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California DBO denies point-of-sale lending license application; issues related guidance
On December 30, the California Department of Business Oversight (DBO) announced the denial of a Minnesota-based point-of-sale company’s application to make loans under the California Financing Law (CFL) after determining the company had already been making unregulated loans to California consumers in violation of the CFL. According to the DBO’s Statement of Issues, the fintech company offers a product that allows consumers to enter into small installment loans in order to make online purchases at participating merchants. The company contended that it purchases credit sale contracts from merchants selling goods to consumers, and argued that these types of purchases do not qualify as loans subject to the CFL. However, following a review of the company’s application and products, the DBO concluded that the company structured its merchant partners’ purported credit sales to evade otherwise applicable consumer protections. Moreover, the DBO stated in its press release that the company’s “extensive role in its merchants’ transactions and pre-existing relationship with some consumers who were parties to the purported credit sales showed that [the company] was making loans under California law.” According to the decision, “[e]xtensive third-party involvement in the underlying credit sale may cause transactions to be deemed loans, regardless of form . . . even if the underlying credit sale is bona fide” (italics in original).
The DBO also issued a separate legal opinion advising a different, unidentified lender that its deferred payment products meet the Civil Code and case law definition of “loans” and therefore require a CFL license to be offered in the state. Among other things, the DBO argued that it is unclear as to why the lender’s products—which the lender claims “are not loans but similar to a forbearance”—would be exempt from the CFL, reiterating that loans and forbearances are both subject to usury provisions. The DOB noted that point-of-sale financing transactions may meet the definition of a loan when: (i) the transactions are treated like loans by the consumer, merchant, and third-party financer, “despite contradictory language in the applicable contracts”; (ii) there is an extensive relationship between the merchant and third-party financer; (iii) disclosures are not clearly made to the consumer about the role of the third-party financer and all financing terms; and (iv) “the financing transaction is not otherwise regulated.”
New York extends consumer protections for vehicle leases
On December 23, the New York governor signed S 3631, which amends the state’s insurance law to increase protections for New York consumers from unplanned charges at the end of a motor vehicle lease. The definition of “service contracts” is broadened to cover more comprehensive service contracts on motor vehicles leased for personal use. Service contracts covered by the law will now include agreements that apply to accidental damage and excess use and wear and tear, including missing parts of the vehicle, and items not covered by a warranty or other service agreement, as long as such services do not exceed the purchase price of the automobile. The law became effective when signed.
Internet provider and states agree to nearly $12.5 million for false advertising, hidden fees
On December 19, the Colorado attorney general announced that an internet service provider (ISP) agreed to pay nearly $8.5 million in order to resolve allegations that it “unfairly and deceptively charg[ed] hidden fees, falsely advertis[ed] guaranteed locked prices, and fail[ed] to provide discounts and refunds it promised” to Colorado consumers in violation of the Colorado Consumer Protection Act. According to the announcement, in 2017 the AG’s office investigated the ISP and compiled information that the ISP had “systematically and deceptively overcharged consumers for services” since 2014 (see the complaint filed by the AG here). In the settlement, the ISP agreed to an order that requires it, among other things, to (i) refrain from making false and misleading statements to consumers in the marketing, advertising and sale of its products and services; (ii) accurately communicate monthly base charges as well as one-time fees, taxes, and other fees and surcharges to consumers; (iii) disclose any “internet cost recovery fee” or “broadband recovery fee” to consumers being charged the fees and allow the affected consumers to switch to different services if they wish to avoid the fees; (iv) refrain from charging an “internet or broadband cost recovery fee” on new orders; and (v) provide refunds to customers who were overcharged for services and to those customers who did not previously receive discounts that the ISP promised.
