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On September 21, the Oregon Department of Consumer and Business Services filed permanent administrative order FSR 3-2022 with the Secretary of State to allow licensed loan originators and employees to work from home. Under the order, Oregon licensed mortgage loan originators “may originate loans from a location other than from a licensed branch office if the location is the licensed mortgage loan originator’s home; the licensed mortgage loan originator is an employee of a mortgage banker or mortgage broker; and the mortgage banker or the mortgage broker complies with OAR 441-860- 0040, as applicable.” Mortgage bankers or brokers must have in place appropriate policies and procedures to supervise licensees working from home, including data security measures to protect consumers’ personal data. Additionally, licensees working from home “are prohibited from engaging in person with consumers for loan origination purposes at the home of the loan originator or employee, unless the home is licensed as a branch.” Licensees may, however, “engage with consumers for loan origination purposes at the home of the loan originator or employee by means of conference telephone or similar communications equipment that allows all persons participating in the visitation to hear each other, provided that participation is controlled and limited to those entitled to attend, and the identity of participants is determinable and reasonably verifiable.” Licensees who work from home are also prohibited from keeping any physical business records at any location other than a licensed location, and must also ensure that all origination records are available at a licensed location.
On September 23, the California governor signed SB 1495. The bill, among other things (i) updates requirements that the assurances required as a condition of license renewal would be that the licensee had, during the preceding 2-year period, informed themselves of those developments; (ii) expands the scope of the crime of perjury, thereby imposing a state-mandated local program; (iii) refers to the Nationwide Mortgage Licensing System and Registry in the provisions of the Real Estate Law as the “Nationwide Multistate Licensing System and Registry”’; and (iv) for real estate broker license applicants, moves the component on state and federal fair housing laws to the real estate practice course instead of the legal aspects of real estate course, and delays the revision to the real estate practice course until 2024. The bill also updates definitions of “SAFE Act,” and “mortgage loan originator.” The bill is effective January 1, 2023.
District Court rules beneficiary bank without actual knowledge of wire transfer misdescription is not liable under Louisiana law
On September 22, the U.S. District Court for the Middle District of Louisiana granted summary judgment to a defendant beneficiary bank in an action concerning a fraudulent wire transfer that was allegedly sent to a hacker instead of the intended recipient. According to the opinion, the originating bank executed a wire transfer on behalf of the commercial plaintiff to a supplier. However, a hacker had inserted false account information into the supplier’s email to the plaintiff, causing the plaintiff’s instruction to the originating bank to indicate the wrong account at the beneficiary bank. As a result, the funds were deposited by the beneficiary bank into an account for which the account number did not match its account name. A large sum of the plaintiff’s money was thereupon withdrawn by a hacker from the account into which the funds had been deposited. The plaintiff sued asserting several claims, including, negligence and gross negligence, violations of the EFTA and the Louisiana’s Uniform Commercial Code (UCC), and aiding fraud. After all the claims except for the UCC claim were dismissed, the defendant moved for summary judgment on the grounds that it did not violate the UCC “because it did not have actual knowledge that the wire transfer at issue misdescribed the beneficiary prior to payment of the wire transfer as contemplated by that statute.”
The court ruled that based on the evidence, no reasonable juror could find that the defendant had actual knowledge of the misdescription at the time it made the transfer, explaining that the defendant did not have actual knowledge that a hacker had accessed the plaintiff’s wire transfer order, provided false instructions, and changed the target account number to its own. The court stated that under Louisiana law, a bank’s liability for completing a wire transfer that misidentifies a beneficiary or account number depends on whether it has “actual knowledge prior to payment that there was a misdescription of a beneficiary”—constructive knowledge is not actionable, the court said. The defendant also did not have actual knowledge of the misdescription prior to the payment, but rather acquired actual knowledge of the misdescription roughly two weeks later when the originating bank alerted the defendant of the alleged fraud. The court further contended that under Louisiana law a beneficiary bank that uses a fully automated payment system for wire transfers is allowed “to act on the basis of the number without regard to the name if the bank does not know that the name and number refer to different persons.”
District Court grants partial summary judgment to debt collector in credit reporting and debt collection action
On September 21, the U.S. District Court for the District of Maryland partially granted a defendant debt collector’s motion for summary judgment in a credit reporting and debt collection action. The plaintiff disputed debt related to two electric bills for two different residences that were eventually combined into one account. After the plaintiff informed the electric company that she would not be paying the bill, the debt was eventually referred for collection to the defendant. The plaintiff disputed the debt, and the defendant conducted an investigation. The plaintiff continued to contend that the defendant was certifying the debt without proof and claimed the defendant’s agents called her a liar and incorrectly asserted that she had not made payments. The defendant argued that it was entitled to summary judgment on the plaintiff’s FCRA and FDCPA claims, contending, among other things, that FCRA 1681e(b) “expressly applies to [credit reporting agencies] and not to furnishers.”
