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Indiana sues credit reporting agency over 2017 data breach
On May 6, the Indiana Attorney General announced a lawsuit filed against a national credit reporting agency in response to its 2017 data breach, alleging the company “chose increasing revenue over protecting the safety of consumers’ sensitive personal information.” According to the complaint, the state alleges the company violated the Indiana Deceptive Consumer Sales Act by failing to secure 3.9 million residents’ personal data while representing to consumers that its payment systems were compliant with Payment Card Industry (PCI) standards. The complaint alleges among other things that the company “knew the system was storing payment card information in clear text, which was a known violation of the [PCI standard]” and “[d]espite its knowledge, … made a conscious choice to break the rules.” Indiana is seeking civil penalties, consumer restitution, costs and injunctive relief.
OCC updates RESPA booklet in Comptroller’s Handbook
On May 7, the OCC announced an update to the RESPA booklet of the Comptroller’s Handbook. Among other things, the revisions to the booklet reflect updates to Regulation X made by the CFPB in recent years, including (i) the establishment and implementation of a definition of “successor in interest;” (ii) compliance with certain servicing requirements when a person is a debtor in bankruptcy; and (iii) clarifications and revisions to the provisions regarding force-placed insurance notices, policy and procedure requirements, and early intervention and loss mitigation requirements.
HUD proposes changes to FHA lender certification
On May 9, HUD announced several proposed revisions to the Federal Housing Administration’s (FHA) lender certification requirements in an effort to provide lenders and servicers “greater certainty in how to satisfy the agency’s compliance requirements.” HUD stated that the revisions are in response to the White House’s March Memorandum on Federal Housing Finance Reform, which included a directive that FHA work to diversify the network of FHA-approved lenders. (Covered by InfoBytes here.) The proposed changes include:
- Loan-Level Certifications. FHA released proposed changes to the Addendum to the Uniform Residential Loan Application (Form 92900-A), reorganizing the Form in a “logical, easy to read, and understandable format” and eliminating “duplicative information collected elsewhere.”
- Annual Lender Certification Statements. FHA released proposed changes to the Annual Lender Certification Statements, including a side-by-side comparison of the current and proposed changes. The changes are intended to “better align [the certifications] with National Housing Act standards while continuing to hold lenders accountable for compliance with HUD eligibility requirements.” The proposed changes include deleting redundancies and replacing handbook references with a general certification to compliance with the requirements of 24 CFR § 202.5.
- Defect Taxonomy. FHA released proposed changes to the Defect Taxonomy. The draft of the Defect Taxonomy Version 2 includes (i) changes to the Severity Tier definitions; (ii) potential remedies that align with each Severity Tier; (iii) revised sources and causes in certain defect areas; (iv) new defect areas for servicing loan reviews; and (v) HUD policy references.
All proposals are posted on the FHA’s Drafting Table for 30-day feedback through June 8.
DOJ issues False Claims Act guidance
On May 7, the DOJ (or the “Department”) announced the release of formal guidance to the Department’s False Claims Act (FCA) litigators, which explains how the DOJ awards credit to defendants who cooperate with the Department during a FCA investigation. Under the formal policy, which is located in Section 4-4.112 of the Justice Manual, cooperation credit in FCA cases may be earned by (i) voluntarily disclosing misconduct unknown to the government, which can be done even if the DOJ has already begun an investigation of other misconduct; (ii) cooperating in an ongoing investigation, such as by preserving documents beyond standard business or legal practices, identifying individuals who are aware of the relevant information or conduct, and facilitating review and evaluation of relevant data or information that requires access to special or proprietary technologies; or (iii) undertaking remedial measures in response to a violation, such as by implementing or improving an effective compliance program or appropriately disciplining or replacing those responsible for the misconduct.
