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  • CFPB announces settlement with Alabama-based operation for allegedly failing to properly disclose finance charges

    Consumer Finance

    On July 19, the CFPB announced a settlement with a small-dollar lending operation that allegedly failed to properly disclose finance charges and annual percentage rates associated with auto title loans in violation of the Truth in Lending Act (TILA) and the prohibition on deceptive practices in the Consumer Financial Protection Act (CFPA). According to the consent order, the Alabama-based operation, which owned and operated approximately 100 retail lending outlets in Alabama, Mississippi, and South Carolina under several names, materially misrepresented the finance charges consumers would incur for Mississippi auto title loans by disclosing a finance charge based on a 30-day term while having consumers sign a 10-month payment schedule. The Bureau asserts that “[c]onsumers acting reasonably likely would not understand that the finance charge disclosed in the loan agreement does not actually correspond to their loan payment term.” Furthermore, the Bureau contends that the operation also failed to disclose the annual percentage rate on in-store advertisements as required under TILA. The order requires the operation to pay redress in the amount of $1,522,298, which represents the total undisclosed finance charges made directly or indirectly by affected consumers on their loans. However, based on defendants’ inability to pay this amount, full payment is suspended subject to the operation’s paying $500,000 to affected consumers. In addition to the penalties, the operation is prohibited from continuing the illegal behavior and the operation’s board must ensure full compliance with the consent order.

    Consumer Finance CFPB Settlement CFPA TILA Auto Finance Disclosures

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  • 8th Circuit reverses district court’s decision, rules compound interest not contractually agreed upon violates FDCPA


    On July 16, the U.S. Court of Appeals for the 8th Circuit reversed a district court’s decision, holding that under Minnesota law, compound interest cannot be collected unless specifically agreed to in a contract. The decision results from a suit filed by a consumer alleging that a law firm violated the Fair Debt Collection Practice Act (FDCPA) when it sent a debt collection letter seeking payment of credit card debt while asserting that the consumer owed compound interest. The consumer’s suit alleged that the debt’s owner, debt collector, and law firm (defendants) “used a false, deceptive, or misleading representation or means . . . and an unfair or unconscionable means” when attempting to collect the debt. Specifically, the consumer alleged the principal balance included interest on the contractual interest—which he claimed he did not agree to in the underlying credit card agreement—and that as a result, the defendants misrepresented the amount of debt and attempted to collect interest that was not permitted under Minnesota law. The district court dismissed the consumer’s claim, finding that he failed to state an FDCPA claim because he did not allege a materially false statement in the collection letter. The 8th Circuit reversed however, finding that the consumer stated a claim under the FDCPA because a demand to pay an amount of debt that is unauthorized under state law is actionable as a false statement or unfair collection attempt, and that a false representation of the amount of a debt that overstates what is owed under state law is a material violation of the FDCPA. The appellate court also rejected the law firm’s argument that there was no FDCPA violation because the agreement authorized the total amount of interest stated in the letter, further declining to calculate the interest under the credit-card terms provided by the law firm because the consumer had contested the terms as unauthenticated.

    Courts Appellate Eighth Circuit FDCPA Debt Collection Consumer Finance

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  • FDIC's FILs address Call Report burden reductions, EGRRCPA statutory amendment changes

    Agency Rule-Making & Guidance

    On July 17, the FDIC issued Financial Institution Letter FIL-40-2018 reminding FDIC-supervised banks, savings associations, and community institutions that revisions to all three versions of the Consolidated Reports of Condition and Income (Call Reports) are effective as of the June 30 reporting date. The finalized changes modified Call Reports FFIEC 031, FFIEC 041, and FFIEC 051. Starting this quarter, institutions with consolidated total assets of at least $100 billion with no foreign offices are now required to use FFIEC 031 instead of FFIEC 041. In addition, the FDIC released supplemental submission instructions for institutions (see FIL-39-2018) and also addressed two reporting requirement changes made by the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174 that took effect immediately: (i) acquisition, development, or construction loans considered high volatility commercial real estate loans are subject to risk weighting with certain exemptions; and (ii) qualifying institutions may exclude a capped amount of reciprocal deposits from being treated as brokered deposits. Second quarter Call Reports are due July 30.

