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Federal agencies update host state loan-to-deposit ratios
On August 9, the Federal Reserve Board, the FDIC, and the OCC released the current host state loan-to-deposit ratios for each state or U.S. territory, which the agencies use to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Act, banks are prohibited from establishing or acquiring branches outside of their home state for the primary purpose of deposit production. Branches of banks controlled by out-of-state bank holding companies are also subject to the same restriction. Determining compliance with Section 109 requires a comparison of a bank’s estimated statewide loan-to-deposit ratio to the yearly host state loan-to-deposit ratios. If a bank’s statewide ratio is less than one-half of the yearly published host state ratio, an additional review is required by the appropriate agency, which involves a determination of whether a bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches. Banks that do not meet the compliance requirements are subject to sanctions by the OCC. Notably, Section 109 is not applicable to federal savings associations or community banks with covered interstate branches.
CFPB settles student-loan suit against defunct educational institution
On August 12, the CFPB announced a settlement with a defunct for-profit educational institution to resolve allegations that the defendant engaged in unfair and abusive acts and practices in violation of the Consumer Financial Protection Act through its private student loan origination practices. As previously covered by InfoBytes, the CFPB filed a lawsuit in 2014 alleging, among other things, that the defendant offered new students short-term zero-interest loans to cover the difference between the cost of attendance and federal loans obtained by students, but when the short-term loans came due at the end of the students’ first academic year, the defendant forced borrowers into “high-interest, high-fee” private student loans knowing that borrowers could not afford them. According to the Bureau, this practice resulted in a 64 percent default rate on the loans. The terms of the proposed settlement include a $60 million judgment against the defendant as well as an injunction prohibiting the defendant from offering or providing student loans in the future.
Earlier in June, the Bureau announced a settlement with a company that managed student loans for the defendant, which includes approximately $168 million in student loan forgiveness. (See previous InfoBytes coverage here.) The company has also agreed to permanently cease enforcing, collecting, or receiving payments on any of its loans.
FTC settles with email company for deceptively collecting consumer information
On August 8, the FTC announced a settlement with an email management company, which requires the company to delete the personal information it obtained from consumers’ email receipts after allegedly misleading consumers about the company’s services. In the complaint, the FTC alleges that the company, which assisted consumers in unsubscribing from unwanted subscription emails, deceptively told consumers that it would “never touch [their] personal stuff,” when providing the company access to their emails, but in reality, the company would access inboxes to collect consumers’ e-receipts to sell the purchase information to other companies. Moreover, the complaint alleges that, even after consumers chose to decline to allow the company access to their email, the company persisted with deceptive messages, which resulted in “[o]ver 20,000 consumers chang[ing] their minds and decid[ing] to complete the sign-up process after viewing the messages.” The settlement requires the company to: (i) delete from its system, and its parent company’s system, the email receipts it collected from consumers, unless it obtains their affirmative consent to maintain the information; (ii) cease misrepresenting the way it collects, uses, stores, or shares the information it collects; and (iii) notify consumers who have signed up for the service, after viewing the deceptive messages, about how it collects and shares information.
9th Circuit: Plaintiffs’ face-scanning claims can proceed
On August 8, the U.S. Court of Appeals for the 9th Circuit affirmed a district court order certifying a class action suit that alleged a social media company’s face-scanning practices violated the Illinois Biometric Information Privacy Act (BIPA). The court found that the plaintiffs alleged a sufficiently concrete injury necessary to establish Article III standing as defined in the U.S. Supreme court’s decision in Spokeo, Inc. v. Robins. The plaintiffs contended that the defendant’s use of the facial-recognition technology did not comply with Illinois law designed to regulate “the collection, use, safeguarding and storage of biometrics”—which, under BIPA, includes the scanning of face geometry. The district court denied the defendant’s motion to dismiss for lack of standing and certified the class. The defendant appealed, arguing, among other things, that even if the plaintiffs have standing to sue, (i) BIPA is not intended to be applied extraterritorially; (ii) the collection of biometric data occurred on servers located outside of Illinois; and (iii) it is unclear that the alleged privacy violations “occurred ‘primarily and substantially within’” within the state. Additionally, the defendant argued that the district court abused its discretion by certifying the class because the state’s “extraterritoriality doctrine precludes the district court from finding predominance,” and that a class action was not superior to individual actions due to the potential for a large statutory damages award.
