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Connecticut amends its Money Transmission Act
On June 6, Connecticut enacted HB 5211 (the “Act”), amending laws regulating virtual currency and money transmission. The Act updated "permissible investment" to include additional forms of assets and clarified that “cash” will include demand deposits and cash equivalents, such as international wires in transit to the payee, transmission receivables funded by debit cards or credit cards, and AAA-rated mutual funds. The Act also stated that after October 1, the owning, operating, solicitation, marketing, advertising, or facilitation of virtual currency kiosks will be considered to “money transmission” business and thus will require persons to be state licensed as a money transmitter.
Additionally, the Act will require money transmission licensees to maintain a detailed accounting plan on winding down operations, as well as meet certain conditions to terminate a licensee’s businesses. Furthermore, the Act will require licensees to communicate third party disclosure information to consumers, as well as provide a physical receipt for transactions to senders. The Act also expanded the banking commissioner’s authority to adopt forms and orders governing digital assets to expressly include nonfungible tokens.
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.
CFPB bans medical debt in credit reporting decisions
On June 11, the CFPB released a proposed rule to ban obtaining or using medical information for credit eligibility determinations. Specifically, the proposed rule would amend the FCRA to remove the medical financial information exception and limit credit reporting of medical debt.
In 2003, Congress amended the FCRA to restrict creditors’ use of medical information for purposes of making credit eligibility determinations, and it authorized the banking agencies to issue exemptions from the restriction through rulemaking. In 2005, the banking agencies issued a regulatory exception to permit creditors to obtain and use consumers’ medical financial information when making credit eligibility determinations if certain conditions were met. The CFPB’s proposed rule would roll back the 2005 exception, in addition to other changes. First, the proposed rule would remove the financial information exception that permits creditors to obtain and use medical and financial information (including regarding medical debt) in connection with credit eligibility decisions (with certain limited exceptions). Second, the proposed rule would limit consumer reporting agencies’ ability to furnish medical debt information to creditors.
CFPB Director Rohit Chopra noted in prepared remarks that the proposed rule would eliminate the “loophole” that allowed lenders to access and use medical debt information, which he argued would align regulations with congressional intent. A fact sheet from the White House, published on behalf of Vice President Kamala Harris and Director Chopra, stated that this action builds on prior efforts by the Biden-Harris administration to reduce the burden of medical debt.
As previously covered by InfoBytes, the Bureau announced this initiative in September 2023. The CFPB signaled its interest in proposing this rule when it threw its support behind Connecticut SB 395, which bans the inclusion of medical debt in consumer reports (covered by InfoBytes here). The proposed rule would go into effect 60 days following publication in the Federal Register.
FINRA imposes censure and $250,000 fine on “influencer” company for misconduct and privacy notice violations
On June 10, FINRA agreed to a Letter of Acceptance, Waiver, and Consent (AWC) from a company, addressing various regulatory infractions for improper use of social media influencers in promotional activities. From 2020 to 2022, the firm was found to have compensated influencers for social media content that was not fair and balanced and contained exaggerated claims, violating FINRA Rules 2210(d)(1) and 2010. The firm also failed to review influencer-produced videos prior to their distribution and lacked adequate supervisory procedures to monitor its influencers’ communications, contravening the Securities Exchange Act Section 17(a), Exchange Act Rule 17a-4(b)(4), and additional FINRA rules. Furthermore, the company issued misleading privacy notices to its customers, violating Regulation S-P and FINRA Rule 2010. Specifically, the company stated in its privacy notice that it disclosed nonpublic personal information “only when it is both permitted by law and required for the ordinary course of business,” when in fact it shared such nonpublic personal information with non-affiliated third parties for marketing purposes. To resolve these claims, FINRA imposed a censure and a $250,000 fine. The company concurred.
California’s DFPI orders two crypto-asset companies to stop operations
On June 5, the California DFPI issued two desist and refrain orders against securities firms for allegedly offering unqualified securities under California’s Corporate Securities Law (CSL). The first order was against a company incorporated in the U.K., whereby the DFPI alleged the firm offered and sold unpermitted securities to Californians through its website. Since 2023, these alleged securities were interest-bearing accounts where the firm promised to pay interest on deposited assets that would be deployed into decentralized finance liquidity pools. According to the order, these securities were packaged as investment contracts “that were neither qualified nor exempt from the qualification requirement” of the state’s CSL. The second order was against another crypto-asset firm whereby the firm offered crypto asset interest-bearing accounts beginning in 2023 that were neither qualified nor exempt from the qualification requirement under the CSL, and the DFPI had not permitted the firm to sell securities in California. Both orders required the firms to desist and refrain from selling securities in California until the CSL’s requirements have been met.
