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California AG, former FTC chairs argue about federal privacy law preemption during Senate committee hearing
On September 23, the Senate Committee on Commerce, Science, and Transportation held a hearing titled, “Revisiting the Need for Federal Data Privacy Legislation.” The hearing examined the current state of consumer data privacy and legislative efforts to provide baseline data protections for American consumers, and examined the lessons learned from the EU’s Global Data Protection Regulation (GDPR) and recently enacted state privacy laws. Witnesses included a number of former chairs and commissioners of the FTC, along with California Attorney General Xavier Becerra.
Becerra discussed the California Consumer Privacy Act (CCPA), which sets forth various requirements for businesses that collect, transfer, or sell a consumer’s personal information, and provides California residents several rights, including the right to know what data companies have collected on them and the right to ask to delete data or opt-out of its sale. (See continuing InfoBytes coverage on the CCPA here.) Concerning future federal privacy legislation, Becerra stressed that any such legislation should not preempt the work happening at the state level, and he urged the Committee “to favor legislation that sets a federal privacy-protection floor rather than a ceiling,” in order to allow states the opportunity to provide tailored protections for their residents. Becerra also stressed that the ideal federal legal framework would “recognize[] that privacy protections must keep pace with innovation,” and further addressed the need for a meaningful enforcement regime that respects the work undertaken by the states.
Former FTC chairs Jon Leibowitz and Maureen Ohlhausen, however, argued (see here and here) in favor of federal preemption. They suggested that a single national comprehensive privacy standard would be stronger and more comprehensive than existing regimes such as the CCPA and GDPR, and could better serve consumers even if it replaces state regulations. Both stressed that preempting state laws should not mean weakening protections for consumers. Moreover, both Leibowitz and Ohlhausen emphasized that federal privacy legislation should be technology- and industry-neutral, with rigorous standards backed by tough enforcement. Leibowitz also urged Congress to provide the FTC with the ability to impose civil penalties on violators for first-time offenses, and recommended that the FTC be granted the primary authority to administer the law and be given continued authority to provide redress directly to consumers. Former chair William Kovacic presented a different approach, which would establish a domestic privacy network to promote cooperation and coordination between federal and state privacy regulators to improve policy formation.
Other topics covered in the hearing included Chairman Roger Wicker’s (R-MS) recently introduced bill (S. 4626), known as the SAFE DATA Act, which would require businesses to be more transparent about their data collection, processing, and transfer activities, and give consumers more choices and control over their data. Among other things, the bill would preempt privacy laws in California and other states, except in regard to data breaches, and would not include a private right of action allowing consumers to sue over privacy violations.
FDIC announces disaster relief in connection with Hurricane Sally
On September 23, the FDIC issued FIL-92-2020 to provide regulatory relief to financial institutions and help facilitate recovery in areas of Alabama affected by Hurricane Sally starting on September 14. In the guidance, the FDIC notes that, in supervising institutions affected by the hurricane, the FDIC will consider the unusual circumstances those institutions face. The guidance suggests that institutions work with impacted borrowers to, among other things, (i) extend repayment terms; (ii) restructure existing loans; or (iii) ease terms for new loans to those affected by the severe weather, provided the measures are “done in a manner consistent with sound banking practices.” Additionally, the FDIC notes that institutions may receive Community Reinvestment Act consideration for community development loans, investments, and services in support of disaster recovery. The FDIC states it will also consider relief from certain reporting and publishing requirements.
FTC settles with company posing as SBA lender
On September 25, the FTC announced a settlement with a Rhode Island-based company and its owner (defendants), resolving allegations that the defendants violated the FTC Act by claiming to be an approved lender for the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) even though the defendants are neither affiliated with the SBA nor an SBA-authorized lender. As previously covered by InfoBytes, the FTC filed an action against the defendants in April, alleging that the defendants made deceptive statements on their websites, such as “WE ARE A DIRECT LENDER FOR THE PPP PROGRAM!,” and directly contacted small businesses claiming to represent the SBA in order to solicit loan applications on behalf of the businesses’ banks. The settlement prohibits the defendants from engaging in the conduct subject to the action, including misrepresenting that they are affiliated with the SBA and that they are authorized to accept or process applications on behalf of the SBA. Moreover, the defendants are prohibited from disclosing or benefitting from consumer information obtained prior to the settlement without express, informed consent from the consumer, and are subject to certain reporting and recordkeeping requirements.
