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  • CFPB reports “all-time high” interest rate margins on credit cards

    Federal Issues

    On February 22, the CFPB released a blog post on credit card interest rates stating that the interest rate margins are at an all-time high. According to the Bureau, the margin is the difference between the average APR and the prime rate. The blog post notes that both the average APR and the margin between the average APR and the prime rate have reached record highs. Specifically, the Bureau noted that, over the last 10 years, the average APR on credit cards interest has nearly doubled from 12.9 percent in 2013 to 22.8 percent in 2023. Likewise, the average APR margin has increased from 3.3 percent in 2013 to 8.5 percent in 2023. According to the Bureau, this change has been brought on by banks and issuers who have raised their APR margins to increase profits. The CFPB noted that, although the CARD Act of 2009 kept APR margins lower throughout the 2010s, issuers began to increase the APR in 2016. The Bureau intends to take steps to ensure a fair market and to “help consumers avoid debt spirals.”

    Federal Issues Credit Cards CFPB Interest Rate APR CARD Act Debt Management

  • District Court addresses plain meaning of “pattern or practice of noncompliance” under RESPA.

    Courts

    On February 7, the U.S. District Court for the District of Maryland granted in part and denied in part a defendant mortgage company’s motion to dismiss a class action lawsuit alleging RESPA violations related to escrow account management for borrowers. Class action plaintiffs claim that the defendant’s failure to pay their property taxes in a timely manner, resulting in their homes being potentially subject to local tax sale procedures for unpaid taxes, created a “pattern or practice of noncompliance” within the meaning of RESPA.

    In moving to dismiss, defendant argued that alleged violations of servicing obligations that fall under separate subsections of RESPA cannot create a “pattern or practice of noncompliance” for obligations of the section setting for the escrow-handling obligations.  While noting that “case law interpreting RESPA statutory damages claims is still developing,” the court found that the statute does not require identical violations from the same subsection of RESPA to state a “pattern or practice” claim.  The court reasoned that the absence of the word “subsection” from the statute is noteworthy, and it indicates that Congress did not intend to confine “pattern or practice” to a single subsection, and held that the plain meaning of the provision only requires plaintiffs to allege repeated violations of the “[s]ervicing of mortgage loans and administration of escrow accounts” section of RESPA (i.e., all of the obligations set forth in 12 U.S.C. § 2605). The court also rejected defendant’s argument that plaintiffs failed to state a claim because they “cannot rely upon their own allegations or the existence of public complaints and lawsuits which have not resulted in a judgment against it for violations of RESPA,” finding that allegations of servicing violations from multiple named plaintiffs in separate jurisdictions was sufficient to survive a motion to dismiss.

    Separately, the court dismissed allegations that defendant violated RESPA by failing to respond to plaintiffs’ qualified written requests, finding that plaintiffs’ claims of “emotional distress, without more, do[] not establish the causal link necessary to show actual damages,” and that  plaintiffs did not support claims that voluntary postage costs for sending correspondence to defendants could be recognized as economic damages.

    Courts Mortgages RESPA Maryland

  • FCC ruling determines AI calls are subject to TCPA regulations

    Federal Issues

    On February 8, the FCC announced the unanimous adoption of a declaratory ruling that recognizes calls made with AI-generated voices are “artificial” under the Telephone Consumer Protection Act (TCPA). The declaratory ruling notes that the TCPA prohibits initiating “any telephone call to any residential telephone line using an artificial or prerecorded voice to deliver a message without the prior express consent of the called party” unless certain exceptions apply. The TCPA also prohibited “any non-emergency call made using an automatic telephone dialing system or an artificial or prerecorded voice to certain specified categories of telephone numbers including emergency lines and wireless numbers.”

    The ruling, effective immediately, deemed voice cloning and similar AI technologies to be artificial voice messages under the TCPA, subject to its regulations. Therefore, prior express consent from the called party is required before making such calls. Additionally, callers using AI technology must provide identification and disclosure information and offer opt-out methods for telemarketing calls.

    This ruling provided State Attorneys General nationwide with additional resources to pursue perpetrators responsible for these robocalls. This action followed the Commission’s November proposed inquiry for how AI could impact unwanted robocalls and texts (announcement covered by InfoBytes here).

