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On August 21, the U.S. Court of Appeals for the 7th Circuit held that Section 13(b) of the FTC Act does not give the FTC power to order restitution, overruling that court’s 1989 decision in FTC v. Amy Travel Service, Inc. As previously covered by InfoBytes, in June 2018, the U.S. District Court for the Northern District of Illinois granted the FTC’s motion for summary judgment against a credit monitoring service and its sole owner in an action filed under Section 13(b) of the FTC Act. The court concluded that no reasonable jury would find that the defendants’ scheme of using false rental property ads to solicit consumer enrollment in credit monitoring services without their knowledge could occur without engaging in unfair or deceptive practices. The FTC argued that the defendants’ scheme, which used the promise of a free credit report to enroll the consumers into a monthly credit monitoring program, violated the FTC Act’s ban on deceptive practices. The court agreed, holding that the ad campaign was “rife with material misrepresentations that were likely to deceive a reasonable consumer.” Additionally the court agreed with the FTC that the defendants’ website was materially misrepresentative because it did not give “the net impression that consumers were enrolling in a monthly credit monitoring service” for $29.94 a month, as opposed to defendants’ claim that consumers were obtaining a free credit report. The court also found that the defendants’ websites failed to meet certain disclosure requirements imposed by the Restore Online Shopper Confidence Act. The court entered a permanent injunction and ordered the defendants to pay over $5 million in “equitable monetary relief” to the FTC.
On appeal, the 7th Circuit affirmed the district court’s liability determination, and affirmed the issuance of the permanent injunction. However, the appellate court took issue with the restitution award ordered pursuant to Section 13(b) of the FTC Act. The appellate court noted that the FTC has long viewed Section 13(b) as authorizing awards of restitution, and even acknowledged that the 7th Circuit agreed with the FTC’s position in its decision in Amy Travel. However, subsequent to the Amy Travel decision, the Supreme Court, in Meghrig v. KFC W., Inc., clarified that “courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme.” Applying Meghrig, the 7th Circuit noted that “nothing in the text or structure of the [FTC Act] supports an implied right to restitution in section 13(b), which by its terms authorizes only injunctions.” The panel emphasized that the FTC Act has two other provisions that expressly authorize restitution if the FTC follows certain procedures, but the current reading of Section 13(b), based on Amy Travel, allows the FTC “to circumvent these elaborate enforcement provisions and seek restitution directly through an implied remedy.” Therefore, based on the Supreme Court precedent in Meghrig, the panel concluded that Section 13(b)’s grant of authority to order injunctive relief does not implicitly authorize an award of restitution, overturning its previous decision in Amy Travel and vacating the district court’s award of restitution.
On August 14, the U.S. Court of Appeals for the 9th Circuit held that TILA’s right of rescission does not apply when a borrower obtains a mortgage to reacquire residential property after having no ownership rights. According to the opinion, in 2003, a borrower quitclaimed his interest in residential property to his then wife; in 2007, he obtained a mortgage loan and took title to the property in accordance with a divorce judgment. The borrower sought rescission of the mortgage loan and the district court dismissed the action as untimely. On appeal, the 9th Circuit vacated the district court’s judgment, holding the borrower gave proper notice within the three year limit under TILA. On remand, the district court granted summary judgment in favor of the mortgage company, concluding the transaction was a residential mortgage transaction, in which no statutory right of rescission exists under TILA.
On appeal, the 9th Circuit affirmed summary judgment in favor of the mortgage company. The appellate court rejected the borrower’s arguments that (i) the mortgage documents showed he already owned an interest in the property before he took out the mortgage loan; and (ii) the mortgage was taken in accordance with a divorce judgment, not to finance the acquisition of the property. The appellate court concluded that under TILA, the mortgage loan was a “residential mortgage transaction,” the definition of which “includes both an initial acquisition and a reacquisition of a property.” The fact the mortgage company characterized the transaction as a refinance is not determinative, according to the panel, because the borrower did not acquire title to the property until the day after he signed the loan. Moreover, while the divorce judgment ordered the borrower to make a payment to his ex-wife in order to obtain title to the property, he obtained a residential mortgage loan “in order to carry out those conditions.”
