Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • Divided FCC says net neutrality reversal won't hurt public safety

    Federal Issues

    On October 27, the FCC voted 3-2 to adopt an Order on Remand in response to a 2019 decision issued by the U.S. Court of Appeals for the D.C. Circuit (covered by InfoBytes here). The D.C. Circuit’s decision mostly ratified the Commission’s 2017 Restoring Internet Freedom Order that reversed the net neutrality rules barring internet service providers from slowing down or speeding up web traffic based on business relationships, however it remanded three “discrete issues” for the FCC’s further consideration, including how the reversal of the net neutrality rules could affect public safety issues. A Fact Sheet accompanying the Order on Remand stated that the FCC found “no basis to alter” its conclusions in the Restoring Internet Freedom Order, noting that, among other things, “[n]either the Commission’s decision to return broadband Internet access service to its longstanding classification as an information service, nor its decision to eliminate the Internet conduct rules, is likely to adversely impact public safety.”

    Federal Issues FCC Net Neutrality Appellate D.C. Circuit

  • Merchant cash advance providers move to dismiss FTC allegations of deceptive and unfair conduct

    Courts

    On October 23, defendants in an FTC lawsuit filed a reply brief in support of their motion to dismiss allegations claiming they misrepresented the terms of their merchant cash advances (MCA), used unfair collection practices, made unauthorized withdrawals from consumer accounts, and misrepresented collateral and personal guarantee requirements in advertisements. As previously covered by InfoBytes, the FTC filed a complaint in August against the defendants—two New York-based merchant cash advance providers and two company executives—alleging deceptive and unfair conduct in violation of Section 5 of the FTC Act. Earlier in October, the defendants filed a motion to dismiss, arguing, among other things, that the FTC “lack[ed] the statutory authority to bring its claims in federal court” under Section 13(b) of the FTC Act because “none of the challenged conduct, to the extent it even occurred or was actionable, is plausibly alleged to be ongoing or ‘about to’ occur.” The FTC countered that it “need only allege” that it had “reason to believe Defendants are violating or are about to violate” Section 5 in order to file suit in federal district court. The FTC further contended that it had also alleged facts sufficient for individual liability.

    The defendants responded to the FTC’s opposition to dismissal, arguing, among other things, that even if the FTC invoked the statutory authority under Section 13(b) to have the court hear its claims, the claims fail for other reasons, including that the complaint fails to state a claim under Section 5 by (i) only providing “fragments of advertisements without necessary context”; (ii) ignoring “the express fee disclosures in the MCA agreement” that outline the fees to be paid by a merchant; and (iii) ignoring the fact that “so-called ‘unauthorized’ ACH withdrawals were “explicitly authorized under the MCA agreement.” The defendants further argued that the individual liability claims should also be dismissed because the FTC failed to sufficiently allege that the individual defendants directly participated in or had authority over the alleged conduct.  

    Courts Merchant Cash Advance FTC UDAP FTC Act Enforcement

  • Split en banc 11th Circuit vacates $6.3 million FACTA settlement

    Courts

    On October 28, the U.S. Court of Appeals for the Eleventh Circuit, in a 7-3 en banc decision, vacated a $6.3 million Fair and Accurate Credit Transactions Act (FACTA) class action settlement, concluding the plaintiffs lacked standing because they did not allege any concrete harm. According to the opinion, the named plaintiff filed a FACTA class action against a chocolate retailer, alleging that the retailer printed too many credit card digits on receipts over several years. The complaint only pursued statutory damages and explicitly stated it did “not intend[] to request any recovery for personal injury.” The parties agreed to settle the litigation for $6.3 million prior to the U.S. Supreme Court decision in Spokeo, Inc. v. Robins (holding that a plaintiff must allege a concrete injury, not just a statutory violation, to establish standing). After Spokeo, the district court approved the class action, and class objectors appealed, with one objector arguing that the district court lacked jurisdiction to approve the settlement because the named plaintiff did not allege an injury in fact. On appeal, the 11th Circuit issued multiple opinions, with the first two affirming the settlement approval. The full panel ordered a rehearing en banc, vacating the last opinion.

