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On September 16, NYDFS filed a statement of charges against a debt collector for allegedly failing to honor consumers’ requests for substantiation of debt. This is the first enforcement action alleging violations of New York’s Debt Collection Regulation, 23 NYCRR Part 1, which was promulgated in 2015. New York law dictates that substantiation must be provided within 60 days after receiving a request, and specifies what documentation must be provided to substantiate the debt. Charges filed against the company allege that requests made by consumers for information proving the validity of the debt and the company’s right to collect the debt were not honored in several ways, such as failing to provide (i) any substantiation to dozens of consumers; (ii) sufficient substantiation to hundreds of consumers, for example, by omitting a complete chain of title or underlying transaction documents; and (iii) substantiation within the required timeframes. NYDFS maintains that the company’s actions violate 23 NYCRR Part 1, Section 1.4, and that such violation carries civil penalties of up to $1,000 per offense under state law. Additionally, NYDFS claims that “each failure to provide any substantiation, timely substantiation, or sufficient substantiation of debt constitutes an independent offense.” A hearing is scheduled for January 12, 2021 before a hearing officer to be appointed by the Superintendent of Financial Services.
On September 11, the New York attorney general announced one of the nation’s largest debt collectors will pay $600,000 in restitution to student loan borrowers and will make significant changes to its debt collection practices in order to resolve allegations that it made false, misleading, and deceptive statements in lawsuits and in communications with borrowers. According to the AG, the debt collector, among other things, (i) filed complaints that falsely identified trusts, which hold the defaulted loans, as the borrower’s “original creditor,” when in fact, the trusts are the assignees of the original financial institutions that originated the loans; (ii) filed various misleading sworn affidavits; (iii) filed complaints that represented borrowers applied for loans from a “servicing agent” when, in fact, borrowers never dealt with the entity; (iv) filed lawsuits beyond the applicable three-year statute of limitations; and (v) threatened legal action against borrowers even though the trusts “could not or would not sue because the statute of limitations for suing on the debt had expired.”
The assurance of discontinuance requires the debt collector to stop identifying the trusts as the original creditor and to cease using misleading language in communications with borrowers. In addition, the debt collector must (i) provide enhanced staff training; (ii) stop filing lawsuits beyond the statute of limitations, and voluntarily dismiss all wrongfully-filed lawsuits; (iii) voluntarily release “all pending garnishments, levies, liens, restraining notices, attachments, or any other judgment enforcement mechanism” obtained as a result of judgments obtained in wrongfully-filed lawsuits where the statute of limitations has expired; (v) take steps to vacate any judgment obtained in any of these wrongfully-filed lawsuits; and (vi) pay restitution to certain borrowers or to the state to be disbursed as appropriate.
On September 1, NYDFS issued guidance to regulated mortgage lenders and servicers clarifying that mortgagees cannot charge registration fees imposed by municipalities when a mortgage defaults to mortgagors’ accounts. The guidance reminds mortgagees that the state’s mortgage servicing regulation, 3 NYCRR Part 419, allows mortgagees to collect only certain types of fees from a mortgagor, consisting of “attorney’s fees, late and delinquency fees, property valuation fees, and fees for services actually rendered to a mortgagor when such fees are reasonably related to the cost of rendering the service to the borrower.” NYDFS asserts that municipality-required default registration fees do not fall under the specified list and therefore cannot be charged to a mortgagor. The guidance instructs mortgagees to refund any such fees that have been collected, or to reverse any such fees that have been charged to accounts. Moreover, the guidance directs mortgagees to create a log of any registration fee charges and their subsequent corrections for inspection during their next NYDFS examination.
On September 2, NYDFS Superintendent Linda A. Lacewell announced the regulator’s opposition to the OCC’s proposed “true lender” rule. As previously covered by InfoBytes, the proposed rule would amend 12 CFR part 7 to state that “a bank makes a loan when, as of the date of origination, it (i) is named as lender in the loan agreement or (ii) funds the loan,” and intends to cover situations where the bank “has a predominant economic interest in the loan,” as the original funder, even if it is not “the named lender in the loan agreement as of the date of origination.” In response, NYDFS issued a comment letter stating that if the proposed rule is enacted, nonbank lenders that are not chartered or licensed by the federal government would be able to “qualify for federal protection from state usury laws” and make high-cost loans with interest rates well above the interest rate normally permitted by New York law. These laws currently make predatory, high-interest lending illegal, and make usurious loans entered into in the state void and unenforceable, NYDFS stated, arguing that the proposed rule would “gut state usury laws and state licensing requirements with respect to unregulated lenders.” NYDFS also stated, among other things, that the proposed rule, if codified, would “effectively sanction so-called ‘rent-a-bank’ or ‘rent-a-charter’ schemes” and allow “unregulated nonbank lenders to launder loans through banks as an end-around consumer-protective state usury limits.” In addition, NYDFS argued that the OCC lacks the authority to issue the proposed rule “because it has failed to comply with the requirements applicable to preemption determinations under federal law and conflicts with Congress’ intent to limit the preemption of states’ consumer protection laws.”
