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Financial Services Law Insights and Observations


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  • Bank enjoined from administering prepaid debit cards for EDD benefits


    On June 1, the U.S. District Court for the Northern District of California issued a preliminary injunction enjoining a national bank from certain actions in administering prepaid debit cards to class member recipients of Employment Development Department unemployment or disability benefits. Under the terms of the preliminary injunction, the bank is prohibited from “considering the results of [its] initial automated fraud claims filter” when investigating or resolving any alleged unauthorized transaction error claims, or from closing claims or denying credit before conducting an investigation, pursuant to EFTA and Regulation E. Class members are also entitled to a written explanation of investigative findings before the bank can deny or close a claim. Additionally, the bank is, among other things, (i) prohibited from considering the results of its claim fraud filter as justification for freezing the card account of any class member; (ii) required to reopen any claims that were closed or denied “based solely” on results of its claim fraud filter if those claims have not already been paid or previously reopened and investigated; (iii) required to provide written notice to class members with blocked accounts explaining that their accounts will be unblocked if they authenticate their identity; and (iv) establish a process for handing class member claims.

    Courts Debit Cards Prepaid Cards Class Action Covid-19 EFTA Regulation E

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  • 5th Circuit: A single unsolicited text constitutes TCPA standing


    On May 26, the U.S. Court of Appeals for the Fifth Circuit held that receiving a single unsolicited text message is enough to establish standing under the TCPA. The plaintiff alleged he received an unsolicited text message on his cell phone from the defendant after he had previously revoked consent and reached a settlement with the defendant to resolve a dispute over two other unsolicited text messages. The plaintiff filed a putative class action alleging that the defendant negligently, willfully, and/or knowingly sent text messages using an automatic telephone dialing system without first receiving consent, and that the unsolicited message was “a nuisance and invasion of privacy.” The district court dismissed the suit for lack of standing, ruling that a “single unwelcome text message will not always involve an intrusion into the privacy of the home in the same way that a voice call to a residential line necessarily does.”

    On appeal, the 5th Circuit disagreed, concluding that the nuisance arising from the single text message was a sufficiently concrete injury and enough to establish standing. “In enacting the TCPA, Congress found that ‘unrestricted telemarketing can be an intrusive invasion of privacy’ and a ‘nuisance,’” the appellate court wrote, commenting that the TCPA “cannot be read to regulate unsolicited telemarketing only when it affects the home.” In addition, the appellate court found that the plaintiff separately alleged personal injuries that separated him from the public at large by arguing that the “aggravating and annoying” robodialed text message “interfered with [his] rights and interests in his cellular telephone.” In reversing the district court’s ruling, the 5th Circuit disregarded precedent set by the 11th Circuit in Salcedo v. Hanna (covered by InfoBytes here). Calling the other appellate court’s decision “mistaken,” the 5th Circuit contended the other appellate court took too narrow a view of the theory of harm by concluding that there must be some actual damage before an action can be maintained. Moreover, the 5th Circuit stated the 11th Circuit misunderstood the U.S. Supreme Court’s decision in Spokeo, Inc. v. Robins, writing “Salcedo’s focus on the substantiality of an alleged harm threatens to make this already difficult area of law even more unmanageable. We therefore reject it.”

    Courts Appellate Fifth Circuit TCPA Class Action Autodialer Spokeo

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  • District Court finds that lender did not waive arbitration clause by filing collection lawsuit