    The en banc panel vacated the district court order approving the settlement, concluding that the named plaintiff lacked standing under Spokeo. Specifically, the panel rejected the named plaintiff’s argument that “receipt of a noncompliant receipt itself is a concrete injury,” noting that “nothing in FACTA suggests some kind of intrinsic worth in a compliant receipt.”  Moreover, the panel disagreed with the named plaintiff’s distinction that his claim was a “substantive” violation and not just a “procedural” one, reasoning that “no matter what label you hang on a statutory violation, it must be accompanied by a concrete injury.” Because the complaint did not allege a concrete injury, the panel vacated the order.

    In dissent, one judge argued that the named plaintiff plausibly alleged concrete harm by establishing that the retailer’s FACTA violation elevated his risk of identity theft. In the second dissent, another judge asserted that both common law and congressional intent support the conclusion that the plaintiff’s complaint constitutes a concrete injury in fact. And lastly, the third dissent argued that the order should not be dismissed outright because the majority made “assumptions about the risks of identity theft without the benefit of a factual record, expert reports, or adversarial testing of the issue in the district court.” 

    Courts Eleventh Circuit FACTA Settlement Class Action Spokeo Standing Appellate

  • DFPI addresses MTA licensing in new letter

    State Issues

    Recently, California’s Department of Financial Protection and Innovation (DFPI) released a new opinion letter covering aspects of the Money Transmission Act (MTA) related to the registered clearing house and payment processing service exemptions.

    The redacted opinion letter concluded that the company, a Delaware Corporation, is required to apply for and receive an MTA license to engage in the proposed activities in California, absent receiving an exemption. According to the letter, the company proposes to offer automated clearing house (ACH) services to merchants through an “integrated payment gateway” in order to “aid merchants with online and offline stores in collecting cross-border payments.” The ACH services would be a five-step process in which (i) a foreign customer purchases goods or services from a U.S.-based merchant; (ii) the merchant scans a quick response code using the company’s payment software; (iii) the company “withdraws a USD equivalent amount of payment in Chinese Renminbi (RMB) from the foreign customer’s” digital wallet; (iv) the company uses foreign exchange services “to convert the RMB amount into the correct corresponding USD amount” and remits the amount into the company’s U.S. bank account; and lastly (v) the company distributes the payment from its account to the merchant’s account. The company sought a clearing agency exemption and/or an excluded persons processing exemption, however, the DFPI concluded that the company did not supply evidence to show it qualified for either exemption. Thus, the company would need an MTA license to engage in the stated processing activity in California. 

    State Issues Money Service / Money Transmitters DFPI Licensing

  • Court stays HUD’s DI rule

    Courts

    On October 25, the U.S. District Court for the District of Massachusetts issued an order granting a preliminary injunction and stay of effective date of HUD’s disparate impact regulation under the Fair Housing Act (Final Rule). As previously covered by a Buckley Special Alert, in September, HUD issued the Final Rule, which is intended to align its disparate impact regulation, adopted in 2013 (2013 Rule), with the Supreme Court’s 2015 ruling in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. Among other things, the Final Rule includes a modification of the three-step burden-shifting framework in its 2013 Rule, several new elements that plaintiffs must show to establish that a policy or practice has a “discriminatory effect,” and specific defenses that defendants can assert to refute disparate impact claims.

    According to the order, two fair housing organizations (collectively, “plaintiffs”) filed the action against HUD seeking to vacate the Final Rule under the Administrative Procedures Act (APA) and subsequently filed for a preliminary injunction and stay, arguing, among other things, that the changes to the 2013 Rule are “arbitrary and capricious.” The court noted that the Final Rule “constitutes a significant overhaul to HUD’s interpretation of disparate impact standards,” and that the alterations to the 2013 Rule “appear inadequately justified.” The court further explained that the Final Rule’s “massive changes pose a real and substantial threat of imminent harm” to the plaintiffs by increasing “the burdens, costs, and effectiveness of disparate impact liability.” Lastly, the court noted that HUD did not identify any “particularized” harm to the government or public should the injunction be granted. Thus, the court granted the preliminary injunction and stayed the implementation date until further order.

