InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
District Court dismisses EFTA claims concerning fraudulent transactions
On August 18, the U.S. District Court for the Eastern District of Michigan dismissed a class action alleging violations of the EFTA brought against a national bank on behalf of consumers who were issued prepaid debit cards providing Covid-19 pandemic unemployment insurance payments. Two of the plaintiffs alleged they experienced fraudulent transactions on their accounts. According to the plaintiffs, the bank froze one of the defendant’s accounts but failed to credit his account for the allegedly fraudulent transaction. In response to a second plaintiff’s fraud report, the bank allegedly froze her account and informed her that she had “to contact the unemployment agency because an unauthorized person had ‘gained access to the card and was using the unemployment benefits.’” The third plaintiff alleged that the bank froze her account based on suspected fraud and was informed that she would have to contact someone else to unfreeze the account. Plaintiffs sued for violations of the EFTA and raised several breach of contract and negligence claims.
The court dismissed the EFTA claim on several grounds, including that (i) the second plaintiff’s claim is time-barred; (ii) the other two plaintiffs’ claims stem from the bank’s alleged errors related to unauthorized transactions, yet neither requested information or clarification about an electronic funds transfer; (iii) one of the plaintiffs never actually experienced fraud (the court emphasized that the EFTA does not regulate account freezes; it regulates electronic funds transfers); and (iv) one of the plaintiff’s failed to plausibly plead that he complied with the EFTA’s notification requirements that must be met before a defendant conducts an investigation. The court also determined that the breach of contract claims failed, citing, among other things, that if an account did not have an unauthorized transaction a defendant cannot breach its reimbursement duties. Nor did the other two plaintiffs provide proper notice to trigger the bank’s duty to investigate, the court wrote, adding that the negligence claims also failed because the plaintiffs failed to respond to a request asking them to show how the bank’s actions caused them injury.
District Court grants defendant’s motion to compel arbitration in electronic signature case
On August 22, the U.S. District Court for the District of Nevada granted a defendant credit union’s motion to compel arbitration regarding a consumer’s signature on bank-owned equipment. According to the order, the plaintiff alleged that the defendant violated 42 U.S.C. § 407 by transferring Social Security benefits from his savings account to his checking account to pay a debt. In March, a magistrate judge determined “that given ‘the liberal construction courts are to afford pro se complaints, it appears Plaintiff states a claim against [the defendant] at least for purposes of surviving screening’ and ordered that the case would proceed against [the defendant]” who filed the motion to compel arbitration. The order further noted that in support of their assertion, defendant provided documentation evidencing the plaintiff’s agreement to arbitrate all claims regarding his account. The defendant submitted an affidavit, a copy of the signature card that the plaintiff executed when he opened his account with the credit union, all subsequent signature cards executed by the plaintiff, and a copy of the “Important Account Information for Our Members,” among other things. According to the affidavit, the signature card the plaintiff executed when he opened his account included the “agreement to the terms and conditions outlined in the Important Account Information for Our Members,” and further indicated that the “[w]ritten notice we give you is effective when it is deposited in the United States Mail with proper postage and addressed to your mailing address we have on file.” The order noted that the “Notice of Change to the Terms and Conditions of Your Account was provided,” and “[t]hat document included a mandatory arbitration provision and the ability to opt out of arbitration.” The defendant argued “that by not exercising his right to opt-out, the agreement necessitates the action be moved into arbitration.” The plaintiff asserted that his signature was collected on an electronic device and because the signature was collected electronically, it was incorporated by fraud. The plaintiff also contended that he did not explicitly sign a document setting forth an arbitration clause because he only electronically input his signature to obtain a debit card.
According to the district court, the plaintiff “does not assert that he did not sign the signature card when he initially opened his account and received the debit card. He asserts that he never agreed to arbitrate his claims because he never received or signed an arbitration agreement.” The district court granted the defendant’s motion to compel arbitration determining that a valid arbitration agreement existed between the parties and that the agreement encompasses the plaintiff’s claims. Among other things, the district court explained that “a valid arbitration agreement exists,” because the “signature card signed by [the plaintiff] certifies ‘[a]greement to the terms and conditions outlined in the Important Account Information For Our Members disclosure and any other material pertaining to the account.’” The district court further wrote that such “statement plainly refers to an external document, and plainly states that the [plaintiff] agreed to be bound by the terms contained therein. Moreover, [the plaintiff’s] assertion that he did not actually receive the Important Account Information For Our Members disclosure does not defeat the signature card’s statement that [the plaintiff] bound himself to the terms contained therein.” Additionally, by signing the signature card, the plaintiff agreed to arbitrate every claim arising from or relating in any way to his account.