    On May 19, the U.S. District Court for the Southern District of Texas granted a lender’s motion to compel arbitration in a putative class action debt collection case, ruling that the lender’s collection lawsuit against an individual did not waive the arbitration clause in the underlying promissory note. After the plaintiff borrower defaulted on a personal loan, she received a collection letter from a law firm hired by the creditor, which contained a warning that if payment was not made within 30 days, a recommendation would be made to the creditor to file a lawsuit to collect on the debt. Six days after sending the letter, the creditor filed suit in small claims court to recover the unpaid debt. The plaintiff then filed a separate lawsuit against the creditor and the law firm, alleging violations of the FDCPA and the Texas Debt Collection Act (TDCA). The plaintiff claimed, among other things, that the letter made “false, deceptive, or misleading representations” because the creditor demanded payment within 30 days even though the FDCPA provides borrowers 30 days to dispute a debt after receiving a collection letter. The plaintiff further sought to hold the creditor “vicariously liable [under the TDCA]” for the law firm’s allegedly unlawful collection activities. The defendants moved to compel arbitration, but the plaintiff argued that the arbitration clause in the underlying promissory note was waived when the defendants sued to collect on the unpaid debt. The plaintiff also argued that the law firm hired by the creditor could not compel arbitration because it was not a party to the promissory note. The court disagreed, finding that the creditor’s decision to file a lawsuit for breach of contract in small claims court “should not prevent it from later enforcing its right to arbitrate a completely separate claim.” The court further concluded that the allegations brought against the law firm are “inextricably enmeshed and have a significant relationship to the terms” of the promissory note, and that, as such, the law firm may compel arbitration even though it is a nonsignatory to the agreement.

    Courts Arbitration State Issues Class Action FDCPA

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  • 3rd Circuit: Alleging only a statutory violation of the TCPA does not establish standing to sue


    On May 19, the U.S. Court of Appeals for the Third Circuit affirmed a district court’s dismissal of a proposed TCPA class action suit for lack of standing, finding that the named plaintiff did not claim anything other than a “bare procedural harm that resulted in no harm.” According to the opinion, the plaintiff—who worked as an investigator for an attorney who prepared TCPA lawsuits—received a prerecorded telemarketing call in 2005 from a marketing company on behalf of the defendant national bank. The plaintiff, using a false name and employer, then placed and recorded more than 20 investigative calls to the marketing company to determine the number and frequency of calls it made. He then provided the recordings to the bank and declined the marketing company’s offer to place him on their Do-Not-Call list. In 2011, the plaintiff sued the bank alleging a single count violation of the TCPA but did not allege that he suffered any annoyance or nuisance from the marketing company’s call. The bank moved for summary judgment, arguing that: (i) the plaintiff lacked Article III standing to sue; (ii) “the call was exempt from the TCPA under FCC rules because the parties had an established business relationship” because the plaintiff was a customer of the bank; and (iii) the recorded message’s content did not violate the TCPA. The district court agreed with the bank and granted summary judgment on all three grounds.

    On appeal, the Third Circuit disagreed with the plaintiff’s assertion that all he had to do was allege a statutory violation in order to have standing to sue, declining “to adopt such an absolute rule of standing with respect to the TCPA.” Because “the TCPA is intended to prevent harm stemming from nuisance, invasions of privacy, and other such injuries,” the plaintiff must allege at least one of those injuries to show concrete harm necessary to demonstrate an injury-in-fact and establish standing to sue, the appellate court wrote.

    Courts Appellate Third Circuit TCPA Robocalls Spokeo

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  • FDIC counters states’ challenge to “valid-when made” rule


    On May 20, the FDIC filed a motion for summary judgment in response to a challenge brought by eight state attorneys general to the FDIC’s valid-when-made rule. As previously covered by InfoBytes, the FDIC’s final rule clarifies that, under the Federal Deposit Insurance Act (FDIA), whether interest on a loan is permissible is determined at the time the loan is made and is not affected by the sale, assignment, or other transfer of the loan. The AGs filed a lawsuit last year (covered by InfoBytes here) arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that while the FDIC has the power to issue “‘regulations to carry out’ the provisions of the FDIA,” it cannot issue regulations that would apply to nonbanks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.”

    The FDIC countered that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority. “The rule, which enjoys widespread support from the banking industry, represents a reasonable interpretation of [the FDIA], and should be upheld under Chevron’s familiar two-step framework,” the FDIC stated. Moreover, the FDIC contended, among other things, that the rule is appropriate because the FDIA does not address at what point in time the validity of a loan’s interest rate should be determined and is “silent” about what effect a loan’s transfer has on the validity of the interest rate. The FDIC also challenged the AGs’ argument that it is improperly trying to regulate non-banks, pointing out that the rule “regulates the conduct and rights of banks when they sell, assign, or transfer loans” and that “any indirect effects the rule has on non-banks do[es] not place the rule outside the agency’s authority.”