On August 20, the FDIC announced a notice of proposed rulemaking (NPR) concerning interest rate restrictions applicable to less than well capitalized insured depository institutions. The NPR provides additional flexibility for these institutions to compete for funds and amends the methodology for calculating the national rate, national rate cap, and local rate cap for specific deposit products. According to the FDIC, the NPR is intended to “provide a more balanced, reflective, and dynamic national rate cap.” Specifically, under the NPR, the “national rate would be the weighted average of rates paid by all insured depository institutions on a given deposit product, for which data are available, where the weights are each institution's market share of domestic deposits,” while the national rate cap for particular products will be set at the higher of either (i) the 95th percentile of rates paid by insured depository institutions weighted by each institution’s share of total domestic deposits; or (ii) the proposed national rate plus 75 basis points. The NPR also will “simplify the current local rate cap calculation and process by allowing less than well capitalized institutions to offer up to 90 percent of the highest rate paid on a particular deposit product in the institution’s local market area.”
Additionally, the FDIC seeks comments on alternative approaches to setting the national rate caps. According to the FDIC, “[s]etting the national rate cap too low could prohibit less than well capitalized banks from fairly competing for deposits and create an unintentional liquidity strain on those banks competing in national markets. . . . Preventing such institutions from being competitive for deposits, when they are most in need of predictable liquidity, can create severe funding problems.”
Comments on the NPR are due 60 days after publication in the Federal Register.
On August 19, the Court of Appeals of Indiana reversed the Indiana Department of Financial Institutions (Department) finding that a car dealership charged an “impermissible additional charge” in violation of the state’s additional-charges statute when the dealership improperly disclosed a finance charge to its consumers. According to the opinion, the dealership charged, in addition to a third party titling fee, a $25.00 convenience fee to its credit customers for electronic titling through the third party. The service was required for credit customers but was optional for cash customers. After conducting a routine examination, the Department identified one violation from a transaction in July 2015, where the dealership did not disclose the convenience fee in the “finance charge” box of the disclosures, noting “the fee was only mandatory for credit customers and therefore was ‘a condition of the extension of credit.’” The dealership provided a contract from the same time period, showing it disclosed the fee in the “Itemization of Amount Financed” and “Amount Financed” boxes, not in the “Finance Charge” box. The Department charged the dealership with violating the state’s additional-charges statute, “for assessing ‘impermissible additional charges’ in the form of the $25.00 convenience fee,” as opposed to a charge for violating the state’s disclosure statute.
On review, the Court of Appeals concluded the charge was a finance charge because it was mandatory for the dealership’s credit customers but not its cash customers, and noted a finance charge cannot also be an additional charge. The Department argued it made no practical difference which violation it alleged, because the remedies under both statutes are the same, while the dealership noted a disclosure violation would entitle it to raise certain defenses under TILA. The appellate court did not address this issue, but nonetheless concluded “a finance charge doesn’t become an ‘impermissible additional charge’ when it’s not disclosed in the ‘Finance Charge’ box,” and remanded the case back to the Department for proceedings under the disclosure statute.
On August 20, the OCC and the FDIC approved a final rule, which will amend the Volcker Rule 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. (See the OCC press release here.) The Federal Reserve Board, CFTC, and SEC are expected to adopt the final rule as well. As previously covered by InfoBytes, the five financial regulators released a joint notice of proposed rulemaking in July 2018 designed to 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. The final rule clarifies prohibited activities and simplifies compliance burdens by tailoring compliance obligations to reflect the size and scope of a bank’s trading activities, with more stringent requirements imposed on entities with greater activity. The final rule also addresses the activities of foreign banking entities outside of the United States.
