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,
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.
The cities of Chicago and San Francisco and the Massachusetts Attorney General have filed the first enforcement actions against Equifax following the announcement of a data breach affecting an estimated 143 million consumers. Equifax announced the data breach on September 7, 2017, after hackers allegedly exploited a vulnerability in open-source software used by Equifax to create its online consumer dispute portal.
The first suits were filed on September 26th by the Massachusetts Attorney General and San Francisco. Massachusetts’s complaint was filed in Superior Court in Suffolk County and alleges that Equifax knew or should have known about the vulnerability and that hackers were attempting to exploit it, but that Equifax failed to take known and available measures to prevent the breach. Massachusetts asserts claims for violations of the Massachusetts data privacy statute and the Massachusetts Consumer Protection Act prohibiting unfair and deceptive practices based on Equifax’s alleged failure to give timely notice of the breach, failure to safeguard personal information, and failure to take other actions that Equifax was uniquely positioned to provide that would have mitigated damages to Massachusetts consumers. The Massachusetts Attorney General is seeking unspecified civil penalties, disgorgement of profits, restitution, costs and attorney’s fees.
San Francisco’s complaint, filed in the Superior Court of San Francisco, asserts claims under the California Business and Professions Code for unlawful, unfair or fraudulent business practices, alleging that Equifax failed to maintain reasonable security practices and procedures, failed to provide timely notice of the security breach, and failed to provide complete, plain and clear information when notice was provided. The lawsuit seeks restitution for all California consumers, civil penalties up to $2,500 per violation of law, restitution, costs, and a court order requiring Equifax to implement and maintain appropriate security procedures in the future.
Finally, the City of Chicago filed suit on September 28th in Cook County Circuit Court and asserts claims arising under both state law and city ordinance. Specifically, Chicago alleges Equifax violated a local ordinance prohibiting fraudulent, unfair, and deceptive business practices, as well as the Illinois Consumer Fraud and Deceptive Business Practices Act. Chicago’s claims are based on allegations that Equifax failed to give prompt notice of the breach, failed to safeguard personal information, and deceived consumers by requiring them to waive their legal rights in exchange for credit monitoring services and by misrepresenting that the offered credit monitoring was free. Chicago seeks civil monetary penalties in the amount of $10,000 for each day a violation has existed that involves a Chicago resident, restitution, and injunctive relief requiring Equifax to maintain adequate security measures to prevent data breaches.
These are likely just the first of many lawsuits to be filed against Equifax by state and local officials. Further action at both the federal and state level seems all but certain. For example, the Federal Trade Commission and Department of Justice have confirmed they are investigating the breach, and the New York Department of Financial Services confirmed that it recently issued a subpoena to Equifax for more information about the breach. This vigorous and immediate government enforcement effort further supports our position that private class action lawsuits are an unnecessary and inappropriate tool for vindicating any harm caused by the data breach. We will continue to follow these significant cases and update you as events unfold.
Last week, New York Governor Andrew Cuomo issued a press release directing the New York Department of Financial Services (“NYDFS”) to impose new rules on consumer reporting agencies (“CRAs”). The proposed regulation would subject CRAs that issue consumer reports (as defined in a manner similar to the federal Fair Credit Reporting Act) about consumers located in New York to new requirements, including:
- Annual registration with NYDFS – such registration must identify officers and/or directors that are responsible for the CRAs’ compliance with the new regulation;
- Annual, and in some cases quarterly, information reporting requirements to NYDFS;
- NYDFS examinations to be conducted as often as NYDFS considers “necessary”;
- Prohibitions against various activities, such as including inaccurate information in a consumer report or engaging in any unfair, deceptive, abusive, and/or predatory acts or practices;
- Communicating with consumers’ authorized representatives; and
- Compliance with the newly issued NYDFS cybersecurity regulation (see Ballard alert).
Except for requiring CRAs to comply with the NYDFS cybersecurity regulation, it is unclear how the other requirements would address the risks posed by the recent Equifax breach, which was the purported reason for Governor Cuomo’s announcement.
