant with the Americans with Disabilities Act.

To listen and subscribe to the podcast, click here.

 

The New York Attorney General has filed a lawsuit against a group of commonly owned and managed companies headquartered in New York that include companies operating retail jewelry stores in numerous states under the name Harris Jewelry and another company providing financing for sales made at such stores under the name Consumer Adjustment Corp.  One of such stores is located in New York near a military base, as are the defendants’ stores located in other states.  The stores sell lines of military-themed jewelry and other commemorative items.  The defendants also include individuals alleged to have substantial involvement in the companies’ operations.

The complaint alleges that:

  • Harris Jewelry marks up its merchandise between 600 and 1,000% over the wholesale price (comparing that to the standard industry jewelry markup of 200 to 300%) and the “excess purchase price,” together with warranties and protection plans offered by Consumer Adjustment as well as other fees and charges, constitutes disguised interest which is added to the financing agreement’s stated 14.99% interest rate.
  • Consumer Adjustment finances more than 90% of Harris Jewelry’s sales and the relationship between the companies is never disclosed to consumers.
  • Harris Jewelry “professes to accept credit card or cash sales, sales are almost never made in this way.”  Instead, nearly all sales are financed by Consumer Adjustment.
  • Servicemembers are enticed to enter the defendants’ stores through the use of a purported charitable program in which Harris Jewelry sells teddy bears in military uniforms with promises of charitable donations and once in a store, tells servicemembers that Harris Jewelry can provide them with an opportunity to build or improve their credit scores through the “Harris Program,” the name given to the financing provided by Consumer Adjustment.  Only after a servicemember agrees to participate in the ”Harris Program” does Harris Jewelry begin to discuss its merchandise with the servicemember in an effort to maximize the amount of credit extended to him or her.

The complaint includes additional allegations regarding the defendants’ practice of advertising an item’s retail price with its “per payday” payment amount.  The AG alleges that the two amounts “bear little resemblance to the total amount paid by a consumer at the end of the financing contract” and thereby prevents a servicemember from calculating the total cost of a purchase.

Based on these allegations and other conduct by the defendants alleged in the complaint, the NY AG makes the following claims:

  • The “inflated retail prices and add-ons included in the ‘principal’ amount of the loan” result in an effective rate that violates New York’s civil and criminal usury laws
  • The interest charged by the defendants violates the 36% rate limit New York’s General Military Law
  •  Defendants’ business practices constitute fraudulent conduct under New York’s Executive Law (which defines “fraud” or “fraudulent”  to include any device, scheme, or artifice to defraud and any deception, misrepresentation, concealment, suppression, false pretense, or unconscionable contract provisions.)  Their business practices also constitute common law fraud because they involved intentional fraudulent conduct by the defendants.
  • Defendants’ business practices constitute deceptive acts or practices under New York’s General Business Law (GBL)
  • Defendants’ business practices caused the defendants to be a “credit services business” under the GBL and constitute deceptive acts under the GBL provisions that regulate such  businesses.
  • Defendants’ practices in connection with the purported charitable program violated provisions of New York’s Executive Law relating to for-profit companies that partner with a charity to sell products for the charity’s benefit.

 

 

 

 

As part of an investigation launched earlier this year into allegations of redlining in the Philadelphia area, the Pennsylvania Attorney General Josh Shapiro recently called on mortgage borrowers and home loan applicants in the Philadelphia area to file complaints with his office “if they believe they may have been victims of redlining or experienced irregularities when looking for a mortgage or home loan.”

As examples of “redlining tactics or irregularities,” the AG’s press release lists:

  • Difficulty getting an in-person appointment with a loan officer
  • Not receiving a written pre-approval or quote promised by the loan officer
  • Not receiving return phone calls from a loan officer, and
  • Refusal to provide a loan application after the loan officer learns of the applicant’s race, the racial makeup of the neighborhood where the applicant intends to buy the home, or other information relating to the area’s racial or ethnic characteristics.

The PA AG launched the redlining investigation in response to an investigative article that identified a pattern of discrimination in which African American borrowers were 2.7 times more likely to be denied a home mortgage in Philadelphia than white borrowers.  The article found that white applicants received 10 times as many loans as black applicants, even though they made up similar proportions of the population.  Based on an analysis of publicly available HMDA data, the article concluded that black applicants were denied conventional mortgage loans at significantly higher rates than white applicants in 48 cities, including Philadelphia..

The District of Columbia’s AG as well as the AGs of other states, such as Washington, Illinois, Iowa, and Delaware, are reported to also be conducting redlining investigations.  In 2015, the New York AG entered into a settlement with Evans Bank to resolve a lawsuit filed by the NY AG alleging that the bank had engaged in redlining.  HMDA data was recently used by a Connecticut fair housing advocacy group to support redlining claims in a lawsuit filed in Connecticut federal district court alleging that Liberty Bank had engaged in discriminatory mortgage lending in violation of the federal Fair Housing Act.

We expect state AGs to continue to focus on redlining unless and until the CFPB and/or DOJ re-focus on the issue.