DOE discharges an additional $1.5 billion in student loans
On August 30, the Department of Education announced $1.5 billion in debt relief for 79,000 borrowers who enrolled in a college accused of “routinely [misleading] prospective students by grossly misrepresenting that its credentials would benefit their career prospects and earning potential.” According to a Department investigation aided by significant evidence from the Colorado and Illinois attorneys general, the college engaged in widespread misrepresentations “in order to profit off student debt that burdened borrowers long after [the college] closed.” Borrowers’ student loans will be discharged regardless of whether an individual has applied for a discharge under the borrower defense to repayment program, and without requiring any additional action on behalf of the borrowers. The announcement builds on the previous approval of $130 million in borrower defense discharges for approximately 4,000 borrowers who had attended the college.
The Department also announced that it plans to engage in future rulemaking “to hold career programs accountable for leaving their graduates with mountains of unaffordable debt and poor job prospects,” and said it is planning “new actions to hold accountable institutions that have contributed to the student debt crisis including publishing lists of the worst actors.” With this recent announcement, the Department of Education “has now approved $14.5 billion in discharges for nearly 1.1 million borrowers whose colleges took advantage of them.”
SEC files charges in undisclosed transactions case
On August 30, the SEC filed a complaint against two North Carolina-based executives, and their Malta-based registered investment adviser company (collectively, “defendants”) in the U.S. District Court for the Middle District of North Carolina for allegedly engaging in a fraudulent scheme involving undisclosed transactions. According to the SEC, the defendants “repeatedly recommended and entered into transactions that were not disclosed to and were not in the best interests of their clients.” Specifically, one of the executives allegedly “acquired 100% ownership of four North Carolina insurance companies [] and a reinsurance trust, which gave him control over hundreds of millions of dollars in premiums from their policyholders.” The complaint further stated that “[a]lthough the funds were supposed to be used to pay the policyholders’ insurance claims, [the executive] treated the funds as his own assets and used the money for any purpose he decided was in his best interest.” The SEC found that the executive allegedly conducted the schemes through “complex” investment structures and affiliate companies and allegedly used the proceeds to pay himself or to divert the funds to his other businesses. The complaint also noted that the defendants “breached their fiduciary duties to their advisory clients by engaging in numerous undisclosed related-party transactions and by misappropriating over $57 million in client funds” and over $21.4 million in advisory fees generated in connection with these schemes. The SEC’s complaint alleged violations of anti-fraud provisions of the Investment Advisers Act of 1940. The complaint seeks a permanent injunction against the defendants, disgorgement of ill-gotten gains, penalties, bars, and other equitable relief.
District Court preliminarily approves $2.25 million settlement resolving credit card upgrade claims
On August 29, the U.S. District Court for the District of New Jersey preliminarily approved a class action settlement in which a national bank agreed to pay $2.25 million to resolve misleading credit card upgrade claims made to secured credit card holders. Plaintiffs alleged in their motion for preliminary approval that they each signed an agreement with the bank that said if they used and maintained a secured credit card account for seven consecutive billing months without defaulting they would be eligible to automatically “graduate” to an unsecured credit card. Transitioning to an unsecured credit card allows customers to regain control of the collateral deposits and receive a prorated refund of the annual fee they paid while they had secured cards, plaintiffs asserted. Plaintiffs claimed that while the bank’s “form contract and promotional materials promised a meaningful review of secured card accounts after seven months in good standing that review, in fact, did not occur in a fashion consistent with the parties’ contract.” The bank denied the claims. According to court documents, this past January the bank amended the graduation provision at issue in its agreement for secured credit cards to “more adequately disclose how a cardholder becomes eligible for an unsecured credit card.” The court deemed the proposed settlement to be “fair, adequate and reasonable to the settlement class,” and granted class certification. If granted final approval, class members would be awarded a portion of the annual fee paid on their secured credit card.
FINRA reminds firms of their obligation to supervise digital signatures
Recently, FINRA issued Regulatory Notice 22-18 reminding member firms of their obligation to supervise for digital signature forgery and falsification. FINRA reported it has received a rising number of reports claiming registered representatives and associated persons have been forging or falsifying customer signatures, as well as those of colleagues or supervisors in some instances. Issues have been flagged in “account opening documents and updates, account activity letters, discretionary trading authorizations, wire instructions and internal firm documents related to the review of customer transactions.” FINRA advised member firms to review outlined methods and scenarios for identifying digital signature forgery or falsification in order to mitigate risk and meet regulatory obligations.
