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7th Circuit: CRAs not required to determine legal validity of disputed debt
On May 11, the U.S. Court of Appeals for the Seventh Circuit affirmed a district court’s dismissal of a putative class action, holding that the FCRA does not compel a consumer reporting agency (defendant) to determine the legal validity of a debt when investigating a dispute. The plaintiffs alleged that they obtained payday loans with allegedly usurious interest rates from online entities affiliated with Native American tribes. After both plaintiffs stopped making monthly payments, the lenders reported the delinquent amounts to the defendant. One of the plaintiffs disputed the accuracy of his credit report, arguing that because the loan was “illegally issued” he was not obligated to make payments. The defendant conducted an investigation and verified the furnished information was accurate. However, the defendant did not investigate whether the debt was legal. The plaintiffs filed suit, alleging two FCRA violations: (i) Section 1681e(b) which requires consumer reporting agencies “to assure maximum possible accuracy of the information” contained in credit reports; and (ii) Section 1681i(a) which “requires consumer reporting agencies to reinvestigate disputed items.” According to the plaintiffs, the defendant’s credit reports “contained ‘legally inaccurate’ information because they posted ‘legally invalid debts.’” The district court granted judgment on the pleadings to the defendant, ruling that the plaintiffs’ FCRA claims fell short because they never alleged that the information that was reported was factually inaccurate and, “until a formal adjudication invalidates the plaintiffs’ loans,” the reported information would not be factually inaccurate.
On appeal, the 7th Circuit held, among other things, that only furnishers—“such as banks, credit lenders, and collection agencies”—are required under the FCRA to correctly report liability, stating it is not the defendant’s responsibility to determine the enforceability of the debt because the “power to resolve these legal issues exceeds the competencies of consumer reporting agencies.” Moreover, the appellate court determined that the defendant cannot be liable under either of the plaintiffs’ FCRA claims if it did not report inaccurate information.
6th Circuit denies stay of injunction against PPP Ineligibility Rule
On May 15, the U.S. Court of Appeals for the Sixth Circuit denied the SBA’s emergency motion for a stay of the district court’s injunction against the agency’s Paycheck Protection Program (PPP) Ineligibility Rule. As previously covered by InfoBytes, the district court granted a preliminary injunction against the SBA’s PPP Ineligibility Rule—which, in relevant part, excludes from PPP loan eligibility “sexually oriented businesses that present entertainment or sell products of a ‘prurient’ (but not unlawful) nature.” The district court concluded that the Rule was in conflict with the Congressional purpose of the CARES Act, which houses the PPP, to protect workers in need during the Covid-19 pandemic, including workers for businesses that have been historically excluded from SBA financial assistance.
The 6th Circuit agreed with the district court, denying the motion for a stay. The court noted that the CARES Act specifies that eligibility “is conferred on ‘any business concern,’” which “encompasses sexually oriented businesses.” It went on to state that “the public interest is served in guaranteeing that any business, including plaintiffs, receive loans to protect and support their employees during the pandemic.”
In dissent, one judge argued that it is “unclear whether Congress meant that any business concern was eligible for a PPP loan regardless of SBA restrictions,” and therefore, the injunction should be stayed pending a decision on the merits.
SEC issues exemption for broker-dealer TALF Agents
On May 15, the SEC granted an exemption to broker-dealers designated by the Federal Reserve Bank of New York (NY Fed) as Term Asset-Backed Securities Loan Facility (TALF) Agents from certain requirements of Section 11(d)(1) of the Exchange Act. As previously covered by InfoBytes, under the TALF, the NY Fed will provide loans to U.S. companies that are secured by certain eligible consumer and small business asset-backed securities, such as student loans, auto and credit card loans, loans guaranteed by the SBA and certain other assets. The exemption for broker-dealers was requested by the NY Fed on May 12, because Section11(d)(1) would prevent TALF Agents from arranging nonrecourse loans in which the broker-dealer participated as a member of a selling syndicate or group.