New York Attorney General sues crypto companies, alleging billion-dollar pyramid scheme targeting immigrant communities
On June 6, New York Attorney General Letitia James announced legal actions against two companies (with the same founders) for allegedly participating in illegal pyramid schemes. The complaint alleged these schemes defrauded hundreds of thousands of investors, including more than 11,000 New Yorkers, out of more than a billion dollars in crypto-assets. The AG alleged that the companies’ activities specifically preyed upon immigrant communities, notably New Yorkers of Haitian descent, using prayer groups and digital communication channels like social media to make false promises of high returns.
According to the complaint, one of the companies offered fraudulent returns from mining cryptocurrency, but never delivered on the promised profits and bonuses, eventually collapsing in 2019. The complaint then alleged the promoters of the collapsed company founded a new company that also promised high returns and bonuses. According to the complaint, from 2019 to 2023, investors deposited more than $1 billion worth of cryptocurrency into the new company, yet a minuscule fraction (less than $26 million) was actually used for trading on the company’s platform before its collapse in May 2023.
The Attorney General’s legal action will seek a permanent ban on the company and the associated individuals from conducting any securities or commodities business within New York and disgorgement and damages for the victims.
Treasury requests information on AI in financial services sector
On June 6, the Department of the Treasury released a request for information (RFI) to collect from financial institutions, consumers, advocates, academics, and other stakeholders’ data on the uses, opportunities and risks presented by artificial intelligence (AI). The Treasury’s release stated that the Department will be interested in gaining greater insight into how AI would be used in risk management, capital markets, internal operations, customer service, regulatory compliance, and marketing. The RFI posed 19 questions related to general topics such as types of models, AI use, and barriers to entry, as well as questions focused on potential opportunities and risks associated with AI.
The Secretary of the Treasury, Janet Yellen, discussed the RFI in her remarks at the Financial Stability Oversight Council (FSOC) Conference on AI and Financial Stability. Yellen noted that the Treasury would be convening a roundtable on AI and insurance and would support FSOC’s monitoring and analysis of AI’s impact on financial stability.
Colorado tightens regulations related to debt settlement and collection practices
On June 6, the Governor of Colorado signed into law HB 1380 (the “Act”) which revised the state’s consumer protection laws related to debt collection, credit services organizations, and debt management service providers. Key provisions of the law included:
- Debt collectors must now include their name and the original creditor’s name in legal actions against consumers and possess full authority to settle the debt.
- Credit services organizations will be required to provide the state administrator with essential business information (including name and address) and pay an annual notification fee.
- The state administrator can issue cease-and-desist orders and impose penalties of up to $1,500 per violation of the Code.
- Debt-management service providers cannot provide their services to consumers unless they have prepared a debt management plan for the individual that, among other things, lists all the creditors that the service provider expects to participate, and not to participate, in the plan, as well as those that it expects to participate but will not grant concessions to the consumer.
- Providing the state administrator the ability to adopt rules regarding debt settlement service fees by March 1, 2025, provided the rules do not “unduly limit consumer access to debt management services programs based on available state and national data.”
The Act’s amendments will go into effect 91 days following final adjournment of the General Assembly, subject to approval by Colorado voters if a referendum would be filed.
Acting Comptroller Hsu addresses AI integration risks and advocates for consumer financial health measures
On June 6, Acting Comptroller of the Currency, Michael J. Hsu, delivered two statements addressing distinct concerns regarding both artificial intelligence (AI) and consumer financial health.
In the first statement at the 2024 Conference on Artificial Intelligence and Financial Stability, Hsu said that AI was capable of being a tool for innovation or a weapon that could undermine the financial system. Hsu detailed potential risks arising from AI’s deployment, such as rapid adoption without adequate controls. He advocated taking a cautious approach, with “risk management control gates” at different stages of AI integration to ensure innovations are beneficial rather than harmful. Hsu stressed the need for a shared responsibility model for AI, where accountability would be defined clearly across different stakeholders, particularly in cases of AI-enabled fraud and cyberattacks.
In the second statement, made at the Financial Health Network Emerge Conference, Hsu discussed the OCC’s engagement in enhancing consumer financial health as part of its broader goal to foster a fair and inclusive economy. Comptroller Hsu described three possible results given “clear and objective measures of consumers’ financial health”: (i) product offerings could better align with consumer needs; (ii) banks that support their customers’ efforts to improve their financial health would have better customer relationships and build trust; and (iii) improvements in mental well-being for individuals and communities.
Hsu presented the concept of Financial Health Vital Signs (FHVS) as a set of metrics—positive cash flow, liquidity buffers, and on-time payments—that could indicate consumer financial health. The OCC’s report, “Community Development Insights: How Banks Can Measure and Support Customer Financial Health Outcomes,” was introduced as a resource for banks to understand and improve their customers’ financial well-being. Hsu encouraged banks to pilot these metrics, which could lead to better product alignment with customer needs, improved financial decision-making, and reduced financial stress among consumers.