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Financial Services Law Insights and Observations


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  • FTC seeks to ban auto lending “junk fees” and “bait-and-switch tactics”

    Agency Rule-Making & Guidance

    On June 23, the FTC issued a notice of proposed rulemaking (NPRM) to ban “junk fees” and “bait-and-switch” advertising tactics related to the sale, financing, and leasing of motor vehicles by dealers. Specifically, the NPRM would prohibit dealers from making deceptive advertising claims to entice prospective car buyers. According to the FTC’s announcement, deceptive claims could “include the cost of a vehicle or the terms of financing, the cost of any add-on products or services, whether financing terms are for a lease, the availability of any discounts or rebates, the actual availability of the vehicles being advertised, and whether a financing deal has been finalized, among other areas.” The NPRM would also (i) prohibit dealers from charging junk fees for “fraudulent add-on products” and services that—according to the FTC—do not benefit the consumer; (ii) require clear, written, and informed consent (including the price of the car without any optional add-ons); and (iii) require dealers to provide full, upfront disclosure of costs and conditions, including the true “offering price” (the full price for a vehicle minus only taxes and government fees), as well as any optional add-on fees and key financing terms. Dealers would also be required to maintain records of advertisements and customer transactions. Comments on the NPRM are due 60 days after publication in the Federal Register.

    The FTC noted that in the past 10 years, the Commission has brought more than 50 auto-related enforcement actions and helped lead two nationwide law enforcement sweeps including 181 state-level enforcement actions in this space. Despite these efforts, the FTC reported that automobile-related consumer complaints are among the top ten complaint types submitted to the Commission.

    Agency Rule-Making & Guidance Federal Issues FTC Auto Finance Junk Fees Fees Disclosures Consumer Finance Federal Register

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  • CA approves commercial financing disclosure regs

    State Issues

    On June 9, the California Office of Administrative Law (OAL) approved the Department of Financial Protection and Innovation’s (DFPI) proposed commercial financial disclosure regulations. The regulations implement commercial financing disclosure requirements under SB 1235 (Chapter 1011, Statutes of 2018). (See also DFPI press release here.) As previously covered by InfoBytes, in 2018, California enacted SB 1235, which requires non-bank lenders and other finance companies to provide written, consumer-style disclosures for certain commercial transactions, including small business loans and merchant cash advances.

    Notably, SB 1235 does not apply to (i) depository institutions; (ii) lenders regulated under the federal Farm Credit Act; (iii) commercial financing transactions secured by real property; (iv) a commercial financing transaction in which the recipient is a vehicle dealer, vehicle rental company, or affiliated company, and meets other specified requirements; and (v) a lender who makes no more than one applicable transaction in California in a 12-month period or a lender who makes five or fewer applicable transactions that are incidental to the lender’s business in a 12-month period. The act also does not cover true leases (but will apply to bargain-purchase leases), commercial loans under $5,000 (which are considered consumer loans in California regardless of any business-purpose and subject to separate disclosure requirements), and commercial financing offers greater than $500,000.

    California released four rounds of draft proposed regulations between 2019 and 2021 to solicit public comments on various iterations of the proposed text (covered by InfoBytes here). In conjunction with the approved regulations, DFPI released a final statement of reasons that outlines specific revisions and discusses the agency’s responses to public comments.

    Among other things, the regulations:

    • Clarify that a nondepository institution providing technology or support services to a depository institution’s commercial financing program is not required to provide disclosures, provided “the nondepository institution has no interest, or arrangement or agreement to purchase any interest in the commercial financing extended by the depository institution in connection with such program, and the commercial financing program is not branded with a trademark owned by the nondepository institution.”
    • Provide detailed instructions for the content and layout of disclosures, including specific rows and columns that must be used for a disclosure table and the terms that must appear in each section of the table, that are to be delivered at the time a specific type of commercial financing offer equal to or less than $500,000 is extended.
    • Cover the following commercial loan transactions: closed-end transactions, commercial open-end credit plans, factoring transactions, sales-based financing, lease financing, asset-based lending transactions. Disclosure formatting and content requirements are also provided for all other commercial financing transactions that do not fit within the other categories.
    • Require disclosures to provide, among other things, the amount financed; itemization of the amount financed; annual percentage rate (the regulations provide category-specific calculation instructions); finance charges (estimated and total); payment methods, including the frequency and terms for both variable and fixed rate financing; details related to prepayment policies; and estimated loan repayment terms.