    Agency Rule-Making & Guidance Federal Issues FDIC Call Report S. 2155

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  • House passes bipartisan package of securities and banking bills focusing on capital market regulations

    Federal Issues

    On July 17, the House passed S. 488, the “JOBS and Investor Confidence Act of 2018” (Act) by a vote of 406 to 4. The package of 32 securities and banking bills now comprises Senate bill S. 488, which previously contained an amendment to the Securities Act Rule 230.701(e) and was included as part of the Economic Growth, Regulatory Relief, and Consumer Protection Act S.2155/P.L. 115-174. The Act focuses on capital market regulations and contains many capital formation provisions designed to, among other things, (i) expand access for smaller companies attempting to raise capital; (ii) reduce regulation for smaller companies such as providing federal stress test relief for nonbanks; (iii) revise crowdfunding provisions to allow for crowdfunding vehicles and the registration of crowdfunding vehicle advisers; (iv) exempt low-revenue issuers from Sarbanes-Oxley Act Section 404; (v) grant banks safe harbor when they keep open certain accounts and transactions at the request of law enforcement; and (vi) clarify various rules, review current securities laws for inefficiencies, and establish additional procedures focusing on virtual currency and money laundering efforts. Additional changes would amend a section of the Exchange Act governing SEC registration of individuals acting as brokers or dealers. The Fair Credit Reporting Act would also be amended to permit entities—including HUD—the ability to furnish data to consumer reporting agencies regarding an individual’s history of on-time payments with respect to a lease, or contracts for utilities and telecommunications services, provided the information about a consumer's usage of the service relates to payment by the consumer for such service or other terms of the provision of that service. S. 488 would also allow certain non-profits conducting charitable mortgage loan transactions to use forms required under the TILA-RESPA Integrated Disclosure Rule, and require the director of the CFPB to issue such regulations as may be necessary to implement those amendments. S. 488 now returns to the Senate for further action.

    Federal Issues U.S. House Federal Legislation Securities FCRA SEC Virtual Currency Stress Test Consumer Finance CFPB TRID Mortgages S. 2155

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  • New Jersey appeals court says statute of limitations does not apply in allegedly fraudulent mortgage application


    On July 13, the Superior Court of New Jersey Appellate Division reversed a trial court’s decision, ruling that a deceased homeowner’s family (defendants) had provided sufficient evidence to show that a division of a national bank (lender) had knowingly engaged in predatory lending practices when it approved a fraudulent mortgage application in violation of the New Jersey Consumer Fraud Act (Act). According to the opinion, in 2007 when the now deceased homeowner purchased a house, the lender may have been complicit in creating and approving a fraudulent loan application that, among other things, stated falsely that (i) the homeowner was a small business owner with a monthly income of $30,000 rather than $1,500, and (ii) the down payment came from the homeowner, when it supposedly came from a second mortgage offered to him from the same lender. The homeowner defaulted on payments in 2010 and passed away in 2012. In 2015, the defendants responded to a foreclosure complaint filed by the bank, alleging that the Act barred plaintiff’s claims due to the lender’s fraudulent actions, including the aforementioned material misrepresentations. However, the trial court granted summary judgment to the lender on the grounds that claims of fraud brought by the defendants were “untenable” and outside the statute of limitations. The appellate court disagreed and remanded to allow for discovery, ruling that the defendants were permitted to introduce evidence of fraud in defense of the homeowner’s estate even through the statute of limitations had expired. “The doctrine of equitable recoupment permits a defendant to assert an otherwise stale claim and avoid the statute of limitations, where the defendant uses the claim as a shield instead of a sword,” the appellate court stated.

    Courts Appellate Mortgages Foreclosure Fraud State Issues

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  • Agencies publish proposed joint revisions to Volcker rule

    Agency Rule-Making & Guidance

    On July 17, the OCC, Federal Reserve Board, FDIC, SEC, and CFTC (the Agencies) published their joint notice of proposed rulemaking designed to simplify and tailor compliance with Section 13 of the Bank Holding Company Act’s restrictions on a bank’s ability to engage in proprietary trading and own certain funds (the Volcker rule). As previously covered in InfoBytes, the Agencies’ announced the proposal on May 30, noting that the amendments would reduce compliance costs for banks and tailor Volcker rule requirements to better align with a bank’s size and level of trading activity and risks. Comments on the proposal are due by September 17.