The SEC granted the exemption with respect to asset-backed securities that are or may be designated as “eligible collateral,” declaring that any broker-dealer designated as a TALF Agent and participating in TALF 2020 is exempted from the requirements of Section 11(d)(1).
FTC alleges telemarketer charged organizations for unordered subscriptions
On May 13, the FTC filed a complaint against a Pennsylvania-based telemarketing operation for allegedly misrepresenting “no obligation” trial offers to organizations and then enrolling recipients in subscriptions for several hundred dollars without their consent. The complaint also charged a New York-based debt collector with violating the FTC Act by illegally threatening the organizations if they did not pay for the unordered subscriptions. The FTC alleged that the telemarketing operation violated the FTC Act and the Unordered Merchandise Statute by calling organizations such as businesses, schools, fire and police departments, and non-profits to offer sample books or newsletters without disclosing that they were selling subscriptions and then sending publications without the recipients’ consent. The FTC alleged that, if the organizations agreed to accept what they believed to be free publications, the defendants enrolled the organizations in a negative option program without their consent, and automatically charged the organizations for annual subscriptions. The telemarketer worked with a debt collection firm that allegedly misrepresented that the debts were valid and used false threats to collect outstanding balances. According to the FTC, the debt collection firm handled collections nationwide despite not having a valid corporate registration in any state and only being licensed to collect debt in Washington State. The FTC seeks a permanent injunction against the defendants, along with monetary relief “including rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.”
CFPB reaches $18 million settlement in credit-report scheme
On May 14, the CFPB filed a proposed stipulated final judgment and order in the U.S. District Court for the Central District of California against a mortgage lender and several related individuals and companies (collectively, “defendants”) for alleged violations of the Consumer Financial Protection Act (CFPA), Telemarketing Sales Rule (TSR), and Fair Credit Reporting Act (FCRA). As previously covered by InfoBytes, the CFPB filed a complaint in January claiming the defendants violated the FCRA by, among other things, illegally obtaining consumer reports from a credit reporting agency for millions of consumers with student loans by representing that the reports would be used to “make firm offers of credit for mortgage loans” and to market mortgage products, but instead, the defendants allegedly resold or provided the reports to companies engaged in marketing student loan debt relief services. The defendants also allegedly violated the TSR by charging and collecting advance fees for their debt relief services. The CFPB further alleged that defendants violated the TSR and CFPA when they used telemarketing sales calls and direct mail to encourage consumers to consolidate their loans, and falsely represented that consolidation could lower student loan interest rates, improve borrowers’ credit scores, and change their servicer to the Department of Education.
If approved by the Court, the Bureau’s proposed settlement would (i) impose an $18 million redress judgment against the mortgage lender, of which all but $200,000 would be suspended due to the lender’s limited ability to pay; (ii) require one of the individuals and his company to disgorge $403,750 in profits to provide redress; (iii) impose a $406,150 judgement against a second individual and his company, which will be suspended due to the defendants’ inability to pay; (iv) impose a total $450,001 civil money penalty against the defendants; (v) permanently ban the defendants from the debt-relief industry and from using or obtaining prescreened consumer reports; and (vi) prohibit the defendants from on using or obtaining consumer reports for “any business purpose other than underwriting or otherwise evaluating mortgage loans.”
FDIC updates Consumer Compliance Examination Manual
On May 13, the FDIC announced the April updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for FDIC examination staff for evaluating financial institutions’ compliance with federal consumer protection laws and regulations, and is designed to promote consistency and efficiency in the FDIC’s examination process. The recent updates include, among other things, (i) changes to the pre-examination planning process; (ii) incorporation of threshold changes for TILA, HMDA, and the Consumer Leasing Act; and (iii) changes to asset-based definitions for small and intermediate banks for the Community Reinvestment Act.
