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House fintech task force examines buy now/pay later industry
On November 2, the House Financial Services Committee’s Task Force on Financial Technology held a hearing titled “Buy Now, Pay More Later? Investigating Risks and Benefits of BNPL and Other Emerging Fintech Cash Flow Products,” urging regulators to examine the BNPL industry. The committee memorandum highlighted the rise in consumers products offered by fintechs, such as BNPL, earned wage access, and overdraft avoidance products, and warned that while these products may help consumers manage their personal cash flow, they also have the potential to create unsustainable levels of debt. FSC staff noted that many lending disclosure requirements, including those under TILA, may not apply to several of these products, thus creating concerns regarding consumers’ understanding of the associated risks. Pointing out that payments made on many of these products are not reported to credit bureaus, FSC staff raised the issue of whether consumers are missing out on opportunities to build credit.
The task force heard from several industry witnesses who discussed, among other things, current federal and state consumer protection regulations that apply to BNPL products. One witness stressed the importance of “balanced and thoughtful regulation” that benefits consumers and merchants using these new payment solutions, and noted that the industry is actively working with credit bureaus on ways to share repayment data. House Financial Services Chair Maxine Waters (D-CA) also urged the CFPB to “look[ ] deeply” at these emerging products to gain a better understanding of how they may impact low- and moderate-income consumers and borrowers of color. Representative Blaine Luetkemeyer (R-MO) noted, however, that these products “allow[] people to purchase products, [and] pay for them in a timely manner as they can afford them.” Representative Warren Davidson (R-OH) agreed, stressing that policymakers need to “avoid punishing new products for not fitting within regulatory buckets that were already built” and “should avoid overly impairing consumer choices on how they spend money.”
11th Circuit’s new opinion says plaintiff still has standing to sue in outsourced debt collection letter action
On October 28, the U.S. Court of Appeals for the Eleventh Circuit issued a split opinion in Hunstein v. Preferred Collection & Management Services, vacating its April 21 decision but still finding that the plaintiff had standing to sue. As previously covered by InfoBytes, last April the 11th Circuit reviewed the district court’s dismissal of plaintiff’s claims that the disclosure of medical debt to a mail vendor violated the FDCPA’s third-party disclosure provisions. The 11th Circuit originally held that transmitting a consumer’s private data to a commercial mail vendor to generate debt collection letters violates Section 1692c(b) of the FDCPA because it is considered transmitting a consumer’s private data “in connection with the collection of any debt.” At the time, the appellate court determined that communicating debt-related personal information with the third-party mail vendor is a concrete injury under Article III. Even though the plaintiff did not allege a tangible injury, the appellate court held, in a matter of first impression, that under the circumstances, the plaintiff alleged a communication “in connection with the collection of any debt” within the meaning of § 1692c(b).
In its most recent opinion, the majority wrote that it was vacating its prior opinion “[u]pon consideration of the petition for rehearing, the amicus curiae briefs submitted in support of that petition, and the Supreme Court’s intervening decision in TransUnion LLC v. Ramirez.” The appellate court first re-examined whether the plaintiff had standing to sue. Among other things, the majority held that while the plaintiff cannot demonstrate “a risk of real harm,” he was able to show standing “through an intangible injury resulting from a statutory violation.” Further, the majority determined that TransUnion reaffirmed its conclusion that the plaintiff “alleged a harm that bears a close relationship to a harm that has traditionally been recognized in American courts.” (In TransUnion, the Court concluded, among other things, that “[i]n looking to whether a plaintiff’s asserted harm has a ‘close relationship’ to a harm traditionally recognized as providing a basis for a lawsuit in American courts, we do not require an exact duplicate.”) The majority further concluded that Congress’s judgment also favors the plaintiff because Congress indicated that violations of § 1692c(b) constitute a concrete injury.
The appellate court next considered the merits of the case, with the majority concluding that the plaintiff adequately stated a claim that the transmittal of personal debt-related information to the vendor constituted a communication within the meaning of § 1692c(b)’s phrase “in communication with the collection of the debt.”
Judge Tjoflat dissented, arguing that the April decision was issued before TransUnion, and following the Supreme Court’s reasoning, the plaintiff did not have standing because he did not suffer a concrete injury, and that there is an important difference between a plaintiff’s statutory cause of action to sue over a violation of federal law and “a plaintiff’s suffering concrete harm because of the defendant’s violation of federal law.” Judge Tjoflat further added that a “simple transmission of information along a chain that involves one extra link because a company uses a mail vendor to send out the letters about debt is not a harm at which Congress was aiming.”