    Federal Issues Agency Rule-Making & Guidance Artificial Intelligence FCC TCPA Consumer Protection

  • New York Fed Bank analyzes BNPL usage

    On February 14, the Federal Reserve Bank of New York (NY Fed) published a blog post evaluating different households’ use of buy now pay later (BNPL) products, which it generally described as “loans that are payable in four or fewer installments and carry no finance charges.” To understand BNPL usage and its relationship with consumers’ financial situations, the NY Fed conducted a study which revealed distinct usage patterns between the financially fragile and the financially stable.

    The study revealed that financially fragile individuals, or individuals who have a credit score below 620, who have been declined for a credit application in the past year, or who have fallen 30 or more days delinquent on a loan in the past year, typically use BNPL to make frequent small purchases when compared to financial stable individuals. The study also found that using BNPL often leads to repeat transactions, indicating a potential trend towards repeat use of the product, particularly among those facing credit challenges.

    The study also found that consumers’ motivations for using BNPL differ. Financially stable individuals often cite zero interest as a key advantage, while the financially fragile prioritize ease of access and convenience. The NY Fed summarized that BNPL usage among financially fragile individuals resembles using a credit card for medium-size, out-of-budget purchases, while financially stable users tend to make fewer purchases with a focus of avoiding interest on high-priced items. The NY Fed noted, however, that there is evidence of misunderstanding among users, such as the belief that BNPL helps build credit, concluding that “those with this view may be better off using a credit card.” 

     

    Bank Regulatory Federal Issues Buy Now Pay Later Federal Reserve New York Consumer Finance

  • Fed, FDIC, and OCC release stress test scenarios for 2024

    On February 15, the Fed, OCC, and the FDIC released their annual stress test scenarios for 2024 to assist the agencies in evaluating their respective covered institution’s risk profile and capital adequacy. The Fed released its “2024 Stress Test Scenarios” to be used by banks and supervisors for the 2024 annual stress test. The scenarios include hypothetical sets of conditions to evaluate the banks under baseline and severely adverse scenarios. The OCC similarly released economic and financial market scenarios to be used by national banks and federal savings associations and include both baseline and severely adverse scenarios as mandated by the stress testing requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The FDIC also released its stress test scenarios for certain state nonmember banks and state savings associations in conjunction with the OCC and the Fed.

    Bank Regulatory Federal Issues Federal Reserve OCC Stress Test Bank Supervision

  • Plaintiffs seek preliminary approval of $9 million class action settlement involving unsolicited texts

    Courts

    On February 8, the U.S. District Court for the Western District of Washington received an unopposed motion for preliminary approval of a class action settlement against a broker-dealer alleging that the defendant violated the Washington Commercial Electronic Mail Act (CEMA) and the Washington Consumer Protection Act (CPA) by having consumers send “unsolicited advertising text messages” to other Washingtonians through a referral program. The proposed settlement would establish a $9 million settlement fund that would compensate an estimated one million affected class members, consisting of consumers who received a referral program text message during the relevant period, were Washington residents, and did not “clearly and affirmatively” consent to receive referral program text messages.

    Courts Class Action Settlement Broker-Dealer Washington

  • Fed finds CEO engaged in crypto “pig butchering” scam which led to bank failure

    On February 7, the Federal Reserve issued an evaluation report, as required by the Federal Deposit Insurance Act (where a loss to the deposit insurance fund is considered material), on a recently failed bank; the Fed concluded the bank failed due to alleged fraudulent activity by the bank’s CEO. In particular, the Fed found that the CEO initiated a series of wire transfers over the course of three months totaling about $47.1 million of the bank’s money as part of a cryptocurrency scam known as “pig butchering.” According to a FinCEN alert, “pig butchering” occurs when a scammer convinces its victims to invest in purportedly legitimate cryptocurrency investments but then steals the victim’s money.

    The Fed found that the bank’s employees neglected to follow proper internal controls and policies that could have “prevented or detected” the alleged fraudulent activity, attributing the failure to a reluctance to challenge the CEO given the CEO’s “dominant role in the bank and prominent role in the community.” Specifically, the employees did not comply with the bank’s BSA/AML policy or file suspicious activity reports as outlined under the policy. As a result, the Fed recommended (i) increasing the awareness among state member banks of cryptocurrency scams; and (ii) providing training to examiners on cryptocurrency scams.

