InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
New Jersey Supreme Court holds that state fiduciary law does not permit affirmative cause of action against bank
On June 17, the New Jersey Supreme Court reversed an appellate division’s judgment and dismissed a complaint against a bank after concluding that the New Jersey Uniform Fiduciaries Law (UFL) does not permit an affirmative cause of action against banks but rather provides them with limited immunity for failing to take notice of and action on the breach of a fiduciary’s obligation. In 2015, the plaintiff filed a complaint on behalf of himself and his dental practice against two of his employees who allegedly took insurance company checks issued to the plaintiff and his practice totaling “several hundred thousand dollars,” forged his endorsement on them, and deposited the checks into personal accounts held by a bank who was sued in the same lawsuit for common law claims of conversion and negligence. The trial court dismissed the cause of action against the bank for failure to state a claim, reasoning that “‘common law negligence is not such a remedy’ in the absence of a ‘special relationship’ between [the plaintiff] and the bank.” The trial court also rejected the plaintiff’s argument that the UFL provided the basis for a cause of action, concluding that the individuals acted as “errant employees”—not as fiduciaries—and that the bank had no fiduciary relationship with the plaintiff who was not a bank customer. The appellate division partially reversed, concluding that plaintiff should be allowed to plead a UFL claim. Among other things, the plaintiff argued that the employees were acting in a fiduciary capacity as “constructive trustees” of the funds and the bank met a bad faith requirement under the UFL in depositing the checks.
The New Jersey Supreme Court disagreed, holding that “[n]othing in the plain language of the UFL suggests that the UFL is itself the basis for an affirmative cause of action.” Moreover, the “UFL does not provide for a recovery through a private action or set forth remedies or a statute of limitations—all indicia of a statutory cause of action.” According to the New Jersey Supreme Court, “[w]hen an action is brought against a bank, the UFL provides that a bank’s liability depends on whether the bank acted with actual knowledge or bad faith in the face of a fiduciary’s breach of his obligations.”
7th Circuit dismisses FDCPA action over interest accrued post-write off
On June 19, the U.S. Court of Appeals for the Seventh Circuit affirmed the dismissal of an action alleging a debt collector violated the FDCPA by attempting to collect interest that accrued on a debt after the creditor wrote off the debt but before the collector acquired it. According to the opinion, the plaintiffs’ original unpaid debt was $3,226.35 before the original creditor ceased collection efforts and stopped sending monthly statements. Approximately two years later, the creditor sold the debt to the collection agency, and approximately two years after that, the debt collector sent a demand letter seeking payment of $5,800, which included around $1,600 in interest for the months after the original creditor ceased collection efforts. The debt collector sent a second letter two months later, and a third letter the following year to their attorney in response to the attorney’s request to verify the debt, but the third letter did not explain how much of the debt was interest. The plaintiffs filed the action against the debt collector, alleging the collector violated the FDCPA’s prohibition on false, deceptive, or misleading representations in connection with collection of a debt by demanding interest that accrued between charge-off and sale. The district court dismissed the action as untimely.
On appeal, the 7th Circuit affirmed dismissal, but determined the suit was filed timely. Specifically, the appellate court concluded that the one year statute of limitations applied to the third letter the debt collector sent to the plaintiffs’ lawyer in response to a demand for debt verification. However, the appellate court concluded that the third collection letter did not violate the FDCPA, arguing the plaintiffs “promised to pay interest, and [the debt collector]’s computer used the correct rate.” Moreover, the appellate court stated that “[a] statement is false, or not, when made; there is no falsity by hindsight,” and previous instances in the circuit “in which a letter was deemed to have falsely stated the amount of the debt dealt with errors known or readily knowable when the letter was sent.” Lastly, the appellate court rejected the plaintiffs’ post-argument submission that the debt collector “must openly state the legal position behind its calculation” in order to avoid having the letter be misleading, noting that the third letter was sent to their lawyer, and it “would not have misled a competent lawyer.”
CSBS challenges OCC’s Covid-19 preemption bulletin
On June 24, the Director of Regulatory Policy & Policy Counsel at CSBS, Mike Townsley, wrote a blog post in response to the OCC’s Bulletin on Covid-19 preemption, arguing that the bulletin does not have the force and effect of law. As previously covered by InfoBytes, on June 17, the OCC issued a Bulletin stating that banks are governed primarily by federal standards and generally are not subject to state law limitations. The OCC acknowledged states’ efforts to respond to the economic disruptions as “well-intended,” but noted that the competing requirements could risk banks’ safety and soundness. The Bulletin also provided specific examples of the types of state laws that do not apply to banks’ lending and deposit activities.
