InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
4th Circuit affirms district court’s decision in lone class member's appeal
On February 10, the U.S. Court of Appeals for the Fourth Circuit affirmed a district court’s approval of a $3 million class action settlement between a class of consumers (plaintiffs) and a national mortgage lender (defendant), resolving allegations arising from a foreclosure suit. In 2014, the lead plaintiffs alleged that the defendants violated federal and Maryland state law by failing to; (i) timely acknowledge receipt of class members’ loss mitigation applications; (ii) respond to the applications; and (iii) obtain proper documentation. After the case was litigated for six years, a settlement was reached that required the defendant to pay $3 million towards a relief fund. The district court approved the settlement and class counsel’s request for $1.3 million in attorneys’ fees and costs, but an absent class member objected to the settlement, arguing that “the class notice was insufficient; the settlement was unfair, unreasonable, and inadequate; the release was unconstitutionally overbroad; and the attorneys’ fee award was improper.” A magistrate judge overruled the plaintiff’s objections, finding that “both the distribution and content of the notice were sufficient because over 97% of the nearly 350,000 class members received notice,” and that “class members ‘had information to make the necessary decisions and . . . the ability to even get more information if they so desired.’”
On the appeal, the 4th Circuit rejected the class member’s argument that the magistrate judge lacked jurisdiction to approve the settlement where she had not consented to have the magistrate hear the case. The 4th Circuit noted that only “parties” are required to consent to have a magistrate hear a case and held that absent class members are not “parties,” noting that “every other circuit to address the issue has concluded that absent class members aren’t parties.” The appellate court also upheld the adequacy of the class notice, and held that the magistrate judge did not abuse his discretion in finding that the settlement agreement was fair, reasonable, and adequate.
SEC, states reach $100 million settlement over crypto lending product
On February 14, the SEC and state regulators reached a $100 million settlement with a New Jersey-based financial services company in parallel actions to resolve allegations that the company failed to register the offers and sales of its retail credit lending product—marking the SEC’s “first-of-its-kind action” taken with respect to crypto lending platforms. According to the SEC, the company offered a product whereby retail investors lent crypto assets to the company “in exchange for the company’s promise to provide a variable monthly interest payment.” Among other things, the SEC found that because the company’s product are securities under applicable law, the company was required to register its offers and sales of the product or qualify for an exemption—both of which the company failed to do. The company also allegedly violated the Securities Act by making misleading statements on its website concerning its collateral practices and the level of risk in its loan portfolio and lending activity. Additionally, the company allegedly violated the Investment Company Act by engaging in interstate commerce while failing to register as an investment company with the SEC. While the company neither admitted nor denied the findings, it agreed to pay $50 million to the SEC and another $50 million to 32 states to settle similar charges. The company also agreed to cease engaging in unregistered offers and sales of its product, and will stop offering or selling its product in the U.S. Additionally, the company’s parent company stated its intention to register the offer and sale of a new lending product under the Securities Act.
1st Circuit vacates ruling in Maine FCRA case
On February 10, the U.S. Court of Appeals for the First Circuit vacated a district court’s ruling that the FCRA preempts amendments to the Maine Fair Credit Reporting Act that govern how certain debts are reported to credit reporting agencies. As previously covered by InfoBytes, a trade association—whose members include the three nationwide consumer credit reporting agencies (CRAs)—sued the Maine attorney general and the superintendent of Maine’s Bureau of Consumer Credit Protection (collectively, “defendants”) for enacting the 2019 amendments, which, among other things, place restrictions on how medical debts can be reported by the CRAs and govern how CRAs must investigate debt that is allegedly a “product of ‘economic abuse.’” The trade association argued that the amendments, which attempt to regulate the contents of an individual’s consumer report, are preempted by the FCRA, and contended that language under FCRA Section 1681t(b)(1)(E) should be read to encompass all claims relating to information contained in consumer reports. The district court agreed, ruling that, as a matter of law, the amendments are preempted by § 1681t(b)(1)(E). According to the court, Congress’ language and amendments to the FCRA’s structure “reflect an affirmative choice by Congress to set ‘uniform federal standards’ regarding the information contained in consumer credit reports,” and that “[b]y seeking to exclude additional types of information” from consumer reports, the amendments “intrude upon a subject matter that Congress has recently sought to expressly preempt from state regulation.” The defendants appealed.