Specifically, the final rule focuses on the following areas:
- Compliance program requirements and thresholds. The final rule includes a three-tiered approach to compliance program requirements, based on the level of a banking entity’s trading assets and liabilities. Banks with total consolidated trading assets and liabilities of at least $20 billion will be considered to have “significant” trading activities and will be subject to a six-pillar compliance program. Banks with “moderate” trading activities (total consolidated trading assets and liabilities between $1 billion and $20 billion) will be subject to a simplified compliance program. Finally, banks with “limited” trading activities (less than $1 billion in total consolidated trading assets and liabilities) will be subject to a rebuttable presumption of compliance with the final rule.
- Proprietary trading. Among other changes, the final rule (i) retains a modified version of the short-term intent prong; (ii) eliminates the agencies’ rebuttable presumption that financial instruments held for fewer than 60 days are within the short-term intent prong of the trading account; and (iii) adds a rebuttable presumption that financial instruments held for 60 days or longer are not within the short-term intent prong of the trading account. Additionally, banks subject to the market risk capital prong will be exempt from the short-term intent prong.
- Proprietary trading exclusions. The final rule modifies the liquidity management exclusion to allow banks to use a broader range of financial instruments to manage liquidity. In addition, exclusions have been added for error trades, certain customer-driven swaps, hedges of mortgage servicing rights, and certain purchases or sales of instruments that do not meet the definition of “trading assets and liabilities.”
- Proprietary trading exemptions. The final rule includes changes from the proposed rule related to the exemptions for underwriting and market making-related activities, risk-mitigating hedging, and trading by foreign entities outside the U.S.
- Covered funds. Among other things, the final rule incorporates proposed changes to the covered funds provision concerning permitted underwriting and market making and risk-mitigating hedging with respect to such funds, as well as investments in and sponsorships of covered funds by foreign banking entities located solely outside the U.S.
FDIC board member Martin J. Gruenberg voted against the rule, stating the “final rule before the FDIC Board today would effectively undo the Volcker Rule prohibition on proprietary trading by severely narrowing the scope of financial instruments subject to the Volcker Rule. It would thereby allow the largest, most systemically important banks and bank holding companies to engage in speculative proprietary trading funded with FDIC-insured deposits.” Gruenberg emphasized that the final rule “includes within the definition of trading account only one of these categories of fair valued financial instruments—those reported on the bank’s balance sheet as trading assets and liabilities. This significantly narrows the scope of financial instruments subject to the Volcker Rule.”
Once approved by the Federal Reserve, SEC, and CFTC, the final rule will take effect January 1, 2020, with banks having until January 1, 2021, to comply. Prior to the compliance date, the 2013 rule will remain in effect. Alternatively, banking entities may elect to voluntarily comply, in whole or in part, with the final rule’s amendments prior to January 1, 2021, provided the agencies have implemented necessary technological changes.
On August 21, President Trump issued a presidential memorandum to Secretary Betsy DeVos of the U.S. Department of Education directing the Department to implement a streamlined process to automatically discharge the federal student loan debt of totally and permanently disabled veterans (TPD discharge). The Higher Education Act currently allows veterans to seek a TPD discharge, but the “process has been overly complicated and difficult, and prevented too many  veterans from receiving the relief for which they are eligible.” The memo notes “[o]nly half of the approximately 50,000 totally and permanently disabled veterans who currently qualify for the discharge” have availed themselves of the benefit. The memo defines “federal student loan debt” as Federal Family Education Loan Program loans, William D. Ford Federal Direct Loan Program loans, and Federal Perkins Loans, and requires the Department to create a policy to facilitate the swift and effective discharge of the applicable loan. The Department is required to implement the directive “as expeditiously as possible.”
On August 21, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Treasury’s Financial Crimes Enforcement Network (FinCEN) announced coordinated actions related to the manufacturing, selling, or distribution of synthetic opioids or their precursor chemicals. OFAC identified two Chinese nationals, a trafficking organization, and a related entity as “significant foreign narcotics traffickers” pursuant to the Foreign Narcotics Kingpin Designation Act, for running “an international drug trafficking operation that manufactures and sells lethal narcotics, directly contributing to the crisis of opioid addiction, overdoses, and death in the United States.” OFAC notes that, in August 2018, the U.S. Attorney’s Office for the Northern District of Ohio unsealed an indictment, which charged one of the Chinese nationals and his father with operating a conspiracy that allegedly manufactured and shipped deadly fentanyl analogues, cathinones, and cannabinoids to at least 37 U.S. states. Additionally, in September 2017, the U.S. Attorney’s Office for the Southern District of Mississippi indicted another significant foreign narcotics trafficker on two counts of conspiracy to manufacture and distribute multiple controlled substances, including fentanyl, and seven counts of manufacturing and distributing the drugs in specific instances. As a result of the sanctions designation, “all property and interests in property of these individuals and entities that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.”
