InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
FINRA issues guidance on broker-dealers using generative AI tools
On June 27, FINRA issued Regulatory Notice 24-09 that discussed the implications to broker-dealers in their use of artificial intelligence (AI), including large language models (LLMs) and other generative AI tools. Although FINRA stated that while AI offered broker-dealers opportunities to improve their services and enhance their operational and compliance efficiencies, it also reminded firms that its rules and federal securities laws continue to apply. In discussing use cases, FINRA noted that AI tools can analyze financial data, summarize documents, and assist in investor education, but also raise concerns about accuracy, privacy, bias, and security.
When using these tools, FINRA reminds firms that: (1) they must have appropriate supervisory systems and governance in place, whether those tools are developed in-house or provided by third parties; and (2) they should evaluate AI tools before use to ensure compliance with FINRA rules. FINRA also stated that in some instances, it could issue further guidance for specific use cases. FINRA encouraged firms to seek interpretive guidance where ambiguous rule applications may exist and have ongoing discussions with their Risk Monitoring Analyst.
Court grants $12 million final judgment but denies prejudgment interest in RICO class action
On June 18, the U.S. District Court for the Southern District of California entered an order granting plaintiffs’ motion for entry of final judgment against a large for-profit educational institution that has since gone bankrupt. According to the 2020 complaint, plaintiffs were left with debt for what they claimed to be a worthless education. After the school’s bankruptcy in 2016, plaintiffs alleged that they continue to be victimized by defendants’ student loan operation. Plaintiffs filed the motion following a jury trial where defendants were found liable under the Racketeer Influenced and Corrupt Organizations Act (RICO). The jury awarded plaintiffs $4 million in compensatory damages, which was trebled to $12 million under the RICO statute.
In addition to the judgment, plaintiffs applied for an additional $4 million in prejudgment interest. In denying the application for prejudgment interest, the court declined to award the discretionary interest based on allegations that defendants “repeatedly attempted to pick off the class representatives for the very purpose of eliminating this action, or at the very least, delaying it.” The court recognized that defendants’ tactics may have delayed the litigation but did not find them to be unreasonable or unfair to a degree that would warrant prejudgment interest, noting that the plaintiffs’ own post-trial motions contributed to the delay in judgment.
The court entered final judgment against the defendants in the amount of $12 million, with attorneys’ fees and costs to be determined later.
District Court approves $3.65 mil. settlement against student loan servicer
On June 24, the U.S. District Court for the Western District of Pennsylvania approved a class action settlement involving student loan borrowers brought against a student loan servicer. The class alleged that from December 2018 to October 2023, the defendant assessed improperly certain convenience fees to process Perkins loan payments from student borrowers by telephone, IVR, or over the internet. The settlement fund of $3.65 million represents 25 percent of the total processing fees collected from hundreds of thousands of borrowers over roughly five years. The parties agreed that, in the event any funds remain after the first distribution, a second distribution will be made to class members.
Colorado’s DIDMCA opt-out blocked by preliminary injunction
On June 18, U.S. District Court of the District of Colorado granted a motion for preliminary injunction filed by several financial services trade associations, enjoining Colorado from enforcing Colo. Rev. Stat. § 5-13-106 with respect to any loan made by the plaintiffs’ members, to the extent the loan is not “made in” Colorado. As previously covered by InfoBytes, the enjoined provision, contained in Section 3 of Colorado HB 23-1229 and scheduled to become effective on July 1, opted Colorado out of Section 521 of the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) which allowed state-chartered banks to export rates of their home state across state borders. Trade groups sued before this law went into effect (covered here), with the FDIC writing a brief in support of the Colorado Attorney General (here).
The court’s decision turned on its interpretation of DIDMCA Section 525, which allowed states to enact laws opting loans “made in” the enacting state out of Section 521, the provision granting insured state banks the same rate exportation authority as national banks. In support of their motion, the plaintiff trade associations argued that loans to Colorado residents by insured state banks located in other states were “made in” the bank’s home state or the state where key loan-making functions occur. Colorado disagreed, contending that a loan was “made in” both the borrower’s state and the state where the lender is located for purposes of applying the DIDMCA opt out provision.
In granting the preliminary injunction, the court found the argument that only a bank “makes” a loan was “more consistent both with the ordinary colloquial understanding of who ‘makes’ a loan, and, more importantly, with how the words ‘make’ and ‘made’ are used consistently throughout the text of the Federal Deposit Insurance Act, including the [DIDMCA] amendments.” The court explained that “the answer to the question of where a loan is ‘made’ depended on the location of the bank, and where the bank takes certain actions, but not on the location of the borrower who ‘obtains’ or ‘receives’ the loan.” Although the court noted that agency interpretations did not address directly how to apply Section 525 of DIDMCA, it found that “[t]o the extent the agency interpretations are helpful, they support the conclusion that in common parlance, a loan is ‘made’ by a bank and therefore where the bank is located and performs its loan-making functions” (italics omitted).
