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States sue installment lender for hidden add-on products
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.
California requires consumer credit contract notices to be provided in multiple languages
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.
District Court rules use of “obligation” in collection letter carries “litigious connotations”
On August 11, the U.S. District Court for the District of New Jersey denied a defendant debt collector’s motion for judgment on the pleadings, ruling that using the word “obligation” in a letter suggested that a time-barred debt was legally enforceable. The plaintiff received a letter in 2022 seeking to recover unpaid debt that had been in default since August 2017 (the statute of limitations for collecting the debt had expired in August 2021). The letter included language stating: “We recognize that a possible hardship or pitfall may have prevented you from satisfying your obligation. We are presenting three options to resolve your balance. We are not obligated to renew this offer.” The letter also stated that it was an attempt to collect a debt and that “any information obtained will be used for that purpose.” The plaintiff sued for violations of Sections 1692e(2)(A), 1692e(5), and 1692e(10) of the FDCPA, claiming the defendant’s letter offered payment options for time-barred debt. The defendant moved for judgment on the pleadings, arguing that that the claims fail because the letter did not include language that could lead the plaintiff to believe that the time-barred debt could be legally enforced.
The court reviewed whether the phrase “satisfying your obligation” would confuse the least sophisticated debtor, and eventually determined that the word “obligation” carried “litigious connotations” and therefore was “closer to ‘settlement’ and other impermissible language than it is to permissible language such as ‘satisfy.’” According to the court, “[i]t is more than plausible, and even likely, that the least sophisticated debtor would understand that their ‘obligation’ is a duty to pay that a creditor could enforce in court through the commencement of litigation.” The court also explained that Congress intended “obligation” as used in the FDCPA to mean “a legal duty arising from mutual promises to pay on the one hand and to perform services or provide goods on the other,” including “one susceptible to being ‘reduced to judgement.’” As such, the court concluded that when viewing the letter in its entirety, it appeared to be “carefully crafted to push the envelope of acceptable language under the FDCPA while maximizing the chance of collecting from debtors.”
FDIC warns financial institutions about NSF fees
On August 18, the FDIC issued FIL-40-2022 along with supervisory guidance to warn supervised financial institutions that charging customers multiple non-sufficient funds (NSF) fees on re-presented unpaid transactions may increase regulatory scrutiny and litigation risk. According to the FDIC, some institutions’ disclosures did not fully or clearly describe their re-presentment practices and failed to explain that the same unpaid transaction may result in multiple NSF fees if presented more than once. Failing to disclose “material information to customers about re-presentment and fee practices has the potential to mislead reasonable customers,” the agency said, noting that the material omission of this information is considered to be deceptive pursuant to Section 5 of the FTC Act. Additionally, “there are situations that may also present risk of unfairness if the customer is unable to avoid fees related to re-presented transactions,” the FDIC said.
The supervisory guidance also discussed the agency’s approach for addressing violations of law, noting that it will focus on identifying re-presentment-related issues to ensure correction of deficiencies and remediation to harmed customers. The agency stated that examiners “will generally not cite UDAP violations that have been self-identified and fully corrected prior to the start of a consumer compliance examination,” and noted that it “will consider an institution’s record keeping practices and any challenges an institution may have with retrieving, reviewing, and analyzing re-presentment data, on a case-by-case basis, when evaluating the time period institutions utilized for customer remediation.” However, the FDIC warned that “[f]ailing to provide restitution for harmed customers when data on re-presentments is reasonably available will not be considered full corrective action.” Financial institutions are encouraged to review practices and disclosures related to the charging of NSF fees for re-presented transactions and should consider FDIC risk-mitigation practices to reduce the risk of customer harm and potential violations.
OCC releases enforcement actions data
On August 18, the OCC released a list of recent enforcement actions taken against national banks, federal savings associations, and individuals currently and formerly affiliated with such entities. Included in the release is a formal agreement between the OCC and a New York-based bank from July 13 in connection with alleged unsafe or unsound practices relating to information technology security and controls and information technology risk governance. The agreement requires the bank to: (i) establish a compliance committee to monitor the bank’s progress in complying with the agreement’s provisions; (ii) report such progress to the bank’s board on a quarterly basis; and (iii) develop, implement, and adhere to a written risk-based IT assurance and testing program.
FCC signs robocall enforcement MOU with Canada
Recently, the FCC announced that it entered into a memorandum of understanding (MOU) with the Canadian Radio-television and Telecommunications Commission (CRTC) to develop a global and coordinated approach for addressing unlawful automated telephone calls. According to the MOU, the FCC and CRTC understand that it is in their common public interest to, among other things: (i) “cooperate with respect to the enforcement against Covered Violations, including sharing complaints and other relevant information and providing investigative assistance”; (ii) “facilitate research and education related to unlawful robocalls and caller ID spoofing”; (iii) “facilitate mutual exchange of knowledge and expertise through training programs and staff exchanges”: (iv) encourage awareness of economic and legal conditions and theories related to the enforcement of applicable laws as identified in Annex 1 to the MOU; and (v) update each other regarding developments related to the MOU in their respective countries in a timely manner. In a related statement, FCC acting Chairwoman Rosenworcel noted that robocall scamming is an “international problem,” and that it is “critical that we work closely with partners like our colleagues in Canada who share our commitment to fighting robocall scams and unmasking the bad actors behind them.”
CFPB updates list of institutions under its authority
Recently, the CFPB updated its list of depository institutions (DIs) and depository affiliates of DIs under its supervisory authority. The CFPB has supervisory authority over banks, thrifts, and credit unions with assets over $10 billion, as well as their affiliates. The list is based on total assets as of March 31.
Special Alert: New Fed guidelines clarify, but do not transform, master account and payment services access
The Federal Reserve Board recently issued final guidelines for the Reserve Banks to use in reviewing requests from a range of financial services providers for access to Federal Reserve master accounts and payment services. Master account and Federal Reserve services allow institutions to transfer money to other master accountholders directly and hold funds in the Federal Reserve System, while others must go through third parties — which can add cost, delay, and further complication to transactions.
The final guidelines are substantially similar to those proposed in 2021 and a supplement issued earlier this year. They make the application process more transparent by describing the risk factors that a Reserve Bank should take into consideration and by applying a three-tier approach regarding the intensity of a Reserve Bank’s review. However, the guidelines do not broaden the categories of entities that are eligible to apply in the first place, do not establish application processing timelines, and do not provide a clear path forward for entities that lack federal bank supervision, including novel charter types.
Maryland Court of Appeals says law firm collecting HOA debt is not engaged in the business of making loans
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.”
DFPI enters into settlement with unlicensed point-of-sale lender
On August 3, the California Department of Financial Protection and Innovation (DFPI) announced a settlement with a Florida-based point-of-sale lender for allegedly engaging in the business of finance lending in California without obtaining a license. According to the settlement, after conducting an inquiry, DFPI determined that the company violated California Financial Code section 22100(a) “by making loans through the operation of buy now, pay later’ point-of-sale products” without obtaining a proper license. The company voluntarily agreed to the consent order, and, among other things: (i) agreed to desist and refrain from engaging in the business of a finance lender or broker in California unless/until it obtains a California Financing Law (CFL) license authorizing the company to conduct business as a finance lender or broker; (ii) must pay an administrative penalty of $2,500; and (iii) refund fees totaling $13,065. The company also agreed that it will only make loans, deferred payment products, and extensions of credit to California residents under the authority of a CFL license and in compliance with the statute.