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  • CFPB fines fintech for algorithm-induced overdraft charges

    Federal Issues

    On August 10, the CFPB announced a consent order against a California-based fintech company for allegedly using an algorithm that caused consumers to be charged overdrafts on their checking accounts when using the company’s personal finance-management app. According to the Bureau, the app promotes automated savings with a proprietary algorithm, which analyzes consumers’ checking-account data to determine when and how much to save for each consumer. The app then automatically transfers funds from consumers’ checking accounts to accounts held in the company’s name. The Bureau asserted, however, that the company engaged in deceptive acts or practices in violation of the CFPA by (i) causing consumers’ checking accounts to incur overdraft charges from their banks even though it guaranteed no overdrafts and represented that its app never transferred more than a consumer could afford; (ii) representing that it would reimburse overdraft charges (the Bureau claims the company has received nearly 70,000 overdraft-reimbursement requests since 2017); and (iii) keeping interest that should have gone to consumers even though it told consumers it would not keep any interest earned on consumer funds. Under the terms of the consent order, the company is required to provide consumer redress for overdraft charges that it previously denied and must pay a $2.7 million civil penalty.

    Federal Issues CFPB Enforcement Consumer Finance Fintech Algorithms Overdraft Deceptive UDAAP CFPA

  • CFPB, OCC issue consent orders against national bank

    Federal Issues

    On July 14, the CFPB announced a consent order against a national bank to resolve allegations that the bank engaged in unfair and abusive acts or practices with respect to unemployment insurance benefit recipients who filed notices of error concerning alleged unauthorized electronic fund transfers (EFTs). The CFPB alleged that the bank violated the CFPA by, among other things: (i) determining that “no error had occurred and [by] freezing cardholder accounts based solely on the results of [the bank’s] automated Fraud Filter”; (ii) “retroactively applying its automated Fraud Filter to reverse permanent credits for unemployment insurance benefit prepaid debit cardholders whose notices of error [the bank] had previously investigated and paid”; and (iii) “impeding unemployment insurance benefit prepaid debit cardholders’ efforts to file notices of error and seek liability protection from unauthorized EFTs.” The CFPB also claimed that the bank violated the EFTA and Regulation E by “fail[ing] to conduct reasonable investigations” of cardholders’ notices of error. Under the terms of the Bureau’s consent order, the bank is required to provide redress to harmed consumers, review and reform its unemployment insurance benefit prepaid debit card program, and pay a $100 million civil penalty to the Bureau.

    The same day, the OCC announced a consent order and a $125 million civil money penalty against the bank for alleged unsafe or unsound practices related to the same prepaid card program. According to the OCC, the bank, among other things: (i) “fail[ed] to establish effective risk management” over its unemployment card program”; and (ii) “beginning in 2020, denied or delayed many consumers’ access to unemployment benefits when consumers filed or attempted to file [unemployment insurance benefits] unauthorized transaction claims.” The OCC’s civil money penalty and remediation requirement is in addition to the CFPB’s civil money penalty.

    Federal Issues CFPB Enforcement OCC UDAAP Unfair Abusive CFPA Electronic Fund Transfer Prepaid Cards EFTA Regulation E Risk Management Consumer Finance

  • CFPB sues payday lender over debt collection practices

    Federal Issues

    On July 12, the CFPB filed a complaint against a Texas-based payday lender (defendant) for allegedly engaging in illegal debt-collection practices and allegedly generating $240 million in reborrowing fees from borrowers who were eligible for free repayment plans in violation of the CFPA. As previously covered by InfoBytes, in 2014, the Bureau ordered the defendant to, among other things, pay $10 million for allegedly using false claims and threats to coerce delinquent payday loan borrowers into taking out an additional payday loan to cover their debt. The Bureau stated that after the CFPB’s 2014 enforcement action, the defendant “used different tactics to make consumers re-borrow.” The complaint alleges that the defendant “engaged in unfair, deceptive, and abusive acts or practices by concealing the option of a free repayment plan to consumers who indicated that they could not repay their short term, high-cost loans originated by the defendant.” The Bureau also alleges that the defendant attempted to collect payments by unfairly making unauthorized electronic withdrawals from over 3,000 consumers’ bank accounts. The Bureau seeks permanent injunctive relief, restitution, disgorgement, damages, civil money penalties, and other relief.