    Bank Regulatory Federal Issues Cryptocurrency FinCEN Federal Reserve Bank Secrecy Act Anti-Money Laundering

  • Supreme Court agrees with Third Circuit that consumers may sue “any” government entity under FCRA

    Courts

    On February 8, the Supreme Court of the United States unanimously decided that a consumer can sue any government agency—in this case the U.S. Department of Agriculture (USDA)—for damages for violating the Fair Credit Reporting Act of 1970, as amended by the Consumer Credit Reporting Reform Act of 1996 (the Act). The court found that government agencies are expressly included in the definition of any “person” who violates the statute.  On appeal from the 3rd Circuit, the case involved an individual who sued the USDA for monetary damages under FCRA, alleging that the USDA furnished incorrect information to a credit reporting company stating that his account was past due, damaging his credit score and impairing his ability to access affordable credit. 

    In affirming the 3rd Circuit’s reversal of the lower court’s dismissal of the case, the Supreme Court noted that, while the U.S. is “generally immune” from monetary judgment suits as a sovereign body, Congress can waive this immunity. Applying a “clear statement” rule, the Supreme Court interpreted the Act’s statutory language that authorizes consumer suits for money damages against “[a]ny person” who willfully or negligently fails to comply with [the law]” to constitute a clear waiver of federal government sovereign immunity. As the Court explained, “the Act defines the term ‘person’ to include “any . . . governmental . . . agency,” therefore “FCRA clearly waives sovereign immunity in cases like this one.” 

    Courts U.S. Supreme Court FCRA CCRA USDA Sovereign Immunity

  • OCC’s Hsu discusses appraisal bias

    On February 13, Acting Comptroller of the Currency Michael Hsu discussed eliminating appraisal bias in the financial industry at a public hearing held by the Appraisal Subcommittee of the FFIEC. In his remarks, Hsu highlighted the importance of addressing bias in the existing standards for appraisal reports to aid in the OCC’s efforts to expand access to homeownership. Hsu noted that the OCC is taking steps to increase access to homeownership by improving supervisory methods used to identify potential discrimination in lending and housing valuations and encouraging banks to expand affordable housing financing and access to credit.

    Bank Regulatory Federal Issues OCC Appraisal FFIEC

  • Third Circuit finds Pennsylvania lending law does not regulate collection of charged-off debt

    Courts

    On February 7, the U.S. Court of Appeals for the Third Circuit affirmed a lower court’s decision to grant a debt collector’s (the defendant) motion for judgment. The defendant argued that its efforts to collect plaintiff’s charged-off debt via a proof of claim in a bankruptcy proceeding was not limited by, or in violation of, the Pennsylvania Consumer Discount Company Act (CDCA).   The plaintiff, who obtained a loan from a third-party small-dollar lender licensed under the CDCA, defaulted on the loan and the licensed lender subsequently charged off and sold plaintiff’s debt to a company that was not licensed under the CDCA. 

    After filing for bankruptcy, the plaintiff sued the defendant and alleged a FDCPA violation when the defendant filed a proof of claim during the bankruptcy proceeding to collect the outstanding balance on the charged-off loan. The plaintiff’s argument was premised on claims that the defendant could not lawfully collect the debt because the CDCA dictates that a licensee may not sell CDCA-authorized contracts to an unlicensed person or entity. As such, the plaintiff argued the proof of claim violated the FDCPA’s prohibition against “false, deceptive, or misleading” representations in connection with the collection of a debt. The 3rd Circuit disagreed.   

    Relying in part on a letter from the Pennsylvania Department of Banking and Securities confirming that the CDCA does not apply to an unlicensed entity that purchases or attempts to collect on charged-off consumer loan accounts of debtors in bankruptcy, the appellate court held that “[t]he CDCA is a loan statute, not a debt collection statute,” and that “entities in the business of purchasing and collecting charged-off consumer debt are not subject to the CDCA’s regulatory scheme.” The 3rd Circuit held that selling charged-off obligations is not the same as selling the defaulted loan contract. Rather, it is selling unsecured debt, which falls outside of the CDCA’s scope. The court concluded that the CDCA’s prohibitions were inapplicable and could not be the basis for the FDCPA violation.

    Courts Third Circuit Appellate Pennsylvania FDCPA

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