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FinCEN, federal banking agencies provide exemption from customer identification program requirements for premium finance loans
On September 27, the Financial Crimes Enforcement Network (FinCEN), Federal Reserve Board, FDIC, NCUA, and OCC (together, the agencies) collectively issued an interagency order announcing an exemption from the requirements of the customer identification program (CIP) rules for premium finance loans extended by banks to commercial customers. The exemption, which is effective immediately, will facilitate short-term financing to business to aid in the purchase of property and casualty insurance policies. The order states that FinCEN believes these types of loans present a low risk for money laundering due to the “purpose for which the loans are extended and the limitations on the ability of a customer to use such funds for any other purpose.” However, banks engaged in premium finance lending are still required to comply with all other regulatory requirements implementing the Bank Secrecy Act (BSA), including filing suspicious activity reports. The federal banking agencies further determined that the order granting this exemption is consistent with both the purposes of the BSA and safe and sound banking practices. (See also Federal Reserve Board SR 18-6, FDIC FIL-52-2018, and OCC Bulletin 2018-35.)
Pennsylvania appeals court upholds broad standard for “deception” under state consumer protection law
On September 12, the Superior Court of Pennsylvania held that Pennsylvania’s Uniform Trade Practices and Consumer Protection Law (UTPCPL) imposes strict liability on businesses who deceive consumers and does not require proof of fraud or negligent misrepresentation to state a claim. The plaintiffs brought common law claims of fraudulent and negligent misrepresentation and a statutory claim under the UTPCPL against insurance companies related to the sale of various insurance products. The common law claims of fraudulent and negligent misrepresentation went to a jury, which returned verdicts on both counts in favor of the insurance companies. The trial judge, however, found that the insurance companies violated the “deceptive” provision of the UTPCPL and awarded damages to the consumers. The insurance companies appealed, arguing that (i) the jury verdict on the common law claims required the court to dismiss the UTPCPL claim, and (ii) challenging the judge’s damages award calculation.
The appellate court affirmed the trial court’s determination that the defendants acted deceptively under the UTPCPL. The insurance companies argued that the UTPCPL claim was barred by the doctrines of collateral estoppel and res judicata based on the jury’s determination that the defendants had not committed a negligent misrepresentation. The appellate court, however, explained that these doctrines do not apply because the UTPCPL raises distinct issues. The court rejected the argument that the consumer must prove common law negligent misrepresentation to bring a claim under the deceptive prong of the UTPCPL. The court concluded that “any deceptive conduct, ‘which creates a likelihood of confusion or of misunderstanding,’” is actionable under the UTPCPL “whether committed intentionally (as in a fraudulent misrepresentation), carelessly (as in a negligent misrepresentation), or with the upmost care (as in strict liability).” The court also upheld the trial court’s damages determination under the UTPCPL, finding that the judge’s calculation was appropriate and consistent with the statute.
On July 18, the New York Department of Financial Services (NYDFS) issued a final rule requiring licensed insurers that offer life insurance and annuity products to New York consumers to establish standards and procedures to ensure that the financial objectives of the consumer are addressed at the time of the transaction and financial exploitation is prevented. According to the NYDFS, the rule amends the state’s current suitability regulation and “provides for a best interest standard of care for all sales of life insurance and annuity products.” The rule provides that when making a recommendation to consumers with respect to policies, the producer must “appropriately address the insurance needs and financial objectives of the consumer at the time of the transaction.” According to NYDFS Superintendent Maria Vullo, “financial compensation or incentives may not influence the recommendation.”
On March 19, the Idaho governor signed HB 521, which updates a section of the Idaho Code pertaining to the “Idaho Motor Vehicle Service Contract Act” (the Act) to, among other things, “provide for state of Idaho regulation of motor vehicle service contracts.” HB 521 also modifies certain provisions surrounding motor vehicle service contracts by (i) clarifying the definition of a service contract; (ii) providing for service contract reimbursement policy requirements; (iii) setting forth rules associated with the sale of service contracts; (iv) specifying recordkeeping requirements; (v) providing for licensing; (vi) stipulating violation penalties; and (vii) noting that the legislation does not preclude a cause of action under the Idaho Consumer Protection Act. Furthermore, HB 521 notes that the “Idaho Insurance Guaranty Association Act shall not apply to any motor vehicle service contract, mechanical breakdown insurance or motor vehicle service contract liability insurance policy.” The Act is effective July 1.
