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Special Alert: DOJ settles claims of algorithmic bias
On June 21, the United States Department of Justice announced that it had secured a “groundbreaking” settlement resolving claims brought against a large social media platform for allegedly engaging in discriminatory advertising in violation of the Fair Housing Act. The settlement is one of the first significant federal actions involving claims of algorithmic bias and may indicate the complexity of applying “disparate impact” analysis under the anti-discrimination laws to complex algorithms in this area of increasingly intense regulatory focus.
11th Circuit reversal emphasizes “harmonized” TILA, FDCPA statements
On June 7, the U.S. Court of Appeals for the Eleventh Circuit held that an individual claiming to have acted as a custodian of an account and not in her personal capacity must arbitrate claims brought against a national bank (defendant). The plaintiff and her mother co-owned an investment account that was eventually transferred to the defendant. The plaintiff’s mother notified the bank that the plaintiff would remain co-owner of the account and signed a brokerage account application containing an arbitration clause. Several years later, after the plaintiff noticed that numerous withdrawals were being made from the account by another family member, she obtained legal guardianship of her mother and applied for another brokerage account in order to move the funds to a new account she could access and oversee. The application included a brokerage agreement (which listed her mother as the account owner and was signed by the plaintiff as a joint account owner/custodian and as the primary applicant). The agreement contained a clause requiring arbitration of “[a]ll controversies that may arise between you, us and [the broker] concerning any subject matter, issue or circumstance whatsoever (including, but not limited to, controversies concerning any Account, order or transaction, or the continuation, performance, interpretation or breach of this or any other agreement between you, us and [the broker], whether entered into or arising before, on or after the date this Account is opened).”
The plaintiff eventually sued the bank alleging theft, aiding and abetting theft and fraud, and negligence, among other claims. The plaintiff contended that she was not bound by the arbitration agreement because she signed the agreement “not in her personal capacity, but as her mother’s guardian,” and that there is no arbitrable issue because her personal claims did not arise from the agreement. The district court granted the defendant’s motion to compel arbitration after determining the plaintiff had not alleged that the defendant fraudulently obtained her signature.
On appeal, the 11th Circuit interpreted the word “you” in the arbitration clause as referring to the plaintiff “as the person who applied for the account and signed the application.” In determining that the plaintiff is a signatory to the defendant’s agreement, the appellate court concluded that the plaintiff “has not alleged that her signature was nonvoluntary or otherwise fraudulently obtained[,]” and thus is bound by the arbitration clause. Moreover, the 11th Circuit rejected the plaintiff’s argument that her claims are not covered by the arbitration clause, writing that the “clause explicitly contemplates disputes arising from other issues or agreements ‘whether entered into or arising before, on or after the date this Account is opened.’”
CFTC Commissioner Romero discusses crypto regulation
On June 14, CFTC Commissioner Christy Goldsmith Romero discussed cryptocurrency regulation in an interview. According to sources, Romero rejected suggestions that the agency would be laissez-faire on cryptocurrency regulation, saying that the CFTC is positioned to protect consumers if provided with more authority. Throughout the interview, Romero noted some similarities between the present market and the 2008 market, stating that there is a “pretty sizeable market that’s largely unregulated.” Noting that a “regulatory gap” exists because the CFTC does not have any regulatory authority over the cash spot market, Romero said that Congress should close that gap. She mentioned her support for a bill similar to the Responsible Financial Innovation Act that she expects will give the CFTC more authority and will be introduced by Senators Stabenow and Bozeman. When asked about the possibility of regulation slowing the crypto market, Romero responded that “companies can’t scale up the way they need to without a lot of the financial institutions investments,” and that “regulation is needed.” She further noted that “bringing credibility [and] bring[ing] customer protections [] are going to be really important for scaling up.” She also referred to the case-by-case philosophy of CFTC enforcement actions, explaining that the agency looks at “where the evidence lies" and that part of this approach is "send[ing] a message to deter future violations of the law.” She further expanded on that point by saying that “since the CFTC doesn’t have regulatory authority, it has to rely on victims and whistleblowers," among other things.
Romero also mentioned that a difference between now and 2008 is that there are not a lot of financial institutions invested in cryptocurrency, as many are “waiting for a regulatory framework" and more regulation. As more financial institutions become invested in cryptocurrency, she said that she expects there to be “more interconnections” and more customer protections. She also noted that her biggest concern is that “if regulation fails to keep pace with technology, the most vulnerable people are going to be hurt.” In terms of areas needing more customer protections, Romero identified the need for segregation of accounts, settlement, custody, and reducing cybersecurity risk. She also expressed her support for customer education, calling it “very important.”
