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  • District Court sends cryptocurrency hack suit to arbitration

    Courts

    On August 24, the U.S. District Court for the Eastern District of New York granted a motion to compel arbitration in an action claiming that a mobile communications company’s failure to protect the personal information of a cryptocurrency company founder allowed a hacker to steal $8.7 million in cryptocurrency. The cryptocurrency company and its founder sued the defendant citing violations of the Federal Communications Act and the New York Consumer Protection Act, along with numerous negligence claims. Plaintiff alleged that due to lack of safeguards, a hacker conducted an unauthorized “SIM swap” and used the plaintiff’s personal information to access his cryptocurrency wallets and exchange accounts. Plaintiff further claimed that even though it reported the SIM swap to the defendant, “[m]ore attacks continued to succeed over the following years.” The defendant moved to compel arbitration claiming that the plaintiff electronically signed receipts agreeing to terms and conditions which require the arbitration of disputes unless a customer opts-out. The plaintiff countered that “he was not shown the full terms and conditions to his service; that he could not conduct a ‘complete review and inspection’ of the digital receipt because of the screen’s small size, resolution, and inadequate backlighting; that the displayed receipt did not permit hyperlinked review of the full terms; that the display did not affirmatively seek his consent to arbitration by requiring he press a button or check a box; that the full terms were not separately provided in another form; and that his consent was not otherwise confirmed by [defendant] personnel.”

    The court found that had the plaintiff “simply thought he was signing a receipt for equipment purchases–and had no idea that any terms and conditions were displayed on the digital device he signed–the court might have concluded that there remained a question of fact suitable for resolution by a jury.” However, the court found that the plaintiff “never claimed that he was unaware that his transactions with [defendant] carried terms and conditions” nor did he allege that he never received “a notice indicating the existence of the terms” even though the court specifically asked the parties to establish these facts in limited discovery. Accordingly, the court ruled that the plaintiff was on notice of defendant’s terms and agreed to them, thus compelling arbitration.

    Courts Digital Assets State Issues Cryptocurrency Arbitration New York Federal Communications Act

  • Court grants summary judgment in payday lender suit

    Courts

    On August 23, a Municipal Court in Ohio granted a defendant’s motion for summary judgment in a case involving payday lending. According to the order, the plaintiff’s complaint alleged that the defendant, in April 2019, executed a Line of Credit and Security Agreement with a lender in the amount of $1,101, and agreed to repay amounts advanced within a 30-day billing cycle pursuant to certain fees and a 24.99 percent interest rate. The complaint further alleged that defendant failed to make timely payment, and thereafter plaintiff, as assignee of the lender, sought to enforce the agreement. In her answer, the defendant denied entering any such agreement and characterized the transaction as “a $500 loan,” asserting that this case “involves an illegal scheme by [the short-term cash lender, the mortgage lender, and the plaintiff] to issue and collect illegal payday loans under a scheme to attempt to evade compliance with new state lending laws. The plaintiff asserted counterclaims for violations of the Short-Term Loan Act, the Mortgage Loan Act, Ohio Consumer Sales Practices Act, and for civil conspiracy.

    On motion for summary judgment, the defendant argued that she was entitled to judgment on “Plaintiff's complaint because the parties’ April 2019 agreement ‘is void because it was made in violation of Ohio lending and consumer laws.’” The defendant presented two arguments: (i) the lender is not licensed under the Short-Term Loan Act to issue a loan less than $1000; and (ii) the lender is “prohibited from engaging in acts or practices to evade the prohibition against Mortgage Loan Act registrants issuing loans for $1,000 or less or that have a duration of one year or less.”

    In granting summary judgment for the defendant, the court found that the underlying transaction was an “open-end loan under the plain language” of the Mortgage Loan Act, and that it was not a loan for $1,000 or less or one with a duration of one year or less under the Mortgage Loan Act, but that by using the security agreement framework, the lender engaged in an act or practice to evade the Mortgage Loan Act’s prohibition. The court found that the evidence showed defendant went to the lender for a simple loan under $1,000 and was provided on that day a check for $501. The court found further that, “it would appear [the lender] gave Defendant what she was seeking, namely a short-term loan … but without complying with any of the myriad restrictions applicable to such loans under the Short-Term Loan Act.” The court held that the security agreement framework did not stand because the “legally convoluted” structure did not benefit the parties in any meaningful way, and “the only explanation the Court can discern as to why that structure was used is that it was a stratagem for eluding the restrictions of the Short-Term Loan Act that would have otherwise applied to the parties’ transaction.”