Colorado has 30 days to appeal the district court’s decision to the Tenth Circuit.
District Court says defendant violated TCPA written consent requirement
On June 6, the U.S. District Court for the District of Maryland held that the prerecorded telemarking calls placed by a health insurance provider and its affiliated marketing company required prior written consent from consumers. Plaintiffs brought a class action against defendants for their marketing practices related to dental savings plans, alleging defendants’ practices violated the Telephone Consumer Protection Act (TCPA). The defendants placed numerous, prerecorded “winback” calls to plaintiffs encouraging them to renew a dental plan expired previously. While the lead plaintiff provided verbal consent to receive text messages and prerecorded phone calls while enrolled in the plan, plaintiff alleged that the automated calls received after the plan ended were not authorized.
The court denied the defendants’ motion for summary judgment and granted the plaintiff’s motion for class certification. The court found that the “winback” calls qualified as telemarketing advertisements under 47 C.F.R. § 64.1200(f)(13) and, as such, were subject to the heightened requirement for “prior express written consent” under the TCPA. The court discussed the “complex tapestry” comprising the definition for prior express written consent, and concluded that such consent will be satisfied if it is in writing and the following three elements are met, at a minimum: “(1) an agreement; (2) a signature (that the signatory intended to function as a signature); and (3) “clear and conspicuous” disclosures about the content of the agreement and that the consumer need not sign the agreement.” Additionally, the court held that the “consumer disclosure” section of the E-SIGN Act applied in this case, further requiring written disclosures to obtain consumer consent under the TCPA.
The court also found that the class action waiver and arbitration clauses on the defendants’ website did not apply to members of the class because: (1) the class members signed up by phone; and (2) similar to the TCPA analysis, telemarketing phone calls to former customers after their plans ended and they were no longer customers did not fall under the "sites and services" governed by the terms of use.
District Court clarifies law related to post-foreclosure RESPA communications
Recently, the U.S. District Court for the District of New Jersey ruled that obligations under RESPA extended beyond the issuance of a foreclosure judgment, but dismissed the plaintiff’s other claim under RESPA. The Court rejected the argument by the servicer-defendant that a loan’s “merger” with a foreclosure judgment under state law exempted them from RESPA’s loss mitigation rules. The Court pointed to the servicer’s active engagement with the borrower’s loan modification application post-judgment as a basis for maintaining the servicer’s liability under RESPA.
Elaborating on the scope of RESPA, the Court addressed the nature of correspondence that can be classified as “qualified written requests” (QWRs). The Court held that the plaintiff’s letters regarding her loss mitigation efforts did not qualify as QWRs because a request for modification of loan terms did not align with the statutory purpose of a QWR, which was intended to facilitate information exchange or dispute resolutions specifically related to the servicing of the loan, such as payment history or charges on the account, rather than the negotiation of new loan terms. Therefore, the Court dismissed the plaintiff’s claim alleging a violation of RESPA due to a failure to respond to a QWR.
The Court also allowed a claim under the New Jersey Consumer Fraud Act (NJCFA) to move forward, signaling that foreclosure judgments do not render the NJCFA inoperative. Finally, the Court dismissed the plaintiff’s breach of good faith and fair dealing claims against the lender’s law firm and the servicer/lender due to the absence of a direct contractual relationship with the borrower and no evidence of denied mortgage agreement benefits.
North Carolina Supreme Court upholds credit union’s right to enforce unilaterally inserted arbitration clause
On May 23, the North Carolina Supreme Court ruled that a defendant credit union can enforce an arbitration clause added to a customer’s contract years after its inception. The case centered on a “Notice of Amendments” provision in the contract, which customers agreed to when opening accounts, allowing the credit union to unilaterally change contract terms with proper notice to the consumer.
In January 2021, the credit union notified the plaintiff that it was updating its membership agreement to include an arbitration requirement for certain disputes and a waiver of class actions. In March 2021, the plaintiff filed a class action lawsuit against the credit union, alleging that it was improperly collecting overdraft fees on accounts that were never overdrawn. The trial court denied the credit union's motion to compel arbitration, but the appeals court reversed that decision and remanded the case with instructions to stay the case pending arbitration, holding that the addition of the arbitration provision was enforceable.
The North Carolina Supreme Court addressed in its opinion whether the inclusion of the arbitration violated the implied covenant of good faith and fair dealing. The Court highlighted the economic necessity for companies to adapt contractual terms efficiently and found that amendments adhering to the original contract's subject matter met the covenant of good faith and fair dealing.