    Courts FDIC Madden Interest Rate State Issues State Attorney General Federal Deposit Insurance Act

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  • Connecticut Supreme Court says lender protected by tribal sovereign immunity


    On May 20, the Connecticut Supreme Court held that a lender accused of issuing usurious consumer loans without being properly licensed is protected by tribal sovereign immunity. In 2014, the Connecticut Department of Banking initiated an enforcement action against two lenders and a tribal officer of one of the lenders, claiming the lenders violated Connecticut’s banking and usury laws by making high-interest consumer loans over the internet without a license. The commissioner issued cease-and-desist orders and imposed civil penalties on the lenders. The lenders filed a motion in Connecticut Superior Court to dismiss the administrative proceedings for lack of jurisdiction, claiming they were arms of a federally recognized tribe and entitled to tribal sovereign immunity. The Superior Court vacated the orders against the lenders and remanded the case for an evidentiary hearing on whether the lenders are entitled to sovereign immunity.

    The Connecticut Supreme Court reversed in part the Superior Court’s order, finding that the lower court should have applied the “Breakthrough factors” adopted by the U.S. Court of Appeals for the Fourth, Ninth, and Tenth Circuits to determine whether the lenders were arms of the tribe. These factors include analysis of (i) “the method of creation” of the entities; (ii) the stated purpose of the entities; (iii) “the structure, ownership, and management of the entities,” which includes the amount of control the tribe has over them; (iv) the tribe’s intent with respect to extending its sovereign immunity to the entities; and (v) “the financial relationship between the tribe and the entities.” Applying these factors, the Connecticut Supreme Court found that one of the lenders was entitled to sovereign immunity because the lender was created under tribal law, is controlled by directors appointed by the tribal council for the purpose of promoting tribal economic development and welfare, and there was a “significant financial relationship” between the tribe and the lender. With respect to the other lender, the court found that there was insufficient evidence to show that it is an arm of the tribe and that further proceedings were necessary to determine its right to sovereign immunity.

    Courts State Issues Tribal Immunity Usury Consumer Lending Consumer Finance Online Lending Interest Rate

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  • Colorado sues PSLF student loan servicer

    State Issues

    On May 26, the Colorado attorney general filed a complaint against a Pennsylvania-based student loan servicer that handles the Public Service Loan Forgiveness (PSLF) program, alleging the servicer failed to comply with state law when asked to provide certain documentation. Under the Colorado Student Loan Servicers Act (SLSA), the state is “authorized to conduct examinations and investigations of student loan servicers that are servicing student education loans owned by residents of Colorado.” The SLSA also allows the state to enforce compliance by bringing a civil action to prevent servicers from violating the SLSA and to obtain other appropriate relief. According to the AG’s press release, the state requested information related to the servicer’s handling of the PSLF program during the Covid-19 pandemic. The servicer allegedly refused to produce the requested materials and only provided certain limited documents regarding non-government owned loans related to its business line. The complaint seeks a preliminary and permanent injunction compelling the servicer to comply with the AG’s oversight authority and provide the requested documentation.

    State Issues State Attorney General Student Lending Courts Student Loan Servicer Consumer Protection Covid-19

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  • District Court rules FCRA waives sovereign immunity


    On May 13, the U.S. District Court for the Eastern District of Michigan denied a motion to dismiss filed by the Department of Education (Department), ruling that the FCRA “unequivocally waives sovereign immunity” concerning the allegations at issue in the case. In the lawsuit, the plaintiff alleges, among other things, that the Department violated Section 1681s-2(b) of the FCRA by “negligently and willfully” failing to conduct a proper investigation of her dispute and by failing to remove an erroneous notation of “account in dispute” from a tradeline reported on her credit files. The Department moved to dismiss, arguing, among other things, that it could not be sued for damages under the FCRA “because Congress has not waived sovereign immunity with respect to that statute.”