On September 1, the New York Department of Financial Services issued industry guidance instructing regulated mortgage lenders and servicers not to charge (or pass through to) consumers for mortgage default registration fees. The press release announcing the guidance notes that certain counties, cities, and municipalities in New York require mortgagees to pay a fee to register mortgages declared to be in default. Noting that consumers are facing financial hardship arising from the Covid-19 pandemic, the DFS guidance provides that these fees may not be passed on to consumers. Moreover, lenders and servicers who have charged consumers such fees must provide refunds, and must create a log of all borrowers who were charged such fees.
On August 13, the OCC filed its reply brief in its appeal of a district court’s 2019 final judgment, which set aside the OCC’s regulation that would allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). As previously covered by InfoBytes, last October, the U.S. District Court for the Southern District of New York entered final judgment in favor of NYDFS, ruling that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
As discussed in its opening brief filed in April appealing the final judgment (covered by InfoBytes here), the OCC reiterated that the case is not justiciable until it actually grants a fintech charter, that it is entitled to deference for its interpretation of the term “business of banking,” and that the court should set aside the regulation only with respect to non-depository fintech applicants with a nexus to New York. Following NYDFS’s opening brief filed last month (covered by InfoBytes here), the OCC argued, among other things, that the case is not ripe and NYDFS lacks standing because its alleged injuries are speculative and “rely on a series of events that have not occurred: OCC receiving and approving an SPNB charter application from a non-depository fintech that intends to conduct business in New York, and then does so in a manner that causes the harms [NYDFS] identifies.”
The OCC further argued that NYDFS “cannot show the statutory term ‘business of banking’ is unambiguous, or that it requires a bank to accept deposits to receive an OCC charter.” Highlighting the evolution of the “business of banking” over the last 160 years, the OCC contended that the National Bank Act does not contain a requirement “that an applicant for a national bank charter accept deposits if it can present the OCC with a viable business model that does not require it,” and that its regulation interpreting the ambiguous phrase “business of banking” is reasonable as it is consistent with U.S. Supreme Court case law. Lastly, the OCC argued that NYDFS’s claim that it is entitled to nationwide relief afforded under the Administrative Procedure Act (APA) is inconsistent with another 2nd Circuit decision, “as well as principles of equity and the APA’s text and history.” The OCC stated that even if the appellate court were to conclude that NYDFS’s claims are justiciable, the regulations should be set aside only with respect to non-depository fintech applicants with a nexus to New York.
On August 12, the U.S. District Court for the Western District of New York dismissed usury claims against a lender, concluding that lenders licensed in New York can charge interest rates up to 25 percent on loans under $25,000. According to the opinion, a consumer received a check in the mail in the amount of $2,539 from a licensed lender under Article IX of New York Banking Law, with terms requiring repayment at an annual interest rate of 24.99 percent, if the consumer cashed the check. The consumer cashed the check, agreeing to the loan terms. After failing to repay the debt in full, the consumer filed a complaint against the lender asserting various claims, including that the interest rate is unenforceable under New York General Obligations Law (GOL) § 5-511 because it exceeds 16 percent. The lender moved to dismiss the action.
The court agreed with the lender on the usurious claim, concluding that as a licensed lender in New York, the lender is “authorized to extend loans of $25,000 or less with interest rates up to 25[percent]” which is “the limit set by New York’s criminal usury statute, New York Penal Law § 190.40.” The court cited to NYDFS interpretations, stating that unlicensed nonbank lenders may not charge more than a 16 percent annual interest rate, but lenders that “obtain an Article IX license  may charge interest up to 25[percent] per annum on the small loans.” Because the lender was licensed under Article IX in the state of New York, the lender “was permitted to loan $2,539.00 to [the consumer] at an agreed-upon annual interest rate of 24.99[percent] without violating GOL § 5-511.”