Importantly, by requiring CRAs to register on an annual basis, the proposed regulation would empower NYDFS to suspend or revoke such registration based not only on the bad acts of a CRA itself, but also based on the bad acts of individual members, principals, officers, directors, or controlling persons at the CRA. Without a valid registration, a CRA would be prohibited from providing any consumer reports about consumers located in New York, any companies licensed by NYDFS would be prohibiting from purchasing consumer reports from the CRA, and any companies licensed by NYDFS would be prohibited from furnishing information about consumers located in New York to the CRA.
Although a version of the proposed regulation was released with Governor Cuomo’s announcement, NYDFS is expected to release an official version for public comment in the coming weeks. CRAs and companies that rely on CRAs to provide information about consumers located in New York should strongly consider participating in this rulemaking process.
In an unusual procedural move last week in the RD Legal Funding case about which we have previously blogged, SDNY Judge Loretta Preska (the judge presiding over the CFPB’s lawsuit against RD Legal Funding) has referred to EDPA Judge Anita Brody the question of whether the NFL Concussion Litigation settlement agreement forbids assignments of settlement benefits. Judge Brody has been presiding over the multidistrict litigation for over five years and is currently overseeing the implementation of the settlement. Within the Order, Judge Preska noted “[t]his case presents an unusual situation in which the Defendants’ underlying conduct is intertwined with an MDL class action settlement in another court,” and stated the referral “ensures uniformity of adjudication with a single ruling that will apply not only to the Defendants in this action but also to other potential lenders to class members who might assert the same defense[.]” The referral had been requested by the NFL Concussion Litigation Co-Lead Class Counsel, Christopher Seeger.
In related news, earlier this week Judge Brody granted a request from Seeger to compel several entities to produce (1) a list of all retired NFL players with whom the entities communicated, (2) a list of all retired NFL players with whom the entities entered into agreements related to the NFL Concussion Settlement, and (3) a copy of any agreement related to the settlement. However, Judge Brody denied Seeger’s request to compel production of similar information from RD Legal Funding.
RD Legal Funding, LLC is seeking to dismiss the lawsuit filed against it, two of its affiliates, and their individual principal in February 2017 by the CFPB and the New York Attorney General in a NY federal district court alleging that a litigation settlement advance product offered by the defendants is a disguised usurious loan that is deceptively marketed and abusive. In particular, the complaint alleged that the transactions were falsely marketed as assignments rather than loans and violated New York usury laws. The complaint also alleged that the transactions could not be assignments because the underlying settlements expressly prohibited assignment of claimant recoveries.
In the complaint, both the CFPB and the NY AG asserted deception and abusiveness claims under Sections 1031 and 1042 of Dodd-Frank. In addition to alleged violations of state civil and criminal usury laws (which were the predicate for one of the CFPB’s deception claims), the NY AG’s state law claims included alleged violations of NY’s UDAP statute.
In their motion to dismiss, the defendants argue that the court should strike down the CFPB as a whole (rather than make the Director removable without cause as the D.C. Circuit panel did in PHH) because its structure is unconstitutional. The defendants’ other arguments for dismissal include: (1) the court does not have jurisdiction under the CFPA because the defendants’ transactions did not involve an extension of credit and therefore none of the defendants are “covered persons” under the CFPA, (2) the complaint’s deceptive conduct claims fail to meet the heightened pleading standard for claims based on allegations of fraud, (3) the complaint fails to allege abusive conduct because the defendants’ representations about the nature of the transactions were truthful and consumers were encouraged to seek professional advice before entering into a transaction, and (4) state usury laws do not apply because the transactions were sales.
In addition to defending the constitutionality of the CFPB’s structure in their opposition to the motion to dismiss , the CFPB and NY AG assert that the defendants are “covered persons” under the CFPA because they offered or extended credit through the transactions and that all counts in the complaint state valid claims for relief (for reasons that include the argument that heightened pleading standards for fraud claims do not apply to consumer protection claims under the CFPA or NY law.)
