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OCC hosts virtual innovation hours
On May 4, the OCC announced it will host virtual Innovation Office Hours on June 14 through 15 to promote responsible innovation in the federal banking system. As previously covered by InfoBytes, the OCC established the Office of Innovation in 2017 to implement certain aspects of the OCC’s responsible innovation framework, including, among other things: (i) creating an outreach and technical assistance program; (ii) conducting awareness and training activities for OCC staff, such as implementing an internal web page that provides OCC staff a ‘one-stop-shop’ to access information on industry trends and innovative products, services, and processes; and (iii) encouraging coordination and facilitation among the regulatory community and industry stakeholders. According to the OCC’s recent announcement, parties should request a virtual office hours session by May 20 and should provide information on their interested topic(s). The OCC will determine specific meeting times and arrangements after it receives and accepts the request.
Washington Court of Appeals affirms dismissal of suit accusing bank of collecting debt under a different name
On May 3, the Washington Court of Appeals, Division Three, affirmed the dismissal of an action accusing a defendant bank of violating the FDCPA by attempting to collect a debt in a name that differed from its own. The plaintiff obtained a credit card from the bank in 2006. Following a merger between the bank holding company (a separate legal entity at the time) and a card services company, the defendant bank merged with and under the charter of the card services company and notified credit card customers that the new issuer and administrator of their accounts would be the card services company. In 2014, the card services company merged into and under the charter of the national bank of the same name, who subsequently became issuer and administrator of the credit card portfolio and the named creditor of the plaintiff’s account. By 2012, the plaintiff had stopped making payments on his credit card and was sued by the card services company. While this action was pending, the 2014 merger occurred but the collection action was not updated to reflect this development. Eventually, the collection action was dismissed without prejudice, and the plaintiff sued the defendant in Washington state court, claiming the defendant violated the FDCPA because it continued its collection suit under the name of the card services company after the merger had taken place. The state court dismissed the case, and the plaintiff appealed. At issue was whether the national bank “falls under the FDCPA despite its status as a creditor because it used a name other than its own ‘which would indicate that a third person is collecting or attempting to collect’ the debt owed by” the plaintiff.
The Court of Appeals disagreed and held that even a least sophisticated consumer would not be confused and think that the debt had been transferred to a third-party collection agency. “Instead, a least sophisticated consumer (and even average-level consumer) might be led to believe that nothing had changed and [the card services company] was still collecting its credit card debt in its own right,” the Court of Appeals wrote. “There is no reason to think a least sophisticated consumer would be led to believe that [the bank] had acquired [the card services company’s] debt and then contracted with [it] to collect the debt.”
9th Circuit: Data release did not violate defendant’s Fourth Amendment rights
On April 27, the U.S. Court of Appeals for the Ninth Circuit concluded that limited digital data uncovered online that was not collected at the behest of the government did not violate the Fourth Amendment, which protects individuals from unreasonable government searches and seizures. According to the opinion, the defendant, who was convicted of child exploitation, argued that his Fourth Amendment rights were violated when two electronic service providers (ESPs) investigated his accounts without a warrant and reported the evidence of child sexual exploitation. He further maintained that evidence seized upon his arrest should have been suppressed because the ESPs were “acting as government agents when they searched his online accounts,” and that “he had a right to privacy in his digital data and that the government’s preservation requests and subpoenas, submitted without a warrant, violated the Fourth Amendment.”
The 9th Circuit disagreed, concluding first that the federal Stored Communications Act and the Protect Our Children Act “transformed the ESPs’ searches into governmental action” and “that the government was sufficiently involved in the ESPs’ searches of the defendant’s accounts to trigger Fourth Amendment protection.” The appellate court also determined that the government’s preservation requests for the private communications did not amount to unreasonable seizure and that “the defendant did not have a legitimate expectation of privacy in the limited digital data sought in the government’s subpoenas, where the subpoenas did not request any communication content from the defendant’s accounts and the government did not receive any such content in response to the subpoenas.” Moreover, the 9th Circuit stated that the defendant agreed to terms of use that granted the ESPs’ contractual rights under agreed upon privacy policies “to investigate, prevent, or take action regarding illegal activities,” and consented to the ESPs honoring of preservation requests from law enforcement.
