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FTC lawsuits allege student loan scams
On September 12, the FTC announced two separate suits filed in the U.S. District Court for the Central District of California against various entities and individuals who allegedly engaged in deceptive practices when promoting student loan debt relief schemes.
In the first complaint, filed jointly with the Minnesota attorney general, a debt relief company and its owners (collectively, the “Minnesota defendants”) were alleged to have violated the FTC Act, TILA, the Telemarketing Sales Rule (TSR), and various state laws, by charging consumers who sought student loan payment reduction programs an advance fee of over $1,300 while falsely representing that the payment would go toward their student loans. The advance fee, the FTC contends, was allegedly financed through high-interest loans from a third-party finance company identified as a co-defendant in both complaints. The stipulated order entered against the Minnesota defendants prohibits them from, among other things: (i) making material misrepresentations related to their financial products and services, or any other kind of product or service; (ii) making unsubstantiated claims about their financial products and services; (iii) engaging in unlawful telemarketing practices; or (iv) collecting payments on accounts sold prior to the order’s date. The stipulated order also requires the Minnesota defendants to notify its customers that none of their prior payments have gone towards a Department of Education repayment program or towards their student loans, and orders the payment of $156,000, with the total judgment of approximately $4.2 million suspended due to inability to pay.
The FTC filed a second complaint against a separate student loan debt relief operation for allegedly engaging in deceptive and abusive practices through similar actions, including charging consumers advance fees of up to $1,400 and enrolling consumers in the same finance company’s high-interest loan program. The action against the second student loan debt relief operation is ongoing.
Both complaints also charge the finance company with violating the assisting and facilitating provision of the TSR by providing substantial assistance to both sets of defendants even though it knew, or consciously avoided knowing, that they were engaging in deceptive and abusive telemarketing practices. The FTC also alleges that the finance company violated TILA when it failed to clearly and conspicuously make certain required disclosures concerning its closed-end credit offers. Separate stipulated orders were entered by the FTC in each case (see here and here) against the finance company. The orders’ terms require the finance company to pay a combined $1 million out of a nearly $28 million judgment, with the rest suspended due to inability to pay, as well as relinquish its rights to collect on any outstanding loans. Among other things, the orders also permanently ban the finance company from engaging in transactions involving secured or unsecured debt relief products and services or making misrepresentations regarding financial products and services.
9th Circuit: TILA right of rescission does not apply for mortgages used to reacquire property
On August 14, the U.S. Court of Appeals for the 9th Circuit held that TILA’s right of rescission does not apply when a borrower obtains a mortgage to reacquire residential property after having no ownership rights. According to the opinion, in 2003, a borrower quitclaimed his interest in residential property to his then wife; in 2007, he obtained a mortgage loan and took title to the property in accordance with a divorce judgment. The borrower sought rescission of the mortgage loan and the district court dismissed the action as untimely. On appeal, the 9th Circuit vacated the district court’s judgment, holding the borrower gave proper notice within the three year limit under TILA. On remand, the district court granted summary judgment in favor of the mortgage company, concluding the transaction was a residential mortgage transaction, in which no statutory right of rescission exists under TILA.
On appeal, the 9th Circuit affirmed summary judgment in favor of the mortgage company. The appellate court rejected the borrower’s arguments that (i) the mortgage documents showed he already owned an interest in the property before he took out the mortgage loan; and (ii) the mortgage was taken in accordance with a divorce judgment, not to finance the acquisition of the property. The appellate court concluded that under TILA, the mortgage loan was a “residential mortgage transaction,” the definition of which “includes both an initial acquisition and a reacquisition of a property.” The fact the mortgage company characterized the transaction as a refinance is not determinative, according to the panel, because the borrower did not acquire title to the property until the day after he signed the loan. Moreover, while the divorce judgment ordered the borrower to make a payment to his ex-wife in order to obtain title to the property, he obtained a residential mortgage loan “in order to carry out those conditions.”
Indiana Court of Appeals reverses state regulator’s finance charge action
On August 19, the Court of Appeals of Indiana reversed the Indiana Department of Financial Institutions (Department) finding that a car dealership charged an “impermissible additional charge” in violation of the state’s additional-charges statute when the dealership improperly disclosed a finance charge to its consumers. According to the opinion, the dealership charged, in addition to a third party titling fee, a $25.00 convenience fee to its credit customers for electronic titling through the third party. The service was required for credit customers but was optional for cash customers. After conducting a routine examination, the Department identified one violation from a transaction in July 2015, where the dealership did not disclose the convenience fee in the “finance charge” box of the disclosures, noting “the fee was only mandatory for credit customers and therefore was ‘a condition of the extension of credit.’” The dealership provided a contract from the same time period, showing it disclosed the fee in the “Itemization of Amount Financed” and “Amount Financed” boxes, not in the “Finance Charge” box. The Department charged the dealership with violating the state’s additional-charges statute, “for assessing ‘impermissible additional charges’ in the form of the $25.00 convenience fee,” as opposed to a charge for violating the state’s disclosure statute.