The court first reviewed the plaintiff’s FCRA claims as to whether the defendant conducted a reasonable investigation. The court stated that the plaintiff bore the burden to establish whether the defendant failed to conduct a reasonable investigation, and noted that because she failed to provide certain evidence to the defendant “there is no genuine dispute that the investigation conducted by [defendant] was not unreasonable” or that the defendant reported accurate information to the CRAs about the debt. With respect to some of the FDCPA claims, the court denied the defendant summary judgment on the basis that the plaintiff created a genuine dispute about whether the defendant violated § 1692d (the provision prohibiting a debt collector from engaging in harassment or abuse). According to the opinion, evidence suggests that the defendant’s agents incorrectly informed the plaintiff that she had never made a payment on one of the accounts, called her a liar when she protested this information, and used a “demeaning tone” in their communications. “[A] reasonable jury could conclude that the language would have the natural consequence of abusing a consumer relatively more susceptible to harassment, oppression, or abuse,” the court wrote.
Additionally, the court ruled on Maryland state law claims introduced in the plaintiff’s opposition to summary judgment. The court ruled against her Maryland Consumer Debt Collection Act claim regarding the alleged use of abusive language, writing that the agents were not “grossly abusive” and that the plaintiff failed to generate a genuine dispute on this issue. Nor did the plaintiff show a genuine dispute as to whether the debt was inaccurate or that the defendant knew the debt was invalid. The court also entered summary judgment in favor of the defendant on the plaintiff’s Maryland Consumer Protection Act and Maryland Collection Agency Licensing Act claims.
On September 20, twenty-four state attorneys general sent a letter to the CEOs of three credit card companies opposing the International Organization for Standardization’s (ISO) recommendation to create a merchant category code (MCC) for gun stores to use when processing credit and debit card transactions. According to the AGs, the MCC “will not protect public safety,” and tracking gun purchase information “can only result in its misuse, either unintentional or deliberate.” The AGs also expressed their concern “that financial institutions that place their desired public policy outcomes ahead of the well-being of their investors do so in derogation of their fiduciary obligations.”
The same week, in a separate letter, twelve Republican U.S. Senators sent a letter to the CEOs also requesting the reversal of their decision to comply with the ISO standard to create a separate MCC for the sale of firearms in the U.S. According to the letter, the CEOs “are choosing the side of gun control advocates over the privacy and Second Amendment rights of millions of law abiding Americans,” and consider the decision to comply with the MCC “the first step towards backdoor gun control on law abiding Americans.” The Senators asked the CEOs to respond to a series of ISO-related questions.
As previously covered by InfoBytes, on September 2, the California and New York AGs sent a letter to the CEOs asking for the establishment of a unique MCC for gun store purchases, writing that a specially-designated MCC would help companies flag suspicious activity. The letter followed recent requests sent by several congressional Democrats to the same companies urging them to establish an MCC code for guns.
On September 19, the FTC and the California Department of Financial Protection (DFPI) announced a lawsuit against several companies and owners for allegedly operating an illegal mortgage relief operation. (See also DFPI’s announcement here.) The filing marks the agencies’ first joint action, which alleges the defendants’ conduct violated the California Consumer Financial Protection Law, the FTC Act, the FTC’s Mortgage Assistance Relief Services Rule (the MARS Rule or Regulation O), the Telemarketing Sales Rule, and the Covid-19 Consumer Protection Act. The agencies claimed that the defendants preyed on distressed consumers with false promises of mortgage assistance relief. According to the complaint, the defendants made misleading claims during telemarketing calls to consumers, including those with numbers on the National Do Not Call Registry, as well as through text messages and in online ads. In certain cases, defendants represented they were affiliated with government agencies or were part of a Covid-19 pandemic assistance program. Among other things, defendants falsely claimed they were able to lower consumers’ interest rates or payments, and instructed consumers not to pay their mortgages, leading to late fees and significantly lower credit score. Defendants also allegedly told consumers not to communicate directly with their lenders, which caused consumers to miss default notices and face foreclosure. Additionally, defendants charged consumers illegal up-front fees ranging from $500 to $2,900 a month, and told consumers they were negotiating loan modifications that in most cases never happened.