The Department has discretion in awarding credit, which will vary depending on the facts and circumstances of each case. With regard to voluntary disclosure or additional cooperation, the Department will consider (i) the timeliness and voluntariness of the assistance; (ii) the truthfulness, completeness, and reliability of any information or testimony provided; (iii) the nature and extent of the assistance; and (iv) the significance and usefulness of the cooperation to the government. Entities or individuals may quality for partial credit if they have “meaningfully assisted the government’s investigation by engaging in conduct qualifying for cooperation credit.” Most often, cooperation credit will take the form of a reduction in penalties or damages sought by the Department. However, the maximum credit that a defendant may earn may not exceed the amount that would result in the government receiving less than full compensation for the losses caused by the misconduct. In addition, the Department may consider in appropriate circumstances other forms of credit, including notifying a relevant agency about the defendant’s disclosure or other cooperation, publicly acknowledging such disclosure or cooperation, and assisting in resolving a qui tam litigation with a relator.
New York legislature introduces bills to protect small businesses, regulate merchant cash advance transactions
On May 1, S5470 was introduced in the New York State Senate and is now sitting with the Committee on Banks, which would establish consumer-style disclosure requirements for certain commercial transactions. Similar to the legislation enacted in California last September, previously covered in InfoBytes here, the bill requires financing entities subject to the law to disclose in each commercial financing transaction “the total cost of the financing, expressed as a dollar cost, including any and all fees, expenses and charges that are to be paid by the recipient and that cannot be avoided by the recipient, including any interest expense.” For open and closed-end commercial financing transactions, the bill requires that the disclosures must include, among other things, (i) the amount financed or the maximum credit line; (ii) the total cost of the financing; (iii) the annual percentage rate; (iv) payment amounts; (v) a description of all other potential fees and charges; and (vi) prepayment charges. The bill sets out analogous, but separate, disclosure requirements for accounts receivable purchase transactions, such as merchant cash advance and factoring transactions.
Importantly, the bill does not apply to (i) financial institutions (defined as a chartered or licensed bank, trust company, industrial loan company, savings and loan association, or federal credit union, authorized to do business in New York); (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) a technology service provider; and (v) a lender who makes no more than one applicable transaction in New York in a 12-month period or any person that makes commercial financing transactions in New York that are incidental to the lender’s business in a 12-month period.
Additionally, the New York legislature is also considering a number of other bills that would affect commercial financing transactions:
- A03637, would amend the state’s banking law to deem asset-based lending transactions (defined as, “a transaction in which advances are made which are contingent on the recipient forwarding payments received from one or more third parties for goods such recipient has supplied or services such recipient has rendered to that third party or parties.”) to be loans for all purposes. On its face, this legislation would subject typical merchant cash advance and factoring transactions, which New York courts have in many recent court cases deemed to be non-loan transactions, to lending law restrictions, which would include potential licensure requirements and usury restrictions.
- A03636, would amend the state’s business law to prohibit the inclusion of a confession of judgment (COJ) in a contract or agreement for a financial product or service provided by an entity regulated by the New York Department of Financial Services for the purpose of consumer or investor protection, which is specifically defined by the bill as: (i) any product or service for which registration or licensing is required or for which the offeror or provider is required to be registered or licensed by state law; (ii) any product or service as to which provisions for consumer or investor protection are specifically set forth for such product or service by state statute or regulation; and (iii) securities, commodities and real property subject to the provisions of article 23A of the general business law. COJs are contractual clauses in which a debtor waives in advance his or her right to be notified of a court hearing, or to present his or her side of the case, which are prohibited under federal law for consumer contracts by the FTC Credit Practices Rule (16 C.F.R. pt. 444). In conjunction with potential licensure required under AO3637 above, the passage of both pieces of legislation in New York could result in the prohibition of COJ clauses in merchant cash advance agreements, a common feature of such agreements and generally permitted under New York law.
- A03638, would extend the majority of the state’s consumer protections with respect to loans made to small businesses (defined by the bill as, a “small business shall be deemed to be one which is resident in this state, independently owned and operated, not dominant in its field and employs one hundred or less persons.”). Specifically, the bill would amend the state’s general obligations law to extend all rights and privileges granted under the title to small businesses and would also amend Section 173 and Section 380-e of the state’s banking law to extend all the rights and privileges granted by the section to small businesses.
Relatedly, the FTC recently held a forum on small business marketplace lending practices, see detailed InfoBytes coverage on the forum here.