When the complaint was filed, the CFPB and the NY AG issued press releases and prepared remarks in which they referenced transactions entered into by the defendants with former NFL players who were entitled to payments from the settlement of the NFL concussion litigation. Class counsel for the plaintiff settlement class in the concussion litigation filed a letter with the NY district court seeking permission to file a memorandum of law as amicus in support of the CFPB. In their proposed memorandum, they assert that their participation is intended to address the defendants’ “erroneous” position that the settlement agreement in the concussion litigation permits the assignment of the settlement’s monetary awards.
A request to file a memorandum of law as amicus in support of the CFPB was also filed by the American Legal Finance Association (ALFA), which describes itself as a trade association that represents the country’s leading consumer legal funding companies. In its memorandum, ALFA indicates that, due to the possibility that a holding in the case could impact the entire legal funding industry, its participation is intended to “assist the Court with expertise not otherwise represented by the parties” regarding the differences between the pre-settlement legal funding transactions offered by ALFA members and the defendants’ transactions.
The defendants opposed the requests of class counsel and ALFA to participate as amici and while the case docket indicates that the court granted permission to ALFA to file its amicus memorandum, it does not indicate the disposition of class counsel’s request.
On November 21, 2017, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar: Litigation Funding: Risks and Rewards. Click here to register.
The Minnesota Attorney General announced that she has filed a lawsuit in state court against two pension advance companies.
According to the AG’s press release, the companies often solicited borrowers through their own websites or websites of “lead generators” who marketed “pension loans” or “loans that can fit your needs.” The press release states that the transactions required military veterans and senior citizens to assign portions of their monthly pension payments for up to ten years in exchange for much smaller cash amounts (usually less than $5,000) on which the AG claimed the companies typically charged annual percentage rates of 200 percent.
The lawsuit is reported to allege that the companies violated Minnesota lending laws by making loans to Minnesota borrowers without being licensed as a lender and sought to evade Minnesota law by falsely characterizing the transactions as pension “purchase agreements” rather than loans.
In February 2017, the CFPB and the New York Attorney General filed a lawsuit in which they alleged that a litigation settlement advance product offered by the defendant was a usurious loan that was deceptively marketed as an assignment. In August 2015, the CFPB and the New York Department of Financial Services filed a lawsuit against two pension advance companies in which the CFPB and NYDFS made similar allegations regarding the advances made by the companies.
The Minnesota AG’s lawsuit and the CFPB/NY lawsuits not only indicate that pension advance companies and litigation funding companies have become targets of regulatory enforcement actions, but also suggest that merchant cash advance providers and other finance companies whose products are structured as purchases rather than loans could face heightened scrutiny from state and federal regulators.
Regulators from the states of Connecticut, Idaho, Massachusetts, Minnesota and North Dakota (“Participating States”) have entered into a settlement agreement with three affiliated debt collection companies to settle allegations that the companies engaged in collection activities that violated the Fair Debt Collection Practices Act, the FTC Act, and state laws and regulations. The settlement requires the companies to pay $500,000 to be divided equally among the Participating States.
The agreement indicates that the companies were licensed as collection agencies under the laws of the Participating States. It also indicates that the Participating States began a multi-state examination of the companies that was conducted concurrently with a targeted review by the CFPB of one of the companies’ federal student loan debt collection activity. The initial examination review period covered collection activity from February 11, 2013 to February 27, 2015, with consideration also given to activity outside of that period.
In addition to alleging that all of the companies failed to provide access to collection records and submit timely and complete responses to requested information in violation of state statutes and regulations, the agreement alleges that one of the companies engaged in the following unlawful conduct:
- To meet revenue goals, the company’s agents were directed to make calls to telephone numbers that previously had been designated as “do not call” and to mark the accounts with a special identifier to avoid disciplinary action for violations of law and company policy. The agreement alleges that such calls violated various FDCPA provisions, such as those limiting third party calls and calls to a consumer at his or her place of employment. It further alleges that the calls constituted unfair conduct in violation of the Consumer Financial Protection Act’s UDAAP prohibition and also violated specified state statutes and regulations.