On appeal, the plaintiff argued that the phrase “relating to information contained in consumer reports” broadly preempts all state laws, but the appellate court was not persuaded and concluded that the broad interpretation “is not the most natural reading of the statute’s syntax and structure.” The 1st Circuit found “no reason to presume that Congress intended, in providing some federal protections to consumers regarding the information contained in credit reports, to oust all opportunity for states to provide more protections, even if those protections would not otherwise be preempted as ‘inconsistent’ with the FCRA under 15 U.S.C. § 1681t(a).” In addition, the court reminded the plaintiff that “even where Congress has chosen to preempt state law, it is not ousting states of regulatory authority; state regulators have concurrent enforcement authority under the FCRA, subject to some oversight by federal regulators.” As such, the appellate court held that the FCRA did not broadly preempt the entirety of Maine’s amendments, and remanded the case back to the district court to determine the scope under which the amendments may be preempted by the FCRA.
District Court says NY champerty statute bars RMBS suit
On February 8, the U.S. District Court for the Southern District of New York issued an opinion granting in part and denying in part defendants’ motion for summary judgment and denying plaintiffs’ motions for partial summary judgment in parallel actions concerning pre-2008 residential mortgage-back securities (RMBS) trusts. In both cases, plaintiffs—RMBS certificateholders—filed suit alleging breaches of contractual, fiduciary, statutory, and common law duties with respect to certificates issued by RMBS trusts for which two of the defendants’ units served as trustee. Both plaintiffs alleged that the defendants failed to follow through on obligations to monitor the pre-2008 RMBS trusts that they administered. However, the court partially ruled in favor of the defendants, concluding that one set of plaintiffs could not avoid their loss in an RMBS trustee case brought against a different national bank, in which the court deemed the plaintiffs lacked a valid legal right to sue. In that matter, the U.S. Court of Appeals for the Second Circuit issued an opinion last October, agreeing with a different New York judge that “found the assignments champertous under New York law, rendering them invalid and leaving Plaintiffs without standing.” According to the 2nd Circuit, district court findings showed it was clear that the assignments were champertous “as they were made ‘with the intent and for the primary purpose of bringing a lawsuit.’”
The district court noted that the assignments of all the claims in the current matter were essentially identical to the issue already decided by the 2nd Circuit, and saw sufficient overlap to find the plaintiffs’ vehicles “collaterally estopped” from relitigating the issues of prudential standing and champerty. “The issues decided by the court of appeals relating to champerty and prudential standing are dispositive of the present action,” the court wrote. “Without prudential standing, the [] plaintiffs cannot assert claims arising out of the certificates and the entire [] action must be dismissed.” With respect to the other set of plaintiffs, while the court allowed certain claims to stand, it declined to grant any portion of the joint partial summary judgment related to the defendants’ alleged responsibilities as trustee, ruling that plaintiffs must prove those claims at trial.
NYDFS locks maximum check-cashing fee at 2.27 percent
On February 14, NYDFS issued an emergency regulation halting annual increases on check-cashing fees and locking the current maximum fee set last February at 2.27 percent. “As our world evolves, so must our approach to regulation, which is why for the first time in Department history, we are reexamining the methodology used to determine the maximum check cashing fee,” Superintendent Adrienne A. Harris stated. “[NYDFS] has a responsibility to take a hard look at the impacts of financial products and services on New Yorkers, especially members of underserved communities.” NYDFS noted that the emergency regulation underscores its concerns over the fixed methodology used to determine annual check-cashing fees, which is based on the Consumer Price Index and is not, according to the Department, “necessarily a reliable or accurate indicator of the costs of operating within a specific sector of business, such as financial services.” NYDFS stated that it intends to promulgate a proposed regulation for a new fee methodology and will seek public comments before a final regulation is issued. The emergency regulation will remain in effect until a final regulation is adopted.
