InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
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.
Senate Committee reports on AI use by hedge fund traders
On June 14, the U.S. Senate Committee on Homeland Security and Governmental Affairs released a report on the use of artificial intelligence (AI) by hedge funds to inform trading decisions. The report suggested that the increased use and reliance upon AI in the financial services sector could lead to greater risks to financial investors and markets. On par with these findings included, for instance, an observation that hedge funds and regulators may use inconsistent or unclear terms to define AI systems that could make it difficult to understand what types of systems are in use and how existing and proposed regulations could apply. The report also suggested this may complicate efforts to audit and assess hedge funds’ review processes and human moderation efforts. The report also suggested that the use of AI for trading purposes could amplify traditional investment industry risks.
The Committee made several recommendations, including calling upon regulators to consider potential gaps in existing and proposed regulatory frameworks. The report concluded that Congress and regulators should seek to improve the public’s understanding of AI and establish guardrails to address risks related to the use of this technology in the financial services sector.
California enacts new consumer protections on disclosures and marketing
On June 14, the Governor of California approved SB 1096 (the “Act”) to amend the Consumers Legal Remedies Act and regulate mailed solicitations about consumer financial products. Subject to certain exceptions, the amendment will require covered persons to include a disclosure statement in enlarged, bold type on the front of any envelope containing a solicitation for a consumer financial product or service that would be sent by physical mail. The bolded disclosure must state clearly that the content would be an advertisement and that the recipient will “not [be] required to make any payment or take any other action in response to this offer.”
The Act also specified unfair or deceptive acts or practices, including, among other things, misrepresenting the terms of a transaction, inserting unconscionable provisions in contracts, and advertising prices for goods or services that do not include all mandatory fees or charges, subject to certain exceptions. It also will prohibit deceptive representations using geographic origin designations or making false claims about a product’s sponsorship or benefits. The legislation will extend to mortgage brokers and lenders and prohibit them from using a home improvement contractor to negotiate the terms of a loan secured by the home that would be used to finance a home improvement contract or any portion of such a contract. Additionally, the bill will address issues related to advertising and promoting events concerning veterans’ benefits. If it were to be the case, the Act will mandate that any such promotion disclose that the event was not sponsored by or affiliated with the VA, the California Department of Veterans Affairs, or any other congressionally-chartered or recognized organization for veterans, or any of their auxiliaries. The Act will go into effect on January 1, 2025.
OCC announces enforcement actions for June 2024
On June 17, the OCC released a list of recent enforcement actions against national banks, federal savings associations, and individuals affiliated with such entities (defined as institution-affiliated parties, or IAPs). In its enforcement actions against national banks, the OCC alleged that one bank had deficient anti-money laundering (AML) and BSA controls; another pertained to a bank’s alleged unsafe or unsound practices related to the bank’s board and management oversight, including strategic planning, liquidity and interest risk management, and audit management, among other issues identified.
The announcement included two other enforcement actions against IAPs, which were generally used to “deter, encourage correction of, or prevent violations, unsafe or unsound practices, or breaches of fiduciary duty.” One was for accessing customer accounts improperly and providing information on those accounts to a third-party individual; the other was for embezzlement. Lastly, the release reported the termination of an enforcement action against a bank for unsafe or unsound practices since the bank demonstrated compliance with “all articles of an enforcement action.” More information on the OCC’s enforcement action types can be found here.
FHFA issues 2023 annual report and noted challenges in housing market
On June 14, the FHFA released its annual report to Congress, as required under the Housing and Economic Recovery Act of 2008, detailing FHFA’s activities and the state of the housing finance industry in 2023. The report highlighted the current housing market’s tight supply of homes, high construction costs, and rising interest rates. All three factors contributed to difficulties buying or refinancing homes, as well as significantly increasing the cost of rent and home prices.
The report also discussed the conservatorships of Fannie Mae and Freddie Mac. Despite remaining undercapitalized, the government-sponsored enterprises built out their capital reserves during 2023 and transferred more credit risks onto private investors. The report detailed the FHFA’s effort to promote equitable access to affordable housing through initiatives focused on energy efficiency products and fair lending practices.
The annual report covered FHFA’s research and regulatory activities, including publications of several working papers on climate risk, mortgage debt, and housing supply. An overview of the FHFA’s regulatory activity included several proposed and final rules, including amendments to the Enterprise Regulatory Capital Framework and the Enterprise Duty to Serve Underserved Markets regulation.
The 2023 annual report followed the FHFA’s report on the FHLBank System, as previously covered by InfoBytes. The FHLBank report recommended actions for banks to provide more consistent and sustained access to home financing. The report highlighted the role of the 11 FHLBanks in providing liquidity to their members and supporting housing and community development. The banks faced increased demand for loans in early 2023 due to volatility in the banking sector but maintained good capital liquidity and lending capacities.
CFPB reports negative equity findings from the Auto Finance Data Pilot
On June 17, the CFPB published the first report in a series that will analyze detailed information from nine major auto lenders – including banks, finance companies, and captive lenders – following the launch of its Auto Finance Data Pilot. The initiative aimed to monitor the market to better understand loan attributes that may result in increased consumer distress.