On review, the Court of Appeals concluded the charge was a finance charge because it was mandatory for the dealership’s credit customers but not its cash customers, and noted a finance charge cannot also be an additional charge. The Department argued it made no practical difference which violation it alleged, because the remedies under both statutes are the same, while the dealership noted a disclosure violation would entitle it to raise certain defenses under TILA. The appellate court did not address this issue, but nonetheless concluded “a finance charge doesn’t become an ‘impermissible additional charge’ when it’s not disclosed in the ‘Finance Charge’ box,” and remanded the case back to the Department for proceedings under the disclosure statute.
3rd Circuit: Proof of written agreement needed for TILA claims
On August 20, the U.S. Court of Appeals for the 3rd Circuit concluded that a plaintiff failed to adequately allege the existence of a written agreement for his deductible payment plan and therefore, his surgery institute did not violate TILA’s disclosure requirements. According to the opinion, the day before his surgery, the surgery institute orally agreed to accept a partial deductible payment and agreed to permit the plaintiff to pay the remaining deductible requirements in monthly installments. The plaintiff received two emails, one confirming the initial payment and the other confirming the payment plan and listing the plaintiff’s credit card. The institute performed the surgery, but the plaintiff failed to make any further payments on the deductible. Instead, the plaintiff filed an action against the institute alleging it violated TILA by extending credit and failing to provide the required disclosures. The district court granted judgment on the pleadings for the institute, concluding that the plaintiff' failed to establish a written agreement for the extension of credit. The court also issued sanctions, in the form of attorneys’ fees, against the plaintiff’s counsel, reasoning the counsel could have reasonably discovered the lack of written agreement and lack of payment before initiating the action.
On appeal, the 3rd Circuit affirmed in part and reversed in part in the district court’s judgment. The appellate court agreed with the district court that the plaintiff failed to establish the existence of a written agreement for credit with the institute, noting “the requirement of a written agreement [under TILA] is not satisfied by a ‘letter that merely confirms an oral agreement.’” But the appellate court noted that the district court erred in relying on an admission to that effect by plaintiff’s counsel during a telephone conference. Nonetheless, the error was “harmless” because the plaintiff failed to establish a written agreement was executed and signed, stating “[n]owhere does he allege that he signed a written agreement, and the [] email correspondence was merely ‘confirming’ the ‘previously discussed’ agreement." The appellate court then reversed the district court’s sanctions ruling, concluding it abused its discretion when it imposed them.
District Court allows case exploring whether cryptocurrency acquisitions are “cash-like” to proceed
On August 1, the U.S. District Court for the Southern District of New York allowed breach of contract and clear and conspicuous disclosure claims brought by a proposed class of consumers against a national bank to proceed, finding that ambiguity exists over whether credit card cryptocurrency purchases are “cash-like transactions.” The plaintiffs claimed that the bank breached their cardholder agreements when it changed the classification of cryptocurrency acquisitions from “purchases” to “cash advances” between January 23 and February 2, 2018. Plaintiffs contended that this change subjected cardholders to higher interest rates and transaction fees in violation of their cardholder agreements. Moreover, the plaintiffs claimed that the bank’s failure to clearly and conspicuously disclose the different types of transactions and varying rates, as well as its failure to provide advance notice of significant changes in its account terms and accurate disclosures in periodic account statements, violated TILA and Regulation Z.
The bank countered that no breach of contract occurred because cryptocurrency acquisitions are “cash-like transactions” that, under the cardholder agreement, are properly classified as cash advances. Specifically, the bank stated that because cryptocurrency can be a “medium of exchange, a measure of value, or a means of payment” under the definition of “cash,” it is therefore “cash-like.”