States settle with company on fraudulent MLO certifications
On February 10, the Conference of State Bank Supervisors announced that the California Department of Financial Protection and Innovation, Maryland’s Office of the Commissioner of Financial Regulation, and the Oregon Division of Financial Regulation have reached a settlement agreement with the owner of a California-based company for providing false certificates claiming that mortgage loan originators (MLOs) took mandatory eight-hour continuing education courses as required for licensure under state and federal law. The three state financial regulators brought separate enforcement actions alleging violations of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) against the individual and his family (collectively, “respondents”) for their role in the “multi-state fraud scheme that involved hundreds of mortgage loan originators.” According to the announcement, the respondents have “agreed to fully cooperate and provide testimony against implicated mortgage loan originators,” and have “agreed to a lifetime restriction from direct and indirect involvement in businesses that provide mortgage lending-related education.” In addition to a $75,000 monetary penalty (which will be divided between the three states), the respondents have agreed to a non-compliance penalty of $15 million should they fail to fully comply with the terms of the settlement agreement.
The action follows a multistate $1.2 million settlement reached last month with 441 MLOs. As previously covered by InfoBytes, the enforcement action included the participation of 44 state agencies from 42 states, and required the settling MLOs to surrender their licenses for three months, pay a $1,000 fine to each state that is a signatory to the consent order in which the MLO holds a license, and take pre-licensing and continuing-education courses before petitioning or reapplying for an MLO endorsement or license.
Agencies defeat states’ valid-when-made challenge
On February 8, the U.S. District Court for the Northern District of California granted cross-motions for summary judgment in favor of the OCC and FDIC (see here and here), upholding their respective rules which clarify that interest charges that are permissible when a loan is originated “shall not be affected by the sale, assignment, or other transfer of the loan.” The judgments resolve lawsuits brought by several state attorneys general in 2020, challenging both the OCC’s final rule on “Permissible Interest on Loans that are Sold, Assigned, or Otherwise Transferred” (known also as the valid-when-made rule) and the FDIC’s final rule which clarified 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.
In the OCC matter, the states’ argued that the agency’s valid-when-made rule (which effectively reversed the U.S. Court of Appeals for the Second Circuit’s 2015 Madden v. Midland Funding decision, and was covered by InfoBytes here) impermissibly preempts state law, is contrary to the plain language of section 85 (and section 1463(g)(1)), and contravenes the judgment of Congress, which declined to extend preemption to nonbanks. Moreover, the states contended that the OCC failed to give meaningful consideration to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.” The OCC countered that its rule does not preempt state law but rather “merely interprets” banks’ authority to charge interest. (Covered by InfoBytes here.) The court agreed with the OCC, holding that the OCC was interpreting the scope of 12 U.S.C. § 85, not determining whether to preempt state laws, and therefore was not required to follow the procedures set forth in 12 U.S.C. § 25b as the states alleged, including consulting with the CFPB. Applying the Chevron framework, the court upheld the OCC’s interpretations of the National Bank Act and Home Owners’ Loan Act. Acting Comptroller of the Currency Michael J. Hsu issued a statement following the decision, in which he emphasized that while the court’s order “affirmed the validity of the OCC’s rule,” the “legal certainty should be used to the benefit of consumers and not be abused.” He added that the agency “is committed to strong supervision that expands financial inclusion and ensures banks are not used as a vehicle for ‘rent-a-charter’ arrangements.”
In the FDIC matter, the states argued, among other things, that the FDIC did not have the power to issue the final rule under 12 U.S.C. § 1831d, and asserted that while the FDIC may issue “regulations to carry out” the provisions of the FDIA, it cannot issue regulations that would apply to nonbanks. The states also claimed that the rule’s extension of state law preemption would facilitate evasion of state law by enabling “rent-a-bank” schemes. The FDIC countered that the states’ arguments misconstrue the rule, which does not regulate nonbanks, 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. (Covered by InfoBytes here.) The court rejected the states’ argument that the FDIC exceeded its authority, and held that under Chevron, the agency’s interpretation of 12 U.S.C. § 1831d is not unreasonable. In upholding the FDIC’s interpretation, the court stated that the final rule “does not purport to regulate either the transferee’s conduct or any changes to the interest rate once a transaction is consummated.”
