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Tennessee amends its Consumer Protection Act
Recently, the Governor of Tennessee signed into law HB 2711 (the “Act”) which amends, among other things, the state’s Consumer Protection Act. In particular, the Act establishes the factors that a court may consider when determining a civil penalty for violation of the Consumer Protection Act. The court may consider (i) the defendant’s participation in the attorney’s general complaint resolution process; (ii) and the defendant’s restitution efforts prior to the action; (iii) whether there was good or bad faith; (iv) injury to the public; (v) one’s ability to pay; (vi) the public’s interest in eliminating the benefits derived by the violator; and (vii) the state’s interest. Additionally, the Act expands its protection of elderly people to “specially targeted consumers” which includes persons who are at least 60 years old, persons under 18, and current and former military service members. Persons who are found to have targeted specially targeted consumers can be liable for penalties up to $10,000. Furthermore, the Act makes other changes such as procedural requirements for actions brought by the attorney general. The Act is effective immediately.
Florida enacts new requirements for payment transaction classification
On May 2, the Governor of Florida signed into law HB 939 (the “Act”) which, among other things, will expand the definition of “depository institution” and amend the requirements for information returns relating to payment-card and third-party network transactions.
As it will relate to Florida’s commercial financing disclosure law, the Act will expand the definition of “depository institution” to mean a bank, credit union, savings or thrift association, or an industrial loan company doing business under the authority of a charter issued by the U.S., Florida, or any other state or territory which is authorized to transact business in Florida and is insured by the FDIC or NCUA Share Insurance Fund.
Additionally, the Act will require third-party settlement organizations handling transactions for participating payees located in Florida to establish a system to identify whether transactions are for goods and services or are personal payments. Third-party settlement organization will be required to create a mechanism that clearly obligates the sender to classify the transaction type prior to completion. The Act will also set forth how the sender of the payment will be responsible for categorizing the transaction accurately. Furthermore, third-party settlement organizations will be instructed to keep detailed records that reflect the transaction type as specified by the sender. However, this requirement will not be applicable to third-party settlement organizations that are contractually bound to process transactions exclusively for goods and services. The Act will define “participating payee,” “third party network transaction,” and “third party settlement organization” as defined by the Internal Revenue Code. The Act will go into effect July 1.
Arizona court upholds debt collection act from industry challenge
On May 3, the Arizona Court of Appeals affirmed the state superior court’s decision to uphold Arizona’s Predatory Debt Collection Act (the “Act”) after being challenged by judgment creditors. The Act lowered the interest rate cap on medical debt, increased the amount of the homestead exemption, increased the dollar value of personal property and assets exempt from creditor claims, and increased the amount of exempt earnings in garnishment actions. The plaintiffs alleged that the “Saving Clause” of the Act was unconstitutionally vague and unintelligible due to its failure to directly state whether the Act would apply when a judgment pre-dates the Act but a wage garnishment proceeding post-dates the Act. The appellate court found that the Saving Clause was not vague or unintelligible as the language “provides a framework and examples consistent with how Arizona courts have long ensured prospective application of the law[.]” As such, the appellate court upheld the superior court’s decision and could not rule the Act as unconstitutional.
District Court grants motion for reconsideration on reverse redlining claim
On April 26, the U.S. District Court for the Eastern District of Michigan granted in part and denied in part the plaintiffs’ motion for reconsideration of its order granting the defendants summary judgment and dismissing claims under the Fair Housing Act (FHA) and the ECOA. The plaintiffs argued the court erred in its decision to dismiss their FHA and ECOA claims without addressing their disparate treatment claims. The court found plaintiffs’ arguments on reverse redlining (i.e., alleged intentional targeting of borrowers in minority areas for predatory loans) supported their claims of disparate treatment under the FHA and the ECOA, and the court had erred in “dismissing those claims in their entirety[.]”