    The regulations take effect December 9.

    State Issues State Regulators Agency Rule-Making & Guidance DFPI California Disclosures Commercial Finance Nonbank

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  • FTC to modernize guidance on preventing digital deception

    Federal Issues

    On June 3, the FTC announced that it is soliciting public comment on modernizing the agency’s business guidance titled “.com Disclosures: How to Make Effective Disclosures in Digital Advertising,” which was published in 2013 and provides guidance to businesses on digital advertising and marketing. In seeking public comment on possible revisions, the FTC is seeking information on the technical and legal issues that consumers, the FTC’s law enforcement partners, and others believe should be addressed. The issues include, among other things: (i) the usage of sponsored and promoted advertising on social media; (ii) advertising embedded in games and virtual reality and microtargeted advertisements; and (iii) the usage of dark patterns, manipulative user interface designs used on websites and mobile apps, and digital advertising that pose unique risks to consumers. According to the Commission, this effort “is one of a number of initiatives the FTC is undertaking to tackle dark patterns and digital deception, including issuing a click-to-cancel policy statementproposing strengthened advertising guidelines against fake and manipulated reviews, arming staff with new tools to investigate dark patterns, and authorizing a Notice of Penalty Offense against deceptive reviews.” Comments close on August 2.

    Federal Issues Agency Rule-Making & Guidance FTC Consumer Protection Deceptive Disclosures

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  • FHFA announces new public disclosure requirements for GSEs

    Agency Rule-Making & Guidance

    On May 26, FHFA announced a final rule that amends the Enterprise Regulatory Capital Framework by introducing new public disclosure requirements for Fannie Mae and Freddie Mac (GSEs). The final rule adds new quarterly quantitative and annual qualitative disclosures related to risk management, corporate governance, capital structure and capital requirements and buffers under the standardized approach. The final rule also aligns the GSEs’ disclosure requirements with many of the public disclosure requirements for large banking organizations under the regulatory capital framework adopted by banking regulators, and is intended to ensure the GSEs operate in a safe and sound manner “in particular during periods of financial stress.” “By allowing market participants to assess key information about the [GSEs] risk profiles and associated levels of capital, this final rule will promote transparency and encourage sound risk management practices at the [GSEs],” acting Director Sandra L. Thompson said. 

    Agency Rule-Making & Guidance FHFA GSEs Fannie Mae Freddie Mac Disclosures Risk Management

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  • FTC to strengthen advertising and endorsement guidelines against fraudulent reviews

    Federal Issues

    On May 19, the FTC announced it is considering changes to strengthen its advertising guidelines to address fake and manipulative reviews, as well as concerns over inadequate disclosure tools. The Commission unanimously voted to submit a notice of proposed changes to its “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (Endorsement Guides), which were enacted in 1980 and amended in 2009. Under the Endorsement Guides, advertisers are required “to be upfront with consumers and clearly disclose unexpected material connections between endorsers and a seller of an advertised product.” In February 2020, the FTC issued a request for comments on, among other things, whether the Endorsement Guides are effective at addressing concerns in the marketplace, as well as issues related to social media disclosures, incentive reviews, and affiliate links. According to the Commission’s announcement, the proposed changes (i) warn “social media platforms that some of their tools for endorsers are inadequate and may open them up to liability”; (ii) clarify that the Endorsement Guides cover fake reviews; (iii) add a new principle, which provides that “in procuring, suppressing, boosting, organizing, or editing consumer reviews, advertisers should not distort or misrepresent what consumers think of their products”; (iv) clarify that social media tags are covered by the Endorsement Guides; (v) modify “the definition of ‘endorsers’ to bring virtual influencers—that is, computer-generated fictional characters—under the guides”; (v) provide an example addressing the microtargeting of a discrete group of consumers; and (vi) introduce a new section addressing concerns related to child-directed advertising.

    A public event will be hosted by the FTC on October 19 to address topics including “children’s capacity at different ages and developmental stages to recognize and understand advertising content and distinguish it from other content,” and the “need for and efficacy of disclosures as a solution for children of different ages, including the format, timing, placement, wording, and frequency of disclosures.”

