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CFPB: Reopening a closed account could be a UDAAP
On May 10, the CFPB released Circular 2023-02 to opine that unilaterally reopening a closed account without a customer’s permission in order to process a transaction is a likely violation of federal law, particularly if a bank collects fees on the account. “When a bank unilaterally chooses to open an account in someone’s name after they have already closed it, this is a fake account,” CFPB Director Rohit Chopra said in the announcement. “The CFPB is acting on all fronts to halt the harvesting of illegal junk fees.”
The Bureau described receiving complaints from consumers about banks reopening closed accounts and then assessing overdraft/nonsufficient funds fees and monthly maintenance fees. Such practices, the Bureau warned, may violate the Consumer Financial Protection Act’s prohibition on unfair acts or practices. Consumers may experience substantial injury including monetary harm by paying fees due to the unfair practice, the Bureau said, explaining that because consumers likely cannot reasonably avoid the injury, “[a]ctual injury is not required; significant risk of concrete harm is sufficient.” Aside from subjecting consumers to fees, when a bank processes a credit through a reopened account, the consumers’ funds may become available to third parties, including those that do not have permission to access such funds, the Bureau warned, adding that there is also a risk that banks may furnish negative information to consumer reporting agencies if reopening the account overdraws the account and the consumer does not quickly repay the amount owed. The Bureau further noted that deposit account agreements typically indicate that a financial institution “may return any debits or deposits to the account that the financial institution receives after closure and faces no liability for failing to honor any debits or deposits received after closure.”
The Circular explained that rather than reopening an account when a third party attempts to deposit or withdraw money from it, banks should decline the transactions. This allows customers the opportunity to update their information with the entity attempting to access a closed account while avoiding potential fees. “Reopening a closed account does not appear to provide any meaningful benefits to consumers or competition,” the Bureau said in the Circular. “While consumers might potentially benefit in some instances where their accounts are reopened to receive deposits, which then become available to them, that benefit does not outweigh the injuries that can be caused by unilateral account reopening.”
6th Circuit: Tennessee judicial foreclosure time-barred
On May 4, the U.S. Court of Appeals for the Sixth Circuit affirmed a lower court’s decision in a judicial foreclosure action, holding that a bank’s lawsuit was barred by Tennessee’s 10-year statute of limitations for actions to enforce liens on real property. The appellate court also refused to establish an equitable lien on the property in favor of the bank. According to the opinion, the home equity line of credit at issue in the case matured in 2007, requiring a final balloon payment, but the bank did not demand this payment, refinance the loan, or foreclose on the property. Instead, the bank continued to accept monthly interest payments totaling around $100,000 until 2017. The opinion reflected that the bank did not contend there to be a written instrument showing an extension of the loan or that such an extension was recorded. Rather, the bank raised several arguments, including that there was an oral modification to the loan and that it had the unilateral right to extend the loan based on “a future advances provision that could extend the maturity date for up to twenty years.” The bank further argued that the defendants’ monthly interest payments excused any writing requirement and evidenced an agreement to extend the loan’s maturity date. The appellate court disagreed, concluding that because the bank could not show, as a matter of law, that the loan’s maturity date was extended, its suit is untimely. The appellate court stated that the bank was aware that the loan “was in default as early as 2011 (well within the statute of limitations period) but took no action to foreclose or refinance.” The 6th Circuit further noted that if the bank had “simply memorialized an extension to the [l]oan’s maturity date in writing as required by Tenn. Code Ann. § 28-2-111(c), it would not be in this situation.”
