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California amends GAP disclosure legislation
On September 13, the California governor signed AB 2311, which amends provisions regarding vehicle finance disclosures. The bill establishes provisions to govern the offer, sale, provision, or administration, in connection with a conditional sale contract, of a guaranteed asset protection waiver (GAP waiver). Specifically, the bill requires creditors to automatically refund the unearned portion of a GAP waiver if a consumer pays off or otherwise terminates their auto loan early. The bill prohibits: (i) conditioning the extension of credit, the term of credit, or the terms of a conditional sale contract upon the purchase of a GAP waiver; and (ii) the sale of a GAP waiver pursuant to certain provisions where the loan-to-value ratio exceeds the maximum loan-to-value ratio of the GAP waiver. The bill, among other things, authorizes the buyer to recover three times the amount of any GAP charges paid. The bill is effective January 1, 2023.
10th Circuit: Payday lender must pay $38.4 million restitution order
On September 15, the U.S. Court of Appeals for the Tenth Circuit affirmed the CFPB’s administrative ruling against a Delaware-based online payday lender and its founder and CEO (respondents/petitioners) regarding a 2015 administrative enforcement action that alleged violations of the Consumer Financial Protection Act (CFPA), TILA, and EFTA. As previously covered by InfoBytes, in 2015, the CFPB announced an action against the respondents for alleged violations of TILA and the EFTA, and for engaging in unfair or deceptive acts or practices. Specifically, the CFPB alleged that, from May 2008 through December 2012, the online lender (i) continued to debit borrowers’ accounts using remotely created checks after consumers revoked the lender’s authorization to do so; (ii) required consumers to repay loans via pre-authorized electronic fund transfers; and (iii) deceived consumers about the cost of short-term loans by providing them with contracts that contained disclosures based on repaying the loan in one payment, while the default terms called for multiple rollovers and additional finance charges. The order required the respondents to pay $38.4 million as both legal and equitable restitution, along with $8.1 million in penalties for the company and $5.4 million in penalties for the CEO.
According to the opinion, between 2018 and 2021, the U.S. Supreme Court issued four decisions, Lucia v. SEC (covered by InfoBytes here), Seila Law v. CFPB (covered by a Buckley Special Alert here), Liu v. SEC (covered by InfoBytes here), and Collins v. Yellen (covered by InfoBytes here), which “bore on the Bureau’s enforcement activity in this case,” by “decid[ing] fundamental issues such as the Bureau’s constitutional authority to act and the appointment of its administrative law judges (‘ALJ’).” The decisions led to intermittent delays and restarts in the Bureau’s case against the petitioners. For instance, the opinion noted that two different ALJs decided the present case years apart, with their recommendations separately appealed to the Bureau’s director. The CFPB’s director upheld the decision by the second ALJ and ordered the lender and its owner to pay the restitution, and a district court issued a final order upholding the award. The petitioners appealed.
On appeal, the petitioners made three substantive arguments for dismissing the director’s final order. The petitioners argued that under Seila, the CFPB’s structure was unconstitutional and therefore the agency did not have authority to issue the order. The appellate court disagreed, stating that it is “to use a ‘scalpel rather than a bulldozer’ in remedying a constitutional defect,” and that “because the Director’s actions weren’t unconstitutional, we reject Petitioners’ argument to set aside the Bureau’s enforcement action in its entirety.”
The petitioners also argued that the enforcement action violated their due-process rights by denying the CEO additional discovery concerning the statute of limitations. The petitioners claimed that they were entitled to a “new hearing” under Lucia, and that the second administrative hearing did not rise to the level of due process prescribed in that case. The appellate court determined that there was “no support for a bright-line rule against de novo review of a previous administrative hearing," nor did it see a reason for a more extensive hearing. Moreover, the petitioners “had a full opportunity to present their case in the first proceeding,” the 10th Circuit wrote. The appellate court further rejected the company’s argument regarding various evidentiary rulings, including permitting evidence about the company’s operational expenses, among other things. The appellate court also concluded that the CFPA’s statute of limitations commences when the Bureau either knows of a violation or, through reasonable diligence, would have discovered the violation. Therefore, the appellate court rejected the argument “that the receipt of consumer complaints triggered the statute of limitations.”
The petitioners also challenged the remedies order, claiming they were not allowed “to present evidence of their good-faith reliance on counsel (as to restitution and civil penalties) and evidence of their expenses (as to the Director’s residual disgorgement order).” The appellate court rejected that challenge, holding that the director properly considered all factors, including good faith, and rejected the petitioners’ challenge to the ALJ’s recommended civil penalties.
The 10th Circuit affirmed the district court’s order of a $38.4 million restitution award, rejecting the petitioners’ various challenges and affirming the director’s order.
