InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
CFPB reports low delinquency rates despite Covid-19
On June 16, the CFPB released findings on delinquency trends for auto loans, student loans, mortgages, and credit cards. The post—the first in a series that will document consumer credit trend outcomes during the Covid-19 pandemic—examines how trends have evolved since June 2020. As previously covered by InfoBytes, last August, the Bureau issued a report examining trends through June 2020 in delinquency rates, payment assistance, credit access, and account balance measures, which showed that generally there was an overall decrease in delinquency rates since the start of the pandemic among auto loans, first-lien mortgages, student loans, and credit cards. According to the Bureau’s recent findings, as of March 2021, new delinquencies remain below pre-pandemic levels, despite a slight rise since July 2020 in auto loan and credit card delinquencies. These levels, the Bureau noted, may be attributed to federal, state, and local policy interventions that provide payment assistance and income support to consumers. Researchers also found that overall trends in new delinquencies were consistent across credit score groups, although “trends were more pronounced for consumers with lower credit scores.” Additionally, the Bureau reported that while stimulus payments and increasing vaccination rates may boost economic activity and keep delinquency rates down, accounts that would have been delinquent in the absence of payment assistance may begin to be reported as delinquent as assistance programs begin to end. Later this year, the Bureau will release a post in this series discussing payment assistance trends since June 2020.
2nd Circuit overturns ruling in favor of defendant in FDCPA case
On June 4, the U.S. Court of Appeals for the Second Circuit overturned a district court’s decision, holding that a debt collector’s offer to settle an outstanding debt did not require informing the consumer that the balance could increase as a result of interest and fees. The plaintiff allegedly incurred credit card debt, which was then placed with the defendant for collection. The defendant sent the plaintiff a collection letter offering to settle the account for less than what was owed. The plaintiff sued, alleging that the letter violated Section 1692e of the FDCPA because it did not specify that interest was accruing on the balance. The district court, relying on the 2nd Circuit’s 2016 decision in Avila v. Riexinger & Associates, held that the defendant violated the FDCPA because the letter did not indicate that the balance would increase as a result of interest and fees.
On appeal, the 2nd Circuit clarified that its Avila decision discussed two exceptions, or “safe harbors,” to the requirement for debt collectors to disclose the possibility of interest and fees accruing, which are if the collection notice: (i) “ accurately informs the consumer that the amount of the debt stated in the letter will increase over time”; or (ii) “clearly states that the holder of the debt will accept payment in the amount set forth in full satisfaction of the debt if payment is made by a specified date.” The 2nd Circuit pointed out that the “payment of an amount that the collector indicates will fully satisfy a debt excludes the possibility of further debt to pay.” The appellate court further held that “a settlement offer need not enumerate the consequences of failing to meet its deadline or rejecting it outright so long as it clearly and accurately informs a debtor that payment of a specified sum by a specified date will satisfy the debt.” Therefore, the appellate court concluded that the collection notice to the consumer did not violate FDCPA section 1692e “because it extended a settlement offer that, if accepted through payment of the specified amount(s) by the specified date(s), would have cleared [the plaintiff’s] account.”
6th Circuit affirms dismissal of FACTA credit card receipt suit
On May 11, the U.S. Court of Appeals for the Sixth Circuit affirmed dismissal of a putative class action for lack of subject matter jurisdiction, holding that while a merchant technically violated the Fair and Accurate Credit Transactions Act (FACTA) by including 10 credit card digits on a customer’s receipt, the customer failed to allege any concrete harm sufficient to establish standing. According to the opinion, the named plaintiff filed a class action against the merchant alleging the first six and last four digits of her credit card number were printed on her receipt—a violation of FACTA’s truncation requirement, which only permits the last five digits to be printed on a receipt. The plaintiff argued that this presented “a significant risk of the exact harm that Congress intended to prevent—the display of card information that could be exploited by an identity thief,” and further claimed she did not need to allege any harm beyond the violation of the statute to establish standing. The district court disagreed, ruling that the plaintiff “lacked standing because she alleged merely a threat of future harm that was not certainly impending” and that the merchant’s technical violation demonstrated no material risk of identity theft.
In agreeing with the district court, the 6th Circuit concluded that a “violation of the statute does not automatically create a concrete injury of increased risk of real harm even if Congress designed it so.” Moreover, the appellate court reasoned that the “factual allegations in this complaint do not establish an increased risk of identity theft either because they do not show how, even if [p]laintiff’s receipt fell into the wrong hands, criminals would have a gateway to consumers’ personal and financial data.” The appellate court further concluded, “statutory-injury-for-injury’s sake does not satisfy Article III’s injury in fact requirement” and the court must exercise its constitutional duty to ensure a plaintiff has standing.