On February 21, the U.S. Court of Appeals for the 10th Circuit affirmed a district court’s decision that under Colorado law, an insurance company had no duty to indemnify and defend its insured against TCPA claims seeking statutory damages and injunctive relief. According to the appellate opinion, the FTC and the states of California, Illinois, North Carolina, and Ohio sued a satellite television company for violations of the TCPA, Telemarking Sales Rule (TSR), and various state laws for telephone calls made to numbers on the National Do Not Call Registry (FTC lawsuit). The FTC lawsuit sought statutory damages of up to $1,500 per alleged violation and injunctive relief. The defendant requested that its insurer defend and indemnify it for the claims pursuant to existing policies. The insurance company filed a complaint for declaratory judgment, seeking a declaration that it need not defend or indemnify the company in the FTC lawsuit. The district court determined that there was no coverage for several reasons, including: (i) that the statutory TCPA damages were a “penalty,” rendering them uninsurable under Colorado law; and (ii) that the injunctive relief sought did not qualify as damages under the policies’ definition. The 10th Circuit Court of Appeals affirmed both holdings, concluding that no coverage existed.
District Court Denies Summary Judgement to Both Parties, Cites Issue of Material Fact Concerning Prepopulated Electronic Signature
On October 18, a federal judge in the U.S. District Court for the District of South Carolina denied summary judgment to both parties because there was a genuine issue of material fact regarding whether a “meaningful offer” of underinsured motorist coverage (UIM) was made. The insured’s electronic signature on the UIM form would indicate that the defendant made a “meaningful offer” of UIM coverage, as required under South Carolina law, and such coverage was rejected. The dispute however, in this case was about whether the electronic signature was prepopulated by the defendant.
Plaintiff purchased an auto insurance policy from the defendant online, and the coverage did not include UIM coverage. Plaintiff argued that he never signed the UIM coverage provision and that instead, his signature was prepopulated by the defendant’s website. The plaintiff argued that his prepopulated signature did not satisfy the requirements for a meaningful offer of UIM coverage. The defendant rebutted by stating that prepopulating portions of the UIM form is compatible with providing a meaningful offer of UIM coverage. The court was “disinclined to agree” with the defendant’s argument that a “prepopulated signature that appears on an insurance policy before the insured reads through and signals affirmative consent. . .fulfills” the UIM requirements. After reviewing the record, which was limited to screenshots produced by the plaintiff (as the defendant’s attempt to proffer additional system-based evidence was refused by the court because the defendant previously objected to producing it during discovery), the court concluded that it could not grant summary judgment to either party because of the factual dispute regarding whether the plaintiff signed the UIM provision.
Third Treasury Report Calls on HUD to Reconsider Application of Disparate Impact Rule to the Insurance Industry
On October 26, the U.S. Treasury Department published a report outlining a number of recommendations for ways to manage systemic risk primarily within the asset management and insurance industry. A section of the report, however, also discusses HUD’s potential application of the disparate impact rule to the insurance industry—specifically related to homeowner’s insurance. The report, “A Financial System That Creates Economic Opportunities—Asset Management and Insurance,” is the third in a series of four the Treasury plans to issue in response to President Trump’s Executive Order 13772 (EO), which mandated a review of financial regulations for inconsistencies with promoted “Core Principles.” (See Buckley Sandler Special Alert on the EO here and InfoBytes coverage on the first two reports here.)
HUD is authorized to adjudicate housing discrimination claims and issue rules relating to the Fair Housing Act. According to the report, Treasury recommends that HUD reconsider the use of the disparate impact theory to the insurance industry. The report notes a number of problems and challenges that would arise from applying disparate impact to the insurance industry. In particular, the report identifies potential challenges because (i) “state insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk” and at least one state expressly prohibits the collection of this data; (ii) the rule could impose unnecessary burdens on insurers and lead to actions that are not actuarially sound in an effort to avoid underwriting practices that may result in disparate outcomes; and (iii) it may be inconsistent with the McCarran-Ferguson Act and other existing state laws.