Additionally, FinCEN released an advisory alerting financial institutions to financial schemes related to the trafficking of fentanyl and other synthetic opioids. The advisory provides detailed explanations of the funding mechanisms associated with fentanyl trafficking patterns, including (i) purchases from a foreign source of supply made using money services businesses (MSBs), bank transfers, or online payment processors; (ii) purchases from a foreign source of supply made using convertible virtual currency (CVC); (iii) purchases from a U.S. source of supply made using a MSB, online payment processor, CVC, or person-to-person sales; and (iv) more general money laundering mechanisms associated with procurement and distribution. The advisory also provides a list of red flags financial institutions should be aware of that may assist in identifying suspected schemes related to illicit fentanyl trafficking. Lastly, the advisory reminds financial institutions of their regulatory obligations to combat illicit financing and anti-money laundering, such as due diligence obligations, customer identification, and suspicious activity reporting.
On August 20, the U.S. Court of Appeals for the 3rd Circuit concluded that a plaintiff failed to adequately allege the existence of a written agreement for his deductible payment plan and therefore, his surgery institute did not violate TILA’s disclosure requirements. According to the opinion, the day before his surgery, the surgery institute orally agreed to accept a partial deductible payment and agreed to permit the plaintiff to pay the remaining deductible requirements in monthly installments. The plaintiff received two emails, one confirming the initial payment and the other confirming the payment plan and listing the plaintiff’s credit card. The institute performed the surgery, but the plaintiff failed to make any further payments on the deductible. Instead, the plaintiff filed an action against the institute alleging it violated TILA by extending credit and failing to provide the required disclosures. The district court granted judgment on the pleadings for the institute, concluding that the plaintiff' failed to establish a written agreement for the extension of credit. The court also issued sanctions, in the form of attorneys’ fees, against the plaintiff’s counsel, reasoning the counsel could have reasonably discovered the lack of written agreement and lack of payment before initiating the action.
On appeal, the 3rd Circuit affirmed in part and reversed in part in the district court’s judgment. The appellate court agreed with the district court that the plaintiff failed to establish the existence of a written agreement for credit with the institute, noting “the requirement of a written agreement [under TILA] is not satisfied by a ‘letter that merely confirms an oral agreement.’” But the appellate court noted that the district court erred in relying on an admission to that effect by plaintiff’s counsel during a telephone conference. Nonetheless, the error was “harmless” because the plaintiff failed to establish a written agreement was executed and signed, stating “[n]owhere does he allege that he signed a written agreement, and the  email correspondence was merely ‘confirming’ the ‘previously discussed’ agreement." The appellate court then reversed the district court’s sanctions ruling, concluding it abused its discretion when it imposed them.
On August 19, the U.S. District Court for the Western District of Michigan held that a Pennsylvania-based student loan servicing agency violated the TCPA by calling the plaintiffs’ cell phones over 350 times using an automatic telephone dialing system (autodailer) after consent was revoked. According to the opinion, after revoking consent to receive calls via an autodialer, two plaintiffs asserted that the servicer called their cell phones collectively over 350 times in violation of the TCPA and moved for summary judgment seeking treble damages for each violation. In response, the loan servicer argued that the system used to make the calls does not meet the statutory definition of an autodialer under the TCPA and disputed the appropriateness of treble damages.