In response, Townsley asserts that the Bulletin has no preemptive effect, because the OCC did not follow the “process required by the National Bank Act (NBA) to determine that these state COVID-19 relief measures are preempted.” Specifically, Townsley argues that through the enactment of the Dodd-Frank Act, Congress “amended the NBA to overturn the OCC’s preemption regulations and establish substantive procedural requirements for the determination of whether the NBA preempts a state law.” The requirements include a court or the OCC having to conclude that the law “‘prevents or significantly interferes with the exercise by the national bank of its powers,’” which determination, according to Townsley, if made by the OCC, must be on a case-by-case basis, and include a notice and comment period and the backing of “‘substantial evidence’ on the record.” Townsley also seeks to cast further doubt as to whether the preemption regulations cited by the Bulletin can serve as a guide on procedural grounds, observing that Dodd-Frank requires the OCC to review and decide, through notice and comment, whether to “continue or rescind” each preemption determination every five years, and it has been “well over five years” since the rules were adopted and no such review has ever been conducted. Townsley concludes by citing to the 19th century Supreme Court decision Nat'l Bank v. Commonwealth, stating that national banks “’are subject to the laws of the State.’”
FTC and SBA warn companies about misleading SBA loan marketing
On June 24, the FTC and the Small Business Administration (SBA) sent warning letters to six companies that they may be misleading small businesses seeking SBA loans due to the Covid-19 pandemic. The press release highlights specific claims from each company that the letters assert “could lead consumers to believe the companies are affiliated with the SBA,” or that consumers could use their websites to apply for loans from the Paycheck Protection Program (PPP) or other programs authorized by the CARES Act. These cited claims include, among others, (i) offering “'COVID-19 SBA Loan Programs”; (ii) offering “SBA Lending experts” and “SBA Loan Officers”; and (iii) stating “Get matched with a PPP lender now!” The letters warn the recipients to remove all deceptive claims and advertisements and remediate any harm to small business consumers that may have been caused. The letters further instruct the companies to notify the FTC within 48 hours of the actions they take in response. Copies of all six warning letters are available via links in the press release.
FDIC adds flood insurance penalty information to enforcement manual
On June 18, the FDIC announced an update to its “Formal and Informal Enforcement Actions Manual,” regarding the assessment of mandatory civil money penalties for certain pattern and practice violations of the National Flood Insurance Act (Act). The Act requires the FDIC to assess a penalty of up to $2,000 (adjusted annually for inflation) for each violation per loan against an insured depository institution. The FDIC will use the following two-step process to calculate the mandatory penalties for violations: (i) determine the base penalty, which takes into account the type and repeat nature of the violations; and (ii) apply the Institution Asset Size Factor, which takes into account the institution’s asset size based on the last Call Report. The manual also describes the difference between “Tier 1” violations and “Tier 2” violations and the base penalty for each.
CFPB launches pilot advisory opinion program to provide regulatory clarity
On June 18, the CFPB launched a pilot advisory opinion program (AO program) to allow entities to submit requests to the Bureau for written guidance in cases of regulatory compliance uncertainty. The pilot AO program procedural rule went into effect June 22, and states that the AO program—established in response to external stakeholder feedback encouraging the Bureau to provide written guidance—will primarily focus on clarifying ambiguities in Bureau regulations, although AOs may also clarify statutory ambiguities. The Bureau notes, however, that it will not issue AOs on matters that require notice-and-comment rulemaking or that are better addressed through that process, and does not intend to issue an AO that will change a regulation or replace a regulation or statute with a “bright-light standard that eliminates all the required analysis.” During the pilot, requests will not be accepted from third parties, such as trade associations or law firms, on behalf of unnamed entities. According to the Bureau’s announcement, it will select topics based on the program’s priorities, and, if appropriate, may publicly “issue an [AO] based on its summary of the facts presented that would be applicable to other entities in situations with similar facts and circumstances.”
The pilot AO program will focus on the following four priorities: (i) providing consumers “with timely and understandable information to make responsible decisions”; (ii) identifying “outdated, unnecessary or unduly burdensome regulations in order to reduce regulatory burdens”; (iii) consistently enforcing federal consumer financial laws “in order to promote fair competition”; and (iv) “[e]nsuring markets for consumer financial products and services operate transparently and efficiently to facilitate access and innovation.”