Illinois Supreme Court rules Workers’ Compensation Act does not bar BIPA privacy claims
On February 3, the Illinois Supreme Court unanimously ruled that the Illinois Workers’ Compensation Act (Compensation Act) does not bar claims for statutory damages under the state’s Biometric Information Privacy Act (BIPA). According to the opinion, the plaintiff sued the defendant and several other long-term care facilities in 2017 for violations of BIPA, alleging their timekeeping systems scanned her fingerprints without first notifying her and seeking her consent. The defendant countered that the Compensation Act preempted the plaintiff’s claims, but in 2020 the Illinois Appellate Court, First District, held that it failed to see how the plaintiff’s claim for liquidated damages under BIPA “fits within the purview of the Compensation Act, which is a remedial statute designed to provide financial protection for workers that have sustained an actual injury.” As such, the appellate panel concluded that the Compensation Act’s exclusivity provisions “do not bar a claim for statutory, liquidated damages, where an employer is alleged to have violated an employee’s statutory privacy rights under the Privacy Act, as such a claim is simply not compensable under the Compensation Act.”
In affirming the appellate panel’s decision, the Illinois Supreme Court agreed that the “personal and societal injuries caused by violating [BIPA’s] prophylactic requirements are different in nature and scope from the physical and psychological work injuries that are compensable under the Compensation Act. [BIPA] involves prophylactic measures to prevent compromise of an individual’s biometrics.” Additionally, the Illinois Supreme Court held that the plain language of BIPA supports a conclusion that the state legislature did not intend for it to be preempted by the Compensation Act’s exclusivity provisions. Noting that it is aware of the consequences the legislature intended as a result of BIPA violations, the Illinois Supreme Court wrote that the “General Assembly has tried to head off such problems before they occur by imposing safeguards to ensure that the individuals’ privacy rights in their biometric identifiers and biometric information are properly protected before they can be compromised and by subjecting private entities who fail to follow the statute’s requirements to substantial potential liability . . . whether or not actual damages, beyond violation of the law’s provisions, can be shown.” Moreover, if a “different balance should be struck under [BIPA] given the category of injury,” that is “a question more appropriately addressed to the legislature.”
D.C. reaches nearly $4 million settlement with online lender to resolve usury allegations
On February 8, the District of Columbia attorney general announced a nearly $4 million settlement with an online lender to resolve allegations that lender marketed high-costs loans carrying interest rates exceeding D.C.’s interest rate cap. As previously covered by InfoBytes, the AG filed a complaint in 2020, claiming the lender violated the District of Columbia Consumer Protection Procedures Act (CPPA) by offering two loan products to D.C. residents carrying annual percentage rates (APR) ranging between 99-149 percent and 129-251 percent. Interest rates in D.C., however, are capped at 24 percent for loans with the rate expressed in the contract (loans that do not state an express interest rate in the contract are capped at six percent), and licensed money lenders that exceed these limits are in violation of the CPPA. According to the AG, the lender—who allegedly never possessed a money lending license in D.C.—violated the CPPA by (i) unlawfully misrepresenting it was allowed to offer loans in D.C. and failing to disclose or adequately disclose that its loans contain APRs in excess of D.C. usury limits; (ii) engaging in unfair and unconscionable practices through misleading marketing efforts; and (iii) violating D.C. usury laws.
Under the terms of the settlement, the company is required to (i) pay at least $3.3 million in restitution to refund alleged interest overcharges to D.C. borrowers; (ii) provide more than $300,000 in debt forgiveness to D.C. borrowers who would have paid future interest amounts in connection with an outstanding loan balance; and (iii) pay $450,000 to the District. According to the announcement, the company has also agreed that it “will not on its own, or working with third parties such as out of state banks, engage in any act or practice that violates the CPPA in its offer, servicing, advertisement, or provision of loans or lines of credit to District consumers.” The company is also prohibited from charging usurious interest rates, must delete negative credit information associated with its loans and lines of credit, and may not represent that it can offer loans or lines of credit in D.C. without first obtaining a D.C. money lender license.
Georgia reaches settlement with rent-to-own company over deceptive business practices
On February 8, the Georgia attorney general announced a settlement with a rent-to-own company accused of allegedly engaging in deceptive sales and marketing practices and violating the FDCPA. While the company did not admit to the allegations, it agreed to pay $145,590 in civil money penalties, with an additional $170,910 due if the company violates any of the settlement terms. The company is also required to (i) ensure its advertising, sales, and marketing practices comply with the Georgia Fair Business Practices Act and the Georgia Lease-purchase Agreement Act; (ii) refrain from engaging in harassing and unlawful debt collection practices; and (iii) verify debts are accurate before placing them with a third-party collection agency. “Our office takes seriously allegations of deceptive business practices, and companies that take advantage of our citizens will be held accountable,” the AG stated.