The court concluded that the plaintiffs offered a reasonable argument that purchases of cryptocurrency did not constitute cash advances. Plaintiffs argued that the contractual term “cash-like”—which was used in the cardholder agreement to describe a cash advance—referred only to financial instruments formally tied to physical, government-issued “fiat” currency, such as checks, money orders, and wire transfers. “Because, as plaintiffs plausibly allege, cryptocurrency does not imbue its holder with a legal right to any government-issued currency, acquisitions of cryptocurrency could not be classified as a cash-like transaction,” the court stated. As such, “[b]ecause plaintiffs have identified a reasonable interpretation of ‘cash-like transactions’ that would exclude purchases of cryptocurrency, the breach of contract claim survives the motion to dismiss.” The court also allowed plaintiffs’ “clear and conspicuous” disclosure claim under TILA to survive because the contract was not clear that purchases of cryptocurrency would result in cash advance fees. However, the court dismissed the plaintiffs’ remaining TILA claims, finding that (i) the bank did not change the contract terms themselves, but rather their application; and (ii) the periodic account statements did not inaccurately convey what the plaintiffs owed to the bank for those particular periods of time.
CFPB adjusts annual dollar amount thresholds under TILA regulations
On August 1, the CFPB published in the Federal Register the final rule amending Regulation Z, which implements the Truth in Lending Act (TILA), including as amended by the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act), the Home Ownership and Equity Protection Act of 1994 (HOEPA), and the Dodd-Frank Wall Street Reform and Consumer Protection Act’s ability-to-repay and qualified mortgage (ATR/QM) provisions. The CFPB is required to make annual adjustments to dollar amounts in certain provisions in Regulation Z, and has based the adjustments on the annual percentage change reflected in the Consumer Price Index in effect on June 1, 2019. The following thresholds will be effective on January 1, 2020:
- For open-end consumer credit plans under TILA, the threshold for disclosing an interest charge will remain unchanged at $1.00;
- For open-end consumer credit plans under the CARD Act amendments, the adjusted dollar amount for the safe harbor for a first violation penalty fee will increase from $28 to $29, and the adjusted dollar amount for the safe harbor for a subsequent violation penalty fee will increase from $39 to $40;
- For HOEPA loans, the adjusted total loan amount threshold for high-cost mortgages will be $21,980, and the adjusted points and fees dollar trigger for high-cost mortgages will be $1,099; and
- The maximum thresholds for total points and fees for qualified mortgages under the ATR/QM rule will be: (i) 3 percent of the total loan amount for loans greater than or equal to $109,898; (ii) $3,297 for loan amounts greater than or equal to $65,939 but less than $109,898; (iii) 5 percent of the total loan amount for loans greater than or equal to $21,980 but less than $65,939; (iv) $1,099 for loan amounts greater than or equal to $13,737 but less than $21,980; and (v) 8 percent of the total loan amount for loan amounts less than $13,737.
OCC releases June enforcement actions
On July 18, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. The new enforcement actions include personal cease-and-desist orders, civil money penalties, formal agreements, prompt corrective action directives, removal and prohibition orders, and terminations of existing enforcement actions. Included in the list is a formal agreement issued against a Texas-based bank on June 20 for alleged unsafe or unsound practices related to, among other things, compliance risk management and violations of laws and regulations concerning the Flood Disaster Protection Act (FDPA), Bank Secrecy Act, TILA, RESPA, and the Expedited Funds Availability Act. Among other things, the agreement requires the bank to (i) appoint a compliance committee responsible for submitting a written progress report detailing specific corrective actions; (ii) ensure that it has “sufficient and competent management”; (iii) prepare a risk-based consumer compliance program, which must include revised policies and procedures related to the Servicemembers’ Civil Relief Act, TILA-RESPA Integrated Disclosure rule, and the FDPA; and (iv) take measures to “ensure that current and satisfactory credit and proper collateral information is maintained on all loans.”
FTC halts operations of credit-repair company
On June 21, the FTC announced that the U.S. District Court for the District of Connecticut temporarily halted the operation of an alleged credit repair scheme based on allegations the company charged illegal upfront fees and falsely claimed to substantially improve consumers’ credit scores in violation of the FTC Act, the Credit Repair Organizations Act, the Telemarketing Sales Rule (TSR), the Consumer Review Fairness Act, TILA, and the EFTA. According to the complaint, since 2014, the company, among other things, (i) claims they can improve consumers’ credit scores by removing negative items and hard inquiries from credit reports; (ii) charges advance fees for their services; (iii) does not provide the required disclosures for its services, including credit transaction disclosures related to the financing of the service fees; (iv) engages in electronic funds transfers from consumers’ bank accounts without proper authorization; and (v) threatens consumers with legal action after consumers complain about the lack of results. The court order requires the company to temporarily cease its operations and ensures the company’s assets are frozen.