NYDFS seeks to implement Commercial Finance Disclosure Law
On October 20, NYDFS published a notice announcing a proposed regulation (23 NYCRR 600) to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here). The CFDL was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
As previously covered by InfoBytes, NYDFS solicited comments on a pre-proposed regulation released last month, which, among other things, (i) specified persons and entities required to comply with the regulation; (ii) defined terms used within the CFDL, including “commercial financing” and “finance change”; (iii) explained APR rate calculations and allowed tolerances; (iv) outlined specific disclosure requirements, including formatting and signature requirements; and (vi) detailed several provisions related to commercial financings that offer multiple payment options, certain duties of financers and brokers involved in commercial financing, record retention requirements, and the reporting process for certain providers that calculate estimated annual percentage rates.
The proposed regulation made several changes to the pre-proposed regulation based on comments NYDFS received. These include:
- Modifying the definition of when a specific offer is made that triggers the requirement to provide a disclosure. NYDFS stated that this change “should allow for some negotiations between borrowers and lenders before disclosures are required.”
- Adding the Secured Overnight Financing Rate (SOFR) as an acceptable rate index for use in adjustable-rate financings due to the cessation of LIBOR at the end of the year.
- Clarifying the definition of a “broker” to be “defined in terms of the substantive services they perform during the underwriting process.”
- Modifying the allowed tolerances when calculating APRs as required under Part 600.04. For most transactions, NYDFS explained that the tolerance threshold will remain one-eighth of one percent. For irregular transactions, NYDFS proposed a larger tolerance of one-quarter of one percent.
Additionally, the proposed regulation provides that the compliance date for the final regulation will be six months after the final adoption and publication of the regulation in the State Register. Comments on the proposed regulation are due December 19.
New York expands disclosure requirements for creditors and debt collectors
On October 8, the New York governor signed S737A, which requires creditors and debt collectors to clearly and conspicuously disclose to a debtor that communications are available in alternative formats. Among other things, the bill requires that creditors and debt collectors: (i) be assessed a civil penalty of up to $250 for violations of the law and up to $500 for each subsequent violation; and (ii) supply a phone number for consumers to request the letter in an alternative format. The bill also defines “communication,” “debt,” and “debt collector.”
DFPI issues third round of draft regulations for commercial financing disclosures
On October 12, the California Department of Financial Protection and Innovation (DFPI) issued a third draft of proposed regulations implementing the requirements of the commercial financing disclosures required by SB 1235 (Chapter 1011, Statutes of 2018). As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances. In July 2019, California released the first draft of the proposed regulations, initiated the formal rulemaking process with the Office of Administrative Law in September 2020, and subsequently released a second round of modifications in August (covered by InfoBytes here, here, and here). The third modifications to the proposed regulations follow a consideration of public comments received on the various iterations of the proposed text. Among other things, the proposed modifications:
- Amend several terms including “approved advance limit,” “approved credit limit,” “at the time of extending a specific commercial financing offer,” “benchmark rate,” “broker,” “provider,” and “recipient funds.”
- Define the term “specific commercial financing offer” to mean a written communication to a recipient related to specific payment amounts and costs of financing, but does not include a recipient’s name, address, or general interest in financing.
- Amend certain disclosure requirements and thresholds, including specific circumstances that a provider can disregard when making calculations and disclosures.
- Clarify APR calculation requirements and tolerances and outline disclosure criteria for specifying the amount of financing used to pay down or pay off other amounts owed by a recipient.
- Amend duties and requirements for financers and brokers.
- Amend criteria for specifying the amount of funding a recipient will receive.
Comments on the third modifications must be received by October 27.
Massachusetts highlights UDAP risks of representment fees
On September 23, the Massachusetts Office of Consumer Affairs and Business Regulation, Division of Banks, issued a supervisory alert reminding financial institutions to clearly disclose representment non-sufficient funds (NSF) fees connected to deposit accounts to avoid consumer confusion as well as potential legal and regulatory risks. The alert explains that a representment NSF fee may occur when a financial institution presents the same transaction again, in an attempt to obtain declined funds. According to the alert, a “repeated merchant payment transaction can trigger the assessment of multiple NSF fees by a depository institution if the transaction is presented more than once,” causing some financial institutions to charge the consumer an NSF fee for both the original presentment as well as for each subsequent representment. The alert discusses consumer protection risks associated with the representment of NSF fees, including recent class action lawsuits for breach of contract, some of which have resulted in customer reimbursements and legal fees. Additionally, the alert highlights issues with standard industry deposit account agreements and fee schedules supplied by payment processing software vendors to financial institutions, which may not adequately explain an institution’s actual NSF fee practices as disclosed to customers. While certain disclosures and account agreements may indicate that one NSF fee will be charged “per item” or “per transaction,” these forms may not sufficiently explain that the same processed transaction may trigger multiple NSF fees. The alert reminds financial institutions charging representment fees that they risk violating state and federal UDAP law if their relevant account disclosures and agreements are not in compliance, and urges financial institutions to review deposit disclosures and contract language to ensure NSF fees are clearly and consistently communicated to consumers.