    Federal Issues FTC Endorsements Advertisement Agency Rule-Making & Guidance Disclosures

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  • CFPB releases Spanish translations of certain disclosures

    Federal Issues

    On May 11, the CFPB announced that it made available Spanish translations of certain disclosures to help financial institutions better support Spanish-speaking communities. According to the Bureau, financial service providers recognize the need for additional services and customer-facing materials in multiple languages. The Bureau also noted that it has encouraged financial institutions to provide fair and transparent access to products and services to those who prefer using a language other than English. Translations of the disclosures released by the Bureau include: (i) prepaid card model forms; (ii) adverse action sample notices; (iii) home mortgage origination documents, including the loan estimate and closing disclosure; (iv) early intervention clauses for mortgage servicers; (v) credit reporting notices; and (vi) debt collection model validation notices.

    Federal Issues CFPB Consumer Finance Limited English Proficiency Disclosures

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  • Connecticut issues CDO against unlicensed small-dollar marketplace lender

    State Issues

    On May 4, the Connecticut Banking Commissioner issued a temporary cease and desist order against an unlicensed California-based marketplace lender after determining it had reason to believe the respondent allegedly violated several provision of the Connecticut General Statutes, as well as Section 1036 of the CFPA. The respondent operates a mobile application to help consumers take out small-dollar loans and solicits lenders via its website through advertisements claiming it “takes the work out of lending by vetting and organizing a marketplace of loan requests” where “[b]orrowers set their own terms and provide appreciation tips to lenders who agree to fund a loan, allowing for mutually beneficial financial outcomes.” Consumers initiate loans on the respondent’s platform for a certain amount, which includes optional monetary tips for both the lender and the respondent of up to 12 and 9 percent of the loan amount respectively. The Commissioner’s investigation noted that while the respondent touted the tips as being optional and not required for submitting a loan request or receiving funding, 100 percent of the loans originated to Connecticut consumers from June 2018 to August 2021 included a tip. When the tips were factored into the finance charge, the APRs of the Connecticut consumers’ loans ranged from 43 percent to over 4,280 percent. During the identified time period, loan disclosures identified the amount of the tips for each loan; however, starting in April 2021, the revised disclosures and promissory notes removed any itemization of the tips, and promissory notes allegedly “failed to indicate any obligation of the borrower to pay tips on their loans.” According to the Commissioner, the corresponding disclosures “stated that only one payment, for the principal loan amount, was due at the end of the loan,” however on the loan’s due date, the total loan amount including tips was withdrawn from the consumer’s account. Additionally, disclosures allegedly informed consumers that the APR on the loans was zero percent even though all the loans carried much higher APRs.

    The Commissioner further concluded that the respondent prohibited direct communication between consumers and lenders and charged several fees on delinquent loans, including late fees and recovery fees for its collection efforts. Moreover, at least one of the contracted collection agencies was not licensed in the state, nor was the respondent licensed as a small loan company in Connecticut, and nor did it qualify for a licensure exemption.

    In issuing its order to cease and desist, order to make restitution, and notice of intent to impose a civil penalty and other equitable relief, the Commissioner stated that the respondent’s “offering, soliciting, brokering, directly or indirectly arranging, placing or finding a small loan for a prospective Connecticut borrower, without the required license” constitutes at least 1,600 violations of the Connecticut General Statutes. The Commissioner cited additional violations, which included engaging in unlicensed activities such as lead generation and debt collection, and cited the respondent for providing false and misleading information related to the terms and costs of the loan transactions in violation of both state law and the CFPA’s prohibition against deceptive acts or practices. In addition to ordering the respondent to immediately cease and desist from engaging in the alleged violations, the Commissioner ordered the respondent to repay any amounts received from Connecticut consumers in connection with their loan, plus interest.

    State Issues Licensing Connecticut State Regulators CFPA UDAAP Deceptive Consumer Finance Small Dollar Lending Interest Rate Disclosures

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  • California Court of Appeal: Including extraneous language in FCRA disclosure may constitute willful violation


    On April 19, the California Court of Appeal for the Fourth Appellate District reversed a trial court’s summary judgment order and held that the inclusion of extraneous language in an employer’s FCRA disclosures to job applicants may constitute willful violation of the FCRA. The plaintiff filed a putative class action against the defendant employer, contending that it willfully violated the FCRA by providing job applicants with a disclosure that included extraneous language unrelated to the topic of consumer reports. The plaintiff alleged that the disclosure violated the FCRA’s requirement for providing a standalone disclosure informing the applicant that the employer may obtain the applicant’s consumer report when making a hiring decision upon applicant’s consent. The defendant filed a motion for summary judgment arguing that no reasonable jury could find that the plaintiff’s FCRA violation was willful, because the erroneous disclosure form was the result of a drafting mistake that took place when the defendant modified a sample disclosure provided by a consumer reporting agency to ensure compliance with the FCRA. The trial court granted the defendant’s motion, finding that any non-compliance resulted from a drafting was an inadvertent error.