District Court partially affirms summary judgment in interest case
On April 28, the U.S. District Court for the Southern District of New York granted in part and denied in part parties’ motions for summary judgment in a suit challenging the retroactive application of a New York statute reducing the state’s statutory interest rate on money judgments arising out of consumer debt. In doing so, the court considered S5724A, the Fair Consumer Judgment Interest Act. As previously covered by InfoBytes, the New York governor signed S5724A in December 2021, which amended the civil practice law and rules relating to the rate of interest applicable to money judgments arising out of consumer debt. Specifically, the bill provides that the interest rate that can be charged on unpaid money judgments is 2 percent and applies to judgments involving consumer debt, which is defined as “any obligation or alleged obligation of any natural person to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes […], including, but not limited to, a consumer credit transaction, as defined in [section 105(f) of the civil practice law and rules].” The bill became effective April 30. According to the suit, a group of credit unions (plaintiffs) filed a federal class action lawsuit seeking to enjoin the enforcement or implementation of S5724A. The plaintiffs sought to invalidate the retroactive portion of S.5724A, arguing that it is an unconstitutional taking in violation of the Fifth Amendment and violative of their substantive due process rights guaranteed under the Fourteenth Amendment. The plaintiffs claimed that they are collectively owed about $3.8 million of outstanding consumer judgments, which includes approximately $1 million in interest, and sought a preliminary injunction enjoining the effective date of S572A. The plaintiffs brought suit against the Chief Administrative Judge of the New York State Courts, and the sheriffs of three New York counties in their official capacity on the basis that those parties “will be involved in enforcement of the Amendment.” The district court issued the preliminary injunction with respect to the sheriffs, relying on the credit unions’ arguments that retroactive application will “eradicate millions of dollars from the balance of judgments lawfully due and owing to judgment creditors.” The district court noted that “[r]egulatory takings … involve government regulation of private property [that is] . . . so onerous that its effect is tantamount to a direct appropriation or ouster. Thus, ‘while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.’”
FDIC, Census launch small business lending survey
On May 3, FDIC acting Chairman Martin J. Gruenberg and U.S. Census Bureau (Census) Director Robert L. Santos announced that approximately 2,000 U.S. banks of all sizes and from all geographic areas in the U.S. have been invited to participate in the 2022 Small Business Lending Survey (SBLS)—a nationally representative online survey regarding small business lending practices and volumes. According to the FDIC, banks are the most common source of external financing for small businesses, however “there is little high-quality data on this activity.” The last SBLS occurred in 2016 and the 2022 survey intends to provide further understanding about current bank lending. Sponsored by the FDIC and administered by Census, the SBLS, according to the announcement, “provides a comprehensive view of small business lending by banks and will significantly expand the FDIC’s and the public’s understanding of the impact banks have on the nation’s small businesses.” The selected banks include all FDIC-insured institutions with assets of $3 billion or more as well as a random sample of banks with assets of less than $3 billion. The survey responses will be confidential and anonymous and the FDIC will only report the aggregated results.
Remittance provider denies CFPB allegations
On May 2, a global payments provider recently sued by the New York attorney general and the CFPB responded to allegations claiming the “repeat offender” violated numerous federal and state consumer financial protection laws in its handling of remittance transfers. As previously covered by InfoBytes, the complaint claimed the defendant, among other things, (i) violated the Remittance Rule requirements by repeatedly failing “to provide fund availability dates that were accurate, when the Rule required such accuracy”; (ii) “repeatedly ignored the Rule’s error-resolution requirements when addressing notices of error from consumers in New York, including in this district, and elsewhere;” and (iii) failed to establish policies and procedures designed to ensure compliance with money-transferring laws, in violation of Regulation E. The complaint further asserted that the defendant violated the CFPA “by failing to make remittance transfers timely available to designated recipients or to make refunds timely available to senders,” and that the defendant failed to adopt and implement a comprehensive fraud prevention program mandated by a 2009 FTC order for permanent injunction (covered by InfoBytes here).
The defendant refuted the charges, calling the allegations “false, inflammatory and misleading.” According to the defendant, “before the CFPB filed its lawsuit against the Company on April 21, 2022, [it] had never before been subject to any enforcement action by the CFPB, nor had [it] ever been publicly accused of violating any of the laws or regulations under the CFPB’s purview.” The defendant also took issue with the Bureau’s suggestion that it had “uncovered widespread and systemic issues involving ‘substantial’ consumer harm,” contending that “data from the CFPB’s own consumer complaint portal strongly suggest otherwise. For example, a search of the CFPB’s Consumer Complaint Database shows that in the nine years that the Remittance Rule has been in place, only 351 complaints were made to the CFPB against [the defendant] for failing to deliver money when promised. These complaints represent 0.0001% of the over 325 million transactions subject to the Remittance Rule that [the defendant] processed during that time period. In New York, the total number of complaints in the CFPB Database for that time period was 28, approximately three per year. There have simply never been widespread or systemic violations by [the defendant] of the Remittance Rule.”
FHFA: SCIF mandatory for loans sold to GSEs
On May 3, FHFA announced that Fannie Mae and Freddie Mac (GSEs) are requiring lenders to use the Supplemental Consumer Information Form (SCIF) as part of the application process for loans that will be sold to the GSEs. According to the announcement, the SCIF is intended to collect information on the borrower’s language preference, and on any homebuyer education or housing counseling that the borrower received, so that lenders can increase their understanding of borrowers’ needs throughout the home buying process. The changes will require lenders to present the SCIF questions to borrowers and to report any data collected from the SCIF to the GSEs purchasing the loan. Lenders will be required to adopt these changes and reporting requirements for loans with application dates on or after March 1, 2023. The announcement also noted that response by borrowers on the preferred language question in the SCIF will be voluntary. The SCIF will be available via Mortgage Translations later this summer.