    Federal Issues CFPB Enforcement Consumer Finance Payday Lending CFPA UDAAP Abusive Unfair Deceptive Debt Collection

  • Ex-NFL players no longer part of CFPB, New York suit on high-cost loans

    Courts

    On June 27, the CFPB and New York attorney general filed an amended complaint in the U.S. District Court for the Southern District of New York, removing references to a New Jersey-based finance company’s arrangements with seven former NFL players in an action concerning whether the company and its affiliates (collectively, “defendants”) mischaracterized high-cost loans as assignments of future payment rights. As previously covered by InfoBytes, the agencies filed a lawsuit in 2017 claiming, among other things, that the defendants misled World Trade Center attack first responders and professional football players in selling expensive advances on benefits to which they were entitled and mischaracterized extensions of credit as assignments of future payment rights, thereby misleading their victims into repaying far more than they received. Specifically, the initial filing in 2017 alleges that the defendants (i) used “confusing contracts” to prevent the individuals from understanding the terms and costs of the transactions; (ii) lied to the individuals by telling them the companies could secure their payouts more quickly; (iii) misrepresented how quickly they would receive payments from the companies, and (iv) collected interest at an illegal rate. The amended complaint removes all references to defendants’ arrangements with the ex-NFL players, but maintains claims related to financing deals signed with first responders to the World Trade Center attack.

    The court issued an order on June 28 accepting the agencies’ unopposed motion to file the amended complaint to “remove references to NFL player consumers and to remove allegations in Count VIII” related to alleged violations of New York General Obligations Law § 13-101 concerning personal injury claims. No additional details on the reasons for the removals are provided.

    The amended complaint follows a March order issued by the district court (covered by InfoBytes here) in which it ruled that the CFPB could proceed with its 2017 enforcement action. In 2020, the U.S. Court of Appeals for the Second Circuit vacated the district court’s 2018 order (covered by InfoBytes here), which had dismissed the case on the grounds that the Bureau’s single-director structure was unconstitutional, and that, as such, the agency lacked authority to bring claims alleging deceptive and abusive conduct by the company. The 2nd Circuit remanded the case to the district court, determining that the U.S. Supreme Court’s ruling in Seila Law LLC v. CFPB (holding that the director’s for-cause removal provision was unconstitutional but severable from the statute establishing the Bureau, as covered by a Buckley Special Alert) superseded the 2018 ruling. 

    Courts State Issues CFPB State Attorney General Enforcement New York UDAAP Deceptive Abusive

  • Halperin discusses invoking UDAAP under CFPA

    Federal Issues

    On June 29, the American University Washington College of Law held a symposium centered in part around the CFPB’s new approach for examining institutions for unfair conduct. During the CFPB’s New Approach to Discrimination: Invoking UDAAP symposium, CFPB Assistant Director for the Office of Enforcement Eric Halperin answered questions related to updates recently made to the Bureau’s Unfair, Deceptive, or Abusive Acts or Practices Examination Manual. These updates detail the agency’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service as an unfair act or practice. (Covered by a Buckley Special Alert here.) The Bureau published a separate blog post by its enforcement and supervision heads explaining that they were “cracking down on discrimination in the financial sector,” and that the new procedures would guide examiners to look “beyond discrimination directly connected to fair lending laws” and “to review any policies or practices that exclude individuals from products and services, or offer products or services with different terms, in an unfairly discriminatory manner.”