Defendant obligated to indemnify bank in data breach suit
On May 10, the U.S. District Court for the Southern District of Texas ordered a defendant hospitality company to reimburse a national bank and its payment processor (collectively, “plaintiffs”) for $20 million in assessments levied against the plaintiffs by two payment brands following a data breach announced by the defendant in 2015. An investigation into the data breach determined that the defendant failed to require two-factor authentication on its remote access software, which contributed to the data breach and violated the payment brands’ security guidelines. The bank paid roughly $20 million to the payment brands and asked the defendant to indemnify it for the assessments. The defendant refused, arguing that its agreement with the bank was not breached because the payment brands’ rules “distinguish between actual and potential data comprises.” Moreover, the defendant stressed that “[b]ecause no evidence indicates that the attackers used the cardholder information” it was not obligated to indemnify the bank. However, the plaintiffs claimed that under the agreement, the defendant agreed to indemnify the bank “if its failure to comply with the brands’ security guidelines, or the compromise of any payment instrument, results in assessments, fines, and penalties by the payment brands.” The plaintiffs filed suit and moved for partial summary judgment on a breach of contract claim. In granting the plaintiffs’ motion for partial summary judgment, the court determined that the hospitality company is contractually obligated to cover the costs, ruling that actual data compromise is not necessary to trigger the agreement’s indemnification guidelines and that the bank does not need to show that the attackers used the payment information.
OCC updates Credit Card Lending booklet
On April 29, the OCC issued Bulletin 2021-22 announcing the revision of the Credit Card Lending booklet of the Comptroller’s Handbook. The booklet rescinds OCC Bulletin 2015-14 and replaces version 1.2 of the “Credit Card Lending” booklet that was issued on January 6, 2017. Among other things, the revised booklet (i) discusses the adoption of current expected credit loss methodology and the increased use of such modeling in credit card origination and risk management; (ii) reflects changes to OCC issuances; (iii) includes refining edits regarding supervisory guidance, sound risk management practices, and legal language; and (iv) includes revisions for clarity.
CFPB rolls back last year’s Covid-19 flexibilities
On March 31, the CFPB rescinded, effective April 1, the following policy statements, which provided temporary regulatory flexibility measures to help financial institutions work with consumers affected by the Covid-19 pandemic:
- A March 26, 2020, statement addressing the Bureau’s commitment to taking into account staffing and related resource challenges facing financial institutions related to supervision and enforcement activities.
- A March 26, 2020, statement postponing quarterly HMDA reporting requirements. (Covered by InfoBytes here.)
- A March 26, 2020, statement postponing annual data submission requirements related to credit card and prepaid accounts required under TILA, Regulation Z and Regulation E. (Covered by InfoBytes here.)
- An April 1, 2020, statement on credit reporting agencies and furnishers’ credit reporting obligations under the Fair Credit Reporting Act and Regulation V during the Covid-19 pandemic. The Bureau notes that the rescission “leaves intact the section entitled “Furnishing Consumer Information Impacted by COVID-19” which articulates the CFPB’s support for furnishers’ voluntary efforts to provide payment relief and that the CFPB does not intend to cite in examinations or take enforcement actions against those who furnish information to consumer reporting agencies that accurately reflect the payment relief measures they are employing.” (Covered by InfoBytes here.)
- An April 27, 2020, statement affirming that the Bureau would not take supervisory or enforcement action against land developers subject to the Interstate Land Sales Full Disclosure Act and Regulation J for delays in filing financial statements and annual reports of activity. (Covered by InfoBytes here.)
- A May 13, 2020, statement providing supervision and enforcement flexibility for creditors to resolve billing errors during the pandemic. (Covered by InfoBytes here.)
- A June 3, 2020, statement providing temporary flexibility for credit card issuers regarding electronic provision of certain disclosures during the Covid-19 pandemic in accordance with the E-Sign Act and Regulation Z. (Covered by InfoBytes here.)
The rescission also withdraws the Bureau as a signatory to the April 7, 2020, Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (covered by InfoBytes here), and the April 14, 2020, Interagency Statement on Appraisals and Evaluations for Real Estate Related Financial Transactions Affected by the Coronavirus (covered by InfoBytes here).
Additionally, the Bureau issued Bulletin 2021-01 announcing changes to how it communicates supervisory expectations to institutions. Bulletin 2021-01 replaces Bulletin 2018-01 (covered by InfoBytes here), which previously created two categories of findings conveying supervisory expectations: Matters Requiring Attention (MRAs) and Supervisory Recommendations (SRs). Under the revised Bulletin, the Bureau notes that examiners “will continue to rely on [MRAs] to convey supervisory expectations” but will no longer issue formal written SRs, as the agency believes that MRAs will more effectively convey its supervisory expectations. The Bulletin further states that “Bureau examiners may issue MRAs with or without a related supervisory finding that a supervised entity has violated a Federal consumer financial law.”