District court: Usury claims preempted by National Bank Act
On September 21, the U.S. District Court for the Western District of New York dismissed allegations against two entities affiliated with a national bank, and a trust acting as trustee of one of the entities, ruling that a plaintiff’s “state-law usury claims are expressly preempted by the [National Banking Act].” The court noted that, “[e]ven before the OCC issued its rule clarifying that interest permissible before a transfer remains permissible after the transfer, [the plaintiff’s] claims would have been preempted” because the national bank “continues to possess an ‘interest in the account.’” The plaintiff contended he was charged usurious interest rates that exceeded New York’s interest rate cap on unsecured credit card loans originated by the national bank. According to the opinion, one of the entities contracted with the bank to service the credit card loans, with the bank retaining ownership of the accounts. The plaintiff argued that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported his claims against the affiliated entities, but the court disagreed, ruling that the national bank retained interest in the loans, which included the right to “change various terms and conditions” as well as interest rates.
9th Circuit: HOLA preempts California interest on escrow law
On September 22, the U.S. Court of Appeals for the Ninth Circuit, in a split decision, reversed the denial of a national bank’s motion to dismiss, holding that state law claims involving interest on escrow accounts were preempted by the Home Owners Loan Act (HOLA). As previously covered by InfoBytes, three plaintiffs filed suit against the bank, arguing that it must comply with a California law that requires mortgage lenders to pay interest on funds held in a consumer’s escrow account, following the U.S. Court of Appeals for the 9th Circuit’s decision in Lusnak v. Bank of America (covered by InfoBytes here). The bank moved to dismiss the action, arguing, among other things, that the claims were preempted by HOLA. The court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan was transferred to a bank whose own lending is not covered by HOLA. The district court granted the bank’s motion for interlocutory appeal.
On appeal, the 9th Circuit disagreed with the district court. Specifically, the appellate court applied the plain meaning of the Office of Thrift Supervision’s preemption regulation, concluding that it “extend[ed] to all state laws affecting a federal savings association, without reference to whether the conduct giving rise to a state law claim is that of a federal savings association or of a national bank.” The appellate court distinguished the case from Lusnak, noting that HOLA preemption is “triggered at a much lower threshold” than National Bank Act. Finally, the appellate court rejected the premise that applying preemption would “run afoul” of HOLA’s purpose of consumer protection, concluding that “HOLA field preemption is so broad that the traditional presumption against preemption does not apply.”
In dissent, a judge argued that the statutory and regulatory text does not support the majority’s conclusion and therefore, HOLA’s application does not excuse the national bank from California’s law requiring interest on escrow accounts.
District court allows Georgia counties’ disparate impact claims to proceed
On September 18, the U.S. District Court for the Northern District of Georgia denied a national bank’s motion to dismiss claims that the bank and its subsidiaries’ (collectively, “defendants”) mortgage originating and servicing practices and policies had a disparate impact on, and resulted in disparate treatment of, minority borrowers, in violation of the Fair Housing Act (FHA). The plaintiffs, three Georgia counties, filed a second amended complaint raising two disparate impact claims and one disparate treatment claim under the FHA, claiming the defendants’ lending and servicing practices—which included allegedly targeting minority borrowers for higher cost loan products, approving unqualified minority borrowers for loans they could not afford, and providing less favorable terms for loan modifications—were “designed to reduce the overall equity minority borrowers located within their counties had in their homes.” The practices, among other things, allegedly caused African-American and Latino borrowers to receive disproportionately higher cost mortgage loans than similarly situated white, non-Latino borrowers, creating an increase in defaults and foreclosures, and causing the plaintiffs to incur alleged damages, including out-of-pocket foreclosure-related costs and increased municipal expenses, and loss of property tax revenues due to decreased home values.
The defendants moved to dismiss, asserting, among other things, that the plaintiffs failed to properly allege their disparate impact claims under Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a previous Buckley Special Alert). The defendants also argued that the plaintiffs’ municipal “economic injuries were not proximately cause by the [d]efendants’ discriminatory policies under [City of Miami Garden v. Wells Fargo & Co.]” (covered by InfoBytes here), and that the plaintiffs failed to allege specific allegations within the FHA’s two-year statute of limitations.
The court granted the motion in part and denied it in part. With respect to the disparate impact claims, the court applied Inclusive Communities and held that the plaintiffs identified several specific policies that caused the alleged disparate impact. The court also rejected the statute of limitations arguments and held that the plaintiffs “‘can prove a set of facts’ showing a timely violation of the FHA.” The court dismissed certain of the counties’ injury claims—the plaintiffs’ attempts to recover franchise tax and municipal expenses (police, fire, and sanitation services related to vacant or foreclosed-upon properties)—ruling that plaintiffs failed to establish proximate cause and “explain how their municipal services injuries ‘are anything more than merely foreseeable consequences’ of [the d]efendants’ discriminatory acts.”