    Assistant Director Halperin’s remarks were followed by a discussion of the Bureau’s revisions to its Examination Manual by a panel that consisted of David Silberman of the Center for Responsible Lending, Kitty Ryan of the American Bankers Association, and John Coleman of Buckley LLP, which was moderated by Jerry Buckley. Topics covered included a June 28 letter that trade associations sent to the CFPB urging recission of revisions to the Examination Manual.

    In his interview with American University Law School Professor V. Gerard Comizio, Halperin stated that the CFPB’s Examination Manual updates provide guidance on how examiners will implement the Bureau’s statutory authority to examine whether an act or practice is unfair because it may cause or is likely to cause substantial injury to consumers that is not reasonably avoidable and not outweighed by countervailing benefits to consumers or competition. He stressed that the update does not create a new legal standard under the three prongs of the unfairness standard. Halperin also discussed how the Bureau’s UDAAP authority interacts with laws enacted specifically to prevent discriminatory conduct such as ECOA and the Fair Housing Act, and touched on steps institutions should consider taking to ensure compliance. Notably, when asked whether the Bureau intends to pursue disparate impact claims under the CFPA, Halperin stated that disparate impact, along with disparate treatment, are wholly distinct concepts from Dodd-Frank’s prohibition on unfair acts and practices. He added that in assessing an unfair act and practice, the key is to examine the substantial injury prong and then assess the reasonable avoidability and the countervailing benefits prongs. He further explained that the unfairness test does not contain an intentional standard and noted that there have been cases brought by both the FTC and the Bureau where there was injurious conduct that was not intentional or specifically known to the party engaging in this practice. According to Halperin, substantial injury alone is not sufficient to prove unfairness and using disparate impact as the mechanism of proof is not what the Bureau uses to prove an unfairness claim.

    Halperin reiterated that the CFPB Examination Manual is designed to provide transparency to financial institutions about the types of issues that examiners will be inquiring about in furtherance of determining whether there has been an unfair act or practice under the current framework, and does not extend or create new law. In terms of practical compliance implications, Halperin said most financial institutions should already have robust UDAAP compliance systems in place and should already be looking for potential unfair acts or practices and examining patterns and group characteristics to identify the root cause of any issues, and to avoid substantial injury to consumers. With respect to a white paper recently sent to CFPB Director Rohit Chopra from several industry groups and the U.S Chamber of Commerce urging the Bureau to rescind the UDAAP exam manual (covered by InfoBytes here), Halperin commented that he has not had time to fully digest the white paper in detail but hoped that some of what was discussed during the symposium, particularly on the legal principles that will be used both in the exam manual and in any supervision and enforcement actions, clarifies that the Bureau is looking for conduct that violates the unfairness test.

    Federal Issues Agency Rule-Making & Guidance CFPB Examination UDAAP Unfair Disparate Impact Discrimination ECOA Fair Housing Act

  • Industry groups urge CFPB to rescind UDAAP anti-discrimination policy

    Federal Issues

    On June 28, industry groups and the U.S Chamber of Commerce (collectively, “groups”) released a White Paper, Unfairness and Discrimination: Examining the CFPB’s Conflation of Distinct Statutory Concepts, urging the CFPB to rescind the recently released unfair, deceptive and abusive acts or practices (UDAAP) examination manual. As previously covered by a Buckley Special Alert, in March, the CFPB announced significant revisions to its UDAAP exam manual, in particular highlighting the CFPB’s view that its broad authority under UDAAP allows it to address discriminatory conduct in the offering of any financial product or service. The White Paper, among other things, explained the groups’ position that the Bureau’s UDAAP authority cannot be used to extend the fair lending laws beyond the limits of existing statutory law. The White Paper stated that the Bureau “conflated” concepts of “unfairness” and “discrimination” “by announcing, via a UDAAP exam manual ‘update,’ that it would examine financial institutions for alleged discriminatory conduct that it deemed to be ‘unfair’ under its UDAAP authority.” The groups stated that the agency has “taken the law into its own hand” arguing that “the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking.” The groups said the change in the examination manual is “contrary to law and subject to legal challenge” as well as legislative repeal under the Congressional Review Act. Additionally, the groups argued that the Bureau’s interpretation exceeds the agency’s statutory authority, and that the Bureau’s “action should be held unlawful and set aside.” The groups further stated that “[c]hanges that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to fill gaps it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps.”

