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FTC settles with auto dealers for falsifying consumer financial documents
On September 4, the FTC announced a settlement with group of auto dealers (defendants) with locations in Arizona and New Mexico near the Navajo Nation’s border, resolving allegations that the defendants advertised misleading discounts and incentives and falsely inflated consumers’ income and down payment information on certain financing applications. As previously covered by InfoBytes in August 2018, the FTC filed an action against the defendants alleging violations of the FTC Act, TILA, and the Consumer Leasing Act for submitting falsified consumer financing applications to make consumers appear more creditworthy, resulting in consumers—many of whom are members of the Navajo Nation—defaulting “at a higher rate than properly qualified buyers.”
The court-approved settlement requires the defendants to cease all business operations and includes a monetary judgment of over $7 million. Because the defendants are currently in Chapter 7 bankruptcy proceedings, the settlement will make the FTC an unsecured claimant in the bankruptcy proceedings. The settlement also prohibits the bankruptcy trustee from using or selling the consumer information obtained from the defendants’ business activities as part of the bankruptcy liquidation.
FHA issues underwriting guidelines on prior forbearances
On September 10, FHA released Mortgagee Letter 2020-30, which discusses FHA’s underwriting guidelines for mortgages involving borrowers who were previously granted a forbearance. The letter notes that FHA is “expanding its underwriting guidelines” to address situations in which borrowers are seeking new FHA insured financing after being granted a forbearance, due to either a Presidentially Declared major disaster or some other hardship, including the Covid-19 pandemic. The letter specifies that a borrower will be eligible for a new FHA insured mortgage after being granted a forbearance if, among other things, (i) the borrower continued to make regularly scheduled payments and the forbearance plan is terminated; or (ii) for cash-out refinances, the borrower has completed the forbearance and has subsequently made 12 consecutive monthly payments; or (iii) for purchases and no cash-out refinances, the borrower has completed the forbearance and has subsequently made at least three consecutive monthly payments; or (iv) for “Credit Qualifying Streamline” refinances, the borrower has completed the forbearance and has subsequently made less than three consecutive monthly payments; and (v) for all “Streamline refinance” transactions, the borrower has made at least six payments on the FHA insured mortgage being refinanced.
FHA requires the new underwriting guidelines be implemented for all case numbers assigned on or after November 9.
DOJ official discusses PPP fraud enforcement
On September 10, in remarks at the Paycheck Protection Program (PPP) Criminal Fraud Enforcement Action press conference, Acting Assistant Attorney General Brian Rabbitt provided an overview of recent PPP enforcement actions and noted that “[m]any financial institutions have been strong partners” in assisting the DOJ with “detecting and investigating potentially fraudulent activity in connection with the PPP.” In addition to partnerships with private institutions, Rabbitt emphasized the agency’s data analytics capabilities as a key component in their ability to bring PPP fraud cases quickly—within six months, the DOJ has charged 57 defendants in at least 19 federal judicial districts. Moreover, Rabbitt discussed commonalities among the cases, including the “defendants’ use of their stolen PPP funds for entirely illegitimate purposes” having nothing to do with the intended relief. In total, according to the DOJ, the current charges against the 57 defendants “involve attempts to steal over $175 million from the PPP” and over $70 million in “actual losses to the federal government.”
Special Alert: California’s new consumer financial protection law expands UDAAP and enforcement authority
On Monday, August 31, the California Legislature passed Assembly Bill 1864, which enacts the California Consumer Financial Protection Law (CCFPL) and changes the name of the Department of Business Oversight (DBO) to the Department of Financial Protection and Innovation (DFPI).
Key takeaways
- Establishes UDAAP authority for the new DFPI, adding “abusive” to “unfair or deceptive” acts or practices prohibited by California law, and authorizing remedies similar to those provided in the Dodd-Frank Act. The DFPI also has authority to define UDAAPs in connection with the offering or provision of commercial financing (e.g., merchant cash advance, lease financing, factoring) and other financial products or services to small business recipients, nonprofits, and family farms.