On August 6, the New York Department of Financial Services (DFS) issued a third supplement to Insurance Circular Letter No. 9, previously covered here and here. The letter, which suspended the expiration of licenses for individual insurance producers, has been extended for an additional 30 days through September 6, 2020. All licenses that would have expired between March 25, 2020, and September 6, 2020, but for Insurance Circular Letter No. 9 (2020) and the supplements thereto will automatically expire on September 7, 2020, unless the producer completes all necessary continuing education credits, and submits a license renewal application, before September 7, 2020. The supplement notes that the extension is a “final accommodation.”
States urge Department of Education to protect federal student loans borrowers as CARES Act deadline approaches
On August 6, the NYDFS sent a letter to the Department of Education, urging Secretary Betsy DeVos to take measures to protect student loan borrowers when federal student loan borrower relief under the CARES Act ends September 30. Currently, the CARES Act provides an automatic freeze for borrowers with Federal Family Education Loan Program and Federal Direct loans (covered by a Buckley Special Alert), and stipulates that during the suspension period, interest will not accrue, servicers will report suspended payments as having been made to consumer reporting agencies, and—for borrowers in loan forgiveness or rehabilitation programs—servicers will treat suspended payments as having been made.
The letter, sent on behalf of seven state student loan ombudspersons, expresses concerns that, despite protections afforded by the CARES Act, “many borrowers are being left behind and . . . borrowers will face hardships once the CARES Act coverage expires.” Specifically, the letter requests DeVos to take additional proactive steps, including: (i) expanding the CARES Act protections to federal borrowers not currently eligible for relief (i.e., “borrowers whose loans are owned by commercial lenders and Perkins Loan borrowers whose loans are owned by their schools”) and extending the term of those protections; (ii) ensuring servicers are prepared for the September 30 end-date to ensure that borrowers are not harmed when their student loan accounts are placed back into repayment status; and (iii) streamlining access to income driven repayment (IDR) plans by eliminating “logistical and administrative barriers to automated IDR plan enrollment” and recommending “that borrowers be able to self-report income and that applications be deemed provisionally approved upon submission, even if incomplete, so that relief is given as quickly as possible.”
On July 23, NYDFS filed its opening brief in the appeal of its challenge to the OCC’s decision to allow non-depository fintech companies to apply for Special Purpose National Bank charters (SPNB charter). The OCC filed its opening brief with the U.S Court of Appeals for the Second Circuit in April (covered by InfoBytes here), appealing the district court’s final judgment in favor of NYDFS, which ruled that the SPNB regulation should be “set aside with respect to all fintech applicants seeking a national bank charter that do not accept deposits,” rather than only those that have a nexus to New York State.
In its brief, NYDFS argued that the district court was “correct to hold that the OCC had exceeded its statutory authority. . .in deciding to issue federal bank charters to nondepository fintech companies.” In response to the OCC’s arguments that NYDFS lacked standing and that the claims were not ripe, NYDFS first stated that “standing and ripeness exist not only when injury has already occurred, but also when it is imminent or when there is a substantial risk of harm.” Specifically, NYDFS asserted that its claims are ripe because (i) the OCC has actively solicited charter applications from the fintech industry and has indicated that companies had started the application process; and (ii) “one of the OCC’s stated objectives in the Fintech Charter Decision is to allow fintech companies that receive [an SPNB charter] to escape state regulation.” NYDFS also argued that because nondepository institutions are not engaged in the “business of banking” within the meaning of the National Bank Act (NBA), they cannot receive federal bank charters. Moreover, it contended that “when Congress did intend to extend OCC’s regulatory jurisdiction over such institutions, it expressly amended the NBA to do so.” Among other arguments, NYDFS claimed it is entitled to nationwide relief, stating that the district court merely granted the relief afforded under the Administrative Procedure Act, which specifies that the proper remedy for when an agency’s actions are contrary to law and “‘in excess of statutory jurisdiction, authority, or limitations” is to set aside the regulation.
Additionally, several parties, including the Conference of State Bank Supervisors and the Independent Community Bankers of America, filed separate amicus briefs (see here and here) in support of NYDFS, arguing that the OCC lacks the authority to grant SPNB charters.
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