This report analyzed financing of negative equity, “where the trade-in value offered for a consumer’s vehicle is less than the outstanding loan balance and the unpaid balance is rolled into the new loan.” According to the CFPB’s report, between 2018 and 2022, 11.6 percent of all vehicle loans in the dataset collected by the CFPB from industry participants included negative equity, ranging from about 8 percent of such loans in 2022, to about 17 percent in 2020. Among other findings, the report also highlighted that when compared to consumers who had a positive trade-in balance, consumers who financed negative equity: (i) financed larger loans; (ii) had lower credit scores and household income; (iii) had longer loan terms; and (iv) were more than twice as likely to have their account assigned to repossession within two years. The Bureau concluded that a higher proportion of consumers buying less expensive vehicles tended to finance negative equity into their auto loans compared with those purchasing more expensive vehicles. The CFPB said data from the pilot suggested that financing negative equity can result in unfavorable outcomes for consumers, with both the occurrence and the amount of negative equity financed increasing through 2023.
CFPB highlights updated guidance on unemployment benefit delivery, prepaid card fees
On June 17, the CFPB published a blog post highlighting The Department of Labor’s recently updated Unemployment Insurance Program Letter which clarified regulatory obligations regarding the delivery of unemployment benefits by state workforce agencies. The revised guidance came in response to CFPB research which identified issues with prepaid debit cards such as “junk fees” that lessen the value of benefits for recipients, the CFPB said. The guidance will aim to ensure that unemployment insurance, particularly highlighted during the Covid-19 pandemic, was delivered efficiently and with minimal additional costs to beneficiaries.
The guidance reiterated that recipients of unemployment benefits must be given a choice in how they receive their payments. It is unlawful for a state to require recipients to receive any unemployment payments on a state-administered debit card, even if they have the option of moving funds to another account later. The CFPB found that certain fees associated with prepaid cards, including ATM and customer service fees, can be burdensome for users, and states were encouraged to negotiate terms that reduce or eliminate additional fees. Recipients facing issues with prepaid cards will be advised to file a complaint with the CFPB or reach out to their state unemployment offices for assistance.
CFPB proposes order against co-trustees for concealing assets to avoid fine
On June 17, the CFPB filed a stipulated order and judgment, subject to court approval in the U.S. District Court for the District of Kansas, in an action against two individuals to resolve a lawsuit accusing them of concealing assets. The CFPB averred the defendants engaged in multiple fraudulent transfers over two years to avoid paying a fine owed to the Bureau. As previously covered by InfoBytes, the CFPB filed a complaint last year accusing the individuals of concealing assets to avoid paying $38 million in restitution and $12.5 million in civil penalties owed by the company and an individual defendant related to their payday lending practices. The Bureau will be seeking recovery of the transferred funds by declaring the transactions fraudulent and imposing liens on properties, as well as pursuing monetary judgment against the wife of one of the individual defendants and her trust.
The stipulated order and judgment would release freezes and holds on defendants’ accounts and require defendants to pay about $7.3 million of an imposed $12.3 million judgment, with the remainder suspended due to a demonstrated inability to pay more. The payment will apply toward satisfying one defendant’s existing $43 million judgment, which included consumer redress and civil money penalties. That defendant must also share their filed federal and state income taxes with the Bureau until the fine is paid. If any additional financial information is found or if defendants made any financial misrepresentations, then defendants would be required to pay the fine in full.
New York Fed risk head delivers speech on emergent risks in finance
On June 11, the New York Fed’s Chief Risk Officer and head of the risk group, Mihaela Nistor, delivered a speech on the evolving landscape of risk management and emphasized the complexities of modern risks within the financial system. Nistor highlighted an increase in new risks around the world, from geopolitical conflicts and economic uncertainties to cyber threats, data privacy issues, and disruptive technologies. She then categorized these risks internal or external threats.
Nistor first addressed the internal risk landscape within organizations and emphasized the need for organizations to develop a comprehensive view of risk within an enterprise, to identify priorities and allocate resources accordingly. The speech described the importance of building a strong risk culture within organizations to identify and mitigate risks proactively. One way to strengthen risk-management culture, according to Nistor, would be through a “portfolio view” that evaluated risks collectively across projects within an organization rather than in isolation. Nistor stated that this approach facilitated a better understanding of interdependencies and cumulative risk exposure. However, the remarks stress the importance of different management approaches that were tailored to allow flexibility to mitigate an identified risk.
For external risk, Nistor focused on the importance of building resilience within organizations. Nistor noted that while external threats are often unpredictable, an organization can build resilience to meet emerging external risks by identifying critical assets and processes and developing contingency plans.
Nebraska notifies entities of background check and notification requirement changes
On June 17, the Nebraska Department of Banking and Finance issued a letter identifying two updates to Nebraska’s consumer financial services licensing laws that apply to entities with either the Nebraska Delayed Deposit Services License, the Nebraska Installment Loan License, the Nebraska Installment Sales License, the Nebraska Money Transmitter License, or the Nebraska Mortgage Banker License. The first change will require consumer financial licensees to utilize NMLS-based background checks to ensure greater uniformity for all consumer financial services licensees. Second, the state will now require a licensed company to notify the state’s Department within three business days of becoming aware that a data breach involving Nebraska residents had occurred. As previously covered by InfoBytes, these changes were included in Nebraska LB 1074 – a 2024 bill that established new consumer data privacy laws. The changes described in the letter will become effective on July 19.