The court then turned to the question of whether the original agreement “reasonably anticipated” the changes and whether the changes reasonably related to “subjects discussed” in the agreement. The court held that the inclusion of an arbitration clause was foreseeable due to the original contract's dispute resolution terms, which stated that the agreement was subject to the laws of North Carolina and set the venue for any dispute. Since the agreement’s changes addressed the forum for disputes, the court deemed this to be within the “same universe of terms.” Moreover, the court determined the contract was not illusory because the language included in the change to the contract limited its scope by stating “[e]xcept as prohibited by applicable law.”
Finally, the court rejected the plaintiff’s argument that she did not accept the offer to arbitrate “through silence,” holding that there was an agreement between the credit union and the plaintiff that the credit union could change the terms upon proper notice, not with consent of the plaintiff.
California appellate court upholds ruling on debt collection practices
Recently, the California Court of Appeal for the First Appellate District upheld a ruling against a defendant and its related entities. Plaintiff had filed a class action lawsuit against the defendants, alleging that they had violated the FDCPA and California’s Unfair Competition Law (UCL) in their debt collection practices related to homeowners’ associate (HOA) assessments.
The case was removed from federal to state court after the parties agreed on the move. Plaintiff was permitted to amend her complaint to include allegations against the law firm representing the debt collector and its associates, asserting they were “alter egos” of the debt collector. The state court agreed to bifurcate the claims and first addressed the UCL claim. The court found in favor of plaintiff, ruling that defendant had violated the FDCPA (a prerequisite to finding liability under the UCL) and that the law firm was jointly and severally liable for restitution and attorney fees for class counsel.
On appeal, defendants contended first that the trial court incorrectly upheld the federal court's decision that a waiver of California Civil Code section 5655(a), which required the application of payments be first applied to assessments owed, was invalid. This waiver was included as part of the payment plan that plaintiff agreed to, but the federal court determined it was void as a matter of public policy. Second, the defendants argued that the court was incorrect that defendants breached the FDCPA by issuing pre-lien notices and letters before issuing a notice of default. Finally, the defendants challenged the trial court's decision to approve plaintiff’s request to split the trial and prioritize a non-jury trial on her claim under the UCL.
In denying defendants’ claims, the appellate court agreed that the section 5655(a) waiver was invalid because it contradicted public policy intended to protect homeowners. Additionally, the court doubted whether the collection agency’s pre-lien letter could reasonably be characterized as threatening foreclosure and agreed with the trial court that “the least sophisticated debtor would reasonably understand this language in [defendant’s] pre-[notice of default] letter as threatening foreclosure in violation of section 5720.” Finally, regarding the decision to bifurcate plaintiff’s claims, the court decided that defendant did not sufficiently demonstrate that the trial court had abused its discretion in granting plaintiff’s motion to bifurcate.
District Court highlights the importance of precise dispute letters when challenging debt collection
On June 6, the U.S. District Court for the Northern District of Alabama ruled on dueling motions for summary judgment in a suit against a debt collection agency for alleged violations of the FDCPA. The plaintiff contended the debt collection agency improperly handled the reporting of two accounts to credit reporting agencies, one of which the debt collection agency failed to identify as disputed after receiving a dispute letter from the plaintiff’s counsel, violating both § 1692e and § 1692f of the FDCPA.
First, the court concluded that the plaintiff’s § 1692f claim was defective because it was duplicative of the § 1692e claim. A claim under the 1692f “catch-all” prohibition against unfair and unconscionable conduct must be supported to conduct “beyond that which [s]he asserts violates other provisions of the FDCPA.” Since the plaintiff offered no additional allegations beyond what was claimed to support the 1692e claim, the court granted the debt collection agency summary judgment on the § 1692f claim.
The court found that there was a genuine dispute as to whether the debt collection agency should have known that one of the debts was disputed, and denied summary judgment to both parties. Here, the plaintiff sent a dispute letter notifying the debt collection agency of a dispute “for all debts that [plaintiff] may have,” and then stated that “the above referenced individual(s) disputes the debt which you are attempting to collect.” While the plaintiff alleged that the reference to “all debts” put the debt collection agency on notice of multiple debts being disputed, the debt collection agency halted negative reporting on the first account by matching the plaintiff’s name and social security number, it did not do the same for the second account because no matching information was provided. The court found that the dispute letter was ambiguous, and consequently denied motion for summary judgment for both sides.
5th Circuit vacates SEC private fund adviser rule
On June 5, the U.S. Court of Appeals for the Fifth Circuit vacated an SEC rule that represented a significant change in how private funds and their fund advisers are regulated. As it stands, the decision will spare private funds and their advisers from what would have been a material increase in regulatory burden. Prior to the 5th Circuit’s ruling, the rule expanded the scope of disclosure, reporting, and other obligations for private funds and their advisers.
You can read more about the court’s decision here as an Orrick Insight.