On appeal, the 9th Circuit held that the plaintiffs’ claims met the standing requirement of Spokeo because the defendant’s alleged development of a face template that uses facial-recognition technology without users’ consent constituted an invasion of an individual’s private affairs and concrete interests. “Because we conclude that BIPA protects the plaintiffs’ concrete privacy interests and violations of the procedures in BIPA actually harm or pose a material risk of harm to those privacy interests, the plaintiffs have alleged a concrete and particularized harm, sufficient to confer Article III standing,” the appellate court stated. The 9th Circuit also dismissed the defendant’s extraterritoriality argument, stating that predominance is not defeated because the threshold questions of exactly which consumers BIPA applies to can be decided on a classwide basis.
Fed issues final rules related to rate decreases
On August 12, the Federal Reserve Board (Fed) published two final rules following its July 31 decision to lower the target range for the federal funds rate to 2 - 2.25 percent. These rules affect the primary and secondary credit available to depository institutions as a short-term backup source of funding, as well as reserve requirements that depository institutions must meet.
A final rule amending Regulation A (Extensions of Credit by Federal Reserve Banks) was issued to reflect the Fed’s approval of a one-quarter percent decrease, from 3 percent to 2.75 percent. Additionally, because the formula for the secondary credit rate incorporates the primary rate, the secondary credit rate also decreased by one-quarter percentage point, from 3.50 percent to 3.25 percent. The amendments are effective August 12, with rate changes for primary and secondary credit applicable on August 1.
A second final rule amending Regulation D (Reserve Requirements of Depository Institutions) was issued to reflect approval of a one quarter percent decrease to the rate of interest paid on balances maintained to satisfy reserve balance requirements (IORR), along with the rate of interest paid on excess balances (IOER) maintained at Federal Reserve Banks by or on behalf of eligible institutions. The final rule specifies that both the IORR and the IOER are 2.10 percent. The amendments are effective August 12, with IORR and IOER rate changes applicable on August 1.
5th Circuit upholds $298 million fine in FCA/FIRREA mortgage fraud action
On August 8, the U.S. Court of Appeals for the 5th Circuit affirmed a district court ruling that ordered two mortgage companies and their owner to pay nearly $300 million in a suit brought under the False Claims Act (FCA) and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The suit accused the defendants of allegedly making false certifications, which reportedly led to mortgages ending in default. The jury agreed that the defendants defrauded the Federal Housing Agency’s mortgage insurance program when a state audit revealed unregistered company branches were used to originate loans in violation of agency guidelines, and the court determined that there was ample evidence to find that the false certifications were a proximate cause of losses from loan defaults. As a result, the government trebled the damages and civil penalties under the FCA from $93 million to roughly $298 million. The defendants appealed the decision, challenging, among other things, the sufficiency of evidence, methodologies presented by the government’s expert witnesses, and the judge’s decision to not order a new trial after dismissing a disruptive juror.
On appeal, the 5th Circuit opined that there was sufficient evidence to support the jury’s findings, and rejected the defendants’ expert witness challenges, holding first that the defendants had waived any argument about the loan default sampling methodology used by one of the witnesses, because their argument that the witness “failed to control for obvious causes of default” never came up “during the extensive negotiations over the sampling methodology that would be used.” The appellate court also concluded that nothing in the record supported the defendants’ argument that the second witness “did not apply the HUD underwriting standards” in his re-underwriting methodology. The appellate court further noted that it has declined to adopt a rule used by other circuit courts that prohibits jurors from being dismissed “unless there is no possibility” that the juror’s failure to deliberate stems from their view of the evidence. Rather, the 5th Circuit held that the district court had grounds to dismiss the juror who “failed to follow instructions, exhibited a lack of candor during questioning, and had engaged in threatening behavior towards other jurors.”
VA consolidates and clarifies IRRRL guidance
On August 8, the Department of Veterans Affairs (VA) issued Circular 26-19-22, which consolidates and clarifies guidance related to Section 309 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law No. 115-174, and updates guidance regarding loan seasoning requirements based on the “Protecting Affordable Mortgages for Veterans Act of 2019,” Public Law No. 116-33. (Covered by InfoBytes here and here.) The Circular states that a lender (broker or agent included), a servicer, or issuer of an Interest Rate Reduction Refinance Loan (IRRRL) must, among other things:
- Recoup Fees. Certify that certain fees and costs of the loan will be recouped on or before 36 months after the loan note date;
- Net Tangible Benefit. Establish that when the previous loan had a fixed interest rate (i) the new fixed interest rate is at least 0.5 percent lower, or (ii) if the new loan has an adjustable rate, that the rate is at least 2 percent lower than the previous loan. In each instance, the lower rate cannot be produced solely from discount points except in certain circumstances;
- Loan Seasoning. Follow a seasoning requirement for all VA-guaranteed loans. A loan cannot be refinanced until (i) the date on which the borrower has made at least six consecutive monthly payments on the loan being refinanced, and (ii) the date that is 210 days after the first payment due date of the loan being refinanced; and
- Disclosure. Present a comparison of the refinance loan to the original loan within two business days from the initial loan application and again at closing that includes information about the overall cost of refinance. The Circular offers a sample comparison statement in Exhibit C.