CFPB studying BNPL growth
On September 15, the CFPB announced plans to consider issuing interpretive guidance or regulations to ensure that buy now, pay later (BNPL) lenders follow many of the same consumer protection measures that exist for credit cards. “We will be working to ensure that borrowers have similar protections, regardless of whether they use a credit card or a Buy Now, Pay Later loan,” CFPB Director Rohit Chopra said in the announcement. The Bureau described BNPL products as a form of interest-free credit that “serves as a close substitute for credit cards” and allows consumers to split a retail transaction into smaller, interest-free installments that are repaid over time.
Recognizing that BNPL products are a rapidly growing alternative form of credit for online retail purchases, the Bureau published a report providing key insights into the industry. According to the report, the number of BNPL loans originated from 2019 to 2021 in the US grew 970 percent, from 16.8 million to 180 million. The total dollar volume of these loans grew by 1,092 percent in that period, from $2 billion in 2019 to $24.2 billion in 2021, the report said, noting that 73 percent of applicants were approved for credit in 2021, up from 69 percent in 2020. Additionally, the report found that 89 percent of consumers using BNPL loans linked their accounts to their debit cards, and that late fee policies vary by issuer.
The Bureau raised several concerns with BNPL products in the report, including (i) inconsistent standardized cost-of-credit disclosures, minimal dispute resolution rights, a forced opt-in to autopay, and occurrences where consumers are assessed multiple late fees on the same missed payment; (ii) risks related to data harvesting and monetization, as many BNPL lenders shift business models toward proprietary app usage, allowing lenders “to build a valuable digital profile of each user’s shopping preferences and behavior”; and (iii) concerns over consumers taking out several loans during a short period of time at multiple lenders. According to the Bureau, because most BNPL lenders currently do not furnish data to the major credit reporting companies, many lenders are unaware of a consumer’s current liabilities when deciding whether to originate new loans.
The Bureau noted in its announcement that while BNPL lenders are currently subject to some federal and state oversight, compliance and licensing requirements vary. In addition to exploring potential new regulatory guidance, the Bureau said it plans to identify surveillance practices that BNPL lenders should seek to avoid, and it will continue to address the development of appropriate and accurate credit reporting practices for the industry. Chopra further announced that the Bureau is inviting BNPL lenders to self-identify if they wish to be examined for any potentially problematic business practices. The Bureau is also reviewing its authorities to conduct examinations on a compulsory basis and will work with state regulators that license nonbank finance companies on examinations of BNPL firms.
11th Circuit says plaintiff lacks standing in collection letter case
On September 8, the U.S. Court of Appeals for the Eleventh Circuit issued an en banc decision in Hunstein v. Preferred Collection & Management Services, dismissing the case after determining the plaintiff lacked standing to sue. The majority determined that “[b]ecause Hunstein has alleged only a legal infraction—a ‘bare procedural violation’—and not a concrete harm, we lack jurisdiction to consider his claim.” In April 2021, the 11th Circuit held that transmitting a consumer’s private data to a commercial mail vendor to generate debt collection letters violates Section 1692c(b) of the FDCPA because it is considered transmitting a consumer’s private data “in connection with the collection of any debt.” The decision revived claims that the debt collector’s use of a third-party mail vendor to write, print, and send requests for medical debt repayment violated privacy rights established in the FDCPA. The 11th Circuit last November, however, voted sua sponte to rehear the case en banc and vacated its earlier opinion. (Covered by InfoBytes here.)
The en banc decision relied heavily on the U.S. Supreme Court’s ruling in TransUnion v. Ramirez (covered by InfoBytes here), which clarified the type of concrete injury necessary to establish Article III standing and directed courts “to consider common-law torts as sources of information on whether a statutory violation had caused a concrete harm.” The majority pointed out that when making a common-law tort comparison, courts “do not look at tort elements in a vacuum” but rather “make the comparison between statutory causes of action and those arising under the common law with an eye toward evaluating commonalities between the harms.”
“What harm did this alleged violation cause?” the majority questioned in its opinion, finding that no tangible injury or loss was identified in the complaint. Rather, the plaintiff analogized to the tort of public disclosure. The majority found that this comparison was inapposite, because “the disclosure alleged here lacks the fundamental element of publicity.” Because there was no public disclosure, there was no invasion of privacy and therefore no cognizable harm.
Four judges dissented, arguing that the plaintiff had standing to sue. They opined that the court’s job is not to determine whether the plaintiff stated a viable common-law tort claim, but rather to “compare the ‘harm’ that Congress targeted in the FDCPA and ‘harm’ that the common law sought to address” and to determine whether those harms bear a sufficiently “close relationship.” The dissenting judges found that the plaintiff’s allegations that the delivery of “intensely private information” to the vendor is the “same sort of harm that common-law invasion-of-privacy torts—and in particular, public disclosure of private facts—aim to remedy.” The dissent also stressed that even if the disclosure alleged by the plaintiff is less extensive than the type of disclosure of private information typically at issue in a common law invasion of privacy claim, that is a question of the degree of harm and not a question of the kind of harm, and therefore should not be the basis for dismissal.