Since this revived plaintiffs’ FHA and ECOA claims, the court then addressed a defendant’s motion for summary judgment, which argued that it was entitled to summary judgment because it merely facilitated a loan to a co-defendant and did not engage in any conduct controlled or restricted by the FHA. The court found that the scope of FHA § 3604(a) extended beyond owners and agents to other actors who are in a direct position to deny housing rights to a member of a protected group. The court found the defendant participated actively in the acquisition and disposition of residential property (e.g., the defendant was the primary funder of property acquisitions, participated in the design of the purchase contracts, had detailed knowledge of a co-defendant’s business model, reviewed a co-defendant’s marketing and advertising strategies, and participated in decisions on individual purchase contracts).
According to the court, this supported plaintiffs’ allegation that such defendant directly affected the availability of housing within the meaning of FHA § 3604(a). The court also disagreed with defendant’s alternative arguments regarding plaintiffs’ showing of disparate treatment, stating “plaintiffs can establish disparate treatment based on reverse redlining by showing that (1) they are a member of a protected class; (2) they applied for and were qualified for loans; (3) they received grossly unfavorable terms; and (4) they were intentionally targeted or intentionally discriminated against.” Therefore, because the court found issues of material fact on plaintiffs’ FHA and ECOA claims, the court denied the defendant’s motion for summary judgment.
GAO calls for the FDIC to address outstanding recommendations
On April 30, GAO sent a letter to the FDIC on its outstanding recommendations, emphasizing the importance of two priority recommendations, which pertained to blockchain technology and fintech. Regarding blockchain technology, the letter stressed the need for the FDIC and other financial regulators to establish a formal mechanism to identify and address blockchain-related risks. Despite the regulator's coordination, the response to crypto-asset risks had been criticized as untimely. With respect to fintech, this recommendation would have the FDIC and relevant agencies clarify the appropriate use of alternative data in loan underwriting for banks that partner with fintech lenders. The letter also called for the FDIC's attention to additional high-risk areas, including IT management, human capital, federal real property, cybersecurity, and the personnel security clearance process.
Fed releases April SLOOS on bank lending practices from Q1 2024
On May 6, the Fed released its quarterly survey of the Senior Loan Officer Opinion Survey (SLOOS) on bank lending practices for the first quarter of the year which revealed tightened lending standards and a decrease in demand across loans. Regarding business lending, the survey asked banks about commercial and industrial lending (C&I) and commercial real estate lending (CRE). For C&I loans, banks reported stricter standards and a decline in demand from firms of all sizes. Banks reported tightening due to a less favorable economic outlook, reduced tolerance for risk, and a worsening of industry-specific problems. For CRE loans, banks reported a tightening of standards for all types of loans. A significant share of banks reported weaker demand for nonfarm nonresidential and multifamily residential lending. For household lending, banks also tightened residential real estate (RRE) loan standards, while demand for all RRE loan types declined. Home equity lines of credit also faced stricter standards. Banks also tightened consumer lending standards for credit card, auto, and other consumer loans. Demand for these loans decreased as well, with a significant drop in auto loan inquiries.
OCC and FDIC release CRA evaluations on 69 banks
On May 2, the OCC released its CRA performance evaluations for April and the FDIC released its evaluations for February. The OCC evaluated 13 national banks, federal savings associations, and insured federal branches of foreign banks. Of the 13 evaluations, most entities were rated “Satisfactory,” one entity was rated “Outstanding,” and one entity was rated as “Needs to Improve.” The FDIC released its May list of state nonmember banks of assigned CRA ratings in February. Out of 56 evaluations, two banks were rated “Outstanding,” 52 were rated as “Satisfactory,” one bank was rated as “Needs to Improve,” and one bank was rated as “Substantial Noncompliance.”
Student loan servicer and trust could pay more than $5M in enforcement action with CFPB
On May 6, the CFPB filed a complaint against a Pennsylvania-based student loan servicer and 15 student loan trusts for alleged failure to properly respond to various borrower requests in violation of the CFPA. The complaint alleged thousands of borrower requests went unanswered from 2015 to 2021. Many of these requests allegedly sought forms of payment relief including: (i) co-signer release; (ii) extension of forbearance or deferment; (iii) loan settlement or forgiveness; (iv) Servicemember Civil Relief Act benefits; and (v) other forms of payment or interest rate reduction.