- The company failed to credit payments made by check on the day the check was received and instead delayed credit until the check cleared, which typically took four to five days. The agreement alleges that such conduct violated the FDCPA prohibition on collecting amounts that are not expressly authorized by the agreement creating the debt or permitted by law, was an unfair or abusive practice in violation of Section 5 of the FTC Act, was unfair, deceptive, or abusive behavior in violation of the CFPA’s UDAAP prohibition, and violated specified state statutes and regulations.
State regulators do not have authority to directly enforce the FDCPA or Section 5 of the FTC Act. However, many state debt collection statutes (such as the Connecticut statute) require debt collectors to comply with the FDCPA. Under Section 1042 of the CFPA, state regulators are authorized to bring a civil action to enforce the CFPA’s UDAAP prohibition against state-licensed entities.
In addition to making the $500,000 payment, the settlement agreement requires the companies to establish a compliance management system that meets specified standards for oversight, monitoring, training, and audits. It also prohibits the companies from continuing to engage in the alleged unlawful conduct, to reimburse consumers for any interest or fees that resulted from not crediting a payment made by check on the date the check was received, and to comply with specified state requirements.
The Minnesota Supreme Court recently ruled that two for-profit postsecondary education schools had charged usurious interest rates on student loans and could not charge rates greater than 8% without obtaining a lending license.
Minnesota’s general usury law caps interest rates at 8% for written contracts but allows a lender to charge up to 18% on a “consumer credit sale pursuant to an open end credit plan.” In State of Minnesota v. Minnesota School of Business, et al., the Minnesota Attorney General sought to enjoin the schools from making private student loans that typically had interest rates between 12% and 18%, alleging that the loans were subject to the 8% cap. The schools did not pay out money to the student and instead credited the loan amount against the student’s outstanding tuition balance. The credit was not available to the student for any other purpose. The student repaid the loan through monthly payments pursuant to a schedule that had a fixed date by which the entire loan and accrued interest had to be paid in full, and no additional funds were available if the student paid off the loan early.
At issue was whether the loans qualified as a “consumer credit sale pursuant to an open end credit plan” on which Minnesota allowed up to 18 percent interest to be charged. (The decision states that the parties agreed that the loans “were consumer credit sales.”) Although the Supreme Court found that the definition of “open end credit plan” under Minnesota law only incorporated the Truth in Lending Act and Regulation Z definition of “open-end credit plan” in effect in 1971 and not as subsequently amended to expressly require revolving credit, it found that revolving credit was nevertheless an essential part of the 1971 definition.
Reversing the Minnesota Court of Appeals, the Supreme Court concluded that the loans were not made pursuant to an open-end plan. It found that the repayment schedule on the schools’ loans, which provided for a fixed end date, was consistent with a closed-end plan and also observed that the schools had required students to sign a form containing an acknowledgment that a loan was not an “extension of credit under an open-end consumer credit plan.” According to the Supreme Court, the schools had “structured their loans to give themselves the benefit of open-end credit plans, charging interest in excess of 8 percent-without providing their students the benefit of revolving credit.”
Having found that the schools had charged usurious interest rates, the Supreme Court concluded that to charge rates higher than 8 percent on loans that were not made pursuant to an open-end credit plan, the schools needed to obtain a Minnesota lending license.
The opinion states that the schools did not contest “that they were [engaged] in the business of making loans” for purposes of the lending license statute. Thus, it appears that the schools did not attempt to argue that, in extending credit to students to finance tuition, they were not acting as lenders making “loans” subject to Minnesota’s general usury law but instead were acting as sellers of goods or services extending credit to buyers to which the time-price doctrine applies. Sellers making closed-end credit sales should consult with counsel as to how they can avoid the 8 percent rate cap by taking advantage of the time-price doctrine under Minnesota law.
Pennsylvania’s Attorney General, Josh Shapiro, announced last Friday that his office is creating a Consumer Financial Protection Unit “to better protect Pennsylvania consumers from financial scams.”
The announcement indicated that the new Unit “will focus on lenders that prey on seniors, families with students, and military service members, including for-profit colleges and mortgage and student loan servicers.” The new Unit will be led by Nicholas Smyth, a former CFPB enforcement attorney, who was named Assistant Director of the Office of Attorney General’s Bureau of Consumer Protection.