    On appeal, the Court of Appeal reversed and remanded with instructions that the trial court deny the motion for summary judgment. The appellate court found that “a reasonable jury could find that [the employer] acted willfully because it violated an unambiguous provision of the FCRA.” The Court of Appeal noted that that there’s evidence that at least one of the defendant’s employees was aware that the extraneous language would be included in the disclosure form. In addition, the continuous use of the allegedly problematic disclosure form for nearly two years could signify recklessness. The Court of Appeal reasoned further that the defendant’s “continued and prolonged use” of the “problematic” disclosure form “suggest[ed] that it had no proactive monitoring system in place to ensure its disclosure was FCRA-complaint.”

    Courts State Issues Appellate Class Action California FCRA Disclosures

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  • NYDFS addresses “potential confusion” over new consumer credit transaction SOL

    State Issues

    On April 7, NYDFS issued guidance to debt collectors addressing potential confusion about how to comply with the notice requirements of 23 N.Y.C.R.R. § 1.3(b) that went into effect April 7. The new amendments are set forth in Section 4 of the Consumer Credit Fairness Act (which was enacted last November and was covered by InfoBytes here), and address the statute of limitations (SOL) applicable to actions arising out of consumer credit transactions. Specifically, Section 214-i provides that “when the applicable limitations period expires, any subsequent payment toward, written or oral affirmation of or other activity on the debt does not revive or extend the limitation period.” The amendments also decreased the SOL period to three years and requires additional notices to be made. While the guidance provides sample disclosure statements that address each of the requirements under § 1.3(b), NYDFS states that “23 N.Y.C.R.R. § 1.3 does not prohibit debt collectors from adding explanatory language to the model disclosure language set forth in § 1.3(c) or using their own language to comply with § 1.3(b).”

    NYDFS’ guidance follows letters sent last month by the New York attorney general to several large credit card companies and major debt collectors operating in the state, which reminded entities about the new obligations and disclosures that will be required when filing collection lawsuits against consumers starting May 7. (Covered by InfoBytes here.)

    State Issues State Regulators NYDFS Debt Collection New York State Attorney General Consumer Finance Consumer Credit Fairness Act Disclosures

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  • SEC seeks investor protections related to SPACs and shell companies


    On March 30, the SEC proposed rules and amendments regarding special purpose acquisition companies (SPACs), shell companies, and projections disclosure. The proposed rules are intended to enhance investor protections in initial public offerings (IPOs) by SPACs and in subsequent business combination transactions between SPACs and private operating companies. The proposed rules will also address the treatment under the Securities Act of 1933 of business combination transactions involving a reporting shell company and amend the financial statement requirements for private operating companies applicable to transactions involving shell companies. Additionally, the SEC proposed “specialized disclosure requirements with respect to, among other things, compensation paid to sponsors, conflicts of interest, dilution, and the fairness of these business combination transactions.” The SEC issued a corresponding Fact Sheet recognizing that the rapid increase in the number of SPAC IPOs over the past two years has “heightened investor protection concerns” and raised questions as to whether certain SPACs may be investment companies subject to the requirements of the Investment Company Act. The proposed rule also includes a new safe harbor designed to “provide that a SPAC that satisfies the conditions of the proposed rule would not be an investment company and therefore would not be subject to regulation under [the Investment Company Act].”

    “[I]f adopted, [the proposed rule] would strengthen disclosure, marketing standards, and gatekeeper and issuer obligations by market participants in SPACs, helping ensure that investors in these vehicles get protections similar to those when investing in traditional initial public offerings,” SEC Chair Gary Gensler said.

    Comments on the proposed rule are due 60 days following publication of the proposing release on the SEC’s website or 30 days after publication in the Federal Register, whichever is later.

    Securities Agency Rule-Making & Guidance SPAC Shell Companies Disclosures

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