District Court preliminarily approves $300 million auto insurance settlement
On May 1, the U.S. District Court for the Northern District of California preliminarily approved a $300 million class action settlement resolving claims that a national bank hid misconduct relating to its auto insurance practices. The lead plaintiff alleged that, between November 3, 2016 and August 3, 2017, the defendant made materially false or misleading statements in violation of the Securities Act, which artificially inflated the price of the defendant’s stock. Specifically, the plaintiff maintained that the defendant concealed that it allegedly force-placed unneeded collateral protection insurance (CPI) on many of its customers and failed to refund unearned guaranteed auto protection (GAP) premiums to other customers, which led to more than 20,000 customers having their cars repossessed. The plaintiff further alleged that the defendant was aware of these issues but failed to disclose them to investors or the public, and claimed that the facts did not emerge until they were published by the media in July of 2017. As a result, class members who purchased defendant’s stock during the relevant period allegedly suffered economic losses when the stock price declined as a result of two corrective disclosures that revealed the CPI and GAP issues to investors. A hearing later this year will determine the service fee award and attorneys’ fees and expenses (to be no more than 25 percent of the settlement amount). The defendant denies all claims of wrongdoing.
CFPB general counsel highlights risks in payments industry
On May 9, CFPB General Counsel and Senior Advisor to the Director, Seth Frotman, discussed the evolution of the payments system and its significant impact on consumer financial protection. Speaking before the Innovative Payments Association, Frotman commented that over the past few years, growth in the use of noncash payments (i.e. ACG, cards, and checks) accelerated faster from 2018 to 2021 than in any previous period, with the value of noncash payments since 2018 increasing nearly 10 percent per year, approaching almost $130 trillion in 2021. The value of ACH transfers and the number of card payments also increased tremendously, Frotman noted, pointing to a rapid decline in ATM cash withdrawals and the use of checks. He observed that the use of peer-to-peer (P2P) payment platforms and digital wallets is also growing quickly, with more traditional financial institutions redoubling their efforts to expand product offerings to capture market shares in this space. Additionally, several large tech firms, drawing on their significant customer bases and brand recognition, are looking to integrate payment services into their operating systems, with some offering payment products used by consumers daily, Frotman said.
Addressing concerns relating to data harvesting and privacy, Frotman said the Bureau is concerned that companies, including big tech companies, are using payment data to engage in behavioral targeting or individualized marketing, while some companies are sharing detailed payments information with data brokers or third parties as a way to monetize data. These behaviors, which he said only increase as payment systems continue to grow, raise the potential for harm, including limiting competition and consumer choice and stifling innovation. Frotman added that these issues are not limited to big tech. Banks, Frotman said, are also rolling out digital wallets as a way to access payment information, and Buy Now Pay later lenders are collecting consumer data “to increase the likelihood of incremental sales and maximize the lifetime value extracted from each current, past, or potential borrower.” Frotman reminded attendees that the Bureau has several critical tools at its disposal to address concerns about how data is bought, sold, used, and protected, and warned the payments industry to comply with applicable legal requirements.
Frotman also discussed challenges facing “gig” and other non-standard workers when trying to navigate consumer financial markets, particularly with respect to the intersection between how workers are being paid and the EFTA. According to Frotman, the Bureau is concerned about whether gig workers are being improperly required to receive payments through a particular financial institution or via a particular payment product or app. Frotman instructed employers to provide payment options that do not require workers to establish an account with a particular institution to ensure they do not run afoul of the EFTA’s “compulsory use” provision. Consumers who use a personal P2P app for work transactions are also entitled to EFTA protections with respect to fraud and error resolution, Frotman added. Frotman closed his remarks by touching briefly on liquidity and stability in the P2P payment system. He warned that consumers who use P2P payment products to store funds do not have the same level of protection as consumers who use traditional banking products.
FTC obtains TROs to halt student loan debt relief schemes
On May 8, the FTC announced that the U.S. District Court for the Central District of California recently issued temporary restraining orders (TROs) against two student loan debt relief companies that allegedly tricked consumers into paying for nonexistent repayment and loan forgiveness programs. According to the complaints (see here and here), the defendants allegedly made deceptive claims in order to lure low-income consumers into paying hundreds to thousands of dollars in illegal upfront fees as part of a purported plan to pay down their student loans. The defendants allegedly made consumers believe that they were enrolled in a legitimate loan repayment program, that their loans would be forgiven in whole or in part, and that most or all of their payments would be applied to their loan balances. The FTC alleges that, in reality, the defendants pocketed the borrowers’ payments. The FTC also charged the defendants with falsely claiming to be or be affiliated with the Department of Education and stating that they were purchasing borrowers’ debt from federal student loan servicers in order to secure debt relief on their behalf. When consumers realized the debt relief program did not exist, the defendants allegedly often refused to provide refunds.