    In a letter sent to CFPB Director Rohit Chopra, the groups conveyed that Congress did not intend for the Bureau to “fill gaps” between the clearly articulated boundaries of antidiscrimination statutes with its UDAAP authority. The groups urged Director Chopra to rescind the exam manual update and stated that “[s]hould [he] believe additional authority is necessary to address alleged discriminatory conduct, we stand ready to work with Congress and the CFPB to explore that possibility and to ensure the just administration of the law.

    Federal Issues CFPB UDAAP Consumer Finance Deceptive Abusive Unfair Examination Discrimination Administrative Procedures Act

  • DFPI seeks to regulate commercial financial products and services under the CCFPL

    State Issues

    Recently, the California Department of Financial Protection and Innovation (DFPI) issued a notice of proposed rulemaking (NPRM) to adopt regulations to implement certain sections of the California Consumer Financial Protection Law (CCFPL) related to commercial financial products and services. (See also text of the proposed regulations here.) As previously covered by a Buckley Special Alert, the CCFPL became law in 2020 and, among other things, (i) establishes UDAAP authority for the DFPI; (ii) authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was willful (thus going beyond both Dodd-Frank and existing California law); (iii) provides the DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage; and (iv) provides that enforcement of the CCFPL will be funded through the fees generated by the new registration process as well as fines, penalties, settlements, or judgments. While the CCFPL exempts certain entities (e.g., banks, credit unions, certain licensees), the law expands the DFPI’s oversight authority to include debt collection, debt settlement, credit repair, check cashing, rent-to-own contracts, retail sales financing, consumer credit reporting, and lead generation.

    The NPRM proposes new rules to implement sections 22159, 22800, 22804, 90005, 90009, 90012, and 90015 of the CCFPL related to the offering and provision of commercial financing and other financial products and services to small businesses, nonprofits, and family farms. According to DFPI’s notice, section 22800 subdivision (d) authorizes the Department to define unfair, deceptive, and abusive acts and practices in connection with the offering or provision of commercial financing. Section 90009, subdivision (e), among other things, authorizes the Department’s rulemaking to include data collection and reporting on the provision of commercial financing or other financial products and services.

    Among other things, the NPRM:

    • Clarifies that the CCFPL makes it unlawful for covered providers, as defined, to engage in unfair, deceptive, or abusive acts or practices;
    • Provides standards for determining whether an act or practice is unfair, deceptive, or abusive;
    • Defines small business, nonprofit, and family farm, among other terms;
    • Clarifies DFPI's ability to enforce the regulation’s provisions;
    • Requires covered providers to submit annual reports containing information about their provision of commercial financing or other financial products and services to small businesses, nonprofits, and family farms;
    • Identifies persons excluded from the reporting requirement;
    • Specifies the information required in the reports, as well as provide guidance on calculating or determining certain information;
    • Clarifies the obligations of those also submitting annual reports to DFPI as licensees under the California Financing Law.

    Written comments on the NPRM are due by August 8.

    State Issues Agency Rule-Making & Guidance DFPI California Commercial Finance UDAAP Small Business Financing

  • FDIC updates Consumer Compliance Examination Manual’s UDAAP provisions

    On June 17, the FDIC announced updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for FDIC examination staff when evaluating financial institutions’ compliance with federal consumer protection laws and regulations. The June update modifies Section VII Unfair, Deceptive, or Abusive Acts or Practices to reflect the FDIC’s existing supervisory authority regarding UDAP and UDAAP under Section 5 of the FTC Act, and Sections 1031 and 1036 of the Dodd-Frank Act, respectively. Among other updates, the new Section VII changes language related to the Equal Credit Opportunity Act and Fair Housing Act to add a reference to Dodd-Frank UDAAP provisions. The updated section provides the following:

    ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that an applicant’s income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The FHA prohibits creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. FTC UDAPs and Dodd-Frank UDAAPs that target or have a disparate impact on consumers in one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act or the Dodd-Frank Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual orientation. Such conduct may also violate the FTC Act or the Dodd-Frank Act.