    Courts State Issues Ohio Payday Lending Mortgages Consumer Finance

  • Maryland orders debt-consolidation operation to pay more than $2 million in penalties and restitution

    State Issues

    On August 22, the Maryland attorney general issued a final order against a debt-consolidation operation, resolving allegations that the respondents collected hundreds of thousands of dollars from consumers to help them consolidate and pay off outstanding debt but failed to provide the promised services. According to the AG, the respondents deceptively promised that their services would save consumers money, allow consumers to pay off outstanding debts in a shorter timeframe than the original loan terms, and improve consumers’ credit scores. Consumers were charged upfront fees ranging from $11,000 to $118,000 for services plus additional amounts that were supposed to go toward paying off their outstanding debts. However, instead of providing the promised services, the respondents allegedly used most of the funds for their own personal use while consumers were threatened with foreclosure and had their cars repossessed. The final order permanently enjoins the respondents from violating the Maryland Consumer Protection Act, the Maryland Mortgage Assistance Relief Services Act, the Maryland Credit Services Business Act, and the Maryland Debt Management Services Act. The respondents are also required to pay a $1.2 million penalty and must refund all monies collected from consumers who did not receive the promised services. The AG estimates that total payments will exceed $2 million.

    State Issues State Attorney General Enforcement Maryland Debt Relief Consumer Finance

  • California appellate court overturns ruling for collector that stapled note to summons

    Courts

    On August 23, the California Sixth Appellate District overturned summary judgment in favor of a collector (defendant) that was sued for FDCPA and the Rosenthal Fair Debt Collection Practices Act violations. According to the court, the plaintiff incurred an unpaid medical debt, which was referred to the defendant for collection. The defendant sent the plaintiff eight letters; however, the plaintiff was allegedly not aware that the hospital assigned the debt to a debt collector and did not pay the debt. The defendant filed a collection suit against the plaintiff, seeking to recover the unpaid medical debt. The defendant stapled a typewritten note to the summons, which read, “If you have any questions regarding this matter, please contact: []” in English and Spanish. The plaintiff filed a complaint, accusing the defendant of violating the FDCPA and the Rosenthal Act, alleging that “it was unlawful for [the defendant] to send the attachment with the summons and the complaint because the attachment appeared to be a message from the court and did not contain language disclosing that it was sent by a debt collector.” The trial court granted the defendant’s motion for summary judgment, ruling that the communication was lawful, and denied the plaintiff’s cross-request for summary judgment.

    On the appeal, the defendant argued that "the attachment is not a ‘communication’ within the meaning of either statute, on the theory that the attachment itself says nothing about the debt." However, the appellate court wrote that the note was not sent “in a vacuum: The attachment, summons, and complaint comprised a collection of documents delivered by a process server—personally to [the plaintiff’s] girlfriend and then by mail to [the plaintiff].” The appellate court further noted that the reference to “this matter” in the note “unmistakably signified the litigation initiated by the accompanying complaint pleading [the plaintiff’s] indebtedness and the amount and source of indebtedness in a common count cause of action.” With regard to whether the note was a communication in connection with the collection of a debt, the appellate court noted that it “fail[ed] to conceive of any subject other than debt collection [the defendant] might think the communication was in connection with. The message in the attachment refers to the existence of a debt, conveys information regarding the debt, and serves the purpose of debt collection by enticing the recipient to contact the debt collector.” The appellate court concluded that “[b]y omitting the mandatory disclosure that this attachment was from [the defendant], a debt collector, [the defendant] made it reasonably likely that the least sophisticated consumer would believe the suggestion to call [the defendant] was from the court that issued the summons to which the suggestion was affixed. [The defendant’s] communication was therefore deceptive.”