    Agency Rule-Making & Guidance FDIC Federal Reserve OCC CFTC SEC Bank Holding Company Act Volcker Rule

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  • 5th Circuit rules FHFA structure violates Constitution’s separation of powers


    On July 16, in a divided opinion, the U.S. Court of Appeals for the 5th Circuit affirmed in part and reversed in part a lower court’s decision that addressed two claims brought by a group of Fannie Mae and Freddie Mac (government-sponsored entities or GSEs) shareholders: (i) whether the Federal Housing Finance Agency (FHFA) acted within its statutory authority when it adopted a dividend agreement, which requires the GSEs to turn over every quarter “dividends equal to their entire net worth” to the Treasury Department; and (ii) whether the structure of the FHFA is unconstitutional and in violation of the separation of powers. The lower court previously dismissed the shareholder’s statutory claims and granted summary judgment in favor of the Treasury Department and the FHFA on the constitutional claim. In addressing the first claim, the appellate court agreed with the lower court and found the government-sponsored entities’ payments acceptable under the agency’s statutory authority and that the FHFA was lawfully established by Congress through the Housing and Economic Recovery Act of 2008, which places restrains on judicial review. However, the appellate court reversed the lower court’s decision as to the second claim and agreed with shareholders that Congress went too far in insulating the FHFA’s single director from removal by the president for anything other than cause, ruling that the agency’s structure violates Article II of the Constitution. “We hold that Congress insulated the FHFA to the point where the Executive Branch cannot control the FHFA or hold it accountable,” the opinion stated. The divided appellate panel remanded to the lower court for further proceedings.

    Earlier this year, in response to a challenge to the CFPB's single-director structure, the U.S. Court of Appeals for the D.C. Circuit en banc upheld the CFPB’s constitutionality in a 7-3 decision (see Buckley Sandler Special Alert). The 5th Circuit is also scheduled to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure, in which 14 state Attorney General filed an amici curiae brief encouraging the appellate court to disagree with the en banc decision of the D.C. Circuit. (See previous InfoBytes coverage here and here.)

    Courts Appellate Fifth Circuit FHFA Fannie Mae Freddie Mac Congress CFPB

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  • Financial Stability Board publishes report discussing methods for monitoring crypto-asset risk


    On July 16, the Financial Stability Board (FSB) published a report, which asserts that, while “crypto-assets do not pose a material risk to global financial stability at this time,” there exists a need for “vigilant monitoring in light of the speed of developments and data gaps.” According to “Crypto-assets: Report to the G20 on work by the FSB and standard-setting bodies” (the Report), the FSB and the Committee on Payments and Market Infrastructures (CPMI) have developed a framework to monitor and assess vulnerabilities in the financial system resulting from developments in the crypto-asset markets. As previously covered in InfoBytes, the FSB earlier released a letter to G20 Finance Ministers and Central Bank Governors in March noting that “[c]rypto-assets raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity and for money laundering and terrorist financing.” The Report specifically discusses actions being undertaken by international regulatory bodies, including (i) the CPMI’s investigation into distributed ledger technologies and monitoring of payment innovations; (ii) the International Organization of Securities Commissions creation of an Initial Coin Offering (ICO) Consultative Network, development of a framework for members to use when dealing with investor-protection issues stemming from ICOs, and exploration into regulatory issues regarding crypto-assets platforms; and (iii) the Basel Committee on Banking Supervision’s assessment of the materiality of banks’ crypto-asset exposures, exploration of appropriate prudential treatment of those exposures, and monitoring of crypto-asset and other financial technology developments. The Financial Action Task Force is also working separately on a report to the G20 on crypto-asset concerns regarding money laundering and terrorist financing risks.

    Fintech Financial Stability Board Cryptocurrency Virtual Currency Initial Coin Offerings

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  • FinCEN director comments on cooperative efforts to freeze assets belonging to transnational criminal organization

    Financial Crimes

    On July 14, FinCEN Director Kenneth A. Blanco issued a statement regarding recent actions taken by Argentina’s Unidad de Informaciὀn Financiera de la República Argentina (UIF-AR) to freeze assets belonging to Clan Bakarat, a transnational criminal organization with ties to Hezbollah leadership. According to Director Blanco, FinCEN’s cooperative efforts with UIF-AR led to the action against Clan Barakat, which is currently listed with the Treasury Department’s Office of Foreign Assets Control as a Specially Designated Global Terrorist for its suspected involvement with money laundering and terrorist financing among other things.

    Financial Crimes FinCEN International OFAC Department of Treasury Anti-Money Laundering

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  • California governor signs bill amending reservist requirement for deferring financial obligations when called to active duty

    State Issues

    On July 9, the governor of California signed into law amendments to Section 800 of the state’s Military and Veterans Code to eliminate the requirement that a reservist called to active duty provide a letter signed under penalty of perjury to an obligor for deferment of certain financial obligations. Specifically, AB 2521 states that a reservist, or his or her designee, is now required instead to deliver a written request—which includes electronic communications— to an obligor for a deferment of financial obligations, including mortgages, credit cards, retail installment accounts and contracts, and vehicle leases. The amendments take effect January 1, 2019.

    State Issues State Legislation Military Lending

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