7th Circuit: Debt collector’s email not a “communication” under the FDCPA
On August 8, the U.S. Court of Appeals for the 7th Circuit affirmed a summary judgment ruling in favor of a consumer, concluding that a debt collector’s emails did not constitute a “communication” under the FDCPA. According to the opinion, the debt collector sent a consumer two emails about separate medical debts containing hyperlinks to the debt collector’s website, which then required the user to click through various screens to access and download a document containing the disclosures required under Section 1692g(a) of the FDCPA. The consumer did not open the emails. After finding out about the debt collection effort from the hospital, the consumer called the debt collector for more information; however, the required disclosures were not provided over the phone or sent in a written notice within the next five days. The consumer filed suit against the debt collector alleging it violated Section 1692g(a) by not providing the disclosures during her phone call or within five days after the call as required by law. The company argued that the emails were the FDCPA’s “initial communications” and contained the mandatory disclosures. The lower court granted the consumer’s motion for summary judgment.
On appeal, the 7th Circuit rejected the debt collector’s arguments that the emails constituted a “communication” under the FDCPA, noting that other appellate courts have held the message “must at least imply the existence of a debt,” and the emails only contained the name and email address of the debt collector. Moreover, the appellate court took issue with the multistep process required to access the validation notice, concluding “[a]t best, the emails provided a digital pathway to access the required information. And we’ve already rejected the argument that a communication ‘contains’ the mandated disclosures when it merely provides a means to access them.”
Notably, the CFPB filed an amicus brief in the action, seeking affirmation of the lower court’s ruling on the separate theory that the debt collector allegedly failed to satisfy the conditions of the E-Sign Act. However, because the court affirmed the decision on other grounds, it chose not to address the E-Sign Act.
FHFA delays URLA implementation, removes language preference question
On August 8, at the direction of the FHFA, Fannie Mae and Freddie Mac (GSEs) announced that the mandatory use of the redesigned Uniform Residential Loan Application (URLA) will no longer begin on February 1, 2020. FHFA has directed the GSEs to make specific modifications to the URLA form, including, most notably, the removal of the language preference question. The question, along with the home ownership education and housing counseling question, will now be a part of a separate voluntary consumer information form. The announcement does not provide information on the new implementation dates.
District Court: Bank’s delay on adverse-action notice does not qualify for safe harbor
On August 8, the U.S. District Court for the Eastern District of Kentucky granted a loan applicant’s request for partial summary judgment on allegations that a bank violated ECOA when it failed to timely send an adverse-action notice. The court ruled that the bank failed to establish its inadvertent error defense. The plaintiff’s loan application was submitted on October 30, 2018, and subsequently reviewed and denied on November 5 due to “issues with his credit report that needed to be resolved” in order for his application to be fully considered. The adverse action paperwork was then placed in a courier pouch for delivery to the lending officer responsible for notifying the plaintiff. However, the information failed to make it to the intended officer until after the plaintiff filed the action, upon which, the adverse action letter was generated on December 19. Under ECOA, notification of action must be made within 30 days of receipt.
The bank argued that partial summary judgment was inappropriate because the failure to provide notice within 30 days was an “inadvertent error” under 12 CFR 1002.16, and therefore did not constitute a violation of ECOA. The court stated that, in order to prevail on its argument on the safe-harbor provision for inadvertent errors, the bank, as the nonmoving party, must establish three elements: (i) the error was “mechanical, electronic, or clerical”; (ii) the error was unintentional; and (iii) the error “occurred ‘. . .notwithstanding the maintenance of procedures reasonably adapted to avoid such errors.” However, the bank conceded that it could not explain what caused the courier pouch error, put forth no evidence to show that the effort was clerical in nature, and also acknowledged that it “does not maintain any procedure reasonably adapted to avoid such errors.” As such, the court determined that the bank failed to demonstrate the existence of a genuine issue of any material fact bearing on the elements of the defense, and thus failed to qualify for the safe harbor defense.