    With respect to the legal standards for “unfair” and “deceptive” under the FTC Act and Dodd-Frank, Section VII notes that these standards are “substantially similar.”

    Bank Regulatory Federal Issues FDIC Examination UDAAP UDAP Compliance FTC Act Dodd-Frank Fair Lending Discrimination ECOA Fair Housing Act

  • CFPB settles with student-loan debt relief company

    Federal Issues

    On June 9, the CFPB filed a stipulated final judgment and order in the U.S. District Court for the Southern District of California resolving allegations that the operator of a student-loan debt relief company engaged in unfair debiting of consumer accounts, in violation of the CFPA. According to the complaint, in 2016, the defendant founded a student debt relief company, which “did not solicit new consumers, but instead obtained student-loan account and billing information for hundreds of former [student debt relief operation] consumers without the knowledge or consent of those consumers.” As previously covered by InfoBytes, in 2016, the CFPB filed a consent order against a San Diego-based student debt relief operation for alleged violations of the CFPA, the TSR, and Regulation P by deceiving borrowers into paying fees for federal loan benefits and misrepresenting to consumers that it was affiliated with the Department of Education. The CFPB alleged that the defendant led a debt collection scheme by withdrawing $39 per month, and collecting hundreds of thousands of dollars in total fees from student borrowers’ bank accounts, without authorization, after previously obtaining their names and account information from the former student loan debt relief business. According to the CFPB, “under this scheme, [the defendant’s] company had unlawfully debited more than $240,000 from hundreds of student borrowers’ accounts.” Under the terms of the settlement, the defendant is permanently banned from engaging in debt relief services and must pay a $175,000 penalty to the CFPB.

    Federal Issues Enforcement CFPB Student Lending Debt Relief Consumer Education CFPA UDAAP TSR Regulation P Consumer Finance

  • District Court enters consent order in 2016 CFPB structured settlement action

    Courts

    On May 18, the U.S. District Court for the District of Maryland approved a consent order against defendants in an action concerning allegedly unfair, abusive, and deceptive structured settlement practices. As previously covered by InfoBytes, in 2016 the Bureau initiated an enforcement action against the defendants alleging that they violated the CFPA by employing abusive practices when purchasing structured settlements from consumers in exchange for lump-sum payments. According to the Bureau, the defendants encouraged consumers to take advances on their structured settlements and falsely represented that the consumers were obligated to complete the structured settlement sale, “even if they [later] realized it was not in their best interest.” In July 2021, the court denied the defendants’ motions to dismiss the Bureau’s amended complaint, which argued that the enforcement action was barred by the U.S. Supreme Court’s decision in Seila Law LLC v. CFPB, which held that the director’s for-cause removal provision was unconstitutional (covered by a Buckley Special Alert). The defendants had also argued that that the ratification of the enforcement action “came too late” because the statute of limitations on the CFPA claims had already expired (covered by InfoBytes here). Under the terms of the May 18 consent order, the individual defendant, who “had an ownership interest in [the company] and served in executive positions at [the defendants] from their inception to their dissolution" is prohibited from, among other things, participating or assisting others in participating in transfer of payment streams from structured-settlement holders and referring consumers to a specific individual or for-profit entity for advice concerning any structured-settlement transaction, including for independent professional advice. The individual defendant must also pay a $5,000 civil money penalty.

    Courts CFPB Enforcement Settlement Structured Settlement CFPA UDAAP Unfair Deceptive Abusive Consumer Finance

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