    Courts HUD Disparate Impact Fair Housing Act Fair Lending Administrative Procedures Act

  • California state bar committee addresses litigation funding

    State Issues

    Recently, the State Bar of California Standing Committee on Professional Responsibility and Conduct  (COPRAC) issued Formal Opinion no. 2020-204 (Opinion), which discusses the ethical obligations of an attorney whose client seeks litigation funding. According to the Opinion, litigation funding—the practice of an unrelated third-party providing funds for litigation in return for a portion of any financial recovery—is not prohibited by law in California, noting that prohibitions against champerty or its variants have never been recognized in the state. However, the Opinion acknowledges several ethical considerations an attorney must consider when working with a client using litigation funding. These considerations include, (i) “understanding how the terms of the funding agreement” may impact litigation decisions; (ii) acting in the client’s best interest at all times, particularly when the client’s interest may depart from the litigation funder’s; and (iii) informing the client of the confidential information risks that exist once a relationship with the funder is formed and communications between the parties continue.

    The Opinion was published after COPRAC released the Proposed Formal Opinion Interim no. 14‑0002, seeking feedback from interested parties with a comment period beginning on September 6, 2019 and ending on January 14, 2020. Throughout its discussion of attorney ethics involved in the practice, the Opinion provides pertinent policy reasons why litigation funding should generally be viewed favorably in California as a means to provide access to justice. The Opinion follows Burford Capital’s recent debut on the New York Stock Exchange, an example of litigation funding, as a practice, becoming more widely accepted.

    State Issues Litigation Funding California

  • Distilled beverage company settles FCPA charges for $19 million

    Financial Crimes

    On October 27, the DOJ announced it had entered into a deferred prosecution agreement with a Chicago-based distilled beverage company to pay over $19 million in criminal penalties related to a conspiracy to violate the “anti-bribery, internal controls, and books and records provisions of the FCPA.” According to the DOJ, from 2006 through the end of the third quarter of 2012, the company’s Indian subsidiary paid bribes to numerous Indian government officials in exchange for the approval of a license to bottle a certain beverage product for sale in India, and to gain or retain general business opportunities in the Indian market. The bribes were authorized by an executive of the company’s Indian subsidiary, but the payments were made through third parties, such as the beverage bottler or distributors. The DOJ’s announcement stated that the company also “agreed with others to fail to implement and maintain an adequate system of internal accounting controls,” which would have helped to detect the subsidiaries’ “longstanding practice of making corrupt payments,” and the company was warned by outside advisors of the “risks associated with improper activities by third parties in India.”

    As part of the deferred prosecution agreement, the company agreed to cooperate with the DOJ’s ongoing investigations and prosecutions, to improve its compliance program, and to report to the DOJ on those improvements. The company’s penalty reflected a 10 percent discount off the bottom of the applicable U.S. Sentencing Guidelines due to its cooperation and remediation; however, the DOJ noted that the resolution reflects a number of factors including, among other things, (i) the involvement of a company executive officer; (ii) an ineffective compliance program in place when the misconduct occurred; and (iii) significant delays caused by the company in reaching a timely resolution.

    As previously covered by InfoBytes, the company settled related FCPA allegations with the SEC in July 2018 for over $8 million. However, the DOJ did not credit any portion of the SEC penalty because the company “did not seek to coordinate a parallel resolution with the department.”