OFAC clarifies North Korea SDNs
On May 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) provided clarifying text related to the modified North Korea Sanctions and Policy Enforcement Act (covered by InfoBytes here), which bars foreign subsidiaries of U.S. financial institutions from knowingly engaging in transactions with Specially Designated Nationals (SDNs) identified under North Korea-related authorities. OFAC added the following text to 490 SDN records to assist the private sector in identifying persons that have been so designated: “Transactions Prohibited For Persons Owned or Controlled by U.S. Financial Institutions: North Korea Sanctions Regulations section 510.214.”
FTC settles with e-commerce telemarketers for $1.2 million
On May 13, the FTC announced a $1.2 million settlement with a group of telemarketing companies and their owners (collectively, “defendants”) for an allegedly deceptive e-commerce scheme in violation of the FTC Act, the Telemarketing Sales Rule (TSR), and the Consumer Review Fairness Act (CRFA). According to the complaint filed in the U.S. District Court for the Western District of Washington, the defendants sold products and services to consumers trying to start at-home internet-based businesses, which the defendants claimed would “substantially increase the visibility of and drive customer traffic to consumers’ ecommerce websites on the Internet.” The defendants would allegedly obtain leads by using a service that produces leads of consumers who have recently registered websites. The defendants would contact the consumers by telephone to sell services and would typically continue to call consumers to “upsell” additional products. The FTC argues that “[c]ontrary to [d]efendants’ representations, many consumers who purchase [d]efendants’ products and services do not end up with a functional website, earn little or no money, and end up heavily in debt.” The complaint alleges that the defendants violated the FTC Act, the TSR, and the CRFA by, among other things, (i) making unsubstantiated and false earnings and product claims; (ii) making false claims about business affiliations; and (iii) using contract provisions that restrict consumers’ ability to review or complain about purchased products or services.
The settlement with two of the entities and one owner includes a monetary judgment of over $16 million, which is partially suspended due to an inability to pay, and requires the defendants to surrender over $900,000. In separate settlements with the other two owners, large monetary judgments are also partially suspended due to an inability to pay, with one required to surrender over $100,000, and the other required to surrender over $200,000.
OFAC issues new Venezuela-related general licenses, revokes other
On May 12, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued two new General Licenses (GL) Venezuela GL 3H, “Authorizing Transactions Related to, Provision of Financing for, and Other Dealings in Certain Bonds,” and GL 9G, “Authorizing Transactions Related to Dealings in Certain Securities.” OFAC removed and revoked GL13E. The changes reflect the need to remove Nynas AB. According to the announcement, Nynas AB “has undertaken a corporate restructuring that has resulted in Nynas AB no longer being blocked pursuant to the Venezuela Sanctions Regulations.” Therefore, U.S. persons can engage in transactions or activities with Nynas AB, “provided such activities do not involve blocked persons or otherwise prohibited activities.” OFAC also made conforming technical updates to two FAQs to reflect the issuance of the new GLs.
SBA, Treasury release PPP loan forgiveness application
On May 15, the Small Business Administration (SBA) in consultation with the Treasury Department announced the release of the Paycheck Protection Program (PPP) Loan Forgiveness Application that borrowers must complete in order to have their loans forgiven at the conclusion of the eight-week covered period, which begins upon loan disbursement. The application provides specific instructions, including several measures designed to reduce compliance burdens and simplify the process. These include: (i) “[o]ptions for borrowers to calculate payroll costs using an ‘alternative payroll covered period’ that aligns with borrowers’ regular payroll cycles”; (ii) the flexibility to count any eligible payroll and non-payroll expenses paid or incurred during the eight-week period after the disbursement of a borrower’s PPP loan; (iii) clear instructions on how to perform calculations to confirm eligibility for loan forgiveness as required by the CARES Act; (iv) a safe harbor from forgiveness reduction for borrowers that were able to rehire employees by June 30; and (v) the addition of a new exemption from forgiveness reduction “for borrowers who have made a good-faith, written offer to rehire workers that was declined[.]” The SBA announced it “will also soon issue regulations and guidance to further assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities.”