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Financial Services Law Insights and Observations

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  • District Court grants defendant’s motion to compel arbitration in electronic signature case

    Courts

    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.

    Courts Electronic Signatures Arbitration Debit Cards Credit Union Consumer Finance

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  • CFPB receives rulemaking petition seeking validation of credit score models for credit unions

    Federal Issues

    Recently, the CFPB received a rulemaking petition seeking validation of credit score models for credit unions. The petition, which seeks “a rule governing the requirement to periodically validate credit scores for all lending or financing entities,” argues that validation is necessary to measure the effectiveness of credit scores being used to measure credit risk. Claiming that general letters of compliance from credit reporting agencies are inadequate, the petitioner explains that these letters do not “address the misapplication of credit scores by banks, credit card issuers, auto financing groups or individual credit unions that are the primary cause of errors and financial exclusion.” According to the petitioner, “[o]nly a statistically valid empirically derived study based on funded and declined loans will resolve many of the issues in consumer lending today.” The petitioner points out that validation reports “provide the information necessary to measure the efficiency of the credit score being used to measure credit risk,” and that “[d]emographic comparisons of funded and declined applicants can also be used to identify if the underwriting guidelines used in the application of credit scores result in acceptable percentages of financial inclusion for minorities or protected consumer groups.”

    Federal Issues CFPB Credit Scores Credit Union Consumer Finance Credit Reporting Agency

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  • District Court partially affirms summary judgment in interest case

    Courts

    On April 28, the U.S. District Court for the Southern District of New York granted in part and denied in part parties’ motions for summary judgment in a suit challenging the retroactive application of a New York statute reducing the state’s statutory interest rate on money judgments arising out of consumer debt. In doing so, the court considered S5724A, the Fair Consumer Judgment Interest Act. As previously covered by InfoBytes, the New York governor signed S5724A in December 2021, which amended the civil practice law and rules relating to the rate of interest applicable to money judgments arising out of consumer debt. Specifically, the bill provides that the interest rate that can be charged on unpaid money judgments is 2 percent and applies to judgments involving consumer debt, which is defined as “any obligation or alleged obligation of any natural person to pay money arising out of a transaction in which the money, property, insurance or services which are the subject of the transaction are primarily for personal, family or household purposes […], including, but not limited to, a consumer credit transaction, as defined in [section 105(f) of the civil practice law and rules].” The bill became effective April 30. According to the suit, a group of credit unions (plaintiffs) filed a federal class action lawsuit seeking to enjoin the enforcement or implementation of S5724A. The plaintiffs sought to invalidate the retroactive portion of S.5724A, arguing that it is an unconstitutional taking in violation of the Fifth Amendment and violative of their substantive due process rights guaranteed under the Fourteenth Amendment. The plaintiffs claimed that they are collectively owed about $3.8 million of outstanding consumer judgments, which includes approximately $1 million in interest, and sought a preliminary injunction enjoining the effective date of S572A. The plaintiffs brought suit against the Chief Administrative Judge of the New York State Courts, and the sheriffs of three New York counties in their official capacity on the basis that those parties “will be involved in enforcement of the Amendment.” The district court issued the preliminary injunction with respect to the sheriffs, relying on the credit unions’ arguments that retroactive application will “eradicate millions of dollars from the balance of judgments lawfully due and owing to judgment creditors.” The district court noted that “[r]egulatory takings … involve government regulation of private property [that is] . . . so onerous that its effect is tantamount to a direct appropriation or ouster. Thus, ‘while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.’”

    Courts New York Credit Union Interest State Issues Interest Rate Class Action

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  • Chopra offers warning on core service providers

    Federal Issues

    On April 7, CFPB Director Rohit Chopra expressed concerns that “contracts written by the major core services providers are making it harder for local financial institutions to switch providers or use add-ons from outside technology providers.” In remarks to the CFPB’s Community Bank and Credit Union Advisory Councils, Chopra discussed downstream effects created by the heavily consolidated core services provider market on relationship banking and consumers. Chopra explained that these contracts “come with costly and unnecessary extra non-core banking services, longer contract periods, and stiff penalties and fees for ending contracts early or making other contract changes,” discourage smaller financial institutions from quickly adapting their own products and services to fit within the ever-evolving banking tech landscape, and overall make it more difficult for smaller financial institutions to compete with larger companies. Chopra announced that Bureau staff will work with core service providers and other federal agencies to examine the concentrated core platform marketplace’s impact on consumers and banks, and respond to questions related to banks’ collective bargaining on core services’ contracts. The Bureau also plans to collaborate with other agencies to examine third-party service providers and the potential referral of complaints.

    Federal Issues CFPB Community Banks Credit Union Third-Party Service Providers Consumer Finance

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  • Colorado reaches agreements with credit unions over unused GAP fees violations

    State Issues

    Recently, the Colorado attorney general announced three separate settlements (see here, here, and here) with three credit unions resolving allegations that they neglected to refund unearned Guaranteed Automobile Protection (GAP) fees to Colorado consumers. The administrator of the Uniform Consumer Credit Code (UCCC), who is part of the Consumer Protection Division of the Department of Law and who led this investigation, concluded that the credit unions engaged in unfair and deceptive trade practices under the Colorado Consumer Protection Act by failing to provide GAP refunds automatically without waiting for a request from the consumer. Under the terms of the assurances of discontinuance, the credit unions have agreed to comply with all legal obligations and issue refunds to affected borrowers, and: (i) must comply with the UCCC rule’s GAP refund requirements; (ii) are subjected to an audit to verify the accuracy of their self-audits; and (iii) must send a confirmation letter pre-approved by the administrator to each consumer to whom a GAP refund was paid because of the self-audits. The AG noted that the “settlements are part of our office’s efforts to ensure lending institutions follow Colorado law and do not cheat hardworking consumers out of money they are entitled to under their lending and coverage agreements.”