In a separate action, on December 31, the Oregon attorney general’s office announced that it entered into a $4 million Assurance of Voluntary Compliance with the same ISP to resolve similar claims of deceptive acts and practices in the advertising, sale, and billing of the ISP’s internet, telephone and cable services in violation of the Oregon Unlawful Trade Practices Act. According to the announcement, the Oregon DOJ started an investigation of the ISP in 2014 for allegedly “misrepresenting the price of services, failing to inform consumers of terms and conditions that could affect the price, and billing consumers for services they never received.” The ISP agreed to requirements that are very similar to those in the Colorado settlement. The announcement notes that the “Oregon DOJ will continue to lead a separate securities class action lawsuit arising from the same conduct.”
NYDFS directs financial institutions to submit LIBOR transition risk management plans
On December 23, NYDFS issued an Industry Letter (Letter) directing its regulated depository and non-depository institutions, insurers, and pension funds to outline their plans for managing the risks associated with the potential impact of LIBOR’s likely cessation at the end of 2021. NYDFS seeks assurance that regulated institutions’ board of directors and senior management fully understand the associated risks, have developed appropriate plans, and have initiated actions to facilitate transition to an alternative reference rate. The Letter does not mandate use of any particular alternative rate, but notes that “the Alternative Reference Rates Committee . . ., convened by the FRB and the [Federal Reserve Bank of New York (FRBNY)], has chosen [the Secured Overnight Financing Rate published by the FRBNY] as its recommended alternative to U.S. dollar LIBOR.” The Letter requires NYDFS-regulated institutions to describe: (i) programs that will assess financial and non-financial transition risks; (ii) “processes for analyzing and assessing alternative rates, and the potential associated benefits and risks of such rates both for the institution and its customers and counterparties”; (iii) processes to communicate with customers and counterparties; (iv) plans and processes for “operational readiness, including related accounting, tax and reporting aspects of [the] transition” from LIBOR; and (v) their governance framework, including oversight by an institution’s board of directors or its equivalent governing authority. Institutions are required to submit their transition-risk management plans to NYDFS by February 7.
Bank and Philadelphia reach $10 million settlement in redlining suit
On December 16, a national bank and the city of Philadelphia agreed to a $10 million settlement in a fair lending suit filed against a national bank in 2017 in the U.S. District Court for the Eastern District of Pennsylvania. The settlement resolves claims against the bank alleging violations of the Fair Housing Act, as previously covered in InfoBytes. Specifically, the city alleged that the bank engaged in discriminatory mortgage lending practices by placing minority borrowers in loans with less favorable terms than loans to similar non-minority borrowers. According to the complaint, these allegedly discriminatory loans increased foreclosure rates and resulted in falling property values, particularly in minority and low-income neighborhoods in Philadelphia. The empty properties and lower property values in turn reduced tax revenues and increased costs to the city to pay for municipal services including police, fire fighting, housing programs, and also maintenance for the growing number of empty properties. The court had previously denied the bank’s motion to dismiss, (prior InfoBytes coverage here), which argued, among other things, that the city had failed to show that the bank’s alleged lending practices were the proximate cause of the city’s harm.
Pennsylvania reaches settlement with travel websites over data breach
On December 13, the Pennsylvania attorney general announced a settlement with two travel websites resolving allegations that a 2018 data breach may have exposed consumer data for more than 20,000 state customers, including 880,000 affected payment cards globally. According to the state’s investigation, a hacker bypassed security detection and built malware that targeted payment cards on one of the company’s platforms. The company was also notified by a business partner of potentially fraudulent point of purchase transactions related to the data breach. Under the terms of the Assurance of Voluntary Compliance—which alleges the company violated the state’s Unfair Trade Practices and Consumer Protection Law by misrepresenting safeguards for customer data in its privacy policy and failing to fully implement data security policies—the companies have agreed to pay $110,000, including a $80,000 civil penalty and $30,000 towards future public protection and education purposes. The company must also implement a number of security requirements, such as (i) implementing a comprehensive information security program on their travel website; (ii) conducting annual risk assessments; (iii) developing a program for implementing and operating safeguards; and (iv) complying with Payment Card Industry Data Security Standards.