    Courts State Issues California Appellate FDCPA Class Action Rosenthal Fair Debt Collection Practices Act Debt Collection

  • Massachusetts reaches settlement with mortgage servicer over foreclosure practices

    State Issues

    On August 17, the Massachusetts attorney general announced that a national mortgage servicer must pay $3.2 million to resolve allegations that its mortgage servicing, debt collection, and foreclosure practices were unfair and deceptive. According to the assurance of discontinuance, the servicer allegedly violated Massachusetts’ Act Preventing Unlawful and Unnecessary Foreclosures by not providing notice and opportunity for borrowers to apply and be reviewed for loan modifications. Among other things, the servicer also allegedly placed debt collection calls exceeding the number of calls permitted by state law, did not inform borrowers of their right to request verification of the amount of their debt, unfairly charged foreclosure-related fees prior to obtaining authority to foreclose, and failed to send required debt validation notices. While the servicer denied the allegations, it agreed to pay borrowers $2.7 million in the form of principal forgiveness on eligible loans as well as a $500,000 fine. The servicer also agreed to “make significant changes” to its business practices.

    State Issues Enforcement Massachusetts State Attorney General Consumer Finance Foreclosure Debt Collection Mortgages Mortgage Servicing

  • DFPI orders crypto lender to cease offering unqualified securities

    State Issues

    On August 8, the California Department of Financial Protection and Innovation (DFPI) issued a desist and refrain order to a now-bankrupt cryptocurrency lender and its CEO after determining that the company allegedly made material misrepresentations and omissions in the offering of crypto interest accounts, particularly with respect to understating the risks of depositing digital assets with the company. According to DFPI, since June 2018, the company funded part of its lending operations and proprietary trading through the sale of unqualified securities in the form of digital asset interest-earning accounts known as “Earn Rewards” accounts. DFPI found that the company allegedly offered these accounts to consumers without first qualifying them as securities in compliance with California’s Corporate Securities Law. Additionally, DFPI contended that the company failed to fully disclose material aspects of its business and Earn Rewards accounts, and claimed that the CEO failed to disclose material aspects of the company’s business, made materially misleading statements, or omitted material facts necessary to ensure the statements were not misleading. In June, the company suspended the fulfillment of customer withdrawals from its crypto interest accounts and filed for Chapter 11 bankruptcy reorganization on July 13. 

    DFPI ordered the company and CEO to desist and refrain from further offers and sale of securities in California, including but not limited to the Earn Rewards accounts, unless such sale has been qualified under California law or unless the security or transaction is exempt from qualification. The company and CEO were also both ordered to desist and refrain from offering securities in California by means of untrue statements of material fact or omissions of material fact.

    State Issues Digital Assets State Regulators DFPI California Cryptocurrency Enforcement Securities

  • D.C. reaches $2.54 million settlement with online delivery company

    Courts

    On August 17, the Superior Court of the District of Columbia issued a consent order and judgment against an online delivery company resolving claims that it charged consumers millions of dollars in deceptive service fees. According to a press release issued by the D.C. AG, from 2016 until 2018, the company allegedly misled consumers into believing that service fees charged on their orders were tips that went to delivery workers. Instead, these fees went to the company to subsidize operating expenses. Without admitting any wrongdoing, the company agreed to pay $1.8 million to the district to go towards restitution and cover litigation costs. The company also agreed it will not seek refunds of $739,057 in previously disputed sales tax payments and will collect and remit sales tax on the total amount of the sales price it charges consumers going forward. Additionally, the company will cease making any misrepresentations about the nature of fees on consumer orders.