Special Alert: Federal court says state bank, fintech partner must face Maryland’s allegation of unlicensed lending before state ALJ
A federal court late last month told a state-chartered bank and its fintech partner that they must return to a state administrative law proceeding to fight a Maryland enforcement action alleging that their failure to obtain a license to lend and collect on loans violated state law — potentially rendering the terms of certain loans unenforceable.
The Missouri-chartered bank and its partners attempted to remove an action brought by the Office of the Maryland Commissioner of Financial Regulation to the U.S. District Court for the District of Maryland, but the district court determined that removal was not proper and that Maryland’s Office of Administrative Hearings was the appropriate venue.
OCFR initially filed charges in January 2021 in Maryland’s Office of Administrative Hearings against the bank and its partner asserting the bank made installment and consumer loans and extended open-ended or revolving credit in the state without being licensed or qualifying for an exception to licensure. As a result, OCFR said they “‘may not receive or retain any principal, interest, or other compensation with respect to any loan that is unenforceable under this subsection.’” It said that not only are the bank’s loans to all Maryland consumers possibly unenforceable, but also that the bank, or its agents or assigns, could in the alternative be “prohibited from collecting the principal amount of those loans from any of these consumers or from collecting any other money related to those loans.”
The OCFR’s charge letter also said the fintech company that provided services to the bank violated the Maryland Credit Services Business Act by providing advice and/or assistance to consumers in the state “with regard to obtaining an extension of credit for the consumer when accepting and/or processing credit applications on behalf of the Bank without a credit services business license.” Additionally, the OCFR alleged violations of the Maryland Collection Agency Licensing Act related to whether the fintech company engaged in unlicensed collection activities, thus subjecting it to the imposition of fines, restitutions, and other non-monetary remedial action.
The defendants filed a notice of removal to federal court last year while the enforcement action was still pending before the OAH; OCFR moved to remand the case back to the agency.
In granting the OCFR’s motion to remand, the court concluded that the OCFR persuasively argued that the defendants have not properly removed this case from the OAH for several reasons, including that the OAH does not function as a state court. “Pursuant to 28 U.S.C. § 1441, a defendant may remove to federal court ‘any civil action brought in a State court of which the district courts of the United States have original jurisdiction.’” However, the court determined that, while defendants correctly observed that the OAH possesses certain “court-like” attributes, its limitations clearly showed that it does not function as a state court.
In reaching this conclusion, the court considered several undisputed facts, including that the OCFR is a unit of the Maryland Department of Labor “responsible for, among other things, issuing licenses to entities wishing to issue loans to consumers in Maryland and investigating violations of Maryland’s consumer loan laws.” The court also said that, while OCFR has authority under Maryland law to investigate potential violations of law or regulation and has the ability to issue cease and desist orders, revoke an individual’s license, or issue fines, it cannot enforce its own subpoenas or orders — and that its decisions are not final and may be appealed to a state circuit court.
The defendants had argued that the case involved a federal question as a result of the complete preemption of state usury laws by Section 27 of the FDI Act. The court said licensure, not state usury law claims, was the issue at hand.
During a status conference held last month to discuss OCFR’s motion to remand, defendants requested an opportunity to file a motion certifying the case for appeal. The court will hold in abeyance its remand order pending resolution of that motion. Parties’ briefings are due by the end of May.
If you have any questions regarding the ruling or its ramifications, please contact a Buckley attorney with whom you have worked in the past.
SEC to expand crypto asset and cyber unit team
On May 3, the SEC announced it will nearly double the size of its Crypto Assets and Cyber Unit within the Division of Enforcement. “By nearly doubling the size of this key unit, the SEC will be better equipped to police wrongdoing in the crypto markets while continuing to identify disclosure and controls issues with respect to cybersecurity,” SEC Chair Gary Gensler stated. Since the unit’s inception, more than 80 enforcement actions have been brought against actors related to fraudulent and unregistered crypto asset offerings and platforms, resulting in monetary relief totaling more than $2 billion. The unit has also “brought numerous actions against SEC registrants and public companies for failing to maintain adequate cybersecurity controls and for failing to appropriately disclose cyber-related risks and incidents.” The expanded unit will focus on investigations related to: crypto asset offerings, crypto asset exchanges, crypto asset lending and staking products, decentralized finance platforms, non-fungible tokens, and stablecoins.
California reinstates single commercial loan licensing exemption under the CFL
On April 28, the California governor signed SB 577, which amends provisions relating to certain financial institutions, including California Financing Law (CFL), Escrow Agent, and Money Transmitter licensees.
The bill reinstates a licensing exemption available to commercial lenders in California. Specifically, the bill reenacted a provision that formerly expired on January 1, 2022. This reinstated provision permits a lender to make a single loan within a 12-month period, if the loan is a commercial loan as defined by the CFL, without having to obtain a CFL license.
The bill also updates contact information to be included on notices posted by California Money Transmitter licensees. Specifically, the bill establishes that California Money Transmitter licensees are required to prominently post, in English and in the same language used by the licensee to conduct business, on the premises of each branch office that conducts money transmission activities a certain notice, including specific contact information for the California Department of Financial Protection and Innovation.
Finally, the bill removes obsolete language from provisions governing criminal and civil background requirements for Escrow Agent licensees.
The bill is effective immediately.