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3rd Circuit: Plaintiff must arbitrate debt adjustment allegations
On March 24, the U.S. Court of Appeals for the Third Circuit determined that a plaintiff must arbitrate proposed class claims brought against a debt resolution law firm. The plaintiff alleged the law firm engaged in racketeering, consumer fraud, and unlawful debt adjustment practices in violation of various New Jersey laws. The district court denied the firm’s motion to compel arbitration, applied the law of the forum state, New Jersey, and ruled that the arbitration provision was invalid and unenforceable. The law firm appealed, arguing, among other things, that the arbitration provision would have been found valid if the district court had applied Delaware law in accordance with the parties’ 2013 professional legal services agreement. On appeal, the 3rd Circuit disagreed with the district court, holding that the arbitration provision demonstrated that the plaintiff gave up her right to litigate her claims in court, despite there appearing to be a true conflict between Delaware and New Jersey law. The appellate court concluded that the arbitration clause met the standard set forth in Atalese v. U.S. Legal Services Group, L.P., which held that an arbitration provision “will pass muster if it, ‘at least in some general and sufficiently broad way,. . .explain[s] that the plaintiff is giving up her right to bring claims in court or have a jury resolve the dispute.’” Moreover, the 3rd Circuit noted that the arbitration provision was also sufficiently broad enough to reasonably encompass the plaintiff’s statutory causes of action.
ARRC not yet in a position to recommend forward-looking SOFR term rate
On March 23, the Alternative Reference Rates Committee (ARRC) announced that it “will not be in a position to recommend a forward-looking Secured Overnight Financing Rate (SOFR) term rate by mid-2021.” Additionally, ARRC noted that it cannot guarantee that it will be able to recommend an administrator to produce a robust forward-looking term rate by the end of 2021, when certain LIBOR U.S. dollar settings cease being published (covered by InfoBytes here). ARRC “encourage[d] market participants to continue to transition from LIBOR using the tools available now,” such as the SOFR averages and index data and ARRC’s A User’s Guide to SOFR, and “not to wait for a forward-looking term rate for new contracts.”
Federal Reserve Board Vice Chair for Supervision Randal K. Quarles also discussed “safety and soundness risks associated with the continued use of USD LIBOR in new transactions after 2021.” Speaking at “The SOFR Symposium: The Final Year” hosted by ARRC, Quarles expressed concerns that use of USD LIBOR has actually increased over the past three years, and emphasized that there should be no “remaining doubts as to exactly when and whether LIBOR will end.” Among other things, Quarles also highlighted a recent Fed supervisory letter (covered by InfoBytes here), which provides supervisory guidance for examiners to consider when assessing an institution’s plan to transition away from LIBOR.
Find continuing InfoBytes coverage on LIBOR here.
Illinois enacts 36 percent rate cap for consumer loans, creates state community reinvestment act
On March 23, the Illinois Governor signed the Predatory Loan Prevention Act, SB 1792, which prohibits lenders from charging more than 36 percent APR on all non-commercial consumer loans under $40,000, including closed-end and open-end credit, retail installment sales contracts, and motor vehicle retail installment sales contracts. For purposes of calculating the APR, the act requires lenders to use the system for calculating a military annual percentage rate under the Military Lending Act. Any loan with an APR exceeding 36 percent will be considered null and void “and no person or entity shall have any right to collect, attempt to collect, receive, or retain any principal, fee, interest, or charges related to the loan.” Additionally, a violation constitutes a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and carries a potential fine up to $10,000. The act also contains an anti-evasion provision that prohibits persons or entities from “making loans disguised as a personal property sale and leaseback transaction; disguising loan proceeds as a cash rebate for the pretextual installment sale of goods or services; or making, offering, assisting, or arranging a debtor to obtain a loan with a greater rate or interest, consideration, or charge than is permitted by this Act through any method including mail, telephone, internet, or any electronic means regardless of whether the person or entity has a physical location in the State.”
The same day, the governor also signed SB 1608, which, among other things, creates a state version of the Community Reinvestment Act. The act will allow the state to assess whether covered financial institutions, including state-chartered banks, credit unions and non-bank mortgage lenders, are meeting the needs of local communities, including low-income and moderate-income neighborhoods. Financial institutions’ lending practices and community development/redevelopment program investments will be examined by the Secretary of Financial and Professional Regulation, who is granted the authority to conduct examinations in compliance with other state and federal fair lending laws including, but not limited to, the Illinois Human Rights Act, ECOA, and HMDA.
Both acts are effective immediately.
Fed establishes Financial Stability Climate Committee
On March 23, Federal Reserve Governor Lael Brainard spoke at the “Transform Tomorrow Today” Ceres 2021 Conference to discuss the challenges and risks climate change poses to financial institutions. To strengthen the Fed’s capacity to identify and assess these financial risks, Brainard announced the establishment of the Financial Stability Climate Committee, which will complement the work of the Fed’s Supervision Climate Committee, and is “charged with developing and implementing a program to assess and address climate-related risks to financial stability.” The new committee will coordinate with the Financial Stability Oversight Council and its member agencies, as well as with the Fed’s community development, payments, international coordination, and economic research and data areas, in order to develop a coordinated approach. Brainard emphasized that the Fed is committed to increasing its capacity “to understand and address the risks, complexities, and challenges related to climate change within the Federal Reserve's responsibilities,” and noted that “climate change can be seen as similar to other financial stability shocks emanating from outside the financial system, such as COVID-19, which are difficult to predict with precision.”