SEC letter illustrates climate-change disclosures
Recently, the SEC’s Division of Corporation Finance issued guidance to companies that may be required to include information concerning climate change risks and opportunities in “disclosures related to a company’s description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.” Such disclosures, as discussed in the SEC’s 2010 Climate Change Guidance, address the following: (i) the effect of pending or existing legislation, regulations, and international agreements related to climate change; (ii) the indirect impact of regulations or the direction of business trends; and (iii) the physical effects of climate change. An illustrative letter provided by the Division outlines “sample comments that the Division may issue to companies regarding their climate-related disclosure or the absence of such disclosure.” The Division clarified that the letter does not provide an exhaustive list of issues that companies should consider, and that any comments issued “would be appropriately tailored to the specific company and industry, and would take into consideration the disclosure that a company has provided in Commission filings.”
NYDFS issues pre-proposed regulation to implement Commercial Finance Disclosure Law
On September 21, NYDFS Acting Superintendent Adrienne A. Harris announced a pre-proposed regulation to implement New York’s Commercial Finance Disclosure Law (CFDL) (covered by InfoBytes here), which was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date to January 1, 2022. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which includes persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients at the time a specific offering of finance is extended for certain commercial transactions of $2.5 million or less.
The CFDL and the pre-proposed implementing regulation are applicable to persons or entities who (i) extend a specific offer of commercial financing to a recipient (i.e., a person who applies for commercial financing and is made a specific offer of commercial financing); (ii) solicit and present specific offers of commercial financing on behalf of a third party; or (iii) provide or will provide commercial financing to recipients and communicate a specific amount, rate or price, in connection with the commercial financing, either directly to a recipient, or to a broker with the expectation that the information will be shared with a recipient.
The term “commercial financing” is defined broadly to include:
- Open-End Financing
- Closed-End Financing
- Sales-Based Financing (i.e., merchant cash advance)
- Defined to mean any transaction repaid over time as a percentage of sales or revenue, in which the payment amount may vary by sales or revenue volume, including any financing with a sales or revenue based true-up mechanism.
- Accounts Receivable Purchase Transactions, including Factoring
- Factoring is defined to mean any accounts receivable purchase transaction that includes an agreement to purchase, transfer, or sell a legally enforceable claim for payment held by a recipient for goods or services that have been supplied or rendered, but for which payment has not yet been made.
- Asset-Based Lending
- Defined to mean a transaction in which advances are made from time to time contingent upon a recipient forwarding payments received from one or more third parties for goods or services the recipient has supplied or rendered to such third party.
- Lease Financing
- Defined to mean providing a lease for goods that includes a purchase option that creates a security interest in the goods leased, including a “finance lease” as defined in the UCC.
- Any other form of financing for which proceeds are not primarily intended for consumer-purpose.
Notwithstanding, the pre-proposed regulation provides that commercial financing does not encompass any transaction in which a financer provides a disclosure required by the Truth in Lending Act. The following entities and transactions are exempt from the CFDL: (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) technology service providers; (v) certain lease transactions under the New York Uniform Commercial Code; (vi) lenders who make no more than five applicable transactions in New York in a 12-month period; (vii) individual commercial financing transactions in an amount over $2.5 million; and (viii) commercial financing transactions involving certain vehicle dealers.
Among other things, the pre-proposed regulation:
- Includes definitions for terms used in the CFDL and the pre-proposed regulation, including definitions of “finance charge” under the different covered transactions (e.g., commercial financing transactions generally, account receivable purchase transactions that are not factoring transactions, factoring transactions, lease financing transactions).
- Explains how providers should calculate the annual percentage rate and outlines allowed tolerances.
- Outlines formatting requirements for disclosures for the following types of financing: (i) sales-based financing (including merchant cash advances); (ii) closed-end financing; (iii) open-end financing; (iv) factoring transaction financing; (v) lease financing; (vi) general asset-based financing; and (vii) all other commercial financing transactions.
- Provides disclosure requirements for instances where the amount financed is greater than the recipient funds, which includes a disclosure entitled “Funding You Will Receive.”
- Provides that, consistent with the CFDL, a provider must give the required disclosures to a recipient at the time of extending a specific offer for commercial financing. The pre-proposed regulation defines “at the time of extending a specific offer” to mean (i) any time a specific periodic or irregular payment amount, rate or price in connection with commercial financing is quoted in writing to a recipient, based upon information from, or about, the recipient; and (ii) any subsequent time when the terms of an existing consummated commercial financing contract are changed, prior to the recipient agreeing to the changes, if the resulting changes would increase the finance charge (certain alternative parameters apply with respect to open-end credit plans). The pre-proposed regulation also notes that where a provider allows a recipient to select from multiple offer options or customize a financing offer, the provider need only provide the disclosure(s) for the specific offer that the recipient elects to pursue.