 

 

The New York Court of Appeals has issued an opinion in Expressions Hair Design v. Schneiderman interpreting the state’s law that prohibits merchants from imposing a surcharge on credit card purchases (Section 518 of the state’s General Business Law). The 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. As a result, the court also concluded that the law prohibits a merchant from using a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers.

The opinion was issued in answer to the following question certified to the NY court by the U.S. Court of Appeals for the Second Circuit: “Does a merchant comply with [Section 518] so long as the merchant posts the total dollars-and-cents price charged to credit-card users?” The Second Circuit certified the question following the U.S. Supreme Court’s decision last year in Expressions Hair Design and remand of the case to the Second Circuit. The Supreme Court ruled that Section 518 regulates speech, thereby making it subject to First Amendment scrutiny. The Second Circuit had initially concluded that Section 518 did not violate the First Amendment because it regulates only pricing, not speech. The Supreme Court vacated that decision and because the Second Circuit had not considered whether, as a speech regulation, Section 518 survived First Amendment scrutiny, remanded for the Second Circuit to do so.

The parties in Expressions Hair Design agreed that Section 518 does not prohibit differential pricing in which a merchant charges more to customers who pay by credit card. However, the plaintiffs, five merchants and their owners, sought to use a “single-sticker-price” scheme in which a merchant posts a single cash price for its goods and services but indicates an additional amount is added for credit card customers rather than a “dual-price” scheme in which a merchant posts two different prices—one for credit card customers and one for cash customers. The plaintiffs alleged that by prohibiting their use of a “single-sticker-price” scheme or restricting how they describe the price differential in a “dual-price” scheme, Section 518 violates the First Amendment because it regulates how they communicate their prices. The NY Court of Appeals concluded that although Section 518 does not allow use of a “single-sticker-price” scheme, it does 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 Second Circuit will now need to determine whether Section 518, as interpreted by the NY Court of Appeals, is a valid restriction on commercial speech under Supreme Court precedent. Such precedent is discussed in the Second Circuit’s opinion certifying the Section 518 question to the NY court. The Second Circuit suggested that if Section 518 were to be understood to compel the disclosure of an item’s credit card price alongside its cash price, it might properly be analyzed under Supreme Court precedent that applies a lenient standard of review to laws that require commercial entities to make certain disclosures to prevent consumer deception or confusion.

The New York Attorney General, on October 12, 2018, filed a notice of an appeal to the Second Circuit from Judge Preska’s dismissal on September 12, 2018 of all of the NYAG’s federal and state law claims, and her subsequent September 18 order amending the September 12 order to provide that the NYAG’s claims under Dodd-Frank Section 1042 were dismissed “with prejudice.”  (Section 1042 authorizes state attorneys general to initiate lawsuits based on UDAAP violations.)

On September 14, the CFPB filed an appeal with the Second Circuit from Judge Preska’s June 21, 2018 decision, as amended by her September 12 order, in which she ruled that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional, struck the CFPA (Title X of Dodd-Frank) in its entirety, and dismissed the CFPB from the case.  That was followed on September 25 by RD Legal Funding’s filing of a cross-appeal with the Second Circuit from Judge Preska’s June 21 decision, as subsequently amended, in which Judge Preska had ruled that the NYAG had stated federal and state law claims against RD Legal Funding.  (Although Judge Preska’s various orders resulted in the dismissal of all of the CFPB’s and NYAG’s claims, RD Legal Funding may have filed the cross-appeal to preserve its ability to challenge Judge Preska’s June 21 ruling that the NYAG had stated claims against RD Legal Funding should the Second Circuit conclude that the CFPB’s structure is constitutional or that the structure is unconstitutional but that the proper remedy is to sever the Dodd-Frank for-cause removal provision rather than strike all of Title X.)

The Bureau’s constitutionality is now before two circuits, the Second and Fifth Circuits.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  Also, a petition for certiorari was recently filed in the U.S. Supreme Court by State National Bank of Big Spring which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

 

 

New York has enacted legislation that requires creditors to provide new disclosures when using devices to remotely disable vehicles, commonly referred to as “kill switches.”  The new law took effect immediately upon its signing by Governor Cuomo on October 2, 2018.

First, the law amended New York’s Uniform Commercial Code to add a definition for a “payment assurance device.”  The term is defined as “any device installed in a vehicle that can be used to remotely disable the vehicle.”

Second, the law amended the provisions of New York’s General Business Law dealing with debt collection procedures.  The law amends the list of prohibited practices to add that “no principal creditor” or its agent shall remotely disable a vehicle using a “payment assurance device” to repossess a vehicle “without first having given written notice of the possible remote disabling of a vehicle in the method and timetable agreed upon by the consumer and the creditor in the initial contract for services.”  A “principal creditor” is defined 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 written notice required to be sent before using a “payment assurance device” must:

  • Be mailed by registered or certified mail “to the address at which the debtor will be residing on the expected date of the remote disabling of the vehicle”
  • Be postmarked no later than 10 days “prior to the date on which the principal creditor or his agent obtains the right to remotely disable the vehicle”

Violations of the debt collection prohibitions in New York’s General Business Law are deemed a misdemeanor and the NY Attorney General or the district attorney  of  any county can bring an action to enjoin violations.