New York law prohibiting paper billing statement fees is an unconstitutional restriction of commercial speech
On March 16, the U.S. District Court for the Northern District of New York dismissed a putative class action with prejudice over whether a national bank violated state law by charging a fee for paper billing statements in certain circumstances. The consumer’s suit alleged violations of N.Y. Gen. Bus. Law § 399-zzz as well as N.Y. Gen. Bus. Law § 349, which prohibits deceptive acts and practices. The bank argued, among other things, that (i) the consumer’s § 399-zzz claim was preempted by the National Bank Act (NBA); (ii) the consumer’s interpretation of § 399-zzz “would prevent [the bank] from exercising its federally authorized power to charge non-interest fees”; (iii) § 399-zzz is unconstitutional under the First Amendment because it limits the bank’s communication of fees and pricing to consumers; (iv) the statute does not apply to national banking institutions like the defendant; and (v) the statute does not prohibit the conduct at issue. The court disagreed, ruling that § 399-zzz is not preempted by the NBA because paper statement fees are not limited to only banking institutions. Moreover the court determined that the state statute is a rule of general application and “does not prevent or significantly interfere with [the bank’s] exercise of its powers.” However, the court ultimately dismissed the consumer’s action, agreeing that § 399-zzz constitutes an unconstitutional restriction on the bank’s First Amendment right of commercial speech under intermediate scrutiny. According to the court, § 399-zzz regulates “how businesses can communicate their fees” by “prohibit[ing] businesses from charging consumers for receiving a paper statement” but permits businesses “to offer consumers a credit for receiving an electronic statement instead of a paper statement.” The court also ruled that the consumer failed to state a claim for a deceptive act or practice because §399-zzz unconstitutionally infringes on the bank’s First Amendment rights.
HUD approves settlement resolving alleged lending discrimination
On March 19, HUD released a Conciliation Agreement between an individual consumer and a mortgage lender to resolve allegations that the lender violated the Fair Housing Act by denying the consumer’s loan for a group home for persons with disabilities. The lender denied any discriminatory behavior, and agreed to resolve the complaint by (i) paying the consumer $125,000; (ii) implementing additional training for employees, including home mortgage consultants, managers, and underwriters; and (iii) ensuring its policies comply with the Fair Housing Act.
FinCEN announces upcoming rulemaking on beneficial ownership reporting requirements
On March 22, FinCEN Director Kenneth A. Blanco spoke at the Florida International Bankers Association AML Compliance Conference, and discussed the upcoming advance notice of proposed rulemaking (ANPRM) concerning new beneficial ownership reporting requirements of the Anti-Money Laundering Act of 2021 (AML Act). As previously covered by InfoBytes, the AML Act was enacted in January as part of the National Defense Authorization Act for Fiscal Year 2021, and made significant changes to BSA and AML laws. Included within the AML Act is the Corporate Transparency Act (CTA), which defines a beneficial owner as an entity or individual “who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise. . .exercises substantial control over the entity” or “owns or controls not less than 25 percent of the ownership interests of the entity,” with limited exceptions. Blanco did not provide a timeline for when the ANPRM would be issued, but emphasized that implementing the AML Act is FinCEN’s “number one priority.” Blanco also noted, among other things, that FinCEN is taking steps to develop a secure database to house collected beneficial ownership information, and is currently in the process of developing the use and confidentiality protocols that will control access to the database.
Digital asset company to pay $6.5 million to settle CFTC allegations
On March 19, the CFTC announced a $6.5 million settlement with a California-based digital asset company to resolve allegations of false, misleading, or inaccurate reporting concerning its digital asset transactions that violated the Commodity Exchange Act or CFTC regulations. According to the CFTC, from January 2015 to September 2018, the company allegedly operated at least two trading programs that generated orders that, at times, matched each other. The CFTC claimed, among other things, that the transactional information provided on the company’s website and given to reporting services resulted “in a perceived volume and level of liquidity of digital assets. . .that was false, misleading or inaccurate.” Additionally, the CFTC alleged that the company was vicariously liable for a former employee’s use of “a manipulative or deceptive device” to intentionally place buy and sell orders that matched each other, creating a misleading appearance of interest in certain cryptocurrencies. The company did not admit or deny the CFTC’s findings and agreed to pay a $6.5 million civil penalty.
OFAC sanctions additional individuals and entities connected to Burmese military coup
On March 22, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 14014 against two individuals and two entities connected to the Burmese military’s “repression of pro-democracy protests.” The sanctions follow previous actions taken by OFAC earlier this year against several individuals and entities (covered by InfoBytes here and here). As a result of the sanctions, all property and interests in property belonging to the sanctioned persons and “any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons,” subject to U.S. jurisdiction are blocked and must be reported to OFAC. U.S. persons are generally prohibited from engaging in any dealings involving the property or interests in property of blocked or designated persons, unless exempt or authorized by a general or specific license.
Utah creates certain affirmative defenses for data breaches
On March 11, the Utah governor signed HB 80, which provides entities an affirmative defense for a data breach if they follow certain cybersecurity industry standards. Among other things, a “person that creates, maintains, and reasonably complies with a written cybersecurity program” that meets specific safeguard requirements to protect personal information and is in place at the time of the data breach has an affirmative defense to claims brought under Utah law or in the courts of the state that allege the person failed to implement reasonable information security controls that resulted in the data breach. A person also has an affirmative defense to claims regarding the failure to appropriately respond to a data breach or provide notice to affected individuals as long as the written cybersecurity program contained specific protocols at the time of the breach that “reasonably complied with the requirements for a written cybersecurity program” for responding to a data breach or for providing notice. HB 80 also outlines the components that a written cybersecurity program must include to be eligible for an affirmative defense, and is effective 60 days following adjournment of the legislature.