- Provides disclosure signature requirements, which may be electronic (prior to consummating a commercial financing, a financer must obtain a copy of the disclosures made pursuant to the CFDL that are signed by the recipient).
- Describes how the CFDL’s $2.5 million disclosure threshold is calculated.
- Outlines requirements for commercial financings that offer multiple payment options.
- Specifies certain duties of financers and brokers involved in commercial financing, including record retention requirements (four years).
- Details the reporting process for which certain providers calculating estimated annual percentage rates will report data to the superintendent relating to “the estimated annual percentage rates disclosed to the recipient and actual retrospective annual percentage rates of completed transactions” in order to facilitate accurate estimates for future transactions.
Outreach comments on the pre-proposed regulation are due by October 1. After NYDFS completes this preliminary phase, NYDFS will make a formal proposed regulation. Comments on the formal proposed regulation will be due within 60 days of publication in the State Register. NYDFS expects to have a final regulation in place by January 1, 2022, which is the effective date set forth in the underlying law.
Fed extends TILA disclosure requirements
On September 1, the Federal Reserve Board adopted a proposal to extend the recordkeeping and disclosure requirements associated with the TILA, implemented by Regulation Z for three years, with revision. While Dodd-Frank transferred rule-writing authority for Fed-supervision institutions under Regulation Z to the CFPB, the Fed is taking action to “minimize burden on small entities through tailored supervision, including through a risk-focused consumer compliance supervision program and an examination frequency policy that provides for lengthened time between examinations for institutions with a lower risk profile.” As previously covered by InfoBytes, the Board proposed in April to revise FR Z (OMB No. 7100-0199) to: (i) include burden connected to disclosure requirements in “rules issued by the Bureau since the Board’s last Paperwork Reduction Act (PRA) submission, as well as for one information collection for which the Bureau estimates burden” but the Board formerly did not; (ii) break out and clarify “burden estimates” that were formerly consolidated; and (iii) eliminate burden associated with some requirements due to the Bureau accounting for burden for the entire industry, or because the burden is now deemed a part of an institution’s usual and customary business practices. The revisions will be implemented as proposed and are effective immediately.
District Court denies bank’s motion to dismiss class action regarding overdrafts
On August 23, the U.S. District Court for the District of Connecticut denied a motion to dismiss a putative class action case, in which the plaintiff alleged that a national bank’s (defendant) overdraft opt-in notice failed to satisfy Regulation E of the Electronic Funds Transfer Act (EFTA), and that the bank’s assessment of overdraft fees in light of such failure violated the Connecticut Unfair Trade Practices Act (CUFTA). The plaintiff alleged that she and other members of the putative class “opted into [the defendant’s] overdraft program for debit card and ATM transactions,” and were charged overdraft fees on an “available” balance policy multiple times. However, the defendant’s opt-in disclosure agreement states that an overdraft only happens “when you do not have enough money in your account to cover a transaction, but we pay it anyway,” which is a description of the “actual” balance of an account. Accordingly, the defendant “charge[d] overdraft fees even at times when there [was] a sufficient amount of money in a consumer’s account.” The plaintiff alleged that the defendant continued this system with knowledge of EFTA’s requirements and “that its opt-in agreement did not provide an accurate, clear, and easily understandable definition of an overdraft.”
In its motion to dismiss, the defendant argued that the plaintiff failed to state a claim alleging violations of the EFTA because, among other things: (i) when the opt-in agreement is considered together with other documents provided to the customer upon opening an account, the policies are clearly explained; and (ii) the defendant is shielded from liability under the safe harbor provisions of the EFTA, because the opt-in language utilized is identical to the CFPB’s model form. The defendant also argued that it complied with Regulation E, “because the opt-in notice it used, when read together with an ‘Account Agreement’ and ‘Overdraft Disclosure’ it says were provided to [the plaintiff] when she opened her account, made clear that it would charge overdraft fees when her ‘available balance’ fell below zero.”
The court found that the defendant’s argument regarding compliance with Regulation E “relies on documents that are not attached to, incorporated in, or otherwise ‘integral’ to the complaint” and that Regulation E requires that the notice itself be a “segregated” document, which utilizes “clear and readily understandable” language. The court also ruled that though the defendant utilized language from the CFPB model form, the plaintiff plausibly alleges that use of the form was not “an appropriate model” since the language did not disclose the defendants overdraft program in a “clear and readily understandable” manner.