New York outlines HECM requirements
On December 6, the New York governor signed AB 5626, which amends the state’s real property law related to lenders offering reverse mortgages in the state issued under the FHA’s home equity conversion mortgage for seniors program (HECM program). The Act provides that an authorized lender, or any other party or entity, is prohibited from engaging in any unfair or deceptive practices connected to the marketing or offering of reverse mortgage loans and must not: (i) use the words “public service announcement” in an advertisement or writing; (ii) use the words “government insured” or other similar language to represent that the reverse mortgage loans are “insured, supported and sponsored by any governmental entity” in any form of advertisement or writing; or (iii) “represent that any such loan is other than a commercial product.” Lenders will also be required to provide certain consumer protection information as specified by the NYDFS Superintendent, and must comply with stipulated requirements during the application process.
The Act also outlines various servicing- and foreclosure-related requirements and restrictions, and provides a private right of action to any person injured by reason of any violation of the Act, or any violation of the rules and regulations of HUD relating to the HECM program, to recover three times the person’s actual damages, plus reasonably attorney’s fees.
The Act takes effect March 5, 2020.
NYDFS proposes to streamline coin listings for licensed virtual currency firms
On December 11, NYDFS issued proposed guidance to create two “coin adoption or listing options” for virtual currency licensees. According to NYDFS, these proposed guidelines are intended to provide “regulatory clarity and efficiency, and to ensure that [NYDFS’s] approach to regulating virtual currency businesses reflects the realities of an evolving market.” Recognizing that its virtual coin licensees “have asked to list new virtual currencies . . . in addition to those included in their initial applications to [NYDFS],” NYDFS proposes, among other things, to provide a list of coins on an NYDFS web page that have been approved for permitted use. Virtual currency licensees may choose to list any of these coins as long as the licensee provides notice to the Department and the listed coins are not modified, divided, or changed after being listed on the NYDFS webpage. The proposal would also allow licensees to create their own “company coin-listing policy” tailored to their specific business models and risk profiles that, if approved by NYDFS would permit a licensee to self-certify the listing or adoption of new coins without prior approval. According to NYDFS Superintendent Linda Lacewell, the proposal is “designed to make it easier for those who have obtained a New York license to periodically add new coins to their existing products.” The deadline for submitting comments on the proposed guidance is January 27, 2020.
New York blocks use of social networks in credit decisions
On November 25, the Governor of New York signed S2302, a measure which prohibits entities that are “licensed lenders” in New York, as well as consumer reporting agencies (CRAs), from including a consumer’s social network information in credit decisions. S2302 amends New York’s general business law and the banking law to prohibit licensed lenders and CRAs from considering “the credit worthiness, credit standing, or credit capacity of members of the consumer’s social network” or “the average credit worthiness, credit standing, or credit capacity of members of the consumer’s social network or any group score that is not the [consumer’s] own credit” information. Specifically, the amendment prohibits licensed lenders and CRAs from collecting, evaluating, reporting, or maintaining the information in a file. Additionally, the consumer’s internet viewing history also may not be factored into the licensed lender’s or agency’s “credit scoring formulas.”
New York AG investigates housing discrimination on Long Island
On November 19, the New York attorney general’s office announced the launch of a Civil Rights Bureau investigation into allegations that Long Island real estate agents have engaged in discriminatory practices. The announcement follows a newspaper’s recent publication of findings based on a three-year examination of residential brokering firms, where, according to the report, several agents allegedly (i) “steered undercover testers to neighborhoods whose composition matched their own race or ethnicity”; (ii) directed white testers to neighborhoods with the highest white representations, whereas minority testers were sent to more integrated areas; and (iii) subjected minority testers to financial bars that were not imposed on white testers, such as requiring mortgage preapproval in order to view properties. The AGs office encourages Long Island residents to report any instances of housing discrimination.