According to the FTC, these deceptive misrepresentations violated Section 5 of the FTC Act and the Telemarketing Sales Rule (TSR). The FTC also alleges that the companies violated the Gramm-Leach-Bliley Act (GLBA), by using deceptive tactics to obtain consumers’ financial information, and the TSR, by calling numbers listed on the National Do Not Call Registry and by failing to pay required Do Not Call Registry fees for access. In issuing the TROs (see here and here), which temporarily halt the two schemes and freeze the defendants’ assets, the court noted that, upon “[w]eighing the equities and considering the FTC’s likelihood of ultimate success on the merits,” there is good cause to believe that immediate and irreparable harm will occur as a result of the defendants’ ongoing violations of the FTC Act, the TSR, and the GLBA, unless the defendants are restrained and enjoined.
FDIC announces Florida disaster relief
On May 5, the FDIC issued FIL-22-2023 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Florida affected by severe storms, tornados, and flooding from April 12 to 14. The FDIC acknowledged the unusual circumstances faced by affected institutions and encouraged those institutions to work with impacted borrowers to, among other things: (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans, provided the measures are done “in a manner consistent with sound banking practices.” Additionally, the FDIC noted that institutions “may receive favorable Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery.” The FDIC will also consider regulatory relief from certain filing and publishing requirements and instructed institutions to contact the Atlanta Regional Office if they expect delays in making filings or are experiencing difficulties in complying with publishing or other requirements.
Colorado establishes medical debt collection requirements
On May 4, the Colorado governor signed SB 23-093 to cap the interest rate on medical debt at three percent per year. The Act outlines numerous provisions, including that entities collecting on a medical debt must provide a consumer with a written copy of a payment plan within seven days for medical debt that is payable in four or more installments. The Act also outlines requirements for accelerating or declaring a payment plan longer operative, and lays out prohibited actions (such as collecting on a debt or reporting a debt to a consumer reporting agency within a certain timeframe) relating to medical debt that an entity knows, or reasonably should know, is under review or being appealed. An entity that files a legal action to collect a medical debt must provide to a consumer (upon written request) an itemized statement concerning the debt and must allow a consumer to dispute the debt’s validity after receiving the statement. Entities are prohibited from engaging in collection activities until the itemized statement is delivered. The Act outlines self-pay requirements and estimates, and further provides that it is a deceptive trade practice to violate outlined provisions relating to billing practices, surprise billing, and balance billing laws. The Act takes effect immediately and applies to contracts entered into after the effective date.
CFPB examines high-cost financings that cover medical expenses
On May 4, the CFPB released a report examining high-cost alternative financing products targeted to patients as a way to cover medical expenses. Products offered by a growing number of financial institutions and fintech companies include medical credit cards and installment loans, which typically carry significantly higher interest rates than those associated with traditional consumer credit cards (26.99 percent annual percentage rate as compared to 16 percent), the Bureau found, adding that these products also often have deferred interest plans which can create significant financial burdens for patients. The report found that between 2018 and 2020, consumers used alternative financing products to pay for nearly $23 billion in healthcare expenses and paid $1 billion in deferred interest. The report further found that companies are primarily marketing their products directly to healthcare providers with promised incentives. While the companies service the credit cards and loans, the Bureau explained that the healthcare providers are responsible for offering the products to patients and disclosing terms and risks. Many of these healthcare providers are unable to adequately explain complex terms, such as deferred interest plans, leaving patients facing ballooned deferred interests and lawsuits, the Bureau warned. According to the Bureau’s announcement, “financing medical debt on a credit card may increase patients’ exposure to extraordinary credit actions that healthcare providers would typically not pursue,” as “there can be a greater incentive for creditors to pursue lawsuits because unlike many healthcare providers, creditors can pursue a debt’s principal plus interest and fees.”
