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Financial Services Law Insights and Observations

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  • New York blocks use of social networks in credit decisions

    State Issues

    On November 25, the Governor of New York signed S2302, a measure which prohibits entities that are “licensed lenders” in New York, as well as consumer reporting agencies (CRAs), from including a consumer’s social network information in credit decisions. S2302 amends New York’s general business law and the banking law to prohibit licensed lenders and CRAs from considering “the credit worthiness, credit standing, or credit capacity of members of the consumer’s social network” or “the average credit worthiness, credit standing, or credit capacity of members of the consumer’s social network or any group score that is not the [consumer’s] own credit” information. Specifically, the amendment prohibits licensed lenders and CRAs from collecting, evaluating, reporting, or maintaining the information in a file. Additionally, the consumer’s internet viewing history also may not be factored into the licensed lender’s or agency’s “credit scoring formulas.”

    State Issues Consumer Finance Lending State Legislation Credit Scores

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  • NYDFS announces multistate investigation of payroll advance industry

    State Issues

    On August 6, NYDFS announced it is leading a multistate investigation into the payroll advance industry based on allegations of unlawful online lending. According to NYDFS, the investigation will focus on whether companies are violating state banking laws, including usury limits, licensing laws, and other applicable laws regulating payday lending. NYDFS alleges that some companies appear to collect unlawful interest rates disguised as “tips” as well as monthly membership and/or excessive additional fees, and may collect improper overdraft charges.

    In addition to New York, other states in the investigation include: Connecticut, Illinois, Maryland, New Jersey, North Caroline, North Dakota, Oklahoma, Puerto Rico, South Carolina, South Dakota, and Texas.

    State Issues Lending Online Lending State Regulators NYDFS Overdraft Usury Interest Rate

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  • NY extends law allowing licensed lenders to charge annual fees

    State Issues

    On July 3, the New York governor signed SB 6100, which extends for an additional two years the existing provision of the banking law allowing licensed lenders to charge annual fees on open-end personal loans. Effective immediately, the law will now remain in full force and effect until June 30, 2021.

    State Issues State Legislation Lending Fees Open-End Credit

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  • CFPB settles with defunct schools’ student loan management company

    Federal Issues

    On June 14, the CFPB announced a settlement with a company that manages student loans for a defunct for-profit educational institution resolving allegations it provided substantial assistance to the institution in engaging in unfair acts and practices in violation of the Consumer Financial Protection Act (CFPA). As previously reported by InfoBytes, the Bureau filed suit against the now-defunct for-profit institution in February 2014.  The Bureau’s complaint against the institution alleged that the institution offered first-year students no-interest short-term loans to cover the difference between the costs of attendance and federal loans obtained by students. The complaint asserts that the institution then forced borrowers into “high-interest, high-fee” private student loans without providing borrowers an adequate opportunity to understand their loan obligations, when their short-term loans became due. In the complaint in the current matter, filed the same day as the proposed stipulated judgment, the Bureau alleges that the management company: (i) was substantially involved in the creation and operation of the loan program, including raising money and overseeing the origination and servicing of the loans; and (ii) knew, or was reckless in not knowing, the risks associated with the loan program. The stipulated judgment requires the company to (i) cease enforcement and collection efforts on all outstanding loans associated with the program; (ii) discharge all outstanding loans associated with the program; and (iii) direct credit reporting agencies to delete consumers’ trade lines associated with the loan program. The company must also provide notice of these actions to affected consumers. The proposed judgment does not include a monetary penalty or require refunds to consumers.

     

    Federal Issues Courts Settlement CFPA Unfair UDAAP For-Profit College Lending Student Lending

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  • 11th Circuit: City of Miami sufficiently alleged Fair Housing Act violations

    Courts

    On May 3, the U.S. Court of Appeals for the 11th Circuit held that the City of Miami plausibly alleged that two national banks’ lending practices violated the Fair Housing Act (FHA) and led to defaults, foreclosures, and vacancies, and eventually reduced property values and corresponding property tax revenues. The court did so by finding “some direct relation” between the City’s tax revenue injuries and the Bank’s alleged violations of the FHA. The case returned to the 11th Circuit after having been appealed to and resolved in part in the U.S. Supreme Court in 2017, where the Court held that municipal plaintiffs may be “aggrieved persons” authorized to bring suit under the FHA against lenders for injuries allegedly flowing from discriminatory lending practices (previously covered by a Buckley Special Alert). According to the appellate court opinion, the Court “declined to ‘draw the precise boundaries of proximate cause under the FHA and to determine on which side of the line the City’s financial injuries fall,’” leaving to the lower courts the issue of how the principles of proximate cause function when applied to the FHA and the facts of the complaints.

    The appellate court concluded that the district court erred in dismissing the City’s claims against the banks in their entirety, with the 11th Circuit finding “a logical and direct bond between discriminatory lending as a pattern and practice applied to neighborhoods throughout the City and the reduction in property values.” However, the appellate court concluded that the City’s allegations fell short of establishing a direct relationship between the alleged misconduct and the City’s purported increase in its municipal services expenditures, noting that the U.S. Supreme Court “has told us that foreseeability alone is not enough.” The appellate court emphasized that at the motion to dismiss stage it was only addressing the plausibility that the alleged conduct violated the FHA, and remanded the case back to the district court.

    Courts Fair Housing Act Fair Lending Lending Consumer Finance Mortgages

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  • 3rd Circuit: District court erred in voiding all cash advance agreements in NFL concussion settlement litigation

    Courts

    On April 26, the U.S. Court of Appeals for the 3rd Circuit, in a consolidated class action, concluded that a district court went “too far” in voiding all of the cash advance arrangements between NFL concussion class members and third party lenders in their entirety. According to the opinion, in December 2017, the district court “issued an order purporting to void in their entirety all assignment agreements” where class members assigned a portion of their settlements from the 2015 NFL concussion injury litigation, concluding that it was “necessary to protect vulnerable class members from predatory funding companies.”