The CFPB also released two proposed stipulated final judgment orders for the trusts and the servicer to resolve the claims. If agreed upon by the court, the trusts and servicer will have to pay civil money penalties of $400,000 and $1.75 million, respectively, in addition to providing close to $3 million in compensation to impacted consumers. Additionally, the orders required non-monetary relief, such as the approval of outstanding borrower applications, the rectification of credit reports, the suspension of debt collection efforts, and the implementation of a functional process.
FHFA shares ‘lessons learned’ from evaluating exposure to climate-related risks
On May 1, the FHFA released a report covering the “lessons learned” from its review of the Climate Scenario Analysis (CSA) which was used by financial institutions and regulators to evaluate exposure to climate-related risk. Climate-related risk can be categorized in two ways: (i) physical risk which is damage to property, land, and infrastructure due to severe weather and environmental changes; and (ii) transition risk that results from policy and technological shifts towards a low-carbon economy.
In its preliminary CSA exercises, the FHFA made the following key observations:
- Data and Methodology Limitations: There were data limitations and methodological shortcomings as current tools depend on incomplete data.
- Modeling Assumptions: Results were significantly impacted by modeling assumptions.
- Challenges with Existing Credit Models: Current credit loss models were constrained while incorporating climate risks.
- Predictive Inaccuracy: The tools used to estimate the historical relationship between climate-related events and financial impacts may not be representative of future financial impacts.
The FHFA concluded that these findings indicated the CSA a complex process with room for enhancement and that no single risk assessment can fully capture the breadth of potential impacts from climate-related physical and transition risks.
HUD guidance on AI to prevent housing discrimination
On April 29, the Office of Fair Housing and Equal Opportunity of HUD issued two guidance documents concerning the use of artificial intelligence (AI) in housing-related practices, specifically in tenant screening and housing advertising. The guidance came in response to Biden's Executive Order to address potential biases in automated systems within the housing sector (covered by InfoBytes here).
HUD emphasizes the need for transparency and fairness when housing providers and screening companies use AI-assisted tenant screening processes. The tenant screening guidance recommended best practices for housing providers and screening companies to prevent discrimination based on race, color, national origin, religion, sex, disability, and familial status. The HUD guidance provided the following six “Guiding Principles for Non-Discriminatory Screenings”: (i) choose relevant screen criteria; (ii) use only accurate records; (iii) follow the applicable screening policy; (iv) be transparent with applicants; (v) allow applicants to challenge negative information; and (vi) design and test complex models for Fair Housing compliance.
Regarding housing advertising, HUD’s guidance warned advertisers and online platforms about the risks of using targeted advertising tools that could violate the Fair Housing Act by denying consumers information about housing opportunities or targeting individuals based on their protected characteristics. To reduce the risk of violating the Fair Housing Act, HUD recommended that advertisers should: (i) utilize advertising platforms that are taking steps to manage the risk of discriminatory delivery of housing-related ads; (ii) ensure the advertisements related to housing are accurately identified to the platform; (iii) analyze the composition of audience datasets; and (iv) monitor outcomes of advertising campaigns to identify and mitigate discriminatory outcomes. Advertising platforms are recommended to: (i) ensure that housing-related ads are run in a separate process designed to avoid discrimination; (ii) avoid providing targeting options for housing-related ads that describe or are related to FHA-protected characteristics; (iii) conduct regular end-to-end testing of advertising systems; (iv) proactively identify and adopt less discriminatory alternatives for AI models and algorithmic systems; (v) ensure that algorithms are similarly predictive; (vi) ensure that ad delivery systems are not resulting in differential charges on the basis of protected characteristic; and (vii) document, retain, or publicly release in-depth information about ad targeting functions and internal auditing.