Court allows certain auto loan claims to proceed
On September 1, the U.S. District Court for the Central District of California determined that certain claims could proceed in a suit alleging a national bank failed to properly refund payments made pursuant to guaranteed asset protection (GAP) waiver agreements entered into in connection with auto loans. According to the plaintiffs’ suit, the bank knowingly collected unearned fees for GAP Waivers and “concealed its obligation to issue a refund on the GAP Waiver fees for the portion of the GAP Waiver’s initial coverage that was cut short by early payoff, and denied any obligation to return the unearned GAP fees.” The bank sought dismissal of the suit, arguing, among other things, that—with the exception of one consumer’s claims—all of the plaintiffs’ contracts include “a condition precedent under which the [p]laintiffs must first submit a written refund request for unearned GAP fees before being entitled to a refund,” which condition was not fulfilled.
The court dismissed breach of contract claims brought by eight of the 11 plaintiffs, noting that seven of these plaintiffs were not excused from complying with the condition precedent in their contracts with the bank, and had not pled sufficient facts to allege compliance; the court held that the eighth plaintiff’s claim was barred by the statute of limitations. The court allowed the breach of contract claims filed by two plaintiffs whose contracts did not contain condition precedent language to proceed, and allowed the final plaintiff’s breach of contract claim to proceed because the bank did not move to dismiss such. The court kept the declaratory judgment requests intact for the three plaintiffs whose contract claims were allowed to proceed, but determined such plaintiffs could not assert standing under laws of states where they do not reside and did not receive an injury. Further, the court granted the bank’s request to dismiss TILA claims—noting that the statute does not apply to indirect auto lenders like the bank—and tossed claims brought under California’s Unfair Competition Law.
The bank also asked the court to strike the six class action claims included in the plaintiffs’ first amended complaint. However, the court denied the bank’s request to strike the plaintiffs’ nationwide class allegations calling it premature. “Deciding whether the alleged classes can be maintained is properly done on a motion for class certification because at that point ‘the parties have had an opportunity to conduct class discovery and develop a record,’” the court noted.
OCC updates OREO booklet
On September 2, the OCC issued Bulletin 2020-79 announcing the revision of the “Other Real Estate Owned” booklet of the Comptroller’s Handbook. Among other clarifying and technical changes the revised booklet reflects changes to the holding period requirements for federal savings associations under 12 CFR 34, subpart E. Additionally, the booklet has been updated to reflect changes to other regulations and other OCC issuances that have been published since the booklet was last updated in August 2018.
FTC seeks $10 million settlement for negative option billing
On September 2, the FTC announced a proposed $10 million settlement with an online education company, resolving allegations the company engaged in negative option marketing and deceptive billing practices in violation of the FTC Act and the Restore Online Shoppers’ Confidence Act. According to the complaint, filed by the FTC in the U.S. District Court for the Central District of California, from 2015 through at least 2018, the company “failed to adequately disclose key terms of memberships to access online education content for children.” Specifically, the company failed to disclose that memberships automatically renewed indefinitely and kept the “ongoing nature of these term memberships only in separately hyperlinked terms and conditions,” with the automatic renewal “buried” in “dense text, in small font and in single-spaced type.” Moreover, the company allegedly created a difficult cancelation process, notwithstanding the promise of “easy cancellation” written in “bold, red text.”
Under the proposed settlement, the FTC is seeking $10 million in monetary relief and seeks to ban the company from making negative option misrepresentations. Additionally, the proposal would require the company to, among other things, clearly disclose terms of membership and obtain consumers’ informed consent before enrolling them in an automatic billing program.