FinCEN issues warning on elder financial exploitation
On June 15, FinCEN issued an advisory alerting financial institutions about the increase of elder financial exploitation (EFE). EFE involves the illegal or improper use of an older adult’s funds, among other things, and is often perpetrated either through theft or scams. According to the advisory, financial institutions filed 72,000 suspicious activity reports in 2021 related to EFE—an increase of 10,000 reports from 2020. The advisory provides updated typologies since FinCEN issued its first advisory on the issue in 2011, and highlights behavioral and financial red flags to aid financial institutions with identifying, preventing, and reporting suspected EFE. The announcement also refers to the risk-based approach to compliance under the Bank Secrecy Act, which provides that “[f]inancial institutions should perform additional due diligence where appropriate and remain alert to any suspicious activity that could indicate that their customers are perpetrators, facilitators, or victims of EFE.”
OCC seeks comments on BSA/AML risk assessment
On June 8, the OCC issued a notice in the Federal Register seeking comments concerning its information collection titled, ‘‘Bank Secrecy Act/Money Laundering Risk Assessment,’’ also known as the Money Laundering Risk (MLR) System. According to the notice, the MLR System “enhances the ability of examiners and bank management to identify and evaluate Bank Secrecy Act/Money Laundering and Office of Foreign Asset Control (OFAC) sanctions risks associated with banks’ products, services, customers, and locations.” The notice stated that the agency will collect MLR information for OCC supervised community and trust banks, and explained that the annual Risk Summary Form (RSF), which collects data about different products, services, customers, and geographies (PSCs), will include three significant changes in 2022. The changes in the 2022 RSF are: (i) the addition of six new PSCs; (ii) the addition of three new customer types under the money transmitters category; and (iii) the deletion of four existing PSCs. Comments close on August 8.
CFPB says BNPL needs standardized credit reporting
On June 15, the CFPB published a blog post calling on the Buy Now Pay Later (BNPL) industry to establish standardized codes and formats for furnishing information to credit reporting agencies that take into account the unique characteristics of these short-term, no-interest consumer credit products. Citing to the rapid growth within the BNPL industry, the Bureau stressed the need for standardization in how BNPL debts are reported on consumers’ credit reports. According to the Bureau, the three major credit reporting agencies have different policies for handing positive and negative reports on BNPL transactions in consumers’ core credit files. Moving to a more standardized approach would “facilitate the consistent and accurate furnishing of BNPL payment information” the Bureau said, noting that the agency “believes that when BNPL payments are furnished it is important that lenders furnish both positive and negative data.” Consumers who pay on time and may be seeking to build credit should receive the benefits of making timely payments on their BNPL debts, the Bureau said, explaining that this may also impact lenders seeking to understand how much debt a consumer is carrying.
The Bureau stressed it will continue to monitor the progress of BNPL lenders, credit reporting agencies, and credit scoring companies, and said it plans to “revisit this issue as part of a broader report on the industry stemming from our market monitoring order and responses to a public request for comments.” The Bureau is currently conducting an industry review, which includes a series of orders sent last December to five companies seeking information on the risks and benefits of the BNPL credit model (covered by InfoBytes here).
SEC settles allegations regarding robo-adviser service
On June 13, the SEC announced a settlement with three subsidiaries of a financial services holding company (collectively, “respondents”) regarding their robo-adviser service. The order, which the respondents consented to without admitting or denying the findings, imposes a civil money penalty of $135 million and a total of $52 million in disgorgement. The order also provides that the respondents must cease and desist from committing or causing any future violations of the antifraud provisions in the Investment Advisers Act.
OFAC sanctions members of Russian extremist group
On June 15, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced sanctions pursuant to Executive Order 13224, as amended, against two key supporters of a Russian extremist group. The U.S. State Department previously designated the extremist group as a Specially Designated Global Terrorist (SDGT) organization in 2020 for having provided training for acts of terrorism. Concurrent with OFAC’s action, the State Department is also designating an individual for posing a significant risk of committing acts of terrorism. According to Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson, the extremist group “has sought to raise and move funds using the international financial system with the intent of building a global network of violent groups that foster extremist views and subvert democratic processes.”
As a result of the sanctions, all property and interests in property belonging to the sanctioned individuals in the U.S. are blocked and must be reported to OFAC. Additionally, “any entities that are owned, directly or indirectly, 50 percent or more by them, individually, or with other blocked persons, that are in the United States or in the possession or control of U.S. persons must be blocked and reported to OFAC.” OFAC noted that U.S. persons are prohibited from participating in transactions with the sanctioned persons unless authorized by an OFAC general or specific license or are otherwise exempt.