    The court, disagreed, pointing out that while the question of whether sovereign immunity is waived under the FCRA “has generated a circuit split,” the “authority finding that the FCRA waives sovereign immunity is more persuasive than the authority supporting the contrary view.” After examining the statute, the court noted that the FCRA defines a “person” to include a “government or governmental subdivision or agency,” and pointed out that the term “person” appears in other FCRA provisions cited within the plaintiff’s lawsuit. As an example, the court referenced Section 1681n(a), which states: “Any person who willfully fails to comply with any requirement imposed under this subchapter with respect to any consumer is liable to that consumer.” The court also determined that the waiver of sovereign immunity “is sufficiently explicit” in Section 1681u of the FCRA.

    Courts FCRA State Issues Department of Education Student Lending

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  • District Court denies TRO request to block CFPB’s eviction disclosure rule


    On May 14, the U.S. District Court for the Middle District of Tennessee denied a request for a temporary restraining order (TRO) to block a CFPB interim final rule (IFR), which requires all landlords to disclose to tenants certain federal protections put in place as a result of the ongoing Covid-19 pandemic. As previously covered by InfoBytes, the plaintiffs sued the CFPB asserting the IFR violates their First Amendment rights because it “mandates untrue speech and encourages plainly misleading speech” by requiring disclosures about a moratorium that has been challenged or invalidated by several federal courts, including a court in Tennessee where the complaint was filed, as well as the U.S. Court of Appeals for the Sixth Circuit. The Bureau urged the court to deny the temporary injunction, arguing, among other things, that “requiring debt collectors to provide routine, factual notification of rights or legal protections that consumers ‘may’ have, in jurisdictions where the CDC [o]rder applies, does not compel false speech and plainly passes First Amendment muster” (covered by InfoBytes here).

    In denying the plaintiffs’ request to block the enactment of the IFR, the court ruled that the IFR does not apply where courts have already blocked the CDC’s eviction order from being enforced.  Therefore, “[b]y its very terms, the [IFR] compels nothing at all—including disclosure of false speech—in jurisdictions where the CDC [o]rder does not apply (whether due to a court order declaring the [IFR] invalid, or to something else).” Additionally, the court noted that the plaintiffs’ First Amendment arguments did not suggest that they would suffer irreparable harm without a TRO, as “[p]laintiffs cannot be harmed by a rule where it does not apply.” The court also addressed the plaintiffs’ claim that the rule is unlawful under the Administrative Procedures Act because it requires disclosures not mandated under the FDCPA that could contain false, deceptive, or misleading representations. Because debt collectors in jurisdictions where the CDC order does not apply do not have to make the required disclosures, the IFR cannot be “unlawful on the grounds that it requires false disclosures.”

    The court did not opine as to the “wisdom or fairness” of the IFR or the CDC’s order, or whether the IFR is “likely unlawful for any reason other than the particular ones” put forth by the plaintiffs.

    Courts CFPB Agency Rule-Making & Guidance Debt Collection Consumer Finance Covid-19 FDCPA First Amendment

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  • FTC settles with remaining operators of student loan debt-relief scam

    Federal Issues

    On May 17, the FTC announced settlements to resolve litigation against the remaining defendants involved in a student loan debt-relief operation charged with allegedly engaging in deceptive and abusive practices by collecting advance fees and making false promises to consumers that they could lower or eliminate loan payments or balances. As previously covered by InfoBytes, the FTC filed complaints against two groups of defendants involved in the debt-relief operation claiming the defendants, among other things, charged consumers advance fees and enrolled consumers in a high-interest financing program without making required disclosures. These actions, the FTC, contended, violated the FTC Act, TILA, and the Telemarketing Sales Rule (TSR), and stipulated orders were entered against several of the defendants in 2019. The terms of the stipulated final orders reached with the remaining defendants (see here and here) prohibit the defendants from (i) engaging in transactions involving secured or unsecured debt relief products and services; (ii) making misrepresentations and unsubstantiated claims regarding any products and services; (iii) violating the TSR; and (iv) collecting any further payments from consumers who purchased debt-relief services prior to the entry of the order. Additionally, certain defendants are required to pay a more than $24.5 million monetary judgment, which will be partially suspended due to inability to pay. One of the defendants is also required to pay $11,500, which will go towards consumer redress.

    Federal Issues Courts FTC Enforcement Settlement UDAP FTC Act TILA Telemarketing Sales Rule Student Lending

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