FDIC releases March enforcement actions
On April 28, the FDIC released a list of administrative enforcement actions taken against banks and individuals in March. The FDIC made public 11 orders including “four prohibition orders, three orders terminating deposit insurance, two consent orders, one order to pay civil money penalty (CMP), and one order terminating consent order.” Included is a civil money order issued against a Missouri-based bank related to alleged violations of the Flood Disaster Protection Act (FDPA). The FDIC determined that the bank had engaged in a pattern or practice of violating the FDPA by increasing, extending, or renewing a loan secured by property located or to be located in a special flood hazard area without timely notifying the borrower and/or the servicer as to whether flood insurance was available for the collateral.
11th Circuit: ECOA anti-discrimination provision against requiring spousal signature does not apply to defaulted mortgage during loan modification offer
On April 27, the U.S. Court of Appeals for the Eleventh Circuit affirmed a lower court’s decision to enter judgment in favor of a defendant national bank following a bench trial related to claims arising from foreclosure proceedings on the plaintiff’s home. The plaintiff executed a promissory note secured by a mortgage signed by both the plaintiff and her husband. After the borrowers defaulted on the mortgage, the defendant filed a foreclosure action and approved the plaintiff for a streamlined loan modification while the foreclosure action was pending. One of the conditions of the streamlined loan modification was that the plaintiff had to make required trial period plan payments and submit signed copies of the loan modification agreement within 14 days. Both individuals were expressly required to sign the modification agreement as borrowers on the mortgage. However, should one of the borrowers not sign, the bank required documentation as to why the signature is not required, as well as a recorded quit claim deed and a divorce decree. The plaintiff acknowledged that she refused to return a fully signed loan modification agreement or provide alternative supporting documentation, and during trial, both individuals admitted that the husband refused to sign. The borrowers eventually consented to final judgment in the foreclosure action and the property was sold.
The plaintiff then brought claims under ECOA and RESPA. The district court granted summary judgment to the defendant on the ECOA discrimination claim and the RESPA claim. After a bench trial on the ECOA notice claim, the district court determined that because the defendant gave proper notice to the plaintiff as required by ECOA (i.e., she was provided required written notices within 30 days after being verbally informed that her modification agreement was not properly completed), plaintiff’s claim failed on the merits.
On appeal, plaintiff argued, among other things, that the district court erred in granting summary judgment in favor of the defendant on her ECOA discrimination claim. The 11th Circuit explained that under ECOA it is unlawful for a creditor to discriminate against an applicant on the basis of marital status. However, ECOA and Regulation B also establish “exceptions for actions that are not considered discrimination, including when a creditor may require a spouse’s signature,” and include additional exceptions to creditor conduct constituting “adverse action” (i.e. “any action or forbearance taken with respect to an account that is delinquent or in default is not adverse action”). The appellate court held that because the plaintiff had defaulted on the mortgage at the time the loan modification was offered, ECOA and Regulation B’s anti-discrimination provision against requiring spousal signatures did not apply to her. Moreover, even if the provision was applicable in this instance, the appellate court held that “the district court correctly concluded that it was reasonable for [defendant] to require either [plaintiff’s] signature or a divorce decree in light of Florida’s homestead laws,” and that such a requirement does not constitute discrimination under ECOA.
As to the notice claim, the appellate court found no error in the district court’s conclusion that the defendant had satisfied applicable notice requirements by timely sending a letter to the plaintiff that (i) specified the information needed from the plaintiff; (ii) designated a reasonable amount of time within which to provide the information; and (iii) informed the plaintiff that failure to do so would result in cancellation of the modification. This letter satisfied the “notice of incompleteness” requirements of 12 C.F.R. § 202.9(c)(2).