FTC holds forum on marketplace lending to small businesses
On May 8, the FTC held a forum with members of the small business marketplace to discuss the recent uptick in online loans and alternative financing products, and to analyze the potential for unfair and deceptive marketing, sales, and collection practices in the industry. Opening “Strictly Business: An FTC Forum on Small Business Financing,” FTC Commissioner Rohit Chopra expressed broad concerns about the state of entrepreneurship in the U.S. and the barriers small businesses face when negotiating contracts. Three panels discussed topics including (i) recent trends in the financing marketplace and small business financing products; (ii) the impact of fintech in online lending; (iii) an examination of the risks and benefits of the merchant cash advance industry; and (iv) consumer protection risks and legislative, self-regulatory, and educational efforts to help better protect borrowers.
During the first panel, several industry members discussed the importance of credit and financing products in meeting the capital needs of small businesses who often experience challenges with funding operations and cash management. While traditional bank lending and Small Business Administration (SBA) loans often require lengthy, costly underwriting standards, several panelists noted that new marketplace financing options have created opportunities for small businesses that previously did not exist. Among other things, panelists emphasized that there is a big difference between consumer credit and business credit, and that online lenders are leveraging underlying business data, credit card receivables data, and fundamental underlying business transaction data to make sure small businesses can sustain and service their debt. Funding time is also critical to small businesses with many choosing online lenders for faster access to funds. The panel discussed the benefits of online financing products, such as moving away from including consumer credit scores in the underwriting process and examining nontraditional data to look at cash flow, but also cautioned that there can be a lack of transparency around terms and pricing.
The second panel discussed the merchant cash-advance (MCA) industry, which they described as providing an unregulated form of financing for small businesses in the form of factoring future receivables. Recently, the industry has been scrutinized for alleged collection abuses and use of confessions of judgment (COJs). COJs, which allow lenders to legally seize borrowers’ bank accounts and other assets without a judge’s review, have led to a flood of questionable legal actions against small businesses, according to Commissioner Chopra. However, one of the panelists noted that the FTC limited the ban on COJs to consumers.
The third panel discussed consumer protection risks as well as products and information available for small business borrowers. A key concern amongst several of the panelists was whether business borrowers are sophisticated enough to understand the various options and if they are able to receive the necessary information to shop between products, such as APRs, total costs, and average monthly payments. The panel also discussed federal and state law, as well as self-regulatory efforts, that offer protections for small business borrowers. All agreed that there has been significant action taken at the state level to try to standardize and harmonize these types of lending practices, and while there was support for a national standard, they cautioned that a weaker national standard should not preempt a stronger state standard. Transparent disclosure standards, consumer protection oriented issues such as privacy and data security, as well as deceptive practices, were also discussed, with panelists agreeing that outreach and consumer education is vital in helping consumers make informed decisions.
Director of the FTC’s Bureau of Consumer Protection, Andrew Smith, closed the forum by emphasizing that the FTC has broad authority under the FTC Act to tackle unfair and deceptive practices, and stating that the Commission is very concerned about reports of unfair and deceptive marketing, sales, and collection practices in the small-business finance market. He stressed that while financial technologies can evolve quickly, the underlying legal protections for small businesses remain the same.
11th Circuit: City of Miami sufficiently alleged Fair Housing Act violations
On May 3, the U.S. Court of Appeals for the 11th Circuit held that the City of Miami plausibly alleged that two national banks’ lending practices violated the Fair Housing Act (FHA) and led to defaults, foreclosures, and vacancies, and eventually reduced property values and corresponding property tax revenues. The court did so by finding “some direct relation” between the City’s tax revenue injuries and the Bank’s alleged violations of the FHA. The case returned to the 11th Circuit after having been appealed to and resolved in part in the U.S. Supreme Court in 2017, where the Court held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices (previously covered by a Buckley Special Alert). According to the appellate court opinion, the Court “declined to ‘draw the precise boundaries of proximate cause under the FHA and to determine on which side of the line the City’s financial injuries fall,’” leaving to the lower courts the issue of how the principles of proximate cause function when applied to the FHA and the facts of the complaints.