    Financial Crimes FCPA Enforcement DOJ Bribery

  • CFPB settles with ninth lender on misleading VA advertising

    Federal Issues

    On October 26, the CFPB announced a settlement with a ninth mortgage lender for mailing consumers advertisements for Department of Veterans Affairs (VA) mortgages that allegedly contained misleading statements or lacked required disclosures. According to the Bureau, the lender allegedly sent false, misleading, and inaccurate direct-mail advertisements for VA guaranteed mortgage loans to servicemembers and veterans in violation of the CFPA, the Mortgage Acts and Practices – Advertising Rule (MAP Rule), and Regulation Z. Among other things, the Bureau alleged the advertisements (i) stated credit terms that the lender was not actually prepared to offer, such as the interest rate and annual percentage rate applicable to the advertised mortgage; (ii) made misrepresentations about “the existence, nature, or amount of cash or credit available to the consumer in connection with the mortgage”; (iii) failed to include required disclosures; (iv) gave the false impression that the mortgage products would help eliminate or reduce debt; and (v) made misleading comparisons in advertisements involving actual or hypothetical loan terms.

    The settlement imposes a civil money penalty of $1.8 million and bans the lender from future advertising misrepresentations similar to those identified by the Bureau. Additionally, the settlement requires the lender to use a compliance official to review mortgage advertisements for compliance with consumer protection laws, and to comply with certain enhanced disclosure requirements.

    The latest enforcement action is part of the Bureau’s “sweep of investigations” related to deceptive VA-mortgage advertisements. Previously, the Bureau issued consent orders against eight other mortgage lenders for similar violations, covered by InfoBytes here, here, here, and here.

    Federal Issues CFPB Enforcement Settlement Mortgages Servicemembers CFPA MAP Rule Regulation Z Disclosures

  • DOJ reaches $25 million settlement with mortgage lender to resolve false claims allegations

    Federal Issues

    On October 20, the DOJ announced a nearly $25 million settlement with a California-based mortgage lender in connection with alleged violations of the False Claims Act (FCA) related to originating and underwriting mortgages insured by the Federal Housing Administration (FHA). According to the DOJ, the lender “knowingly approved ineligible loans that later defaulted and resulted in claims to FHA for mortgage insurance,” failed to comply with material program rules requiring lenders to maintain quality control programs to prevent underwriting deficiencies, and failed to self-report identified materially deficient loans. The mortgage lender agreed to pay the DOJ $24.9 million to resolve the FCA claims. In addition, a whistleblower will receive nearly $5 million under the settlement. The DOJ’s press release noted that the claims “are allegations only, and [that] there has been no determination of liability.”

    Federal Issues False Claims Act / FIRREA DOJ FHA Mortgages

  • Agencies propose lowering threshold for certain fund transfers and transmittals of funds under Bank Secrecy Act

    Agency Rule-Making & Guidance

    On October 23, the Federal Reserve Board and the Financial Crimes Enforcement Network (FinCEN) announced a proposed rule that would, among other things, amend the Recordkeeping Rule and the Travel Rule under the Bank Secrecy Act (BSA) by reducing the data collection threshold from $3,000 to $250 for certain fund transfers that begin or end outside of the U.S. In addition, the proposed rule would set the threshold at $250 for financial institutions “to transmit to other financial institutions in the payment chain information on fund transfers and transmittals of funds that begin or end outside of the [U.S.]” The proposed rule’s $250 threshold for data collection would also apply to digital currency transactions, both for international transfers and those within the U.S. The agencies also propose to clarify the meaning of “money” as used in certain defined terms to ensure the rules apply to domestic and cross-border transactions involving convertible virtual currencies. By proposing to lower the current threshold, the agencies “specifically considered Suspicious Activity Reports filed by money transmitters, which indicate that a substantial volume of potentially illicit funds transfers and transmittals of funds occur below the $3,000 threshold.” The agencies also note that the threshold for domestic transactions would remain unchanged at $3,000. Comments are due 30 days after publication in the Federal Register.

    Agency Rule-Making & Guidance Federal Reserve FinCEN Bank Secrecy Act Of Interest to Non-US Persons Fund Transfers

Pages

Upcoming Events