OCC announces settlements with former senior executives over account openings
On September 21, the OCC announced settlements with three former senior executives of a national bank for their roles in the bank’s incentive compensation sales practices. According to consent orders (see here and here), the OCC alleged that two of the individuals either “knew or should have known” about the sales misconduct problem and its root cause, but allegedly failed to, among other things, appropriately consider concerns about the “unreasonably high sales goals” and the associated risks of incentivizing sales of secondary deposit products. The third individual—previously in charge of identifying human resource risks—allegedly approved incentive compensation plans that overly incentivized sales and failed to respond to or escalate information received about unreasonable sales goals. In addition to paying civil money penalties, the individuals—who did not admit or deny wrongdoing—have each agreed to cooperate with the OCC in any investigation, litigation, or administrative proceeding related to sales misconduct at the bank.
As previously covered by InfoBytes, in January, the OCC reached settlements with three other former senior executives in January for their alleged roles in the bank’s sales practices misconduct, and issued notices of charges against five others.
FHFA extends Covid-19 flexibilities until October 31
On September 24, the FHFA announced the extension of several loan origination guidelines put in place to assist borrowers during the Covid-19 pandemic. Specifically, FHFA has extended until October 31 existing guidelines related to: (i) GSE purchases of qualified single-family mortgages in forbearance that meet specific eligibility criteria; (ii) alternative appraisal requirements on purchase and rate term refinance loans; (iii) alternative methods for documenting income and verifying employment before loan closing; and (iv) expanding the use of power of attorney to assist with loan closings. The extensions are implemented in updates to Fannie Mae Lender Letters LL-2020-03, LL 2020-04, LL-2020-06, and Freddie Mac Guide Bulletin 2020-37.
OCC: Banks may hold stablecoins in reserve accounts
On September 21, the OCC released Interpretive Letter 1172, stating that national banks may hold stablecoin in reserve accounts as a service to bank customers and may engage in activity incidental to receiving the deposits. According to the OCC, issuers of stablecoins—a type of cryptocurrency backed by an asset such as a fiat currency—have a desire to place assets in reserve accounts with national banks to “provide assurance that the issuer has sufficient assets backing the stablecoin in situations where there is a hosted wallet.” Hosted wallet, as defined by the OCC, is “an account-based software program for storing cryptographic keys controlled by an identifiable third party.” Because national banks are authorized to receive deposits and provide “permissible banking services to any lawful business they choose,” they may provide these services to issuers of stablecoins, as long as they comply with applicable laws and regulations. (In Interpretive Letter 1170, the OCC approved the holding of cryptocurrency on behalf of customers, covered by InfoBytes here.) Specifically, the OCC noted that national banks should ensure that deposit activities comply with the Bank Secrecy Act and anti-money laundering regulations. Moreover, a national bank must also “identify and verify the beneficial owners of legal entity customers opening accounts.” Lastly, the OCC emphasized that stablecoin reserves “could entail significant liquidity risks,” and national banks may consider entering into contractual agreements with stablecoin issuers to “verify and ensure that the deposit balances held by the bank for the issuer are always equal to or greater than the number of outstanding stablecoins issued by the issuer.” This guidance does not apply to stablecoin transactions involving un-hosted wallets.
Supplement marketer again settles with FTC over negative option marketing
On September 22, the FTC announced a $1.04 million settlement with a supplement marketer and its two officers (collectively, “defendants”), resolving allegations that the defendants engaged in deceptive sales and billing practices, in violation of the Restore Online Shoppers’ Confidence Act (ROSCA), the Telemarketing Sales Rule (TSR), and a previous court order. Previously, in 2016, the marketer entered into a settlement with the FTC covering allegations that the company engaged in negative option marketing by enrolling consumers in a membership program that billed up to $79.99 monthly unless the consumers canceled within an 18-day trial period. The 2016 settlement barred the company from, among other things, (i) obtaining consumers’ billing information without first disclosing they would be charged, that the charge would increase after a certain period, or that the charge would be reoccurring; (ii) obtaining payment from consumers without express written authorization; and (iii) failing to provide a simple way for consumers to cancel.
According to the FTC’s new complaint, from 2016 to 2019, the defendants violated the previous consent order, ROSCA, and TSR by failing to clearly and conspicuously disclose that in order to cancel, consumers must contact the company “at least one day before the end of the advertised Free Trial Period to avoid being charged for the monthly membership program.” The agreed-upon proposed contempt order requires the defendants to pay nearly $1.04 million to be used for equitable relief, including consumer redress.