The report also recommends, among other things, that Congress clarify the “business of insurance” exception that generally excludes these services from the CFPB’s jurisdiction. The report recommends clarification to this exception to eliminate uncertainty about the CFPB’s jurisdiction and the potential overlap between the Bureau and state insurance regulators. A fact sheet accompanying the report further highlights Treasury’s recommendations to evaluate systemic risk, streamline regulations, rationalize international engagement, and promote economic growth.
On September 14, a federal judge in the U.S. District Court for the Southern District of Texas ruled after a five-week jury trial that defendants, who allegedly submitted fraudulent insurance claims after acquiring risky loans, were liable for treble damages and the maximum civil penalties allowed under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA). According to the court, the evidence presented at trial demonstrated that the damages suffered by the U.S. were a “foreseeable consequence” of the defendants’ misconduct and that such misconduct was part of an “prolonged, consistent enterprise of defrauding the [U.S.],” warranting a higher level of penalties. The jury found that one of the defendants along with its CEO “submitted or caused to be submitted 103 insurance claims” while misrepresenting that its branches were registered by HUD, causing the Federal Housing Administration (FHA) to sustain damages in excess of $7 million. A separate mortgage broker defendant was found to have submitted or caused to be submitted 1,192 insurance claims causing over $256 million in damages to the FHA due to the “reckless” underwriting of loan applications, in violation of FCA. The court rejected the defendants’ request for lenient civil penalties, finding the defendants’ behavior to be “custom-designed to flout the very program that relied upon [defendants’] diligence and compliance” and demonstrating “a patent unwillingness to accept responsibility for their actions.” The FIRREA penalties resulted from defendants submitting false annual certifications to HUD that were intended “to serve as a separate and independent quality check on the [defendant’s] branches,” but instead led to injury in the form of borrowers entering into default or foreclosures, as well as elevated mortgage insurance premiums.
The judge imposed over $291 million in FCA treble damages and penalties against the three defendants. Additionally, each defendant was fined $2.2 million in FIRREA penalties for actions that “were neither isolated or relatively benign . . . [but] were reckless, egregious, and widely injurious.”
On June 26, the Treasury’s Office of Foreign Asset Control (OFAC) reached a settlement with an international financial services and insurance company based in New York for alleged violations of OFAC sanctions programs. OFAC claimed that the company “issued policies and insurance certificates, and/or processed claims and other insurance-related transactions that conferred economic benefit to sanctioned countries or persons and undermined the policy objectives of several U.S. economic sanctions programs.” Specifically, OFAC maintained the company violated the following sanctions programs: (i) Iranian Transactions and Sanctions Regulations, 31 C.F.R. Part 560 (ITSR); (ii) Weapons of Mass Destruction Proliferators Sanctions Regulations, 31 C.F.R. Part 544 (WMDPSR); (iii) Sudanese Sanctions Regulations, 31 C.F.R. Part 538 (SSR); and (iv) Cuban Assets Control Regulations, 31 C.F.R. Part 515 (CACR). The settlement requires the company to pay $148,698 to settle the claims, which the company voluntarily self-disclosed to OFAC.
For others to avoid these issues, OFAC suggested that “the best and most reliable approach for insuring global risks without violating U.S. sanctions law is to insert in global insurance policies an explicit exclusion for risks that would violate U.S. sanctions laws.”