    State Issues Colorado GAP Fees State Attorney General Enforcement Settlement Credit Union Consumer Finance

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  • NCUA extends Covid-19 regulatory relief

    Federal Issues

    On December 21, the NCUA unanimously approved an extension to the effective date of a temporary final rule, which granted regulatory relief to federally insured credit unions during the Covid-19 pandemic. In 2020, the NCUA issued the final rule to temporarily raise “the maximum aggregate amount of loan participations that a [federally insured credit union (FICU)] may purchase from a single originating lender to the greater of $5,000,000 or 200 percent of the FICU’s net worth.” The final rule also temporarily suspended certain “limitations on the eligible obligations that a federal credit union [] may purchase and hold.” Required timeframes related to the occupancy or disposition of certain properties not in use for federal credit union business or that were abandoned were also suspended. The temporary final rule’s modifications will remain in effect through December 31, 2022.

    Federal Issues NCUA Credit Union Covid-19 Agency Rule-Making & Guidance

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  • NCUA approves expansion of CUSO lending rights

    Agency Rule-Making & Guidance

    On October 21, the National Credit Union Administration Board approved a final rule by a 2-1 vote to expand the range of permissible activities and services that credit union service organizations (CUSOs) may engage in. Under the final rule, CUSOs will be allowed to originate, purchase, sell, and hold any type of loan a federal credit union is permitted to, including auto and payday loans. The final rule also provides the Board “additional flexibility to approve permissible CUSO activities and services outside of notice and comment rulemaking.” NCUA Vice Chairman Kyle Hauptman stated the rule “gives credit unions the tools to compete more effectively in the digital marketplace.” However, NCUA Chairman Todd Harper opposed the final rule, warning that because NCUA “lacks the third-party vendor authorities that the other federal banking agencies and several state regulators have, the NCUA has no power to supervise CUSOs for compliance with federal consumer financial protection laws and regulations and compliance with prudential standards like concentration limits, maximum loan-to-value ratios, and minimum capital levels.” The final rule takes effect 30 days after publication in the Federal Register.

    Agency Rule-Making & Guidance NCUA Credit Union CUSO Consumer Lending

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  • New Hampshire clarifies licensing requirements

    On May 27, the New Hampshire governor signed HB 312, which clarifies certain deadlines and provisions in consumer credit applications and licensing requirements for mortgage loan originators. Among other things, HB 312 states that company licensees or persons must “deliver to the commissioner a list of all New Hampshire consumers who have contracted with the licensee or with whom the licensee is otherwise engaged in business regulated under this chapter, and other requested lists summarizing the business of the licensee, within 7 days of receipt of the request” or be subject to a $50 fine per day for each day. The bill further stipulates that a “license shall not be issued and effective unless the applicant or licensee is licensed or registered in the state where its principal office is located.” This provision modifies the previous requirements, in that it is now only applicable to nondepository mortgage bankers, brokers, and servicers, but no longer applies to mortgage loan originators. Additional provisions address, among other things, “examinations of family trust companies, delegation by credit union boards to committees, qualifications of the banking commissioner, and authorizing depository banks to elect benefit corporation status.” The act takes effect 60 days after its passage.

    Licensing State Legislation New Hampshire Mortgages Credit Union

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  • Court approves $9.7 million overdraft fee settlement

    Courts

    On February 25, the U.S. District Court for the Northern District of New York approved a roughly $9.7 million class action settlement resolving claims that a New York credit union improperly assessed banking fees, including overdraft fees, when members had sufficient funds in their checking accounts to pay for the transactions presented for payment. The plaintiffs also alleged, among other things, that the credit union (i) improperly charged fees on a variety of transactions for members who did not opt-in to the credit union’s protection programs; (ii) assessed fees in instances where there was no contractual basis to assess the fees; (iii) transferred money from members’ savings accounts into checking accounts to avoid negative balances and resulting fees, but still imposed the fee; and (iv) violated the terms of its contracts and various laws by imposing non-sufficient funds fees more than once on the same transaction. The settlement requires the credit union to pay approximately $5.85 million into a settlement fund, plus nearly $2.53 million in attorneys’ fees, $168,030 in costs, and $15,000 service awards to each of the three named plaintiffs. The settlement amount also includes the value of the policy changes to be made by the credit union.

    Courts Credit Union Settlement Overdraft Class Action State Issues

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  • CFPB and NCUA announce supervision MOU

    Federal Issues

    On January 14, the CFPB announced a Memorandum of Understanding (MOU) with the NCUA, which is intended to improve supervision coordination of credit unions with over $10 billion in assets. According to the Bureau’s press release, the MOU covers (i) the sharing of the Covered Reports of Examination and final Reports of Examination for covered institutions, using secure, two-way electronic means; (ii) collaboration in semi-annual strategy planning sessions for examination coordination; (iii) information sharing on training activities and content; and (iv) information sharing related to potential enforcement actions.

    Federal Issues CFPB NCUA MOUs Supervision Credit Union

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