FTC shares 2018 enforcement report with the CFPB
On June 6, the FTC announced that it submitted its 2018 Annual Financial Acts Enforcement Report to the CFPB. The report—which the Bureau requested for its use in preparing its 2018 Annual Report to Congress—covers the FTC’s enforcement activities regarding Regulation Z (the Truth in Lending Act or TILA), Regulation M (the Consumer Leasing Act or CLA), and Regulation E (the Electronic Fund Transfer Act or EFTA). Highlights of the enforcement matters covered in the report include:
- Auto Lending and Leasing. The report discusses two enforcement matters related to deceptive automobile dealer practices. The first, filed in August 2018, alleged that a group of four auto dealers, among other things, advertised misleading discounts and incentives in their vehicle advertisements, and falsely inflated consumers’ income and down payment information on financing applications. The charges brought against the defendants allege violations of the FTC Act, TILA, and the CLA. The FTC sought, among other remedies, a permanent injunction to prevent future violations, restitution, and disgorgement. (Detailed InfoBytes coverage of the filing is available here.) In the second, in December 2018, the FTC mailed over 43,000 checks, totaling over $3.5 million, to consumers allegedly harmed by nine dealerships and owners engaged in deceptive and unfair sales and financing practices, deceptive advertising, and deceptive online reviews. (Detailed InfoBytes coverage is available here.)
- Payday Lending. The report covers two enforcement matters, including the U.S. Court of Appeals for the 9th Circuit’s December 2018 decision upholding the $1.3 billion judgment against defendants responsible for operating an allegedly deceptive payday lending program. The decision is the result of a 2012 complaint in which the FTC alleged that the defendants engaged in deceptive acts or practices in violation of Section 5(a) of the FTC Act by making false and misleading representations about costs and payment of the loans. (Detailed InfoBytes coverage is available here.) The report also indicates that, in February 2018, the FTC issued over 72,000 checks totaling more an $2.9 million to consumers stemming from a July 2015 settlement, that alleged that online payday operators used personal financial information purchased from third-party lead generators or data brokers to make unauthorized deposits into and withdrawals from consumers’ bank accounts, regardless of whether the consumer applied for a payday loan. (Detailed InfoBytes coverage is available here.)
- Negative Option. The report covers six enforcement matters related to alleged violations of the EFTA and Regulation E for “negative option” plans, including three new filings against online marketers for allegedly advertising “free trial” offers for products that enrolled consumers in expensive, ongoing plans without their knowledge or consent. The report notes that, in 2018, the FTC reached a settlement with one entity and obtained a court judgment against another, both resulting in injunctive relief and monetary settlements (which were suspended due to the defendants’ inability to pay). The report also notes that the FTC mailed 2,116 refund checks totaling more than $355,000 to people who bought an allegedly deceptive “memory improvement” supplement.
Additionally, the report addresses the FTC’s research and policy efforts related to truth in lending and leasing, and electronic fund transfer issues, including (i) a study of consumers’ experiences in buying and financing automobiles at dealerships; and (ii) the FTC’s Military Task Force’s work on military consumer protection issues. The report also outlines the FTC’s consumer and business education efforts, which include several blog posts warning of new scams and practices.
CFPB issues fact sheet on TRID disclosures with assumption transactions
On May 1, the CFPB released a factsheet addressing when loan estimates and closing disclosures are required for assumption transactions under the TILA-RESPA Integrated Disclosure Rule (TRID Rule). The factsheet includes a flowchart and a narrative summary to demonstrate when the disclosures would be required. According to the factsheet, as a threshold matter, the new transaction must be within the TRID Rule’s scope of coverage (e.g., the transaction is a closed-end consumer credit transaction secured by real property or a cooperative unit and is not a reverse mortgage subject to § 1026.33). The creditor must then determine if the transaction is an “assumption” as defined in Regulation Z (under § 1026.20(b) an assumption “occurs when a creditor expressly agrees in writing to accept a new consumer as a primary obligor on an existing residential mortgage transaction.”) The factsheet includes three elements the transaction must meet in order to qualify as an assumption under Regulation Z: (i) the creditor must expressly accept the new consumer as a primary obligor; (ii) a written agreement must be executed, which includes the creditor’s express acceptance of the new customer; and (iii) it must be a “residential mortgage transaction” as to the new customer—specifically, the new customer must be financing the acquisition or initial construction of his or her principal dwelling. If the creditor determines the transaction is an assumption, based on the outlined factors, it must provide a loan estimate and closing disclosure required by the TRID Rule, unless the transaction is otherwise exempt from the requirements.