OFAC further warned that engaging in certain transactions with the designated individuals entails risk of secondary sanctions, and cautioned that it can also “prohibit or impose strict conditions on the opening or maintaining in the United States of a correspondent account or a payable-through account of a foreign financial institution that either knowingly conducted or facilitated any significant transactions on behalf of a SDGT, or that, among other things, knowingly facilitates a significant transaction for [the extremist group] or certain persons designated for their connection to [the extremist group].”
3rd Circuit: Student loan servicer’s calling system is not an autodialer under the TCPA
On June 14, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s ruling in favor of a defendant student loan servicer, holding that it is not enough for telecommunication equipment to be capable of using a random or sequential number generator to dial telephone numbers in order to meet the definition of an automatic telephone dialing system (autodialer). Instead, to constitute a violation of the TCPA, the telecommunication system must actually employ such random- or sequential-number generation when placing the actual call. The plaintiffs filed a putative class action complaint against the defendant alleging it used an autodialer to call class members’ cell phones without their prior express consent. The defendant countered that the TCPA claims fail because its calling system “lacked the capacity to generate random or sequential telephone numbers and then dial those numbers.” As such, it could not be an autodialer. The district court granted summary judgment in favor of the defendant, ruling that the defendant did not use an autodialer to place the calls at issue as the calling system did not have “the necessary present capacity to store or produce telephone numbers using a random or sequential number generator.”
On appeal, the 3rd Circuit disagreed with the district court’s finding that the defendant’s telecommunication system was not an autodialer, noting that the district court used too narrow a definition of the term “equipment” and holding that “an [autodialer] may include several devices that when combined have the capacity to store or produce telephone numbers using a random or sequential number generator and to dial those numbers.” Thus, the 3rd Circuit held that the district court erred in accepting defendant’s argument that the defendant’s telephone system was not an autodialer because the defendant’s SQL Server (which was capable of generating random and sequential numbers) was independent of the defendant’s dialing system.
Nonetheless, the 3rd Circuit affirmed the district court’s ruling on the basis that it did not matter whether the defendant’s calling system could be classified as an autodialer under the TCPA because the phone numbers were drawn from a contact list stored on the defendant’s SQL Server and not randomly generated. As such, the appellate court held that the plaintiffs’ claims fail because the defendant did not actually use random- or sequential-number generation when it placed the specific calls in question.
While agreeing with the decision to affirm, one of the judges argued that the majority focused on the wrong question. “In my view, the fundamental question is: what is an [autodialer] under Section 227(a)(1)? I would hold that a dialing system must actually use a random or sequential number generator to store or produce numbers in order to qualify as an [autodialer] under § 227(a)(1),” the concurring judge wrote. “Because [defendant’s] dialing system did not do so, it is not an [autodialer], and [defendant] is entitled to summary judgment.”
3rd Circuit affirms decision that creditors can collect after issuing 1099-C notice
On June 14, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of a class action alleging a national bank (defendant) violated state laws in New Jersey by attempting to collect on a debt after it had issued a 1099-C notice to the plaintiff to cover the debt that was discharged. According to the opinion, the defendant obtained a judgment against the plaintiff and his wife for an unpaid debt, which the plaintiff did not satisfy. The defendant issued an IRS 1099-C form to the plaintiffs, indicating that $199,427.80 of the $244,248.49 was discharged. After issuing the 1099-C, the defendant notified the plaintiff that such filing had not caused the defendant to release the judgment and that the plaintiff needed to either pay the judgment or reach a settlement. The plaintiff sued, alleging the defendant violated the New Jersey Consumer Fraud Act and other state laws based on defendant’s issuance of a 1099-C IRS Form for cancellation of debt. The district court granted a motion to dismiss filed by the defendant, which the plaintiff appealed.
On appeal, the plaintiff argued the creditors should not send 1099-C notices unless the debt has actually been canceled, and that sending such a notice while still intending to collect on the debt constitutes an “unlawful practice.” The 3rd Circuit disagreed, holding that the text of the governing IRS regulation, 26 C.F.R. § 1.650P-1(a)(1), indicates that “the filing of a Form 1099-C is a reporting requirement that does not depend on whether the debt has been ‘actually discharged,’ or the debtor has actually been released from his obligations on the underlying debt.” The appellate court further noted that “[t]he satisfaction of this reporting requirement, additionally, does not operate to forgive or extinguish a debtor’s obligations to repay the debt at issue.”