The U.S. District Court for the Central District of California granted a restraining order temporarily shutting down the defendants’ operations. In freezing the defendants’ assets and ordering them to submit financial statements, the court noted that the agencies established a likelihood of success in showing that the defendants “have falsely, deceptively, and illegally marketed, advertised, and sold mortgage relief assistance services.”
On September 15, the California governor signed AB 1904, which amends Section 1770 of the Civil Code relating to financial institutions. Among other things, the bill prohibits a covered person or a service provider from engaging in unlawful, unfair, deceptive, or abusive acts or practices regarding consumer financial products or services, such as, among other things: (i) misrepresenting the source, sponsorship, approval, or certification; (ii) using deceptive representations of geographic origin; (iii) representing that goods are original or new if they have deteriorated unreasonably or are altered; (iv) advertising goods or services with the intent not to sell them as advertised; and (v) making false or misleading statements of fact concerning reasons for, existence of, or amounts of, price reductions. The law authorizes the California Department of Financial Protection and Innovation to bring a civil action for a violation of the law. The bill would also make unlawful the failure to include certain information, including a prescribed disclosure, in a solicitation by a covered person, or an entity acting on behalf of a covered person, to a consumer for a consumer financial product or service.
On September 14, NYDFS published a notice of proposed rulemaking under New York’s Commercial Financing Disclosure Law (CFDL) related to disclosure requirements for certain providers of commercial financing transactions in the state. As previously covered by InfoBytes, the CFDL was enacted at the end of December 2020, and amended in February to expand coverage and delay the effective date. (See S5470-B, as amended by S898.) Under the CFDL, providers of commercial financing, which include persons and entities who solicit and present specific offers of commercial financing on behalf of a third party, are required to give consumer-style loan disclosures to potential recipients when a specific offering of finance is extended for certain commercial transactions of $2.5 million or less. Last December, NYDFS announced that providers’ compliance obligations under the CFDL will not take effect until the necessary implementing regulations are issued and effective (covered by InfoBytes here).
The newest proposed regulations (see Assessment of Public Comments for the Revised Proposed New Part 600 to 23 NYCRR) introduce several revisions and clarifications following the consideration of comments received on proposed regulations published last October (covered by InfoBytes here). Updates include:
- A new section stating that a “transaction is subject to the CFDL if one of the parties is principally directed or managed from New York, or the provider negotiated the commercial financing from a location in New York.”
- A new section requiring notice be sent to a recipient if a change is made to the servicing of a commercial financing agreement.
- An revised definition of “recipient” to now “include entities subject to common control if all such recipients receive the single offer of commercial financing simultaneously.”
- Clarifying language stating that the “requirements pertaining to the statement of a rate of finance charge or a financing amount, as that term appears in Section 810 of the CFDL, shall be in effect only upon the quotation of a specific commercial financing offer.”
- Provisions allowing providers to perform calculations based upon either a 30-day month/360-day year or a 365-day year, with the acknowledgment that different methods of computation may lead to slightly different results.
- An amendment stating that “a ‘provider is not required to provide the disclosures required by the CFDL when the finance charge of an existing financing is effectively increased due to the incurrence, by the recipient, of avoidable fees and charges.’”
- An acknowledgement of comments asking that 23 NYCRR Part 600 be identical to California’s disclosure requirements (covered by InfoBytes here) “or as consistent as possible.” In response, NYDFS said that while it generally agrees, and has consulted with the California Department of Financial Protection and Innovation (DFPI), the regulations cannot be identical because the CFDL differs from the California Consumer Financial Protection Law and the Department cannot anticipate any future revisions DFPI may make to its proposed regulations.
Comments on the proposed regulations are due October 31.
On September 20, the Massachusetts attorney general announced that a California-based debt collection company and its subsidiaries agreed to pay $12 million, including restitution and debt relief, for allegedly engaging in unfair and deceptive debt buying practices. According to the assurance of discontinuance, the debt collector allegedly violated state law by, among other things, (i) purchasing debts without obtaining all relevant documentation from the seller to ensure the debts were valid and accurate; (ii) exceeding the number of calls permitted when attempting to collect a debt and placing harassing debt collection calls; (iii) failing to prevent its collection law firm from using falsified or otherwise incorrect information about the existence of lawsuits and judgments; and (iv) attempting to collect debts that were beyond the statute of limitations or time-barred. The debt collector also allegedly “represented that certain vulnerable consumers were required to make good faith payments or enter an agreement for judgment with payment on a debt when the consumer had only exempt sources of income like social security disability benefits and pensions,” the AG said in the announcement. While the debt collector expressly denied the allegations, it agreed to pay $4.5 million and will reform its debt collection practices and cease to collect on more than 4,200 debts placed with the collection law firm for which a judgment could not be verified. These debts total approximately $7.5 million.