Nevada AG Issues Advisory Opinion Finding Assignment of a Retail Installment Sales Contract Does Not Subject Assignee to Licensure or Regulation Under Ch. 675 of the NV Code
Last month, the Office of the Attorney General for the State of Nevada (OAG) issued an Advisory Opinion finding that a retail seller financing its own sales pursuant to the retail installment sales contract (RISC) provisions found in Chapter 97 of the Nevada Revised Statutes (NRS), but which is otherwise not engaging in lending activity, is not required to secure a lender’s license under Chapter 675 of the NRS. In reaching this conclusion, the OAG references another opinionit had issued earlier this year concerning retail installment lending, and noted that “[w]hen a retail seller finances its own sales pursuant to the provisions of Chapter 97, but otherwise engages in no lending activity, the retailer's business activity is governed exclusively by the provisions of Chapter 97” (emphasis added). In light of this earlier holding, the OAG reasoned as follows:
[W]hen a person purchases or takes an assignment of a RISC pursuant to the provisions of Chapter 97 of the NRS, the person’s acceptance of the assignment does not subject the person to regulation or licensure under NRS Chapter 675. Assuming that the person is not independently engaged in lending activity subject to licensure and regulation under NRS Chapter 675, the person’s financing activity is governed exclusively by the provisions of NRS Chapter 97. To the extent that a vehicle dealer adopts the contractual terms of the form RISC as prescribed by the Commissioner in accordance with Chapter 97, the vehicle dealer is permitted to assign the RISC to a financial institution. Although it applies in general terms to certain types of lending activity, NRS Chapter 675 does not specifically abrogate the exclusive provisions of Chapter 97 that govern the parties to a RISC made and assigned pursuant to Chapter 97.
Notably, the Opinion was issued in response to a request from the Commissioner of the Financial Institutions Division of the Nevada Department of Business and Industry (NDBI), seeking a “formal opinion” regarding certain indirect vehicle financing transactions that use the form retail installment contract prescribed for use in the sale of vehicles pursuant to NRS 97.299. Specifically, the Commissioner sought an opinion addressing “[w]hether a financial institution that purchases Retail Installment Sales Contracts ("RISC[ s ]") from motor vehicle dealers in the State of Nevada (i.e. engages in indirect financing) is required to be licensed pursuant to Chapter 675 of the NRS[.]” The Commissioner also requested clarification addressing “[w]hether NRS Chapter 675 requires such a financial institution to have an in-state physical presence[.]”
- Valerie L. Hletko to discuss "Forecasting litigation and settlement trends in the mortgage servicing and fair lending context" at the American Conference Institute National Forum on Residential Mortgage Regulatory Enforcement & Litigation
- Michelle L. Rogers and Jonice Gray Tucker to discuss “Building a govt affairs program; Government investigations” at the TechGC National Summit
- Tina Tchen to deliver keynote address at the American Bar Foundation Montgomery Summer Research Diversity Fellowship 30th Anniversary Celebration
- Douglas F. Gansler to discuss "Privacy, security and protection of your assets in contracts; Security exercises and tactical measures" at the TechGC National Summit
- H Joshua Kotin will discuss federal regulatory developments in mortgage lending and servicing at the Mortgage Bankers Association of Arkansas Fall Conference
- Kate Shrout to discuss "Conducting workplace investigations" at the TechGC National Summit
- Kathryn R. Goodman to discuss "HECM servicing policies and updates" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Fredrick S. Levin to discuss "Reverse mortgage litigation trends" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Melissa Klimkiewicz to speak at the "Digital marketing compliance roundtable" at the National Reverse Mortgage Lenders Association Annual Meeting & Expo
- Hank Asbill to discuss "The role of the media in white collar criminal investigations and the Mueller probe" at the American Bar Association White Collar Crime Town Hall
- John C. Redding to discuss "Regulatory compliance update" at PowerSports Finance
- Matthew P. Previn to discuss "Enforcement trends: Who is doing what and how?" at the Cambridge Forums Inc. Forum on Consumer Finance Litigation & Enforcement
- Jonice Gray Tucker to discuss "Protect yourself from a CFPB investigation" at the National Association of Settlement Purchasers Conference
- Tina Tchen to deliver keynote address at the American Bar Association Professional Success Summit
- Andrea K. Mitchell to discuss "Developments in fair lending law" at the Mortgage Bankers Association Summit on Diversity and Inclusion
- Jonice Gray Tucker to discuss "Consumer financial services" at the Practising Law Institute Banking Law Institute
- Daniel P. Stipano to discuss "New CDD Rule: Pitfalls in compliance" at the American Bankers Association/American Bar Association Financial Crimes Enforcement Conference