 

In August 2018, we reported about significant changes to Connecticut’s licensing laws for consumer financial services providers that were to take effect on October 1, 2018.  In our blog post, we highlighted a new requirement (which appeared to be unprecedented), for sales finance companies to acquire and maintain information about the ethnicity, race, and sex of applicants for motor vehicle retail installment contracts.  A licensee is required to submit the demographic records collected between October 1, 2018 and June 30, 2019 to the Connecticut Banking Department by July 1, 2019.

We observed that the new requirement presented an apparent conflict with the Regulation B proscription against a non-mortgage creditor inquiring about the race, ethnicity or gender of an applicant.  See 12 C.F.R. § 1002.5(b) (“A creditor shall not inquire about the race, color, religion, national origin, or sex of an applicant or any other person in connection with a credit transaction, except as provided in paragraphs (b)(1) [relating to self-testing that complies with Sections 1002.15 of Regulation B] and (b)(2) of this section [authorizing only an optional request to designate a title on an application form such as Ms., Miss, Mr. or Mrs.])

On September 28, the Connecticut Department of Banking issued a memo stating that it has formally asked the CFPB for an official interpretation as to whether the state’s new requirement is consistent with Regulation B.  The Department also indicated that until it receives additional guidance from the CFPB, it “takes a no-action position as the enforcement of the new requirement.”  The Department also stated that it considers the no-action position necessary to provide it with “additional time to undertake a review of the appropriate manner and form for which [the records required to be kept by sales finance companies] shall be acquired, maintained and reported to this Department.”

At the Online Lending Policy Institute’s (OLPI) annual summit in Washington, D.C. earlier this week, the OCC’s recent decision to accept applications from non-depository financial technology firms for a special purpose national bank (SPNB) charter was the focus of considerable discussion.

The summit speakers included Grovetta Gardineer, the Senior Deputy Comptroller for Compliance and Community Affairs at the OCC.  Comments made by attendees indicated that there is substantial interest in the SPNB charter but a reluctance to be the first applicant due to concerns about litigation risk and regulatory requirements.  After the OCC announced its decision to accept applications, the Conference of State Bank Supervisors (CSBS) announced that it would again pursue litigation challenging the OCC’s recent decision.  While the CSBS has not yet filed another lawsuit and there is speculation that it is waiting until the first SPNB charter is granted to do so, a second lawsuit challenging the OCC’s authority to issue SPNB charters was filed last month by the New York Department of Financial Services (DFS) in New York federal district court.  (For an analysis of the DFS lawsuit, click here.)

In her remarks and responses to questions, Ms. Gardineer indicated that, although the Community Reinvestment Act does not apply to non-depository institutions, financial inclusion commitments from the SPNB charter applicant will be required and be subject to scrutiny by the OCC.  Questions directed at Ms. Gardineer raised concerns about the application of bespoke capital, liquidity, and risk management requirements for SPNB charter applicants.  And in response to questions about the charter’s implications for Federal Reserve requirements and access to Federal Reserve services, Ms. Gardineer indicated that the Federal Reserve was considering these issues and that they were the subject of ongoing discussions between the OCC and Federal Reserve.

Paul Watkins, recently named by CFPB Acting Director Mulvaney to serve as Director of the Bureau’s Office of Innovation, was also a speaker at the summit.  Mr. Watkins was formerly in charge of fintech initiatives in the Arizona Attorney General’s office, and Arizona is the first state to create a “regulatory sandbox” that allows new financial technologies and products to be tested in a controlled environment with reduced regulatory risk.  Mr. Watkins discussed the CFPB’s proposal to revise its Trial Disclosure Policy and suggested that the program could be used to address a broad range of issues.  For example, Mr. Watkins noted that a trial disclosure could be used to address challenges faced by creditors in supplying reasons for an adverse action where a decision is made through artificial intelligence or mechanical learning.  Mr. Watkins indicated that the CFPB’s no-action letter policy may also be subject to review by the Bureau.  Taken together, the trial disclosure and no-action letter policies appear to be the CFPB’s tools of choice for advancing its efforts to facilitate innovation that might be unduly limited by regulatory constraints.

A third summit speaker was Maria Vullo, DFS Superintendent.  Ms. Vullo expressed concern regarding the risks that “regulatory sandboxes” and trial disclosures can create for consumers where they are used for products and services actually offered in the marketplace rather than in a mock setting.  She also expressed concern about the potential for alternative data used in credit decisions to serve as a proxy for prohibited characteristics and suggested that an ability to repay standard should apply to all consumer credit and not be limited to mortgages and credit cards.

Finally, Adam Maarec, Of Counsel in Ballard’s D.C. Office, participated in a panel on data, privacy, and fraud prevention policy.  The panelists discussed the California Consumer Privacy Act’s potential application to financial institutions as a result of shortcomings in the exception for information “collected, processed, sold, or disclosed pursuant to” the Gramm-Leach-Bliley Act.  They also discussed ways for companies to manage the tension between data minimization and artificial intelligence/machine learning priorities, the latter of which depends on the accumulation of large data sets to identify insights.