The appellate court concluded that the district court erred in dismissing the City’s claims against the banks in their entirety, with the 11th Circuit finding “a logical and direct bond between discriminatory lending as a pattern and practice applied to neighborhoods throughout the City and the reduction in property values.” However, the appellate court concluded that the City’s allegations fell short of establishing a direct relationship between the alleged misconduct and the City’s purported increase in its municipal services expenditures, noting that the U.S. Supreme Court “has told us that foreseeability alone is not enough.” The appellate court emphasized that at the motion to dismiss stage it was only addressing the plausibility that the alleged conduct violated the FHA, and remanded the case back to the district court.
NMLS issues “temporary authority” licensing guidelines for MLOs
On April 4, the Nationwide Multistate Licensing System (NMLS) issued a set of guidelines and FAQs clarifying federal SAFE Act amendments created by the Economic Growth, Regulatory Relief, and Consumer Protection Act (the Act), to establish “temporary authority” provisions for mortgage loan originators (MLOs). According to the guidelines, temporary authority to act as a loan originator while completing state-specific licensing requirements is granted to: (i) qualified MLOs who are changing employment from a depository institution to a state-licensed mortgage company; and (ii) qualified state-licensed MLOs seeking to be licensed in another state. The guidance expands upon temporary authority eligibility requirements; disqualification criteria; and the length of time MLOs may operate under temporary authority.
The guidelines also emphasize that “any MLO operating under temporary authority is subject to the requirements of the federal SAFE Act, and all applicable laws of the application state, to the same extent as if that MLO was a state-licensed loan originator licensed by the state.” MLOs will be able to apply for a license and become eligible for temporary authority on November 24.
CFPB proposes debt collection rules
On May 7, the CFPB issued its Notice of Proposed Rulemaking (NPRM) amending Regulation F, to implement the Fair Debt Collection Practices Act (FDCPA) (the “Proposed Rule”). The Bureau also released a Fact Sheet on the Proposed Rule. The proposed effective date is one year after the final rule is published in the Federal Register, with comments on the Proposed Rule due 90 days after publication. Generally, the Proposed Rule covers debt collection communications and disclosures and addresses related practices by debt collectors. Highlights of the Proposed Rule include:
- Coverage. The Proposed Rule incorporates many existing provisions of the FDCPA into Regulation F including existing definitions of “debt collector” and “debt,” with only minor wording and organizational changes. The Proposed Rule would generally only cover third-party debt collectors, not the first-party efforts of the original creditor or its servicer, and specifically excludes in-house collectors of creditors (“[a]ny officer or employee of a creditor while the officer or employee is collecting debts for the creditor in the creditor’s name.”). The Proposed Rule restates the FDCPA’s definition of “consumer” but interprets the term to include “a deceased natural person who is obligated or allegedly obligated to pay a debt.” Additionally, with respect to the special definition of “consumer” for the section on communications in connection with debt collection, the Proposed Rule interprets that to include a confirmed successor in interest as well as the personal representative of a deceased consumer’s estate.
- Disclosures.
- Validation Notice. The Proposed Rule requires a debt collector to provide a consumer with a validation notice that includes certain information about the debt and the consumer’s rights with respect to the debt including: (i) the debt collector’s name and mailing address; (ii) the name of the creditor to whom the debt is currently owed and, for consumer financial product or service debt as defined in the Proposed Rule, the name of the creditor to whom the debt was owed on the itemization date; (iii) the itemization date and the amount of debt owed on that date; (iv) itemization of the current amount of the debt in a tabular format reflecting interest, fees, payments, and credits since the itemization date; (v) the current amount of the debt; (vi) if the debt is a credit card debt, the merchant brand, if any, associated with the debt, to the extent available to the debt collector; (vii) information about consumer protections; and (viii) consumer response information, including dispute prompts. The validation notice must also include the “debt collector communication disclosure” indicating the communication is for the purposes of collecting a debt.