The court, in disagreeing with the loan servicer, concluded that the system used by the loan servicer to make the calls qualified as an autodialer. The court applied the logic of the U.S. Court of Appeals for the 9th Circuit in Marks v. Crunch San Diego, LLC (covered by InfoBytes here), stating that it was not bound by the FCC’s interpretations of an autodialer, based on the D.C. Circuit’s ruling in ACA International v. FCC, and therefore, “‘only the statutory definition of [autodialer] as set forth by Congress in 1991 remains.’” The court noted that there was “no question” that the system used by the loan servicer “stores telephone numbers to be called and automatically dials those numbers,” which qualifies the system as an autodialer. However, the court determined that the loan servicer did not violate the statute “willfully or knowingly,” noting that at the time of the calls it was not clear from the FCC whether the system being used was an autodialer. As a result, the court awarded statutory damages, but not the treble damages sought by the plaintiffs.
On August 21, the OCC published in the Federal Register a final rule providing partial assessment refunds to banks under OCC jurisdiction that exit the OCC’s jurisdiction within the prescribed timeframe. As previously covered by InfoBytes, in March, the OCC proposed to maintain semiannual assessment fee payments, but allow for partial refunds equal to the prospective half of the assessment for banks that leave the OCC’s jurisdiction between the date of the applicable Call Report and the date of collection. The final rule was adopted without substantive changes to the proposed rule and is effective as of September 20.
- Hank Asbill to discuss "Ethical guidance in conducting internal investigations – The intersection of Yates and Upjohn" at the American Bar Association Southeastern White Collar Crime Institute
- H Joshua Kotin to discuss "Recent developments in fair lending and avoiding the pitfalls" at the Arkansas Community Bankers/Bankers Assurance 2019 Compliance Conference
- Brandy A. Hood to discuss "RESPA Section 8/referrals: How do you stay compliant?" at the New England Mortgage Bankers Conference
- Daniel P. Stipano to discuss "Risk management in enforcement actions: Managing risk or micromanaging it" at the American Bar Association Business Law Section Annual Meeting
- Valerie L. Hletko to discuss "Banking on guns ‘n drugs: Social policy meets financial services" at the American Bar Association Business Law Section Annual Meeting
- Daniel P. Stipano to discuss "Navigating the conflicting federal and state laws for doing business with cannabis companies" at the American Bar Association Business Law Section Annual Meeting
- Tim Lange to discuss "Services and value" at the North American Collection Agency Regulatory Association Annual Conference
- Katherine L. Halliday to discuss "UDAP, UDAAP & the Map rule compliance basics" at the Mortgage Bankers Association Regulatory Compliance Conference
- Brandy A. Hood to discuss "How to ace your TRID exam" at the Mortgage Bankers Association Regulatory Compliance Conference
- Amanda R. Lawrence to discuss "Data privacy litigation" at the Mortgage Bankers Association Regulatory Compliance Conference
- Melissa Klimkiewicz to discuss "Navigating FHA rules and regs" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jonice Gray Tucker to discuss "HMDA data is out, now what?" at the Mortgage Bankers Association Regulatory Compliance Conference
- Jeffrey P. Naimon to discuss "Washington regulatory overview" at the Mortgage Bankers Association Regulatory Compliance Conference
- Daniel P. Stipano to discuss "Assessing the CDD final rule: A year of transitions" at the ACAMS AML & Financial Crime Conference
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions and CMPs" at the ACAMS AML & Financial Crime Conference
- Kathryn L. Ryan to discuss "The state’s role in fintech: Providing an industry framework for innovation" at Lend360
- Jeffrey P. Naimon to discuss "Truth in lending" at the American Bar Association National Institute on Consumer Financial Services Basics
- Daniel P. Stipano to discuss "Lessons learned from recent enforcement actions" at the Institute of International Bankers Risk Management and Regulatory Examination/Compliance Seminar
- Jonice Gray Tucker to discuss "Fintech regulatory developments, crypto-assets, blockchain and digital banking, and consumer issues" at the Practising Law Institute Banking Law Institute
- Amanda R. Lawrence to discuss "How to balance a successful (and stressful) career with greater personal well-being" at the American Bar Association Women in Litigation Joint CLE Conference