    On appeal, the 3rd Circuit addressed the merits in three of the four timely appeals, noting that the fundamental question was whether the district court had the authority to void the agreements. The appellate court held that the district court retained the authority to enforce and administer the settlement because there was an anti-assignment language in the settlement agreement. The appellate court upheld on the district court’s interpretation of the anti-assignment provision, holding that “any true assignments contained within the cash advance agreements—that is, contractual provisions that allowed the lender to step into the shoes of the player and seek funds directly from the settlement fund were void.” However, the appellate court concluded that the district court “went beyond its authority” by purportedly voiding the agreements in their entirety, because there are portions of some of the cash advance agreements that may still be enforceable after the true assignments are voided, such as ones structured as a non-assignment loan agreement. Since the district court’s authority “does not extend to how class members choose to use their settlement proceeds after they are disbursed,” the appellate court reversed in part the December 2017 order, leaving certain cash advance agreements enforceable to the extent rights are retained after the true assignments are voided.

    Courts Third Circuit Appellate Lending Structured Settlement Class Action

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  • District Court enters first significant decision under CFPB’s ATR/QM Rule

    Courts

    On March 26, the U.S. District Court for the Southern District of Ohio, in what appears to be the first significant decision on claims brought against a mortgage lender under the CFPB’s Ability-to-Repay/Qualified Mortgage Rule, granted summary judgment in favor of the lender. The court rejected plaintiff’s claims that his bank improperly relied on income under his spousal support agreement, stating that “[t]he fact that Plaintiff and [his spouse] did not keep the separation agreement and instead opted to divorce – a series of events which reduced Plaintiff’s income by an order of magnitude – was not an event that was reasonably foreseeable to the Bank.” The court also noted that, “[a]lthough Plaintiff is now in his eighties, he is a repeat player in the field of real estate and mortgages, and a consumer of above-average sophistication.” While this decision does not break new legal ground, it does provide useful insights into how courts may respond to inherently fact-specific claims about the underwriting of individual loans.

    Courts Ability To Repay Qualified Mortgage Mortgages Mortgage Lenders Lending CFPB

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  • California DBO seeks to revoke auto title lender’s license

    State Issues

    On March 19, the California Department of Business Oversight (DBO) filed an administrative action to revoke the license and void loans made by a Southern California auto title lender for allegedly violating state lending laws. According to the DBO announcement, the lender allegedly, among other things, (i) charged consumers more interest than permitted by state law; (ii) failed to consider the borrower’s ability-to-repay; and (iii) engaged in “false and misleading” advertising. Specifically, DBO alleges that, in two separate examinations, it determined the lender included DMV fees in borrowers’ principal loan amounts to bring the loans above $2,500. DBO alleges these loans carried interest rates over 100 percent, while the state law cap is 30 percent for loans under $2,500. DBO also alleges the lender violated state law by failing to report the profits it made from a “duplicate-key fee” and made loans from unlicensed locations.

    In addition to the formal accusation, the DBO also has commenced an investigation to determine whether the more than 100 percent interest rates that the lender charges on most of its auto title loans may be unconscionable under the law.

    State Issues Lending Enforcement Supervision Usury Auto Finance DBO

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  • OCC fines national bank $25 million for violating Fair Housing Act

    Lending

    On March 19, the OCC announced that a national bank has agreed to pay a $25 million civil money penalty to resolve alleged violations of the Fair Housing Act. According to the OCC’s consent order, (i) from August 2011 to April 2015, the bank did not properly train loan officers about available mortgage discounts under its Relationship Loan Program (RLP); (ii) from August 2011 to November 2014, the bank failed to provide explicit instructions within their written guidelines that employees should offer those discounts to all eligible customers; and (iii) from August 2011 to November 2014, the bank did not require loan officers to document the reason for a customer’s rejection. Moreover, according to the OCC, the bank did not require loan officers to inform customers about potential mortgage discounts from August 2011 to January 2015. As a result, the OCC stated that certain borrowers allegedly did not receive RLP benefits for which they were eligible and were adversely affected on the basis of their race, color, national origin, and/or sex. The bank—which did not admit nor deny the allegations and self-reported the problems in 2015—initiated and has nearly completed a reimbursement plan, which will deliver roughly $24 million in restitution to the approximately 24,000 borrowers who may have missed out on the appropriate RLP benefit.

    Lending OCC Fair Lending Fair Housing Act Enforcement

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  • Fair lending claims dismissed against Connecticut bank

    Lending

    On March 1, the U.S. District Court for the District of Connecticut signed an order dismissing with prejudice a Fair Housing Act complaint filed by the Connecticut Fair Housing Center through its legal counsel, the National Consumer Law Center, against a Connecticut-based bank. The bank denied all allegations of wrongdoing and liability. Under the terms of the stipulation of dismissal, the bank agreed voluntarily to resolve the claims and, among other things, to (i) revise its fair lending policies and procedures and conduct fair lending training for all employees; (ii) open a loan production office in Hartford; (iii) spend $230,000 on targeted marketing and advertising to minority communities, and provide additional consumer financial education opportunities; (iv) invest $300,000 for subsidies to promote home ownership and enhance access to credit in identified communities; (v) identify a Community Development Officer within the bank; and (vi) expand its community development loan program by investing $5 million over the next three years.

    Lending State Issues Fair Lending FHA Redlining

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