HUD finalizes new disparate impact standard
On September 4, HUD released the final rule amending agency’s interpretation of the Fair Housing Act’s disparate impact standard (also known as the “2013 Disparate Impact Regulation”). The final rule, among other things, seeks to (i) codify the burden-shifting framework from the 2015 Supreme Court ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a Buckley Special Alert); (ii) create a uniform standard for determining when a policy or practice has a discriminatory effect in violation of the Fair Housing Act; and (iii) codify HUD’s position that its rule is not intended to infringe on the states’ regulation of insurance. Based on public feedback, the final rule largely adopts the August 2019 proposed rule (covered by InfoBytes here) with a number of clarifying and substantive changes.
A Special Alert from Buckley on the details of the final rule will soon be available.
NYDFS opposes OCC’s true lender rule
On September 2, NYDFS Superintendent Linda A. Lacewell announced the regulator’s opposition to the OCC’s proposed “true lender” rule. As previously covered by InfoBytes, the proposed rule would amend 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan,” and intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.” In response, NYDFS issued a comment letter stating that if the proposed rule is enacted, nonbank lenders that are not chartered or licensed by the federal government would be able to “qualify for federal protection from state usury laws” and make high-cost loans with interest rates well above the interest rate normally permitted by New York law. These laws currently make predatory, high-interest lending illegal, and make usurious loans entered into in the state void and unenforceable, NYDFS stated, arguing that the proposed rule would “gut state usury laws and state licensing requirements with respect to unregulated lenders.” NYDFS also stated, among other things, that the proposed rule, if codified, would “effectively sanction so-called ‘rent-a-bank’ or ‘rent-a-charter’ schemes” and allow “unregulated nonbank lenders to launder loans through banks as an end-around consumer-protective state usury limits.” In addition, NYDFS argued that the OCC lacks the authority to issue the proposed rule “because it has failed to comply with the requirements applicable to preemption determinations under federal law and conflicts with Congress’ intent to limit the preemption of states’ consumer protection laws.”
CFPB issues Summer 2020 Supervisory Highlights
On September 4, the CFPB released its summer 2020 Supervisory Highlights, which details its supervisory and enforcement actions in the areas of consumer reporting, debt collection, deposits, fair lending, mortgage servicing, and payday lending. The findings of the report, which are published to assist entities in complying with applicable consumer laws, cover examinations that generally were completed between September and December of 2019. Highlights of the examination findings include:
- Consumer Reporting. The Bureau cited violations of the FCRA’s requirement that lenders first establish a permissible purpose before they obtain a consumer credit report. Additionally, the report notes instances where furnishers failed to review account information and other documentation provided by consumers during direct and indirect disputes. The Bureau notes that “[i]nadequate staffing and high daily dispute resolution requirements contributed to the furnishers’ failure to conduct reasonable investigations.”
- Debt Collection. The report states that examiners found one or more debt collectors (i) falsely threatened consumers with illegal lawsuits; (ii) falsely implied that debts would be reported to credit reporting agencies (CRA); and (iii) falsely represented that they operated or were employed by a CRA.
- Deposits. The Bureau discusses violations related to Regulation E and Regulation DD, including requiring waivers of consumers’ error resolution and stop payment rights and failing to fulfill advertised bonus offers.
- Fair Lending. The report notes instances where examiners cited violations of ECOA, including intentionally redlining majority-minority neighborhoods and failing to consider public assistance income when determining a borrower’s eligibility for mortgage modification programs.
- Mortgage Servicing. The Bureau cited violations of Regulation Z and Regulation X, including (i) failing to provide periodic statements to consumers in bankruptcy; (ii) charging forced-placed insurance without a reasonable basis; and (iii) various errors after servicing transfers.
- Payday Lending. The report discusses violations of the Consumer Financial Protection Act for payday lenders, including (i) falsely representing that they would not run a credit check; (ii) falsely threatening lien placement or asset seizure; and (iii) failing to provide required advertising disclosures.
The report also highlights the Bureau’s recently issued rules and guidance, including the various responses to the CARES Act and the Covid-19 pandemic.