On September 15, the U.S. Court of Appeals for the Second Circuit held that New York’s interest-on-escrow law impermissibly interferes with the incidentals of national bank lending and is preempted by the National Bank Act (NBA). Plaintiffs in two putative class actions obtained loans from a national bank, one before and the other after certain Dodd-Frank provisions took effect. The loan agreements—governed by New York law—required plaintiffs to deposit money into escrow accounts. After the bank failed to pay interest on the escrowed amounts, plaintiffs sued for breach of contract, alleging, among other things, that under New York General Obligations Law (GOL) § 5-601 (which sets a minimum 2 percent interest rate on mortgage escrow accounts) they were entitled to interest. The bank moved to dismiss both actions, contending that GOL § 5-601 did not apply to federally chartered banks because it is preempted by the NBA. The district court disagreed and denied the bank’s motion, ruling first that RESPA (which regulates the amount of money in an escrow account but not the accruing interest rate) “shares a ‘unity of purpose’ with GOL § 5-601.” This is relevant, the district court said, “because Congress ‘intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.’” Second, the district court reasoned that even though TILA § 1639d does not specifically govern the loans at issue, it is significant because it “evinces a clear congressional purpose to subject all mortgage lenders to state escrow interest laws.” Finally, with respect to the NBA, the district court determined that “the ‘degree of interference’ of GOL § 5-601 was ‘minimal’ and was not a ‘practical abrogation of the banking power at issue,’” and concluded that Dodd-Frank’s amendment to TILA substantiated a policy judgment showing “there is little incompatibility between requiring mortgage lenders to maintain escrow accounts and requiring them to pay a reasonable rate of interest on sums thereby received.” As such, GOL § 5-601 was not preempted by the NBA, the district court said.
On appeal, the 2nd Circuit concluded that the district court erred in its preemption analysis. According to the appellate court, the important question “is not how much a state law impacts a national bank, but rather whether it purports to ‘control’ the exercise of its powers.” In reversing the ruling and holding that that GOL § 5-601 was preempted by the NBA, the appellate court wrote that the “minimum-interest requirement would exert control over a banking power granted by the federal government, so it would impermissibly interfere with national banks’ exercise of that power.” Notably, the 2nd Circuit’s decision differs from the 9th Circuit’s 2018 holding in Lusnak v. Bank of America, which addressed a California mortgage escrow interest law analogous to New York’s and held that a national bank must comply with the California law requiring mortgage lenders to pay interest on mortgage escrow accounts (covered by InfoBytes here). Among other things, the 2nd Circuit determined that both the district court and the 9th Circuit improperly “concluded that the TILA amendments somehow reflected Congress’s judgment that all escrow accounts, before and after Dodd-Frank, must be subject to such state laws.”
In a concurring opinion, one of the judges stressed that while the panel concluded that the specific state law at issue is preempted, the opinion left “ample room for state regulation of national banks.” The judge noted that the opinion relies on a narrow standard of preempting only those “state laws that directly conflict with enumerated or incidental national bank powers conferred by Congress,” and stressed that the appellate court declined to reach a determination as to whether Congress subjected national banks to state escrow interest laws in cases (unlike the plaintiffs’ actions) where Dodd-Frank’s TILA amendments would apply.
- Benjamin W. Hutten to discuss “Ongoing CDD: Operational considerations” at NAFCU’s Regulatory Compliance & BSA Seminar
- James C. Chou to discuss ransomware at NAFCU’s Regulatory Compliance & BSA seminar
- Jedd R. Bellman to provide an “Attorney exemption/medical debt update” at the North American Collection Agency Regulatory Association annual conference
- Kathryn L. Ryan to discuss “What should crypto regulation look like: Legislation, regulation and consumer issues” at WCL's First Annual Virtual Currency Law Institute
- Elizabeth E. McGinn to discuss “How to mitigate and manage third-party risks: Leveraging tools and best practices” at The Knowledge Group’s webcast
- Elizabeth E. McGinn, Benjamin W. Hutten, and James C. Chou to discuss “The evolving regulatory landscape: Third-party and cyber risk management” at the 2022 mWISE Conference
- Sherry-Maria Safchuk to discuss “For your eyes only: Privacy updates for 2022-2023” at CCFL’s Annual Consumer Financial Services Conference
- James T. Parkinson to present a “Global anti-corruption update” at IBA’s annual conference