- Disclosure Safe Harbor. Under the Proposed Rule, if a debt collector delivers in writing the Bureau’s Model Form B-3 validation notice, provided in appendix B to the Proposed Rule (available on pg. 491), it is considered to be in compliance with the validation notice requirements, though use of the model form is not required.
- Electronic Disclosures. The Proposed Rule would require debt collectors who provide required disclosures electronically to obtain the consumer’s affirmative consent directly to comply with Section 101(c) of the Electronic Signatures in Global and National Commerce Act (E-SIGN Act). In the alternative, debt collectors can send the electronic disclosures to a particular email address or phone number (in the case of text messages), that the creditor or prior debt collector could have with regard to that debt in accordance with the E-SIGN Act. Additionally, the Bureau released a flow chart to clarify how a debt collector would provide certain required disclosures electronically.
- Conduct Provisions.
- Time and Place Restrictions. The Proposed Rule clarifies that calls to mobile telephones and electronic communications, such as emails and text messages, are subject to the FDCPA’s prohibition on communicating at times or places that the debt collector knows or should know are inconvenient to the consumer, subject to certain exceptions.
- Restriction on Number of Telephone Calls. With exceptions for certain types of calls (such as those responding to a consumer request for information or made with prior consent by the consumer given directly to the debt collector), the Proposed Rule prohibits a debt collector from calling a consumer about a particular debt more than seven times within a seven-day-period. The Proposed Rule also prohibits a debt collector from calling a consumer for seven consecutive days after having had a telephone conversation with the consumer regarding the debt, beginning with the date of the conversation. A debt collector who does not exceed the frequency limits is deemed in compliance with the FDCPA’s prohibition on harassment and the Dodd-Frank Act’s prohibition on unfair acts or practices as it relates to telephone calls.
- Text and Email Communications. The Proposed Rule does not contain a restriction on the frequency or number of communications a debt collector can make via email or text message. However, the Proposed Rule requires a debt collector to include—in emails, text messages and other electronic communications—an option for the consumer to unsubscribe from future such communications and would prohibit a debt collector from attempting to communication through a medium the consumer has requested the collector not use, including a particular phone number or email address. The Proposed Rule would prohibit a debt collector from contacting a consumer through a workplace email address (absent prior consent by the consumer or receipt by the debt collector of an email sent from the consumer’s work email account) or through a public-facing social media platform, except through the platform’s private message function.
- Limited-Content Messages. The Proposed Rule specifies certain content parameters for a “Limited-Content Message” that a debt collector could send by voicemail or text that would not be considered a “communication” and therefore, would not need to include the required disclosures. Additionally, if the limited-content message was heard or observed by a third party, it would not constitute a prohibited third-party disclosure.
- Other prohibitions. The Proposed Rule prohibits a debt collector from, among other things, (i) suing or threatening to sue on a time-barred debt; (ii) reporting debts to credit reporting agencies prior to initiating communications with the consumer; and (iii) selling, transferring or placing for collection a debt to another debt collector that the collector knows or should know has been paid or settled, discharged in bankruptcy, or relates to a filed identity theft report.
District Court: No FDCPA violation when letter contains safe harbor language
On May 1, the U.S. District Court for the Eastern District of New York granted a debt collector’s motion for judgment on the pleadings in a suit concerning alleged FDCPA violations. In 2018, the plaintiff filed a putative class action against the defendant contending the debt collection letter he received omitted debt amount information and failed to provide any information about the accruing interests and charges. In its motion, the defendant argued that the letter did not violate the FDCPA because it provided the minimum amount due, current balance, and safe harbor language approved by the U.S. Court of Appeals for the 2nd Circuit in Avila v. Riexinger & Associates LLC. In that opinion, the 2nd Circuit held that “a debt collector will not be subject to liability under section 1692e for failing to disclose that the consumer’s balance may increase due to interest and fees if the collection notice . . . accurately informs the consumer that the amount of the debt stated in the letter will increase over time.” The district court agreed and ruled that because the defendant’s letter informed plaintiff of “the total, present quantity of money due” as of the date of the letter and contained the safe harbor language, the plaintiff failed to plead that the letter violated the FDCPA.