NYDFS finds credit card underwriting showed no evidence of wrongdoing
In March, NYDFS released a report detailing the findings of an investigation into whether a global technology company and a New York state-chartered bank allegedly discriminated against women when making underwriting decisions for a co-branded credit card. According to the report, in 2019, allegations were made that the bank offered lower credit limits to women applicants and unfairly denied women accounts. NYDFS launched a fair lending investigation into the allegations and reviewed underwriting data for nearly 400,000 New Yorker residents, but ultimately found no evidence of unlawful disparate treatment or disparate impact. Among other things, the report noted that the bank “had a fair lending program in place for ensuring its lending policy—and underlying statistical model—did not consider prohibited characteristics of applicants and would not produce disparate impacts.” The bank also identified the factors it used when making the credit decisions, including credit scores, indebtedness, income, credit utilization, missed payments, and other credit history elements, all of which, NYDFS stated, appeared to be consistent with its credit policy.
Court says Kansas credit card surcharge ban is unconstitutional
On February 25, the U.S. District Court for the District of Kansas granted in part and denied in part a plaintiff’s motion for summary judgment in an action concerning whether a state statute that bans credit card surcharges violates the First Amendment. Kansas law prohibits merchants from imposing a surcharge on customers who pay with credit cards instead of cash, and allows merchants to offer discounts to consumers who pay with cash. The plaintiff, a payment processing technology company, provides “software that allows merchants to display prices, including cost surcharges on purchases made by credit card,” which “allows consumers to comparison shop among payment types.” The plaintiff challenged the constitutionality of the law, claiming it is an unconstitutional restriction on commercial speech since it “effectively limits” what the plaintiff and merchants “can treat as the ‘regular price’ of an item and the corresponding information about prices and credit card fees that can be conveyed to consumers.” The Kansas attorney general—who has the authority to enforce the state’s no-surcharge statute—countered, among other things, that the statute furthers substantial state interests by (i) encouraging merchants to charge lower prices to customers who pay with cash; (ii) lowering the amount of consumer credit card debt through the use of cash discounts; and (iii) providing benefits to merchants by encouraging cash purchases, thereby allowing them to receive immediate payments, avoid credit card fees, and incur lower costs.
The court disagreed, ruling that none of the AG’s arguments advanced a substantial state interest—a requirement in order to not be considered a violation of the First Amendment. “Plaintiff's desire to display a single price while informing customers that credit card purchasers will be charged an additional fee would logically tend to support whatever interest the state may have in encouraging lower prices for cash customers,” the court wrote. “The statute nevertheless effectively prohibits this type of disclosure. Clearly, this restriction on speech is more extensive than necessary to further the asserted state interest.” Moreover, the court noted that “‘surcharges and discounts are nothing more than two sides of the same coin; a surcharge is simply a ‘negative’ discount, and a discount is a ‘negative’ surcharge.”
FTC settles with credit card laundering defendants
On February 10, the FTC announced settlements with several defendants that allegedly violated the FTC Act and the Telemarketing sales Rule by assisting an operation responsible for laundering millions of dollars in credit card charges through fraudulent merchant accounts. As previously covered by InfoBytes, the defendants engaged in a credit card laundering scheme with the operation to process credit card charges through merchant accounts set up by the operation under fictitious company names instead of processing charges through a single merchant account under the operation’s name. According to the FTC’s complaint, the defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants.
The settlements (see here, here, and here) permanently ban three of the defendants from payment processing and telemarketing or acting as independent sales organizations or sales agents in the payment processing industry. A previously issued settlement against a fourth defendant banned him from payment processing or acting as an independent sales organization or sales agent in the payment processing industry. Monetary judgments totaling more than $10.7 million collectively have been suspended due to the defendants’ inability to pay.
States reach $4.2 million settlement to resolve credit card interest overcharges
On February 8, state attorneys general from Pennsylvania, Iowa, Massachusetts, New Jersey, and North Carolina entered into an assurance of voluntary compliance with a national bank to resolve allegations that it overcharged credit card interest for certain consumers. According to the investigating states, between February 2011 and August 2017, the bank allegedly failed to properly reevaluate and reduce the annual percentage rate (APR) for certain consumer credit card account holders who were entitled to a reduction, as required by the CARD Act and state consumer protection laws. The announcement follows a 2018 CFPB settlement, in which the bank agreed to provide $335 million in restitution to affected consumers (covered by InfoBytes here). At the time, the Bureau noted that it did not assess civil monetary penalties due to efforts undertaken by the bank to self-identify and self-report violations to the Bureau. The states also acknowledged that the bank self-identified issues with its APR reevaluation process through an internal compliance program. The bank denied liability or that it violated the states’ consumer protection laws and has agreed to pay $4.2 million to approximately 25,000 current and former affected consumers, which will be limited to consumers who received a payment of $500 or more in restitution from the bank for the original violation.