FTC, states sue rental listing platform for fraud
On August 30, the FTC announced a lawsuit, together with the attorneys general from New York, California, Colorado, Florida, Illinois, and Massachusetts, against a rental listing platform and its owners for allegedly charging consumers for false endorsements and fake listings. The complaint, which alleges violations of the FTC Act and various state laws, claims that the defendants used both fake reviews and fake listings to lure consumers to its platform and pay for access to so-called “verified and authentic living arrangement listings.” In particular, one of the individual defendants is alleged to have deceptively promoted the platform “by providing tens of thousands of fake four- and five-star reviews” to app stores. That individual defendant stipulated to the entry of a proposed stipulated final order on the same day, which requires the following: (i) cooperation with the FTC’s ongoing action; (ii) informing the app stores that he was paid to post reviews and identify the fake reviews and when they were posted; (iii) a permanent ban from selling or misrepresenting consumer reviews or endorsements; and (iv) payment of a total of $100,000 to the state AGs.
The action is part of the FTC’s on-going efforts to address fake and deceptive reviews, which include a $4.2 million action taken against an online fashion retailer accused of suppressing negative reviews, and warnings issued in 2021 to more than 700 companies announcing that they may face fines over misleading online endorsements (covered by InfoBytes here and here).
FFIEC releases new HMDA tool
On August 30, the CFPB unveiled the Federal Financial Institutions Examinations Council’s Quarterly Graphs tool, which permits users to view HMDA mortgage loan data and, for the first time, follow mortgage market trends throughout the collection year. According to the CFPB, the new tool integrates currently available quarterly data submitted by financial institutions who report a combined total of at least 60,000 applications and covered loans (excluding purchased covered loans) for the preceding calendar year. The tool provides graphs for an extensive lists of metrics, including loan-to-value ratios, debt-to-income ratios, borrower credit scores, denial rates, interest rates, and total loan costs. The tool also allows users to download graphs in a number of formats, including CSV, XLS, PDF, or custom web link. The tool currently contains data for 2019, 2020, 2021 and the first quarter of 2022, with future quarter data being added as it is available.
FTC sues data broker for unfair sale of sensitive data
On August 29, the FTC announced an action taken against a data broker accused of allegedly selling precise geolocation data from hundreds of millions of mobile devices that can be used to trace individuals’ movements to and from sensitive locations. According to the complaint, the defendant purchases location information from other data brokers and packages it into customized data feeds that match unique mobile device advertising identification numbers with timestamped latitude and longitude locations. These data feeds allow purchasers to identify and track specific mobile device users with no restrictions on usage and puts consumers at significant risk, the FTC claimed, noting that by failing to adequately protect its data from public exposure, consumers may be identified and face substantial injury. Moreover, people are often unaware that their location data is being purchased and shared by the defendant and have no control over its sale or use, the FTC said in its announcement. The complaint alleges the defendant’s unfair sale of sensitive data violates the FTC Act, and seeks a permanent injunction and any additional relief deemed just and proper.
3rd Circuit vacates dismissal of FCRA lawsuit regarding sovereign immunity
On August 24, the U.S. Court of Appeals for the Third Circuit vacated the dismissal of an FCRA lawsuit, holding that the federal government does not have sovereign immunity under the statute and can be held liable for reporting requirement violations. The plaintiff sued the Department of Agriculture (USDA) and a student loan servicer for allegedly reporting two loans as past due even though he claimed both were closed with a $0 balance. The plaintiff notified the relevant consumer reporting agency who in turn notified the USDA and the servicer. When neither entity took action to investigate or correct the disputed information, the plaintiff sued all three parties for damages under Section 1681n and 1681o of the FCRA. The USDA moved to dismiss for lack of subject matter jurisdiction based on sovereign immunity claims, which the district court granted on the grounds that the United States and its agencies are not subject to liability under the FCRA—a decision in line with opinions issued by the 4th and 9th Circuits.
On appeal, the 3rd Circuit disagreed, instead siding with opinions issued by the D.C. and 7th Circuits that reached the opposite conclusion. According to the 3rd Circuit, the federal government and its agencies enjoy sovereign immunity from civil suits unless Congress unambiguously waives it within a statute. The FCRA provides that any “person” who either negligently or willfully violates the statute is liable to the consumer for civil damages, the appellate court wrote, noting that the term “person” is defined to include any “government or governmental subdivision or agency.” The appellate court stressed that Congress need not express its intent in any particular way, and that courts need only look at the statutory text to discern Congress’ intent. Where Congress wanted to use a narrower definition of “person” in the FCRA, it did so, the appellate court said, pointing to where the FCRA specifically excludes the federal government from the statutory obligations for persons who make adverse employment decisions based on credit reports. “We presume, therefore, that Congress’s failure to do so in §§ 1681n and 1681o was deliberate and intended to convey the full statutory definition,” the 3rd Circuit wrote, finding that Congress unambiguously waived the government’s sovereign immunity in enacting FCRA.