In determining the appropriateness of an AO, the Bureau will consider several factors, including whether (i) prior Bureau examinations have identified the issue as one that may benefit from additional regulatory clarity; (ii) the issue is “of substantive importance or impact or one whose clarification would provide significant benefit”; and/or (iii) the issue concerns an ambiguity not previously addressed through an interpretive rule or other authoritative source. Additionally, issues currently under investigation or enforcement likely will not be considered appropriate for an AO.
A proposed procedural rule and information collection was also announced June 18, which requests comments on the proposed AO program. Comments must be received 60 days after publication in the Federal Register. The proposed AO program, following the conclusion of the pilot, will be fully implemented after the Bureau reviews the comments.
CFPB updates Remittance Transfer Small Entity Compliance Guide
On June 18, the CFPB updated its Remittance Transfer Small Entity Compliance Guide to reflect the final amendments to the Remittance Transfer Rule (Final Rule) issued by the Bureau in May (covered by InfoBytes here). Among other things, the Final Rule grants a permanent safe harbor from exact remittance cost disclosures to insured institutions that do fewer than 500 remittances annually in the current and prior calendar years. Additionally, the Final Rule adopts a new, permanent exception that permits insured institutions to estimate the exchange rate for a remittance transfer to a particular country if, among other things, the remittance payment is made in the local currency of the designated recipient’s country and the insured institution processing the transaction made 1,000 or fewer remittance payments to that country in the previous calendar year.
As previously covered by InfoBytes, the CFPB issued FAQs covering Covid-19 and the Final Rule, and the Bureau issued a policy statement, which established a temporary exception allowing institutions providing remittance transfers to estimate fees to consumers in light of the Covid-19 pandemic. For the period between July 1 to January 21, 2021, the Bureau will not cite supervisory violations or initiate enforcement actions against certain institutions for disclosing estimated fees and exchange rates.
Consumer advocacy groups claim CFPB taskforce is illegally chartered
On June 16, several consumer advocacy groups filed a lawsuit in the U.S. District Court for the District of Massachusetts against the CFPB claiming that the Bureau’s Taskforce on Federal Consumer Financial Law was “illegally chartered” and violates the Federal Advisory Committee Act (FACA). As previously covered by InfoBytes, the taskforce was established last year to examine the existing legal and regulatory environment facing consumers and financial services providers. As also covered by InfoBytes, the taskforce recently outlined its future plans, which include analyzing comments received from a March request for information, holding a public hearing, and participating in public listening sessions with the Bureau’s four advisory committees. The complaint argues, however, that the taskforce’s membership lacks balance, and that the appointed members who “uniformly represent industry views” have worked on behalf of several large financial institutions or work as industry consultants or lawyers. This composition, the consumer advocacy groups argue, undermines the purpose of the taskforce and is a violation of FACA and the Administrative Procedure Act. The complaint also states that while FACA requires advisory committee meetings to be open to the public and that records be disclosed, the taskforce has held closed-session meetings without providing public notice and has failed to make available any of the records related to these meetings or its other work.
The complaint seeks declaratory and injunctive relief and asks the court to (i) set aside the taskforce’s charter, all orders and decisions, and the appointments of the taskforce members; (ii) enjoin the taskforce from meeting, or otherwise conducting taskforce business; (iii) order the Bureau to immediately release all materials prepared for the taskforce; and (iv) enjoin the Bureau from relying upon taskforce recommendations or advice. The complaint also seeks costs and attorneys’ fees.
OFAC sanctions network for supporting Maduro regime, blocks two vessels
On June 18, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions against three individuals and eight foreign entities for allegedly engaging in activities in or associated with a network attempting to evade U.S. sanctions on Venezuela’s oil sector. Two vessels owned by two of the designated entities were also identified as blocked property pursuant to Executive Order 13850. OFAC noted that the identified persons participated in a scheme involving involved Venezuela’s state-owned oil company, Petroleos de Venezuela, S.A. (PdVSA), in order to benefit “the illegitimate regime of President Maduro.” Both PdVSA and Maduro were previously designated by OFAC (covered by InfoBytes here and here), and OFAC warned that persons who facilitate activity with designated persons “risk losing access to the U.S. financial system.” As a result, all property and interests in property belonging to the identified individuals and entities subject to U.S. jurisdiction are blocked, and “any entities that are owned, directly or indirectly, 50 percent or more by the designated entities, are also blocked.” U.S. persons are generally prohibited from dealing with any property or interests in property of blocked or designated persons.
Illinois regulator releases recordings of PPP Loan Forgiveness Application webinars
On June 23, the Illinois Department of Financial and Professional Regulation announced that recordings of webinars offered to lenders and businesses on June 18 concerning the federal Paycheck Protection Program Loan Forgiveness Application are available online.