    Courts State Issues Consumer Finance Fees District of Columbia Settlement

  • States sue installment lender for hidden add-on products

    State Issues

    On August 16, a multistate lawsuit led by the Pennsylvania attorney general was filed against a subprime installment lender for allegedly charging consumers for hidden add-on products without their consent. According to the Pennsylvania AG’s press release, consumers believed they had entered into agreements to borrow and repay, over time, a fixed loan amount when allegedly the lender “added hundreds to thousands of dollars to the total amount a consumer owed.” Among other things, the complaint claimed the lender’s alleged “aggressive, high-pressure sales tactics” were “dictated by a profit-driven model,” and that its loans and aggressive sales tactics targeted the most vulnerable borrowers (often subprime and deep subprime borrowers that already carry significant credit card, installment loan, and/or student loan debt) by offering them “small dollar personal loans with high interest costs.” Additionally, the complaint contended that the lender’s corporate policies and practices resulted in employees charging consumers for add-on products they did not know about and did not consent to buy, and that employees were encouraged to perpetrate the unlawful conduct by being rewarded for maximizing add-on charges. The complaint seeks restitution, repayment of unlawfully obtained profits, civil penalties, rescission or reformation of all contracts or loan agreements between the lender and affected consumers, and injunctive relief.

    State Issues State Attorney General Enforcement Consumer Finance Predatory Lending Add-On Products Installment Loans

  • California requires consumer credit contract notices to be provided in multiple languages

    State Issues

    On August 15, the California governor signed SB 633, which expands the obligation of creditors who obtain more than one person’s signature on a consumer credit contract when providing cosigners a notice regarding their obligation if the borrower does not pay the debt. Under existing law, these notices had to be provided in English and in Spanish. A creditor who provides a consumer a contract in a foreign language will now have to provide the cosigner notice in the language in which the contract is written. In addition to expanding the languages the notice must be provided in, the required cosigner notice must be provided even if the individuals are married to each other. SB 633 also requires the California Department of Financial Protection and Innovation to provide translations of these notices on its website by January 1, 2023, along with any translations of languages later added to state law. Additionally, notice must be provided only on a separate sheet preceding the contract.

    State Issues State Legislation California Consumer Finance DFPI

  • Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans

    Courts

    On August 11, a split Maryland Court of Appeals held that “a law firm that engages in debt collection activities on behalf of a client, including the preparation of a promissory note containing a confessed judgment clause and the filing of a confessed judgment complaint to collect a consumer debt, is not subject to the Maryland Consumer Loan Law [(MCLL)].” A putative class action challenging the law firm’s debt collection practices was filed in Maryland state court in 2018. According to the opinion, several homeowners associations and condominium regimes (collectively, “HOAs”) retained the law firm to help them draft and negotiate promissory notes memorializing repayment terms of delinquent assessments. These promissory notes, the opinion said, included confessed judgment clauses that were later used against homeowners who defaulted on their obligations. The suit was removed to federal court and was later stayed while the Maryland Court of Appeals weighed in on whether the law firm was subject to the MCLL. Loans made under the MCLL by an unlicensed entity render the loans void and unenforceable, the opinion said.

    Class members claimed that the law firm is in the business of making loans and that the promissory notes are subject to the MCLL and “constitute ‘loans’ because they are an extension of credit enabling the homeowners to pay delinquent debt to the HOAs.” Because neither the law firm nor the HOAs are licensed to make loans the promissory notes are void and unenforceable, class members argued. The law firm countered that it (and the HOAs) are not obligated to be licensed because they are not lenders that “engage in the business of making loans” as provided in the MCLL.

    On appeal, the majority concluded that there is no evidence that the state legislature intended to require HOAs to be licensed “in order to exercise their statutory right to collect delinquent assessments or charges, including entering into payment plans for the repayment of past-due assessments.” Moreover, in order to qualify for a license, an applicant “must demonstrate, among other things, that its ‘business will promote the convenience and advantage of the community in which the place of business will be located[]’”—criteria that does not apply to an HOA or a law firm, the opinion stated. Additionally, applying class members’ interpretation would lead to “illogical and unreasonable results that are inconsistent with common sense,” the opinion read, adding that “[t]o hold that the MCLL covers all transactions involving any small loan or extension of credit—without regard to whether the lender is ‘in the business of making loans’—would cast a broad net over businesses that are not currently licensed under the MCLL.”

    The dissenting judge countered that the law firm should be subject to the MCC because to determine otherwise would allow law firms to engage in the business of making loans in the form of new extensions of credit with confessed judgment clauses and would “create a gap in the Maryland Consumer Loan Law that the General Assembly did not intend.”

    Courts State Issues Licensing Maryland Appellate Consumer Finance Consumer Lending Debt Collection Confessions of Judgement

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