FTC will not extend comment period on NPRM seeking to ban auto lending junk fees and bait-and-switch tactics
On August 23, the FTC issued a decision declining to extend the public comment period for its 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. As previously covered by InfoBytes, the NPRM seeks to prohibit dealers from making deceptive advertising claims to entice prospective car buyers and would also: (i) prohibit dealers from charging 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. In declining to extend the comment period, the FTC said the public has been afforded “a meaningful opportunity to provide the Commission with comments regarding its rulemaking proposal.” The comment period will end September 12.
FTC seeks feedback on digital ad effects on children
On August 23, the FTC announced that it is soliciting additional public feedback on the effects digital advertising and marketing messages have on children. As previously covered by InfoBytes, in May the FTC announced that it is seeking comment on its notice of proposed changes to its “Guides Concerning the Use of Endorsements and Testimonials in Advertising” (Endorsement Guides), which includes the addition of a new section highlighting special concerns related to child-directed advertising. Under the Endorsement Guides, which were enacted in 1980 and amended in 2009, advertisers are required “to be upfront with consumers and clearly disclose unexpected material connections between endorsers and a seller of an advertised product.” The Commission also noted that, in conjunction with the notice, it is hosting a public event 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.” Comments are due by November 18 “to accommodate those who wish to provide input on the topics discussed at the October digital advertising event.”
4th Circuit: Borrower must return loans proceeds to rescind reverse mortgage
On July 14, the U.S. Court of Appeals for the Fourth Circuit held that a borrower has three years to rescind a reverse mortgage loan if a lender fails to provide required TILA disclosures, but that in order for the cancellation of the loan to be complete the proceeds must be returned. The borrower attempted to rescind a reverse mortgage she took out on her home after discovering the lender allegedly did not provide required TILA disclosures at closing. She notified the lender seeking to rescind the mortgage, but later sued after the lender failed to honor her rescission rights as required by Section 1635(b) of TILA. At trial, a jury sided with the lender, finding that it did not fail to honor the borrower’s attempt to rescind the loan. However, the district court issued judgment as a matter of law for the borrower, holding that the lender violated TILA’s requirements following the borrower’s notice of rescission, and ruling that because of this failure, the borrower was not required to return $60,000 in loan proceeds. The lender appealed.
In vacating the district court’s order granting judgment as a matter of law, the appellate court held that the district court’s ruling violated TILA’s recission provisions, which are intended to return all parties to their status prior to the loan agreement. “To decide otherwise would bestow a remarkable windfall on a borrower and penalty on the lender divorced from the text of TILA and the entire purpose of rescission,” the Fourth Circuit wrote. Moreover, the appellate court concluded that while a lender’s obligations in response to a rescission notice are mandatory, nothing in Section 1635(b) “specifies that if the lender fails to take these actions, it loses its right to the monies it loaned to the borrower.”
FINRA fines firm $2.8 million for faulty trade confirmations
On June 29, the Financial Industry Regulatory Authority (FINRA) entered into a Letter of Acceptance, Waiver, and Consent (AWC), which ordered a New York-based member firm to pay $2.8 million to settle allegations that it sent customers inaccurate trade confirmations. According to FINRA, from November 2008 through the present, the firm allegedly sent customers roughly “270 million confirmations that inaccurately disclosed the firm’s execution capacity, the customer’s price, the market center of execution, or whether the trade was executed at an average price.” FINRA attributed the inaccuracies to 11 underlying issues, including technology issues, a drafting error, and a misunderstanding of regulatory guidance that allegedly went undetected for at least five years. Additionally, FINRA claimed that from at least November 2008 through March 2020, the firm failed to establish and maintain a supervisory system, including written procedures, to achieve compliance with the confirmation requirements, and claimed this alleged failure “persisted even though, by mid-2017, [the firm] was aware due to FINRA examinations of multiple systemic issues resulting in tens of millions of inaccurate confirmations.” Rather than implementing a “reasonable” supervisory system, FINRA contended that the firm took a year to set up a system and procedures that monitored only whether confirmations were delivered, not whether they were accurate. The firm neither admitted nor denied the findings set forth in the AWC agreement but accepted and consented to the entry of FINRA’s findings and censure and agreed to certify within 120 days that it corrected the identified issues.
FTC seeks to ban auto lending “junk fees” and “bait-and-switch tactics”
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.
CA approves commercial financing disclosure regs
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.